Eurointelligence – 28Julho2011, enviado por Domenico Mario Nuti

Eurointelligence Daily Briefing 

 

The next EFSF customer: the crisis is now spreading to Cyprus

  • Moody’s downgraded Cyprus to two notches above junk, as the country looks set to fall under the EFSF umbrella;
  • EU officials have set off for talks with the governments, but claim that no decision was imminent;
  • yields of Cyprus 10-year bonds reached 10.18% yesterday;
  • one factor for outbreak of the panic was the EU’s agreement on Greece, which has negative consequences for Cypriotic banks;
  • Italian and Spanish bond markets suffered another bad days, with 10-year spreads now at 3.189%, and 3.397% respectively;
  • stocks markets tumble over fears of a breakdown in the US debt talks;
  • EU plans to fast-track legislation on the extension of the EFSF powers;
  • remaining funds from existing bilateral loan agreement will be folded into EFSF;
  • officials there is some flexibility in apportioning the funds earmarked for collateralisation and bonds-buy backs;
  • George Papandreou says the reduced interest rate of the Greek loan was a kind of Eurobond;
  • French unemployment continued to rise for the second month running;
  • IMF warns that the French governments growth forecasts are too optimistic and that more savings are needed;
  • Le Monde has a go at Nicolas Sarkozy’s duplicity on austerity;
  • the Irish government reduces its stake in Bank of Ireland;
  • Wolfgang Schäuble, meanwhile, has relaunched the debate on the withdrawal of voting for recipients of EFSF funds.

 

Eurointelligence Comment

 

Why contagion cannot be stopped in the eurozone

By Paul de Grauwe

By refusing the lender of last resort role in the Eurozone, the ECB has become the single most important reason why the Eurozone crisis cannot be stopped.

________________________________

Moody’s yesterday downgraded Cyprus to two notches above junk, as the country looks set to become the EFSF’s forth customer. On a day, in which the Italian and Spanish markets came under further pressure, EU officials were headed for special talks with the government in Nikosia, but said no agreement was imminent, according to the Financial Times. Yields on Cyprus’ 10-year bonds were up 0.85pc at 10.18% yesterday, which is above the borrowing rates that forced Ireland and Portugal into the EFSF, the paper remarked.

 

 

In another article, the FT noted that the EU’s agreement on a bond swap for Greece, has had seriously negative consequences for Cypriotic banks, who are among the largest lenders to Greece. The Cypriotic banking sector has assets of about seven times the country’s GDP. Cyprus was hit by two further shocks, a political crisis that resulted from the government’s attempt to force through an austerity package, and an explosion at the country’s largest power plant that killed 13 people. The situation in Cyprus was not quite as bad as in Ireland, but the losses faced by the banks were still very large.

 

 

Another terrible day for the Italian and Spanish bond markets

It was another terrible day on European bond and stocks markets, which are now panicking over the both the US debt ceiling and the European debt crisis at the same time. But while Wall Street was down a little, the Italian stock market was down by a lot. Milan was down 4% in the afternoon, and subsequently recovered to minus 2.8%, while Italian 10-year spreads continued to rise, and now stand 3.189% – close to the pre-summit peak. According to Corriere della Sera, the main reason for yesterday’s mini-panic were fears over the US economy. (But this does not explain why the Italian markets would perform worse than the US market.)

 

 

Schäuble wants to re-introduce debate on voting rights for EFSF recipients

In another example of EU debates moving around in circle, Wolfgang Schäuble has raised the issue of a withdrawal of voting rights for member states that received EFSF funds, according to FT Deutschland, quoting from an interview with Stern magazine. When asked whether this could actually be implemented, he said: “Just wait for it.” He also said yesterday that Berlin was opposed to a “carte blanche” for the EFSF to get active on secondary markets. Reuters writes that this comment contributed to yesterday’s market tensions.

 

 

EFSF up and running by year end

Meanwhile, according to a Reuters report, the EU expects the EFSF’s new powers to be agreed by the end of the year. The story quotes anonymous official as saying that the aim was to fast-track the legislation, so that the EFSF itself will be in a position to undertake the Greek debt repurchasing programme.

 

The report also offers some details on the Greek debt buy back timetable. The Greek government will present a formal offer to banks by early September. The funds allotted to the debt collateralisation and the debt buy back might shuffled around – within a grand total of €55bn. Furthermore, the buyback would focus on bonds trading at less than 65 cents on the euro. The remaining €45bn in loans would also fall under the umbrella of the EFSF – rather than the bilateral.

   Euro zone officials said the reminder of euro zone bilateral loans to Greece from the first bailout — 45 billion euros — would be replaced by EFSF loans in the second programme. Also interesting was the official’s comment that not all of the amounts of the programme would involve physical transfers of money. Some can be given in EFSF bonds, which might not be sold on the market.

 

 

Is the Greek loan a Eurobond?

George Papandreou thinks so. Speaking to members of his parliamentary party, he said yesterday:   “The decision of our European partners to lend us at 3.5 percent, an interest rate just above the one at which Germany itself is borrowing, is in essence tantamount to introducing a European bond, regardless of the fact that this system has not been completed yet.”

 

 

French unemployment on the rise, IMF warns growth forecasts too optimistic

Unemployment is on the rise again in France, the second time in a row and the strongest increase since 2009, writes Les Echos, pushing the government on the defensive. Socialist leader Martine Aubry calls the results catastrophic. The IMF warns in its report on France that the government’s growth forecasts are too optimistic and that additional savings of about €16bn will be necessary to reach the 3% deficit target in 2013. Without additional measures the deficit is more likely to be 3.8%. The report also warns that France cannot afford to miss its target, otherwise it risks losing its AAA rating. Budget minister Valérie Pécresse said earlier that additional savings could be realised by reducing tax breaks.

 

 

Sarkozy holds on to tax break for restaurants while promoting golden rule

Le Monde mocks Nicolas Sarkozy and his contradicting pledge to introduce a golden rule for a balanced budget in the constitution and his defence of the reduced VAT rate for restaurants, the most costly tax break, which costs the state annually €3bn. There are two Sarkozys, the article writes, one as “father of the eurozone” and the other as party leader wooing for UMP votes.

 

 

Irish government reduces its stake in Bank of Ireland

The Irish government reduces its stake in Bank of Ireland by more than half to 15.1% after a better-than-expected sale of shares to North American fund managers who will take a 34.9% stake and invest €1.12bn to meet a higher capital ratio following stress tests in March, the Irish Times reports.  The successful sale means that Bank of Ireland will be the only Irish bank to avoid State control.

 

 

Spreads, Forex, and ZC Swaps

This is really bad. Italian and Spanish spreads at 3.189%, and 3.397% respectively.

 

 

Previous Day Close

Yesterday’s Close

This morning

France

0.601

0.601

0.601

Italy

2.905

3.185

3.189

Spain

3.227

3.337

3.397

Portugal

10.365

10.068

10.080

Greece

12.275

12.246

12.66

Ireland

9.232

8.777

8.977

Belgium

1.591

1.650

1.644

Bund Yields

3.245

2.654

2.65

 

 

Euro bilateral exchange rates:  

 

€at last Briefing

This morning

Dollar

+1.4506

+1.4366

Yen

+112.87

+111.84

Pound

+0.8828

+0.8793

Swiss Franc

+1.1631

+1.1520

 

 

Zero Coupon Inflation Swaps

 

previous close

last close

1 yr

2.00

2.00

2 yr

2.05

2.04

5 yr

2.05

2.18

10 yr

2.21

2.19

 

 

 

 

 

 

 

Source: Reuters

 

 

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