Eurointelligence Daily Briefing, 25 de Outubro de 2011. Enviado pelo Domenico Mario Nuti.


That CDO in full – and a murder threat

  • Reuters has details of the two EFSF options under discussion: bond insurance scheme with a seperable “partial protection scheme”, and an SPV with at least three tranches: a first lost equity tranche, a mezzanine instrument, and a senior tranche;
  • the paper seems to express a preference for the second option;
  • the summit agreement should pave the way for an immediate purchase of Italian bonds through the EFSF right after the summit;
  • this is the reason why Angela Merkel and Nicolas Sarkozy exerted so much pressure on Silvio Berlusconi, but Berlusconi responded with anger;
  • there was no progress on economic reforms at a cabinet meeting in Rome;
  • the Bundestag will hold a full vote on the leveraged EFSF on Wednesday morning, with opposition parties not yet committed;
  • Merkel’s coalition majority is expected to shrink further;
  • the EU now seeks a 60% “voluntary” haircut on Greek bonds;
  • there are now visible signs in Athens of a bank run;
  • the Greek government hopes to secure opposition votes in support of the legislation for a haircut;
  • German newspapers report that the European summit will de facto instruct the ECB to continue with their bond purchases;
  • bank recapitalisation plans hit Italy, Spain and Portugal the most;
  • George Soros has a seven-point plan to save the euro (of which not a single one is likely to be politically acceptable);
  • 49% of Brits favour an exit from the EU;
  • Berlusconi, meanwhile, is pondering whether or not he should kill Lorenzo Bini-Smaghi.

Hats off to Reuters, the first media organisation to our knowledge which says it obtained a non-paper that explains the two toxic finance schemes in all its gory detail.


Here is our interpretative summary of their summary.


First, under the insurance option, the EFSF guarantees a yet to be agreed percentage of the value of a newly issued sovereign bond, with a “partial protection certificate” (PPC). The PPC would be separable, and freely traded (presumably to pretend that this is still a bond, not some toxic waste product). The issuing government would buy EFSF bonds to back the guarantee, to be held by a trust or an SPV. It has yet to be defined what constitutes a default, but in the event the investor would exchange the PPC for EFSF bonds at the trust/SPV.


There is also a discussion in the paper of the benefits and drawbacks. One drawback is the impact of the negative pledge clauses, which guarantees that the country that issues the bonds will not offer a more secure paper to investors later. Furthermore, since the programme focuses on primary markets only, it can only be used by countries that are not in a programme.


The second option is a similar to a classic CDO/SPV structure. The EFSF sets up the SPV with at least three tranches: the EFSF would be holding the equity tranche – which absorbs first losses – while private investors hold Participation Capital Instruments (PCI), which sounds like a mezzanine tranche, plus senior bonds. The SPV would lend to sovereigns, and invest in primary and secondary markets. All tranches of this CDO would be traded. Among the benefits the paper lists that the structure might attract sovereign wealth funds.


It seems that option 2 is preferred because it is more flexible.



EFSF will start to buy Italian bonds as soon as possible

The EFSF will start to buy Italian bonds as soon as it is operational, Le Monde writes. The reason for the pressure Angela Merkel and Nicolas Sarkozy exerted on Silvio Berlusconi at was to get the Italians ready to respond to the conditionality the EFSF will demand of Italy in exchange for supporting the country’s bonds. According to the paper Nicolas Sarkozy and the French government are particularly worried about Italy and push for a quick EFSF intervention.“ According to a government minister Italy is the ‘shock absorber’ for France”, the paper writes. “If it falls, the euro will fall as well.”


Berlusconi seemed to row back on the commitment, criticising Sarkozy and Merkel for trying to put Italy under pressure. A cabinet meeting to discuss reforms ended with no result.


Bundestag will vote in a plenary session on the EFSF

In a surprise move Angela Merkel’s chief whip Volker Kauder decided to hold a vote on Wednesday in the Bundestag’s plenary on the enhanced EFSF, Süddeutsche Zeitung reports. Until now the plan was that the budget committee gives Merkel a negotiating mandate for the leader’s euro summit on Wednesday evening. But the news of a considerable leverage for the fund had angered many deputies in the coalition and the opposition. Up until Monday morning, leading coalition parliamentarians had ruled out a plenary vote despite calls of the SPD and the Greens to do so. The vote exposes Merkel (and the rest of the eurozone) to considerable risk because a coalition majority is not certain, while SPD and the Greens have so far not committed themselves. Nevertheless Kauder argued that the vote was of “fundamental importance” and that that was the reason for his and Merkel’s decision to seek the mandate from the plenary.


EU seeks a “voluntary” 60% haircut

There is no wonder that these negotiations take so long because many of the actors involved have no idea what they are doing. The latest detour, as reported by the Financial Times, is the attempt to force a 60% “voluntary” haircut. The way the story is written appears to suggest that the plan is to force the haircut of 60%, and then label it “voluntary”. Germany does not seem to care whether it’s voluntary or (on this point we agree with the Germans. Either you do this properly, or you don’t do this at all. This is one of those issues where a compromise is worse than either of the extreme options.) The French, the ECB and the IMF are still concerned about the consequences of an involuntary haircut, but seemed to have yielded to the inevitable, and agree to give Vittorio Grilli a mandate to force this through. The articles quotes European officials scared at creating a credit event. The rules of the game are fairly clear. If the losses are forced on investors, there is a credit event, but a purely voluntary one is not. There is a grey area, of course (but with losses so big, most banks and investors have a clear idea whether they are in or out.)


First signs of a Greek bank run

The expected summit decision that banks will have to accept a loss of 50% or more on Greek bonds led to first signs of a bank run in Athens, Bild reports. The mass circulation daily’s Athens correspondent Paul Ronzheimer has been at several banks in the capital where he found people queuing in order to get their money out of their accounts. He quotes bank employees who talk of people walking away from the bank with €300.000 in cash and others who will hide their cash in fish, walls or bury it in their garden. “The situation is so alarming that only few people still have trust in their country”, he quotes one director of a bank branch.


Greek parliament will need opposition votes

The Greek government might seek a qualified majority of at least 180 in Greece’s 300-seat Parliament, once the rescue package reached in Brussels is put to a vote in Greece’s Parliament, Kathimerini reports. Finance Minister Evangelos Venizelos suggested on Monday that it is “not because this is a legal requirement but because it is a national imperative and political responsibility”.


The ECB will continue to be heavily involved in the Euro rescue after the enhancement of the EFSF

Even with a leveraged EFSF, the ECB will have to continue to intervene in order to stabilize Italy, Financial Times Deutschland and Frankfurter Allgemeine Zeitung report. FAZ quotes the draft conclusion of tomorrow’s euro summit, in which heads of state and government support the ECB in continuing to buy government bonds. But according to commission sources cited by the paper this is supposed to be understood as a formal instruction. The stories reveal that Angela Merkel’s assertion that the ECB would not be involved in the ECB was at best misleading. In reality, Nicolas Sarkozy seems to have gotten his way in assuring that there will be a continued ECB back-up even after the EFSF is up and running. The whole idea is based, of course, on the assumption that Mario Draghi will continue to buy government bonds of Italy and the other crisis countries. The news will further complicate Merkel’s efforts to get the Bundestag’s support because one of her main arguments for the enhanced EFSF was so far that it would relieve the ECB from its burden and allow it to regain its independence.


Recapitalisation plans may hit Italy, Spain and Portugal most

Italian, Portuguese and Spanish banks will be most affected by a €100bn recapitalisation plan, while their counterparts in the UK, Germany and France may avoid raising additional funds, Bloomberg reports. Policy makers may force banks to boost core-tier 1 capital to 9% of risk-weighted assets by the end of June, two people with knowledge of the talks said. Lenders may be able to mark up the value of bonds that are trading above face value, allowing them to mitigate the cost of writing down their southern European sovereign debt, the people said. That may benefit UK and German lenders, whose biggest holdings of bonds are those issued by their own governments, and may also allow French banks to avoid further capital increases.


George Soros on what it now takes to save the euro

George Soros has made a seven-point proposal on what it now takes to save the euro (not one of which is likely be politically acceptable.) The first is to negotiate a Treaty with the view to establish a fiscal union, while the ECB would immediately act as a lender of last resort (note, this is just one point). Second, EFSF takes over all Greek bonds held by ECB and IMF;

EFSF would then guarantee the banking system;

banking supervision moved to ECB;

ECB instructs banks to maintain credit lines;

ECB lowers interest rates to help governments raise short-term treasury bills;

markets will conclude that eurozone solves the problem in the short- and the long-term. Crisis over.


(It is quite clear that the actions needed to save the eurozone are miles apart from what is being discussed and likely to be politically acceptable. This is why the probability of a collapse of the eurozone is now rising.)


In an EU referendum 49% of UK citizens would vote for withdrawal

A poll for the Guardian suggests that two third of UK citizens wish to hold a referendum on the country’s membership in the EU., 49% would vote for withdrawal though there are marked differences across the age range.  Just 28% of the youngest voters aged 18-24 would vote to quit the EU, but there are 63% of those aged 65 and over would do the same.  An outright majority of Tory voters – some 56% – would vote to leave, as against 34% who would prefer to stay in. By contrast among Labour and Liberal Democrats, there are majorities for staying in Europe, although there are also sizeable minorities– 38% and 44% respectively – who would vote to get out.


Berlusconi: Shall I kill Lorenzo Bini Smaghi? (Of course not)

Financial Times Deutschland and Frankfurter Allgemeine Zeitung have a report on the summits reaction to Lorenzo Bini-Smaghi’s failure to resign from the ECB’s executive board (for now at least). Nicolas Sarkozy got angry because he cannot now appoint a Frenchman to succeed Trichet on the committee. Contrary to his promise to the French president Berlusconi has not yet managed to lure away Bini Smaghi whose mandate at the ECB has two further years to run. “Sarkozy started to get angry”, Berlusconi told reporters after the summit. “So I asked him at one point in time: What am I supposed to do? Should I kill him?” Berlusconi now appeals to Bini Smaghi to resign voluntarily by the end of the year in order not to become a “casus belli” between Italy and France.


Spreads, Forex, and ZC Swaps

That’s when markets are optimistic. Italian spreads still close to 4%, and French spreads over 1.2% – and this despite rising expectations of a backstop agreement on Wednesday.


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Source: Reuters




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