 Greek package in serious trouble over dispute about haircut
Greece’s new €130bn rescue package could be delayed, after talks on a voluntary haircut for private sector bondholders ended without agreement on Tuesday, according to the FT. “We did make some progress, but the key issues remain open and unresolved,” Charles Dallara, head of a consortium of financial institutions, said in an interview. Among those issues are whether government would be treated the same way as private debt holders and whether the new bond issuance under the haircut would be governed by UK rather than Greek law. Negotiators said talks could restart as early as Thursday in Paris. But timing has become part of the negotiating strategy on both sides, with eurozone negotiators believing that their threat of an involuntary default would appear more real if talks get closer to the larger bond repayment date in March.
IMF warns that Greece is behind schedule with its reforms Poul Thomson from the IMF warns that Greece is failing to implement the reforms envisaged and that there is no more scope for tax increases. His comments came as government figures showed that the budget deficit in November was€20.5bn, high but within the revised target of €21bn set by foreign creditors, Kathimerini reports.
The euro falls The euro’s relative strength this year has been something of an enigma – discussed at length in the FT this morning. It is now falling back again, but the reported trigger seems rather odd to us. The newswires reported that the fall – to $1.3039 this morning – was triggered by comments from Angela Merkel yesterday that the size of the ESM would not be increased. This is not really news, as this was already in the conclusions of the European Summit on Friday. No banking licence, and no increase in funds. The complexity of the European mess has now reached a level that the markets can no longer penetrate – and this constitutes a further element of uncertainty.
Yields on the rise at Greek T-bill auction Greece’s Public Debt Management Agency sold €1.625bn of six-month T-bills on Tuesday, Reuters reports, with the yield rising by 6bp compared to the last auction in November, now paying 4.95%. The sale’s bid-cover ratio was 2.93. Monthly T-bill sales have been Greece’s sole source of market funding since it was shut out of bond markets early last year. The sale will help fund the rollover of a previous 2 billion euro issue that matures on Dec. 16.
Italians mobilise to buy up government debt Italy sold €8bn in 3y bonds to private investors in an oversubscribed auction this Monday. Italians mobilise to buy up Italian bonds, an initiative started by the Italian businessman Giuliano Melini. Currently Italian private bondholders hold 14% of the state bonds, one fifth of their wealth, according to Der Standard.
Germany’s CEO’s think Merkel is a strong chancellor While Angela Merkel is getting much criticism around the world for her leadership qualities (or the lack of them) Germany’s business elite gives her rather good ratings. According to a poll among 500 German business leaders done by the Allenbach-Institut for „Capital“ magazine, the number of those who think she has shown strong leadership qualities in the euro crisis recently has almost doubled to 70%, Financial Times Deutschland writes.
Future French ECB board member favours stepping up SMP in case of a crisis escalation The new French ECB board member Benoit Coeuré is in favour of stepping up the SMP should the crisis escalate further. „The ECB should be vigilant and look is it needs to do more“, the deputy director of the French treasury told the EP’s Econ-committee, according to Frankfurter Allgemeine Zeitung. With his stance Coeuré is clearly more positive about the controversial bond buying program than most other board members and central bank governors who have recently either emphasized the limited nature of the program or not commented publicly at all. Last week the ECB drove down its weekly volume of bonds bought to just €635m.
Advanced ESM implementation forces Schäuble to modify the budget The summit decision to activate the ESM already by mid-2012 instead of 2013 will force Wolfgang Schäuble to introduce a supplementary budget in the magnitude of at least €4.3bn in June next year, according to Bild.
Fears of a split within Merkel’s liberal coalition partner There are fears that Angela Merkel’s liberal coalition partner FDP may end up splitting as a result of the deep divisions on the euro crisis response, Bild reports. The reason is a party referendum on the ESM that finished yesterday and the results of which will be announced on Friday. FDP chairman Philipp Rösler had already announced on Sunday that the request that liberal parliamentarians vote against the ESM in the Bundestag had been defeated. Now the opponents to the government’s euro policy think about splitting and founding a new party.
Bundesbank conditions bilateral IMF loan to other countries’ participation Jens Weidmann wrote a letter to Wolfgang Schäuble in which he conditioned the Bundesbank’s €45bn bilateral loan to the IMF on the participation of all other EU members and significant loans from non EU countries, Financial Times Deutschland and Süddeutsche Zeitung report. The Bundesbank president’s request is… significant because the US and Japan are so far not prepared to send the IMF more money that would most likely be used to bail out large euro economies like Italy and Spain. Also within the EU some countries like the Czech Republic hesitate. In the Bundestag the budgetary committee will today take note of the Bundesbank bilateral loan. The central bank had asked parliamentarians to deal with the issue because the loan effectively extends the ceiling of the German guarantees to the euro rescue that Bundestag had fixed at €211bn.
Jean Quatremer on the dangers of the pact In his blog, Jean Quatremer asks the questions whether an inter-governmental treaty that bypasses the European Parliament and national parliament in its inception can ever see the light of day. If this had been a normal treaty process, there would have been a constitutional convention, made up of a wide representation of parliamentarians across the EU. That is not the case now. Springing a final agreement between governments onto parliaments at the ratification stage may simply not work.
Seperately, the FT reports this morning that several member states face implementation difficulties. It appears that the non-eurozone countries will make their ratification contingent on whether they can get an exemption from the pact.
John Kay on why the fiscal pact will fail John Kay argues in his FT column that the word “fiscal union” is misunderstood. In the European continent it does not mean sharing of tax revenues, but simply a balanced budget rule. He points the inherent contradiction in such a setup. “… The purpose of the planned mechanisms is to avoid a break-up of the eurozone and the measures will fail in their purpose if they do not offer a reassurance that no member will be allowed to fail. But the necessary consequence of providing that reassurance is that Europe loses its only effective leverage against recalcitrant members.”
This is was also the problem with the old sanctions procedure.
Martin Wolf is getting really pessimistic about the eurozone Martin Wolf has been trying, for weeks, to explain the economics behind eurozone adjustment. We doubt there are many people in Brussels or the national capitals who have any idea what he is talking about, as they are trying to reduce the entire crisis to the lack of fiscal discipline. Wolf writes that such a Draconian fiscal adjustment, if enforced, would causes a massive and long recession. The argument is essentially that the eurozone will not be able to achieve a large current account surplus (due also to the economic situation in the rest of the world). This means that the saving of the governments will have to be compensated by the dissaving in the private sector. “This leaves much the most plausible outcome of the orgy of fiscal austerity: long-term structural recessions in vulnerable countries. To put it bluntly, the single currency will come to stand for wage falls, debt deflation and prolonged economic slumps. Can this stand, however big the costs of a break-up?
10-Year Spreads, Forex, ZC Swaps and Ois-Libor Spreads up, euro down. The crisis is back.
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