 Fitch says Greek exit from Eurozone possible
There seem to be some progress in the PSI+ negotiations, but Fitch managing director David Riley still warned on Tuesday that an exit by Greece from the eurozone in 2012 was a possible option, Kathimerini reports. He said that even a 60% haircut to Greek bonds would not lead to a substantial reduction of the country’s debt. However, he stated that his main worry was Italy, whose debt and refinancing needs are particularly high. Credit Management Association puts Greece’s chances of a default in the next five years at 93.8%, according to a report it published on Tuesday. The state’s overdue debts to third parties remain high, amounting to €6.63bn in the January-November period. The ministry with the highest debts is that of National Defense, which owes €292m, followed by the Infrastructure Ministry (€269m). Willem Buiter expects a long recession, and has raised his euro break-up probabilities We are skeptical about any numeric values to the possibility of a Eurozone breakup. It is all part of the financial industry’s pretensions that they have some sort of a reliable model through which they can peak into the future. That said, Willem Buiter (hat tip FT Alphaville) has raised his numbers for the breakup probability of the Eurozone – attaching a 25% probability to the departure of a peripheral country and a 5% probability to the departure of Germany. (We think, intuitively, the first is about right, but the second is too high.) He also predicts that 2012 will be a year of recession for the whole of the Eurozone, due fiscal tightening and reforms, to be continued in 2013, and followed by continued weak demand in subsequent years. On PSI, Greek sovereign bond holdings and the ECB FT Alphaville made an interesting point that while the ECB has opted out of the PSI, it still faces the risk of restructuring, as the Greek parliament prepares to draw up and vote on the retro-CAC law, making Greek law bonds, such as those held by the ECB, easier to restructure later on. The ECB with its estimated €45bn of Greek sovereign holdings would face huge bond write-down losses if the CACs were triggered further down the line. If the ECB resisted insertion of CACs into its own holdings successfully, that would suggest the central bank was indistinguishable from a senior creditor. The Tobin tax has already been introduced by the French parliament in 2001 The Tobin tax championed by Nicolas Sarkozy has already been introduced by the French parliament in 2001, Le Figaro writes referring to an article in the satirical weekly Le Canard enchainé to be published today. The draft law was introduced by the Socialist government of the time prime minister Lionel Jospin and signed by Jacques Chirac, Sarkozy’s predecessor. It says that all financial transactions of more than €75.000 shall be taxed with 0.1%. The text states however that the law shall only be applied once it is introduced on an EU level. In order to make the tax reality it would be sufficient to just scrap this one sentence the article concludes. Sarkozy’s 2007 election accounts will be examined by a judge Nicolas Sarkozy’s accounts of the 2007 presidential elections will be examined by a judge, Sud-Ouest reports. The examination is part of a research done by the judge Jean-Michel Gentil in the context of potentially illegal political financing by the L’Oréal inheritor Liliane Bettencourt, which involves Eric Woerth, the former budget minister who had been forced to resign in the context of the affair and who was one of Sarkozy’s allies. Regulators may expand yoo-big-to-fail definition Global regulators may expand the definition of a too-big-to-fail financial firm, Bloomberg reports, signing up domestic lenders, clearing houses and insurers to capital rules designed for the world’s biggest banks. 29 banks are subject to the so-called capital surcharge on globally systemic financial institutions drawn up by the Financial Stability Board (FSB) in November. Banks will have to boost reserves by 1 to 2.5 percentage points above minimum levels agreed on by international regulators. Portugal plans no new measures, central bank cuts forecast, dockworkers strike Portugal doesn’t plan any additional austerity measures this year, Finance Minister Vitor Gaspar said in parliament yesterday. With respect to the document suggesting a 5.4% deficit this year, cited by Jornal de Negocios, Gaspar said that “the document that appeared in public is an internal working document was never intended for public communication but to inform a debate”. He did not comment on the content though. Portugal’s central bank lowered its economic outlook for 2012, citing a worse-than-expected drop in internal demand. The central bank expects the economy to contract 3.1% this year, slightly worse than the government forecast of 3%. Portuguese dockworkers are on a five-day strike since Monday, compounding the economic problems of the country. Denmark wants to sign the fiscal pact Denmark which took over the EU presidency from Poland this month reiterated its willingness to sign the fiscal pact, Süddeutsche Zeitung writes. Denmark wants to do everything it can to consolidate the euro because it fears that a euro implosion may also unravel the internal market on which 500,000 Danish jobs depend. Also the Danish prime minister Helle Thorning-Schmidt who was allegedly told during the December summit by Nicolas Sarkozy to shut up does not want to be seen on the sidelines of EU affairs. However Denmark is eager to avoid a referendum on its participation in the fiscal pact and will therefore demand written guarantees that the participation does not in any way force the country to adopt the euro at a later stage. Bild lauds Merkel’s force but laments her isolation Bild’s deputy editor Nikolaus Blome writes in comment that Angela Merkel is always strong when she faces grave problems. In those cases she first thinks about the situation at length, she calculates the potential outcome and then she acts decisively, he writes. However Blome warns there is nothing Merkel can do about her two most pressing current problems: the scandal surrounding the doubtful financial dealings of the federal president Christian Wulff and the erratic behaviour of her liberal coalition partner FDP. „Even the strongest person cannot stay strong for long if she is alone“, Blome concludes. Spain will fight to retain its member in the ECB board Spain is willing to fight in order to keep its member in the ECB board, Financial Times Deutschland reports. The paper quotes a eurozone central bank source who told Reuters that a group of smaller countries of euro areas north wanted to take advantage of Spain’s current weakness in order to conquer the seat in the board that the current Spanish member José Manuel González-Páramo will have to vacate at the end of his term on May 31. But like Germany, France and Italy, Spain considers itself one of the big eurozone economies that are entitled to a permanent seat in the powerful six member board. With the BIS president Jaime Caruana and the Bank of Spain’s general director José Maria Róldan the country has two highly regarded potential candidates. The northern countries led by the Netherlands have yet failed to agree on a candidate although they do have experienced central bankers such as Luxemburg’s Yves Mersch or Finland’s Erkki Liikanen. Italy’s banks absorb a quarter of total ECB liquidity This story is a sign of the desolate state of the Italian banking system. FT Alphaville reports that ECB lending to Italian banks increased from €153.2bn in November to €210bn in December, absorbing almost a quarter of total ECB liquidity. Italian banks are among those that have drawn very heavily on the ECB’s three-year tender before Christmas. Writing in the Financial Times, Mohamed El Erian warns the Germans against rejoicing over the negative interest rates. Investors are selling peripheral debt, and are now moving into German debt. Another factor is operational stress. Banks need high quality collateral. He says all this may be short-lived, but if not, we may be witnessing “an accelerating disengagement of the private sector from the region’s economic integration project” with a negative impact on growth and employment. Wolfgang Münchau on negative interest rates In his FT Deutschland column, Wolfgang Münchau argues that Germany’s negative yields have three implications. The first is a realization that the ECB’s liquidity policies are not working, at least not in the way they were intended. Most of the money went straight back to the ECB, and most of the rest goes into Germany short-dated bonds, which explains the negative rates. Second, the lower drift of market rates will ultimately force the ECB into rate cuts, and possibly into quantitative easing. Third, we will soon have a broad discussion about negative interest rates, as zero is not really a technical lower bound, as economists have always assumed. 10-Y Spreads, Forex, ZC Swaps and Ois-Libor |