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Legal and financial advisers warns eurogroup that PSI offer may fail
This is a cracker of a story by Peter Spiegel in this morning’s Financial Times. The restructuring of Greek debt is running into severe obstacles, as the eurozone is running out of time. According to the issues note, the eurozone needs to raise €93.5bn to complete the debt swap. Of that amount, €30bn would go directly to private bondholders as sweeteners, and €23bn to recapitalise Greek banks. But national parliaments are not expected to approve the release of the funds until after the debt swap is launched. The FT writes that the EWG proceeds along those lines despite having received outside legal and financial advice that the swap could fail without the money in place. The article quotes Lazard as giving the following written warning: “We would expect this uncertainty to reduce the chances that the offer succeeds… Greece would, in effect, be asking creditors to commit to tender their [Greek bonds] and to block them for a period of as long as three weeks without having any assurance that Greece will be able to deliver the EFSF notes that it needs to deliver to close the exchange.” The New York law firm of Cleary Gottlieb Steen & Hamilton, asked whether Greece would be bound by the debt swap offer once the invitation went out to private debtholders, said it would be legal to scupper the debt swap even after the invitation went out, but it warned against it. “Each sovereign restructuring is unique and sets a precedent,” says the legal note. “The adverse reputational consequences (for [Greece] as well as the rest of the EU) of launching a transaction that fails as a result of their collective failure to meet the conditions should be assessed very carefully.”
Eurogroup meeting cancelled as Greece failed to produce required documents and growing scepticism among EU partners Plans for a special eurogroup meeting on Wednesday were cancelled late on Tuesday night, as Greek government officials failed to provide the explanations about the €325m shortfall in savings and political guarantees demanded by creditor states. Ministers in the Eurogroup had been expected to gather in Brussels on Wednesday for a meeting which, if all had gone to plan, could have approved the bailout. Antonis Samaras has yet to sign a commitment to implement the deeply unpopular reform package according to reports. Reuters quotes a government source saying that Samaras would provide the undertaking on Wednesday morning. With New Democracy well ahead in opinion polls, Samaras is frontrunner to become the next prime minister. When parliament debated the austerity package he indicated that he would try to renegotiate the terms of the bailout, further sowing doubt in the minds of European leaders. The other issue is the €325m shortfall in savings. Kathimerini writes that the Greek cabinet examined a proposal to use cuts in defense spending, public investment funds and the health sector, but that this proposal was rejected by Euro Working Group — low-level EU finance ministry officials who were meeting in Brussels on Tuesday. Kathimerini’s sources said that the EU officials insisted that the additional savings should come from cuts to pensions.
Widening split in the EU over whether to prefer disorderly default over bailout
The FT reports that there also seem to be a widening split over whether Athens should be trusted with a second bail-out. Hardline officials in Germany, the Netherlands and Finland are increasingly urging a Greek default. One key reason for the increasing boldness in northern Europe is a growing belief the EU can contain the blowback from a disorderly default. Some officials also believe financial markets have priced in a default, meaning any adverse reaction will be limited.
Weidmann opposes the eurosystem’s help for Greece Jens Weidmann is opposed to any mechanism like a rapid distribution of the national central banks’ gains on Greek bonds to the governments that would lead to a contribution by the eurosystem to the second rescue package for Greece. „The key point is that we (the eurosystem’s central banks) are not allowed to renounce to demands against a state. This would be a form of monetary financing of that state“, Weidmann said in an interview with Handelsblatt. The Bundesbank president appeared to directly contradict ECB executive board member Benoit Coeuré who had told Libération on Tuesday: „Should there be a profit (on Greek bonds), like all monetary revenues, it is to be distributed to the (member) states“, the board member had said. “They could use it to contribute to the sustainability of Greek debt“. Weidmann further stressed that he was worried about the increasing risks that the eurosystem is taking on its balance sheet. Examples are the SMP and the loosening of the collateral framework by the central banks in France, Italy, Spain, Portugal, Austria, Ireland and Cyprus with quality standards below the standards currently in place in the eurosystem. „Also Mr. Draghi has conceded that with this acceptance of additional collateral the risks increase“, the German central banker said. Weidmann announced that the Bundesbank would probably announce an increase of its provisions of €1.6bn last year at its annual press conference in March in order to cover potential risks and losses.
Controversy over reports that Spain gets penalised Reuters started a row with its reports that the EU is likely to take action against Spain’s newly installed government by May for delaying austerity measures ahead of a regional election next month. Three senior EU officials told Reuters that a final decision still has to be made, but the European Commission believes the new government overstated the deficit figures for 2011 so the current year’s data would look better. Spain is also not addressing quickly enough the deterioration in public finances expected in 2012, risking the country’s longer-term growth, the officials said. El Pais reports that both the Spanish government and the European Commission categorically denied the reports .
OECD criticizes Germany for its lack of reform Angel Gurría of the OECD yesterday gave a critical assessment of the German economy when he presented the organization’s most recent country report on Germany in Berlin, Süddeutsche Zeitung reports. Gurría said the performance of the German economy had been „exceptional“ but the country risked to lose that dynamic quickly if it did not profoundly reform its tax system. Gurría recommended a stronger taxation of consumption and less tax burden on work, a reform of the pensions system, enhanced efforts to get people between 55 and 64 back to work and to scrap all incentives that lead to early retirement. Financial Times Deutschland quotes several EU parliamentarians and economists who severely criticize Olli Rehn for failing to point to Germany’s surplus economy while he issued recommendations to 12 countries yesterday for failing to improve their competetiveness. „The lobby work of the federal government has paid off, but that is not useful to the stability of the Eurozone“, Green MdEP Sven Giegold is quoted by the paper. „The Commission bows to the federal government and thereby it renders its new control instrument useless“, the SPD parliamentarian Udo Bullmann told FTD.
Controversy over reports that Spain gets penalised Reuters started a row with its reports that the EU is likely to take action against Spain’s newly installed government by May for delaying austerity measures ahead of a regional election next month. Three senior EU officials told Reuters that a final decision still has to be made, but the European Commission believes the new government overstated the deficit figures for 2011 so the current year’s data would look better. Spain is also not addressing quickly enough the deterioration in public finances expected in 2012, risking the country’s longer-term growth, the officials said. El Pais reports that both the Spanish government and the European Commission categorically denied the reports.
Bosch boss asks for Greece’s exclusion from the EU and the Eurozone There are more signs of Germany industry captains giving up on the eurozone. The head of Bosch, one of the best known German companies, said the eurozone should kick out the Greeks. The country’s economy was „ramshackle and an unbearable burden for a solidarity community“, Franz Fehrenbach told the economic monthly Manager Magazin. Should Greece not decide to leave voluntarily the company leader recommended a change of EU law and the exclusion of a country. According to a poll done among 300 economic decision makers in Germany 57% of the respondents favored the Greece reintroduces the drachma.
Claudia Buch replaces Beatrice Weder di Mauro in the „wise (wo)men’s group“ After the departure of Beatrice Weder di Mauro for UBS, economics minister Philipp Rösler yesterday nominated Clauda Buch to the Council of Economic Advisers, Frankfurter Allgemeine Zeitung reports. The 45-year old economist has a chair for money and currency questions at the University of Tübingen. Also she chairs the scientific advisory body to the economics ministry.
Sarkozy wants to use a referendum to introduce the golden rule Speaking to the leading UMP figures yesterday over breakfast, Nicolas Sarkozy said that he would use a referendum to get the golden rule into the constitution once he was re-elected, Le Figaro reports. The outgoing president acknowledged with the left wing majority at the Senate, it was very unlikely that the threshold for changing the constitution could be met in a regular vote of the so called congress, the body mandated to change the French constitution. So a referendum on the rule that is supposed to enshrine low deficit levels in the constitution was the other promising way, Sarkozy said.
Martin Wolf on Greece Marin Wolf devotes his column to discussing Willem Buiter’s latest analysis of Greece, in which he gives a relatively upbeat assessment of the likelihood that an agreement will eventually be reached, but a more downbeat assessment of what is to follow afterwards. We thought the most interesting point Wolf made relates to the eurozone as such. The eurozone is in a form of limbo: it is neither so deeply integrated that break-up is inconceivable, nor so lightly integrated that break-up is tolerable.
Successful Italian bond auction despite downgrade Italian borrowing costs fell yesterday despite a downgrade by Moody’s, as strong demand in a €6 billion government bond auction boosted sentiment, the FT reports. Italy was downgraded one notch to A3, six notches below the highest triple A rating. Yet the country sold €4bn of benchmark securities due November 2014 at a yield of 3.41%, down from 4.83% at the last auction of similar-maturity bonds on January 13. The bid to cover ratio was 1.4 times.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois Getting worse again. The relative good news is Euribor-Ois. The long-term rates are coming down, as the inter-banking sector is starting to breathe again.
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