Eurointelligence Daily Briefing, 21 de Fevereiro de 2012


Hurrah, Crisis over! Or Not!

  • Eurozone finance ministers reached a deal in the early hours this morning on a second Greek loan programme;
  • haircut to be increased to 53.5%, and debt to stabilise at 120.5% in 2020 if all reforms are implemented (and in the absence of any negative shocks);
  • there will be an enhanced and permanent presence of the Commission  in Greece;
  • Greece agreed to pay three months of debt repayments into escrow account;
  • Greece will introduce over the next two months a legal provision ensuring that priority is granted to debt servicing payments;
  • The ECB’s profits on Greek holdings will be disbursed to member states via national central banks;
  • member states agreed to an additional retroactive lowering of the interest rates;
  • most of the €130bn are earmarked to fund the bond swap;
  • the leaked troika’s debt sustainability report says Greek debt would stabilise at 160% if reforms are delayed, or only partially implemented;
  • says more bailout funding is needed in 2014;
  • says virtually all the risks to the 120% debt-to-GDP scenario are on the downside;
  • Portuguese Socialist leader told troika that Portugal needs more time;
  • twelve EU countries, but not Germany and France, sign a letter calling for a new EU growth agenda;
  • the ECB has made no bond purchases last week;
  • Peter Praet says ECB has a good understanding of the effects of the LTRO;
  • Angela Merkel is badly bruised after her coalitions agreement on the new German president;
  • Bundesbank says house prices rose 5% in Germany last year;
  • Germany’s Target 2 balances are now over €500bn;
  • Fitch has increased the rating of Iceland to BBB- with a stable outlook as the country escapes from the crisis;
  • Guy Mandy of Nomura, meanwhile, makes the case for the ECB to issue debt certificates.


Euro zone finance ministers sealed a second bailout for Greece in the early hours of Tuesday, after negotiators for private bondholders accepted bigger losses to help plug the funding gap, the FT reports.  Private bondholders will now be offered a “voluntary” deal with a haircut of 53.5% in nominal value up from 50% agreed last October. The second bailout deal will get Greek debt levels to 120.5% by 2020.


The Eurogroup statement in full is on Reuters, here are the main points:

–          There will be an enhanced and permanent presence of the Commission  in Greece;

–          Greece agreed to make debt repayments to an escrow account;

        Greece will introduce over the next two months a legal provision ensuring that priority is granted to debt servicing payments.

–         The ECB’s profits on Greek holdings will be disbursed to the National CBs, and will be disbursed to euro area Member States. These revenues may be used by Member States to further improving the sustainability of Greece’s public debt;

–          National governments committed to pass on to Greece future income on Greek bond holdings of their national CB until 2020. The income flows would be expected to help reducing the Greek debt ratio by 1.8pp by 2020 and are estimated to lower the financing needs over the programme period by approximately €1.8bn;

–          All Member States agreed to an additional retroactive lowering of the interest rates of the Greek Loan Facility so that the margin amounts to 150bp. This will bring down the debt-to-GDP ratio in 2020 by 2.8pp and lower financing needs by around €1.4bn over the programme period. National procedures for the ratification of this amendment to the Greek Loan Facility Agreement need to be urgently initiated;

–          Member states national procedures to allow for the provision by EFSF of (i) a buy back scheme for Greek marketable debt instruments for Eurosystem monetary policy operations, (ii) the euro area’s contribution to the PSI exercise, (iii) the repayment of accrued interest on Greek government bonds, and (iv) the residual (post PSI) financing for the second Greek adjustment programme, including the necessary financing for recapitalisation of Greek banks in case of financial stability concerns.


The vast majority of the funds in the €130bn programme will be used to finance the bond swap and ensure Greece’s banking system remains stable: some €30bn will go to “sweeteners” to get the private sector to sign up to the swap, €23bn will go to recapitalise Greek banks.  A further €35bn or so will allow Greece to finance the buying back of the bonds. Next to nothing will go directly to help the Greek economy, Reuters reports.


Pro-bailout politicians unpopular in Greece

In Greece latest polls show that the two parties backing the austerity programme fell to an all-time low,Kathimerini reports. The survey by pollster GPO was carried out on Feb 16-21, a week after lawmakers of the conservative New Democracy and the Socialist PASOK parties approved the austerity package demanded by Greece’s international lenders.  Backing for the two main parties fell 2pp, for New Democracy to 19.4 % and for PASOK to 13.1%. “This is the lowest level for the two parties that we have ever recorded,» GPO’s head pollster Takis Theodorikakos told Mega TV. Leftist, anti-bailout parties – the Left Coalition and the Democratic Left – gained, the GPO poll showed.  The poll also showed that most Greeks want to stay in the euro zone, with 77% saying their country must keep the currency «at all costs», the same percentage as two months ago.  Almost two-thirds of respondents said a coalition government was best suited to deal with the country’s problems. On current poll numbers, New Democracy would fail to win an absolute majority in the election and would depend on the Socialists to govern. Those undecided or not intending to vote made up 27%.


Leaked Troika report on debt sustainability throws doubt on the strategy

The IMF’s debt sustainability report was leaked to several news organisations, including the FT and Reuters. It basically says that the agreed numbers in the Greek package are balloney. We quote from the text. For further details see the FT’s Brussel blog:


„There are notable risks. Given the high prospective level and share of senior debt, the prospects for Greece to be able to return to the market in the years following the end of the new program are uncertain and require more analysis. Prolonged financial support on appropriate terms by the official sector may be necessary. Moreover, there is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term. In this context, a scenario of particular concern involves internal devaluation through deeper recession (due to continued delays with structural reforms and with fiscal policy and privatization implementation). This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it.“


There are a number of other sobering comments in the assessment. One is that given the extent of the official sector’s involvement, all private sector debt is now effectively junior. That means that Greece will not get back to the market for the forseeable (meaning in our livetimes).  Also, the FT writes, there was a hidden reference to a further €50bn bailout likely to be needed in 2014. The assessment also says that it is subject to risks that are mostly on the downside (which is another way of saying that the assessment is biased).


The programe foresees that the Greek primary balance improve from -1% in 2012 to 4.5%. If there is any slippage in the reforms and on privatisation, the IMF’s foresee a very negative debt dynamic. Under this adverse scenario, debt-to-GDP would peak at 178% in 2015, and come down only to 160% in 2020. It would then take another decade to stabilise the debt at 120%.


Our comment

This report is absolutely incredible. Not only is the troika’s strategy once again based on the most optimistic of all optimistic assumptions about future state of the world. The troika no longer seems to believe in the success. The report essentially says that Greece is bankrupt under any reasonable assumptions.


Socialist leader told troika that Portugal needs more time

Antonio Seguro, leader of the Socialist Party that secured Portugal’s bailout program last May, broke ranks as he told a visiting inspection team from the ‘troika’ of lenders that the country needed more time to hit the fiscal goals set under the loan, Reuters reports. Last year, Portugal met the 5.9% deficit target, but only thanks to a one-off transfer of banks’ pension fund assets to the state. Passos Coelho said Lisbon would seek no more emergency funding or extend its bailout. Latest data showed that tax revenues in January were down by 8% compared to last year, according to Jornal de Negocios, and that public companies’ debt as a percentage of GDP rose to 27% in December, up from 25% a year earlier.


Twelves countries – but not Germany and France – sign letter to call for a growth agenda

This is an interesting story from Reuters because it points to a division among eurozone member state on a crucial strategic issue – whether to prioritise growth or austerity. Twelves countries, including Italy and the Netherlands, have called on the EU to shift the focus towards growth. The articles suggests that Mario Monti has been the driving force behind this initiative. The article said the letter was a challenge to the German position that austerity must come before growth. The letter specificially advocated an opening of the internal market to services.


In a speech in Milan, Monti also said that if Italy missed its deficit targets as a result of a deeper recession, he would not be proposing another austerity package.


No ECB bond purchases last week

For the first time since last August, the ECB made no purchases last week, a sign of a relatively positive maket dynamics that resulted from the LTRO. The news also suggests that the ECB has pitched the LTRO as an alternative to the securities market programme (one that has a broadly similar economic effect, but the legal position is different).


Reuters quotes Peter Praet as saying that the ECB „had a good idea of what is happening“: the LTRO has succeeded to stabilise the long-term funding of eurozone banks, and broken a dangerous dynamic in December. He said, however, that it was not clear year how it would affect the banking sector and the real economy.


Coalition struggle about the president leaves partners bruised

The power struggle between the liberal FDP and Angela Merkel’s christian democrats has massively angered CDU and the Bavarian sister party, Süddeutsche Zeitung reports. According to the paper the chancellor threatened at one point on Sunday afternoon to break up the caolition if FDP party chairman Philipp Rösler did not give up backing Joachim Gauck, who eventually got the job. But Gauck had received the backing of the entire FDP party leadership to be tough because it was seen as neccessary to confront the Christian Democrats in order to rebuild the credibility the party has lost since the elections 2009. Butt the Bavarian prime minister Horst Seehofer and Volker Kauder, the CDU’s chief whip, both warned that there would be payback time for the liberals  and at the next conflict they would force their solution on them.


Bundesbank report shows continued rise of house prices in Germany

In its monthly report the Bundesbank points out house prices have risen in Germany last year by 5.5%, Frankfurter Allgemeine Zeitung writes. According to the report the rise had been 2.5% in 2010 and both rises this and last years are the first since the 90s. The Bundesbank also points out that this is the first time since long that an economic upswing is accompanied by rising house prices. But the German central bank warnst hat the declining demography could stop that trend quickly.


The Bundesbank’s target 2 balance has reached a record level

Börsenzeitung reports on its front page on the most recent target 2 balance figures from the Bundesbank’s monthly report, which have reached a record level of €511bn. Since German banks distrust eurozone financial institutions, the crossborder flow of private money has practically come to a standstill and has led to a rise in target 2 claims against the ECB. The record level is likely to fuel the debate about the risks associated with the target 2 balances in case of a breakup of the eurozone.


„We are not Iceland“

Writing in the Irish economy blog, Stephan Kinsella makes fun of the popular notion in Ireland that „we are not Iceland“. He says this is true because Fitch has just upped their rating of Iceland‘s debt to BBB- with a stable outlook. He also notes that Iceland is coming out of the recession quicker than Ireland.


The case for ECB debt certificates

FT Alphaville has a very interesting technical article referencing a comment by Guy Mandy of Nomura, who makes the case for ECB debt certificates. Mandy says that LTRO’s have given rise to excess liquidity that is seeking some long-term returns. The ECB’s reverse liquidity operations to sterlise the SMP are subject to significant overbidding. If the ECB were to introduce debt certificates at varying maturities, it would be able to stabilise the money market situation, which has still not recovered, since banks now have the choice a riskless ECB deposit facility, as opposed to risky lending in the interbanking-market. Debt certificates would provide a useful collateral for use in inter-bank repo operations.


10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

Spreads relatively stable. Euro rise on the news of the agreement.










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Source: Reuters




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