Eurointelligence Daily Briefing, 22 de Fevereiro de 2012

Paving the way for a quiet Greek exit

  • On the day when the deal was struck, Greece is revising its deficit forecast for this year down from 5.4% to 6.7% this year;
  • Anders Borg says that the goal of the agreement has been not to solve the Greek problem, but to isolate the eurozone from it;
  • Gregorz Kolodko, former Polish deputy finance minister, says the eurozone is heading into a slowly unfolding catastrophe;
  • Antonis Samaras says Greece will miss all the targets without growth (and there won’t be growth for a long time);
  • the head of the Greek commerce federation says the country will be stuck in recession for a long time;
  • the details of the 30-year swap bond came out yesterday;
  • the Greek parliament is now about to introduce a CAC with a two-thirds threshold;
  • some analysts are still concerned about an execution risk of the agreement;
  • CDS are likely to be triggered;
  • Le Monde says that confidence between northern and southern Europe has broken down;
  • Holger Steltzner says a third Greek loan programme is now likely, or else Greece will have to exit the eurozone;
  • a poll among readers of Le Figaro shows a large majority believe that Greece will not stick to its promises;
  • a Greek consumer organisation has called for a boycott of German and Dutch products;
  • Mariano Rajoy plans to go to Brussels to renegotiate the country’s 2012 deficit target;
  • Portugal’s January deficit was down;
  • the French parliament approved the ESM, with the Socialists abstaining;
  • George Magnus, meanwhile, said that a victory by Francois Hollande would lead to a fracture in the European consensus on austerity.


The troika’s shockingly frank debt sustainability analysis has told it all. This was a cynical exercise, in which even those agreed the dead do not believe in. And just on the day when the second  bailout package was approved, the targets are already slipping. The Greek parliament’s website published its latest forcast for the budget deficit this year to be 6.7% rather than the envisaged 5.4%, due to a stronger than expected recession,  Spiegel onlinereports .


We wrote about the details of the agreement in yesterday’s new briefing. Today we are focusing on reaction. We rarely quote finance ministers after an Ecofin meeting, but the chilling words of Anders Borg of Sweden are worth a full quote.


„Of course the Greeks remain stuck in their tragedy; this is a new act in a long drama. I don’t think we should consider that they are cleared of any problems, but I do think we’ve reduced the Greek problem to just a Greek problem.“


Poland’s former deputy finance minister Gregorz Kolodko was even more frank. Writing in the FT, he said:


„After the latest meeting of eurozone finance ministers, resulting in the decision to grant Greece a second €130bn bail-out, one might keep saying that things are on the right track. But they are not. They are heading for a catastrophe that is already unfolding, albeit in slow motion. Cheating the public and miscalculating and misleading the market is neither a strategy, nor a policy. It is sheer stupidity.“


Reuters sampled the reaction in Greece. Antonis Samaras said that none of these targets, not even the immediate fiscal targets, can be met without a return to economic growth. The article quotes Vassilis Korkidis, head of the Greek Commerce Confederation as saying: “We sowed the wind, now we reap the whirlwind… The new bailout is selling us time and hope at a very high price, while it doggedly continues to impose harsh austerity measures that keep us in a long and deep recession.” 


The overall market reaction was muted, with attention now focusing on Portugal.


Debt swap details are out; CDS are likely to be triggered



Greece released the details of the debt swap. The new 30-year bonds investors receive in part compensation for their current bonds, will carry a 2.0% payment pa until 2015, 3% until 2012, and 4.3% until maturity in 2042.European policymakers are slowly coming to terms with the fact that this is no longer a voluntary agreement. The Greek government yesterday brought in legislation to introduce CACs with a two-thirds threshold – hoping that this is low enough to ensure that the CACs will be triggered. The FT writes that about 20-25% of Greek bonds are now in the hands of hedge funds, which may complicate the deal. It quoted a bond experts as saying that he expected to see an execution risk. The article said that even some banks may not participate given the rise in the net present value loss to 75%. The Greek CDS will now almost certainly be triggered by this deal. The attempt to avoid a CDS trigger was the original motivation to engage in a voluntary debt exchange deal.


According to Le Monde confidence has down broken between Athens and Northern Europe

In its front page editorial called „Athens in a state of limited souvereignty“ Le Monde says that the more fragile eurozone countries have prevailed in imposing a transfer union for Greece. But the paper stresses that this victory comes with a price. „The group of the AAA’s has imposed its conditions. Between this group and the Greek leaders something has broken down: confidence. The Greek public finances are now being administered, a state of limited budgetary souvereignty is imposed upon Athens“, Le Monde notes.


Holger Steltzner sees Greece on the way towards a third credit package

Frankfurter Allgemeine Zeitung’s economic editor Holger Steltzner sees perverse incentives at work in the second Greek rescue package that will inevitably lead either to Greece’s exit from the eurozone or to a third rescue package. According to Steltzner the credits encourage Greece to continue without addressing the root causes of its problems.

„The prices must fall if Hellas wants to compete with its neighbors in agricultural products or tourism. Normally such an adjustment works via the exchange rate with the devaluation of the own currency. But members of the monetary union have relinquished this instrument. In Greece wages and prices would have to fall by half in order to become as successful as Ireland. That is too much, there is a lack of will and force. Therefore, a third credit package is coming – or the farewell from the euro“.


Le Figaro’s readers think Greece will not stick to its promisses

Out of roughly 10000 online readers of, almost 82% thought this morning that Greece will not stick to its promisses in the context of the second bailout package agreed Monday night, an online poll of Lefigaro.frshows.


Greek consumer boycott against German and Dutch products

The Greek consumer organisation INKA called for a boycott of German and Dutch products and to buy Greek products instead, Der Standard reports. “The most important message is for Greek consumers to buy more Greek products to strengthen our economy,” says Fotis Spiropoulos from INKA. But it is also a protest against the political pressure from Germany supported by the Dutch, to force Greece into “a new form of slavery”.


Rajoy to renegotiate deficit targets

El Pais has the story this morning that Mariano Rajoy and his economy minister Luis de Guindos plan to head to Brussels within the next 10 days to renegotiate this year’s deficit target of 4.4%, which is essentially unattainable, considering last year’s number of 8%. It would involve a budget adjustment of €40bn. The paper says the aim would be to get the deficit target raise to a few decimal points above 5%, quoting government sources.That would still require an adjustment of over €30bn, or twice as much as Rajoy’s first austerity plan. (Even a relaxation would still have the effect to prolong and deepen Spain’s recession. The same mechanism is here at work, as was in Greece.)


Sarkozy’s official candidacy declaration fails to pay off in the polls

An Ipsos poll for Le Monde shows that Nicolas Sarkozy’s official declaration to be a candidate at the presidential election in April and May did not make any difference. In the first round Sarkozy would make 25% compared to 32% for his Socialist challenger Francois Hollande. That is identical with a poll taken before the President’s announcment. The article points out that this voter behavior is exceptional because Valéry Giscard D’Estaing, Francois Mitterrand and Chirac Chirac had all been boosted in the polls by their announcements despite the fact that they were widely anticipated as was the case with Sarkozy’s announcement.


Portugal’s budget deficit fell in January

Portugal’s budget deficit in January totalled €436m, a drop of 41% compared to last year. According to the latest summary of budget execution from Directorate-General (DGO) for the Budget, the drop was mainly due to expenditure falling 12.7% as compared to January 2011, as the States’ revenues fell because of a 7.9% drop in tax revenues.  Jornal de Negocios  reports that government expenses fell in the double digits largely due to savings on salaries and withholding of funds that ceased to be transferred to the Autonomous Region of Madeira.  Some public companies, such as REFER and Metro do Porto, have not submitted the accounts in time to be included, and are likely to affect the balance negatively.


ESM approved by French parliament, Socialists abstained

French parliament approved the financing of the ESM bailout fund with 256 votes, 44 voted against and 131 abstentioned, according to Le Monde. The measure was part of an amended 2012 budget that includes a hike in VAT aimed at reducing France’s debt.  Party leader Martine Aubry defended the Socialists abstention by saying that this is a message the  Socialist MPs say  “yes to solidarity and no to austerity”. About twenty socialists voted against the ESM, among them Henri Emmanuelli, supporter of the ‘Non’ in the referendum about the Nice treaty in 2005.


George Magnus:  Hollande’s victory could challenge Merkel’s austerity dogma in Europe

Writing for Bloomberg, George Magnus argues that if, as opinion polls suggest Francois Hollande, ousts Nicolas Sarkozy in elections this spring, he could challenge Merkel over the austerity doctrine, and become a lightning rod for rising European opposition to the German approach to integration. Hollande has come out in favour of a series of key goals including a strong and specific emphasis on measures to spur economic growth, both nationally and at EU level; a more activist policy by the ECB with regard to sovereign-bond purchases; a well-resourced bailout fund or firewall; and joint and severally issued euro- area bonds. Magnus argues that if Hollande challenges Merkel on this, the future of fiscal integration in the eurozone may be called into question again. The ECB might scale down its engagements if it were to be taken hostage between the two emerging divisions, and it will build up resistance to further integration in Germany.


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

Bond market reaction to the Greek deal is muted.  But note the gradual flattening of the Euribor-Ois curve. At the hight of the latest crisis in December, the one-year spread was over 150bp. It is now at 126bp. Still high, but coming down. This is a metric of the success of the LTRO.










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Source: Reuters



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