Eurointelligence Daily Briefing, 16 de Maio de 2012. Enviado por Domenico Mario Nuti.

Greek president warns of a bank run – and Spain’s spreads top 500bp for the first time

  • Greek parties fail in a last-ditch attempt to form a government;
  • there will be new elections, most like June 17;
  • decision followed an attempt by the Democratic Left to broker a deal, whereby ND and Pasok would renounce the promises they made in a letter to the EU;
  • the Greek election campaign has already started, with centrist leaders trying to portray the poll as a vote for or against the euro;
  • President Karolos Papoulias said he had been informed by the central bank governor that there was a danger of a bank run in Greece;
  • statistics show that Greece have stepped up bank withdrawals since the elections;
  • former Greek PM Costas Simitis says leaving the euro would be a disaster for Greece;
  • the caretaker Greek government has decided to service the current tranches of Greek international law bonds;
  • Cyprus has become the latest country to run into trouble with its banks, and is likely to request official help soon;
  • Francois Hollande was inaugurated as president, takes off to Berlin, and tells Angela Merkel that he really wants to renegotiate the fiscal pact;
  • he says the eurozone will miss its deficit targets without a stronger effort to raise growth;
  • he said all options, including eurobonds, will have to be carefully considered;
  • the German economy grew by 0.5% in Q1, helping the eurozone to achieve an overall rate of zero;
  • but experts warn that the German performance is unlikely to be sustained as the global economy turns down;
  • Hollande names the former German teacher Jean-Marc Ayrault as his prime minister;
  • Michel Sapin and Pierre Moscovici are considered the most likely candidates for the finance ministry;
  • the ECB and Germany are at loggerheads over what to do with the EFSF guarantees to the ECB during the Greek PSI;
  • Spain wants to co-opt the ECB into its bank resolution strategy;
  • five candidates are standing for the EBRD presidency, with the eurozone unable to announce its own candidate;
  • Fitch says another LTRO is needed because banks will not have deleveraged in time to repay the old one;
  • John Kay says economists’ notions of credibility was incompatible with democracy;
  • Robert Skidelsky, meanwhile, wonders what Keynes would have done.

Spain’s 10-year spread has risen to above 500bp this morning for the first time in the eurozone;


The big news yesterday were the announcement of new elections in Greece, and the extraordinary statement by the Greek president that the country may already be subject to a run (something that can easily become a self-fulfilling prophecy). As we are writing our newsbriefing this morning, the Spanish 10-year rose to over 500 basis points for the first time. The eurozone crisis is once again in a highly acute phase.


Greece is likely to hold elections on June 17, after party leaders failed on Tuesday to agree on the formation of a government despite efforts by President Karolos Papoulias to broker a last-ditch deal. After barely two hours, the meeting was over. Kathimerini reports that Democratic Left leader Fotis Kouvelis had put forward a proposal to break the deadlock during the meeting. SYRIZA leader Alexis Tsipras had argued that it was impossible for his party to form a government with PASOK and ND as their leaders, Evangelos Venizelos and Antonis Samaras, had given the EU and IMF written pledges to keep to the terms of the loan deal. Kouvelis suggested this could be overcome by Venizelos and Samaras giving fresh pledges to back the new government’s efforts to negotiate a gradual disengagement from the EU-IMF bailout. But the proposal was not backed.


Almost immediately after the meeting, Greek party leaders were in front of cameras and supporters in spirited pre-election campaign mode.  “The message you sent is clear: ‘Yes’ to the euro, ‘No’ to those policies which devastate the Greek people,” Reuters quotes Samaras.   New Democracy sources told Kathimerini that during the campaign Samaras would focus his attacks on Tsipras rather than Venizelos. The conservatives believe that they have to turn the campaign into the question of staying in the euro or returning to the drachma. They will attempt to convince voters that SYRIZA’s economic policies would lead to Greece having to leave the eurozone.


Has the Greek president invited his countrymen to take part in a bank run?



He spoke the truth, but when it comes to the likelihood of bank run, you politicians to shut up.

It emerged yesterday that George Provopoulos, head of the Greek central bank, told President Karolos Papoulias that Greeks have withdrawn as much as €700m and the situation could worsen,Bloomberg reports. “Provopoulos told me that of course there’s no panic but there’s great fear which can evolve into panic,” Papoulias said. The ECB needs to step in to guarantee the deposits of the regional lenders to fend off contagion, Yannis Ioannides, economics professor at Tufts University, told Bloomberg TV.


Leaving the euro would be a “catastrophe” for Greece, with the risk of a run on banks, former Greek Prime Minister Costas Simitis is cited by Bloomberg. Banks would have to close for at least three months while preparations, including printing a new currency, are made, Simitis said, citing the views of “experts.”


In another development, the caretaker government in Athens decided to service the interest payment on the holdouts. The government this is not a decision, merely an acknowledgement that it is not in a position to take a decision.


Cyprus likely to tap the EFSF/ESM



Cyprus’s banks sustained huge losses as a result of the Greek debt write-down, with the two biggest, Bank of Cyprus and Laiki now being called upon to proceed with significant recapitalization measures. Bank of Cyprus is already close to its goal, though Laiki is still quite far off the mark, as it needs €1.8bn in fresh capital. Newly appointed Finance Minister Vassos Shiarly said the government was ready to discuss ways in which it could contribute, if the need arises. 


A €2.5bn loan from Russia has largely covered Cyprus’s financial needs for 2012, but this money is insufficient to bolster the banking system as well if the need arises. But the fiscal deficit is already behind target and Shiarly had to announce new measures to keep the deficit below 2.5%.  Given these developments, the likelihood of Cyprus having to resort to a support mechanism to ensure the domestic banking system has the necessary capital is no longer just theoretical, writesKathimerini.


Hollande insists that the fiscal treaty must be renegotiated


In his first meeting with Angela Merkel after being sworn in as president Francois Hollande insisted last night that the fiscal pact be “renegotiated”, Les Echos reports. According to the new French president the aim is “to integrate a growth dimension” into the treaty. “Our method is to put all ideas on the table and to see afterwards how they can be legally implemented”. By staying firm on his request to actually renegotiate the treaty that has already been ratified by several euro member states and not accept simply adding growth enhancing measures Hollande was tougher with the chancellor than many expected. But the president’s calculation appears to be that the chancellor is significantly weakened by her recent electoral defeats in state elections. Also Hollande warned “without growth we cannot respect the aims that we have fixed ourselves regarding the debt and the deficit”. As a candidate Hollande has repeatedly promised to bring the deficit to 3.0% in 2013 and to present a balanced budget by 2017. But the commission last Friday warned that without drastic additional measures the French deficit would be 4.2% next year.


France trails Germany in terms of the growth rate



New Eurostat figures showed a considerable difference between France and Germany in terms of growth rates, Le Figaro reports. While Germany grew by 0.5% in Q1 of 2012 the French rate was 0% for the same period. Germany pushed up the eurozone growth to 0%. However, certain experts caution that the German rate is no precursor to strong and sustained growth in Germany. Italy’s economy shrank by 0.8% and Spain by 0.3% in Q1 2012 according to Eurostat.


Hollande names Ayrault as prime minister


Francois Hollande yesterday nominated the former the Socialist’s former chief whip in parliament Jean-Marc Ayrault prime minister, Le Monde reports. The nomination of the former German teacher who is considered to be a pragmatic social democrat will reassure those in Germany and Europe who had feared a traditional left wing politician such as the Socialist’s former chairwoman Martine Aubry. Hollande and Ayrault are working on the government portfolios which will be attributed and announced today. According to Les Echos the finance ministry will either go to Michel Sapin, a former finance minister already under Francois Mitterrand, or to Pierre Moscovici, a former Europe minister in Lionel Jospin’s government. The foreign ministry could go to former French prime minister Laurent Fabius or to Moscovici if he does not get finance. According to Les Echos, Aubry may get a big ministry for education, research and culture.


ECB and Germany fight about €35bn of guarantees


The ECB and Germany clashed in Monday night’s eurogroup meeting on what to do with €35bn of guarantees the EFSF had given to the ECB during the time of the Greek PSI, when the ECB was no longer able to accept Greek government bonds as collateral, Financial Times Deutschland reports. Germany and the EFSF argue that the ECB should repay those guarantees since the PSI had been successfully implemented and only a handful of Greek bonds were still rated as selective default (SD). The ECB, however, refers to a treaty clause that says that it may keep the guarantees as some of the Greek SD bonds are still around. The ECB also argues that the uncertain situation requires keeping the guarantees. Germany thinks the ECB’s stance is “disproportionate” while the central bank says Germany is acting under pressure of the Bundestag.


Spain involves ECB in bank programme


The Spanish government has become so desperate that it asked the ECB to get involved in the clean-up of the banking sector. El Pais said the decision was evidence that the markets are distrusting the government’s banking reform. Luis de Guindos confirmed that the ECB had “shown interest” (yeah, right). The markets, and apparently also the eurogroup, distrust the Spanish bank data, and the idea to involve the ECB is to give credence to the published data. El Pais points out this exercise is likely to fail just as the previous government’s stress tests failed to bring calm to the markets. (We think the ECB should tread with caution here. If the ECB becomes part of a general exercise in obfuscation, it, too, gets tangled up in the markets’ distrust.)


Chaotic selection process of next EBRD president


According to Financial Times Deutschland the election of the next EBRD president is totally open. The euro and EU finance ministers were unable to agree on a common candidate on their meetings Monday and Tuesday. As a result there will be five European candidates at Friday’s vote of the 65 EBRD shareholders: Next to the outgoing German president Thomas Mirow, who was proposed by Russia and Bulgaria but who is not supported by his own government, there will be candidates from France, the UK, Poland and Serbia. Given that the victor has to have a double majority of 33 of the 65 national representatives and of the countries’ capital shares in the bank it is impossible to predict the outcome. Despite the fact that the EBRD is dominated by Europeans it may now be non-European shareholders such as the US, Russia or Australia who will effectively decide who will head the London based institution. Should Mirow win the vote it would be an embarrassment for Angela Merkel who may then face headwinds getting Wolfgang Schäuble accepted as the successor to Jean-Claude Juncker as the eurogroup’s chairman.


Fitch wants another LTRO III


Given that the LTRO has failed to solve the problem, as some naïve investors, and virtually all politicians had hoped, it comes as a surprise to us that Fitch now wants another one, at least according to Reuters. The article quotes an investors survey, and says that Fitch believes another round may be necessary because many banks will not have deleveraged in time for the repayment of the second LTRO. The survey says 38% of respondents thought a third LTRO would be necessary. Additionally, 25% of investors said they would not invest in any European senior  unsecured bank debt.


John Kay says the economists’ notion of credibility is not compatible with democracy


This is a brilliant column by John Kay, who argues that the way economists and policymakers are defining credibility is not compatible with modern democracy:


„The elevation of credibility into a central economic doctrine has turned a sensible point – that policy stability is good for both business and households – into a dogma that endangers stability. The credibility the models describe is impossible in a democracy. Worse, the attempt to achieve it threatens democracy. Pasok, the established party of the Greek left, lost votes to the moderate Democratic Left and more extreme Syriza party because it committed to seeing austerity measures through. Now the Democratic Left cannot commit to that package because it would lose to Syriza if it did. The UK’s Liberal Democrats, by making such a deal, have suffered electoral disaster. The more comprehensive the coalition supporting unpalatable policies, the more votes will go to extremists who reject them.“

Robert Skidelsky on what Keynes what have done



In a commentary in the FTRobert Skidelsky compares the austerity policies of the EU with the Versailles Treaty. He has dug out a quote by Keynes: “If they do sign, they can’t possibly keep some of the terms, and general disorder and unrest will result everywhere.” He says that there is solution to the eurozone crisis without growth.  This might mean debt restructuring, or project bonds, or both, but it has to be done. On Greece, he said, an exit with a controlled devaluation, cannot be avoided.


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

Still getting worse. Euro now at $1.27, Spanish spreads approach 5%.












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Source: Reuters








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