- A group of ten officials have been meeting regularly to study the impact of a Greek eurozone, and to propose policies to mitigate the impact;
- Angela Merkel and Francois Hollande met yesterday to prepare a joint strategy towards Greece
- no official announcements were made;
- Frank-Walter Steinmeier wants to give Greece one extra year with the programme;
- Wolfgang Schauble rejects a programme extension;
- Jan Kees de Jager says he hopes Germany stays firm;
- a senior CDU lawmaker says there is no flexbility on the programme itself, but some flexibility on the interest rates and the duration of the loan;
- Manfred Neumann says economically it would make sense for German to leave the euro, though this is not realistic for political reasons;
- also criticised Mario Draghi for spending too much time in Brussels;
- Claus Hulverscheidt says the German fiscal surplus is not what it seems to be;
- Philip Rickert writes that one reason for the fall in spreads is the expectation that the ECB will give up the preferred creditor status;
- also makes the point that it could reverse that position at any time;
- Spain’s deposit guarantee fund may receive rescue money;
- in certain cases of bankruptcy, senior bank bondholders may also be bailed under, according to Spain’s new bank resolution decree;
- various sources have told Reuters that the Spanish EFSF negotiations are well under way;
- Spain is proposing a reform of real estate rental laws;
- tax revenue shortfall threatens Portugal’s deficit target;
- the Greek finance ministry says liquidity will run out in October;
- Ireland sells amortising bonds at 5.91% in the country’s return to the bond markets;
- John McHale says the rate still implies a default probability of over 50%;
- Germany, meanwhile, said it will oppose any Irish debt relief proposal.
FT Deutschland leads with the story this morning that a working group in the German finance ministry, headed by state secretary Thomas Steffen, is studying how to contain the costs of a Greek euro exit. The paper says that the preparations for a Grexit are much more concrete than is generally known. The paper gives no details of the work carried out, but says the group consists of ten finance ministry officials, which has been meeting regularly for some time.
A week of high-level shuttle diplomacy kicked off yesterday with Francois Hollande’s visit in Berlin, which focused on Greece. At the joint press conference both leaders were trying hard not to say anything, which did not stop the media to quote them at length. Perhaps the most interesting developing in Berlin yesterday was the statement by SPD parliamentary leader Frank-Walter Steinmeier that he favours to extend the Greek by one year. Wolfgang Schauble, meanwhile, joined other cabinet ministers in ruling out a programme extension. as this would cost more money. That position is also supported by Jan Kees de Jager, the Dutch finance minister, who yesterday urged Germany to “stick with its strict position”, according to an interview with FT Deutschland. Reuters has also a revealing quote from a senior CDU Bundestag member who said he cannot imagine a change to the programme itself, but there may be some flexibility on the interest rates and the duration of the credit.
Manfred Neumann is considering a German exit from the euro
It is considered poor form among German academics to talk about a German euro exit, but Manfred Neumann came very close in an interview with Suddeutsche Zeitung. He first criticised Mario Draghi for being too political, spending too much of his time in meetings in Brussels. Then he went on to say that if one just looked at the figures, one could imagine a German exit. German has a large industry, which is focused on the global market, and Germany is always likely to diverge from the rest of the eurozone. He recalled that France proposed a German exit from the ERM in 1993 for exactly the same reasons. The idea was only abandoned once the Netherlands and Belgium threatened that they would join Germany on the way out. Later in the interview he said he did not favour a German exit for political reasons (but his arguments suggest that he favours it for economic reasons).
The German fiscal surplus is not what it seems
Claus Hulverscheidt has a comment in Suddeutsche Zeitung, in which he warns against excessive exuberance about the news of a small fiscal surplus. He says the German political classes never succeeded to think in terms of counter-cyclical policies – that you run deficits in bad times, but surpluses in good times. If you take a closer look at the 0.6% of GDP surplus, you will discover that it is mostly due to record surpluses of the social funds, which the government actually ran a deficit.
Why the spreads are coming down
Philip Rickert writes in Frankfurter Allgemeine Zeitung that the true reason for the fall in spreads is the announcement by the ECB that it seeks a change in its creditor status. He quotes Jörg Krämer, chief economist at Commerzbank, as saying that the ECB abandoned the old SMP because of its preferred creditor status, which had concentrated an increasing amount of risk among a progressively smaller number of private investors. For a new programme to work, it must be made clear that the ECB ranks pari passu. Rickert recalls that Mario Draghi rejected an ECB participation in the Greek debt restructuring on the grounds that this would constitute monetary financing. That statement may now haunt Draghi. He quotes Piero Ghezzi of Barclays as saying that a pari passu claim would be time inconsistent, as the ECB could change its ranking unilateral at any time.
Spain’s deposit guarantee fund may receive rescue money.
El Pais leads its print edition again with the draft decree on banking reform to which they had access and which would still be subject to change as it the final decree to be approved only a week from today. Today, the paper focuses on two paragraphs: the first one on the deposit guarantee fund (FGD) and the second one on the resolution of inviable institutions.
According to El Pais, the draft contains language allowing the FROB restructuring fund to grant funding to the FGD “at market rates”. the paper recalls that the FGD ended 2011 €2bn in the red, as a result of the intervention of the caja CAM and the losses of the FROB which at the outset was partly capitalized by the deposit guarantee fund.
Senior bondholders may be bailed in
El Pais has a story that the FROB, in case it is resolving a non-viable institution, can restructure any and all of the bank’s liabilities. It can sanction “capital increases or reductions, the issue total or partial amortization of obligations, participations or any other securities or financial instruments, as well as statutory changes related to these operations, including waiving the right to first access to new capital issues”, which extends loss provisions beyond subordinated debt.
Sources tell Reuters Spain bailout negotiations “well under way”
The Spanish press carries a Reuters story, quoting three unnamed sources, that Spain is negotiating the conditions of a rescue with other Eurozone countries. These sources (one of which identified as “close to President Hollande”) claim that the preferred option would see the EFSF intervene in the primary government bond market and the ECB in the secondary market, and that conversations had been going on for weeks and focused on the conditionality attached to the plan, which would “make more specific” the conditions already laid out on May 31. Reuters also quotes other sources denying any conclusions from the talks, or even the talks themselves. The Spanish official position continues to be to wait until after the ECB’s governing council meeting of September 6, even though one of Reuters’ sources says the ECB will leave the conditionality up to the Eurogroup. Other key dates mentioned by Reuters are the German Constitutional Court’s expected ruling on the ESM on September 12, and the Ecofin meeting the weekend after, coinciding with the Dutch elections.
Spain to reform real-estate rental and taxation laws
Infrastructure minister Ana Pastor announced yesterday that the government will today introduce legislation to make the real estate rental market more flexible. The most important measure is allowing the eviction of tenants in arrears of their rental payment of more than 10 days (!) because “it’s clear that those who don’t pay, won’t pay even if given more time”. The new law will also make it easier for both tenants and landlords to end contracts with shorter notices. According to El Economista the government will also introduce an 85% tax deduction on the corporate tax for real estate rental firms, and relax the conditions to qualify for the special tax regime. It will also introduce tax exemptions for non-resident landlords, and will encourage the formation of Real Estate Investment Listed Societies (Socimi in the Spanish acronym) to make real estate “more liquid”. The ultimate goal is to increase the share of residential rentals, which right now stands at 17%, significantly lower than the European average, as well as providing an outlet for the 700,000 homes which Levante-EMV reports will be among the assets of the “bad bank” to be created shortly.
Tax revenue shortfall threatens Portugal’s deficit target
Portuguese tax revenues continue to fall in July making it more difficult for the government to meet budget deficit targets. Finance ministry data released on Thursday showed Portugal’s tax revenues dropped 3.5% to €17.78bn in the first seven months of the year, according to Reuters. Still, the state sector deficit fell to €3.98bn as total revenues rose 11.4% to €23.17bn thanks to one-off transfers of banks’ pension funds to state coffers that had already helped the country meet its deficit target last year. Primary spending that excludes interest payments fell 3.2%, mainly on cuts in civil servants’ benefits. Total spending dropped just 0.7% from a year earlier as debt servicing costs jumped by 17%. But the finance ministry spokesman said interest payments were below what had been envisaged and should offset part of the drop in tax revenues along with lower spending with civil servants and reprogrammed EU cohesion funds. The troika officials are due to arrive next week for the quarterly evaluation.
Greece: liquidity runs out mid- October
State cash reserves will last until the middle of October, according to the Greek Finance Ministry’s latest projections. The troika’s report, on which the disbursement mainly hinges, is expected by early October. In order to be able to continue paying salaries and pensions, the government will have to rely on T-bills. This month alone, the government has borrowed 6 billion euros through T-bills. The government is also putting a series of other payments due on hold. Since the beginning of the year, overdue payments to suppliers to the public sector have grown by about €900m, while the government has frozen tax rebates and significantly cut primary expenses to offset a revenue shortfall. It has also used up about €3bn of the Financial Stability Fund.
Ireland sells amortising bonds at 5.91%
Ireland has taken advantage of improving investor sentiment by issuing five long-dated amortising bonds as part of a strategy to diversify its sovereign funding to help it exit its bailout programme. Dublin successfully raised €1.02bn at an average yield of 5.91%, the FT reports. The bonds were offered at yields of between 5.72% and 5.92%, reflecting improving investor confidence in the Irish recovery.
McHale: Ireland still faces 50% default risk.
John McHale in the Irish Independent calculated that the implied probability of default over the rest of the decade fell from 83% in July 2011 to 52% today. He writes that from an Irish perspective, it is bad luck that the eurozone crisis has escalated just as the domestic effort began to bear fruit and that a big portion of the remaining default risk relates to broader eurozone concerns. The “best domestic course is to push ahead with the difficult fiscal adjustments required for debt sustainability, avoiding a political gridlock that would cast doubt on the capacity to see the adjustment through.”
Germany sceptical about Irish bank debt plan
Germany has said it will oppose any Irish debt-relief proposal it believes sends a negative signal to financial markets. In an interview with the Irish Times Wolfgang Schäuble said Ireland’s “massive” reform progress should not be compromised by anything that would halt the “winning back of trust”. “Naturally we want to help each other but I am not yet convinced, by any means, that some of the measures which are mentioned would not have the opposite effect.”
Irish Government officials begin a tour of European capitals next week to discuss technical details of debt relief. Irish officials insist leaders have committed to agreeing a political deal by October.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Spreads rising again.
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