Greece gets the extension – at the price of more austerity in 2015 and 2016
- The eurogroup reached a partial agreement on Greece, under which it accepted the two-year deadline extension for deficit reduction;
- but Greece will have to find additional austerity measures in 2015 and 2016;
- discussion on the funding of the two-year extension and the IMF’s involvement has been put off until next week;
- a German newspaper reports that the ECB will after all extend the ELA to help Greek banks fund the financing gap;
- Olli Rehn says even if the ECB says No, Greek banks should still be in a position to fund the government’s temporary financing gap;
- Jean-Claude Juncker and Christine Lagarde openly disagree about the extension of the 2020 debt target, with Juncker favouring an extension to 2022;
- the euro falls and bond spreads rise as investors are becoming more sceptical about the eurozone’ s prospects;
- the FT got hold of the leaked troika report, which shows a significant scaling down of the privatisation programme;
- Angela Merkel has visited Portugal, advocating more reforms;
- a Portuguese newspaper criticises her for conducting science experiments on Portugal;
- Portuguese activists have created a video explaining Portugual to Germans, but it was banned for political reasons;
- the inter-banking market is showing signs of revival;
- Italian prosecutors are bringing charges to rating agency analysts over Italy’s downgrade;
- the ESM explains is debt issue strategy in some detail;
- Spanish banks pre-empt a legal change on eviction laws through a two-year moratorium on the eviction of poor families;
- Spain is pondering a change in the laws for personal bankruptcy that might include the notion of non-recourse mortgages;
- the Spanish authorities reveal the details of the bad bank;
- Louis de Guindos says Spanish banks will be able to support the real economy by the end of this year;
- also says EU should switch from nominal to structural deficit targets;
- the Spanish regions are due to cut their deficits by 6% in 2013;
- Pierre Moscovici says German papers should stop French-bashing;
- some French editorialists agree with the Germans;
- Jakob Augstein, meanwhile, explains why Peer Steinbruck is the wrong man to challenge Angela Merkel.
At the Eurogroup meeting last night Greece got a two years extension to 2% by 2016, but the next aid disbursement is still held up by a spat between the eurogroup and the IMF over the longer term debt targets. According to a leaked draft report Greece will have to find an additional €4bn in austerity measures for 2015 and 2016, which will be difficult for the government to achieve. There is no decision yet on how to finance the two-year extension. The outstanding issues were postponed to the meeting next week, November 20. The intention is to fund the extension without putting up more money, and it remains unclear whether the IMF will continue to contribute, Bloomberg reports.
No resolve of the Eurogroup-IMF spat about debt targets
The EU-IMF spat went public when Jean- Claude Juncker told a post-meeting press conference the debt target would be moved to 2022, prompting Christine Lagarde to insist the IMF was sticking to the original timeline, the FT reports. When Juncker again insisted it would be moved – “I’m not joking,” he said – Lagarde appeared exasperated, rolling her eyes and shaking her head. “In our view, the appropriate timetable is 120% by 2020,” Lagarde said. “We clearly have different views.” Officials will meet again November 20 in an effort to reach agreement.
No decision on releasing the next aid tranche
As expected, eurozone finance ministers postponed the agreement on releasing the next aid tranche for Greece to Nov 20. An agreement between the IMF and eurozone governments is essential to releasing the bailout tranche since both creditors disburse financial assistance concurrently, writes the FT. Eurogroup officials also await the full troika report. The FT got hold of a leaked draft troika report that eurozone finance ministers received ahead of the full report. The two years extension means essentially that all targets Greece was supposed to hit in 2014 under the old programme must now be achieved by 2016. Also the privatisation programme was scaled down significantly: Instead of €1bn in receipts by 2015, the troika is now expecting only €10.4bn by 2016.
Draft troika report says €4bn more austerity measures in 2015 and 2016
The Brussels blog also highlights from the report that Greece will have to find an additional €4bn in austerity measures for 2015 and 2016 and that there are some “remaining outstanding issues” that might be difficult for the Greek government to achieve. The political risk is raised in the report, as the coalition government appears fragile and there is strong resistance against some components.
No imminent default risk: ECB reportedly ready to extend Greek bank collateral limits
The ECB has agreed to broaden the framework for allowing Greek banks to tap emergency loans from Greece’s national central bank, German daily Die Welt (hat tip Reuters) reported on Monday, citing central bank sources.
By broadening the collateral framework for Greek banks to obtain the loans – so called emergency liquidity assistance (ELA) – from the Bank of Greece, the ECB would more than offset a reduction in the ceiling on T-Bills the banks could use as security to €3bn from €7bn, the paper said. The net increase in available liquidity funding for Greek banks would allow them to buy more Greek sovereign bonds, helping Athens bridge a funding gap, the paper said in a pre-release of an article to run in its Tuesday edition. The ECB declined to comment.
Even if not, there is nothing to worry about, says Olli Rehn
Olli Rehn said that even if the ECB is not helping, Greek banks are expected to purchase the debt anyway, as they have improved their cash position enough, he said.
Merkel Portuguese science experiment
Angela Merkel visited Portugal on Monday. Hailing the progress Portugal made, she said a combination of austerity and structural reforms was the only way out of the crisis for Europe, which “must show again that it is competitive.” Passos Coelho was anxious to mark out Portugal’s differences from troubled debtor Greece, Reuters reports. He was clearly pleased Merkel and German business leaders have hailed Portugal as model for the kind of deficit cuts and economic reforms they see as necessary to restore investment, revive growth and repay creditors. But the Portuguese government also made clear it wants European allies to go beyond kind words and act to help – notably by letting Portugal slash some taxes on corporate investment that might otherwise fall foul of EU fair trade rules.
The people of Lisbon woke on Monday to find a dozen public statues in the city draped with black plastic sashes in a sign of mourning. Protesters also pasted up posters showing Passos Coelho, Merkel and ECB chief Mario Draghi in a casino with the subtitle: “We pay, they play, bank wins.” The newspaper Diario Economico ran a piece on Monday condemning Merkel, a trained physicist, for her “science experiments” with Portugal. It argued that recession should be a cue for greater public spending. “Merkel has made an economic Frankenstein out of Portugal,” the newspaper said, warning of a downward spiral in activity. Portugal’s consensus for austerity appears to be changing, even if there were only a few hundred protesters rallying against Merkel.
Video that explains Portugal to Germans
On the occasion of Angela Merkel’s visit to Portugal, two Portuguese activists produced a 5-minute video (“Ich bin ein Berliner”) purporting to explain the realities of Portugal since the Carnation Revolution and EU accession until the recent austerity policies. According to Portugal Daily View, the view was meant for a public screening in Berlin, but the local authorities “rejected it ‘for political reasons'”.
The inter-banking market is showing signs of a revival
FT Deutschland has the front page story that the latest data show an impressive increase in the inter-banking market. The paper quotes data from Thomson Reuters, according to which the volume of unsecured loans to banks had risen by 15.6% from September to October to a volume of $21.9bn. At the same time, the volume for secured lending has fallen. This trend reversal has been brought upon the ECB’s LTRO/OMT programmes, which have provided an effective, albeit temporary backstop to the banking system. The paper also noted that the iTraxx Senior Financial index is now at 179bp, after reaching 300bp in July. It is most large banks that profit from the improvement in inter-banking lending, while small and medium-sized banks in the periphery continue to be dependent on the ECB.
Italian prosecutors request trial of S&P and Fitch Ratings analysts over downgrades
The have tried and convicted scientists, who have failed to predict an earthquake. Now they are going for ratings analysts. The FT reports that Italian prosecutors have requested that five employees of Standard & Poor’s and two from Fitch be put on trial for alleged market manipulation, connected to their downgrades of Italy’s credit rating. The charge is that they accused violated EU rules by releasing the downgrades when European markets were open and by not alerting the Italian government 12 hours before the decisions.
ESM explains issue strategy
Boersenzeitung has an interview with Christophe Frankel, the CFO of the ESM, in which he said the ESM’s yield will ultimately rank between those of the EIB and the EFSF – though might be possibly higher in the short term. He ESM will start to issue long-term benchmark bonds, plus a programme of money market instruments. He also said the ESM will not actively invest the €80bn of its capital, but will only buy bonds that are specifically offered to them. They have already started the programme, which is restricted to purchases of bonds with a minimum AA-rating.
Spanish banks pre-empt legal reform with eviction freeze
The Wall Street Journal reports that the Spanish Banking Association AEB on Monday announced a two-year moratorium on evictions of families “in extreme financial need” (a concept yet to be defined), in an apparent attempt to pre-empt the legal reform of foreclosure law being negotiated by Spain’s two main parties PP and PSOE. Meanwhile, the New York Times has a piece about Spain’s “austerity homeless crisis”.
El Confidencial advances some of the features of the legal reform being negotiated with the intention of preventing evictions. It appears that personal bankruptcy law will be reformed, while avoiding making mortgages into non-recourse loans (as in some US states where the property can be surrendered in full payment of the debt). El confidencial quotes one of the (unnamed) experts taking part in the negotiations, that the reform will be inspired by the insolvency procedures in other European countries, notably France, Germany and Sweden, involving first a mediation process to restructure the debt, followed by a moratorium of eviction after liquidating the debtors’ other assets. There is an oft-repeated reference to the “good-faith” overindebted debtor.
Spain’s bad bank unveiled
Reuters reports on a presentation on Spain’s bank restructuring by the director of the FROB rescue fund, Antonio Carrascosa. In it, he announced that the so-called SAREB ‘bad bank’ will start off with €1bn in capital and €4bn in subordinated debt. Carrascosa admitted that foreign investors are more interested in buying assets from the bad bank once it’s running, rather than contributing capital, which is more likely to be done by domestic banks. The bad bank will initially receive €45bn in assets from the four nationalized institutions, though it may eventually manage €60bn and it is authorized to grow its assets to €90bn. The Spanish government would like to keep its stake below 50% to reduce its impact on the state debt.
In a story by El Pais on the mismanagement that led to Spain’s own subprime bubble (and which flatly accuses the banking sector in its headline of ‘granting mortgages to insolvent people out of greed’), some more figures about the Sareb bad bank are given: it will receive 89,000 homes and 13 million square metres of land from the nationalised banks. According to the story Bankia alone has 100 million square metros of repossessed undeveloped land and 45,000 homes.
Spain’s De Guindos appears optimistic on bank restructuring
Spain’s economy minister Luis de Guindos appeared before the European Parliament on Monday. As reported by El Pais (English edition) Luis de Guindos argued for a softening of deficit reduction targets to “a sensible pace”, focusing on structural and not nominal deficits to account for the recession, something on which he said “everyone in the eurogroup is on the same page”. De Guindos insisted that Spain “already fulfils the conditions that would be imposed” with an ESM bailout, but that Spain has met its financing needs for the year. He also claimed that the setting up of the bad bank and a €35bn to €40bn capital injection out of the €100bn authorized by the Eurogroup would result in a “much-healed, stronger financial sector”. According to El Economista, he went as far as to say that by the end of the year Spain’s banking sector will be “ready to finance the real economy” as the “deep” restructuring exercise “will have ended”.
Spanish regions to cut budgets by 6%
El Pais (English edition) reports that 10 out of 17 Spanish regions will average a 6% spending reduction from 2012 to 2013 according to budgets presented on Monday, which the paper calls “the greatest effort to contain costs in Spain’s democratic history”.
French press worries about German worries about French competitiveness
Wolfgang Schauble’s decision to call for a special report on the French economy has unleashed a highly emotion dispute across the Rhine.
Liberation’s headline was “Achtung”, and Boersenzeitung quotes Pierre Moscovici as saying criticising the French bashing of the German media. Les Echos took a pro-German line, saying that Germany, unlike France, had understood that the situation is fundamentally different and that the conjunctural cycle will not end the crisis in 2014.
Jean Quatremer has a number of quotes from various German officials – some quite hilarious – reflecting Germany’s paranoia that it might lose France as a partner in the eurozone crisis. As ever, the Germans look at everything in terms of competitiveness, and so do some, but not all of the French commentators.
Jakob Augstein about Peer Steinbruck
In his Spiegel Online column, Jakob Augstein writes that Peer Steinbruck is the wrong candidate for the SPD. Steinbruck is damaged through the revelations that he earned millions through speeches, including for public sector appearances. He writes that Steinbruck never understood why his earning constitute a political problem (they are legal without a doubt). He concludes the only subject with which the SPD can mobilise its voters is social justice, and Steinbruck is by far the worst candidate to push this issue.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
The euro fall and falls. Now at $1.269. And Spanish spreads rise and rise. Not at 4.65%.
| 10-year spreads | |||
| Previous day | Yesterday | This Morning | |
| France | 0.789 | 0.761 | 0.769 |
| Italy | 3.641 | 3.806 | 3.815 |
| Spain | 4.504 | 4.557 | 4.649 |
| Portugal | 7.502 | 7.452 | 7.802 |
| Greece | 16.775 | 16.700 | -1.34 |
| Ireland | 3.456 | 3.449 | 3.617 |
| Belgium | 0.966 | 0.938 | 0.964 |
| Bund Yield | 1.346 | 1.346 | 1.337 |
| Euro Bilateral Exchange Rate | |||
| Previous | This morning | ||
| Dollar | 1.272 | 1.2688 | |
| Yen | 100.980 | 100.57 | |
| Pound | 0.801 | 0.7993 | |
| Swiss Franc | 1.205 | 1.2046 | |
| ZC Inflation Swaps | |||
| previous | last close | ||
| 1 yr | 1.68 | 1.68 | |
| 2 yr | 1.69 | 1.69 | |
| 5 yr | 1.82 | 1.82 | |
| 10 yr | 2.06 | 2.06 | |
| Euribor-OIS Spread | |||
| previous | last close | ||
| 1 Week | -7.729 | -6.729 | |
| 1 Month | -4.200 | -3.5 | |
| 3 Months | 3.657 | 4.757 | |
| 1 Year | 45.714 | 44.514 | |
Source: Reuters |
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