Edging towards a deal

• The Greek finance minister expresses confidence that a deal is now in sight;
• IMF is willing to relax the target to 124% by 2020;
• measures on the table include a mix of ECB profits, interest rates cuts on the first programme, moratorium of interest payments on the second programme, and a new EFSF credit;
• EU officials are working on a complex package, containing elements of all;
• IMF calculates that based on the participation rate of the last restructuring, Greece could reduce outstanding debt by 24% of GDP;
• most banks have already written down their Greek exposure, and would register a small profit through a buy-back;
• Paolo Manasse writes that the delay in approving the Greek tranche could have serious negative consequences for the entire Greek programme;
• Mark Schieritz writes that it is not clear that an immediate debt restructuring is the optimal solution;
• Germany is digging in its heels over banking union, insisting that small banks must be fully supervised by national supervisors;
• ECB’s role should be restricted to the right to ask questions;
• Germany concedes, however, that five of the seven Landesbanken would fall under ECB supervision;
• the latest purchasing managers index shows a continued downward trend in November, as the recession continues to get worse;
• there are some tentative signs of a stabilisation in the manufacturing sector, which is more than compensated for by the decline in services;
• a small Spanish city elevates the idea of insolvency to an entirely new level: it has debts of €1bn, and its annual revenues have fallen from €22bn to €2bn;
• the amount of non-performing loans in Spain are set to explode as banks are drawing down on personal guarantees for many loans;
• the change to non-recourse loans is likely to have an extremely negative impact on the value of Spanish mortgage-backed securities, the main real estate finance instrument in Spain;
• Giorgio Napolitano says Mario Monti cannot be a candidate in the Italian elections, as he is already a life senator;
• but Monti can play a prominent role after the elections;
• Yves Mersch is formally appointed to the ECB;
• Ashoka Mody says financial crisis, fiscal multipliers and trade multipliers are all driving a synchronised global downturn;
• Louis Garicano, meanwhile, list five areas of false debt accounting, which he says are threatening the adjustment effort.

It looks like a deal on Greece is in sight. Kathimerini cites Yannis Stournaras saying that there are about €10bn away from a deal and that the IMF has accepted that Greek debt will not meet its target of 120% of GDP in 2020 and is willing to change this to  124% in the same year.  The measures on the table to finance this include foregone profits of the ECB, an interest rate cut on the first bailout programme, an interest rate moratorium for several years on the second programme. A new EFSF-credit of up to €10bn is preferred by Germany but rejected by the Netherlands and others (see our News Briefing the other day). Boersenzeitung this morning reports that to get the package together different countries are to contribute in different ways to the deal.

Bond buyback could also benefit private sector lenders

If Greece could buy back Greece’s private-sector bondholders, i.e. of those who took part in the restructuring deal, it could reduce its outstanding debt by €45bn, so the calculations of the IMF, equivalent of 24% of its GDP. Most European banks holding Greek debt have already written it down to 20-22 cents on the euro, writes the Wall Street Journal, so they could even book a profit on the buyback. A significant portion of the remainder lies with hedge funds, most of which bought the debt at even more depressed levels, and so stand to realize big profits on an otherwise illiquid asset.

The troika’s credibility problem

The delay of the last tranche aid of €44bn constitutes a threat to Greece’s future, Paolo Manasse writes. In an analysis published on Linkiesta, Manasse notes that the delay contains three dangers: the solvency of Greek banking system, a possible new contagion to Italy and Spain, the destabilization of a government majority. According to Manasse, the refusal of the only possible remedy to Greek debt crisis, an OSI in exchange for massive privatizations and a reliable fiscal consolidation programme, can only be explained with the German elections in September 2013. The loss of credibility of the troika is well illustrated by last figures about Greek debt-to-GDP forecasts, released by the IMF, see below.

Mark Schieritz on the optimal moment for a Greek debt restructuring

In his column in Herdentrieb, Mark Schieritz casts doubt on whether an immediate Greek debt restructuring is sensible. He said Greece had already received significant help through lower interest rates, to be lowered again, and through a maturity extension. He said an immediate debt restructuring would be beneficial if the debt itself could cause negative economic effects. But he writes the debt overhang literature is not clear on this point.

(For once, in the case of Greece, there is a negative effect simply through a lack of investment caused by uncertainty about the country’s future in the eurozone. A sufficient degree of OSI would remove doubts over the future of Greek membership in the eurozone. It is difficult to see how Greek GDP could pick up until that uncertainty is removed.

Europe’s incredibly shrinking banking union

German newspapers have more details on the German position on the banking union – which like all eurozone policies will ultimately determine the outcome. Germany is in principle ok with the five of the seven Landesbanken to come under the ECB’s remit, as Suddeutsche Zeitung reports. With that acknowledgement, Germany wants to make clear to other member states that it does not plan to sabotage the project. But the German position remains unrelenting on the other banks. As FT Deutschland points out, the German position is that the SSM focuses only on the systemtically relevant banks, while the others remain under full national control. The article goes into some detail of what that entails. The Germans want to the ECB only to have the right to ask questions, and obtain information, but no automatic right of access, except only in extreme cases, where national supervision has failed. The FT Deutschland also confirmed that five Landesbank would be considered systemically relevant. They are, NordLB, Bayern LB, HSH Nordbank Helaba and LBBW. The two remaining smaller Landesbanken, from Bremen and the Saar, will remain under national control. The sources for these sources maintain that Germany fully supports a banking union, but wants to ensure that it is done properly.

(Yeah right. The German government is determined not to let go of the Sparkassen and savings banks, which produces a two-tier system, with a small number of ECB controlled banks, and smaller banks in national control. This is a banking disunion. As the whole idea of a banking union is to separate sovereign risk from banking risk, this construction seems absurd.)

Eurozone economy continues downtrend in November

The latest Markit PMI was not good. The composite index for the entire private sector in the eurozone sharnk 0.1 to 45.8 in November – still well in recession territory. Markit now estimates that the eurozone’s GDP could shrink by 0.5% during the fourth quarter. Looking at the components, industry stabilised, with the index rising 0.8 points to 46.2 points, while the production index rose 0.9 points to 45.9 points. But this was more than compensated by a further downturn in service, which has reached the 2009 levels.

Jerez, a microcosm of Spain’s recession

Residents protesting a three-week garbage collection strike set fire to rubbish piles across the Spanish city of Jerez, reports the Irish Examiner. The cost of the destroyed garbage containers is estimated at €150,000 which is a heavy blow to the finances of a city of 212,000 people whose revenue has collapsed from €22m to €2m a year as a result of the recession, and which finds itself €1bn in debt after 30 years of what even the previous mayor of 24 years, Pedro Pacheco, acknowledged as living beyond its means. Most city employees are owed wages and are or have been on strike in recent years as unemployment, reaches 34%, out of an active population of 100,000. El Pais (English edition) surveys the situation under the ominous headline “if you want to see where Spain is headed, take a look at Jerez”.

An impending nonperforming mortgage crisis in Spain?

El Confidencial publishes an analysis by Spanish think-tank Sintetia on Spain’s nonperforming loans. Reacting to a statement by Spain’s economy minister Luis de Guindos that “Spain’s non-performing mortgage rate is low and will continue to be low”, the analysts point out that loans accounting for 10% of nonfinancial sector debt to the financial sector is non-performing, up from under 1% 5 years ago, and that 4/5 of that amount is due to firms, and 1/5 to households, despite both sectors accounting for roughly the same amount of total debt. This is mostly because large firms take advantage of limited liability. In fact, SMEs and self-employed people also have low rates of non-performing debt because, like individuals, they are typically required to personally guarantee business loans.

The article observes that through the crisis, financial institutions have restructured debts backed by personal guarantees, but that this outlet is being exhausted and, if the recession endures and unemployment stays high, private nonperforming loans could explode, as among European countries, Spain’s rate of nonperforming mortgages is seen in countries with unemployment rates around half of Spain’s.

The article ends with the observation that Spain’s cédulas hipotecarias (Mortgage-backed securities), which are the main source of wholesale funding for Spain’s banks in international markets, could lose much of their value if Spain’s mortgage law was relaxed by making mortgages non-recourse loans as is being demanded widely in Spain. Currently, a repossessed property is auctioned and, if there are no buyers at auction, the creditor keeps it at 60% of its assessed value. The authors argue this should be raised to 95% which would solve most of the problems surrounding foreclosures.

Napolitano says Monti cannot be a candidate at the elections

Italian president Giorgio Napolitano yesterday clarified the role Mario Monti can play in the elections, as Il Corriere della Sera reports. Napolitano had appointed Monti to the job of life senator before he became PM, and as a parliamentary for life he is not in a position to run for parliament. This means, as head of the government, it would be preferable if he retained a position of neutrality. However, Monti can still play a prominent role after the elections. There will be no constraints on him taking on a political role then.

About Mersch

The European Council yesterday formally nominated Yves Mersch to the ECB – overriding a No vote by the European Parliament. We wonder what must go on inside somebody’s head who would want to serve on the ECB’s board, having been rejected by the European Parliament. The European Council will probably try to make amends by appointing a woman to the job of chief bank supervisor, but that is hardly a credible alternative, given the direction banking union is currently taking. As for the composition of opinion on the ECB’s governing council, Mersch’s appointment is largely irrelevant. (We still remember Mersch’s argument of why it is best to keep interest rates above zero: for otherwise, the economy would fall into a liquidity trap, he said.)

Ashoka Mody on the three effects that drive a synchronised global downturn

Writing in Boersenzeitung, via Project Syndicate, Ashoka Mody makes the point that the IMF and other forecasters had misjudged three factors in their forecast, which subsequently turned out to be too optimistic. The frist is the recovery time after a financial crisis, the second are the fiscal multipliers, and the third is what he calls the global trade multiplier. The latter is not as well known as the former two, but explains why the downturn is so broadly based globally. The eurozone is at the epicentre of all three effects. His bottomline is the predicted global recovery next year is in danger, and the political mistakes are likely to prolong the downturn.

Luis Garicano on cheating at solitaire

Writing on the blog of think tank Fedea, Luis Garicano criticizes the tendency to ‘cheat at solitaire’ in debt accounting, which damages the credibility of efforts to correct debt and deficit levels. Garicano enumerates 5 instances of misleading accounting:

1. The rescue of the financial system has been done in an opaque way optimized for not adding to public debt: issuing guarantees, bank mergers, and resort to the ECB’s liquidity

2. The ‘tariff deficit’ of the electricity sector, whereby €30bn of difference between wholesale ‘market’ prices and a state-mandated price cap was securitised with (again) a state guarantee.

3. The ‘bad bank’ is being structured with the overarching concern of not adding to the state debt, not of ‘doing it right’. In addition, the government keeps lowering its estimate of the amount to be tapped out of the banking rescue approved by the EU.

4. Spain’s social security accounting is being manipulated to hide the consequences of having barely two workers per pensioner. Among other tricks, the government is paying social security on behalf on the increasing number of unemployed workers.

5. Finally Spain, as a creditor to Greece alongside the rest of the Eurozone, continues to act in denial of Greece’s insolvency and throwing good money after bad in a futile attempt to avoid recognizing a loss.

Garicano closes asking that the focus shifts from improving the accounts to improving the economy.

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

Sideways.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.753	0.750	0.756
Italy	3.415	3.493	3.467
Spain	4.305	4.234	4.318
Portugal	6.464	6.442	6.314
Greece	15.333	14.922	-1.46
Ireland	3.061	3.037	3.276
Belgium	0.916	0.903	0.878
Bund Yield	1.428	1.434	1.46
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.284	1.2883
Yen	106.170	105.98
Pound	0.804	0.8078
Swiss Franc	1.205	1.2044
ZC Inflation Swaps
	previous	last close
1 yr	1.64	1.77
2 yr	1.67	1.79
5 yr	1.77	1.88
10 yr	2	2.11
Euribor-OIS Spread
	previous	last close
1 Week	-7.100	0
1 Month	-1.900	-2
3 Months	5.200	5.6
1 Year	44.557	43.557
Source: Reuters