About that meeting of eurozone finance ministers, ECB and IMF officials that collapsed in the early hours of this morning (at least, until Monday) for ‘further technical work’…
First: looks like our bold call was correct. Um, yay?
Second, Reuters says it has the document prepared for the meeting and circulated among the ministers. Read more
That wasn’t quite our last pre-LTRO/Ltro/L-Troh post.
On Tuesday Marc Chandler, global head of currency strategy at Brown Brothers Harriman, ventured an interesting hypothesis on what the market’s response might be to the LTRO-II take-up, in relation to the consensus expectations of roughly €500bn. Read more
Greek officials are due to meet with private international creditors on Wednesday afternoon, reports Reuters, after talks broke down on Friday over the interest rate Greece will offer on new bonds and a plan to enforce investor losses. Cash-strapped Athens needs a deal with the private sector within days to avoid going bankrupt when 14.5bn of bond redemptions fall due in late March. Bondholders said after the Friday talks broke down that an agreement needed to be reached by the end of this week, in order for changes to be made in time. The IIF said on Tuesday its managing director and co-chairman of the private investor creditor steering committee for Greece, Charles Dallara, and Jean Lemierre, special adviser to the chairman, would resume discussions with the Greek government. Read more
Greece’s international creditors are considering an appeal to the French and German leaders to break a deadlock in negotiations over the size of the losses to be taken by banks and other bondholders as part of a €100bn deal seen as crucial to bringing the country’s debt under control, says the FT. This follows a breakdown in talks between banks and official investors on Friday. Citing people close to the negotiations, the newspaper said much of the agreement had been in place for several weeks, but that a final deal had stalled over the coupon payment for new 30-year bonds to be issued by the Greek state. Greek debt managers had agreed with bondholders on a coupon just below 5 per cent but creditors last week proposed a much lower interest rate. Germany has proposed a 2-3 per cent coupon that would increase bondholders’ losses from 60 per cent to more than 80 per cent in net present value terms. Charles Dallara, the IIF’s managing director, told the FT on Sunday that he believed an agreement in principle needed to be completed by the end of this week if the restructuring deal was to be finalised in time for a €14.4bn Greek bond redemption due on March 20. “[Ms Merkel and Mr Sarkozy] and all the European heads of state said they wanted a deal with a 50 per cent [haircut] and a voluntary agreement,” Mr Dallara said. “Some of their own collaborators are not following that decision.” Greece’s finance minister, Evangelos Venizelos, says talks with the IIF will recommence on Wednesday, reports the WSJ. Read more
One of the most prominent hedge funds holding Greek bonds has threatened legal action against officials negotiating the country’s debt restructuring if losses are too deep, the FT says. Madrid-based Vega Asset Management, an original member of a steering committee for bondholder negotiators, wrote to fellow investors this month to say that it would consider suing if Greece insisted on writedowns of more than half the net present value of the debt. “Vega believes that, given the current position of the official sector, a voluntary exchange that implies a NPV loss of 50 per cent or less is not now a likely outcome,” Jesús Sáa Requejo, a senior Vega executive, wrote in the letter on December 7. “Vega needs to start considering all available legal options to refuse and challenge any exchange that implies a NPV loss of more than 50 per cent.” Vega, which has resigned from the steering committee, declined to comment. Read more
A number of large institutional investors have threatened to stop buying bonds issued by Santander after Spain’s biggest bank offered to exchange some of its existing debt into new instruments at what they consider punitive terms, the FT reports. The investors say they are unhappy with the terms of Santander’s debt exchange, in which it plans to boost its capital by getting investors to exchange €6.8bn of “subordinated” bonds – debt that ranks below other creditors – into new senior notes. In response, some intend to boycott future offerings from the Spanish bank. “It’s pretty unlikely Santander will be able to issue senior unsecured or covered bonds,” Roger Doig, senior financial analyst at Schroders, told attendees at a bank capital conference in London on Thursday. George Grodzki, global head of credit research at Legal & General, also criticised the terms of the debt exchange at the conference. Only 23.8 per cent of the bondholders have agreed to the debt exchange, according to a statement from Santander on Thursday, underlining the move’s unpopularity among investors. Read more
The precedent set by the restructuring of Greek sovereign debt risks leaving banks more exposed to future financial crises of other countries, according to Deutsche Bank chief executive Josef Ackermann, who helped to orchestrate the so-called “private sector involvement” in the rescue plan for Athens. Banks and other bondholders that volunteer for a 50 per cent cut in the value of Greek sovereign debt could set a precedent for other sovereign haircuts, Mr Ackermann, the eurozone’s most prominent banking head, told the FT. He insisted the Greek PSI deal should be an “exception”, echoing the language of other bankers and politicians. “If you open up the Pandora’s box, then who is willing to invest in sovereign risk?” But the veteran Swiss-born banker also predicted voluntary agreements with private sector creditors would continue to be preferred to a “disorderly” sovereign default, which could trigger potentially disastrous claims on CDS. Mr Ackermann said it was now clear that sovereign CDS were of less worth than before. Read more
A few, initial head-scratchers at pixel time.
First, the Greek debt deal: Read more
[Updated with comments from IIF, below.]
The full statement from the euro summit is out. Read more
European negotiators have asked Greek debt holders to accept a 60 per cent cut in the face value of their bonds, a hardline stance that far exceeds losses agreed in a deal between private investors and eurozone authorities three months ago, reports the FT. The stance is a victory for German-led northern creditor countries who have been pushing for Greek bondholders to accept far more of the burden for a second bail-out. Reuters writes that a paper prepared for Wednesday’s summit proposes that the eurozone combine two current ideas for the EFSF: an insurance model and a special purpose vehicle. Bloomberg focuses on comments in the document saying that while the capacity of the EFSF could be enlarged without extending the guarantees underpinning it, the leverage arrangements would have to be determined “after dialogue with investors and rating agencies around the new instrument, and in the light of prevailing investor appetite over time for the sovereign bonds of particular member states”. Meanwhile, Silvio Berlusconi called a crisis cabinet meeting for Monday night local time to consider new economic reform proposals after the prime minister returned to Italy following his humiliation at the eurozone leaders’ summit in Brussels, writes the FT. Compounding the region’s problems, the sharper than expected fall in PMIs published on Monday have heightened fears of a eurozone recession, says the WSJ, and are increasing pressure on the ECB to cut interest rates, the FT reports. Read more
Eurozone banks are raising the threat of being nationalised in an effort to fend off suffering losses of up to 50 per cent on their Greek bonds should the terms of Greece’s bail-out be redrawn. The FT cites people close to holders of Greek debt who said a compromise of a reduction of 35-40 per cent of net present value was possible, but they warned that increasing the proposed “haircut”, or losses, on the bonds to 50 per cent could force eurozone governments to take stakes in a number of institutions. Separately, FT says its own research indicated that the amount of financial pain Greeks faced on a per capita basis as a result of austerity measures were twice as severe as those in Portugal and Ireland and nearly three times that of Spain, underlying concerns about the Greek programme’s impact on the country’s economy. Meanwhile, Portugese trade unions called for a general strike in November. Read more
Angela Merkel, the German chancellor, and France’s President Nicolas Sarkozy spelt out their determination to defend the stability of the euro as they met for a bilateral summit in Berlin, the FT reports, but refused to spell out any further details of their plans. Mr Sarkozy insisted that the two leading governments in the eurozone were pursuing a common course, and were ready to announce a comprehensive package before the summit of the G20 leading global economies in France at the beginning of November. The only concrete statement they made, however, was Ms Merkel’s announcement that “we are determined to do whatever is necessary for the recapitalisation of our banks”. There was no sign that the two governments had yet managed to resolve their differences over whether the cash for such an exercise will come from national treasuries or from the €440bn EFSF. Bloomberg says the focus on what both called a “durable” solution signals a willingness to accept more extensive haircuts for bondholders, which Mr Sarkozy has resisted. Separately, Wolfgang Schäuble, German finance minister, told Frankfurter Allgemeine Sunday that the participation of private creditors in the latest Greek rescue plans for Greece might have to be reviewed, and German news agency DPA, citing unnamed people involved in the negotiations, reported that haircuts of up to 60 per cent were being discussed. Read more
Or the trouble “reviewing bank capital positions” — euphemism du jour from the European Banking Authority.
The EBA’s denied on Thursday that they’ll do actual new stress tests on banks in order to model bigger write-downs of peripheral sovereign debt and possibly identify where more capital is needed, as the FT reported. This worries us regarding how useful any EBA input will be. Read more
Nervousness is growing in Whitehall that the government might have to inject further capital into RBS as part of a European effort to recapitalise the continent’s banking system, the FT reports, quoting an unnamed government official who said: “[RBS’s] sovereign exposure is not fundamentally worrying but if there is a broader European drive to recapitalise the banks it’s conceivable they may need more government money.” RBS received the world’s biggest bail-out during the financial crisis, at a cost of £45bn to the UK taxpayer. In the EBA’s July stress tests, which applied virtually no writedowns for eurozone peripheral bond holdings, RBS, Commerzbank, Deutsche Bank, Société Générale and UniCredit had stress test results in a grey area above the minimum but below 7 per cent. Once sovereign haircuts – likely to range from 20 per cent on Spain up to 65 per cent on Greece – are applied, those numbers will fall, in some cases sharply. Read more
Asian shares and commodities fell on Thursday, Reuters reports, on growing worries that Europe’s intractable debt problems will plunge the world into a second global financial crisis. Copper fell 3 per cent, gold slipped toward $1,600 an ounce to stand more than $300 below its record high earlier this month, and commodities-related stocks such as global miner Rio Tinto were dumped on worries that demand will weaken as the international economy slows. The current focus of concern is a vote on the EFSF enhancements in Germany on Thursday morning, which is expected to receive poor support from members of chancellor Angela Merkel’s centre-right coalition. Late on Wednesday a backlash from Greece’s private sector creditors to talk of bigger haircuts, covered in the FT, sparked more fears for the future of the monetary union and helped stall a rally that had begun earlier in the week. Read more
Leaving aside the volatility and growth fears, who is really compelled to sell Treasuries as a result of the S&P downgrade?
The answer, when it has all played out, might go some way to explaining just how powerful the ratings agencies are right now. Or, how powerful they should be. The last few days have seen some passionate debate on that subject. Read more
While some European bankers are feeling confused over the matter of private sector participation in the new Greek bail-out, what might it mean for Ireland and Portugal?
The insistence from EU leaders that the Greek programme was “for Greece, and Greece alone” was of course aimed at telling bondholders in other peripheral countries that haircuts, voluntary or not, would not be in their future. Though, apparently, it hasn’t convinced all. Read more
Several European banks with large exposures to Greek sovereign debt have yet to sign up to a plan for private-sector bondholders to contribute €37bn to a second Greek rescue package, the FT says. The UK’s Royal Bank of Scotland, Germany’s DZ Bank and LBBW and Austria’s Erste Bank, which between them hold about €3bn of Greek sovereign debt, are among the lenders that have not yet committed to take part in a programme that will see participants swap or roll over their Greek debt for bonds that mature in 30 years. Senior bankers said considerable uncertainty remained about the details of the Greek bail-out plan and its likely application. There was also uncertainty about the level of take-up, but analysts said the banks’ 90 per cent estimated acceptance of the scheme was realistic. Read more
European leaders have agreed a new €109bn bail-out of Greece under which private bondholders will be called on to participate for the first time, contributing a target of a further €37bn. The FT says deal will almost certainly lead to the first default on eurozone bonds since the creation of the single currency. In addition to the €109bn in new loans from international lenders, the agreement includes a commitment from Europe’s leaders to support Athens until it is able to return to the financial markets – a potentially unlimited guarantee that could see European taxpayers fund Greece for years. But the contribution by private creditors will only be known when bondholders decide if they will take part in the proposed programme. Bondholders will be given four options – three forms of debt exchange and one rollover plan – with different durations and interest rates. On top of that, an additional €12.6bn is expected to come in commitments from bond owners to sell their holdings at a reduced price as part of a bond buy-back programme. Also in the FT, officials stressed such a programme would not be used in other countries. Asian markets rose sharply on news of the agreement. Read more
So the International Swaps and Derivatives Assocation had a swift reply to the question of whether a restructuring credit event occurred after Ireland’s bailout.
But don’t expect questions over credit rankings in eurozone bailout policies to go away too soon. Some details of the European Stability Mechanism ESM were finalised last weekend, and so far this particular facility ranks decidedly senior to bondholders. Read more
There are plenty of strange things about Europe’s banking stress tests. Notably, the idea of engaging in a test which is meant to assure nervous investors with its rigorousness — but not frighten them too much by actually finding big problems.
It’s Europe’s Goldilocks banking exercise. But more fantastical. Read more
Just a few additional items we’d like to record that might shed some light on the still-developing story that MBS investors were pressuring BofA to repurchase mortgages the bank had sold them.
First, with a hat tip to Dealbook, we’re posting the letter itself (pdf) — click the image to open: Read more
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