It’s the clause that makes German officials’ faces look like they’re struggling to keep their lunches down when someone mentions the prospect of write-downs on Greece’s official loans. The no bailouts clause! Article 125 of the EU Treaty: Read more
The IMF’s desired target of a 120 per cent debt-to-GDP ratio by 2020 has been replaced by 124 per cent by the same date — thanks in large part to official creditors taking a lower interest rate on repayments from the original bailout. A lot also seems to hinge on the Greek debt ‘buyback boondoggle’, which is now well and truly on the table. Read more
Draghi-day is just around the corner and JPM’s Malcom Barr is of the opinion that the ECB might just kick off its move by purchasing short-dated Portuguese sovereign debt.
Heck, why not? The arguments to intervene are simple enough. Read more
Click to enlarge.
A word of caution in advance: the optimal structure is deeply complex, which itself should raise concern in the minds of investors… Read more
Steven Major, fixed income strategist at HSBC, has a remarkably sunny note out on the prospect of unlimited bond market intervention by the ECB, driving short term sovereign yields significantly lower.
Here are his seven steps to a definitive crisis solution… Read more
On Monday, FT Alphaville wrote about the case in front of the German constitutional court concerning Europe’s fiscal pact and permanent bailout fund, the European Stability Mechanism. An interim ruling scheduled for September 12 could give a greenlight for the ESM to be brought online. The wait was already unnerving for markets.
By late Monday afternoon, news hit that the court had received a fresh challenge. The WSJ reports that a spokeswoman for the constitutional court has stated that the September 12 date for the interim ruling will not be affected by this latest challenge. More detail on this below. Read more
A Swiss bank asks a German professor for advice to clients on the prospects for a European bailout fund.
It must be Karlsruhe and ESM ratification! Read more
Recent comments from Mario Draghi and Ewald Nowotny have got the markets all aflutter and struggling to understand how policymakers are going to keep the eurozone together in the next weeks and months.
JPM’s David Mackie has complied a list of possible actions, in descending order of likelihood as he sees it: Read more
A little bit of confusion about this one on Thursday.
ERVV: n marginaali on nykyisin 0 korkopistettä
Which roughly translates from the Finnish as: Read more
Lend at low rates, for a long term.
It’s one way Spain’s official creditors could believably renounce seniority in the bailout. Concessional loans would make it easier for Spain to refinance its debt stock as a whole, improving bondholder recovery, while recapitalising its banks. Arguably. Read more
Admittedly the words Karlsruhe and German and constitutional court lack any sex factor, but the relative lack of attention the case is getting seems a bit odd to us given what’s at stake. We’d expect the markets to be just a bit more het up about it.
So would Martin Lueck, an economist at UBS, who argues in his latest note that too many investors don’t understand the situation and are just assuming that the court will yield to the markets’/politicians’ pressure and let ratification of the ESM and fiscal compact pass: Read more
The Eurogroup finance ministers have inched things forward with their long Monday summit, but the press conference in the early hours of this morning also reaffirmed that many big questions remain.
The first headline is that Spain gets an extra year to meet its 3 per cent deficit-to-GDP ratio target. Just as well, because the country was extremely unlikely to hit that by the end of next year. The Journal reports that a draft statement says this means Spain can now run a 6.3 per cent deficit this year without risking penalties, compared with 5.3 per cent under the 2013 target. Read more
9 July 2012
Eurogroup Statement on the follow-up of the 29 June Euro Summit Read more
Q: In the case of Spanish bank recapitalization, why are you assuming that the public debt does not increase? We now know that government debt has increased by as much as EUR100bn.
A: The losses in the Spanish banking system existed prior to the announcement of the official loan. Most investors/analysts now estimate public recapitalization needs of close to EUR100bn. The official loan from the European Stability Mechanism (ESM) or the European Financial Stability Facility (EFSF) per se does not make the losses any bigger. Once the losses are acknowledged, the realistic choices are between Spain issuing bank recapitalization bonds or a bank recapitalization bond issued by the EFSF/ESM to the sovereign that subordinates the rest of government creditors (with the recapitalization bonds, Spanish banks can tap eurosystem liquidity). According to our calculations, existing bondholders are better off, all else being equal, with senior EFSF/ESM financial support at the concessional rate that is being suggested (3-4%) than with recapitalization bonds that would otherwise have to be issued. Read more
Reporter: Um, I’ve filed some copy from Los Cabos
Panicked Night News Editor: Well, what’s the news!?!?! Read more
As we all wait for an actual Spanish bailout loan doc, and what it might say about that ESM seniority…
Here’s some seriously intriguing, counter-intuitive food for thought from Barclays’ Piero Ghezzi. From a Tuesday note: Read more
Hat-tip to Charles Forelle for pointing out a feature of ESM creditor status that we really should have noted earlier. From the Treaty:
In the event of ESM financial assistance in the form of ESM loans following a European financial assistance programme existing at the time of the signature of this Treaty, the ESM will enjoy the same seniority as all other loans and obligations of the beneficiary ESM Member, with the exception of the IMF loans. Read more
On Monday morning, a relief rally took place in markets around the open-half of the globe as investors digested the bailout of Spain’s banks, as announced by the Eurogroup.
The move was, of course, recognition of what was known for a long time — that Spain could not backstop its ailing bank sector alone. It would seem, however, that Monday’s rally might already be losing steam. Read more
“If the Spanish state has difficulty in financing itself outside Spain, then the difficulties will be even greater for those in the private sector…”
Circularity. Reinforcing the sovereign-bank loop. However you’d put it – this weekend’s ‘rescue’ deal for Spain’s banks seemed designed to avoid doing this. Or at least to avoid appearing to do so. Read more
Or, up to €100bn in EFSF and/or ESM loans channelled to the bank recap fund (with conditions on structural and bank reforms but without specific fiscal demands), while Spain itself carries on issuing in the market.
Click image for full Eurogroup statement:
Kinda obvious, but we knew Merkel would go for option 2!
That would be the one which combines the full EFSF and ESM lending capacities to get a total lending capacity of €940bn. Of which:
a) €200bn is already allocated to the Greece/Portugal/Ireland, and can’t be re-used when it is repaid, and
b) the EFSF part expires in mid-2013. Read more
The European Commission has published a short paper outlining three options for the eurozone rescue programme, ahead of eurozone and EU finance ministers’ meetings next week. Click on the image for the PDF:
A reader passes on this curious detail from a Finnish MPs’ debate on Greece (via Helsingin Sanomat):
Some MPs expressed shock that the Ministry of Finance decided to keep the collateral agreement reached between Finland and Greece a secret. Read more
Anyone remember the EFSF’s ersatz CDS?
They announced it back in November 2011. Another measure to eke the bailout fund’s resources out a bit more in a bad patch of the eurozone crisis. Read more
China is considering how to get “more deeply involved” in resolving Europe’s debt crisis by co-operating more closely with European rescue funds, Wen Jiabao, Chinese premier, said on Thursday. The FT reports China “is investigating and evaluating concrete ways in which it can, via the IMF, get more deeply involved in solving the European debt problem through [European Stability Mechanism/European Financial Stability Facility] channels,” Mr Wen said in a joint press conference with German Chancellor Angela Merkel in Beijing. European officials said they believed Beijing had clearly changed its position and more concrete terms of any Chinese contribution were likely to be discussed in two weeks at a delayed EU-China summit. Mr Wen said it was increasingly “urgent” that a solution be found to the European debt crisis and he called on the international community to co-operate towards that end. The euro rose about half a per cent against the US dollar soon after his words were reported.
China is considering how to get “more deeply involved” in resolving Europe’s debt crisis by co-operating more closely with European rescue funds, Wen Jiabao, Chinese premier, said on Thursday. China “is investigating and evaluating concrete ways in which it can, via the IMF, get more deeply involved in solving the European debt problem through [European Stability Mechanism/European Financial Stability Facility] channels,” Mr Wen said in a joint press conference with German Chancellor Angela Merkel in Beijing. The FT reports that the comments have revived hopes that China, which holds by far the world’s largest foreign exchange reserves, could add some of this $3.2tn cash pile to existing and future European bail-out funds.
Angela Merkel is prepared to let the existing EFSF, which has about €250bn in unused funds, run in parallel with its successor, the €500bn ESM, says the FT, citing unnamed German and eurozone officials. In return, the German chancellor wants eurozone heads of government to sign up to rules to cut budget deficits and public debt that are much tougher than those currently foreseen by eurozone governments. The German offer emerged as Christine Lagarde, the IMF head who met Ms Merkel on Sunday, pressed Berlin for “a clear and credible timetable” to fold the existing EFSF into the ESM to increase its size. Without a larger bail-out fund, fundamentally solvent countries like Italy and Spain could be forced into a financing crisis, Ms Lagarde said in a speech in Berlin. “This would have disastrous implications for systemic stability,” she said.
Standard & Poor’s on Monday stripped the eurozone’s bail-out fund of its AAA credit rating, potentially constraining its ability to contain the region’s debt crisis and focusing attention on efforts to create a more robust successor, the FT reports. S&P lowered the European Financial Stability Facility’s rating to AA+, following its decision on Friday to remove the triple-A ratings of France and Austria, two of the find’s guarantors. The EFSF relies on the triple-A ratings of its guarantors to raise cash in debt markets, which it then lends to stricken eurozone governments at a small mark-up. France and Austria account for some €180bn of the credit guarantees underlining the fund, created after the first Greek bailout in May 2010 and supposed to serve as a firewall sealing the eurozone’s core economies from the crisis. Shorn of its top-tier credit rating, the EFSF is likely to be forced to pay higher premiums or operate with less cash at its disposal.
Standard & Poor’s on Monday stripped the eurozone’s bail-out fund of its AAA credit rating, potentially constraining its ability to contain the region’s debt crisis and focusing attention on efforts to create a more robust successor, reports the FT. S&P lowered the European Financial Stability Facility’s rating to AA+, following its decision on Friday to remove the triple-A ratings of France and Austria, two of the find’s guarantors. The EFSF relies on the triple-A ratings of its guarantors to raise cash in debt markets. The EFSF has so far committed €43.7bn to Ireland and Portugal, and was expected to contribute another €150bn to help underwrite a second Greek bail-out and recapitalise banks. Although it is sufficient for those tasks, analysts have long complained that it lacks the firepower to assure financial markets that much larger eurozone economies, such as Spain and Italy, could be protected if the crisis deepened. Even before S&P’s move, European officials had accepted that it would be politically impossible to secure support in Germany and other triple A-rated countries to increase their exposure to the fund. As such, they are now focusing their efforts on bringing to life its €500bn successor, the European Stability Mechanism, which is supposed to come into service on July 1 – a year ahead of schedule.