With a big hat-tip to El Pais, the draft memorandum of understanding for Spain’s bailout. We’re still reading through all the conditions imposed on Spanish banks…. Click pic for full doc
Featuring bank bail-ins for subordinated debt, notably: Read more
A trip to the European Stabilisation Mechanism treaty, first…
ARTICLE 25 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
Assuming there are no voting hiccups in getting the ESM to buy sovereign bonds on the secondary market…
Some arguments that bailout fund’s limited size means it will eventually hit a floor which will ultimately make bond market liquidity worse. Read more
There’s nothing FT Alphaville likes doing more on a New York morning than rooting around the ESM Treaty.
So when you see headlines like this (via Reuters) Read more
Spot the eurozone country that doesn’t actually have to issue bonds in these closing 5-year bond yields on Friday:
Spain 5.4 per cent Read more
*EURO LEADERS RENOUNCE SENIORITY ON SPAIN LOANS
Update (0445am UK time) — Well, well, well… eurozone leaders did indeed promise not to subordinate Spanish bondholders at the summit, as we assumed they would below. Seniority was “renounced” in the case of Spain.
That phrase suggests a reversion to the original status of official eurozone bilateral and EFSF loans – of being at least pari passu with bondholders. (Though at times the loans have even been subordinated on some points, such as restructuring interest rates. The status is a political football subject to constant change, you could say.) 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
1) How do holders of Spanish bonds react to ESM subordination?
The cat’s out of the bag now, isn’t it. On the one hand Spain borrows up to €100bn for the bank recapitalisation which everyone knew was coming, but at a lower rate than everyone had priced into Spanish bond yields. Bond yield relief, maybe. 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: Read more
We missed this last week, from the (deep breath) Economic and Financial Committee (EFC) Sub-Committee on EU Sovereign Debt Markets.
Something to read if you’re planning to buy a eurozone sovereign bond after 2012… Read more
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:
Germany has set itself up for a clash at this weekend’s G20 summit by ruling out an increase in the size of the European Stability Mechanism, the eurozone bailout fund, according to the FT. “The German government’s position has not changed,” a spokesman said. “That means no, it is not necessary.” The IMF and other eurozone governments have pushed for an increase in order to maintain the initiative in fighting Europe’s debt crisis, but German Chancellor Angela Merkel faces domestic opposition to enlarging Germany’s guarantees for the ESM. Read more
Eurozone states signed the final version of the treaty establishing the European Stabilisation Mechanism on February 2.
(Click the image for the full document) Read more
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. Read more
The president of the European Council said Friday that a new intergovernmental treaty meant to save the single currency will include the 17 eurozone states plus six other EU countries – but not all 27 EU members, reports AP, and the bloc’s permanent bail-out fund was capped at €500bn, after talks in Brussels that went well into Friday morning. German Chancellor Angela Merkel praised the plan, saying ”I have always said, the 17 states of the eurogroup have to regain credibility,” she said. “And I believe with today’s decisions this can and will be achieved.” Herman Van Rompuy, president of the European Council, said the countries would provide up to €200bn in extra resources to the IMF. French President Nicolas Sarkozy said early Friday he would have preferred a treaty among all EU members, but that was not possible because the British proposed that they be exempted from certain financial regulations. “What is on offer isn’t in Britain’s interest so I didn’t agree,” said British prime minister David Cameron, according to the BBC on Twitter. Reuters says the EU leaders decided that the currency bloc’s future permanent bailout fund, the ESM, would be capped at €500bn at Germany’s insistence. It will also not get a banking license, which would have allowed it to draw on ECB funds to increase its firepower, another move Germany objected to. However AP also reports Mr Sarkozy also said two bailout funds would be managed by the ECB, though the details still need to be worked out. Read more
Well, it wouldn’t be Summit Eve without rumours and counter-rumours. But the clown show might have outdone itself this time.
Forty minutes before US markets closed, Reuters reported that the ESM would receive a banking licence and run side-by-side for one year with the EFSF, according to a draft summit statement. Read more
Stock markets in Asia and Europe have risen modestly on the latest plan to deliver a “firewall” for eurozone sovereign debt, the FT reports. The Italian 10-year bond yield fell below 5.8 per cent early in European trading. The proposal involves cobbling together the eurozone’s existing EFSF funds with bringing forward over $670bn of fresh funds from the European Stability Mechanism, a bailout vehicle, earlier than planned, the FT adds. Timothy Geithner, the Treasury Secretary, has praised eurozone leaders’ efforts on his three-day trip to Europe — but declined to be drawn on what the European Central Bank should do to fix the crisis, reports the WSJ. Read more
Asian stocks rose on news of last-minute negotiations to create a bigger financial “bazooka” to present at this week’s EU summit, reports the WSJ. US stock markets also rose in the late afternoon on the news, but lost most of the gains by close. The FT, citing senior European officials, says negotiators are considering allowing the eurozone’s existing €440bn bail-out fund to continue running when a new €500bn facility, the European Stability Mechanism (ESM) comes into force in mid-2012, almost doubling the firepower of the bloc’s financial rescue system. The proposal is being debated by “sherpas” ahead of Thursday’s crucial eurozone summit, could also include speeding up cash payments into the ESM to give it more heft and support its credit rating. Under the plans being considered, the ESM is unlikely to have its headline €500bn from the start, now envisioned for July. But leveraging up the existing EFSF, which could raise its disposable resources to about €600bn, and adding new IMF and ESM resources could create the so-called “bazooka” effect leaders have been searching for. As FT Alphaville notes, however, it’s not clear — among other things — where the funds would come from, or how such a plan might win support from the electorates of the northern eurozone countries. Tim Geithner, in Berlin for talks with eurozone leaders, backed the German-French push for closer economic ties in Europe that was discussed on Monday, says Bloomberg. Mr Geithner’s comments were more upbeat than his previous remarks urging European leaders to act faster. Read more
Germany is prepared to yield on language in the European Stability Mechanism requiring private bondholders share in any losses, says Reuters, citing four sources. The concession, which would be aimed at reassuring private sector investors in sovereign debt, would be made in exchange for “much stricter” budget rules, that would include the possibility of taking transgressors to court, according to one source. The change would be to wording on which the ESM, the permanent fund that is to replace the EFSF from 2013, is based. It would not make private bondholders exempt from having to share in losses, but it would bring the ESM statutes more in line with IMF rules. France is keen for references to private sector involvement in losses to be moved from the ESM treaty itself to the annexes. Ms Merkel will meet French President Nicolas Sarkozy in Paris on Monday to discuss positions ahead of the EU leaders’ summit in Brussels later this week. A second source said the aim was for the language in the ESM’s treaty, which has already been drafted, to be altered so it was more closely aligned with international practice, a move that would reassure bond markets.
No-one likes to kick a financially engineered monoline-cum-CDO super-fund of dubious sovereign debt when it’s down.
Aside from Moody’s, that is. Read more
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