Let’s take a moment for a high level overview of public debt-to-GDP ratios in the eurozone. If that’s not your idea of fun, well, you probably wouldn’t be reading FT Alphaville.
Courtesy of a note by Lasse Holboell W. Nielsen of the Economics Research team at Goldman Sachs (we may have added some kittens)… Read more
The de-euroisation continues and is, in Italy at least, getting faster… these charts show foreigners running away from Italian liabilities in March at their fastest pace ever, and illustrate just how quickly the LTRO sheen has faded.
Italy’s March balance of payments, out on Monday, showed its biggest ever decline in portfolio liabilities and while Italian repatriation flows show no consistent sign of slowing they are not keeping up with the foreign pull-out from Italian portfolio instruments. Read more
Grexit being, of course, a Greek exit from the eurozone. (Also, an app for archiving and sharing Gmail threads. Bummer for them.)
The term comes from Willem Buiter and Ebrahim Rahbari at Citi, who are now leaning towards the “let them leave” argument: Read more
In a note released on Tuesday, GMO, the global asset management firm headed by Jeremy Grantham, writes that “European banks need tons of money” to correct capital shortfalls. This much, we know.
But the five scenarios used by Richard P. Mattione, the firm’s head of macroeconomic research, for why banks will need to raise much more capital should prove familiar to FT Alphaville readers. Mattione uses data from the July EBA tests and July BIS data, so be warned. In fact, there are a few points here that seem to be behind the results of the latest EBA efforts. Read more
And now for some light relief as the Italian bond market goes under…
As the self-declared Napoleonite met his Waterloo yesterday, FT Alphaville is wondering how Silvio will be characterised in the annals of history. Read more
Will the eurozone survive? If so, in what guise? If not, how will it be broken up and what might the consequences be?
These, among others, are some of the key questions currently occupying the minds of the financial great and good. Read more
Or, trying to reduce Italian solvency risk by changing the debt structure. Plus a little bit of financial repression?
FT Alphaville has just got off the phone with Luca Mezzomo, macroeconomist at Intesa Sanpaolo Group, to discuss ‘cliff risk‘ in Italian bonds. Read more
Compare this note from IFR on Friday…
Frankel [Christophe Frankel, CFO of the EFSF] said that the recent spread underperformance would not necessarily hurt the EFSF’s prospects. “A very important part of our investor base is buy-and-hold and mostly insensitive to mark-to-market and, for some, they will be more than happy to buy high quality paper with a spread,” he said.
David Cameron has urged European leaders to take a “big bazooka” approach to resolving the eurozone crisis, warning they have just a matter of weeks to avert economic disaster. The UK prime minister told the FT he wants France and Germany to bury their differences and to adopt before the end of the year what he claims would be a decisive five-point plan to end the uncertainty, which was having a “chilling effect” on the world economy. Separately, Mr Cameron wants Germany and others to accept the “collective responsibility” of euro membership and to increase the firepower of the eurozone’s €440bn bailout fund to stop financial contagion spreading from Greece. Although he refused to speculate on a Greek default – some British government ministers believe it is now inevitable – he said all uncertainty had to be removed about the country’s economic future. He also called for the IMF to be more active in “holding feet to the fire”, confronting eurozone leaders in the starkest terms possible with the consequences of further prevarication. The final part of Mr Cameron’s plan is to address Europe’s underlying weaknesses, including deepening the single market and improving the governance of the eurozone, if necessary through treaty change. “That’s the menu,” he said. “It’s not à la carte – you have to do the whole thing.”
Eurozone finance ministers gave a clear indication they were preparing to paper over Greece’s failure to hit international lenders’ mandated budget targets for 2011, saying they would now evaluate Athens’ performance based on goals that combine both this year’s and next year’s finances, the FT reports. The EU appeared to be preparing to fudge this year’s missed benchmarks, paving the way for the closely watched aid payment, which Athens says it needs in a matter of days or it will run out of cash. But senior eurozone officials warned they were likely to extract new concessions for 2013 and 2014 in the coming days before signing off on the new money. Jean-Claude Juncker, the Luxembourg prime minister who heads the group of eurozone finance ministers, signalled the new €109bn bail-out for Greece agreed in July was likely to be reopened, particularly the complicated plan to get Greek bondholders to shoulder some of the burden by taking an estimated 21 per cent “haircut” on their debt repayments. Any new plan is likely to require deeper cuts for private bondholders, though Mr Juncker declined to say what changes would occur. He insisted that none of the ministers wanted to see a Greek default, and “everything will be done” to avoid it. Meanwhile Finland will now be able to get collateral for its EFSF contribution, but only under highly onerous terms that all other eurozone countries agreed to shun.
Global stocks fell to a 15-month low on Tuesday, Reuters reports, pinning Asian stocks near a 16-month low, as investors shed riskier assets on growing doubts over Greece’s ability to avoid default, fuelling fears of global financial turmoil and recession. Fears over the banking sector’s exposure to eurozone sovereign debt and plummeting value of assets across the board further led to a sharp widening of credit default swaps. Weakening outlook for industrial demand weighed on copper and oil while gold, yen and the dollar strengthened. The main US indices are approaching bear market territory, says the WSJ, with the S&P 500 down 19.4 per cent since April. CDS on Morgan Stanley soared 92 basis points to a mid-price of 583 basis points on Monday afternoon, Bloomberg reports, the highest since October 2008. Those on Goldman Sachs increased 65 basis points to a mid-price of 395.
A split has opened in the eurozone over the terms of Greece’s second €109bn bail-out with as many as seven of the bloc’s 17 members arguing for private creditors to swallow a bigger writedown on their Greek bond holdings, the FT reports, citing senior European officials. While hardliners in Germany and the Netherlands are leading the calls for more losses to be imposed on the private sector, France and the European Central Bank are fiercely resisting any such move. They fear re-opening the bond deal could spark renewed selling of shares in European banks, which have significant holdings of Greek and other peripheral eurozone debt. The divisions threaten to unpick a painfully negotiated deal reached with private sector bond holders in July. Meanwhile German chancellor Angela Merkel faces a backlash from within her own party on a crucial vote to reform the EFSF, Reuters reports. The measure will pass the Bundestag on Thursday regardless, as it has support from Social Democrats and Greens, but failure to get majority support within the ruling centre-right coalition will weaken Ms Merkel’s ability to push through further rescue measures.
US Treasury secretary Tim Geithner makes a one-day trip to Poland this week, Reuters reports, for an unprecedented meeting with eurozone finance ministers as growing fears of a potential Greek debt default rip into Europe’s banking sector. The trip comes as a surprise since Mr Geithner returned only on Saturday from a meeting of Group of Seven finance ministers in Marseilles, France, where he said Europe’s strongest economies must offer “unequivocal” backing to the weakest. The FT concurs, saying his attendance is highly unusual, particularly at such a tense moment for eurozone economies. According to EU officials, he has not attended such a gathering before. The Treasury said in a statement that Mr Geithner and his counterparts will discuss “ their efforts to contribute to global economic recovery and our continuing co-operation on financial regulatory reform”.
Trading in French government bonds has surged as worries about the debt crisis in the periphery of the eurozone spreading to the core countries has captured investors’ attention, the FT says. The average daily trading volume this August is about double the level from previous summers, echoing unusually high volumes in equity and derivative markets in the recent turmoil. France saw €2.195bn ($3.17bn) of bonds traded on an average daily basis up until August 10 this year. That compared with average daily volumes of €1.22bn in the month in 2007, €844m in 2008, €803m in 2009 and €1.12bn in 2010, according to Tradeweb, a data provider.
European authorities should stop public bickering and speak with one voice to make the second rescue package for Greece work, warned Christine Lagarde, the new managing director of the International Monetary Fund. In an interview with the FT, the former French finance ministersaid public discord between eurozone ministers and the European Central Bank over the last bail-out had created confusion in the markets. “Putting on my European hat for a microsecond…we did not communicate it in a harmonised fashion, nor did we particularly speak with one voice,” she said, adding that this time the Europeans must “stick to the script”. But Ms Lagarde, the 11th successive European to run the IMF, also defended the eurozone’s handling of the Greek crisis and fiercely resisted criticism that she was likely to be biased towards Europe.
Gold burst through $1,600 an ounce for the first time as the eurozone’s escalating debt crisis sent fear through financial markets, the FT reports, taking the metal’s price to a nominal record. Markets turned up the pressure on European leaders ahead of a crunch summit on Thursday, with bank shares plummeting and Italian and Spanish borrowing costs hitting new euro-era records. The eurozone crisis, combined with the possibility of a US default, have burnished the appeal of gold and other havens such as the Swiss franc and German bunds. Asian shares dropped for a fourth day, led by Japanese banks and exporters, says Bloomberg.
The price of oil briefly hit $100 a barrel, but strong US earnings and an uptick in hopes for the eurozone crisis gave investors cover to return to riskier assets as unease over unrest in Egypt diminished slightly, reports the FT’s global market overview. Oil traders briefly pushed the price of Brent crude above $101 for the first time since September 2008. However, on Monday, Abdalla el-Badri, OPEC secretary-general, said: “If we see a real shortage we will have to add”. With Egypt’s markets closed, investors expressed their opinion through credit default swaps. Protection against default by the government is still highly elevated, at 440bp, according to Markit. However, that narrowed slightly from Friday evening, when the cost was 455bp. The S&P 500 index was recovering, adding 0.8 per cent to 1,286.12, its best one-day performance in 3 weeks. US Treasury bonds were also falling after surging on haven demand, up 6 basis points to 3.38 per cent. The levelling of Egypt fears came as CDS prices on some of Europe’s peripherals also narrowed. Greece was 10bp narrower, at 860bp, after reports in Greek papers that the EU and other authorities had reached an understanding that some kind of default, with a resulting haircut on bonds, was inevitable.
The European Central Bank suspended its emergency purchases of eurozone government bonds last week as the debt crisis eased, allowing it to focus on combating rising inflation, reports the FT. Official data published on Monday showed annualised eurozone inflation reached 2.4 per cent in January, the highest for more than two years and beyond the ECB’s target of “below but close” to 2 per cent. The ECB is expected to hold its interest rate unchanged at 1 per cent on Thursday. However, the larger than expected rise in prices is likely to prompt warnings from Jean-Claude Trichet, bank president, that the ECB will act on any signs of inflation spinning out of control. Eurozone inflation was 2.2 per cent in December.
Well, it didn’t come from us (taps side of nose) but apparently the EU has a covert, conspiratorial — rather German — top-secret eurozone reform committee.
From the EU affairs specialist, EurActiv: Read more
China has promised further “concerted action” to support European financial stabilisation, including continuing to buy bonds of countries at the heart of the region’s sovereign debt crisis, say European officials, reports the FT. The officials said that Wang Qishan, a Chinese vice-premier, had given assurances that China would step up support for European stabilisation efforts “if necessary”. Wang made the pledge at the third annual China-EU economic and trade talks, held in Beijing on Tuesday. In comments reported by state media, Wang said China supported measures taken by the EU and the IMF to stabilise the eurozone, but gave little detail as to the form such backing would take.
And we thought the Mediterranean was nice this time of year.
Research released by Fitch on Friday shows how the ten largest US MMFs have eroded their exposure to banks in peripheral Europe during the last few years. Read more
Asian markets rallied on Thursday as they took their cue from healthy rises in the previous session in Europe and the US on hopes that the European Central Bank was set to step up its bond buying programme to calm the eurozone debt markets, the FT’s global market overview reports. In Asia, the Nikkei 225 climbed 1.8 per cent to 10,168.52, while the Shanghai Composite rose 0.7 per cent to 2,843.61. Yet the focus of the day remains Europe’s sovereign debt markets as many investors hope for action by the ECB to stabilise government bond markets. European stock markets opened in buoyant mood with the FTSE 100 up 0.4 per cent at 5,662 and the FTSE Eurofirst 300 up 0.2 per cent. The euro, which gained more than 1 per cent in the previous session against the dollar, was steady at $1.3135 against the US currency in early trading on Thursday. Commodity markets were also benefiting from the more upbeat mood in Europe as well as promising recent economic and jobs data out of the US and Asia. Copper was up for the third session in a row, briefly touching a high of $8,716 a tonne, just $250 short of its record of November 11.
Foreign ownership of certain peripheral European government bonds has been dropping like a Blarney stone, in a reversal of a decade-long trend.
You can see the effect in the below chart — from Citigroup’s economics team — and made using the World-Bank Joint External Debt Database: Read more
It was a generally bad start to Monday for eurozone government debt, FT Alphaville says, as CDS pain went on, while yield spreads with German debt continued to widen for Italian, Spanish and French bonds. French debt is particularly one to watch, Deutsche Bank says, given knock-on effects on the health of corporate debt. Read more