After years of failed attempts to stabilise the Greek economy, the Greek government finally got debt relief in 2012. As we explained in our previous post, interest payments fell by more than half between 2011 and 2013. Since the 2012 modifications, Greece’s sovereign debt service costs have been significantly smaller as a share of total output than in Italy or Portugal.
Yet it hasn’t helped much. The economy continues to contract and Greece’s depression since 2008 is among the absolute worst of any country in the world since 1980. Investment spending had already plunged by 60 per cent in real terms between the peak in 2007 and the end of 2011. Since then, it’s dropped another 13 per cent. Overall, Greece has had no economic growth since the beginning of 2013:
Part of the reason: the debt modifications failed to convince private investors to return to Greece, despite having “solved” the problem of government debt service costs. Read more
Last week, we revealed a significant discrepancy between the Greek government’s net debt as reported by the International Monetary Fund’s World Economic Outlook database and what you’d get if you replicated the IMF’s standard methodology for netting out “financial assets corresponding to debt instruments” using data published by the Bank of Greece.
Neither the IMF nor the Bank of Greece had responded to our requests for an explanation of the discrepancy at the time we wrote our original post, nor did either institution respond in time for our follow-up discussion of the Greek government’s equity portfolio. Four days after we’d emailed our original question (while we were on holiday) we finally got some responses. Read more
According to the International Monetary Fund, the Greek government’s financial assets were worth around €3bn in 2015, or less than 2 per cent of GDP. That’s what you get if you take the difference between general government gross debt and net debt, as reported in the latest version of the World Economic Outlook Database.
Yet according to our independent analysis of data from the Bank of Greece — and using the IMF’s preferred definitions of what should and shouldn’t be counted — the Greek government’s financial assets appear to be worth around €30bn in 2015, or about 16 per cent of GDP. Read more
Last week we got a Draghi-backed report by the ESRB which challenged the risk-free treatment of sovereigns by banks.
It included such insights as “the evidence presented in the report illustrates, however, that sovereign risk is not a novel concept” and “If sovereign exposures are in fact subject to default risk, consistency with a risk-focused approach to prudential regulation and supervision requires that this default risk is taken into account”. Which, you know, makes sense.
Thing is though, it doesn’t seem like the bank-sovereign nexus is going anywhere fast. As Gary Jenkins put it:
The tone suggests that the ESRB would like to see a change in the regulatory regime although it is clearly a case of ‘Give me chastity, just not yet,’ as this is also the week that the ECB began its QE programme without differentiating on risk between 3 year or 30 year bonds. They have set a yield of -0.2% as where they are prepared to buy anything. Thus technically holders of 30 year bunds could say that is the level they are prepared to sell at.
Speaking at Davos this morning, Angela Merkel and Alexander Stubb argued that European creditors should not be held responsible for their poor lending decisions.
Well, that’s not exactly how they phrased it: Read more
One of the reasons that the eurozone’s peripherals should be willing to put up with austerity is that it’s helping address internal balances and address falls in competitiveness. That’s the story being sold by the politicians at least. But now that the crisis is coming into its fifth year, there is a decent amount of data that allows us to see if those imbalances are indeed being corrected and that lost competitiveness regained.
James Nixon at SocGen has has done some clever number crunching with unit labour costs in the most crisis-hit eurozone countries since 2000, and found that any apparent improvements in competitiveness are likely to be fleeting. Read more
Greece has had a break from the headlines recently, but how long can it last? With a banking system that’s soon going to need shoring up again, probably not long. Read more
Some more details about Spain’s bad bank are filtering through, mainly on how it might function in practice. And analysts are finding that the more they find out, the more concerns they have.
On Thursday Credit Suisse’s Ignacio Cerezo and Andrea Unzueta summed up their latest thoughts on AMC following a meeting with Cuatrecasas, legal advisers to the bank recap fund FROB. Overall, they see the new details that emerged as ” incrementally negative” for both Spain and its banking sector. Read more
Small but beautifully shaped country seeks bond investor for long term relationship. Must be open-minded about banking crises and like walks along the Adriatic coast.
Slovenia was in the market on Friday — with $2.25bn of bonds. That’s greenbacks, not euros, despite belonging to the currency union. Read more
Getting a bit impatient waiting for Friday/anything to happen? Well, why not print out (and update) your Eurozone Crisis Rebooted calendar, courtesy of Citi:
If only the ECB had a shared Google Calendar with Germany’s constitutional court, this would be so much easier. From Bloomberg on Friday:
European Central Bank President Mario Draghi may wait until Germany’s Constitutional Court rules on the legality of Europe’s permanent bailout fund before unveiling full details of his plan to buy government bonds, two central bank officials said.
Waiting for the eurozone crisis to properly kick off again would fill us with anxiety if we weren’t so damn used to it by now. And while partaking in the time-honoured tradition of thumb twiddling, we’ve been looking at projected debt issuance by Italy and Spain for the remainder of what promises to be a fun second half once everyone is done sunning themselves.
Chart courtesy of UBS: Read more
Then and now the key to the door of the eurozone’s
success survival, especially given the currency union’s propensity for contagion.
There may be a relief rally because of utterances by European Central Bank President Mario Draghi, but speaking on behalf of investors: it’s hard not to feel a bit let down lately (understatement). Read more
There was some chatter on Monday about whether the bailout of Spain’s banks could trigger credit default swaps that reference the sovereign. It centred around the question of subordination.
As Joseph pointed out earlier, it remains unclear whether that funds tapped from the European Stability Mechanism will be de facto senior. 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
Banking in Europe boomed upon the creation of the euro and the global expansion of credit in the 2000s. In the US, banks were also riding high on strong assets growth and accompanying increases in market capitalisation. Cross-border claims also climbed as banks sought to grab an even bigger share outside their domestic markets.
Things have since changed. Read more
Analogy du jour, courtesy of Gerry Fowler of BNP Paribas’ Equity & Derivative Strategy Team (emphasis ours):
The investment environment right now, especially in Europe, reminds me of the old arcade game of Frogger where the player had to direct their frog safely across a busy motorway and a river full of crocodiles. Despite the normal dangers, success usually required a series of forward and backward moves and sometimes several in quick succession. Sometimes however, the dangers ahead appear so overwhelming that one could easily sit on the side of the road for long periods – much like many investors now.
The European Central Bank will meet on Thursday, and the broad consensus is for rates to remain on hold. After yesterday’s dismal Purchasing Manager Indices, the press conference will be watched even more closely.
A quick recap of those PMI numbers, courtesy of Jim Reid and Colin Tan at Deutsche Bank, and then onto the implications for the ECB’s rate setting. Read more
As markets ponder France’s post-election future, and the Dutch deal with the collapse of their government, some analysts are wondering which countries even qualify as being in the “core” of Europe.
In so contemplating, Divyang Shah, Global Strategist at IFR Markets, has put together this table of the correlations between the daily changes in the 10-year benchmark bonds of various countries, year-to-date (click to expand): Read more
On Friday, FT Alphaville discussed the process of de-euroisation that is currently underway as foreign investors continue to withdraw from the sovereign bond markets of peripheral countries. For Spain and Italy, the issue is of particular concern, as the ability and willingness of remaining investors to fund them will, in large part, determine whether the or not countries will need to be bailed out.
According to research analysts at Credit Suisse though, the recent focus on Spain, rather than Italy, is misplaced: Read more
Eurozone finance ministers reached a long-delayed €130bn second bail-out for Greece early on Tuesday after strong-arming private holders of Greek bonds to take even deeper losses than they had accepted last month, the FT reports. Although Greek bondholders agreed in October to accept a 50 per cent cut in the face value of their bonds in face-to-face negotiations with Nicolas Sarkozy, France’s president, and German chancellor Angela Merkel, they will now be offered a “voluntary” deal with a haircut of 53.5 per cent, eurozone officials said. Both Mr Juncker and Christine Lagarde, managing director of the International Monetary Fund, emphasised at a post-meeting press conference that Greece still had to live up to a series of “prior actions” by the end of the month before eurozone governments or the IMF can sign off on the new programme. The bail-out comes with tough new terms, including a permanent team of monitors in Greece to ensure Athens lives up to the terms of the bail-out deal and an escrow account which Greece will ensure always holds three months worth of debt payments. The escrow account will be temporary, however, and Athens has agreed to change its constitution to make debt repayment the top priority in government spending.
With a long night of Euro-deal watching ahead we thought we would leave you some mixed-metaphors to mull over.
This is from Gabriel Sterne over at Exotix (emphasis his): Read more
Economic growth in China could drop by half this year in the event of a sharp recession in Europe, the IMF predicted on Monday in a report that underscored the importance of global trade to the world’s second largest economy. “The risks to China from Europe are both large and tangible,” and “China would be highly exposed through trade linkages,” said the report, which was published by the IMF’s resident representative office in China. The FT reports that the IMF’s forecast for China’s annual growth in 2012 has already been lowered to 8.2 per cent from a previous forecast of 9 per cent but if Europe’s performance is worse than expected then China’s export-driven economy would be badly hit.
Law firm Clifford Chance must be tired of fielding questions about what would happen to derivatives contracts should one’s eurozone counterparty exit the single-currency. So much so that they’ve put a document together covering 20 of what we imagine have been the most frequently asked questions.
FT Alphaville has waded through the legal mists, guided by Clifford Chance, to give you a bit more
pedantic detail than “it depends”. Read more
The International Monetary Fund has asked its member countries for an extra $500bn in firepower to combat the world’s spreading fiscal emergencies, which it estimates will generate demand for bail-out loans totalling $1tn over the next two years, the FT reports. The estimate was presented by Christine Lagarde, IMF managing director, to the fund’s executive board this week, according to people familiar with the discussions, and would most likely be financed by voluntary ad hoc loans rather than mandatory contributions. The IMF currently has $387bn in available resources. Eurozone countries last month pledged about $200bn to the IMF, which will count towards the new goal. But with the US unwilling to contribute and the UK reluctant, much of the remaining commitments will have to come from large developing countries. US and EU officials have been wary of soliciting funds from China. US and European officials are concerned Beijing will seek geopolitical concessions, such as a lifting of arms embargoes imposed after the 1989 Tiananmen square massacre, in return for aid.
A quarterly report released by the Bank of Japan on Monday revealed that the outlook for the economic conditions in seven of the country’s nine regions has dimmed, the WSJ reports. While the central bank doesn’t think the regions risk a downward trend, rather saying some of the regional economies have “paused”, the strength of the yen and decreased demand from overseas has had a markedly negative impact. Officials at the BOJ see the sovereign debt crisis in Europe as a key concern. Meanwhile the WSJ also reports that the tax policy chief of the ruling Democratic Party has warned that Japan itself may be subject to a downgrade on its debt if the government doesn’t raise sales tax in order to financing increasing social security costs.
Bobby Robson, the former England football coach, once described a player as being so truculent he could have an argument with himself.
Willem Buiter has gone one better. In his latest note, the Citigroup chief economist has invented someone so he can have an argument. Read more
MF Global’s executives were racing to secure a sale of the company on Thursday as Moody’s and Fitch downgraded its credit to “junk”, the FT reports, citing people close to the situation who said a small number of interested buyers were in talks with the company over an acquisition of its main futures brokerage arm or the entire group. However several large international banks said privately that they had no interest in acquiring the company, which has been put up for sale by chief executive Jon Corzine. Ratings agencies have been particularly alarmed by a $6.3bn exposure to European sovereign debt. Reuters says some customers are moving money away from struggling futures brokerage, citing hedge funds, rivals, and analysts, though the extent of the outflows is unclear. Bloomberg, citing three people with knowledge of the matter, reports MF Global tapped the entirety of two revolving credit lines this week. Shares in MF Global fell 16 per cent to $1.43. They have lost more than 60 per cent of their value this week after Moody’s first lowered its credit rating and warned it could cut again to junk and after reporting an unexpected loss.
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.