Greece may have an ongoing issue or two, but that didn’t stop its government debt rallying 274 per cent in the second half of last year. Clearly, the driver was the reduced likelihood of it leaving/being kicked out of the eurozone, rather than the (dismal) economics.
Gabriel Sterne at Exotix says the run was one of the “most astounding sovereign bond rallies of all time”, but that the bonds are now over-bought. The declining possibility of a Grexit, he says, is more than fully priced in (his emphasis): Read more
Much has been made of the buyback announced as part of the latest Greek debt reduction deal. Mainly because more than half of total debt savings agreed are expected to come from the buyback, according to this leaked doc.
The details of how the scheme is might actually work are pretty thin on the ground, but we know from the leak that the plan is to spend €10.2bn (from the EFSF most likely) buying back and retiring bonds. It is expected that this will lead to a reduction of 11 per cent of GDP by 2020. Read more
The Greek parliament will vote late Wednesday on the structural reforms and budget cuts demanded by the Troika. Reports suggest that the government will be able to get a majority. But in a last minute attempt to derail the vote, the country’s two main labour unions called a 48 hour general strike that started today.
These are the some of the scenes: Read more
There are some worrying signs about the strength of the Greek government coalition building this week. Between voting abstentions, public disagreements and new strikes, it’s looking ever bleaker. Read more
Greece’s political crisis deepened on Wednesday after a deal to give the premiership to the speaker of parliament fell through at the last moment, reports the FT. Philippos Petsalnikos, speaker of parliament and a former justice minister, was poised to become premier, having emerged as a compromise candidate after fierce infighting inside the PanHellenic Socialist Movement over the candidacy of Lucas Papademos, a former ECB vice-president. But George Papandreou, the departing Socialist prime minister, reportedly reintroduced Mr Papademos’s candidacy, along with that of Evangelos Venizelos, the finance minister. The presidency said another meeting would be held at 10am on Thursday.
Greece’s prime minister unexpectedly announced a referendum to approve a second EU bail-out deal for his austerity-hit country, less than a week after it was agreed with international creditors at a EU summit, the FT reports. George Papandreou made the pledge on Monday night in a speech to lawmakers in his fractious PanHellenic Socialist Movement (Pasok) party but did not set a specific date for the vote. The premier’s move looked likely to cause alarm in Brussels and reinforced concerns that Greece’s fraught domestic politics are spiralling out of control amid growing popular anger over public sector job cuts and tax increases. The referendum is only Greece’s second in almost 40 years, reports Reuters, and the outcome seems predictable as recent opinion polls show the bail-out deal is unpopular. It is likely to be held in early 2012.
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 leaders on Friday received some interesting weekend reading.
FT Alphaville has also taken a look at “Greece: Debt Sustainability Analysis”, an assessment prepared by European Commission economists for discussion on Friday among European finance ministers. We’ve put it in the usual place (and extensively quoted excerpts below). 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.
The Group of 20 richest nations put the ball firmly in France and Germany’s court at the weekend, the FT reports, saying that by the European summit next Sunday the eurozone should have a comprehensive plan to end the sovereign debt crisis. G20 finance ministers called for the eurozone to have an agreement on the losses the private sector should take on Greek debt; arrange a credible plan for the recapitalisation of Europe’s banks; and install a firewall to protect other countries from Greece’s woes. Having risen sharply last week on expectations that Europe was getting a grip on its problems, financial markets are also nervously awaiting the political decisions to be taken this week. Bloomberg reports that the G20 governments are also considering naming as many as 50 banks as systemically important to the global economy and in need of extra capital, citing two officials from member nations.
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.
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.
Greece will miss a deficit target set just months ago in a massive bailout package, Reuters reports, with a government draft budget figures released on Sunday targeting a deficit equivalent to 8.5 per cent of GDP instead of the 7.6 per cent target. For 2012, the government predicts a deficit of 6.8 per cent of GDP compared to the previous target of 6.5 per cent. The shortfalls were attributed to a continuing recession, with the FT reporting the budget assumes that Greece’s economy will shrink about 2 per cent in 2012, on top of a projected 5.5 per cent contraction this year as private consumption plummets and the government slashes infrastructure spending and other public investment. The draft budget is expected to be presented to the Greek parliament on Monday, the same day the country’s finance minister attends an emergency meeting of his eurozone peers in Luxembourg. The budget is expected to contain spending cuts and tax increases worth about €6.5bn, including additional levies on income and property that the government plans to start collecting this year. The euro fell to an eight-month low ahead of Monday’s meeting, says Bloomberg. Asian equities also fell, with fears compounded by an interview in the German press, reported by Deutsche Welle, with the country’s finance minister, Wolfgang Schäuble, who said Germany would not contribute any more money to the Greek bail-out fund on top of the expansion approved last week.
How do you top a note that goes into the unlikely but vivid possibility of serious social unrest, civil war and authoritarian governments in modern Europe?
Such a conundrum faced UBS Europe economists after their warnings earlier this month of what a eurozone break-up could mean a few weeks ago. In a new note, they say things have entered a more dangerous phase now. A €1,000bn – €2,000bn levered rescue fund appears unrealistic, they say, amid the opposition to the ECB funding the EFSF. Read more
The IMF annual meetings wrapped up in Washington on Sunday with widespread concern over the eurozone sovereign debt crisis but no immediate consensus on the solution, the FT reports. Participants said they were waiting for the ratification of the action plan agreed on July 21 by the eurozone, particularly by the German Bundestag this week, before starting serious negotiations on increasing the rescue fund’s firepower or asking for a bigger writedown in private sector holdings of Greek debt. Disagreements and doubts continued over whether the €440bn EFSF could be leveraged. Meanwhile, Greece continued to insist it would not default, despite widespread private pessimism among attendees at the meetings. The Telegraph says German and French authorities are working on a three-pronged strategy behind the scenes, including a plan to build a “firebreak” around Greece, Portugal and Ireland to prevent the crisis spreading to Italy and Spain. Meanwhile Bloomberg reports that China’s central bank Governor Zhou Xiaochuan said it remained to be seen how emerging economies might help the euro area, and in particular commitments about the EFSF made in July had to be implemented.
Lead troika negotiators set to return to Athens early next week in the clearest sign yet they are about to sign off on an €8bn aid payment to Greece, the FT reports. The European Commission said “good progress” was made in a teleconference between Evangelos Venizelos, the Greek finance minister, and ECB, EC and IMF representatives late on Tuesday. The full mission is expected to come back to Athens early next week to resume the review, almost three weeks after leaving the Greek capital. The Greek finance ministry said in a statement that satisfactory progress had been made. Discussions will also continue this weekend at the annual IMF meeting in which Mr Venizelos is taking part, the ministry said. Separately in the FT, Italy’s finance minister is drawing up new austerity plans following the country’s downgrade by S&P, which would begin with a decree by the end of this month to give the private sector fiscal incentives to invest in infrastructure and broadband internet. Meanwhile, EC president Jose Barroso said eurobonds should not be ruled out, Bloomberg reports.
Greek authorities tried again on Monday night to convince international lenders they had a credible plan to close a growing financing gap, the FT reports, amid signs that negotiators were hardening their line over a €8bn aid payment Athens needs in three weeks to avoid running out of cash. The Greek proposals, made in a conference call with heads of the so-called “troika” – the European Union, International Monetary Fund and European Central Bank – came after a German-led group of European creditor countries made clear they were unsatisfied with measures unveiled last week.
Greece will seek to persuade its lenders that it deserves another €8bn loan payment in a pivotal conference call on Monday as the government battles to head off a looming cash crunch, the FT reports. The call will pit Evangelos Venizelos, the Greek finance minister, against representatives from the so-called troika that crafted the €109bn rescue package granted to Athens last year. The onus will be on the Greeks to prove they are delivering the budget cuts and fiscal reforms mandated by that emergency loan – a task that has grown more arduous as a deeper-than-expected recession has cut into tax receipts. In addition, eurozone ministers at the weekend lowered revenue estimates for a proposed property tax, which the Greek government had hoped could raise about €2bn a year in 2011 and 2012. Greek officials estimate they have enough cash for the remainder of this month, and perhaps the first 10 days of October. An emergency cabinet meeting on Sunday showed signs of renewed brinkmanship between Greece and its rescuers, says the WSJ, as the country’s finance minister, Evangelos Venizelos, pledged new cuts but also lashed out at eurozone countries that are funding the bailout.
Asian shares jumped on Thursday on easing concerns about Europe’s debt crisis after leaders from France and Germany reassured that Greece will remain in the eurozone, the FT reports. Finance, technology, auto and resources stocks were the main gainers, while both spot gold and WTI futures fell slightly. France and Germany offered their full support for Greece remaining in the eurozone, the FT reports separately, but made an emphatic appeal to Athens to implement promised economic reforms as a way of stabilising the bloc. Following a conference call on Wednesday evening with George Papandreou, the Greek prime minister, Nicolas Sarkozy, French president, and Angela Merkel, German chancellor, tried to quell speculation that Greece could be forced out of the single currency, saying in a statement they were “convinced” that Greece’s future lay in the eurozone.
Representatives of leading emerging market countries at the International Monetary Fund have warned the fund’s management against pouring more large sums of money into another Greek bail-out with uncertain prospects, the FT says. The officials said that – several days after a new financing plan from the eurozone authorities – its details were unclear and a proposed reduction in private sector holdings of Greek debt appeared to be inadequate. Interviews with the FT, including the Brazilian and Indian representatives, along with private conversations with other representatives from non-European economies, reveal several governments unwilling to risk financial contagion by curtailing IMF lending to Greece, but alarmed at the risks the fund was taking. Concerns among countries on the fund’s executive board pose a challenge to IMF managing director Christine Lagarde, who soon must decide how much more money she recommends is lent to Athens.
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.
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.
European leaders are looking at ways to keep Greek banks afloat as part of a new €115bn bail-out plan for Athens, the FT says. The plans could add as much as €20bn to an increasingly costly bail-out plan, according to estimates by the European Commission, but the size would likely depend on how long Greek banks were cut off from ECB financing. Under one proposal, eurozone governments would set up a “cash buffer” to assist Greek banks. Other proposals are “emergency liquidity assistance” similar to a facility used extensively in Ireland, while there is rising support for a tax on banks to help pay for rescues. The NYT says some sources saw the bank tax proposal, which was introduced at a late stage in the talks, as a sign of confusion about the architecture of a bailout.
Greek prime minister George Papandreou said the eurozone and International Monetary Fund must quickly approve a second bailout for his country to avoid its economic reform plans collapsing. Reuters says Mr Papandreou told FT Deutschland, ”If we don’t get a decision soon supporting the second Greek programme so that the country can begin its far-reaching reforms, the programme itself could be held up.” The prime minister said he was open to proposals being discussed in the eurozone about potentially using the European Financial Stability Facility for Greece to buy back its debt. Meanwhile the FT reports the IMF on Wednesday warned that the Greek sovereign debt burden risked spiralling out of control and that it would be “appropriate” for private bondholders to share in any restructuring.
European leaders are for the first time prepared to accept that Athens should default on some of its bonds as part of a new bail-out plan for Greece that would put the country’s overall debt levels on a sustainable footing, the FT says. The new strategy, to be discussed at a Brussels meeting of eurozone finance ministers on Monday, could also include new concessions by Greece’s European lenders to reduce Athens’ debt, such as further lowering interest rates on bail-out loans and a broad-based bond buyback programme. It also marks the possible abandonment of a French-backed plan for banks to roll-over their Greek debt, as more debt holders support aspects of a German proposal to reduce Greek debt levels. Sources say banks have pushed for a Greek bond buyback plan in return for agreeing to a restructuring programme, arguing that only if Greece’s overall debt were reduced could a sustainable recovery occur. Officials cautioned the new tack was still in the early stages, and final details were not expected until late summer.
German politicians have started a new push for Greece’s creditors to agree to a one-off swap of their sovereign bonds for paper with longer maturities, the FT reports, but private-sector bondholders said it would not gain traction. Just as eurozone governments and banks appeared to be coalescing around a French-led plan for a piecemeal rollover into new 30-year bonds, Wolfgang Schäuble, German finance minister, said a rethink was needed as talks about “a quantifiable private-sector contribution . . . had produced no result”. Also in the FT, senior European officials have lashed out at Moody’s over the timing of its downgrade of Portugal’s debt rating on Wednesday. Bloomberg says hedge funds are already moving on from Greece to bet that the debt crisis will spread to Portugal, Spain and Italy.
The eurozone’s big banks will meet again in Paris on Wednesday in an attempt to end the deadlock with European authorities over the terms of investors’ participation in the restructuring of Greek sovereign debt, the FT reports. People briefed on the talks say a new proposal will ease the burden on Greece, sweetening the terms of the banks’ original plan that would have seen them roll over for 30 years half of their holdings of Greek debt due to mature in the next three years. The buy-in target could be raised, while the coupon on the rolled over debt could be changed from the formula of 5.5 per cent plus a ‘kicker’ based on Greece’s growth rate, to a floating Euribor-based rate plus a kicker linked to inflation. The WSJ, meanwhile, says that eurozone officials’ hopes that private sector bond holders will voluntarily rollover €30bn Greek bonds could come unstuck, as banks have sold off a substantial proportion of their near-maturity Greek sovereign bonds.