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
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
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
What headline factoid to use?
Hands-Off policy fails UK Read more
Real games of chicken are about fundamentally misaligned incentives.
So, at the weekend’s G8, Europe’s voice was heard, and it muttered something under its breath about Greece ‘respecting the commitments that were made’ to its second bailout’s terms. No renegotiation. We also all know what Alexis Tsipras thinks of pretty much any terms applying to a bailout. Cue the Grexit fear cycle, terror of a retaliatory funding shock, etc. Read more
Something you will never ever read in an IMF report on Greece…
There seems to be something of a love-in going on between China and the IMF, though admittedly you have to wade through a weighty report to glimpse it.
Last weekend, finally, after years international pressure, China’s central bank said it was widening the renminbi’s daily trading band with the US dollar. Read more
As well as warning that eastern Europe has the most exposure to a eurozone credit freeze, the IMF has given us a handy, visual guide to eurozone contagion (click to enlarge):
The ECB has some room to further lower the policy rate, given that inflation is projected to fall appreciably below the ECB’s “close to but below” 2 percent inflation target over the medium term and that risks of second-round effects from high oil prices or tax and administrative price hikes appear small––WEO projections see headline consumer price index inflation falling to about 1½ percent by 2013, below the ECB’s target. Low levels of domestic inflation can hinder much-needed improvement in debtors’ balance sheets and stand in the way of much-needed adjustments in competitiveness. The ECB’s unconventional policies need to continue to ensure orderly conditions in funding markets and thereby facilitate the pass-through of monetary policy to the real economy.
Plus: “The Bank of England can further ease its monetary policy stance,” according to the Fund. Read more
The IMF’s latest quarterly update on the currency composition of official foreign exchange reserves (COOFER) is out. One person excited by the numbers is Simon Derrick at BNY Mellon.
But not with respect to what they say about the share of global US dollar reserves, but rather what they say about the world’s “other” non-dollar denominated reserves, as well as reserve growth in general. Read more
So, in case you missed it, the IMF released an excellent, pithy staff note on ‘Accounting Devices and Fiscal Illusions’ this week – all about book-cooking of sovereign debt stats.
It touches on almost any accounting trick you can think of, where the effect is that ‘this year’s reported deficit is reduced, but only at the expense of future deficits,’ as the IMF note says. ’The result is that the reported deficit loses some of its accuracy as a fiscal indicator,’ it drily adds. Read more
So it turns out that we won’t know, for a little while longer, who the holdouts are in Greece’s foreign law bonds – a remaining pimple on the bottom of its debt workout.
Greece has pushed back the deadline for foreign law bondholders to agree to a debt restructuring to April 4, as IFR reported on March 23. The deadline was meant to be March 23. Read more
Our Brussels Blog colleague Peter Spiegel has penned a great piece on the latest IMF report into Greece, covering the Hellenic Republic’s ‘Request’ for the second bailout.
Even at more than 200 pages, the report’s worth reading. Read more
Greece’s political leaders ended weeks of market-rattling brinkmanship on Thursday by agreeing to €3.3bn in budget cuts that they hoped would clear the way for a second multibillion euro bail-out to avert a sovereign default, reports the FT. No sooner was the deal sealed in Athens, however, than a potentially more fractious debate began in Brussels, where eurozone finance ministers were poised to work late into the night to structure a bail-out package with the target of cutting Greece’s debt to 120 per cent of economic output by 2020. Hopes for an agreement were raised by Mario Draghi, president of the European Central Bank, who indicated that he was willing to forgo profits on the bank’s €40bn in Greek bonds, a move that could wipe up to €15bn off of the Athens’ €350bn debt load. Without the ECB’s co-operation, the International Monetary Fund has determined that it will be impossible to reduce Greece’s debt sufficiently through the restructuring of private debt alone. Private bondholders have agreed to take a €100bn writedown on the €200bn in Greek debt they hold.
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.
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
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.
The FT’s James Mackintosh recently pointed out an interesting provision in the loan agreement Greece has with its bilateral official creditors – its fellow eurozone states.
They are entitled to require Greece to pay the whole loan back immediately if the country defaults on private bondholders. Click the image to enlarge (the full agreement is available here from the Greek finance ministry): Read more
The unstoppable force…
“If the level of Greece’s privately held debt is not sufficiently renegotiated, then public creditors, holders of Greek debt, will also have to participate in the financial effort,” Lagarde told journalists in Paris. Read more
The IMF has turned up pressure on European officials to take on more of the burden of filling a widening gap in Greece’s budget by pressing the European Central Bank to take a hit on its €40bn in Greek bond holdings, the FT says, citing unnamed eurozone officials said. The ECB bought the bonds at below face value as part of a programme to prevent the collapse of Greek debt markets in 2010. It has also been accepting Greek bonds as collateral for cheap loans to teetering Greek banks. The bonds, with estimated yields in excess of 7 per cent, will provide a big return if Greece does not default and they are held to maturity. An IMF official denied the fund was pressing the ECB to take writedowns on the bonds. But eurozone officials involved in the discussions said the pressure to earmark potential gains to fill Greece’s financing hole was being fiercely resisted by the ECB.
Well, this is cheery.
Let’s start with a graph. An AV-esque graph. 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.
The International Monetary Fund has slashed its global growth forecast for this year and exhorted the European Central Bank to boost liquidity to stave off a deeper eurozone crisis, The Telegraph says, citing a leaked draft of the IMF’s economic outlook, to be published next week. Global GDP growth is to be cut from 4 per cent to 3.3 per cent, with Italy’s economy forecast to contract by 2.2 per cent and Spain’s by 1.7 per cent, the newspaper says. The eurozone as a whole is expected to shrink by 0.5 per cent, down from growth of 1.1 per cent in the IMF’s last forecast made in September. UK growth was forecast at 0.6 per cent while China’s was revised downwards from 9 per cent to 8.2 per cent. The report also encourages the ECB to adopt a ”more accommodative monetary policy”.
The IMF 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, citing people familiar with the discussions, says the estimate was presented by Christine Lagarde to the fund’s executive board this week, 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 contributeand the UK reluctant, much of the remaining commitments will have to come from large developing countries. “The IMF cannot substitute for a robust euro area firewall,” the US Treasury said in a statement. “We have told our international partners that we have no intention to seek additional resources for the IMF.”
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.
*IMF SAID TO PROPOSE BOOSTING ITS LENDING RESOURCES BY $1 TRLN
*CORRECT: IMF SAID TO SEEK RAISING LENDING RESOURCES BY $500 BLN Read more
David Cameron has left open the door to Britain giving billions of pounds of new support to the IMF – and indirectly to ailing members of the eurozone – in a move likely to infuriate eurosceptic MPs in his own Conservative party, reports the FT. The prime minister’s move would be welcomed by France and Germany but would be subject to a fraught parliamentary vote in the UK. Britain is already under pressure from eurozone countries to increase its IMF commitments by about €30bn as part of a European package of new resources. Mr Cameron’s team stress that no decision has been taken to increase Britain’s contributions beyond the £10bn approved by MPs in that vote last July, but the newspaper cites unnamed insiders saying that the situation could change if Japan and other big economies such as China and Brazil agreed to increase their support for the IMF’s eurozone assistance.
Gosh, Hungary divides sentiment. (It has also, just as we went to pixels, been stripped of its last investment-grade rating by Fitch.)
Despite our saying not once but twice that Hungary isn’t running out of money in its current crisis, people seem to think that we think they are running out of cash to pay off their debt. Read more
Hungary’s currency plunged to fresh lows against the euro on Thursday after the country failed to attract enough investors at a government bond auction to reach its target, the FT reports. Analysts warned that the central bank might have to take drastic action to raise interest rates in an effort to prevent investors from selling assets after the sale of just Ft35bn in government debt, down from a targeted Ft45bn. Investors have become increasingly concerned about the country’s ability to pay its debt as bond yields have risen, with credit default swaps hitting a record high this week. A new law that curbs the central bank’s independence as well as a lack of a clear timetable for negotiations with the IMF and the EU are also unnerving investors — although, FT Alphaville says, they are not quite as unnerved as might be expected.
Hungary — still in basket-case mode earlier on Thursday… (a snapshot courtesy of Bloomberg):
The government sold 35 billion forint ($140 million) of one-year bills, 10 billion forint less than targeted, data from the Debt Management Agency on Bloomberg show. The average yield rose to 9.96 percent, the highest since April 2009, from 7.91 percent at the last sale of the same-maturity debt on Dec. 22… Read more