In this guest post, Gabriel Sterne, head of global macro research, Oxford Economics, looks at previous large drawdowns in Greek bond prices for clues about the future.
Greek Prime Minister George Papandreou “asked our partners to contribute decisively in order to give Greece a safe harbour” five years ago this week.
Since then, Greek government bond (GGB) prices have plunged by 37 per cent — or more! — four separate times, with one amazing long rally in between: Read more
This guest post is from Peter Doyle, an economist and former IMF staffer
In an otherwise sound critique of Mr. Varoufakis’ list of proposals for Greek government policies last week, Mme. Lagarde’s letter to Mr. Dijsselbloem contains an additional, unremarked, but revealing element. After saying that, in the IMF’s view, the Greek list was sufficiently comprehensive to be a valid starting point for a successful conclusion of the review, she added:
… but a determination in this regard should of course rest primarily on an assessment by Member States themselves and by the relevant European institutions.
You may have heard Yanis Varafoukis, Greek finance minister, is also a professor of game theory.
However you’ve also probably heard negotiations over Greek debt are like a game of chicken, where both players try to convince the other they really will go ahead and crash the car.
This is the wrong analogy. It looks more like a bargaining game where two players have to find agreement to avoid an unpleasant outcome where neither side gets what they want. In practical terms, an agreement over an extension loan for Greece can be reached, it just depends on whether it benefits the troika or the Greek government more, while no agreement is bad for all concerned.
Here’s where another €2bn or so of freshly-issued Greek bonds would go. Chart via Citi:
And that’s after the largest sovereign debt restructuring in history. Bracing isn’t it?
And yet maybe Greece is better off paying up to issue a bond to private bondholders on Thursday. In the long run, it could well beat taking ‘free’ money from the Troika.
Those rascal short sellers are at it again, daring to ask awkward questions of the European project. This time the manifesto comes from New York based Tortus, who have a plan to “rehabilitate” Portugal. (H/T @Pawelmorski and @IyerC).
Before rehabilitation, however, there must come acceptance, and Tortus is short “certain Portugese sovereign bonds” because it does not think the status quo is sustainable. Read more
Now that Cypriots have elected the guy who’ll have to negotiate how to pay for the costliest bank bailout in history (relative to the size of the economy on the world’s 81st-biggest island)…
He (and they) could do worse than look at these charts, courtesy of Gabriel Sterne at Exotix: Read more
Angela Merkel visited Portugal on Monday to give a message of “tough love”, as the FT put it:
The German chancellor praised Lisbon for the “courageous way” it had implemented deficit-reduction measures, saying there was “at the moment no reason to renegotiate” the adjustment programme… Read more
So, we’re going to the wire once again in the now traditional dance between Greece and the troika. As the FT reported on Thursday:
Eurozone leaders face a new round of brinkmanship over Greece’s €174bn bailout after international lenders failed to bridge differences on how to reduce Athens’ burgeoning debt levels, pushing the country perilously close to defaulting on a €5bn debt payment due next week.
So, the Greek government has left this latest, very long, round of eurozone marriage counselling to head into, well, predictable domestic acrimony with headlines like “Crucial Test for Greek Coalition” trailing in its wake. From the ekathimerini:
“We did everything we could. We achieved significant improvements,” noting that Greece would remain in the euro if the package was passed and otherwise risked “descending into chaos.” “It is now down to the sense of responsibility of all political parties and each individual MP,” Samaras said.
Democratic Left issued a rejection within minutes, saying it does not agree with the outcome of negotiations with troika and repeating its objection to labor reforms.
JP Morgan’s Alex White points out that the next few weeks are going to be critical and that this one is likely going to the wire… again. Read more
The euro is dropping and Talthybius-wire has a few suggestions why. Our money is on the fugitive.
Apparently that Greek shortfall is even bigger than the even bigger figure reported in the German press on Monday.
From Eurointelligence: Read more
France thinks Greece should get the two extra years that it’s been seeking to achieve the cuts outlined in its 2013-14 austerity programme.
The French PM: Read more
There are two fairly important bits to this story in Der Spiegel.
One, that Merkel wants to avoid a Grexit for the time being and two, that the upcoming Troika report might be massaged to make that a reality. Read more
Chalk this one up to the ‘second bailout, no PSI‘ trade, maybe — Portuguese government bonds have been a top performer so far this year.
So, as for that second bailout… Read more
Greek cabinet ministers are meeting later today to finalise how they’re going to come up with €11.5bn in savings over the next two years as demanded by the Troika. Unsurprisingly, the most contentious and sensitive part is the €1.5bn in pension and wage cuts that are needed.
From the FT: Read more
The euro crisis spotlight may be focused on Spain and the larger euro members this week, but it’s unlikely to be long before it swings right around to Greece. Again.
It seems that further EU/IMF loan disbursements to Athens are not likely before September. But some €3.2bn in bond redemptions are due on August 20, requiring perhaps a bridge loan. Read more
The New Democrats are off to attempt forming a coalition, Pasok’s busy making itself look important but will probably join, while Syriza says it’ll be “very powerful” in opposing them. It’s already conceded to, and ruled out allying with, the NDs.
So… Read more
The ECB’s move to unclog the transmission mechanism, that carries its monetary policy decisions to markets and the wider economy, has been unconventional. The €1,019bn in cheap three-year loans to banks, under its long-term refinancing operations (LTRO), being the most daring.
Naturally, the question on the minds of many is whether the operation has just delayed the inevitable. While the policy goal for the eurozone’s central bank was clear — unclog the transmission mechanism — the fact that this would just buy time for the fiscal and balance sheet readjustments of sovereigns and banks was evident from the beginning. Read more
Here it is via a reader (not that one), also in various places on the interwebs.
Lucas Papademos, the Greek premier, failed to make party leaders accept harsh terms in return for a second €130bn bail-out, pushing Athens closer to a disorderly default as early as next month, reports the FT. Greek television reported that Mr Papademos has set a deadline of midday on Monday for the three leaders to let him know whether they agree in principle with the proposed austerity measures, before he meets them again later in the day. After five hours of discussions, the three leaders of Greece’s national unity government had not accepted demands by international lenders for immediate deep spending cuts and labour market reforms as part of a new medium-term package. Eurozone officials are deliberately refusing to allow Greece to sign off on a €200bn bond restructuring plan because the threat of default is the leverage they have to convince recalcitrant Greek ministers to implement necessary cuts. While some recognise that Greek politicians must be seen by voters to be putting up a fight, there are fears that the show of brinkmanship could easily go too far and backfire, with disastrous consequences. By late on Sunday, no meeting of the Euro Working Group had been formally scheduled for Monday, says Reuters, but it could confer either by conference call or schedule a face-to-face meeting at short notice, depending on the outcome of talks in Athens.
You can say what you want about the achievements of the WTO; it sure is nice to be part of the club.
Certainly that is what the Kremlin will be thinking this morning after Russia cleared the final hurdle to joining the 153-nation trade organisation after 17 years of trying. 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
Asian stocks rose for the fourth consecutive session on hopes for a solution to Europe’s debt crisis, while Chinese banks surged after a unit of the country’s sovereign wealth fund increased its stake in the lenders, the FT reports. The MSCI Asia Pacific index advanced 1.1 per cent with Hong Kong’s Hang Seng index up 3.6 per cent and China’s Shanghai Composite index 2.1 per cent higher. Earlier, the renminbi staged its biggest one-day jump in six years. Overall sentiment was boosted by pledges made by German and French leaders over the weekend to recapitalise Europe’s banks. They plan to unveil a comprehensive package of measures to tackle the eurozone debt crisis by the end of this month. Meanwhile talk grew of bigger haircuts for Greek bondholders. The Telegraph says unnamed officials told the newspaper it is “more likely than not” that investors will suffer bigger losses on Greek debt than the 21 per cent haircut agreed in July, with the exact level to be determined by the Troika.
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
There’s been plenty of comment, and prodding, about how European politicians need to man (and woman) up, bite the bullet, and start acting with conviction. After all, with every passing day, the price tag rises as the level of distress increases and lack of growth butts up against austerity measures.
Take, for example, the slow hollowing out of Greek banks, which suffer not only for their holdings of their government’s debt, but also from the flight of depositors. Every wonder exactly how much deposit flight there has already been? Credit Suisse has your back on that one, chart below: Read more
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.
Standard Bank, Africa’s biggest lender by assets, is to take a 33% stake in Troika Dialog, Russia’s second-largest investment bank, in a deal that marks the first foray by a foreign bank into Russia’s financial sector since it plunged into crisis. The combination, which requires regulatory approval in South Africa and Russia, would see Johannesburg-based Standard swap a $200m convertible loan and its business in Russia, worth about $100m, for a 33% stake in Troika Dialog.
In town for the Russian Economic Forum earlier this week, Ruben Vardanian, chief executive of Troika Dialog, the Russian investment bank, is a model of relaxation concerning the controversy surrounding the event – from which Russian business leaders and officials abruptly pulled out, apparently on Kremlin orders – and about the prospects for Troika in the years to come.
As far is he is concerned, he’s happy to go to conferences and forums in Moscow, St Petersberg, London, New York, and probably anywhere else to promote Russia as a place to do business. Read more