Old and still drinking water and eating dry white toast.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Portugal First to Test 2011 Demand With Bill Sale: Euro Credit
Jan. 5 (Bloomberg) -- Portugal sold six-month bills today, the first of Europe’s high-deficit nations to test investor demand in 2011 after the threat of default forced Greece and Ireland to seek bailouts last year.
“The big question in the market for Portugal is, is it next in terms of a bailout?” said Phyllis Reed, head of bond research at Kleinwort Benson Private Bank in London. “It may be that, sooner or later, that is what is going to happen.”
The government debt agency, known as IGCP, auctioned 500 million euros ($665 million) of bills repayable in July. The yield jumped to 3.686 percent from 2.045 percent at a sale of similar maturity securities in September, with investors bidding for 2.6 times the amount offered. A year ago, the country paid just 0.592 percent to borrow for six months.
Portugal, which intends to sell as much as 20 billion euros in bonds to finance its budget and redemptions this year, is raising taxes and cutting wages as it tries to convince investors it can narrow its budget gap after the Greek debt crisis led to a surge in borrowing costs for indebted euro nations last year. Ireland in November became the second euro country to seek a bailout and the first to request aid from the European Financial Stability Facility.
‘Not Optimal’
European nations that have already sold bills this year include France, Belgium, the Netherlands and Malta, with Germany also holding an auction today. Austria’s debt agency canceled a scheduled Jan. 11 bond auction, opting instead to sell debt via a syndicate of banks later this month. Portugal’s borrowing costs rose at a Dec. 15 auction of 500 million euros of three- month bills, the country’s final debt sale of 2010, almost doubling to 3.403 percent from 1.818 percent in November.
The difference in yield between Portuguese 10-year bonds and German bunds, Europe’s benchmark, reached a euro-era record of 484 basis points on Nov. 11. The spread is currently about 376 basis points, up from 362 a week ago.
Testing Times
Portugal doesn’t face any bond redemptions until April, with repayments that month and in June worth about 9.5 billion euros. The nation’s debt agency estimates this year’s gross financing needs will be 3 billion euros lower than in 2010, and plans to sell a new bond through banks in the first quarter.
Spain will sell 93.8 billion euros of bonds this year, compared with 93.5 billion euros in 2010, while Italy’s borrowing needs will decline to 225 billion euros from 249 billion euros, according to figures compiled by Barclays Capital.
“The real test will be a bond auction,” said Olaf Penninga, who helps oversee 140 billion euros at Robeco Group in Rotterdam. “Portugal really needs to sell a new bond in the first quarter. It needs to raise money to finance the budget and face the bond redemption in April.”
The government is taking the necessary measures so that it doesn’t have to request aid, Finance Minister Fernando Teixeira dos Santos said on Dec. 15. The 2011 budget includes the deepest spending cuts in more than three decades. In September, the government said it would trim the wage bill by 5 percent for public-sector workers earning more than 1,500 euros a month, freeze hiring and raise value-added sales tax by 2 percentage points to 23 percent to help narrow a deficit that amounted to 9.3 percent of gross domestic product in 2009.
Rating Cuts
Portugal’s debt rating was cut one level by Fitch Ratings on Dec. 23, which said the economy faces a “deteriorating” outlook. The grade was lowered to A+, the fifth-highest level, from AA-. Fitch said the outlook for that assessment is negative, meaning it is more likely to worsen than improve.
Moody’s Investors Service on Dec. 21 said Portugal’s bond rating may be downgraded one or two levels because budget cuts may worsen the country’s “sluggish” economic growth. Moody’s cut Portugal’s credit rating two steps to A1 on July 13. Standard & Poor’s said on Nov. 30 it may lower the country’s rating, having already cut it to A- from A+ in April.
The credit rating companies are also reviewing other countries. Moody’s said on Dec. 15 it may cut Spain’s Aa1 credit rating and on Dec. 16 said it placed Greece’s Ba1 bond ratings on review for a possible downgrade. Ireland’s credit rating was cut by five levels by Moody’s on Dec. 17.
Portugal is counting on exports such as paper and wood products to support economic expansion as it cuts spending. The budget forecasts gross domestic product growth of 0.2 percent in 2011, slower than last year’s estimated 1.3 percent pace. Portugal’s economic growth has averaged less than 1 percent a year in the past decade, one of Europe’s weakest growth rates.
The country posted the biggest shortfall in the 16-nation euro region in 2009 after Ireland, Greece and Spain. It set a target for a budget deficit of 7.3 percent of GDP last year and 4.6 percent in 2011, and aims to reach the European Union limit of 3 percent in 2012.
Bond Sale
Bond crisis on the way?
With strong Christmas sales and the stock market surging to a two-year high, talk is spreading that the long-awaited recovery is at hand.
Perhaps.
But gleaning the news from Europe and Asia as U.S. cities, states and the federal government sink into debt, it is difficult to believe a worldwide financial crisis that hammers governments, banks and bondholders alike can be long averted.
Consider. Fitch and Moody's have just downgraded the debt of Ireland, Greece, Portugal and Hungary. In Budapest, the politicians talk of default. Spain has been warned that its debt and banks could be downgraded.
The European Central Bank is buying up this paper to prevent panic selling by investors. There is talk of forcing bondholders to take a haircut. They would trade their suspect bonds for new euro bonds whose face value would be appreciably less.
In the Latin American debt crisis, the United States bailed out its banks holding the bad paper by giving them U.S.-backed bonds, while forcing them to take a loss on their Latin bonds. Courtesy of Uncle Sam, Latin America walked away from a huge slice of its debt.
Japan's national debt is slated to pass 200 percent of gross domestic product this year, highest of any major economy on Earth. Half of Japan's spending is now financed by bonds. Tax revenues do not even cover 50 percent.
Nor is America out of the woods.
Financial analyst Meredith Whitney told 60 minutes that we can expect 50 to 100 cities and counties to default on their municipal bonds. Though derided as an alarmist, Whitney was among the few who warned that U.S. banks were in treacherous waters before 2008.
If anyone is an alarmist, it is The New York Times. In an editorial the day after Christmas, The looming crisis in the states, The Times writes, ``Illinois, California and several other states are at increasing risk of being the first states to default since the 1930s.''
California and Illinois are to America what Germany and Spain are to the European Union -- the first and fifth largest states.
Illinois, writes the Times, ``is faced with $4 billion in overdue payments.'' The state ``has lacked the money to pay its bills. Some of its employees have been evicted from their offices for nonpayment of rent, social-service groups have laid off hundreds of workers while waiting for checks, pharmacies have closed for lack of Medicaid payments.'' Illinois is also still borrowing to finance half of its budget.
By Sept. 30, the U.S. government will have run three straight deficits of close to 10 percent of GDP. And President Obama and the GOP just passed $858 billion in new and extended tax cuts and fresh spending.
Yet many dismiss the threat of a series of defaults by European nations and U.S. states and cities leading to a financial crisis that could eclipse the one we have just passed through.
What is the basis of this confidence?
Germany dominates the European Central Bank and will not allow defaults by Ireland, Portugal, Greece or Spain, for that would imperil the One Europe project to which Germany has been dedicated since World War II. Berlin will do what is necessary to save the euro and prevent Europe's monetary union from collapse.
What is wrong with this thesis is that it is not Germany alone that decides on defaults. The weaker countries in the euro zone, like Greece, may decide they will not endure the agonies of austerity any longer. Street politics may force regimes to abandon the regimens imposed upon them as a condition of their bailouts.
In America, it is the Fed that is the last line of defense and has shown a disposition to act in a financial crisis.
Since 2008, it has doubled the money supply and taken a trillion dollars in bad debt off the books of U.S. banks. Secretly, it has lent trillions to banks and businesses all over the world and is now buying U.S. bonds to inject more dollars into the economy.
But how does the Fed prevent a state like Illinois from failing to meet its debt obligations and defaulting? How does the Fed prevent a series of municipal bond defaults by cities and counties that lack the tax revenue to pay their bills and whose credit rating has reached a junk-bond status where they can no longer borrow?
Congress would have to vote the bailout money. But will a House that owns its majority to the tea party approve half a trillion dollars to bail out Democratic-run cities or Obama's home state or Jerry Brown's California?
This June, the stimulus money runs out, and as housing prices continue to fall across America, property tax revenue will fall.
The Feds are about to stop bailing out the states, and the states, on shortening rations, will stop bailing out counties, cities and towns. We may be closer to the falls than we imagine.
Bond Crisis
I am still trying to get the wife to be a Surrogate 4sex trader.
SurrogateAlternatives.com For California residents; Offers from $20,000 to $25,000 plus expenses and more (for proven surrogates).
A little Greek music to start the new year.....
Zorba
STAVROS FLATELY & SON
STAVROS FLATELY
Stavros Flatley: Greek Dancers
Stavros Flatley: Lord Of The Dance
Stavros Flatley
The priest and the stock broker both died and went to Heaven's gate.
The gatekeeper welcomed them both and then let the stock broker in immediately.
And he made the priest wait for the decision outside in the waiting room.
After a while and a long wait, the priest was annoyed and said to the gatekeeper:
"How come you let that crook in immediately ?
All his life he cheated, lied, stole, swindled, snorted coke,
laughed at widows and orphans, lived at other's expense etc.
And I led an exemplary life, always about God's work, never complaining..."
And the gatekeeper said:
"My dear priest, here in Heaven we go by results !
Every time you preached, people snored in their seats.
And every time that broker was at work, everyone prayed all the time !
He brought more people to God than you did."
Greek economy at a crucial crossroads
The program for the consolidation of the Greek economy is at a crucial crossroads as a series of fundamental structural changes have to be implemented in the following few months, said IMF Managing Director Dominique Strauss-Khan in an interview with Kathimerini.
Greek Deals Hidden From EU Probed as Bonds Show Doubt
Four months after the 110 billion- euro ($140 billion) bailout for Greece, the nation still hasn’t disclosed the full details of secret financial transactions it used to conceal debt.
“We have not seen the real documents,” Walter Radermacher, head of the European Union’s statistics agency Eurostat, said in a Sept. 2 interview in his Luxembourg office. Eurostat first requested the contracts in February.
Radermacher vows new toughness when officials from his staff head to Greece this month to come up with a “solid estimate” of the total value of debt hidden by the opaque contracts. “This is a new era,” he said.
Greece is the only euro country that lied about using these complex swap contracts after Eurostat told countries to report them in 2008, Radermacher, 58, said. It also likely signed a greater number of individual agreements than any other euro member, based on information it has provided to Eurostat, he said. Greece’s debt was 115.1 percent of its total economic output last year, second among the 16 counties that share the euro, behind Italy’s 115.8 percent.
“What the Greeks did was an absolute cardinal sin,” said Ruairi Quinn, former finance minister of Ireland who presided over the 1996 meeting where debt and deficit limits for countries joining the euro were set. “They deserve to be punished for it. I think they have been severely punished for it.”
Doubling Deficit Estimate
Greece has requested technical help from Eurostat for its statistics service, and data from the country now reflects guarantees and swaps that weren’t previously included, Finance Minister George Papaconstantinou said in an interview today. The statistics agency became independent from the finance ministry this year.
There is “a clear political will for full transparency in everything,” he said. “There is a clear and complete break with past practices.”
Confidence in Greece’s statistics and its ability to repay debt was shattered in October, when the country more than doubled its 2009 deficit estimate. The euro plunged, sparking questions whether the single European currency could survive. It has lost 15 percent of its value against the dollar since Oct. 20.
Restructuring Debt
Investors still don’t trust Greece. They demand yields more than five times that of Germany to hold 10-year Greek debt - a sign that buyers fear the country will have to reorganize its borrowing.
“I think restructuring will be a necessary part of them pulling out of the predicament they are in,” Andrew Bosomworth, Munich-based head of portfolio management at Pacific Investment Management Co., which oversees the world’s largest bond fund. He cited the projection of the International Monetary Fund, which foresees Greece’s debt topping out 149 percent of gross domestic product in 2012. Italy in May estimated that its debt would be 117.2 percent of economic output in 2012.
National Bank of Greece SA Chief Executive Officer Apostolos Tamvakakis said today that the bank “strongly believes” the country will not default on its debt and that Greece is moving in the right direction. The bank yesterday set out plans to raise 2.8 billion euros to bolster capital and help with its expansion in Greece and the region. The shares dropped 7.8 percent to 9.59 euros at 12:24 p.m. in Athens trading today.
Increased Exposure
Banks worldwide increased their total exposure to Greek debt in the first quarter of the year by 7.1 percent, or $20.7 billion, to $297.2 billion, according to a Sept. 6 report by the Basel, Switzerland-based Bank for International Settlements. Norway’s sovereign wealth fund, the world’s second largest, said in August that it had bought Greek bonds, along with those from Spain and Portugal, because of higher yields and as those governments push to reduce their deficits.
Greece received the three-year, 110 billion-euro bailout from the European Union and International Monetary Fund in May after investor concern about the government’s ability to curb the budget deficit led to soaring borrowing costs that pushed the country to the brink of default. Greece pledged to implement austerity measures equivalent to almost 14 percent of GDP in exchange for the rescue funds.
The fiscal crisis turned attention to currency swaps arranged by Goldman Sachs Group Inc. that helped Greece hide the extent of its debt.
More Swaps
“There are more, or even many, of this kind of swap operation, which we have to clarify,” said Radermacher, the former president of the German Federal Statistics Office who was appointed as the EU’s chief statistician in April 2008. “The Goldman Sachs case was the beginning.”
Greece has told the agency that the other contracts were each significantly smaller than the ones signed with Goldman Sachs, Radermacher said. Signed in 2000 and 2001, the Goldman swaps reduced the country’s foreign denominated debt in euro terms by 2.367 billion euros and lowered debt as a proportion of GDP to 103.7 percent from 105.3 percent, according to a Feb. 21 statement by Goldman.
Goldman Sachs spokewoman Fiona Laffan declined to comment for this article.
In April, Eurostat said it might have to revise Greece’s 2009 debt figure higher by as much as 7 percentage points of GDP, in part because of the use of swap contracts that allowed it to reduce current reported debt in return for greater liabilities in future years.
Prime Minister
About a third of Greece’s borrowings have swaps attached to them, according to a person with direct knowledge of the operations. Only a portion of those contracts were set up in a way to reduce current reported debt, the person said. Radermacher said he believed Greece stopped using swaps that included up-front payments in 2008, about the same time that Eurostat questioned the country that year.
Greek Prime Minister George Papandreou, elected in October, has pledged to change his country, asking Greeks to pay taxes and accept sacrifices to pull the country through its financial crisis. His slogan is “either we change or we sink.”
“Our largest deficit was our credibility deficit,” Papandreou said in a Sept. 3 speech to his ruling Pasok party. He wasn’t available to comment for this article.
Investigating Statistics
The new government has initiated a series of measures to end opaque financing in Greece. The statistics agency now reports directly to Greece’s parliament, rather than the finance ministry. A parliamentary committee this month will begin investigating the false statistics.
Under the rules to join the euro, countries’ debts must not exceed 60 percent of GDP. Interest payments linked to swaps are included in the calculation. That means that until accounting guidance was changed in 2008, upfront payments or lower initial interest payments could initially lower the debt or cause it to rise by a smaller amount than would otherwise be the case, while liabilities could increase down the road.
The problem is that such contracts rely on an estimate that the future debt will be lower or economic activity much greater, allowing a country to meet higher payments, said Yannis Stournaras, director general of the Foundation for Economic and Industrial Research in Athens. He was chairman of Greece’s Council of Economic Advisors from 1994 through 2000.
‘Hope Over Experience’
“You might say this is triumph of hope over experience,” he said, adding that the blame should be shared with the European Commission, which didn’t intervene despite years of warnings by Eurostat of problems with Greek data.
“We addressed the issue several times in meetings of finance ministers and we asked for enhanced powers for Eurostat in 2005, which we didn’t receive at the time,” said Amadeu Altafaj, a spokesman for the Commission.
In April 2009, the European Central Bank identified a Greek swap operation of unusual terms, according to a confidential ECB document dated March 3, 2010, obtained by Bloomberg News. The ECB said its executive board prepared internal reports on the swaps. ECB spokesman Niels Buenemann declined to comment on it.
Greece began using this type of contract for the 2001 budget year to avoid recording a spike in debt the first year after it adopted the euro, Stournaras said. It continued to use them after 2001 and increased their use after 2004, he said.
Under guidance set out in 2008 by Eurostat, any upfront payments linked to a swap must be counted as a loan.
Upfront Payments
Germany, Italy, Poland and Belgium, like Greece, received upfront payments from derivatives, Radermacher said at a hearing at the European Parliament in April. The difference, he said in the September interview, was that when Eurostat asked the other countries about the contracts in 2008, they provided the data and adjusted their debt figures.
A spokeswoman for Italy’s Finance Ministry in Rome said the country had received upfront payments and revised its debt figures accordingly when the accounting guidelines were revised. Officials from the other three countries’ debt agencies did not return calls for comment.
Eurostat gained new powers effective last month that allow it to audit a country’s financial data if it can show there are clear risks that the statistics aren’t accurate. The visit to Greece this month will include officials from Eurostat, the European Central Bank and the European Commission’s Economic and Financial Affairs directorate, Radermacher said.
‘More Muscles’
“Because we have more muscles, so to say, we are free to ask for an inside look to whatever we find important or relevant,” Radermacher said.
He said he expects to have sufficient details to present an estimate of the off-market swaps’ impact for its semi-annual report on member states’ debts and deficits on October 22.
The transition to providing full and accurate data has been slow, according to Radermacher.
The EU’s statistics agency for months got partial responses to requests for complete records on the country’s use of swaps. Eurostat still doesn’t know the full number of contracts Greece signed that used historical or other non-market interest or currency rates. Nor does it know the total amount of debt covered by those transactions or the effect on the country’s debt-to-GDP ratio.
Greece’s statistics office blamed the delay in answers on a lack of staff and expertise in the field, said Eurostat officials.
In August, Greece made a proposal for how to estimate the total effect of the off-market swaps without including any of the contracts themselves, Radermacher said.
Some Surprises
He likened the task of unraveling Greece’s financial picture to the recent renovation of his house.
“You start to renovate and you open up the walls, then you are confronted with some surprises, and this is more or less the case here,” he said.
In the past few months, Greece has told Eurostat of a “big number” of off-market swaps, Radermacher said.
Eurostat’s ability to untangle the web of transactions and demand accurate records from all euro members is critical to restoring investor confidence in the currency and in Greece, says Edward Scicluna, a member of the European Parliament, which held a hearing in April on swaps.
Greek government bonds have lost about 24 percent since October, according to Bloomberg/EFFAS indexes.
‘Smoke and Mirrors’
“The swaps were part of the smoke and mirrors that were part of the mystique of the euro,” said Bill Blain, joint head of fixed income at Matrix Corporate Capital LLP in London. “There’s potential for Europe to trip-up again. It needs to provide full information and demonstrate that it’s in control of the situation.”
Changing Greece from a country that operates on hope to one that relies on hard numbers is Papandreou’s biggest challenge, said Ireland’s Quinn, who lived in Greece for a year in the early 1970s.
“Part of becoming modern Europe is shedding that tradition of being economical with the truth and not telling the full story,” he said.
The stakes for Greece are significant, Andreas Georgiou, head of the Hellenic Statistics Authority, said in a speech to employees on July 22, the day he took up his position. Providing real, credible figures will mean “to a great degree the success of the country’s economic policy in these difficult times as well as possibly our national interests on a long-term basis.” He didn’t comment for this article.
“If there’s a feeling that there’s proper due diligence, I’d feel more confident about investing,” said Robin Marshall, a director of fixed income at Smith & Williamson Investment Management in London, which manages $20 billion in assets including Greek debt. “For investors, the credibility hinges as much on perception as on the numbers themselves.”
Old News
Europe’s debt woes could be harbinger
European Central Bank president Jean-Claude Trichet never comments on what he calls “market behaviour” but it appears he knows a thing or two about market psychology. At a press conference in early December in Frankfurt, shortly after Ireland’s bailout and in the thick of a run on Portuguese bonds, he in effect cried “foul!” The euro zone’s public finances, he said, are in “much better shape than other big advanced economies.”
A global debt crisis in the making? He rolled out some figures. The euro zone’s collective budget deficit, as a per cent of gross domestic product (GDP), will fall from 6.3 per cent in 2010 to 4.6 in 2011. The equivalent 2011 figures for the United States and Japan are 8.9 per cent and 6.4 per cent.
The message: If you think we have debt problems, look across the Atlantic or the Pacific, where budget deficits are out of control, relatively speaking.
Was one of the world’s most powerful central bankers trying to deflect attention from the euro zone’s debt woes? Or was he predicting a global debt crisis? Perhaps both. So far the debt collapses in Greece and Ireland, and sinking bond prices in Portugal, Spain and Italy, have dominated the debt crisis headlines. But that could easily change in 2011. If it does, Mr. Trichet will be able to take some of the credit, or blame, depending on your point of view.
Indeed, the global debt crisis may have already started. In the first half of December, bond yields of the peripheral euro zone countries – Portugal among them – fell, partly because of aggressive ECB bond buying, while yields on American and Japanese sovereign debt went in the opposite direction. Yields on the U.S. bonds hit a two-year high on Dec. 7 and Dec. 8, with 10-year Treasuries reaching 3.33 per cent at one point, up from 2.94 per cent. Bond investors were reacting to the extension of the Bush tax cuts, including the payroll tax holiday, which is expected to boost growth at the expense of slathering an extra $1-trillion (U.S.) onto the already burgeoning U.S. deficit over the next two years.
Certainly the view within the 16-country euro zone (soon to be 17, with the addition of Estonia) is that Greece, which took a €110-billion ($146-billion) bailout in May from the European Union and the International Monetary Fund, and Ireland, which took €85-billion in December, were merely the start of a far more dangerous debt problem, one that may become global as tepid growth, high unemployment, waning tax revenues and the cost of bank rescues and stimulus programs drive up deficits and debt loads. A member of the ECB’s executive board, who did not want to be identified, called the euro zone’s debt problems a “wake-up call for politicians everywhere,” adding that “this is a global problem.”
Others agree. In their 2011 outlook, Morgan Stanley economists said: “We continue to think that a spreading of the sovereign debt crisis constitutes the main downside risk to our otherwise constructive global outlook.” Citigroup had a similar view.
Greece and Ireland account for a mere 5 per cent of the euro zone’s economic output and look at the damage this un-dynamic duo inflicted on Europe. The euro plunged in the spring, yields rose throughout the euro zone, two bailouts were launched and confidence cracked in the great euro project. Since Greece buried its snout in the bailout trough, there have been endless predictions from economists and investors that the common currency, only 12 years old, might not survive its teenage years.
Now imagine the damage a debt crisis in the United States and Japan could cause. The two biggies are often cited as debt victims in the making. Developing countries, because of their high growth rates and young populations, are unlikely to get hit, economists say.
The United States and Japan are vulnerable because investors are not convinced that either country is serious about tackling its budget deficit and public debt load. With a debt-to-GDP ratio of 200 per cent, Japan is already the world’s most indebted country and could see its debt rise to an extraordinary 250 per cent by 2015, according to the IMF.
So far, Japan’s perennially high debts have not caused financing turmoil. But it may be playing a risky game. The government has enough cash flow to service is debts. Whether it will down the road, as growth wanes and the ratio of the working-to-retired population drops relentlessly, is an open question.
Japan’s GDP growth is estimated at a healthy 3.5 per cent in 2010, but is expected to fall to less than half that in 2011, then rise marginally a year later to 1.7 per cent. In its autumn economic forecast, the European Commission said investors could “lose confidence in [Japan’s] long-term fiscal sustainability” if long-term interest rates were to rise suddenly.
In the United States, the public debt load, at 60 per cent of GDP, is rising as deficits explode. Under current policy, including the extension of the Bush tax cuts, the debt is forecast to reach 100 per cent shortly after 2020, according to the U.S. Congressional Budget Office. Traditionally, rising American debt loads have not troubled economists, because of the country’s flexible work force, vast intellectual capital and ability to use innovation to reinvent its economy to create new wealth and jobs.
This recovery, such as it is, may be different. Unemployment in the United States, at 9.6 per cent in 2010, is forecast to remain stubbornly high for at least the next two years. Spiralling health care costs, an ugly housing market, weak GDP growth and widening deficits at the state level are making the American debt hole deeper.
At the moment, the United States government can borrow 10-year money at the bargain rate of 3.4 per cent. Americans would be wrong to think that investors won’t eventually punish them for the government's rising debt load in the absence of compelling growth. Nor should they assume a debt crisis will come with ample warning. Ireland’s debt problems, though well-known since 2009, were largely and mysteriously ignored until November, when bond yields soared. Less than a month later, Ireland required a bailout.
News Link
Greece in Talks on Extending Debt Repayment
ATHENS (Reuters) - Greece is in talks with commercial banks on extending the repayment of its outstanding debt, in line with a similar plan to stretch out paying back its EU/IMF bailout, an Athens weekly reported on Friday.
Fears that the overborrowed country may restructure its debt after the 110 billion euro emergency funding ends in 2013 are keeping yield spreads at high levels, despite the government's repeated assurances that no such move is on the table.
More than 70 percent of Greece's outstanding debt is held in foreign portfolios.
The Realnews paper said former European Central Bank Vice-President Lucas Papademos, who currently advises Prime Minister George Papandreou, was handling the talks with banks and funds holding the debt-ridden country's bonds.
The finance ministry would not comment on the report.
"The discussions on a parallel extension of the repayment period of the debt owed to the private sector are being conducted by ... Lucas Papademos who has been making rounds between Berlin, Franfurt, London and Brussels recently," the paper said without quoting any sources.
It said the plan for a mild restructuring calls for a repayment extension of 10 up to 30 years, with the focus on paper maturing in 2013 to 2015.
Greece will have until 2021 to repay its 110 billion euro ($145.7 billion) EU/IMF bailout loan, the country's finance minister said last month after an informal deal reached at a meeting of euro zone finance ministers.
Policymakers hope the move will help dilute fears that Athens will opt for debt restructuring after the three-year EU/IMF funding ends in 2013. An easier-to-service repayment plan can give the economy more time to return to growth.
Greece's public debt-to-GDP ratio is projected to hit 152.6 percent next year or 348 billion euros based on the government's 2011 budget.
In November, Papademos said he was against a debt restructuring in Greece or in Europe.
"The debt restructuring that is currently debated is not a desirable solution, neither for Greece nor for the eurozone," he said in a speech in Athens. "It is not necessary and it is not inevitable.
Greece's finance minister has consistently ruled out the possibility of debt restructuring, saying it is not on the table.
Yield spreads of Greek government bonds over German Bunds remain near peaks despite the fiscal progress Greece has made in recent months. On Friday the spread of 10-year Greek government paper stood at 960 basis points.
Athens is aiming to cut the budget deficit to 7.4 percent of GDP next year from 9.4 percent in 2011.
New Link
Eurozone to show small recovery signs next year, predict institutes
The eurozone is expected to see signs of a tentative economic recovery in 2011 but analysts say the rebound from the recent financial crisis will be clouded by persistent sovereign debt problems,
A report from Euroframe, a group of the 10 most respected economic forecasting and research institutes in Europe, is forecasting that gross domestic product in the 16-nation currency bloc will increase by 1.6% in 2011 and 1.l7% in 2012.
Euroframe’s forecast for 2011 is higher than the 1.5% predicted recently by the European Commission in Brussels.
The report contains projections of key economic variables for the major European Union countries and the US. It analyses the effects on the euro area of the fiscal consolidation measures to be implemented over the period 2010 to 2012.
“The persistence of elevated risk premiums and the sovereign debt problems in Europe are obstructing the return to normality in financial markets which is necessary to underpin a broad-based economic recovery. High unemployment and the implementation of austerity measures to reduce large fiscal deficits built up during the crisis will weaken the pick-up in aggregate demand,” the report says.
While growth is picking up more strongly than expected in Germany, the outlook for countries with severe debt and competitiveness problems, notably Greece, but also the Republic of Ireland, Portugal, Spain and to some extent Italy, is more subdued, it says.
Germany appears to be one of the few eurozone economies benefiting from the ongoing crisis regarding sovereign debt,
“The (Frankfurt) stock market has rallied to its highest level in more than two years, confirming that the German economy has become the safe haven of the eurozone debt crisis,” said ING Bank economist Carsten Brzeski.
Labour market conditions in the eurozone are expected to remain challenging throughout 2011 with the unemployment rate projected to stand at 9.7% in 2012. The case of Germany illustrates the importance of wage moderation in reducing the unemployment rate, the report says.
Given the moderate outlook for inflation, the European Central Bank is expected to raise the main refinancing rate slowly in the course of 2011 and 2012 in line with the forecast recovery.
“We anticipate the ECB will raise the main refinancing rate to 1.6% by the end of 2012,” the Euroframe report adds.
Although France and Germany moved at the end of 2010 to strengthen eurozone defences, a number of economists have questioned whether the single currency area can survive in its present form.
A leading UK independent economics think-tank is the latest group of experts to cast doubt on the survival of the euro. It says that to keep the single currency in its current form would require a reduction in consumer spending of 15% or more in Ireland, Greece, Spain, Portugal and Italy.
Such cuts would be greater than the fall in consumer spending faced by the UK in the Second World War, according to a calculation contained in the latest issue of Global Economic Prospects from the Prospects Service of the Centre for Economics and Business Research.
The report argues that for the euro to survive in its current form, five things need to happen: German growth needs to be 3% plus for at least four years; a European bailout fund sufficient to bail out Spain and Italy needs to be constructed; a system whereby the European Union has some control over economic policy in the weaker economies needs to be constructed and encapsulated in a new treaty; government spending in weaker economies needs to fall by around 10% of gross domestic product; and living standards in weaker economies need to fall by on average 15%.
However, the report argues that making all these things happen at the same time is unlikely to prove politically or economically acceptable in most European countries.
Ernst & Young is predicting that the region is “likely to muddle through” the current crisis but a “three-speed” Europe lies ahead.
The accountancy firm believes Germany, Austria and Slovakia will grow steadily in 2011, a northern bloc including France and the Netherlands will grow more modestly, and peripheral countries like Ireland and Greece will see their economies contract.
Ernst & Young believes trouble in the eurozone will mean softer demand for UK exports and weaker UK growth.
News Link
German Bonds Climb in 2010 as Fiscal Crisis Roils Euro Area
Dec. 31 (Bloomberg) -- German bunds climbed this year, the best performance since 2008, as the fiscal crisis that roiled the euro area’s most-indebted nations drove investors to the safest fixed-income assets in the region.
Top-rated securities from Austria, Germany, the Netherlands, Finland and France led euro-member gains in 2010, while the debt of Greece and Ireland, which sought bailouts this year, had the biggest losses among 26 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. Bunds slid in the fourth quarter by the most since June 2008 amid signs the global economy is strengthening and concern German costs for helping fellow euro-area states may escalate in 2011.
“There has been a flight-to-quality and Europe has been divided between the haves and the have-nots,” said Orlando Green, assistant director of capital-markets strategy at Credit Agricole Corporate & Investment Bank in London. “The have-nots are clearly the likes of Greece and Ireland, and they needed to be bailed out. The risk going into next year is that this domino effect could continue.”
The yield on the 10-year bund fell seven basis points yesterday to 2.95 percent. It’s down from 3.39 percent on Dec. 30, 2009, according to Bloomberg generic data. The yield increased 44 basis points last year and slid 136 basis points in 2008 as the global financial crisis erupted. The price yesterday of the 2.5 percent security maturing in January 2021 rose 0.56, or 5.6 euros per 1,000-euro ($1,336) face amount, to 96.16.
Greek Deficit
German bonds returned 6.3 percent this year, according to Bloomberg/EFFAS data, compared with a 20 percent loss on Greek debt, a 14 percent slump in Irish securities and an 8 percent decline for Portuguese bonds. Spanish and Italian debt also made a loss as investors demanded increasing yields to own the securities of the euro area’s high-deficit nations.
The region’s sovereign debt crisis took hold at the end of 2009 after Greece’s newly elected socialist Pasok government said the budget deficit was twice as big as the previous administration disclosed. In April, Greece sought a 110 billion- euro loan facility from the European Union and International Monetary Fund after being shut out of debt markets.
As borrowing costs climbed amid a wave of sovereign downgrades that saw Greek debt cut to non-investment grade at Moody’s Investors Service and Standard & Poor’s, Ireland accepted an 85 billion-euro bailout on Nov. 28. That also failed to contain the debt crisis as investor concern deepened that Europe’s stronger nations may be unwilling or unable to foot the bill for future rescues.
Credit Default Swaps
The cost of insuring Portuguese, Spanish and Italian bonds climbed to records this year as investors bet a 750 billion-euro financial lifeline drawn up by the EU and IMF in May wouldn’t be enough to ward off defaults. Purchases of 73.5 billion euros of bonds by the European Central Bank and a delay in its plan to end extraordinary monetary stimulus measures implemented to ease the financial crisis also failed to stem the rise in yields.
The extra yield investors demand to hold Greek 10-year bonds instead of German bunds climbed to a euro-era record of 973 basis points on May 7, the last business day before the EU- IMF financial backstop was announced, and was at 952 basis points yesterday. It began the year at 239 basis points. The difference in yield, or spread, between German bonds and 10-year debt from Ireland, Portugal, Spain and Italy also reached the highest since the common currency was introduced in 1999.
Fourth-Quarter Slump
The cost of insuring sovereign debt more than tripled since the start of the year, according to the benchmark Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments.
Five-year contracts insuring $10 million of debt have climbed to almost $210,000 a year compared with less than $69,000 on Jan. 1.
While investor demand for the safest fixed-income assets during the debt crisis pushed the yield on the bund to a record- low 2.087 percent on Aug. 31, German debt slumped in the fourth quarter. The yield climbed 68 basis points since Sept. 30.
Still, the yield discount for bunds compared with similar- maturity U.S. Treasuries increased to 41 basis points yesterday from a low for the year of 3.9 basis points on Oct. 20 as Federal Reserve asset purchases stoked speculation that growth will strengthen next year. The Stoxx Europe 600 Index of shares jumped 6.7 percent this quarter, up 9.1 percent in the year.
The bund yield may rise to 3.28 percent by the end of next year, according to the weighted average of 17 analyst estimates compiled by Bloomberg. Spain’s 10-year yield may fall to 4.43 percent, a separate survey showed, from 5.48 percent yesterday.
Debt Issuance
Total euro government issues may reach 863 billion euros next year, said Morgan Stanley strategist Elaine Lin in London. While that’s down from 925 billion euros in 2010, it’s “elevated compared to historical levels,” and higher than the average from 2000 to 2008, she said.
“Each auction or each redemption date will be accompanied by significant selling pressure on the respective yield curves,” said Michael Leister, fixed-income analyst at WestLB AG in Dusseldorf, Germany. He expects the 10-year bund yield to reach 4 percent by the end of next year.
“There’s a great deal of political uncertainty, as well as a constant risk of negative ratings headlines,” Leister said. “Even at these levels, we still see potential for spreads to widen again.”
News Link
No new year joy for Europe
It’s been a sombre year-end for the eurozone, with major European sharemarkets losing ground on their last full trading day for the year at the same time that the cost of insuring European sovereign debt is close to an all-time high.
The iTraxx SovX Western Europe index, which allows investors to take out default protection on a basket of 15 sovereign borrowers, has been climbing since mid-October when worries about the finances of the debt-laden eurozone countries resurfaced.
Already, the eurozone sovereign debt crisis claimed Greece and Ireland as its victims this year, with both countries being forced to request emergency funding from the European Union and the IMF.
But investors are worried that the sovereign debt crisis looks set to roll on into 2011, and that Portugal, which is battling anemic growth and a heavy dependence on external funding, will be the next eurozone country to succumb.
Overnight, Portugal’s Minister of the Presidency, Pedro Silva Pereira, tried to allay these fears, saying that the country planned to shore up its finances by cutting government debt.
"We are confident in the capacity of the Portuguese economy to confront the current situation," he told reporters in Lisbon.
Portugal has already announced a series of austerity measures, including cuts in public sector wages, and tax hikes in order to cut its budget deficit to 4.6 per cent of GDP in 2011, compared with an estimated 7.3 per cent this year.
But Pereira also noted that the sovereign debt crisis was not unique to Portugal, but affected the entire eurozone. As a result, he said, a solution was needed at the European level.
There are worries that the eurozone sovereign debt crisis could flare up early next year, as a number of countries rush to capital markets in January in the hope of getting their borrowing programs off to a good start.
Some bankers estimate that eurozone countries could be looking to borrow up to €80 billion in January. In addition, the European Union will be looking to raise a further €10 billion for its bailout fund to cover the cost of rescuing Ireland.
This represents more than 10 per cent of the €800 billion in bonds that eurozone countries are expected to issue next year in order to finance government budget deficits and to refinance maturing debt.
A heavy rash of bond issues in January could put intolerable pressure on fragile European financial markets. Already, many investors are refusing to buy the bonds of those eurozone countries which as seen to be particularly vulnerable.
As a result, the borrowing costs of countries such as Portugal have soared, putting further pressure on government finances. In recent weeks, yields on 10-year Portuguese bonds have climbed above 7 per cent, which has further fuelled speculation that Lisbon will be the next eurozone country to put its hand up for a bailout.
In the wake of the Irish crisis, the European Central Bank – which had been hoping to wind back its purchases of eurozone bonds – has had to step into the market and buy the bonds of countries such as Ireland, Greece and Portugal in order to stop their interest rates from spiraling out of control.
But many fear that the ECB will be deeply reluctant to continue loading up its balance sheet with bonds of suspect quality, particularly if there is no sign that European politicians are committed to resolving the sovereign debt crisis.
News Link
New Year To Start With Old Problems, Heavy Funding In Euro Zone
FRANKFURT (Dow Jones)--With Portugal hitting the debt markets already next week, the euro zone looks set to start the new year much as it began 2010--under threat from countries with weak economies and shaky public finances.
But this time around, the first auctions of the year could be decisive.
Despite the Greek and Irish bailouts, 2010 ended with debt-laden euro-zone countries facing escalating borrowing costs, and it is now feared Portugal will soon need foreign help to stay afloat.
"This will be a question of make or break," said Rene Defossez, a strategist at French bank Natixis. "If the first 2011 issues are completed without too many difficulties, this will bode well for the rest of the year in as much as it would suggest investors have taken on board the risk presented by peripheral debts."
Although the so-called peripheral countries have improved their situation through budget cuts and tax increases, their funding needs remain heavy, because most have a higher amount of debt to pay off in 2011.
Natixis expects EUR824 billion of euro-zone government bonds to be auctioned in 2011, with 10% of the planned supply expected to come in January, Defossez said.
"If yields on issue surge, other countries could be tempted to call on the European Financial Stability Facility, with the obvious risk that this facility will be insufficient to cover the needs of all liquidity-stressed countries," Defossez said. The temporary EUR440 billion fund was set up by the European Union after the Greek debt crisis and has already been used to help Ireland.
Portugal is the biggest question mark right now. Intesa Sanpaolo's forecast scenario assumes the country will turn to European Union for help in the first quarter. But bank also thinks no further bailouts will follow.
"We believe the euro government bond crisis should be overcome without other countries reaching the point of default," Intesa Sanpaolo strategists said. If tensions mount but don't lead to a bailout, the expected trend of euro spreads would not necessarily change a lot, they said.
With European leaders still debating how to set up a permanent mechanism for dealing with financial crises, the European Central Bank's intervention operations seemingly remain the only near-term stabilizing factor for the peripheral markets, Nomura said. The bank continues to buy euro-zone sovereign bonds to ease the borrowing costs in struggling countries and contain the crisis.
"Heading into the new year, it is hard to see this changing," especially with European Union leaders pushing back the final deadline for collective action until March, Nomura said.
France will be the first euro-zone country to sell debt in 2011, auctioning EUR8.5 billion treasury bills Monday, or debt at the shortest end of the yield. Treasury bill supply is also scheduled from Belgium, the Netherlands, and Portugal, which will auction EUR500 million of six-month T-bills Wednesday.
The first auction of bonds--or debt with medium, long- or ultra-long maturity--will come from Germany, the euro-zone benchmark. Germany will auction EUR5 billion of the 2.50% January 2021 bund Wednesday. France will be the week's other bond issuer, on Thursday offering EUR7.5 billion to EUR9 billion of three series of OATs, or long-term government bonds, maturing in 2020, 2026 and 2029.
"Investors will be putting new money to work next week, and dealers are short, so the German and French auctions will go well," a trader said.
News Link
Greek PM seeking support for E-bonds
ATHENS (Reuters) - Greek Prime Minister George Papandreou said on Friday that Athens was seeking support for proposed common euro zone bonds, which are opposed by Germany, saying they would help countries deal with high borrowing costs.
While Germany firmly opposes a proposal to issue common euro zone bonds the idea has been championed by some European policymakers including Jean-Claude Juncker, chairman of the Eurogroup of euro zone finance ministers, as a way to step up fiscal integration.
Papandreou, in a Greek newspaper article, said Greece was fighting a battle to deal with imbalances in the euro zone, where higher borrowing costs faced by some countries due to investor concerns about their ability to cut high debt, were putting them at a competitive disadvantage.
Greece was effectively shut out of capital markets after its borrowing costs skyrocketed this year, sparking a debt crisis that shook the euro and forcing Athens to seek a 110-billion-euro ($145.7 billion) bailout from its euro zone peers and the International Monetary Fund.
"We are fighting a battle at a world and European level. A battle to deal with the weaknesses of an international banking system, which has still difficulties and is not financing the real economy, and imbalances in the euro zone, where some are borrowing more expensively than others and as a result they are always less competitive," Papandreou wrote in an article in the Ethnos newspaper published on Friday.
"In this battle we are forming allies in proposals such as the common euro bonds," he said.
Germany argues that the issue of common euro zone bonds, or E-bonds, would reduce market discipline on countries to tackle high budget deficits. It also fears that euro zone bonds would raise its own borrowing costs, the lowest in the European Union.
German Finance Minister Wolfgang Schaeuble reiterated on Thursday that the euro zone should not issue joint sovereign bonds to tackle future crises.
"The higher yield level expressed in so-called spreads is both incentive and sanction (to have a stable fiscal policy)," Schaeuble wrote in a contribution to the German Tagesspiegel newspaper.
E-bond
2011 Do Not Bet on More of the Same
The three major economic blocs of the world economy face an uncertain future in 2011. The United States, the European Union and China began the recession in very different economic form, enacted different polices to cope with the downturn and have experienced marked variation in recovery.
China Portugal Germany European Union GDP Consumer Addiction The future of all three is equally dependent on the facts of economic recovery and the still potent political remains of the financial and economic collapse of 2008 and 2009. Behind the economic surface is the profound divergence in national credit and the overextension of debt in much of the developed world. The United States and Europe have become dependent on the grace of the world's credit markets. They are losing sovereignty to their lenders, the coming year will make the costs of that governing failure increasingly evident.
Throughout history economic tribulation has often preceded political upheaval. Here is the wildcard in the world's immediate economic future. In the United States the recession and the Washington's inability to procure relief overthrew unified Democratic control of the government. Could not the Greek or the Portuguese, or any of a half dozen other polities elect governments that repudiate the EMU economic straightjacket? What is the limit of German forbearance for its feckless union partners? The danger is not limited to the debtors. If Chinese economic growth falters, if inflation escapes control how long before the multitudes are on the streets of China's cities. Beijing may not fear Western political pressure, its own people are another story.
The EMU is the most straightforward case of this nexus of history and political economy. The monetary union is a project of the 20th century. Its goal was to make another European war impossible. In that it has succeeded. Europe is at peace, its people engaged in the pursuits of life and culture. Its defense budgets are miniscule and the terrors of war are a memory of the passing generation. But the ultimate goal of the theorists was and remains political unification. Monetary union was but one step to that end.
The structure of the European Monetary Union is ill-suited to be the focus of the unification forces pressing the continent's national governments to an ever closer union. It has neither the political ability to compel national capitals to practice budgetary intelligence nor the fiscal control to deny them deficit license. EMU designers hoped that the monetary union would raise all members to the probity level of the German nation. Instead national and political cultures are unchanged. The virtues and foibles of nation states as expressions of their people have not vanished in the utopia fantasies of Brussels bureaucrats.
The endgame for the EMU is simple. Either Germany underwrites all the debts of the union or a long list, perhaps a third of its nations default. It is a near economic certainty that Greece, Portugal, Spain, Ireland, Italy and others will not grow fast enough to pay their debts. The burden on their national account is increasing faster than GDP expansion. The unpalatable choices open to the union and the simmering discontent of its peoples will frame the economic, fiscal events of the coming year.
China's rulers are students of their own history. Mao's dictum that 'revolution springs from the barrel of a gun', is a comment on China's history of violent dynastic change. The cadres in Beijing depend for their legitimacy on dynamic economic growth. Were China a democracy the opposition's campaign slogan would surely be 'Jobs, Jobs and Jobs mean a Strong China'. When China's political and economic interaction with the rest of the world is interpreted through this lens its policies are coherent, sensible and necessary. Greece, Italy and Britain may tolerate and excuse general strikes, student riots, anarchists and a colorful array of political expression. The imperial cadres of Beijing are not so modern.
China's dependence on the global economy is profound but it is the same as its trading partners. All of the world's governments have, to a great degree, staked their economic future on fostering a recovery. This is natural and proper. What other path could they follow? Unfortunately most have done so without correcting the ills that produced the financial collapse and recession. Europe and the United States continue to issue debt at record rates, bankrupt firms are supported, banks are coddled, debtors protected, lenders punished and consumers are encouraged to extend themselves once again in a frenzy of unaffordable purchases.
China's position as the world's chief creditor, only she has the money to lend to the indebted, has given Beijing dominance over the terms of world trade. Twenty years of protest and pressure from the West have produced a pittance of accommodation. While it may be true that China rulers ultimately have as much or more to lose from a failure of global trade, that weakness never plays out in negotiation with the West. The addiction of the developed countries to debt, both sovereign and consumer, is a much closer fact than the next potential depression. China has been most astute in using the realities of its place in the global economy to its advantage. Its trading partners, led by the United States have largely been failures because they have not recognized the financial source of their own weakness.
The financial collapse of two years ago was the culmination of economic, political and financial trends that stretch back a generation. The reconstitution of the world's economic and financial system will not resemble the past. Power flows from economic strength, it will soon flow to the gun as well.
2011
Italy raises €12 billion in bond auction
Italy today raised €12 billion in a treasury bond auction that drew strong demand but at interest rates sharply higher than at a previous operation.
Italy, with a public debt approaching 120% of gross domestic product, has lately prompted investor unease amid a wider euro zone finance crisis affecting Spain, Portugal, Ireland and Greece.
The Bank of Italy said the treasury had placed six-month bonds worth €8.5 billion and two-year bonds worth €3.5 billion. The offer was heavily oversubscribed.
But the yield, or interest rate demanded by investors, rose sharply compared with a similar operation November 25. The rate on the six-month bond went to 1.698% from 1.483% while that on the two-year bond rose to 2.937% from 2.307%.
Italy Bonds
Europe divided as it faces its defining test
AFTER A year of drama and upheaval, European leaders face a mammoth task in 2011 to gain some control over the sovereign debt emergency. Defending the euro has already stretched them to the limits of their political and fiscal endurance but they remain deeply divided over the scope and scale of their next intervention. Each move they make will have a crucial bearing on the survival of the single currency.
The thread of disruption leads back to lies in Athens over the parlous state of the Greek public accounts. But there is more to it than that. The crisis feeds on critical design flaws in the currency system, wayward public finances throughout Europe, rampant bank mismanagement and panic-prone markets that have yet to regain their composure following the Lehman Brothers explosion in 2008.
With no end in sight to the turmoil, confronting the selfsame forces that brought down Greece and Ireland increasingly looks like the defining test of European integration. Any failure here could trigger a break-up of the euro, with potentially devastating economic and political consequences throughout Europe, and could lead the EU down a path of irreversible decline. While that is something EU leaders are determined to avoid, they remain at odds with each over the best way forward. They promise to do whatever is necessary to avert disaster but cannot agree on what.
At the same time, however, the primacy of German chancellor Angela Merkel in the debate says much about her dominance of European politics. For good or ill, she is perceived to set policy, pace and tone at every turn.
The scene is highly volatile. EU leaders are desperate to reassert the primacy of politics yet they are on the hind foot. In the face of market pressure, for example, efforts to extract bailout costs from private investors were put back for three years. As taxpayers endure massive austerity, they continue to shoulder virtually the entire burden of adjustment.
In question now is whether Portugal can avoid the fate of Ireland and Greece and whether Spain can stay afloat without aid. This, in turn, raises big issues for other heavily indebted countries such as Italy and Belgium. The temporary €750 billion EU-IMF bailout net could bear a Portuguese intervention but a Spanish rescue might split it.
There are questions, too, about whether Europe’s leaders have it in them to trigger support for Madrid. They insist they have, but that there is no need for an intervention in any event. These questions are rooted in the scale of the aid package that might be required – hundreds of billions of euro most likely – and the threat of a domino effect on other weakened countries.
By now, however, there is little enough scope to consider such issues in the abstract. Although 2010 heralded the end of Europe’s infamous no-bailout clause, the political psychodrama set off by that manoeuvre has yet to reach its denouement. That moment seems closer now but there are many acts still to play.
At issue still in the chancelleries and presidential palaces of Europe is whether and how to enlarge the €750 billion net, but this is only one question. The scale of the permanent fund to replace this scheme in 2013 has yet to be quantified. There is strident resistance in Berlin and Paris to the development of “eurobonds”, debt issued with the benefit of a common single-currency guarantee, but the idea keeps surfacing.
For Ireland, the €85 billion EU-IMF bailout marked a humiliating turn. With full employment and boom-time excess still fresh in the memory, the State is now totally reliant on its European and IMF partners and subject to their whims.
However, huge European Central Bank (ECB) loans to burnt-out Irish banks meant Dublin was deep in the danger zone long before the Government’s capitulation. Informed sources point to lingering annoyance in Coalition circles at the manner in which Ireland came under international pressure in those fateful November weeks but the die was by then well cast.
Despite considerable pressure from Paris and Berlin, there was no dilution of Ireland’s 12.5 per cent corporation tax rate in return for rescue aid. But with further debate on eurobonds likely, all signs point to pressure for harmonised taxation policies if such debt is to be issued. On this front and others, Ireland’s negotiating hand is feeble.
With an election imminent, however, it seems likely that Europe’s first interest will be to ensure any incoming government sticks to the terms of the bailout deal. Although Opposition parties are calling for a renegotiation of the package, they may find it is in their interests to blame the outgoing administration for unpopular policies.
Strain and anxiety were everywhere in 2010. Merkel held the line against easy bailouts but her dogged intransigence on core principles led to accusations that she was making matters worse, not least in Ireland. From the summit room came whispered reports of shouting matches between French president Nicolas Sarkozy and ECB chief Jean-Claude Trichet; of threats from Merkel (later denied) that she might pull Germany from the euro; and of ardent Spanish displeasure at moves to burn bondholders. Some emergency meetings continued until the middle of the night; routine meetings ran to the early hours.
There were glaring moments of scarcely concealed tension. Finance ministers emerged tired-eyed from a long meeting in Luxembourg to look in astonishment at television shots of Merkel and Sarkozy declaring in Deauville that they had decided how Europe would respond to the crisis. Thus did European Council president Herman Van Rompuy, chairman of the Luxembourg meeting, find himself squeezed out by Berlin and Paris.
There was farce too. Van Rompuy claimed many months ago that the battle to save the currency was won, remarks that smacked of wishful thinking. Trichet, whose pallor is seen to denote his acute concern about the crisis, is fond of saying, “We never declare victory.” There is good reason for that.
Four things are clear at this point. First, raw politics are at the core of the crisis. This goes between governments, within them and in relations with the people touched by their actions.
For example, Merkel’s reluctance to contemplate bailing out Greece was prompted chiefly by electoral concerns and flowed from deep German aversion to the notion of turning the EU into a fiscal union. Dithering over the Greek deal went on for so long that the €110 billion package, once in place, was swiftly overtaken by the clamour for something bigger for any other distressed country.
Second, the political element seems likely to intensify. As austerity tightens its grip, it seems inevitable that pressure will build for greater private sector contributions to any bailout costs. To be fair to Merkel, she has been to the fore in placing this on the political agenda. While the market response was adverse, EU leaders have pledged to agree by next March how such procedures should be incorporated in the permanent bailout scheme. This is not without resonance in Ireland, for a unilateral move to impose a “haircut” on senior bank bondholders was ruled out when the EU-IMF deal was done.
Third, the response to the crisis is essentially an improvised, experimental one. As such, there is no precedent for such policies, no historical guide and, therefore, no certainty that they will work. This goes both for the bailout schemes themselves and for the drive for austerity in ailing countries. As well as helping to balance the public finances, senior figures in Europe say austerity may also bring down costs in a manner akin to currency devaluation, thereby aiding recovery in the long run. In the short term, however, austerity touches ordinary life in a very severe way.
Fourth, external elements far beyond the control of European leaders cast a shadow over this scene. They include volatility in debt markets, the ever-present danger of uncontrollable, self-fulfilling downward spirals taking hold and the vulnerability of brittle banks and countries to any increase in tension in other financial markets. Another factor is the global economic scene. If the recovery intensified, that would clearly be for the good but the opposite is also true.
The euro crisis has drawn European leaders deeper into each others’ affairs than ever before, but they will have to go further still before they finally reach safe haven. How far? How fast? We may know that soon enough.
Europe divided
How low can we go?
The last 12 months have been utterly disastrous for Ireland’s banking sector and, in turn, for the Irish taxpayer.
So much has happened that will leave lasting scars on banking for many years, it is hard to encapsulate everything.
The most striking thing of all is the contrast between what we were being told about the situation and where it actually is now. In that sense, the year can be characterised as one of ever worsening scenarios. No matter how bad Minister for Finance Brian Lenihan told people the banking situation was, it kept turning out to be even worse.
Nama numbers
Take Christmas 2009. At that time, it was still widely accepted that the National Asset Management Agency (Nama) would buy close to €77 billion of bank loans, at a discount of roughly 30 per cent.
This was widely (although not universally) accepted as the case, because this was the figure that Lenihan told the nation it was going to be. It was contained in the first Nama business plan published in October 2009.
This plan suggested that the agency could spend around €54 billion buying €77 billion worth of loans, and still make a profit of €5 billion.
But as 2010 rolled around, the assumptions behind these calculations went completely awry. Nama, which has a commercial mandate, took a very tough line in deciding what price it would pay for the loans.
The moral hazard of using taxpayer funds to purchase loans at above their market value, in order to keep banks in private ownership, was just too much.
Equally, the European Commission applied tight scrutiny to the process and wanted to see every loan deal done. The final factor was that the loans given out by banks to property developers were in a much worse state than Nama - and Lenihan - had first believed.
Poor security, very little equity put in by developers, a lack of paperwork, worthless personal guarantees and a wrecked property market pushed the discounts paid to over 50 per cent. The impact on the banks was devastating. It forced them to take loan losses up front.
Black Tuesday
On Black Tuesday, March 30, Lenihan announced details of the discounts paid by Nama on the first batch of loans, and the subsequent amounts of money they would need in new capital, mainly from the state.
That morning, the expectation was that Anglo Irish Bank, having received €4 billion, would need another €6 billion to €8 billion. Lenihan also announced that it needed another €8 billion immediately and possibly a further maximum of €10 billion, bringing the total cost to €22 billion.
This has now been revised to around €30 billion to €34 billion.
For AIB, the figure was €7.4 billion of additional capital. By October it ended up being €10.4 billion, and the final figure will be higher.
In Irish Nationwide’s case, the expectation was an additional €2 billion. Lenihan announced a figure of €2.8 billion.
This has now been revised to €5.4 billion.
Even little old EBS needed more. It was widely expected that it would require €300 million. Lenihan said the figure was now €878 million.
At the time, we were told that the money going into Irish Nationwide and Anglo Irish Bank was probably gone, but we were investing in AIB and Bank of Ireland. In other words, we would get our money back.
As the amounts of money required for all the banks has gone up, it is increasingly difficult to see how the state will reclaim the billions of euro it is ‘‘investing’’ in these banks.
AIB will be broken up and most likely sold off. The price attained for the non-core parts, and probably the main Irish bank itself, will not cover the funds that the state will put into it.
In many respects, with the obvious exception of Anglo, AIB has been the most troublesome for Lenihan. Its executives took a tough stance on government intervention right from the start.
A protracted row about the appointment of insider Colm Doherty to the post of managing director saw the bank eventually win out. But, as the news broke that AIB needed another €3 billion more than previously thought, Doherty was gone. Including new executive chairman David Hodgkinson, AIB has had four chief executives since March 2009 - Eugene Sheehy, Dan O’Connor, Doherty and Hodgkinson.
In Bank of Ireland’s case there is a better chance but, with the state likely to end up with a majority stake in it, getting all its money back will be very difficult.
Bank of Ireland convinced many of its existing shareholders to throw more money into the stock when they did their successful rights issue, raising €1.5 billion from shareholders.
Unfortunately, those investors have seen the value of the shares they bought in the summer halve. It doesn’t augur well for pulling off something similar again.
Anglo and Irish Nationwide remain bottomless pits that our money is being poured into. That money won’t be coming back. Together, these two lenders are on track to cost the taxpayer a minimum of €35 billion.
Non-Nama loans
There could be worse to come. Having dealt with the crisis triggered by commercial property disasters, real cracks are emerging in other parts of the banks’ loan books - the bits they are not selling to Nama.
For example, around 10 per cent of all Irish residential mortgages are not being paid on time. Loans to major companies and SMEs are also expected to lead to significant losses.
Arise in eurozone interest rates could be the trigger for a new crisis.
Elsewhere in the banking sector, the non-Irish banks continued to retrench and feel the pain in 2010.Ulster Bank and HBOS had to increase their provisions for loan losses in Ireland.
In February, HBOS announced that it was closing its Halifax branch network in Ireland, with the loss of 750 jobs.
The remaining 850 jobs in Ireland were said to be safe, as the company said it would continue to run its corporate lending arm trading as Bank of Scotland (Ireland). But just six months later, it announced that it was closing this business as well.
The last 12 months have witnessed numerous nasty surprises, prompted by the realities of how comprehensively commercial property lending collapsed. The next year should see more activity and responses to those changes.
The passing of the Credit Institutions (Stabilisation) Act will ensure a more speedy break-up and shrinking of the Irish banks.
There will be some consolidation around the two big lenders in the Irish market, but there are few certainties about what will happen.
We are also likely to see staff cuts across the Irish banks. Some lenders are still operating with 2007 staffing levels.
As they shrink, their employment numbers will go down, too.
There are likely to be enormous job losses across financial services next year. The shape of banking has also been affected by the arrival of the IMF and EU through the bailout fund.
They want rapid action in addressing problems. The European Central Bank was a key driver in the arrival of the IMF here.
The ECB had be come alarmed at the extent to which it was providing liquidity to the Irish banking system.
Bonds issued by Nama to Irish banks were being cashed with the ECB. The gaps left by the collapse in wholesale funding and the enormous exit of deposits all had to be plugged by the ECB and the Irish Central Bank. Together, they are into the Irish banks for around €135 billion.
The uncertainty that persists around sovereign and bank debt in several eurozone countries will also cast its own shadow on banking in the year ahead.
The likelihood of a Portuguese bailout, and the storm clouds gathering around Spain, are not helping when it comes to the wider issue of stability of the euro.
Anecdotal evidence suggests that some Irish citizens with sizeable savings, and some larger corporations, are spreading their deposits around lenders in different jurisdictions.
Brokers describe how high net worth individuals are purchasing 0 per cent coupon German bonds, knowing that the transactions fees, et al, mean it will cost them money.
The fears are understandable, but the logic is hard to figure out. Irish bank deposits are as safe as the Irish state itself. But if you have fears about just how safe that is, the deposits are also heavily supported by the actions of the ECB.
Lenihan’s annus horribilis
The last 12 months have been utterly bruising for Lenihan.
The ever-increasing billions required for the banks were linked to the blanket guarantee he introduced in September 2008.
This decision has come back to haunt him with a vengeance. The worsening situation, which meant that estimates of cost were continually being revised upwards, eroded his credibility on the banking issue.
Several u-turns, particularly with the arrival of the IMF and EU, raised questions about the choices he had made to shape a solution to the banking crisis.
Take Anglo Irish Bank, for example. After courting the EU with a good bank/bad bank plan for months, Lenihan went ahead with a deposit bank/slow wind-down split of the bank. Now it’s just being wrapped up.
And it got worse. The speed With which things are now happening, post-IMF, gives the impression that Lenihan wasted too much time and took an excessively softly-softly approach with the banks.
This was further emphasised by the row over bank bonuses, which also appears to have backfired on him.
Those who wanted heads on pikes, any bankers, weren’t being given too much to feed on.
The slow progress of investigations into Sean FitzPatrick, David Drumm and the events at Anglo Irish Bank have given the impression that the individuals who made the decisions that cost the taxpayers billions of euro are simply walking away from the carnage.
Aside from specialist probes such as those of the Office of Director of Corporate Enforcement (ODCE) or the gardaí, there hasn’t even been much progress on official investigations into what went wrong.
Investigations
In 2010,we had two reports into the crisis: one by Central Bank governor Patrick Honohan, and the other by Max Watson and Klaus Regling. They aimed to explore how we got into this mess, but didn’t really point the finger at anyone.
They confirmed that the failure in bank regulation and government policy had contributed, as well as how the banks were run.
But they didn’t satisfy the public’s need to know that somebody did this and would have to pay for it somehow.
The biggest single issue the Honohan probe cleared up was the extent to which our crisis was a homemade problem. Bertie Ahern, Brian Cowen and a raft of others had blamed the collapse of Lehman Brothers for precipitating the Irish banking crisis.
Honohan concluded that, while both domestic and international factors were at play, our crisis was 70 per cent homegrown. It put a stop to the nonsense that had infected political discourse about the issue. The closing few months of 2010 have also clarified another issue which had dominated debate for the previous 18months - whether the banks were lending enough.
When it emerged in October that AIB, the country’s biggest bank, needed an additional €3 billion of new capital to bring its requirement to €10.4 billion, the debate was over. With the ECB providing €130 billion in funding to the Irish banks, it was clear that they were in a much worse state than many had imagined.
The IMF/EU bailout sets aside €10 billion more of new capital for the banks, with an additional €25 billion available on a contingency basis. Banks that are so strapped, and with such weakened balance sheets, couldn’t possibly be in a position to lend into the economy to anything resembling normal levels.
The hope now is that Lenihan’s new banking legislation, with its extraordinary emergency powers, will enable a fast and decisive clean-up of the Irish banks.
If it achieves that, they may eventually be in a position to move on and rebuild. But a lack of competition in the future is a real concern. Several foreign banks operating here are either closing or pulling back.
The most worrying aspect to the banking crisis, as 2010 draws to a close, is that, more than three years after the credit crunch began to emerge in international banking (August 2007), there is still so much uncertainty about the future of the industry.
We still don’t know who will own some of our banks in a year’s time, how big they will be, how much lending they will do, where they will get their funding or how many people they will employ.
Source
Greece Continues to Flounder
Greece risks Mediterranean isolation, as government debt accumulates and international confidence weakens — especially now that Moody's Investors Service is reviewing a possible downgrade of its current Ba1 credit rating. With Greece's debt levels rising to 127 percent of GDP, Moody's noted that the "review will focus on the factors, namely nominal growth and fiscal consolidation, that will drive the country's debt dynamics over the next few years."
Translation: The leadership of Greece's near-bankrupt country had better tighten the financial ropes and cease government handouts and trivial spending projects.
The government has been issuing worthless checks for decades. Eurostat, a Directorate-General of the European Commission, amended debt and deficit figures, labeling Greece as the region's most "indebted country." Financial insolvency has nearly crushed Greece's hopes of returning to the international bond market and has aroused negative sentiment among European neighbors.
From Italian and German invasions in World War II to political division resulting from the Greek Civil War, the country's political structure has become deeply instilled with socialist principles. The truly debt-financed country has a labor force with a bloated public sector, with roughly a third of the workforce toiling for the government.
Though the government may at least recognize its fiscal reality — with Greece's new Prime Minister, George Papandreou, claiming the implementation of spending cuts — the country carries heavy baggage. The problem is that Greeks, as a whole, are not committed to change, something that is to be expected in a country with such a massive public sector. They are content in their cozy government jobs — and used to high wages funded by borrowed money.
Greek society is ingrained with the ideology that it is government which creates wealth, rather than individual investment and private enterprise. Citizens expect to work short hours and receive many government benefits.
Another problem is the government's view toward the market economy. The Heritage Foundation and the Wall Street Journal's 2010 Index of Economic Freedom described Greece's limits on economic latitude:
Challenges to economic freedom remain in such areas as government spending and labor freedom. High government spending chronically causes budget deficits and places upward pressure on an already high public debt. The rigidity of the labor market impedes productivity and job growth, undermining long-term competitiveness.
Intrusions into the business environment have exerted a pronounced impact on the market. Greece's economy is tanking, with the third-quarter unemployment rate reaching 12.4 percent, leaving 622,000 currently out of work. Labor unrest has sprung up: Riots ensue and labor strikes overwhelm businesses and government agencies.
Despite an ever-mounting wall of government debt, labor unions screech as the government plans to cut state subsidies by 20 percent, including wage cuts and involuntary job transfers. Union workers criticize their government and "global capitalism," as fiscal austerity measures threaten their professional lives.
Spending itself is not the only problem; government transparency is practically nonexistent. The OECD, World Bank, Transparency International, and other international organizations all agree that bureaucracy is the primary deterrent to Greek investment and business operations. Arbitrary business inspections and financial monitoring produce rampant corruption. Government officials are swayed to favor some private entities over others, generally for political clout and financial incentives.
In the business world, investors and lenders are highly regulated, with "international norms" determining compensation. And in true socialist form, private property may be requisitioned for public purposes. Shady tax practices present a system that is unstable and unpredictable, while the government frequently adjusts tax levels, sometimes compelling retroactive taxation.
The solution to Greece's fiscal meltdown is not tax hikes, as the country has a top income tax rate of 40 percent, a top corporate tax rate of 25 percent, and other taxes such as inheritance and value-added taxes. The solution is a combination of pro-business tax policies, an expanded private sector, and decreased government spending. Furthermore, bureaucracy must be thwarted and politicians made accountable, by increasing transparency and loosening the government's reins on economic freedom.
With such a vast public sector, labor regulations must be amended. Rigid regulations on labor hours and government oversight of business layoffs impede the corporate environment. And though corrupt private business practices should not be ignored, unreasonable searches and seizures and regulatory oversight must subside.
For Greece to revive its feeble global reputation, it must prove fiscal responsibility and pro-market growth. Progress in privatization will make businesses more competitive and open the door to technological innovation and development.
Moody's warning should be a wakeup call, to both the government and the populace, and unless the Greek people embrace individual responsibility, their nation's financial and economic decline will endure
Greece Flounder
Portugal Rating Downgrade Follows on Heels of Greece Bond
Several weeks ago, Greece was on the point of collapse and the European Union needed to bail out the government. In November, Ireland, once the economic dynamo known as the “Celtic Tiger,” needed a bailout of its banking system. Earlier this month, it appeared as though Belgium might be the next domino in that economic house of cards which is the European Union. The Euro itself is viewed as facing grave, perhaps insurmountable, problems. Spain and Italy are in serious trouble. Now things seem to be coming to a head. Greece, as reported here by Brian Koenig, faces a downgrade of government bonds from the Ba1 rating by Moody’s Investor Service. The confidence level that investors have in the new Greek government appears very low.
Portugal has also just had its credit rating reduced by Fitch Ratings Agency from AA- to A+, reflecting concerns that the government cannot raise money to finance its borrowing. Moody’s Investor Services indicated earlier this week that it might reduce its A1 rating by one level or perhaps even by two (which would send a profoundly serious signal to potential investors.) The combined effect of these two highly respected investment services viewing the Portuguese ability to repay public debt negatively will mean that the interest payments required by the government of Portugal — the revenue needed simply to service the debt — will rise. Absent much stronger than anticipated economic growth in the Iberian nation, there is no real light at the end of the tunnel, aside from very rigorous public austerity.
Although Greece, Ireland, and Portugal are relatively small nations (so too is Belgium, who may require a bailout), the steady erosion of confidence in nations of the EU means that the chances of a large nation — Spain very likely and possibly Italy — needing a bailout rise considerably. Not only slow economic growth in other members of the EU, but the broad perception — the accurate perception — that many nations in the European Union have behaved irresponsibly and assumed government debt and government obligations (especially public pensions) which cannot realistically be paid, pulls down general confidence. This is producing more friction within the EU. The German government, which has distanced itself from the problems of less responsible nations, is conspicuously pulling even farther away — rejecting French proposals for more unified economic governance. Germany also faces resentment from other nations, who recall unhappily German efforts at hegemony in the past; now, however, these nations want Germany to pick up the pieces of their public debt woes.
Beyond just doubting the prudence of individual nations in the EU, investors in public debt instruments must, at some point, begin to wonder whether the European Union itself can provide help to many of these nations. There is, inevitably, a “tipping point” at which the ability of the collective known as the European Union will itself face implosion. Right now, the size of the EU creates the impression of confidence — much as the huge federal government gives that impression in the United States — but no government and no international union of governments is “too big to fail.”
The real question is this: If the European Union itself essentially collapses, how far off will the fall of its constituent nations be? Stay tuned.
Portugal Rating Downgrade
Time for EU to Finish the Job
At last week's European Union summit, leaders agreed on a limited change in the EU's founding treaty that would allow for the creation of a permanent emergency lending facility in mid-2013. The volume and operation of the facility were left open, raising the usual doubts of whether Europe will ever take a full step toward anything.
How does this new euro-saver function? Who allocates and distributes funding, or administrates over its rule-enforcement loan processes? How independent is the decision making? Who says debt needs debt restructuring? On what terms?
Germany's Chancellor Angela Merkel promised more details by March. That would be about the limit for investors are waiting for the next steps to be convinced that the European Union is putting structures into place that, if falling short of a fiscal transfer union, ensures that there will be a newly systematized response to fiscal crisis. The hair-raising, eleventh-hour agreements with Greece and Ireland have taken their toll. With Portugal and Spain now also seen at risk, financial markets are looking for more brick-and-mortar institutional commitment.
Germany's Economy Minister Rainer Bruederle in Rome last month.
Lack of credible institutions is a prime reason why the EU has a debt crisis and the U.S. and Japan, with their bigger deficits and debt loads, don't. With a massive program of debt redemptions of new borrowing ahead next year, euro-zone member states may have only weeks, rather than months, to fill that credibility gap.
This week we've watched the euro continue to sink to record lows against the Swiss franc, sometimes fatuously referred to as Europe's new D-Mark but nonetheless the region's currency gold standard. Ratings agencies in the past two weeks have unleashed a torrent of year-ending downgrade warnings on certain euro-zone government debt.
Expectations that Greece will lose its last fingerhold on investment-grade status by mid-January haven't been improved by new reports that Athens is thinking about a future debt restructuring plan. Clearly, it's time to begin drawing up blueprints for more buttressing, and preferably in time for the next meeting of EU finance ministers on Jan. 17.
There are early glimpses.
From France we hear more talk of European economic government, details to follow. German Economics Minister Rainer Bruederle said last week's agreement on a permanent bailout facility points to something like a ØEuropean Monetary Fund. Naturally, this would be more about discipline and sanctions than transferring assets.
Then, after what might have been a calculated leak, the German finance ministry confirms a report in Germany's Sueddeutsche Zeitung newspaper a low-level ministry working group has worked up a proposal for a new, independent EU institution to oversee the fund and enforce its rules and loan conditions.
For many, that couldn't make more sense. How else to convincingly administer that facility than to give it form and structure beyond frantic late-night phone calls from Berlin to Paris? This agency, a streamlined version of the International Monetary Fund, would be the institution that oversees fiscal compliance, processes loan requests and administers over conditions set on a possible sovereign debt restructuring. And all that conducted with the same political independence as the European Central Bank—to the extent that politics can ever be removed from such issues.
And who couldn't wish for this kind of sister institution more? The European Central Bank for years has wailed lament about fiscally wayward governments that don't listen because they don't have to.
The ECB's rapture would be complete if, as the Sueddeutsche story also reports, such an institution also would assume the ECB's program of supporting weak euro-zone sovereign debt markets with purchases of government bonds. Were that to happen, the ECB would be back in business of being a central bank and not Europe's bad bank, a depository for unwanted and decomposing government bonds.
The ECB now owns more than €72.5 billion ($95 billion) of euro-zone government debt, chiefly from Greece, Ireland and Portugal, the three countries considered most likely to default, reporter Geoffrey T. Smith reports in his WSJ.Com blog. The central bank also has over €330 billion outstanding in loans to banks in the four problem countries, when adding Spain.
What has emerged in the past month is that the EU will want private-sector investors to take a hit in future debt deals for prostrated government treasuries. That makes erecting a credible and independent decision-making structure as important as the
size and function of the bailout fund itself.
News Link
Reading the IMF report on Ireland (page 16)...the Bank of Ireland is considered to be one of the viable banks
Good read to see the overall master plan for the Ireland Banking System.
Euro Zone Debt Crisis Threatens to Derail Euro in 2011
Despite the implementation of a comprehensive €750 billion rescue package in the the European Financial Stability Facility, concerns linger heading into the New Year. Can the Euro Zone stave off further bailouts and will bond markets stabilize in the New Year? A case-by-case study suggests that Spain and Portugal could be the next dominos to fall in 2011, and the Euro could remain on the defensive amidst further turmoil in the European Monetary Union.
The Greek Government Spending Dilemma and its Spread to Ireland
To understand what led to controversial bailouts for Euro Zone members, a bit of historical perspective is in order. In 2002, Greece’s economic reforms allowed it to drop its local currency in favor of the euro—giving the government far better access to low-cost borrowing. The Greek government subsequently went on a debt-funded spending binge, and under strain of massive debt obligations the country was hit particularly hard by the global economic downturn in 2008.Now under a €110 billion three year bailout agreement with the European Union and International Monetary Fund, Greece still has yet to see the light at the end of the tunnel. The country must deal with imposed austerity measures amidst an economic downturn to achieve deficit levels imposed by the European Union and International Monetary Fund.Greece’s economic woes induced contagion throughout the market, resulting in investors higher borrowing costs for other weaker European Union countries, such as Ireland.
The €67.5 billion bailout package for Ireland quickly turned from a preventable event to a matter of “fait accompli,” as the latest act in the European Union’s year-long drama to prevent its weakest members from getting overwhelmed by mounting debts. Ireland had moved aggressively to slash €15 billion from annual deficits in four years by slashing spending by €10 billion while increasing taxes by €5 billion (with the harshest steps coming in 2011), which was thought to save Dublin from seeking bailout funds. Yet the deficit grew larger dueto rising borrowing costs and the escalating costs of guaranteeing debt obligations of the country’s troubled banking sector. While the European Commission seems determined to shore up its troubled members, albeit contentiously , the outlook on the euro will remain dim as long as rates keep rising and the dominos keep falling.
Spain Credit Outlook Uncertain on Banks' Funding Needs
Spain has become a new target of the bond vigilantes following bailouts of Ireland and Greece, sending Spanish government securities to their biggest loss in seventeen years in 2010. Moody's Investors Service warned in recent weeks that it may downgrade its ratings on Spain's sovereign debt, adding that its banks have funding needs of up to €90 billion. Although funding assistance seems inevitable, many believe that Spain is too large for a bailout and debt restructuring is a more likely outcome. This scenario could have widespread consequences; notably, many of the bondholders that would face losses are European banks, which already face precarious economic situations.
If troubles continue to mount, Spain’s borrowing costs will likely rise, causing hardships for the country's banks and other local companies alike. The 10-year yield has already increased significantly, from under 4 percent in mid-October to its current level above 5.4 percent. Should fiscal difficulties in the euro-zone evolve into crisis in 2011, the euro will likely plunge as a result and the continuity of the monetary union may come into question. Although the sixteen-nation currency has already dropped from $1.40 in November to $1.30 in December, further downside is not out of the question if its fourth-largest member state falls victim to credit market turmoil.
Portugal Could Be the Next Domino to fall
As two of its European constituents have already fallen by the wayside, Portugal is lined up to become the next country overwhelmed by the sovereign debt crisis spreading through Europe. It needs to cut deficit to below 5 percent of GDP next year, from 7.3 percent in 2010. According to government projections, GDP growth is forecasted to slow to 0.2 percent from 1.3 percent in 2011. The International Monetary Fund has also chimed in; no growth will occur, and unemployment is expected to reach 11 percent by mid-2011.With government debt now at 83 percent of GDP, Portugal is facing a multitude of problems that could reach their boiling points in the next few months. Rating agencies are taking notice of these problems as Fitch downgraded Portugal’s long-term and local currency ratings to A+ (from AA-), stating that it would be “extremely challenging” to meet the budget cut requirements to move back towards solvency.
Markets have reacted too; the cost of borrowing continues to climb, signaling that lenders are nervous that Portugal will not be able to control is unmanageable debt problems. Estimates of a bailout package vary from pundit to pundit, but one sentiment holds regardless of who you ask: at least $50 billion will be required if Portugal is able to enact significant austerity measures, although up to double that amount could be required if the government isn’t able to meet its lofty goals.
Given such challenges to Portugal and Spain in the New Year, we believe that the Euro could remain on the defensive until further notice. Indeed, many DailyFX Analysts list a Euro/US Dollar short as one of their top trades of 2011.
DailyFX Research Team
Greek unions vow to step up protests over stringent austerity measures
Greek unions vowed to step up the relentless stream of protests that have paralysed the debt-stricken country in the run up to Christmas, after parliament approved an austerity budget described as the toughest since the second world war.
The spectre of yet more strikes came as prime minister George Papandreou pledged to push ahead with the unprecedented economic reforms dictated by the EU and IMF as part of the €110bn (£93.5bn) bailout. In a display of his determination to override growing dissent within his own party over the measures, the socialist leader insisted he would not waver.
"We will not go bankrupt," he said addressing the 300-seat house ahead of the crucial vote. "We will do whatever it takes to succeed. We will change this country."
But despite the fighting talk, Papandreou faces what is fast being called a struggle between the gruelling conditions of the "memorandum" Greece signed with its international creditors last May and mounting anger over policies widely seen as unfair.
Short of overhauling the public sector, streamlining loss-making utilities and stamping out some 70 "closed" professions, which lie at the root of the country's lack of competitiveness, Athens risks not being given a fourth loan, amounting to €15bn in March.
The race against time has put the government under extraordinary pressure despite the praise it has also received from the EU and IMF for reducing the budget deficit by a record 6% of GDP in 2010.
Next year's budget aims to slash the deficit to 7.4% of GDP with further cuts and tax hikes worth €14bn. Additional measures were required after the EU monitoring body, Eurostat, revised Greece's budget deficit upwards to 15.4% of GDP last month.
But the policies are taking their toll. The left-leaning newspaper Ta Nea, which has excellent ties with the socialists, said the mood among MPs in the ruling Pasok party was such that ministers in charge of sensitive portfolios had stopped greeting one another.
"With the dawn of the new year the government faces a mountain of problems," the paper opined on its front page. "Their handling is resonant of a passage through a mine field."
Indicative of the charged political atmosphere, Papandreou agreed to postpone voting on reforms that would liberalise regulated professions.
In the past six months the leader has seen his parliamentary majority drop to 156 seats following the expulsion of four MPs for failing to endorse the measures.
With some openly saying that the hard-hitting budget is as far as they will go in backing Greece's ambitious fiscal consolidation programme, speculation is growing that the recession-hit country is heading for early general elections next spring.
MPs, including the former EU commissioner and veteran socialist Vasso Papandreou, have complained openly about the "breakneck" speed of reforms that have seen workers' rights, won over the course of decades, rolled back overnight.
Many fear that, with tolerance fading fast (civil servants and pensioners have seen incomes drop by 20%), Greek society could soon implode.
Opposition has been reinforced by the growing sense that despite the unparalleled austerity Greece is heading for a sovereign default. Public debt is projected to hit 160% of GDP in 2013.
This week Fitch said it had placed the country on negative watch and could downgrade its rating in the coming months.
Ta Nea also revealed today that secret negotiations were underway between the Greek government and mandarins in Brussels to restructure the debt once the bailout agreement expires in 2013.
Greek News
AIB nationalisation was 'last resort'
Minister for Finance Brian Lenihan admitted today markets had no confidence in the Irish banking system, and the move to nationalise Allied Irish Banks represented a “last resort” to keep the troubled lender afloat.
Speaking after the Government secured a High Court order allowing it to inject a further €3.7 billion of State funds into the bank, Mr Lenihan said Irish banks had not stayed in private hands because private money had not been willing to invest in them.
“They [the markets] don’t have confidence in them and that’s the state the banks have brought themselves to.”
“We have to have a banking system in this country and it has to be brought into public ownership. I have always made it clear that would be a last resort and we are now engaged in that last resort,” he said.
Mr Lenihan said AIB had failed to meet its capital requirements despite agreeing to sell sizeable subsidiaries in Poland and the US.
Unless further State funds were invested in the bank it would cease to function on January 1st, he said.
The injection of capital will eventually bring the Government’s stake in the lender to 92.8 per cent, once the bank has disposed of its own stake Poland's Bank Zachodni WBK.
Mr Lenihan said because of the amount of public ownership now involved in the bank, its shares would be de-listed from both the Dublin and London stock exchanges.
The shares would still be listed on the junior Irish market, the Enterprise Securities Market. Shareholders will still be able to dispose of their shares under this listing arrangement, Mr Lenihan said.
Asked if the rushed banking legislation and today’s High Court order reflected a further run of deposits at AIB, Mr Lenihan said there had been a gradual erosion of deposits in the Irish banking system but declined to be more specific.
“Rushed legislation was required because in these commercial matters the biggest criticism of our banking policy to date was that we moved too slowly."
He said further actions would have to be swift and determined, indicating the phasing out of Anglo Irish Bank and Irish Nationwide would be accelerated early next year.
Mr Lenihan said Bank of Ireland and Irish Life & Permanent were still seeking funds in the markets but if this failed they too would require further State funding.
On whether taxpayers were likely to see a return on their investment in AIB, Mr Lenihan said there was no reason why, if the bank was run properly, it could not have a reliable rate of profit.
“The difficulty with our banking system is that they became greedy for too much profit and engaged in reckless lending.”
He told RTE’s News at One the taxpayer and the National Pension Reserve Fund, which is funding the latest bailout, would get a return from AIB “in time”.
However, he conceded this would be in the longer term and there would be no annual return for a number of years. “We will have to wait for a number of years while the bank is turned around and we will then have a solid investment in it,” he said.
News Sources
I agree, no need to chase this one. I will wait and let the pps come to me.
Only planning on risking $2K on the play, this may try to test $1.50 again so need to rush in to support the stock.
Nope, spending time with the son who's down visiting us for the week....I would not touch that one with a ten foot pole.
More aid for Bank of Ireland and Irish Life likely too
If Bank of Ireland and Irish Life cannot raise additional capital privately from the markets, the Irish government will fill the gap, says FinMin Lenihan.
The news comes on the heels of the Irish government taking a majority stake in Allied Irish…
news source
Greek Parliament Approves 2011 Budget, Deficit Plan
Dec. 23 (Bloomberg) -- Greece’s parliament approved the government’s 2011 budget that aims to cut the fiscal deficit to about half of last year’s level when it swelled to the largest in Europe and triggered a regional debt crisis.
The budget passed by a vote of 156 to 142 in the Athens- based parliament. Measures include 14 billion euros ($18.4 billion) in spending cuts and additional revenue aimed at cutting the shortfall to 7.4 percent of gross domestic product, from a projected 9.4 percent this year and meeting conditions of a 110 billion-euro bailout from the EU and International Monetary Fund approved in May.
“I am not calling on you to vote for this because it leads us to the road to salvation, I call on you to vote for this because it is a punctual continuation of a plan we committed to, so we can respect the sacrifice Greek citizens made in 2010,” Finance Minister George Papaconstantinou told the country’s 300- member parliament.
Greece’s debt woes broadened into a euro-area crisis this year and governments from Lisbon to Rome have struggled to convince investors they can reduce debt and deficits enough to prevent future bailouts. The EU and IMF agreed on an 85 billion- euro aid package for Ireland last month, and borrowing costs in Portugal and Spain rose to euro-area records on concern they may be next.
Heightened Concerns
Fitch Ratings, the only rating company that still considers Greece debt investment grade, followed Moody’s Investors Service and Standard & Poor’s this month in placing the country’s credit rating on review for a possible downgrade. Moody’s cited heightened concerns about whether the country will be able to reduce its debt to “sustainable levels” and a “substantial” shortfall in 2010 revenue.
The extra yield investors demand to buy Greek 10-year bonds over German bunds rose to 905 basis points yesterday, nearing the May 7 record of 1973 basis points at the time of the bailout.
Greece’s debt as a percentage of GDP stood at 127 percent in 2009, the highest in the 27-nation EU. The EU says the measure will rise to 156 percent in 2012. Greece has said debt as a percentage of GDP will peak in 2013. The European Commission forecasts the economy will contract for a third year in 2011, shrinking 3 percent, before returning to growth in 2012.
Protests
Greece’s two biggest unions staged a 3-hour walkout yesterday and transport workers held their fourth 24-hour strike this month. About 2,000 workers marched to parliament before the budget vote to protests the additional austerity measures, police estimated.
Prime Minister George Papandreou and his socialist Pasok party came to power in October 2009 and soon revealed that the deficit was twice what the outgoing government had estimated. Papandreou who campaigned on pledges of higher spending and wage increases, has managed to maintain much of his popular support even as he implements the deepest austerity measures in decades, triggering regular protests by unions, Pasok’s voting base.
During the final budget debate, Papandreou said the government has had three goals since it was elected: to save the country from bankruptcy, stabilize the economy and proceed with necessary structural reforms. He said those who still talk about a Greek default are being “unfair” and that the memorandum has given it the needed stability to proceed with necessary changes and return to growth in 2012.
Top Pick
Papandreou was still the top pick to run the country according to 42 percent of Greeks surveyed in a poll by Public Issue published in Kathimerini newspaper on Dec. 12. That compared with the 43.9 percent support he had in the 2009 elections. Sixty-six percent of respondents said the economic situation in Greece would worsen, the poll showed.
The government has said it expects a 4 billion-euro shortfall in tax revenue this year even after raising taxes and beginning a crack-down on tax evasion. Greece has lowered pensions and wages to offset the lag, which is hurting efforts to cut a deficit that swelled to 15.4 percent of GDP in 2009, the largest of any euro area state in the currency’s history.
Other measures to cut the deficit to 17 billion euros include increasing the lowest sales-tax rate to 13 percent from 11 percent, extending a levy on profitable firms and freezing pensions. To boost growth, Greece will reduce the tax on non- distributed corporate profits to 20 percent from 24 percent as well as give the key tourism industry a cut in value-added tax, reducing the rate to 6.5 percent from 11 percent.
Deficit Plan
Debt Struggles Set to Deepen for Peripheral Europe: Euro Credit
Dec. 23 (Bloomberg) -- Europe’s most indebted nations, already struggling to find buyers for their bonds, will face more competition as the region begins issuing new securities to fund Ireland’s rescue package.
The European Financial Stabilization Mechanism and European Financial Stability Facility will raise as much as 34.1 billion euros ($44.6 billion) for Ireland in 2011, the European Commission said Dec. 21. So-called peripheral nations also will vie for funds against AAA-rated Germany and France, which plan to sell a combined 486 billion euros of debt next year. Spain’s funding needs are 90 billion euros and Portugal may require 19 billion euros, analysts at Credit Agricole SA estimate.
Portuguese 10-year bond yields rose by almost half a percentage point in the past two weeks as investors bet the country may follow Ireland in seeking aid after European Union officials deferred a decision on whether to let the EFSF buy bonds of the most indebted countries. EU leaders also failed to agree on topping up the temporary 750 billion-euro emergency fund of which the EFSM and the EFSF form the main pillar.
“The crowding out effect is a big problem for Spain as they have to come to the market pretty quickly and they have lots to do,” said Orlando Green, assistant director of capital- markets strategy at Credit Agricole Corporate & Investment Bank in London. “The funding conditions are going to be tough until there’s more certainty in terms of support for troubled sovereigns.”
Ignis Asset Management, UBI Pramerica SGR SpA and Robeco Greop NV, which together manage about $340 billion, say they will shun bonds from peripheral nations until policy makers come up with a more credible solution to the debt crisis.
Spanish Slump
Spanish government securities dropped 5.1 percent in 2010, headed for their worst year since at least 1992, according to indexes from Bank of America Corp.’s Merrill Lynch unit. Portuguese notes declined 8.6 percent in the same period.
The EFSM and EFSF together are providing 40.2 billion euros of Ireland’s 85 billion-euro rescue. The EFSM’s share is 22.5 billion euros and the EFSF’s portion is 17.7 billion euros.
In addition to the 2011 financing, the two funds will sell bonds to raise as much as 14.9 billion euros in 2012, the European Commission said on Dec. 21. Most of the bonds will have maturities of five, seven and 10 years, according to the commission. Next year, the EFSM and EFSF will issue a total of seven to eight benchmark bonds each worth 3 billion euros to 5 billion euros.
The AAA credit ratings of the EFSF and EFSM mean bonds sold by them probably will be more attractive to investors than those from lower-ranked countries. The Luxembourg-based EFSF is overseen by euro-area governments and the EFSM is run by the Brussels-based European Commission.
Bond Payments
Portugal, which is rated A- by Standard & Poor’s, has to refinance 11.5 billion euros of Treasury bills that come due in March and repay about 10 billion euros of bonds by June, according to Chiara Cremonesi, a London-based fixed-income strategist at UniCredit SpA.
Portuguese bonds fell on Dec. 21 after Moody’s Investors Service said it may cut the country’s credit rating “by a notch or two,” partly citing the “likely deterioration in debt affordability over the medium term.” Portugal posted the biggest shortfall in the 16-nation euro region last year after Ireland, Greece and Spain. The ratings company on Dec. 15 put Spain’s Aa1 on review for a possible downgrade.
The yield premiums investors demand to hold Portuguese 10- year bonds instead of similar maturity German bunds was 361 basis points yesterday, down from last month’s euro-era record of 460.
Future Packages
“It’s likely that we haven’t seen the worst of the crisis,” said Emilio Franco, chief investment officer in Milan at UBI Pramerica, which manages about $48 billion. “We don’t exclude future debt restructurings in some of the weakest countries.”
While EU leaders agreed to amend the bloc’s treaties to create a permanent debt-crisis mechanism in 2013, they still need to iron out details of the plan and bridge divisions over immediate steps to stabilize bond markets.
Debt is sold under the euro-area’s financial backstop only after an aid request is made by a country. So far the only nation to tap the fund is Ireland, whose package also includes loans from the U.K., Sweden, Denmark and the International Monetary Fund. Greece’s earlier 110 billion-euro rescue involved loans from euro-area governments and the IMF.
Euro-area governments are debating whether to expand the role of the EFSF to allow it to buy the bonds of countries in need. The current mandate is to sell debt backed by 440 billion euros of national guarantees and use the money to offer aid.
“We would like to see that policy makers are ahead of the game instead of only reacting when problems arise before we start being constructive in this market again,” said Kommer van Trigt, a money manager at Robeco in Rotterdam, which has about $182 billion in assets. “The sovereign credit problem isn’t going away any time soon.”
Euro Credit
China ready to buy up to 6.6 billion of Portugal debt
LISBON (Reuters) - China is ready to buy 4-5 billion euros ($5.3-$6.6 billion) of Portuguese sovereign debt to help the country ward off pressure in debt markets, the Jornal de Negocios business daily reported Wednesday.
The paper said, without citing any sources, that a deal reached between the two governments will lead to China buying Portuguese debt in auctions or in the secondary markets during the first quarter of 2011.
China's central bank declined to comment on the report, while Portuguese government officials were not immediately available for comment.
It is unclear whether China's government would be prepared to take on so much fresh exposure to Portugal in such a short space of time, given that Beijing has faced domestic political pressure to invest the country's foreign reserves more carefully.
Chinese investment funds suffered some large, high-profile losses during the global financial crisis.
The euro rose to the day's high versus the dollar on Wednesday on the back of the report, climbing around 30 pips to a session high of $1.3168 according to Reuters data.
However, "the report is unsourced so although it's providing a bit of support, clients certainly aren't putting much weight on it," said one trader.
Portugal has moved into the eye of the storm in the euro zone's debt crisis, with borrowing costs spiking as investors grew concerned it would be next in line to seek an international bailout after Ireland and Greece.
Despite the report, the premium investors demand to hold Portuguese 10-year bonds rather than safer German Bunds was still seven basis points from Tuesday's settlement levels to 378 bps. Last month the spread hit a euro lifetime record of more than 481 bps but has narrowed thanks to bond buying by the European Central Bank.
Portugal has completed its debt issuance program for 2010, and according to the IGCP debt agency, its next bond redemption is due in April, when it has to repay 4.5 billion euros. In total, Lisbon has to repay 9.5 billion euros in bonds next year.
The 2011 budget puts next year's net financing needs at 10.75 billion euros. The IGCP has not yet announced the issuance program for next year.
Finance Minister Fernando Teixeira dos Santos met Chinese Finance Minister Xie Xuren and the head of the People's Bank of China during a visit to the country last week.
Portuguese officials have said the government is trying to diversify the debt investor base, with China as a priority.
Tuesday Moody's Investor Service warned it may downgrade Portugal's A1 rating by one or two notches after a review that will take up to three months, citing high borrowing costs and weak growth prospects.
In October, during a visit to Greece, Chinese Premier Wen Jiabao offered to buy Greek bonds when Athens resumed issuing.
A month later, President Hu Jintao visited Portugal and offered "concrete measures" to help the weak economy but stopped short of promising to buy Portuguese bonds.
Chinese Vice Premier Wang Qishan said Tuesday that Beijing supported efforts by the EU and the International Monetary Fund to calm global markets in the wake of Europe's debt crisis and said China had taken "concrete actions" to help some European countries.
Later in the day, the Chinese commerce minister put the onus more firmly on EU policymakers to act.
"We want to see if the EU is able to control sovereign debt risks and whether consensus can be translated into real action to enable Europe to emerge from the financial crisis soon and in a good shape," Chen Deming said.
Major euro zone economy France played down the concerns over Portugal Wednesday. The government has "no particular worry" about Portugal, government spokesman and Budget Minister Francois Baroin said, responding to reporters' questions.
China White Knight
Moody’s Sees No Europe Defaults, Portugal at Investment Grade
Dec. 21 (Bloomberg) -- Moody’s Investors Service said it doesn’t foresee defaults or maturity extensions on euro-area debt because the region will likely backstop weaker members, and reiterated that Portugal will likely stay investment-grade.
“Moody’s base-case scenario remains that over the medium term, no euro-zone country will suffer a payment default or otherwise impose losses on private-sector lenders through maturity extensions or other forms of distressed exchange,” the company said in a report today. “The collective willingness of the euro zone to support weaker members through the provision of liquidity will remain an important element of investor protection.”
Borrowing costs in Spain, Ireland and Portugal have surged since European leaders opened the door to making private investors pay for future crises as part of the region’s plans for a permanent rescue facility, which would replace the current bailout fund that expires in 2013. Moody’s is reviewing its ratings of Spain and Portugal for possible downgrades and cut Ireland’s credit grade five levels to Baa1 on Dec. 17.
“Spain’s rating is expected to remain in the Aa rating category, indicating extremely low credit risk, on par with many other strong sovereigns,” the company said. “Portugal’s rating will also remain firmly placed within the investment-grade range, and to the extent that Greece’s rating is repositioned, it will remain at a level consistent with a base-line expectation that Greece will not default over the next five years.”
Spain is currently rated Aa1 by Moody’s, meaning that it would need to be cut three grades to fall out of the Aa bracket to single A ratings. Moody’s rates credit investment grade until it drops below a Baa3 rating.
Moody's blues