Greece’s second bailout is €11bn short of cash, and eurozone governments need to fill almost half of that gap before the end of the year, the International Monetary Fund reported in its quarterly assessment of the Greek rescue.
In addition, the IMF said that in order to bring Greek debt levels back to a manageable level, Athens must be relieved of debts it owes to eurozone governments totalling 4 per cent of economic output – or about €7.4bn – within the next two years.
Eurozone governments may be forced to write off even bigger chunks of their bailout loans to Athens unless the Greek economy begins to turn round, the IMF said in its most clear call yet for these governments to accept big losses on their Greek aid.
“If investors are not persuaded that the policy for dealing with the debt problem is credible, investment and growth will be unlikely to recover as programmed,” the IMF said in the 195-page report. “Should debt sustainability concerns prove to be weighing on investor sentiments even with the framework for debt relief now in place, European partners should consider providing relief that would entail a faster reduction in debt than currently programmed.”
Almost all Greek sovereign debt is owed to eurozone governments. It is expected to peak this year at 176 per cent of economic output. Read More
Crisis-hit Cyprus could be headed for a much worse recession than initially anticipated when international creditors agreed to prop up its economy, the IMF has announced in a 47-page report released today. Helena Smith writes:
Forecasting that the island’s output will shrink by at least 9% in 2013 (and perhaps even more) the IMF said Cyprus faced “unusually high” macro-economic risks if it did not adhere to the stringent terms of the €13bn bailout it has signed with the EU, ECB and IMF.
“Should these risks materialize, additional financing measures may be needed to preserve debt sustainability,” it said, predicting that the tiny nation’s debt load would hit 126% of gross domestic product in 2015 before falling to 105% of GDP by 2020.
Despite having already agreed to draconian belt-tightening measures – including highly controversial capital capitals – it was likely that Nicosia would be required to further slash GDP by 4.7% a year (the equivalent of €900m worth of budget cuts) over 2015 to 2018 to secure the island’s long-term primary budget surplus, said the IMF.
With the ink on the loan agreement barely dry, the report has unleashed fury among politicians on the island with the anti-austerity main opposition Akel party not only slamming the bailout deal but questioning if the government had read it before it signed up to the agreement.
Akel cadres say the IMF assessment will embolden those now openly asking if it would not be better for the beleaguered island to exit the eurozone than apply such tough conditions.
Slovenian officials have a message for the world: Don’t panic — we won’t be the next to fall.
The tiny European Union member is trying to convince its people and foreign investors that it won’t be the next in line for a banking system collapse and a messy international bailout.
“We are absolutely no Cyprus,” says new Slovenian Prime Minister Alenka Bratusek. “We don’t need help. All we need is time.”
But time is running out for the Balkan state, once considered an East European success story and a model for the rest of the region on how to build a post-communist economy. With few specifics from leaders on a rescue plan, some economists are skeptical they can live up to their promises. Read More
“It’s not an exaggeration to say that the Greek banking system was in danger because if the deposits of Greeks at Cypriot branches [in Greece] had also suffered a haircut, no one knows what would have happened afterwards,” Stournaras told parliament as it debated the decision to ring fence the banks.
The decision to place the Greek network of Bank of Cyprus and Laiki banks in the hands of Pireaus Bank was “evidence of the helpful stance and support of Greece towards Cyprus,” he said.
Many Cypriots would disagree. Greece is widely blamed by the islanders for their country’s spectacular economic collapse. Had it not been for Nicosia standing in solidarity next to Athens when its own debt load was restructured last year, the Cypriot banking system would not have suffered €4.5bn of losses (tountamount to 25% of GDP) overnight, officials say.
One of the best kept secrets, rarely if ever acknowledged by the leaderships of both countries, is the little love lost between them. In truth the Cypriots and Greeks have little time for each other.
Euro-area finance ministers are planning another extraordinary meeting to discuss Greece, this one scheduled for Nov. 8, according to a euro-zone official.
The official said the meeting would aim to make it possible for the pre-planned Nov. 12 ministers’ meeting to reach a decision on how to proceed with Greece’s widely off-track program. Ministers have to decide on whether to disburse a long-delayed 31.5 billion euros ($40.68 billion) tranche of aid; how to fund a projected EUR30 billion gap in the country’s finances up to 2016 following a two-year extension in meeting fiscal targets; and how to deal with the nation’s debt load, now seen at around 140% of economic output by 2020, a level deemed unsustainable.
The 17 currency-bloc ministers are also set to hold a teleconference Wednesday on the same issues, while their deputies have been intensively working on the technical aspects of these proposals for the last few weeks.
The way to proceed with Greece is extremely controversial, pitting the country’s creditors (the International Monetary Fund, the European Central Bank and the European Commission) against each other on who should accept losses or pay more to make it sustainable.
The plan is to reach an agreement on all those issues by Nov. 12 and, with the country facing a EUR5 billion debt maturity Nov. 16, Prime Minister Antonis Samaras, has repeatedly raised concerns about Greece’s cash reserves.
Spain, deficits and the Euroregulator to rule them all?
Eurozone finance ministers wrapped a two-day summit on Tuesday, and the results were encouraging—for what they did and didn’t do.
The group did agree to extend Spain’s deficit reduction targets, provided the government boosts tax revenue (a VAT hike and tax evasion clampdown are expected). Spain’s deficit can now reach 6.3% of GDP (up from 5.3%) in 2012 and 4.5% (from 3.0%) in 2013. 2014’s target is 2.8%, though that can likely be adjusted if needed. Overall, it’s a welcome development—higher targets likely mean fewer immediate public-sector cuts, which perhaps reduces economic angst a bit.
Ministers also made progress on Spain’s bank bailout, agreeing to release the first aid tranche of €30 billion by month’s end (plans for the remaining €70 billion are still to be determined). As expected, the funds will be lent to Spain’s bank bailout fund, which will channel money to banks as needed. All banks receiving aid must adopt specific reforms, and Spain must overhaul its banking regulatory system—a rather strange condition, considering officials still aim to replace national regulatory schemes with a eurozone-wide body.
Which brings us to what the group didn’t do: Make any progress on said eurozone bank regulatory scheme. The European Commission—the idea’s driving force—still expects to complete it by yearend, but Germany’s finance minister, among others, said it will take at least a year given “it’s complicated, [and] it isn’t easy to do.” We rather agree: Rushing this increases the likelihood of creating a solution in search of a problem. It will take time and careful debate to devise a useful scheme that promotes, rather than hinders, banks’ efficient functioning.
Granted, delaying the euroregulator means the bank bailout funds will remain on Spain’s balance sheet longer—but if markets become troubled by the increased debt load, officials have shown they’re willing to do what’s needed to ease the strain.
Moody’s has decided to cut the ratings of Spanish banks by two to three notches and will issue a statement after markets close on Wall Street on Monday, the Spainish financial daily Expansion reported, citing Spanish banking sources.
“The communicated to us a downgrade of two to three notches for almost all [banks]. They aren’t looking at the financial situations of individual banks. They are not discriminating,” the publication cited one source as saying.
According to the report, Moody’s is to make the announcement sometime after 2100 GMT/1700 ET today. A Moody’s spokeswoman declined to comment.
The paper noted that normally banks of a given country are automatically downgraded when their sovereigns are, and that they normally have a rating that is inferior to the government’s. Because Spain’s sovereign rating is currently only one notch above the lower end of the investment grade category, most of the banks are likely to get junk ratings, the report said.
Possible exceptions are Spain’s largest banks: Santander, BBVA and CaixaBank, which “could possibly avoid falling to that level,” Expansion said.
Moody’s downgraded 16 Spanish banks by one to three notches on May 17, following its downgrade of Spanish sovereign debt a few days earlier. Last week, Moody’s downgraded 15 large banks worldwide, citing their elevated exposure to trading in global markets.
Earlier today, Spain’s Economy Minister Luis de Guindos formally requested recapitalization aid for Spain’s banks in a letter to Eurogroup President Jean-Claude Juncker. The aid request was expected after the Eurogroup said earlier this month that it would make up to E100 billion available for Spanish banks to recapitalize — money that would be loaned via a government entity and thus add to Spain’s mounting debt load.
The Treasury, apparently dissatisfied with the speed of indirect bank and/or Fed-inspired monetization of its exponentially rising debt-load at ever-cheaper costs of funds, decided in June 2011 to allow the Chinese, with their equally large bucket of USDs to bid directly for US Treasuries. As Reuters reports, China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury’s first-ever direct relationship with a foreign government. The documents, viewed by Reuters, indicate that the US Treasury has given the PBOC a direct computer link to its auction system – which was first used in the 2Y auction of June 2011. Perhaps this helps explain the massive spikes in direct bidders July and August 10Y auctions (around the US downgrade). Interestingly, Primary dealers are not allowed to charge customers money to bid on their behalf at Treasury auctions, so China isn’t saving money by cutting out commission fees; instead, China is preserving the value of specific information about its bidding habits. By bidding directly, China prevents Wall Street banks from trying to exploit its huge presence in a given auction by driving up the price. This, after the 2009 discovery (and relaxing of other reporting requirements to cover this) that China was using special deals to hide its bond purchases, seems like more pandering to the large-holder-of-Treasuries as “direct bidder status may be controversial because some government officials are concerned that China has gained too much leverage”.
If nothing else, it changes dramatically any empirical interpretation of direct vs indirect bidders once and for all…
Over the last couple of decades we have come to take the free movement and allocation of capital for granted. Yet a quick glance back in history shows that state intervention in financial markets, and the banking sector in particular, tends to move in cycles. And most of the time it has been much heavier than it is today.
As governments struggle to restore fiscal balance, negative real yields are playing an important part in reducing the burden of the debt load. And many of the well-known tools of financial repression are making a re-appearance.
Banks and financial institutions in general are central to the implementation of that low interest-rate policy. In an upcoming piece (“Heading for the Great Repression (ii): Why banks will be the captive buyers of sovereign debt”) we will explore the implications for the sector in more detail. However, in this piece we focus on the broader consequences of financial repression and the impact on risky assets, credit in particular.
We make the case that, in its early stages, financial repression is not necessarily negative for credit spreads. Quite the opposite, in fact. Low interest rates and unconventional monetary policy have provided a huge boost to risk assets since 2009. In Europe, state intervention in the banking sector has largely been positively perceived in markets – being deemed necessary to contain systemic risks.
However, the strong equity returns and the low credit spreads of the financially repressed 1950s and 1960s are probably a poor guide to the current situation. To the extent that financial repression in a low-growth environment over time facilitates even bigger imbalances that have to be corrected, we expect the long-term impact will be negative for risk assets.
The famously tight credit spreads in Japan should offer scant comfort – their debt problem has really yet to be dealt with. To the extent the ultimate solvency question is addressed through a combination of more sovereign debt restructurings and inflation, credit is unlikely to escape the impact. Read More