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Mon, 20th February 2017

Anirudh Sethi Report

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Archives of “eurozone” Tag

Greece : Banks worry over sudden bad loan spike in January

Nonperforming loans last month posted a major spike of almost 1 billion euros, reversing the downward course set in the last few months of 2016. This has generated major concerns among local lenders regarding the achievement of targets for reducing bad loans, as agreed with the Single Supervisory Mechanism (SSM) of the European Central Bank for the first quarter of this year.

Bank sources say that after several months of stabilization and of a negative growth rate in new nonperforming exposure,the picture deteriorated rapidly in January, as new bad loans estimated at 800 million euros in total were created.

This increase in a period of just one month is considered particularly high, and is a trend that appears to be continuing this month as well. Bank officials attribute the phenomenon to uncertainty from the government’s inability to complete the second bailout review, fears for a rekindling of the crisis and mainly the expectations of borrowers for extrajudicial settlements of bad loans.

Senior bank officials note that a large number of borrowers will not cooperate with their lenders in reaching an agreement for the restructuring of their debts, in the hope that the introduction by the government of the extrajudicial compromise could lead to better terms and possibly even to a debt haircut

Greece facing fresh junking without bailout cash, warns Fitch

Greece is at risk of being downgraded further into junk territory should its creditors fail to resolve their latest set of differences over the country’s bailout this month, one of the world’s leading rating agencies has warned.

Ahead of its next decision on Greece in less than two weeks, Fitch Ratings said its current “CCC” junk rating on Greece was contingent on the country securing a successful injection of its latest tranche of bailout cash “well ahead of July” when it faces a major a €7bn repayments crunch.

The warning comes as finance ministers are due to thrash out their differences at a meeting in Brussels on February 20 – their last major discussion before a raft of eurozone elections beginning with the Netherlands in March and ending with Germany in September.

Fitch is due to make its next rating decision days after this month’s meeting of the Eurogroup on February 24. Greece has been unable to raise fresh funding on international markets since 2014, undergoing a fresh €86bn bailout in the summer of 2015 having been bought to the brink of default and introducing capital controls on its banking system.

A rating downgrade would also scupper the Syriza government’s ambitious plans to return to the bond markets before the end of its bailout in the summer of 2018.

Cash No Longer King: Europe Accelerates Move To Begin Elimination Of Paper Money

In the shadow of Donald Trump’s spree of controversial actions, the European commission has quietly launched the next offensive in the war on cash. These unelected bureaucrats have boldly asserted their intention to crack down on paper transactions across the E.U. and solidify a trend that has been gaining momentum for years.

The financial uncertainty amplified by Brexit has incentivized governments throughout Europe to seize further control over their banking systems. France and Spain have already criminalized cash transactions above a certain limit, but now the commission has unilaterally established new regulations that will affect the entire union. The fear of physical money flowing out of the trade bloc has manifested a draconian response from the State.

The European Action Plan doesn’t mention a specific dollar amount for restrictions, but as expected, their reasoning for the move is to thwart money laundering and the financing of terrorism. Border checks between countries have already been bolstered to help implement these new standards on hard assets. Although these end goals are plausible, there are other clear motivations for governments to target paper money that aren’t as noble.

Frexit would ‘impoverish’ France warns ECB’s Cœuré

Image result for frexitMarine Le Pen’s plans to take France out of the euro would consign the country to impoverishment, one of the European Central Bank’s most senior French officials has warned.

Benoît Cœuré, executive board member at the ECB, called the notion of a ‘Frexit’, a choice for “impoverishment” that would “threaten the jobs and savings of the French people”.

Ms Le Pen, leader of the far-right National Front, is vowing to hold a referendum to take France out of the eurozone and redenominate the country’s €2tn of outstanding debt into a new franc after 18 years of membership should she become the country’s new president in May.

Should a Frexit occur, “debts incurred by French businesses and households would increase”, warned Mr Cœuré.

“Inflation, which would no longer be restrained by the ECB, would eat into savings, the fixed incomes of households and small pensions”, he added.

Despite Ms Le Pen’s assurances of an “orderly” exit, the French central banker said “leaving the euro would mean taking risks which have unpredictable consequences”.

The prospect of surging popularity for Ms Le Pen and the apparent demise of one of her main rivals for the job, the right-wing Francois Fillon, has sent the country’s 10-year bond yields to an 18-month at the start of the week.

Investors have dumped French debt, demanding the highest premium in four years to hold its benchmark bonds over Germany’s, as the likes of S&P Global Ratings have warned a Frexit would result in a likely downgrade of France’s sovereign borrower status.

With less than three months since the start of the first round presidential vote, Mr Cœuré said he could “not contemplate” a French vote in favour of leaving the euro, with the latest polling showing around 68 per cent of French people still back membership of the single currency area.

Amid promises by Ms Le Pen to restore monetary sovereignty to France and reverse the forces of globalisation, Mr Cœuré defended the euro, arguing it had proven to have had “greater benefits for the disadvantaged and the vulnerable”.

Le Pen Kicks Off Presidential Campaign Echoing Trump: The Highlights From Her Manifesto

The leader of the anti-immigration French National Front party Marine Le Pen kicked off her presidential campaign on Saturday by echoing many of the same vows that brought Trump to power in the US, hoping promises to shield voters from globalization, promote protectionism, leave the Eurozone, slap taxes on imports and on the job contracts of foreigners, lower the retirement age, increasing welfare benefits and boost defense spending push her above her competitors at a time of sweeping political turmoil in France.

According to opinion polls – which have recently shown their utter irrelevance in the age of Brexit and Trump – the 48-year old daughter of National Front (FN) founder Jean-Marie Le Pen has a solid lead in the first round on April 23 but then losing the May 7 run-off to a mainstream candidate, who after last week’s fireworks may no longer be her main challenger Francois Fillon, thanks to a corruption scandal.

And in the most unpredictable election race France has known in decades, the FN hopes a two-day rally in Lyon where Le Pen is spelling out her electoral platform, will help convince voters to back her. “The aim of this programme is first of all to give France its freedom back and give the people a voice,” Le Pen said in the introduction to the manifesto.

Pressure on Greece Mounts, New Crisis Looms

The problem is uncomfortably familiar.  Greece has a chunky payment due to its official creditors.  Reports suggest that Greece has not completed much more than a third of the measures that had been agreed upon free up the next aid tranche from the 86 bln euro package.   

Time is working against Greece.  The elections in France and Germany do not provide a conducive backdrop for concessions, and public support for the Greek government is sliding.  Given the political context, it is important that Greece’s measures are implemented ahead of the February 20 Eurogroup meeting.  

If this window of opportunity is not met, the situation could deteriorate quickly.  The more Prime Minister Tsipras enacts the reforms demanded by thecreditors, the less the public supports him.  Many still suspect Greece is headed toward an election this year.  Since in some respects, Tsipras speaks the language of populism, a change in governments would likely be in the direction of the center, such as the New Democracy.  

Currently, the official creditors expect Greece to hit its fiscal targets this year.  The problem is 2018.   The key target is the primary surplus (budget balance before debt servicing).  The primary surplus in 2016 was estimated at 2.3% (of GDP).  Starting in 2018, the agreement calls for a goal of a 3.5% primary surplus.  The IMF has been insisting that considerably more dramatic action by Greece is necessary if the other official creditors refuse to reduce the debt burden, which the multilateral lender says is unsustainable.  

Eurozone unemployment rate drops to 9.6%

Unemployment in the euro area has dropped to its lowest level since May 2009, reaching 9.6 per cent in December from 10.5 per cent in the same month a year ago.

As usual, the Czech Republic and Germany were the EU’s star performers, Eurostat noted in its release, while Greece and Spain were still weighed down by painfully high jobless levels.

Youth unemployment also stands at a lofty 44.2 per cent in Greece and nearly 43 per cent in Spain.

‘Catastrophic Effect’: More Austerity Measures Could Force Greece to Exit the EU

Greec debtThe Greek government has just three weeks to secure a deal with the European Commission, the European Central Bank and the International Monetary Fund, to avoid the possibility of a Greek exit from the EU and a fresh debt crisis. Radio Sputnik discussed this with Dr. Marina Prentoulis, a senior lecturer at the University of East Anglia.

When asked whether there was any chance of a compromise that would appease both creditors and Greece, Marina Prentoulis said that the situation hasn’t changed since the first round of negotiations.

“There are different political forces involved and the creditors insist on the implementation of additional austerity measures. One thing the IMF doesn’t want to understand is that these measures have already had a catastrophic effect on Greece and also on the future of the European Union,” she noted.

Meanwhile, it looks like the Greek government is taking advantage of the political instability in the EU to secure a better deal for itself, knowing that if the country enters another debt crisis it could destabilize the already fragile EU.

A Few Takeaways from the Latest IMF Reserve Figures

The IMF is the most authoritative source for reserve holdings of central banks.  It reports the data at the end of each quarter with a quarter lag.  At the end of last year, the IMF published the Q3 16 reserve figures.  As often is the case, the Q3 reserve figures get lost in the holiday shuffle. 
 
Nevertheless, there are a couple of interesting developments.  First, though, let review the basics.  Overall, the valuation of global reserves rose to a little more than $11 trillion, a $36 bln build on the quarter, but off $182 bln from Q3 15.  It is awkward to say, but the $36 bln increase in reserves in Q3 16 is so small that it is practically a rounding error.  Currencies did not fluctuate much in the quarter (euro rose almost 1.2%, and the yen rose 1.8%, sterling was off nearly 2.6%), but still could likely account for much of the change.
The other important point to recall is that not all central banks report the currency allocation of reserves.  Of the $11 trillion of reserves almost $7.8 trillion are allocated, leaving $3.2 trillion unallocated.  Of the allocated reserves, the dollar accounts for 63.3%, the euro accounts for 20.3%, the yen and sterling are about 4.5% each, and the Australian and Canadian dollars are 2% each.  The Swiss franc and other currencies account for the remainder (~3.3%).
Central banks typically move slowly and cautiously when adjusting reserves.  However, there is an important development that is taking place.  China has agreed to report the allocation of its reserves.  However, it is slowly bleeding them in preserve their confidential nature.   Allocated reserves rose by $299 bln in Q3.  Unallocated reserves fell by a little more than $263 bln.    Over the past four quarters, total reserves have fallen by $182 bln.  Allocated reserves have increased by $1.19 trillion, while unallocated reserves have fallen by $1.37 trillion.  

ECB tells Monte dei Paschi it needs to raise 8.8 billion euros

A Christmas message from the European Central Bank to Monte dei Paschi

  • Needs to plug a capital shortfall of 8.8 billion euros
(Was previously 5 bn euro gap)
  • ECB said the lender was solvent
  • But the liquidity position had rapidly deteriorated between the end of November and December 21