Is the IMF Closing the Tap for Greece?
FOREX NEWS | YOHAY | OCTOBER 23, 2011 11:06 AM GMT
Christine Lagarde, the managing director of the IMF, is showing her bold approach once again. Reports are emerging that the IMF threatens to deny further aid to Greece unless a 50% haircut is agreed with the private sector.
IMF programs usually consist of restructuring of debt among other measures. In Greece’s case, the opposition of France and the ECB to restructuring / haircut / default complicated the situation.
The European Union decided to approve the next tranche of aid to Greece based on the troika report. The IMF hasn’t given its approval yet. This seemed like a delay, but the bold stance of Lagarde at the meeting of finance ministers shows that things are more serious.
A small comment regarding the IMF stand appears deep inside a report by the Telegraph:
The IMF would no longer be willing to pick up a third of the total bill for rescuing Greece, a contribution worth €73 billion, unless European banks were prepared to write off 50 per cent of Greek debt.
Lagarde found herself on a collision course with her successor at the French finance ministry over this issue and closer to the German approach. Regarding bank recapitalization and the role of the ECB, Lagarde’s stand is not necessarily similar to the German one. The IMF wants a wider recapitalization of banks than the €100 billion that is coming out of the current meetings.
The IMF contributes a third of the Greek aid. With the IMF not playing along, things are more complicated. The EU could provide Greece with the immediate lifeline without the IMF’s participation, but this would still make a lot of damage:
A blow to investor confidence: Without endorsement from the IMF which has been active up to now, no solution will be comprehensive.
More pressure on the EFSF: If Europe carries the burden also for the IMF, cash will run out faster.
In the analysis of the EU Summit, I wrote that the compromise that will be reached will probably fall short of expectations: a temporary celebration that will lead to a downfall, exactly likely the July 21 Summit.
Currently things are set to begin with a downfall which may hurt the euro quite soon. For more on the euro, see the EUR/USD forecast.
Showing posts with label FX - Eurozone Articles. Show all posts
Showing posts with label FX - Eurozone Articles. Show all posts
Tuesday, 29 November 2011
Wednesday, 23 November 2011
Euro Zone - Top Economies Figures
CNBC 23-11-11 1400hrs
Survey shows more than half the investors think the Euro to go into recession in 2012, at least one country to exit the Euro.
Don't focus on macro events.
Taken from TV:
GDP
Germany 2.9%
It's very hard to understand where the ''bottom line is.''
Survey shows more than half the investors think the Euro to go into recession in 2012, at least one country to exit the Euro.
Don't focus on macro events.
Taken from TV:
GDP
Germany 2.9%
France
Italy
UK
Unemployment
Germany 5.9%
France
Italy
UK
?
Germany 1.9%
France
Italy
UK
10 Year Yields
Germany
France
Italy
UK
Italy
UK
Unemployment
Germany 5.9%
France
Italy
UK
?
Germany 1.9%
France
Italy
UK
10 Year Yields
Germany
France
Italy
UK
Thursday, 10 November 2011
Greek Debt Crisis
10 November 2011 Last updated at 13:18 GMT
Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics, which went well over its budget.
The country was hit by the downturn, which meant it had to spend more on benefits and received less in taxes. There were also doubts about the accuracy of its economic statistics.
Greece's economic problems meant lenders started charging higher interest rates to lend it money. Widespread tax evasion also hit the government's coffers.
There have been demonstrations against the government's austerity measures to deal with its debt, such as cuts to public sector pay and pensions, reduced benefits and increased taxes.
The EU and IMF have agreed 229bn euros of rescue loans for Greece plus a 50% cut in its debts. PM George Papandreou quit in November after trying to call a referendum on the latest deal.
Eurozone leaders are worried that if Greece were to default, and even leave the euro, it would cause a major financial crisis that could spread to much bigger economies such as Italy and Spain.
Former European Central Bank vice-president Lucas Papademos has been named as Greece's interim prime minister, following days of negotiations.
He will head an interim government being formed to make sure the debt-strapped country gets its latest bailout payment.
His administration will also have to approve a new 130bn-euro ($177bn; £111bn) international rescue package from the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF).
The three-point plan includes expanding the single currency's bailout fund to 1tn euros, banks being forced to raise more capital to protect themselves against losses resulting from any future defaults, and banks accepting a loss of 50% on money they have lent Greece.
Greece and its huge debts have weighed on the eurozone for more than a year.
The country has been bailed out twice - and investors still fear a default.
Why is Greece in trouble?
Greece has been living beyond its means since even before it joined the euro, and its rising level of debt has placed a huge strain on the country's economy.
The Greek government borrowed heavily and went on something of a spending spree after it adopted the euro.
Public spending soared and public sector wages practically doubled in the past decade. It has more than 340bn euros of debt - for a country of 11 million people, about 31,000 euros per person.
However, whilst money has flowed out of the government's coffers, its income has been hit by widespread tax evasion.
When the global financial downturn hit, Greece was ill-prepared to cope.
It was given 110bn euros of bailout loans in May 2010 to help it get through the crisis - and then in July 2011, it was earmarked to receive another 109bn euros.
But that still was not considered enough. Another summit was called in October in Brussels to solve the crisis once and for all.
How did we get to this point?
The aim of the original Greece bailout was to contain the crisis.How did we get to this point?
That did not happen. Both Portugal and the Irish Republic needed a bailout too because of their own debts.
Then Greece needed a second bailout, worth 109bn euros.
In July this year, eurozone leaders proposed a plan that would see private lenders to Greece writing off about 20% of the money they originally lent.
But bond yields continued to rise on Spanish and Italian debt - leading to fears that their huge economies will need to be bailed out too.
The failure of Franco-Belgian lender Dexia also added to woes - French and German banks are large holders of Greek debt.
The eurozone rescue fund - the European Financial Stability Facility - was 440bn euros, nowhere near big enough to deal with that scenario.
And so, in October, the eurozone agreed to expand the EFSF to 1tn euros and got banks to agree to a 50% "haircut" on their Greek holdings.
But then Greece's Prime Minister George Papandreou shocked European leaders by calling a referendum on the bailout package.
That led the leaders of Germany and France, as well as the IMF, to declare that Athens would not receive its next tranche of emergency aid until the referendum had passed.
Moreover, the question of Greece leaving the euro was raised for the first time by angry eurozone leaders.
That forced Mr Papandreou to back down over the referendum, and he has since made way for a new cross-party unity government that is expected finally to pass the latest bailout deal.
Why did the crisis not end with the Greek bailout?
Although Greece's troubles are the most extreme, they highlight problems in the eurozone that also apply to other economies.
Many other southern European countries ran up huge debts - government debts as well as household mortgage debts - during the past 10 years. They also enjoyed rapidly rising wage levels.
Now the bust has come, it is very hard for them to repay the debts. And the high wage levels leave their economies uncompetitive compared with, for example, Germany.
Because they are inside the euro, these governments cannot rely on their central bank - the ECB - to lend them the money. Nor can they devalue their currencies to regain a competitive edge.
Meanwhile they are having to push through very painful spending cuts and tax rises to get their borrowing under control.
But this is just pushing their economies into recession, which leads to higher unemployment, and therefore less income tax revenue and more benefit payments for the governments, compounding their financial problems.
What would happen if Greece defaulted?
Europe's banks are big holders of Greek debt, with perhaps $50bn-$60bn outstanding. An "orderly" default could mean a substantial part of this debt being rescheduled so that repayments are pushed back decades. A "disorderly" default could mean much of this debt not being repaid - ever.
Either way, it would be extremely painful for banks and bondholders.
What's more, Greek banks are exposed to the sovereign debts of their country. They would need new capital, and it is likely some would need nationalising. A crisis of confidence could spark a run on the banks as people withdrew their money, making the problem worse.
Nonetheless, the Greek economy is only a small part of the eurozone, and the losses should be manageable for its lenders.
The real risk is that a unilateral default by Greece could lead to a financial panic, as investors fear that other, much bigger eurozone countries may ultimately follow Greece's example.
This effect could be even worse if Greece also leaves the euro - something that was explicitly acknowledged as a possibility by the outgoing Greek Prime Minister, George Papandreou, as well as the German and French leaders at the end of October.
Such a move might be a repeat of the collapse of Lehman Brothers, which sparked a global financial crisis that pushed Europe and the US into deep recessions.
According to figures from the Bank for International Settlements, UK banks hold a relatively small $3.4bn worth of Greek sovereign debt, compared with banks in Germany, which hold $22.6bn, and France, which hold $15bn.
When you add in other forms of Greek debt, such as lending to private banks, those figures rise to $14.6bn for the UK, $34bn for Germany and $56.7bn for France.
The UK government's direct contribution to any Greek bailout is limited to its participation as an IMF member.
However, any knock-on from Greece's troubles would exacerbate the UK's exposure to Irish debt, which is larger.
And if it led to a major financial crisis, as well as a deep recession in the eurozone - the UK's main trading partner - the damage to the UK economy would be substantial.
What went wrong in Greece?
Greece's economic reforms, which led to it abandoning the drachma as its currency in favour of the euro in 2002, made it easier for the country to borrow money.Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics, which went well over its budget.
The country was hit by the downturn, which meant it had to spend more on benefits and received less in taxes. There were also doubts about the accuracy of its economic statistics.
Greece's economic problems meant lenders started charging higher interest rates to lend it money. Widespread tax evasion also hit the government's coffers.
There have been demonstrations against the government's austerity measures to deal with its debt, such as cuts to public sector pay and pensions, reduced benefits and increased taxes.
The EU and IMF have agreed 229bn euros of rescue loans for Greece plus a 50% cut in its debts. PM George Papandreou quit in November after trying to call a referendum on the latest deal.
Eurozone leaders are worried that if Greece were to default, and even leave the euro, it would cause a major financial crisis that could spread to much bigger economies such as Italy and Spain.
Former European Central Bank vice-president Lucas Papademos has been named as Greece's interim prime minister, following days of negotiations.
He will head an interim government being formed to make sure the debt-strapped country gets its latest bailout payment.
His administration will also have to approve a new 130bn-euro ($177bn; £111bn) international rescue package from the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF).
The three-point plan includes expanding the single currency's bailout fund to 1tn euros, banks being forced to raise more capital to protect themselves against losses resulting from any future defaults, and banks accepting a loss of 50% on money they have lent Greece.
Greece and its huge debts have weighed on the eurozone for more than a year.
The country has been bailed out twice - and investors still fear a default.
Why is Greece in trouble?
Greece has been living beyond its means since even before it joined the euro, and its rising level of debt has placed a huge strain on the country's economy.
The Greek government borrowed heavily and went on something of a spending spree after it adopted the euro.
Public spending soared and public sector wages practically doubled in the past decade. It has more than 340bn euros of debt - for a country of 11 million people, about 31,000 euros per person.
However, whilst money has flowed out of the government's coffers, its income has been hit by widespread tax evasion.
When the global financial downturn hit, Greece was ill-prepared to cope.
It was given 110bn euros of bailout loans in May 2010 to help it get through the crisis - and then in July 2011, it was earmarked to receive another 109bn euros.
But that still was not considered enough. Another summit was called in October in Brussels to solve the crisis once and for all.
How did we get to this point?
The aim of the original Greece bailout was to contain the crisis.How did we get to this point?
That did not happen. Both Portugal and the Irish Republic needed a bailout too because of their own debts.
Then Greece needed a second bailout, worth 109bn euros.
In July this year, eurozone leaders proposed a plan that would see private lenders to Greece writing off about 20% of the money they originally lent.
But bond yields continued to rise on Spanish and Italian debt - leading to fears that their huge economies will need to be bailed out too.
The failure of Franco-Belgian lender Dexia also added to woes - French and German banks are large holders of Greek debt.
The eurozone rescue fund - the European Financial Stability Facility - was 440bn euros, nowhere near big enough to deal with that scenario.
And so, in October, the eurozone agreed to expand the EFSF to 1tn euros and got banks to agree to a 50% "haircut" on their Greek holdings.
But then Greece's Prime Minister George Papandreou shocked European leaders by calling a referendum on the bailout package.
That led the leaders of Germany and France, as well as the IMF, to declare that Athens would not receive its next tranche of emergency aid until the referendum had passed.
Moreover, the question of Greece leaving the euro was raised for the first time by angry eurozone leaders.
That forced Mr Papandreou to back down over the referendum, and he has since made way for a new cross-party unity government that is expected finally to pass the latest bailout deal.
Why did the crisis not end with the Greek bailout?
Although Greece's troubles are the most extreme, they highlight problems in the eurozone that also apply to other economies.
Many other southern European countries ran up huge debts - government debts as well as household mortgage debts - during the past 10 years. They also enjoyed rapidly rising wage levels.
Now the bust has come, it is very hard for them to repay the debts. And the high wage levels leave their economies uncompetitive compared with, for example, Germany.
Because they are inside the euro, these governments cannot rely on their central bank - the ECB - to lend them the money. Nor can they devalue their currencies to regain a competitive edge.
Meanwhile they are having to push through very painful spending cuts and tax rises to get their borrowing under control.
But this is just pushing their economies into recession, which leads to higher unemployment, and therefore less income tax revenue and more benefit payments for the governments, compounding their financial problems.
What would happen if Greece defaulted?
Europe's banks are big holders of Greek debt, with perhaps $50bn-$60bn outstanding. An "orderly" default could mean a substantial part of this debt being rescheduled so that repayments are pushed back decades. A "disorderly" default could mean much of this debt not being repaid - ever.
Either way, it would be extremely painful for banks and bondholders.
What's more, Greek banks are exposed to the sovereign debts of their country. They would need new capital, and it is likely some would need nationalising. A crisis of confidence could spark a run on the banks as people withdrew their money, making the problem worse.
Nonetheless, the Greek economy is only a small part of the eurozone, and the losses should be manageable for its lenders.
The real risk is that a unilateral default by Greece could lead to a financial panic, as investors fear that other, much bigger eurozone countries may ultimately follow Greece's example.
This effect could be even worse if Greece also leaves the euro - something that was explicitly acknowledged as a possibility by the outgoing Greek Prime Minister, George Papandreou, as well as the German and French leaders at the end of October.
Such a move might be a repeat of the collapse of Lehman Brothers, which sparked a global financial crisis that pushed Europe and the US into deep recessions.
What does all this mean to the UK?
According to figures from the Bank for International Settlements, UK banks hold a relatively small $3.4bn worth of Greek sovereign debt, compared with banks in Germany, which hold $22.6bn, and France, which hold $15bn.
When you add in other forms of Greek debt, such as lending to private banks, those figures rise to $14.6bn for the UK, $34bn for Germany and $56.7bn for France.
The UK government's direct contribution to any Greek bailout is limited to its participation as an IMF member.
However, any knock-on from Greece's troubles would exacerbate the UK's exposure to Irish debt, which is larger.
And if it led to a major financial crisis, as well as a deep recession in the eurozone - the UK's main trading partner - the damage to the UK economy would be substantial.
Thursday, 3 November 2011
How the ECB rate call may affect the EUR/USD?
Thu, Nov 3 2011, 03:12 GMT
by Ivan Delgado Egea - FXstreet.com | View company's profile
by Ivan Delgado Egea - FXstreet.com | View company's profile
THREE POTENTIAL SCENARIOS
- Rate hold, no hint for cuts next month: It is well known that the ECB primary mandate is to ensure price stability, thus defending inflationary pressures, which remain above the 2% target, may force the central bank to hold rates unchanged. In this case, and solely based on this decision, the Euro is likely to appreciate significantly, even with more impetus than previously expected, as the Fed just signaled it continues to be ready to embark on QE3 if necessary. Between one to two breaks of technical levels to the upside are possible.
- Rate hold, hint for cut next month: Chances of an imminent rate this month are neutral. Draghi may prefer not to be seen as excessively aggressive, however, the new ECB president may hint an increasing inclination toward lower rates in the coming month. If that happens to be the case, the Euro is likely to depreciate by either stay mostly flat, range-bounding, or break to the downside by one technical level.
- Rate cut, more to follow shortly: A faltering economic recovery in Europe, where low to null growth continues to be the norm, combined with weakness in the labor market and a debt crisis that continues to deteriorate, may encourage Mr. Draghi to adopt a dovish tone and cut rates, in an attempt to adjust the overstretched cash rate, which does little to contribute on improving the ailing economy.
New President of ECB Cuts Rates - EUR/USD Extends Drops
Draghi: Risks Have Materialized – EUR/USD Extends Drops
FOREX NEWS | YOHAY | NOVEMBER 3, 2011 2:23 PM GMT
FOREX NEWS | YOHAY | NOVEMBER 3, 2011 2:23 PM GMT
In his first press conference as the president of the ECB, Mario Draghi explains the decision to cut the interest rate from 1.50% to 1.25% and describes the risks to growth as “materializing”.
EUR/USD reacts with a extended drops on the worrying tone of Draghi.
EUR/USD is already at support at 1.3725 and threatens to break lower. Update: this line is lost after Draghi says that Europe is headed towards a mild recession by year end.
Live updates.
13:20 GMT: EUR/USD is at 1.3760. All times are GMT.
13:23 Background: The rate cut came as a surprise for many, but it certainly was on the cards, given the discussion about it last month, and the deteriorating economic situation, related and unrelated to the debt crisis. This is a reverse of the rate hike made by Draghi’s predecessor, Jean-Claude Trichet, in July.
13:25 The markets were rocked by the announcement of a Greek referendum made last night. But then, the chances of a government collapse in Greece rose, pushing the euro higher, on hopes that the referendum will be cancelled.
13:28 EUR/USD eases just before the presser begins. Support is at 1.3725, followed by 1.3650. Resistance is at 1.38, with the really important cap at 1.3838.
13:31 Press conference begins.
13:32 Inflation has remained high and is expected to remain above 2% but expected to drop below 2% in 2012
13:33 After the decision, inflation should be in line with expectations.
13:34 Intensified downside risks – some risks are materializing. EUR/USD slides to 1.3735.
13:35 Draghi hints about risks of recession while talking about the mandate of the ECB regarding to inflation.
13:35 Liquidity to banks is important and help is temporary.
13:36 Risks have been materializing and growth is expected to be very moderate. Draghi talks about the drop in global demand, and the debt crisis.
13:36 Uncertainty is high, financial markets tension can spill into the real economy. Oil prices are problematic as well.
13:37 Inflation remains high but is mostly due to oil and commodity prices. Inflation is expected drop. EUR/USD is dropping to 1.3737.
13:38 Risks to inflation remains broadly balanced, after the current decision. Inflationary pressures should abate.
13:39 EUR/USD holds above support at 1.3725.
13:40 Financial market tensions haven’t impacted until September but the situation can worsen.
13:41 Banking stability is critical to growth. ECB welcomes the decision about bank recapitalization.
13:44 ECB calls governments to make more reforms and enhance longer term growth potential.
13:45 Draghi focuses on labor market reforms and also in enhancing competitiveness.
13:46 EU Summit decisions must be implemented.
13:47 Questions begin: Was the decision unanimous and why was it made? Decision was unanimous.
13:48 Reasons: Worsening PMIs, drops in consumption, new orders growth, Euro barometer, etc.
13:49 Q: When will bond buying stop? Draghi says it is temporary and meant to transmit monetary policy in a better way.
13:50 The situation in Greece is evolving quickly says Draghi. Indeed, Papandreou is determined to have the referendum. EUR/USD is dropping to 1.37.
13:52 Are we heading for a recession? Answer: Mild recession by year end.
13:53 The use of the word Recession sends EUR/USD under 1.37. “Inflation expectations are anchored”.
13:54 Regarding Chinese help, it is not the business of the ECB.
13:55 What about Italian bonds? Answer: we haven’t been focusing on Italian discussions.
13:57 Regarding a euro-zone breakup, it’s not in the treaty.
13:58 Are interest rates appropriate now? Answer: We never pre commit…
13:59 “We are all bound by the treaty” regarding euro-zone exodus of Greece.
14:00 EUR/USD falls to 1.3677.
14:01 Draghi says that all indicators are weak and that forecasts might need to be revised to the downside.
14:02 No risk to price stability by the rate cut, and no deflation on the horizon.
14:03 In the meantime, US ISM Non-Manufacturing PMI slid to 52.9. Expectations were for a rise to 53.7 points, so this adds to global worries. Factory orders surprised with a rise of 0.3%, contrary to expectations of no change.
14:04 “We are using the treaty as the reference point for our decisions”.
14:05 VP Constancio reminds us that a rate cut was on the cards also in the last meeting, and that the situation has worsened since then.
14:06 More bond buying? Draghi provides a very general answer.
14:09 He refuses to sate future bond buying and sends reporters to the weekly reports.
14:10 Regarding the balance sheet, Draghi also refuses to answer.
14:15 EUR/USD manages to recover some of its losses and gets close to 1.37
14:16 Draghi expects a Chinese contribution in the G-20 Summit.
14:17 “The Greek situation is unique” - no debt reduction for Ireland!
14:18 Is Draghi loyal to the Bundesbank principals? “I have an admiration for the German Bundesbank”. But no commitment for the future…
14:19 Can Italy make reforms at this moment? Will the ECB be forced to buy bonds for a long time? Answer: We are independent. No response to the political question.
Press conference ended.
Live updates.
13:20 GMT: EUR/USD is at 1.3760. All times are GMT.
13:23 Background: The rate cut came as a surprise for many, but it certainly was on the cards, given the discussion about it last month, and the deteriorating economic situation, related and unrelated to the debt crisis. This is a reverse of the rate hike made by Draghi’s predecessor, Jean-Claude Trichet, in July.
13:25 The markets were rocked by the announcement of a Greek referendum made last night. But then, the chances of a government collapse in Greece rose, pushing the euro higher, on hopes that the referendum will be cancelled.
13:28 EUR/USD eases just before the presser begins. Support is at 1.3725, followed by 1.3650. Resistance is at 1.38, with the really important cap at 1.3838.
13:31 Press conference begins.
13:32 Inflation has remained high and is expected to remain above 2% but expected to drop below 2% in 2012
13:33 After the decision, inflation should be in line with expectations.
13:34 Intensified downside risks – some risks are materializing. EUR/USD slides to 1.3735.
13:35 Draghi hints about risks of recession while talking about the mandate of the ECB regarding to inflation.
13:35 Liquidity to banks is important and help is temporary.
13:36 Risks have been materializing and growth is expected to be very moderate. Draghi talks about the drop in global demand, and the debt crisis.
13:36 Uncertainty is high, financial markets tension can spill into the real economy. Oil prices are problematic as well.
13:37 Inflation remains high but is mostly due to oil and commodity prices. Inflation is expected drop. EUR/USD is dropping to 1.3737.
13:38 Risks to inflation remains broadly balanced, after the current decision. Inflationary pressures should abate.
13:39 EUR/USD holds above support at 1.3725.
13:40 Financial market tensions haven’t impacted until September but the situation can worsen.
13:41 Banking stability is critical to growth. ECB welcomes the decision about bank recapitalization.
13:44 ECB calls governments to make more reforms and enhance longer term growth potential.
13:45 Draghi focuses on labor market reforms and also in enhancing competitiveness.
13:46 EU Summit decisions must be implemented.
13:47 Questions begin: Was the decision unanimous and why was it made? Decision was unanimous.
13:48 Reasons: Worsening PMIs, drops in consumption, new orders growth, Euro barometer, etc.
13:49 Q: When will bond buying stop? Draghi says it is temporary and meant to transmit monetary policy in a better way.
13:50 The situation in Greece is evolving quickly says Draghi. Indeed, Papandreou is determined to have the referendum. EUR/USD is dropping to 1.37.
13:52 Are we heading for a recession? Answer: Mild recession by year end.
13:53 The use of the word Recession sends EUR/USD under 1.37. “Inflation expectations are anchored”.
13:54 Regarding Chinese help, it is not the business of the ECB.
13:55 What about Italian bonds? Answer: we haven’t been focusing on Italian discussions.
13:57 Regarding a euro-zone breakup, it’s not in the treaty.
13:58 Are interest rates appropriate now? Answer: We never pre commit…
13:59 “We are all bound by the treaty” regarding euro-zone exodus of Greece.
14:00 EUR/USD falls to 1.3677.
14:01 Draghi says that all indicators are weak and that forecasts might need to be revised to the downside.
14:02 No risk to price stability by the rate cut, and no deflation on the horizon.
14:03 In the meantime, US ISM Non-Manufacturing PMI slid to 52.9. Expectations were for a rise to 53.7 points, so this adds to global worries. Factory orders surprised with a rise of 0.3%, contrary to expectations of no change.
14:04 “We are using the treaty as the reference point for our decisions”.
14:05 VP Constancio reminds us that a rate cut was on the cards also in the last meeting, and that the situation has worsened since then.
14:06 More bond buying? Draghi provides a very general answer.
14:09 He refuses to sate future bond buying and sends reporters to the weekly reports.
14:10 Regarding the balance sheet, Draghi also refuses to answer.
14:15 EUR/USD manages to recover some of its losses and gets close to 1.37
14:16 Draghi expects a Chinese contribution in the G-20 Summit.
14:17 “The Greek situation is unique” - no debt reduction for Ireland!
14:18 Is Draghi loyal to the Bundesbank principals? “I have an admiration for the German Bundesbank”. But no commitment for the future…
14:19 Can Italy make reforms at this moment? Will the ECB be forced to buy bonds for a long time? Answer: We are independent. No response to the political question.
Press conference ended.
Monday, 31 October 2011
Why Europe Can't Solve its Debt Crisis
Why Europe can't solve its debt crisis
Posted by MICHAEL SCHUMAN Monday, October 31, 2011 at 5:11
from Times App Article
Any hope that last Thursday's debt crisis agreement would finally quell the contagion raging through the euro zone was dashed almost before the ink dried. Only a day later, Italy's borrowing costs actually rose to a euro-era high in a bond auction, a clear sign that investors were far from certain that the debt deal was a game changer in Europe. The leaders of the euro zone appear to have botched yet another opportunity to convince the global investment community that they could tackle the crisis.
Why do Angela Merkel & Co. consistently disappoint? The reasons are many. They have repeatedly put their own domestic political concerns above the needs of the euro zone overall, leading to “historic” agreement that always fall short. They have shown a bewildering lack of urgency, stepping in too late with too little again and again. If the rich members of the zone are wary of committing their own money to support the euro, why should they expect private investors to do so? The debt burden of Greece, Italy and other euro zone countries is so huge, and the economic weaknesses of these nations so daunting, that it is simply impossible to address the problems in any reasonable period of time. But most of all, I fear the leaders of Europe are simply misunderstanding what is at the root of the crisis, and that faulty diagnosis is the reason why the medicines used are never a cure. Here's what I mean:
So far, Europe's approach to the crisis has been primarily a combination of three elements: (1) bailouts to provide liquidity and financing to debt-heavy governments and prevent a sovereign default; (2) austerity measures and, to a lesser extent, structural reform in the troubled economies: and (3) moderate reform to the way the monetary union functions, such as stiffer sanctions on those government that break debt limits and closer coordination of national fiscal policies. None of the measures taken to alleviate these three problems have ever been sufficient – the bailout fund has never been big enough, the reforms never extensive or credible enough, and the changes to the monetary union never strong enough. But beyond that, these issues are only part of the reason Europe is experiencing a debt crisis. The real causes are being ignored.
How's that? The bailout system is predicated on the belief that the debt crisis is first and foremost a liquidity crisis, that if the euro zone members put up enough cash to show they'll defend the euro, investors will feel better and the crisis will wind down. The austerity and reform programs have been mainly confined to the PIIGS – the economies in the crosshairs of investors – since the leaders of Europe seem to believe that only the weaker economies actually require reform. And the changes to strengthen the monetary union have mainly entailed the imposition of more rules, as if its flaws can be repaired by improving the way the existing structure functions.
All of these three assumptions are wrong.
The debt crisis in Europe has never been a liquidity crisis. That's why the bailouts have failed to stop it. Investors are fleeing the bonds of certain European countries because they believe their economies are fundamentally broken, simply uncompetitive compared to either stronger countries in Europe or up-and-coming emerging markets. That means investors don't have confidence in their long-term outlook, and thus their ability to handle their large debt loads. And the budget cutting and minor structural reform taking place isn't enough to change their downward course. The problem, in other words, is not concern over these countries' short-term ability to service their debt, but their long-term ability to prosper within the constraints imposed by the monetary union.
Nor is the difficulty in the euro zone limited to the weakest economies. Yes, Spain, Italy, Portugal, Greece and Ireland need to reform themselves. But that's only one side of the story. Massive imbalances between its members lie at the heart of the euro zone's problems. On the one hand, you've got uncompetitive economies like Spain and Portugal that have tumbled into large current account deficits; on the other, stronger economies, especially Germany, that gorge on giant current account surpluses. These imbalances are at the center of the debt crisis, but they aren't being treated that way. The euro zone's answer has been to force the uncompetitive economies to become more competitive, by reducing their real costs and wages. But that is a painful process, one that is potentially unsustainable either politically or socially. The real solution lies in zone-wide reform. Surplus nations also have to change, to stimulate domestic spending and import more from the rest of the region, which would help the weaker countries grow and stabilize their debt. Or the euro zone has to encourage these surpluses to be recycled into weaker economies – not through bailouts or handouts, but real investment that creates jobs and growth. None of that, however, is taking place in any serious way.
Lastly, the very structure of the euro zone is seriously flawed, and tweaking it isn't enough. No one believes that new rules and guidelines can be enforced, and no one believes they will be followed by governments will little history of doing so. The problem with the monetary union can be found in its decentralization. With no unified authority controlling fiscal policy overall, investors don't believe it can be controlled. The euro zone will be continually forced to adjust to the actions of its members, not the other way around, no matter what pacts are signed. And that decentralization presents a political hurdle as well. Though it is remarkable that 17 different nations with different interests can come together and reach agreement on anything – the mere two parties in Washington haven't been able to achieve the same degree of compromise – the fact remains that any one of the those 17 countries an upend any euro zone policy. We've already seen that happen, when Finland halted the process of forging a second bailout of Greece. That's why many economists believe the only answer to the euro zone debt crisis is more centralization – the often-mentioned fiscal union. But there is little evidence that the individual members of the euro zone will ever sacrifice the degree of sovereignty required to achieve such a union. Thus investors will remain unconvinced that any euro zone policies or programs can actually be effective.
So in the end, the root problem is that investors fear the euro simply can't survive. The worry is that the debt crisis will bring to its knees the European experiment in integration – not the other way around. To avoid that fate, the doctors of the euro zone have to write up the correct prescriptions. Otherwise, the disease will keep spreading.
Posted by MICHAEL SCHUMAN Monday, October 31, 2011 at 5:11
from Times App Article
Any hope that last Thursday's debt crisis agreement would finally quell the contagion raging through the euro zone was dashed almost before the ink dried. Only a day later, Italy's borrowing costs actually rose to a euro-era high in a bond auction, a clear sign that investors were far from certain that the debt deal was a game changer in Europe. The leaders of the euro zone appear to have botched yet another opportunity to convince the global investment community that they could tackle the crisis.
Why do Angela Merkel & Co. consistently disappoint? The reasons are many. They have repeatedly put their own domestic political concerns above the needs of the euro zone overall, leading to “historic” agreement that always fall short. They have shown a bewildering lack of urgency, stepping in too late with too little again and again. If the rich members of the zone are wary of committing their own money to support the euro, why should they expect private investors to do so? The debt burden of Greece, Italy and other euro zone countries is so huge, and the economic weaknesses of these nations so daunting, that it is simply impossible to address the problems in any reasonable period of time. But most of all, I fear the leaders of Europe are simply misunderstanding what is at the root of the crisis, and that faulty diagnosis is the reason why the medicines used are never a cure. Here's what I mean:
So far, Europe's approach to the crisis has been primarily a combination of three elements: (1) bailouts to provide liquidity and financing to debt-heavy governments and prevent a sovereign default; (2) austerity measures and, to a lesser extent, structural reform in the troubled economies: and (3) moderate reform to the way the monetary union functions, such as stiffer sanctions on those government that break debt limits and closer coordination of national fiscal policies. None of the measures taken to alleviate these three problems have ever been sufficient – the bailout fund has never been big enough, the reforms never extensive or credible enough, and the changes to the monetary union never strong enough. But beyond that, these issues are only part of the reason Europe is experiencing a debt crisis. The real causes are being ignored.
How's that? The bailout system is predicated on the belief that the debt crisis is first and foremost a liquidity crisis, that if the euro zone members put up enough cash to show they'll defend the euro, investors will feel better and the crisis will wind down. The austerity and reform programs have been mainly confined to the PIIGS – the economies in the crosshairs of investors – since the leaders of Europe seem to believe that only the weaker economies actually require reform. And the changes to strengthen the monetary union have mainly entailed the imposition of more rules, as if its flaws can be repaired by improving the way the existing structure functions.
All of these three assumptions are wrong.
The debt crisis in Europe has never been a liquidity crisis. That's why the bailouts have failed to stop it. Investors are fleeing the bonds of certain European countries because they believe their economies are fundamentally broken, simply uncompetitive compared to either stronger countries in Europe or up-and-coming emerging markets. That means investors don't have confidence in their long-term outlook, and thus their ability to handle their large debt loads. And the budget cutting and minor structural reform taking place isn't enough to change their downward course. The problem, in other words, is not concern over these countries' short-term ability to service their debt, but their long-term ability to prosper within the constraints imposed by the monetary union.
Nor is the difficulty in the euro zone limited to the weakest economies. Yes, Spain, Italy, Portugal, Greece and Ireland need to reform themselves. But that's only one side of the story. Massive imbalances between its members lie at the heart of the euro zone's problems. On the one hand, you've got uncompetitive economies like Spain and Portugal that have tumbled into large current account deficits; on the other, stronger economies, especially Germany, that gorge on giant current account surpluses. These imbalances are at the center of the debt crisis, but they aren't being treated that way. The euro zone's answer has been to force the uncompetitive economies to become more competitive, by reducing their real costs and wages. But that is a painful process, one that is potentially unsustainable either politically or socially. The real solution lies in zone-wide reform. Surplus nations also have to change, to stimulate domestic spending and import more from the rest of the region, which would help the weaker countries grow and stabilize their debt. Or the euro zone has to encourage these surpluses to be recycled into weaker economies – not through bailouts or handouts, but real investment that creates jobs and growth. None of that, however, is taking place in any serious way.
Lastly, the very structure of the euro zone is seriously flawed, and tweaking it isn't enough. No one believes that new rules and guidelines can be enforced, and no one believes they will be followed by governments will little history of doing so. The problem with the monetary union can be found in its decentralization. With no unified authority controlling fiscal policy overall, investors don't believe it can be controlled. The euro zone will be continually forced to adjust to the actions of its members, not the other way around, no matter what pacts are signed. And that decentralization presents a political hurdle as well. Though it is remarkable that 17 different nations with different interests can come together and reach agreement on anything – the mere two parties in Washington haven't been able to achieve the same degree of compromise – the fact remains that any one of the those 17 countries an upend any euro zone policy. We've already seen that happen, when Finland halted the process of forging a second bailout of Greece. That's why many economists believe the only answer to the euro zone debt crisis is more centralization – the often-mentioned fiscal union. But there is little evidence that the individual members of the euro zone will ever sacrifice the degree of sovereignty required to achieve such a union. Thus investors will remain unconvinced that any euro zone policies or programs can actually be effective.
So in the end, the root problem is that investors fear the euro simply can't survive. The worry is that the debt crisis will bring to its knees the European experiment in integration – not the other way around. To avoid that fate, the doctors of the euro zone have to write up the correct prescriptions. Otherwise, the disease will keep spreading.
Thursday, 27 October 2011
Unfolding Eurozone Crisis : Timeline
27 October 2011 Last updated at 09:39 GMT
In December, EU leaders agree on a 200bn-euro stimulus plan to help boost European growth following the global financial crisis.
Estonia, Denmark, Latvia and Lithuania join the Exchange Rate Mechanism to bring their currencies and monetary policy into line with the euro in preparation for joining.
In April, the EU orders France, Spain, the Irish Republic and Greece to reduce their budget deficits - the difference between their spending and tax receipts.
In October, amid much anger towards the previous government over corruption and spending, George Papandreou's Socialists win an emphatic snap general election victory in Greece.
In November, concerns about some EU member states' debts start to grow following the Dubai sovereign debt crisis.
In December, Greece admits that its debts have reached 300bn euros - the highest in modern history.
Greece is burdened with debt amounting to 113% of GDP - nearly double the eurozone limit of 60%. Ratings agencies start to downgrade Greek bank and government debt.
Mr Papandreou insists that his country is "not about to default on its debts".
The European Central Bank dismisses speculation that Greece will have to leave the EU.
On 11 February, the EU promises to act over Greek debts and tells Greece to make further spending cuts. The austerity plans spark strikes and riots in the streets.
In March, Mr Papandreou continues to insist that no bailout is needed. The euro continues to fall against the dollar and the pound. The eurozone and IMF agree a safety net of 22bn euros to help Greece - but no loans.
In April, following worsening financial markets and more protests, eurozone countries agree to provide up to 30bn euros in emergency loans. Greek borrowing costs reach yet further record highs. The EU announces that the Greek deficit is even worse than thought after reviewing its accounts - 13.6% of GDP, not 12.7%.
Finally, on 2 May, the eurozone members and the IMF agree a 110bn-euro bailout package to rescue Greece. The euro continues to fall and other EU member state debt starts to come under scrutiny, starting with the Republic of Ireland.
In November, the EU and IMF agree to a bailout package to the Irish Republic totalling 85bn euros. The Irish Republic soon passes the toughest budget in the country's history.
In April, Portugal admits it cannot deal with its finances itself and asks the EU for help.
In June, eurozone ministers say Greece must impose new austerity measures before it gets the next tranche of its loan, without which the country will probably default on its enormous debts. Talk abounds that Greece will be forced to become the first country to leave the eurozone.
In July, the Greek parliament votes in favour of a fresh round of drastic austerity measures, the EU approves the latest tranche of the Greek loan, worth 12bn euros.
In August, European Commission President Jose Manuel Barroso warns that the sovereign debt crisis is spreading beyond the periphery of the eurozone. The yields on government bonds from Spain and Italy rise sharply - and Germany's falls to record lows - as investors demand huge returns to borrow.
On 7 August, the European Central Bank says it will buy Italian and Spanish government bonds to try to bring down their borrowing costs, as concern grows that the debt crisis may spread to the larger economies of Italy and Spain. The G7 group of countries also says it is "determined to react in a co-ordinated manner," in an attempt to reassure investors in the wake of massive falls on global stock markets.
During September, Spain passes a constititional amendment to add in a "golden rule," keeping future budget deficits to a strict limit. Italy passes a 50bn-euro austerity budget to balance the budget by 2013 after weeks of haggling in parliament. There is fierce public opposition to the measures - and several key measures were watered down. The European Commission predicts that economic growth in the eurozone will come "to a virtual standstill" in the second half of 2011, growing just 0.2% and putting more pressure on countries' budgets. Greek Finance Minister Evangelos Venizelos says his country has been "blackmailed and humiliated" and a "scapegoat" for the EU's incompetence.
On 19 September, Greece holds "productive and substantive" talks with its international supporters, the European Central Bank, European Commission and IMF. The following day, Italy has its debt rating cut by Standard & Poor's, to A from A+. Italy says the move was influenced by "political considerations". That same day, in its World Economic Outlook, the IMF cuts growth forecasts and warns that countries are entering a 'dangerous new phase'. The gloomy mood continues on 22 September, with data showing that growth in the eurozone's private sector shrank for the first time in two years.
The sense of urgency is heightened on 23 October, when IMF head Christine Lagarde urges countries to "act now and act together" to keep the path to economic recovery on track. On the same day, UK Prime Minister David Cameron calls for swift action on the debt crisis.
The next day US Treasury Secretary Timothy Geithner tells Europe to create a "firewall" around its problems to stop the crisis spreading. A meeting of finance ministers and central bankers in Washington on 24 September leads to more calls for urgent action, but a lack of concrete proposals sparks further falls in share markets. After days of intense speculation that Greece will fail to meet its budget cut targets, there are signs of a eurozone rescue plan emerging to write down Greek debt and increase the size of the bloc's bailout fund.
But when, on 28 September, European Union head Jose Manuel Barroso warns that the EU "faces its greatest challenge", there is a widespread view that the latest efforts to thrash out a deal have failed.
On 4 October, Eurozone finance ministers delay a decision on giving Greece its next instalment of bailout cash, sending European shares down sharply. Speculation intensifies that European leaders are working on plans to recapitalise the banking system.
On 6 October the Bank of England injects a further £75bn into the UK economy through quantitative easing, while the European Central Bank unveils emergency loans measures to help banks.
Financial markets are bolstered by news on 8 October that the leaders of Germany and France have reached an accord on measures to help resolve the debt crisis. But without publication of any details, nervousness remains.
On 14 October G20 finance ministers meet in Paris to continue efforts to find a solution to the debt crisis in the eurozone.
On 21 October eurozone finance ministers approve the next, 8bn euro ($11bn; £7bn), tranche of Greek bailout loans, potentially saving the country from default.
On 26 October European leaders reach a "three-pronged" agreementdescribed as vital to solve the region's huge debt crisis. After marathon talks in Brussels, the leaders say some private banks holding Greek debt have accepted a loss of 50%. Banks must also raise more capital to protect them against losses resulting from any future government defaults.
The euro, the dream of many a politician in the years following World War II, was established in Maastricht by the European Union (EU) in 1992.
To join the currency, member states had to qualify by meeting the terms of the treaty in terms of budget deficits, inflation, interest rates and other monetary requirements.
Of EU members at the time, the UK, Sweden and Denmark declined to join the currency.
Of EU members at the time, the UK, Sweden and Denmark declined to join the currency.
Since then, there have been many twists and turns for the countries that use the single currency.
1999
On 1 January, the currency officially comes into existence.2001
Greece joins the euro.2002
On 1 January, notes and coins are introduced.2008
Malta and Cyprus join the euro, following Slovenia the previous year.In December, EU leaders agree on a 200bn-euro stimulus plan to help boost European growth following the global financial crisis.
2009
Slovakia joins the euro.Estonia, Denmark, Latvia and Lithuania join the Exchange Rate Mechanism to bring their currencies and monetary policy into line with the euro in preparation for joining.
In April, the EU orders France, Spain, the Irish Republic and Greece to reduce their budget deficits - the difference between their spending and tax receipts.
In October, amid much anger towards the previous government over corruption and spending, George Papandreou's Socialists win an emphatic snap general election victory in Greece.
In November, concerns about some EU member states' debts start to grow following the Dubai sovereign debt crisis.
In December, Greece admits that its debts have reached 300bn euros - the highest in modern history.
Greece is burdened with debt amounting to 113% of GDP - nearly double the eurozone limit of 60%. Ratings agencies start to downgrade Greek bank and government debt.
Mr Papandreou insists that his country is "not about to default on its debts".
2010
In January, an EU report condemns "severe irregularities" in Greek accounting procedures. Greece's budget deficit in 2009 is revised upwards to 12.7%, from 3.7%, and more than four times the maximum allowed by EU rules.
The European Central Bank dismisses speculation that Greece will have to leave the EU.
In February, Greece unveils a series of austerity measures aimed at curbing the deficit. Concern starts to build about all the heavily indebted countries in Europe -Portugal, Ireland, Greece and Spain.
On 11 February, the EU promises to act over Greek debts and tells Greece to make further spending cuts. The austerity plans spark strikes and riots in the streets.
In March, Mr Papandreou continues to insist that no bailout is needed. The euro continues to fall against the dollar and the pound. The eurozone and IMF agree a safety net of 22bn euros to help Greece - but no loans.
In April, following worsening financial markets and more protests, eurozone countries agree to provide up to 30bn euros in emergency loans. Greek borrowing costs reach yet further record highs. The EU announces that the Greek deficit is even worse than thought after reviewing its accounts - 13.6% of GDP, not 12.7%.
Finally, on 2 May, the eurozone members and the IMF agree a 110bn-euro bailout package to rescue Greece. The euro continues to fall and other EU member state debt starts to come under scrutiny, starting with the Republic of Ireland.
In November, the EU and IMF agree to a bailout package to the Irish Republic totalling 85bn euros. The Irish Republic soon passes the toughest budget in the country's history.
2011
On 1 January, Estonia joins the euro, taking the number of countries with the single currency to 17.
In February, eurozone finance ministers set up a permanent bailout fund, called the European Stability Mechanism, worth about 500bn euros.
In April, Portugal admits it cannot deal with its finances itself and asks the EU for help.
In June, eurozone ministers say Greece must impose new austerity measures before it gets the next tranche of its loan, without which the country will probably default on its enormous debts. Talk abounds that Greece will be forced to become the first country to leave the eurozone.
In July, the Greek parliament votes in favour of a fresh round of drastic austerity measures, the EU approves the latest tranche of the Greek loan, worth 12bn euros.
A second bailout for Greece is agreed. The eurozone agrees a comprehensive 109bn-euro ($155bn; £96.3bn) package designed to resolve the Greek crisis and prevent contagion among other European economies.
In August, European Commission President Jose Manuel Barroso warns that the sovereign debt crisis is spreading beyond the periphery of the eurozone. The yields on government bonds from Spain and Italy rise sharply - and Germany's falls to record lows - as investors demand huge returns to borrow.
On 7 August, the European Central Bank says it will buy Italian and Spanish government bonds to try to bring down their borrowing costs, as concern grows that the debt crisis may spread to the larger economies of Italy and Spain. The G7 group of countries also says it is "determined to react in a co-ordinated manner," in an attempt to reassure investors in the wake of massive falls on global stock markets.
During September, Spain passes a constititional amendment to add in a "golden rule," keeping future budget deficits to a strict limit. Italy passes a 50bn-euro austerity budget to balance the budget by 2013 after weeks of haggling in parliament. There is fierce public opposition to the measures - and several key measures were watered down. The European Commission predicts that economic growth in the eurozone will come "to a virtual standstill" in the second half of 2011, growing just 0.2% and putting more pressure on countries' budgets. Greek Finance Minister Evangelos Venizelos says his country has been "blackmailed and humiliated" and a "scapegoat" for the EU's incompetence.
On 19 September, Greece holds "productive and substantive" talks with its international supporters, the European Central Bank, European Commission and IMF. The following day, Italy has its debt rating cut by Standard & Poor's, to A from A+. Italy says the move was influenced by "political considerations". That same day, in its World Economic Outlook, the IMF cuts growth forecasts and warns that countries are entering a 'dangerous new phase'. The gloomy mood continues on 22 September, with data showing that growth in the eurozone's private sector shrank for the first time in two years.
The sense of urgency is heightened on 23 October, when IMF head Christine Lagarde urges countries to "act now and act together" to keep the path to economic recovery on track. On the same day, UK Prime Minister David Cameron calls for swift action on the debt crisis.
The next day US Treasury Secretary Timothy Geithner tells Europe to create a "firewall" around its problems to stop the crisis spreading. A meeting of finance ministers and central bankers in Washington on 24 September leads to more calls for urgent action, but a lack of concrete proposals sparks further falls in share markets. After days of intense speculation that Greece will fail to meet its budget cut targets, there are signs of a eurozone rescue plan emerging to write down Greek debt and increase the size of the bloc's bailout fund.
But when, on 28 September, European Union head Jose Manuel Barroso warns that the EU "faces its greatest challenge", there is a widespread view that the latest efforts to thrash out a deal have failed.
The sense that events are spinning out of control are underlined by Foreign Secretary William Hague, who calls the euro a "burning building with no exits".
On 4 October, Eurozone finance ministers delay a decision on giving Greece its next instalment of bailout cash, sending European shares down sharply. Speculation intensifies that European leaders are working on plans to recapitalise the banking system.
On 6 October the Bank of England injects a further £75bn into the UK economy through quantitative easing, while the European Central Bank unveils emergency loans measures to help banks.
Financial markets are bolstered by news on 8 October that the leaders of Germany and France have reached an accord on measures to help resolve the debt crisis. But without publication of any details, nervousness remains.
Relief in the markets that the authorities will help the banking sector grows on 10 October, when struggling Franco-Belgian bank Dexia receives a huge bailout. On 10 October, an EU summit on the debt crisis is delayed by a weekso that ministers can finalise plans that would allow Greece its next bailout money and bolster debt-laden banks.
On 14 October G20 finance ministers meet in Paris to continue efforts to find a solution to the debt crisis in the eurozone.
On 21 October eurozone finance ministers approve the next, 8bn euro ($11bn; £7bn), tranche of Greek bailout loans, potentially saving the country from default.
On 26 October European leaders reach a "three-pronged" agreementdescribed as vital to solve the region's huge debt crisis. After marathon talks in Brussels, the leaders say some private banks holding Greek debt have accepted a loss of 50%. Banks must also raise more capital to protect them against losses resulting from any future government defaults.
Sunday, 23 October 2011
EU Summit: Not Enough Progress Made – Pressure Remains on EUR/USD
Forex News | Yohay | October 23, 2011 6:23 pm GMT
The leaders of the European Union have made some progress in the first summit on Sunday, and it seems that some kind of watered down compromise will be reached on Wednesday.
It looks far from comprehensive and is likely to weigh on the euro. Here are the main points, and what’s missing to make it a real deal.1) Greek haircut
The progress: Germany managed to get some concessions from France and especially from bondholders, the banks. The banks are now ready to up their offer to a 40% haircut, from 21% agreed on July 21.
This is still short of the 50% to 60% demanded by the IMF and Germany. So nothing is agreed yet. This will wait for Wednesday, and the IMF threatens to close the tap for Greece if a big haircut isn’t agreed upon.
Note that this debt cut doesn’t provide a full relief for Greece as it applies only to the private sector, not the Official Sector: the EU, ECB and IMF.
Possible serious solution: A 60% haircut for the private sector AND a similar cut for the ECB will be more in the direction of a comprehensive solution.
2) EFSF Leveraging
In order to ring fence Italy and Spain, some kind of enhancement is necessary for the current bailout fund – the EFSF. France wants to turn it into a bank that can borrow money using leverage from the European Central Bank. Germany strictly opposes it.
Progress made: France has gathered backing from many other countries and the pressure on Germany and the ECB is growing, especially as the president of the ECB, Jean-Claude Trichet, a great hawk, is stepping down in about one week.
Possible serious solution: Germany should give up this demand in return for a bigger haircut and perhaps some other concessions from France. Using the ECB is a swift solution that can also have a side effect of printing money, weakening the euro and boosting growth that is so necessary in Europe, on the brink of recession.
Progress made: France has gathered backing from many other countries and the pressure on Germany and the ECB is growing, especially as the president of the ECB, Jean-Claude Trichet, a great hawk, is stepping down in about one week.
Possible serious solution: Germany should give up this demand in return for a bigger haircut and perhaps some other concessions from France. Using the ECB is a swift solution that can also have a side effect of printing money, weakening the euro and boosting growth that is so necessary in Europe, on the brink of recession.
The chances of this happening seem low, but there’s always hope.
3) Bank recapitalization
This is one area that an agreement seems closer. Banks will be required to raise between €100 to €110 billion.
This is far from €200 billion (IMF estimates) to €372 billion by other estimates. Unfortunately this deal seems to be closed, but it isn’t comprehensive.
4) Growth
This was on the agenda on July 21 and is still missing from the agenda. This is what can make a deal very comprehensive indeed.All in all, the deadlock around the EFSF, the small progress around the Greek haircut and the small deal for the banks are not enough to boost the euro. On the other hand, expectations were already lowered towards the summit.
A small slide in EUR/USD is likely with tension remaining high towards Wednesday.
For more on the euro, see the EUR/USD forecast.
Update: EUR/USD Indeed Gaps Lower – 50-60 pips is significant, but isn’t an avalanche. It represents the disappointment but also the tension towards Wednesday.
Saturday, 22 October 2011
EU Summit: 4 Reasons Why the EU Summit(s) Will Fall Short, Again
OPINIONS | YOHAY | OCTOBER 22, 2011 8:20 PM GMT
Scrambling continues in the euro-zone towards the October 23 Summit, which will likely be followed by an October 26 Summit. Progress is made towards compromises, which will likely be celebrated but will share the same fate of the July 21 Summit.
1) Bank Recapitalization Falls Short
Scrambling continues in the euro-zone towards the October 23 Summit, which will likely be followed by an October 26 Summit. Progress is made towards compromises, which will likely be celebrated but will share the same fate of the July 21 Summit.
There are three main issues on the agenda. All will likely end in a weak compromise. And there’s one thing very absent from the agenda. Its absence alone means no comprehensive solution. Here are the 4 reasons:
1) Bank Recapitalization Falls Short
The latest reports regarding recapitalizing the banks talk about €100 billion of aid. This falls short of the common estimation of €200 that was expressed by the IMF and by many economists. There is one estimate talking about a €372 funding gap.
Stress tests that were published in July saw Dexia passing nicely. We know the fate of the Franco-Belgian bank, the first victim of the current crisis. Also now, European policymakers are behaving like ostriches.
In addition, Italy, Spain and Portugal have worries about the costs. Even if the €100 sum is agreed upon, this isn’t sufficient.
2) Greek Haircut Falls Short
The July 21 Summit talked about a 21% haircut, which seemed insufficient already back then. It took European leaders time to catch up with reality, which in turn has deteriorated since then. A 42% to 60% haircut is discussed now and it should be voluntary.
In order to make Greece’s debt sustainable, the scissors need to cut deeper, at 60% or even more. Greece is in a debt trap. The banks are whining and want to stick to the 21% deal. But even with the 21% deal, not all bondholders were ready to volunteer. The 90% participation for that deal was never reached.
For a haircut to finally take place, the leaders need to be more assertive towards the bondholders: they need to accept a big haircut or face a hard involuntary default. And needs to happen now.
A big haircut means bigger losses for French banks and larger government aid. This risks a loss of France’s AAA rating and elections are coming up. Their strive for a light haircut will likely force a compromise that won’t help Greece and won’t solve the crisis.
3) EFSF cannot use the ECB
On the other side of the EU leadership, Germany’s stance against using the EFSF bailout fund as a bank that can get money from the ECB isn’t helping either. This is the fast track to leverage the bailout fund
The European Central Bank always had the ability to ease the crisis by buying bonds. In fact, it did it successfully when push came to shove and saved Italy and Spain from losing market access.
It can print money in an American / British style quantitative easing program, lower the yields and also weaken the euro as a side effect. This in turn can help growth.
Unfortunately this is where Germany drew a line in the sand, either because of an ideological resistance to mixing monetary and fiscal policy, political objection or fear of the constitutional court.
It doesn’t matter.
All the other ways to leverage the EFSF will likely have a limited impact and will not fully ring-fence Italy and Spain – the main goal of the original summit in July. Some more complex leveraging compromise will likely be reached, with weak powers.
4) No growth plans
Up to now we have discussed the matters that are high on the agenda. A short term and long term solution requires not only cutting the debt side in the GDP-to-debt formula but also providing more GDP: growth which will also bring hope.
The July 21 Summit talked about a Marshall plan for Greece. This is absent now. Other countries will also require Marshall plans. Portugal is close to sinking into the same spiral like Greece. Growth is fading away from Italy and Spain. And also Germany and France are walking in the same path.
One step that can help well before a Marshall Plan is presented, is a rate cut. But here we get back to the ECB, that has “one needle in its compass” – inflation. The ECB, at least during Trichet’s rein, is a big hurdle for growth.
Conclusion
All in all, the summit or summits will likely result in a half-baked, watered-down compromise. This will be celebrated as a great success of diplomacy.
Europe is good in diplomacy, but not in solving problems.
The euro is likely to rise at first, but then meet reality and fall, similar to the events in July, just three months ago.
Update: Partial progress was made on Sunday. The theory presented here, of a watered down compromise, is definitely taking form.
Saturday, 24 September 2011
Euro Zone Countries & GDP
| State | Adopted | Population (Jan. 1, 2011) | Nominal GDP World Bank, 2009 | Exceptions |
|---|---|---|---|---|
 Austria | 1 January 1999 | 8,404,252 | 384,908 | |
 Belgium | 1 January 1999 | 10,918,405 | 468,522 | |
 Cyprus | 1 January 2008 | 804,435 | 24,910 |  Northern Cyprus[note 1] |
 Estonia | 1 January 2011 | 1,340,194 | 19,120 | |
 Finland | 1 January 1999 | 5,375,276 | 237,512 | |
 France | 1 January 1999 | 65,075,373 | 2,649,390 |  New Caledonia[note 2] French Polynesia[note 2] Wallis and Futuna[note 2] |
 Germany | 1 January 1999 | 81,751,602 | 3,330,032 | |
 Greece | 1 January 2001 | 11,325,897 | 329,924 | |
 Ireland | 1 January 1999 | 4,480,858 | 227,193 | |
 Italy | 1 January 1999 | 60,626,442 | 2,112,780 |  Campione d'Italia[note 3] |
 Luxembourg | 1 January 1999 | 511,840 | 52,449 | |
 Malta | 1 January 2008 | 417,617 | 7,449 | |
 Netherlands | 1 January 1999 | 16,655,799 | 792,128 |  Aruba[note 4] Curaçao[note 5] Sint Maarten[note 5] Caribbean Netherlands[note 6] |
 Portugal | 1 January 1999 | 10,636,979 | 227,676 | |
 Slovakia | 1 January 2009 | 5,435,273 | 87,642 | |
 Slovenia | 1 January 2007 | 2,050,189 | 48,477 | |
 Spain | 1 January 1999 | 46,152,926 | 1,460,250 | |
 Eurozone | 331,963,357 | 12,460,362 | ||
