sovereign debt crisis

In a June letter, Anastasiades called Bank of Cyprus his country's "mega-systemic bank".

After the upheaval of March’s prolonged fight over Cyprus’s €10bn bailout, much of the ensuing debate has focused on the island’s largest remaining financial institution, the Bank of Cyprus, which was saved from shuttering but faces an uncertain future.

The bank’s fate was highlighted in a letter from Cyprus’s president to EU leaders in June, where he argued that eurogroup finance ministers had not properly dealt with the “urgent need” to address the “severe liquidity strain” the bailout had placed on the country’s last “mega-systemic bank”.

“I stress the systemic importance of BoC, not only in terms of the banking system but also for the entire economy,” Nicos Anastasiades wrote at the time.

Well, the European Commission’s soon-to-be-released first review of the Cyprus programme, a draft of which was obtained by Brussels Blog and posted here, shows that the fate of the bank is still somewhat unresolved – and that the EU has decided to make Nicosia’s promise to live up to the original bailout terms a primary condition for easing onerous capital controls which still hamper economic activity. Read more

Greek finance minister Stournaras, left, with IMF chief Lagarde at Monday's eurogroup meeting

In an interview with five European newspapers published Thursday, Jeroen Dijsselbloem, the Dutch finance minister who heads the committee of eurozone finance ministers, said his eurogroup will need to look at whether Greece needs additional bailout aid in April 2014.

This will surprise some members of the troika, particularly the International Monetary Fund, who were pushing for a reckoning much more quickly amid signs the €172bn second Greek bailout is running out of cash much sooner than anticipated.

Once the €3bn in EU aid contained in a new €4.8bn tranche approved this week is paid out, total EU outlays will reach €133.6bn — out of a total €144.6bn committed (the IMF puts up the rest). So just €11bn left in the EU’s coffers. Further evidence that cash is leaving too quickly is contained in the latest report on Greece’s rescue prepared by the European Commission, which our friends and rivals at Reuters obtained and helpfully posted for everyone to see.

As Brussels Blog noted earlier, there is no more EU cash left in the programme for the second half of next year, even though the bailout was originally supposed to contain enough until the end of 2014. But this chart in the new report makes clear that cash may run out even quicker than that: Not only is the third and fourth quarters of 2014 completely unfunded, now there’s only €1.5bn left for the second quarter, too. Read more

Pedro Passos Coelho, Portugal's prime minister, addresses his nation on Tuesday

Portugal’s political wobble has raised anew questions about whether it will need a second bailout once its current €78bn rescue runs out in the middle of next year. With bond market borrowing costs hovering above 7 per cent – just below levels where Lisbon was forced into the rescue in April 2011 – a full return to market financing appears far less likely than it did just a few days ago.

What are the options if Portugal can’t make it? Back in February, when eurozone finance ministers were weighing whether to give both Ireland and Portugal more time to pay off their bailout loans, EU officials drew up a memo that included a section titled “Options beyond the current programmes and the role of the ESM”.

Although it’s over four months old, it hasn’t been made public before and it offers some newly-relevant insights into what path Portugal may take if it can’t stand on its own by May 2014. Read more

Nicos Anastasiades, the Cypriot president, leaving bailout negotiations in March.

Remember when accusations of money laundering appeared to be Cyprus’ biggest problem? It was only a few weeks ago that Nicosia was pressured into agreeing an outside auditor to poke around its banks to ensure they are not havens for questionable Russian deposits.

Given the fact Cyprus’ two main banks have been either shuttered or drastically restructured as part of its €10bn bailout, it may now seem a moot point, but the 34-page draft “memorandum of understanding” between Cyprus and bailout lenders (a copy of which we’ve gotten our hands on and posted here) is holding Nicosia to the promise.

On page 6 of the MoU, Cyprus agrees to go forward with the audit, as well as an “action plan” to make clearer just who is behind the “brass plate” shell companies that offshore entities use to take advantage of the island’s low corporate tax rates: Read more

At Friday’s gathering of eurozone finance ministers in Dublin, the so-called eurogroup is expected to give a “political endorsement” of the details of Cyprus’ €10bn bailout programme, according to a senior EU official.

Ahead of that meeting, documents related to that sign-off have begun to leak out, including the always-interesting “debt sustainability analysis” (which Brussels Blog got its hands on and posted here) and an equally intriguing document titled “assessment of the actual or potential financing needs of Cyprus”, which we’ve also posted here.

As our friends and rivals at Reuters first reported, the most unexpected thing in the documents is the revelation that Nicosia will help reduce its debt burden by selling off “the excess amount” of gold reserves held by the Cypriot central bank, which is expected to raise €400m.

But the details of the rest of what will be the “contribution by Cyprus” to the bailout may be more significant. It is spelled out in detail on page four of the second document and makes clear just how damaging the mishandling of the first bailout agreement was.

Originally, Cyprus was to contribute €7bn (€5.8bn from the now-infamous bank levy and the rest from a new withholding tax on investment profits) to the €17bn total cost of the bailout. Just over a week later, the amount Nicosia will contribute almost doubled, to €13bn, and the total price tag had increased to €23bn. Read more

The EU's Rehn, left, with Cypriot finance minister Sarris at the outset of Friday night's meeting

With the eurozone’s €10bn Cyprus bailout now laid waste by the country’s parliament, the recriminations are likely to begin almost immediately. In fact, they started even before the vote was held — almost as soon as it was announced early Saturday morning that the programme included a 6.75 per cent levy on bank accounts under €100,000.

Since then, almost all officials involved in the talks have said it wasn’t their decision to seize deposits from small savers.

Wolfgang Schäuble, the German finance minister, was the first out of the gate, telling public broadcaster ARD on Sunday that it wasn’t his idea. “We would obviously have respected the deposit guarantee for accounts up to €100,000,” Schäuble said. “But those who did not want a bail-in were the Cypriot government, also the European Commission and the ECB, they decided on this solution and they now must explain this to the Cypriot people.”

That statement sparked anger over at the ECB, which denied any involvement in levying smaller depositors. “I want to emphasise that it wasn’t the ECB that pushed for this special structure of the contribution which has now been chosen. It was the result of negotiations in Brussels,” Jörg Asmussen, the ECB executive board member who handled the central bank’s negotiations Friday night, said Monday. “We provided technical help with the calculations, as always, but we didn’t insist on this special structure.

This morning, Pierre Moscovici, the French finance minister, added his name to the list, saying he had been in favour of exempting smaller depositors “from the beginning”.

So where does the truth lie? We pieced together the events of Friday night and Saturday morning for Monday’s dead tree edition of the FT, but it appears more forensics might be needed to get this all straight. Having talked to multiple participants, here’s an even more detailed account. Read more

International lenders agreed to a €10bn bailout of Cyprus early Saturday morning after 10 hours of fraught negotiations, which included convincing Nicosia to seize €5.8bn from Cypriot bank deposits to help pay for the rescue, a first for any eurozone bailout.

The cash from Cypriot account holders will come in the form of a one-time 9.9 per cent levy on all deposits over €100,000 that will be slashed from their savings before banks reopen Tuesday, a day after a Cypriot holiday. An additional 6.75 levy will be imposed on deposits below that level.

Cypriot finance minister Michalis Sarris said his government had already moved to ensure deposit holders could not make large withdrawals electronically before Tuesday’s open; Jörg Asmussen, a member of the European Central Bank executive board, said a portion of deposits equivalent to the levies would likely be frozen immediately.

“I am not happy with this outcome in the sense that I wish I was not the minister that had to do this,” Mr Sarris said. “But I feel that the responsible course of action of a minister that takes an oath to protect the general welfare of the people and the stability of the system did not leave us with any [other] options.” Read more

Finance ministers MIchael Noonan of Ireland, center, and Vito Gaspar of Portugal, right, with the EU's Olli Rehn at January's meeting.

After Greece last year won a restructuring of its €172bn rescue that included an extension of the time Athens has to pay off its bailout loans, Ireland and Portugal decided they should get a piece of the action, too.

So at the January meeting of EU finance ministers in Brussels, both Dublin and Lisbon made a formal request: they’d also like more time to pay off their bailout loans. According to a seven-page analysis prepared for EU finance ministry officials a few weeks ago, though, the prospect is not as straight forward as it may seem.

The document – obtained by the Brussels Blog under the condition that we not post it on the blog – makes pretty clear that while an extension might help smooth “redemption humps” that now exist for Ireland (lots of loans and bonds come due in 2019 and 2020) and Portugal (2016 and 2021), it’s not a slam dunk case. Read more

Over the course of the eurozone crisis, the relationship between EU leaders and credit-rating agencies has been, at best, a love-hate one, with officials frequently lashing out at the three major sovereign raters for the timing and severity of their downgrades.

So it was probably with some Schadenfreude that those same officials learned of the news that the US Justice Department will soon file a civil suit against Standard & Poor’s – arguably the most prominent of the rating agencies – for misleading investors when it gave gold-plated endorsements to US mortgage-related securities before the 2008 financial crisis.

But what happens when S&P starts pointing out that some of the most criticised eurozone policies – the austerity measures aimed at forcing internal devaluations in struggling peripheral countries – may be working? The silence thus far has been deafening. Read more

Greek prime minister Samaras takes questions after last month's EU summit in Brussels.

When eurozone leaders finally reached agreement on an overhauled €173bn bailout of Greece last month, Antonis Samaras, the Greek prime minister, declared the prospect of his country leaving the euro to be over: “Solidarity in our union is alive; Grexit is dead.”

But late on Friday, someone decided to resurrect it: the International Monetary Fund. In its first report on the Greek bailout since last month’s deal, the IMF was unexpectedly explicit on the risks that Greece still faces, including the potential for full-scale default and euro exit.

In fact, the 260-page report includes a three-page box explicitly dedicated to examining the fallout if Greece were to be forced out of the euro, which we’ve posted here. The box, titled “Greece as a Source of Contagion”, concludes that while the eurozone has improved its defences, it still remains hugely vulnerable to shocks that would come following Grexit. Read more

Ireland's Kenny, right, with European Commission chief Barroso at start of the Irish EU presidency.

Ireland appears to be taking advantage of the comparatively positive sentiment in the eurozone that has marked the start of the year by moving back into the bond markets in a major way.

Last week, Dublin raised €2.5bn by issuing additional five-year government bonds, and then days later was able to convince private investors to buy €1bn in debt it holds in one of the largest banks nationalised at the peak of its banking crisis. This morning, the government was at it again, announcing a €500m auction in short-term t-bills will take place tomorrow.

Despite the winning streak, there’s still a lot of nervousness in official circles about whether Ireland can fully emerge from its bailout when its €67.5bn in rescue loans run out in November. All this has led to a debate in Dublin about whether Ireland should seek additional aid, such as a line of credit from the International Monetary Fund or the EU – which would be backed by the European Central Bank’s new limitless bond-buying programme – to provide a backstop to new Irish bonds.

The Irish website TheStory.ie got its hands on the new European Commission report on the Irish bailout, which makes clear on page 44 that Dublin is in discussions with the troika about whether the ECB’s bond-buying programme – known as Outright Monetary Transactions – can be accessed: Read more

As we note in today’s dead-tree edition of the FT, the European Commission is out with its latest assessment of Portugal’s €78bn bailout. But buried in the report is a two-page box that raises the intriguing question of whether the bailout is actually bigger than leaders have disclosed.

In its small print, the box – soporifically titled “Euro Area and IMF Loans: Amounts, Terms and Conditions” – makes pretty clear that Portugal’s bailout will actually be closer to €82.2bn (we’ve posted the box here). Elsewhere, another table (posted here) says it’s actually €79.5bn.

Why the sudden increase? About €1.8bn of the rise is pretty straight forward. The International Monetary Fund, which is responsible for one-third of the total bailout funding, doesn’t pay its bailout aid in euros. Instead, it uses something called Special Drawing Rights, or SDRs, which have a value all of their own.

Because an SDR’s value fluctuates based on a weighted average of four currencies – the euro, the US dollar, the British pound and the Japanese yen – the 23.7bn in SDRs that was worth €26bn when the Portuguese bailout was agreed last year is now worth about €27.8bn, meaning Lisbon gets more cash just because of the currency markets.

The extra money from the EU is a little harder to explain. Read more

Enda Kenny, Ireland's prime minister, during a November EU summit in Brussels

One of the hardest things about keeping on top of the eurozone crisis is the tendency for issues once regarded as done and dusted to re-emerge months later as undecided. In the new year, there are two places where this revisionism will be thrust back into the limelight: Cyprus and Ireland.

In Cyprus, two hard-and-fast principles, long believed sacrosanct, will be tested. The first is eurozone leaders’ long-held insistence that Greece is “unique”, in that it would be the only eurozone country where private holders of sovereign debt would be defaulted on.

With Cyprus’s bailout likely to double the country’s debt levels, officials say debt relief must come from somewhere or Nicosia faces a burden rivalling Greece’s – somewhere in the neighbourhood of 190 per cent of economic output. Haircuts for private bondholders could be one option to lower that, though for the time being Jean-Claude Juncker, outgoing head of the eurogroup of finance ministers, insists it’s off the table.

Which takes us to controversial option two: wiping out senior creditors in Cypriot banks. If creditors don’t need to be repaid, than the size of the bailout can be much smaller. This may appear more palatable to eurozone leaders – after all, about €12bn of the €17.5bn in bailout funding is need to recapitalise Cyprus’s collapsing banking sector – but it would also break unspoken rules. Read more

Van Rompuy, left, has set out a different vision of common eurozone debt than Barroso, right.

Herman Van Rompuy, the European Council president, published the latest iteration of his plan to overhaul the eurozone this morning, just a week after his counterpart across the Rue de la Loi, European Commission president José Manuel Barroso, offered his own blueprint.

Van Rompuy’s 14-page outline includes many of the ideas he’s been proffering since October, including a requirement that all eurozone countries engage in “contractual arrangements” with Brussels, committing them to economic reform plans, and the creation of a eurozone budget. Barroso’s plan has similar elements.

But it’s worth noting where Barroso and Van Rompuy differ, because it could have major implications for the direction the eurozone heads in the coming months. And the differences are perhaps nowhere more evident than on one of the issues that has bedevilled the eurozone since the outset of the crisis: so-called “eurobonds”.

 Read more

Cyprus finance minister Vasos Shiarly, left, with EU economics chief Olli Rehn.

With the Greek government announcing the details of its highly-anticipated debt buyback programme this morning, there really is only one major agenda item offering any suspense at tonight’s meeting of eurozone finance ministers in Brussels: Cyprus.

Brussels Blog has got its hands on the draft deal between Nicosia and the “troika” of international lenders (with the words “contains sensitive information, not for further distribution” on top of each of its 29 pages) that, for the first time, lays out in minute detail just what the Cypriots are being asked to do in return for bailout cash. We’ve posted a copy here.

Senior Cypriot and eurozone officials have cautioned that the whole deal cannot be completed until Pimco, the California-based investment firm, finishes a complete review of the teetering Cypriot banking sector. But the Memorandum of Understanding pencils in €10bn to recapitalise banks.

Considering Cyprus’ entire economy is only €18bn, that’s a whopping sum, equivalent to 56% of gross domestic product – much higher than either the Irish or Spanish bank bailouts.

Which raises a problem: Cypriot sovereign debt is already at almost 90 per cent of GDP. The bank rescue, plus additional cash that will be lent to run the Cypriot government, will take that debt to levels the International Monetary Fund has, in the past, argued is unsustainableRead more

IMF chief Christine Lagarde arrives at Monday's eurogroup meeting where Greek deal was struck.

When eurozone finance minsters announced their long-delayed deal to overhaul Greece’s second bailout early Tuesday morning, there was much they didn’t disclose.

The most glaring was how big a highly-touted bond buyback programme would be, a question dodged repeatedly at a post-deal news conference. But there were other things that were left out of a two-page statement summing up the deal, including how much the European Central Bank was making on its Greek bond holdings, profits that will be returned to Athens as part of the agreement.

It turns out, those were not the only – or even the biggest – unanswered questions left after the early-morning deal. As we report in today’s dead-tree edition of the FT, ministers failed to find enough debt relief measures to get to the purported Greek debt target of 124 per cent of economic output by 2020, far above the 120 per cent target set in February.

In reporting our story, we relied heavily on a leaked chart that we got our hands on (which we’ve linked to here) that lays out in great detail the assumptions built into the new programme. A quick review of the chart comes after the jump… Read more

Germany's Schäuble and France's Moscovici after the 1st attempt this month to reach a Greek deal.

Eurozone finance ministers have begun arriving at the EU’s summit building in Brussels for their third meeting in two weeks to try come up with a deal to get Greece’s overweening debt levels back down to levels that can credibly be considered sustainable.

For those who need a reminder of where the talks stand, we offer a handy official chart we got our hands on (see it here) which shows just how big the debt gap is – a gap that must be closed to finalise the overhauled programme and release the long-delayed €31.3bn in bailout assistance.

The key thing to remember is the last time the eurozone revamped the Greek programme in February, they agreed that it would return Athens to a debt level of 120 per cent of economic output by 2020. This has become a de facto benchmark.

As the chart shows, without any debt relief, Greece’s debt is now expected to be at 144 per cent by 2020 and the entire debate today (and possibly tonight) will be on who will give up some share of Greek debt repayments to bring that down. Read more

Greek finance minister Stournaras, left, and prime minister Samaras during last night's debate.

Tonight’s meeting of eurozone finance ministers was, as recently as a week ago, thought to be the final bit of heavy lifting needed to complete the overhaul of Greece’s second bailout. After all, Athens has done what it promised: it passed €13.5bn of new austerity measures on Wednesday and the 2013 budget last night.

But EU officials now acknowledge that the Brussels meeting of the so-called “eurogroup” will not make any final decisions on Greece amid continued debate over how much debt relief Athens needs – and how fast it should come. That means a long-delayed €31.3bn aid payment will be delayed yet again.

One EU official said that despite hopes, the key part of a highly-anticipated report from international monitors – known as the “troika report” because it is compiled by the European Central Bank, International Monetary Fund and European Commission – will not be ready in time for tonight’s meeting: the debt sustainability analysis, which remains a point of contention. Read more

Geithner, left, has been in frequent touch with ECB's Draghi and his predecessor, Trichet.

A joint election party co-hosted by Democrats and Republicans Abroad at the Renaissance Hotel in Brussels this evening is scheduled to go until 3am in anticipation of a long night ahead for any eurocrats waiting to get first word on who has won the US presidential contest.

Looking for something to do in the interim? For his part, French economist Jean Pisani-Ferry, director of the influential Brussels think tank Bruegel, scoured the recently-released calendars of US treasury secretary Timothy Geithner to find out which of the American’s EU counterparts he talked to most frequently since the eurozone crisis broke nearly three years ago.

Perhaps not surprisingly, by far his most frequent phone calls have gone to the Washington-based International Monetary Fund. Pisani-Ferry counts 114 contacts with either IMF chief Christine Lagarde or her predecessor, Dominique Strauss-Kahn, or their deputies.

What is a surprise is that Geithner’s most frequent interlocutor on this side of the Atlantic has not been in Brussels, Paris or Berlin. Instead, it was Frankfurt, where he contacted European Central Bank president Mario Draghi and his predecessor, Jean-Claude Trichet, 58 times in the 30 months examined. Read more

IMF's Blanchard unveils report at Tokyo gathering of finance ministers and central bankers.

[UPDATE] After a meeting of EU finance ministers in Luxembourg, Olli Rehn, the European Commission’s economic chief, said he would read the IMF’s analysis on the way back to Brussels. But he cautioned that while the impact of austerity on growth was important to consider, it was also essential to take into account the “confidence effect” budget consolidation has. He pointed to Belgium, which has gone from market laggard to nearly a safe haven after implementing tough austerity measures earlier this year.

Although the headlines generated by last night’s release of the IMF’s annual World Economic Outlook focused on the downgrading of global growth prospects, for the eurozone crisis the most important item in the 250-page report may just be a three-page box on how austerity measures affect struggling economies.

The box – co-authored by IMF chief economist Olivier Blanchard and staff economist Daniel Leigh – argues in stark language that the IMF as well as other major international institutions, including the European Commission, have consistently underestimated the impact austerity has on growth.

For a eurozone crisis response that has piled harsh austerity medicine on not only bailout countries but “core” members with high debt levels –Italy, France and Belgium, for instance – the IMF finding could shake up the debate on how tough Brussels should continue to be on eurozone debtors. As French economist Jean Pisani-Ferry, director of the influential Brussels think tank Bruegel, tweeted yesterday:

[blackbirdpie url="https://twitter.com/BruegelPisani/status/255520457976061952"] Read more