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 unsustainable. Read 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:
#IMF finding that multipliers have been systematically underestimated in consolidation episodes is bound to trigger major policy debate.
Italy's Mario Monti, left, being greeted at the G20 summit by Mexican president Felipe Calderon
When EU leaders agreed last year to give the eurozone’s €440bn rescue fund more powers to deal with a teetering country short of a full-scale bailout, it actually created two separate tools to purchase sovereign bonds of a government finding itself squeezed by the financial markets.
Some officials in northern creditor countries believed the most efficient tool would be using the fund, the European Financial Stability Facility, to purchase bonds on the primary market (when a country auctions them off to investors) rather then on the secondary market (where bonds already being openly traded).
The rationale was simple: By declaring the EFSF was going to move into an auction, perhaps at a pre-agreed price, they would effectively set a floor that would encourage private investors to pile in. Indeed, as one senior official said at the time, the EFSF might not even need to spend a cent; the mere threat of auction intervention might be enough to drive up prices and spark confidence, luring buyers back.
In addition to the prospect of using only very little of the EFSF’s increasingly scarce resources, a primary market intervention also had another political benefit: instead of buying bonds off private investors – in essence, rewarding the bad bets made by bankers and traders – the EFSF money would go directly to the governments selling the bonds.
With the topic of using the EFSF – and its successor, the €500bn European Stability Mechanism – to purchase sovereign bonds back on the table for Spain and Italy, it would seem an opportune time for advocates of a primary market programme to have their say. But there’s a problem: as designed by eurozone officials, it can only come as part of a full-scale bailout, meaning it is virtually impossible for Rome or Madrid to accept one. Read more
Passos Coelho with Britain's David Cameron during a visit to Downing Street on Wednesday
Largely overlooked amidst the handwringing over Spain this week was a piece written by Portuguese prime minister Pedro Passos Coelho in the FT that all but admits publicly what many officials have been saying privately for some time: Portugal is probably going to need a second bailout.
In fairness, Passos Coelho doesn’t actually come out and say that, but it sure sounds like he’s preparing the groundwork:
We are utterly committed to fulfilling our obligations. But while we are optimistic, we must also be realistic and pragmatic. This is why we accept that we may need to rely on the commitment of our international partners to extend further support if circumstances beyond our control obstruct our return to market financing.
Although Portugal’s current €78bn bailout runs through 2014, a decision on whether a second bailout is needed must be made much more quickly than that – probably sometime in the next two or three months. A look at why after the jump… Read more
Italy's Mario Monti, right, with Chinese premier Wen Jiaobao during a Beijing trip at the weekend.
Most of the focus on Friday’s meeting of eurozone finance ministers in Copenhagen was on how much leaders would increase the size of their €500bn rescue system. But according to a leaked document we got our hands on, the eurozone firewall wasn’t the only topic being debated.
The four-page report says the “Budgetary situation in Italy” was item #3 on the eurogroup’s agenda. As we wrote for Tuesday’s print edition, the report warns that any slippage in growth or a rise in borrowing rates could force the technocratic government of Mario Monti to start cutting again – something he has vowed not to do.
As is our practice, Brussels Blog thought it was worthwhile giving some more details and excerpts from the report beyond what fits in the newspaper. Read more