sovereign debt crisis

Peter Spiegel

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

Peter Spiegel

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

Peter Spiegel

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

Peter Spiegel

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

Peter Spiegel

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

Peter Spiegel

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

Peter Spiegel

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

Peter Spiegel

Denmark's Margrethe Vestager, center, with her counterparts in Copenhagen this weekend.

Following our story Saturday and subsequent blog post on two confidential economic analyses prepared for European finance ministers in Copenhagen which paint a less-than-confident picture of the eurozone crisis, we here at Brussels Blog have received multiple requests for more on their contents. Read more

Peter Spiegel

Klaus Regling, head of the eurozone rescue fund

Coming up with a number for the size of the new, enlarged eurozone rescue fund seems to be the favourite parlour game in the run-up to today’s meeting of eurozone finance ministers in Copenhagen.

According to a leaked copy of the draft conclusions obtained by the FT, the ceiling for the next year will be €700bn. But is that, to quote a former US president, fuzzy math? Is it really €940bn…but some leaders are afraid to admit it out of fear of angering their bailout-fatigued national parliaments?

The leaked draft has three elements of a new firewall starting in mid-2012 : €200bn is committed to the ongoing bailouts in Greece, Ireland and Portugal; €240bn of left-over money in the current, temporary rescue fund is frozen in an emergency account; and two-fifths of the new €500bn permanent rescue fund gets capitalised.

The fuzzy math comes in when you try to account for the new permanent rescue fund, called the European Stability Mechanism. An attempt to clarify, plus some excerpts from the draft, after the jump… Read more

Peter Spiegel

Poul Thomsen, head of the IMF mission to Greece

On Friday, after much of Europe shut down for the week, the International Monetary Fund issued its 231-page report on Greece’s new €174bn bailout, which seems to struggle to keep an optimistic tone about Athens’s ability to turn itself around over the course of the rescue plan.

But the IMF report is worth scrutinising for reasons beyond its gloomy prose: If there’s anyone who might force eurozone leaders back to the drawing board once again, it’s the IMF, which essentially pulled the plug on the first €110bn Greek bailout early last year when it became clear it wasn’t working.

Signs that the IMF is on a bit of a hair trigger litter the new report. Read more

Peter Spiegel

Most of officialdom has been referring to the second Greek bailout, formally launched today, as a €130bn rescue. But the first 189-page report by European Union and International Monetary Fund monitors makes clear it’s actually a lot larger, though the actual size depends on how your measure it.

In the latest in our occasional series “We Read Brick-Sized Bailout Reports So You Don’t Have To”, Brussels Blog will attempt to explain why the figures have gotten so confusing and the bailout is probably better described as a €164.5bn rescue. Or maybe it’s €173.6bn.

The key thing to remember is that the first €110bn Greek bailout was originally supposed to run through the middle of next year and its remainnig funding will be folded into the new package and added to the €130bn in new funding. According to the report, €73bn of the first bailout has been disbursed, leaving about €37bn left.

But here’s where it gets slightly complicated. Read more

Peter Spiegel

IMF's Lagarde, Eurogroup's Juncker and German finance minister Schauble at Thursday's meeting

The Greece crisis is entering a crucial week, with private investors deciding whether to participate in a €206bn debt restructuring and Greek officials scrambling to finalise reform measures to release the last €71.5bn in bail-out money in time for a eurozone finance ministers meeting Friday.

The failure of the ministers to sign off on all the aid during a meeting in Brussels on Thursday caught a few people by surprise. Over the weekend, Brussels Blog got its hands on the report by the troika – the European Union and International Monetary Fund team that monitors Greek compliance – showing where Athens came up short.

As we reported last week, the troika evaluation (a copy of which can be found here) held that Greece had completed most of the 38 “prior actions” ahead of Thursday evening, but had not yet fully implemented all of them, particularly in the area of so-called “growth-enhancing structural measures” – mostly a series of changes in wage and collective bargaining laws aimed at driving down costs. Read more

Peter Spiegel

Ad appeared in the FT, International Herald Tribune, and Wall Street Journal's European edition

[UPDATE] The German version of the ad can be seen here via Twitter (thanks to blogger @TeraEuro for the link). It was in the mass-market daily Bild. And here’s the French version via Le Figaro (h/t @hbeaudouin).

With just days to go ahead of an expected Thursday meeting of eurozone finance ministers where they will finally give the green light to Greece’s €130bn second bail-out, a group of Greek businessmen has taken out advertisements in a wide range of international newspapers to plead their country’s case.

According to a spokesman for the group, which calls itself “Greece is Changing”, the ads were rushed into print by a group of like-minded business leaders and designed by Peter Economides, the acclaimed marketing strategist who, among other things, helped develop the “Think Different” campaign for Apple in 1997.

Economides, born in South Africa of Greek émigrés, has been on a campaign to get Greece to “rebrand” itself for months, and the ads ran in three English-language newspapers – the FT, International Herald Tribune and the Wall Street Journal’s European edition – as well as German, French and Dutch papers. (Dutch blogger Michiel van Hulten posted the version that ran in NRC Handelsblad here.) Read more

Peter Spiegel

Greece's Lucas Papademos, flanked by Greek and French finance ministers, at Monday's meeting.

The 10-page Greek debt sustainability report that we obtained Monday night is filled with very sobering conclusions that we highlighted in our news story that’s now up on the web.

But the document – prepared by analysts in the so-called “troika” of international lenders, the European Central Bank, European Commission, and International Monetary Fund – is filled with so much interesting data, that we thought we’d give it further airing here at the Brussels Blog.

The report, marked “strictly confidential” and dated February 15, starts with a page-long summary that includes arguably the most revealing paragraph in the entire document: Read more

Peter Spiegel

Lead negotiators for Greek bondholders, Charles Dallara and Jean Lemierre, outside the Greek prime minister's office last month.

This morning, the dead tree edition of the FT has a story based on some leaked documents we got our hands on regarding the massive Greek debt restructuring that needs to begin in a matter of days.

The documents make clear the schedule is slipping dangerously; the meeting of eurozone finance ministers tonight that has been cancelled was supposed to approve the launch of the restructuring so the process can begin Friday. The whole thing needs to be done before a €14.5bn Greek bond comes due for repayment March 20. Time is running out.

But perhaps more interestingly is the fact that eurozone finance ministries asked for financial advice from New York financial advisors Lazard and legal advice from the New York firm of Cleary Gottlieb Steen & Hamilton about what the consequences would be if they launched the debt restructuring – but were forced to scrap it after it had started.

As is our tradition, we thought we’d give Brussels Blog readers a bit more on what the documents had to say. Read more

Peter Spiegel

Dutch EU Commissioner Neelie Kroes: "No ‘man overboard’ if we lose someone from eurozone."

[UPDATE 2] Dutch finance minister Jan Kees de Jager was asked about Kroes’ comments during the government’s regular parliamentary question time Tuesday. De Jager said that while the contagion risk in the eurozone has decreased over the last year because of measures taken in Brussels, a Greek exit would still be very costly.

[UPDATE] In response to Kroes’ comments, Olivier Bailly, an EU Commission spokesman, today insisted its policy towards keeping Greece in the euro has not changed.

José Manuel Barroso, the European Commission president, may have promoted his economic chief Olli Rehn to vice president last year with new responsibilities for managing the eurozone crisis, but in recent days a growing number of other commissioners seem to be elbowing in, opining on whether Greece will leave the single currency.

On Monday came an interview with Greece’s own commissioner, Maria Damanaki, where she told the newspaper To Vima tis Kyriakis that contingency plans for Greece leaving the euro were being “openly studied”. “Now they’re not simply scenarios,” said Damanaki, whose portfolio is fisheries. “They are alternative plans that are being openly studied.” Rehn’s spokesman insisted that no such plans were afoot within the commission, although he acknowledged some in the private sector were making such calculations.

This morning, however, comes another broadside, this time from Neelie Kroes, the European commissioner from the Netherlands – one of the eurozone’s remaining triple A-rated countries where support for more aid to Greece is dwindling. Read more

Peter Spiegel

Greek government employees protest against austerity measures in Athens on Friday.

As the week comes to an end, we seem no closer to a deal to sort out Greece’s troubles than we were when it started. With rumours of a deal a daily (hourly?) occurrence, and questions over whether eurozone finance ministers will meet Monday to sign off on a new €130bn bail-out, Brussels Blog thought we’d revive our popular “viewer’s guide to the Greek crisis” to lay out the state of play for those not following the negotiations on an hourly basis.

The best way to think of what is currently happening in Greece is to look at it as the proverbial row of dominoes that must fall before a deal is complete. Unless they all fall in order, Athens is at risk of missing payment on a €14.5bn bond due March 20, which could lead to a messy default and renewed chaos across the eurozone.

The first domino has basically been complete since last weekend: a deal with private holders of Greek bonds to wipe off €100bn from Athens’ €350bn debt load.

As we reported on Monday, a consortium of private Greek debt holders has agreed to accept new bonds that are be worth half the face value of their current bonds (including a one-time cash payment). The new bonds would have low interest rates that would reduce their value even more. According to our sources, the “haircut” in the long-term value will be just over 70 per cent.

But there are two more dominoes that must still fall: Greece must (yet again) agree to new austerity measures being urged by the “troika” of international lenders –European Commission, European Central Bank and International Monetary Fund – and then Brussels must decide on how to fund any shortfall. Read more

Peter Spiegel

Portuguese prime minister Pedro Passos Coelho arriving at Monday's EU summit in Brussels

As financial markets watch with nervous anticipation the outcome of the tense negotiations over Greece’s debt restructuring, there is clear evidence that bond investors believe Portugal could be next, despite repeated insistence by European leaders that Greece is “an exceptional and unique case” – a stance reiterated at Monday’s summit.

Portugal’s benchmark 10-year bonds were over 17.3 per cent this week, though things have eased off a bit today. Those are levels seen only by Greece and are a sign the markets don’t believe Lisbon will be able to return to the private markets when its bailout ends next year. Default, the thinking goes, then becomes inevitable.

But are Greece and Portugal really comparable? Portugal certainly shares more problems with Greece (slow growth, uncompetitive economy) than with Ireland and Spain (housing bubbles, bank collapses). But unlike Greece, where talk of an inevitable default was the topic of whispered gossip in Brussels’ corridors from almost the moment of its first €110bn bailout, there is no such buzz about Portugal.

More concretely, the latest report by the European Commission on the €78bn Portuguese bail-out, published just a couple weeks ago, paints a much different picture for Lisbon than for Athens. An in-depth look at the largely overlooked report after the jump… Read more

Peter Spiegel

Obama shakes hands with Treasury chief Geithner after his State of the Union address.

The news overnight focused on President Barack Obama’s annual State of the Union address. For the Brussels crowd, the most interesting thing in the speech may have been what was not in the speech: Europe.

Despite the ongoing eurozone crisis, and the increasingly deep involvement of senior US officials like Treasury secretary Timothy Geithner in crisis management, Obama did not mention Europe’s economic problems once. In fact, his only reference to the continent at all was a line that military alliances in Europe (and Asia) were “as strong as ever”, and putting “Berlin” in a list of global capitals where governments are “eager to work with us”.

Obama’s Republican adversaries have not done much more than that in their frequent televised debates, despite growing concern in Washington that a crisis-induced collapse of Europe’s economy could have a severe impact on the US economy in the midst of this year’s presidential campaign. Read more

Peter Spiegel

Uwe Corsepius, EU Council's secretary general

UPDATE: According to a British official, the UK has today been invited to participate in the treaty negotiations, a significant shift that will allow London to weigh in on some of the most sensitive issues to be discussed, including whether EU institutions will enforce the new pact.

Senior officials from European national finance ministries chatted last night in the first informal negotiations on the highly-touted new intergovernmental treaty to govern the region’s economic policy, though diplomats say little substance was discussed.

Ahead of the talks, however, Uwe Corsepius, the new secretary general of the European Council, sent out a four-page letter to negotiators in an attempt to set a roadmap for how the talks will proceed – and we at Brussels Blog got our mitts on it.

Significantly, Corsepius writes that he wants negotiations completed by the end of January “so as to allow the signature of the agreement at the beginning of March”. Officials said this is why a new informal EU summit is tentatively scheduled for early February. A first draft of the treaty text could be done by tomorrow, or early next week at the latest. Read more