Greece needs time to convince international investors about its reform programme and may not be able to return to financial markets next year as planned, its finance minister has admitted.
George Papaconstantinou’s comments in a Financial Times interview highlight how Greece continues to struggle to turn its economy round almost a year after the launch of an €110bn European Union and International Monetary Fund bail-out. They may fuel speculation that European leaders will have to find fresh ways of alleviating Greece’s debt problems to avert a default scenario.
“It is necessary to refer to available funding mechanisms in the European framework.” This, grimly, from Portugal’s finance minister Fernando Teixeira dos Santos, according to Portuguese paper Journal de Negocios. Portugal is also holding talks on a bridging loan with the EU.
The news follows a punitive auction of 6-month bills today, at which the cost of debt to the government rose to 5.11 per cent, up from 2.98 per cent a month ago for comparable debt. More than €4bn longer-term debt is due to expire in April, leaving the central bank with a significant shortfall if it cannot issue new bonds at manageable levels. Today’s auction strongly suggests this would not be possible.
Answering a set of questions in writing, the finance minister said, via Google Translate:
Business: Portugal must now ask for help as they appeal the bankers and economists in general? The debt that you have to pay in a year do not worry you?
Fernando Teixeira dos Santos: The country has irresponsibly pushed a very difficult situation in financial markets. Given this difficult situation, which could have been avoided, I think it is necessary to refer to available funding mechanisms in the European framework as appropriate to the current political situation. This will require also the involvement and commitment of major forces and political institutions.
JDN: How do you assess the results of the auction today, particularly with regard to interest rates?
Ireland’s new PM turned down an offer to improve the terms of the bail-out deal – and the Irish public are overwhelmingly behind him. Seventy-eight per cent of those polled think Mr Kenny was correct to refuse trading higher corporate tax rates for lower rates on bail-out loans.
Ireland’s troubles remained notably unaddressed in a bold agreement between eurozone ministers early on Saturday morning. In a sign of ongoing market stress, yields on Irish government debt have continued to rise today, unlike those of Greece, Spain and Belgium, which have fallen.
The European Central Bank was guilty of a “major failure of supervision” in not restraining lenders from fuelling the property bubble in Ireland, says a former prime minister.
John Bruton, premier in the 1994-97 centre-right, Fine Gael-led coalition, on Monday accused British, German, Belgian and French banks of “irresponsible lending . . . in the hope that they too could profit from the Irish construction bubble.” Mr Bruton said in a speech to the London School of Economics that banks had “lots of information available to them about spiralling house prices in Ireland”. They were supervised by their national central banks and by the ECB which “seemingly raised no objection to this lending.”
Markets are showing signs of stress over Portugal following Moody’s three-notch downgrade of Greece as we approach a significant bond auction on Wednesday.
Yields on the ten-year government bond reached 7.65 per cent today – a euro lifetime high – indicating Lisbon would need to pay these sorts of levels if it tried to issue ten-year debt now. (Or Wednesday.) If it goes ahead, the auction is intended to raise €0.75-1bn. This is optimistic, however. The last two auctions raised just €1.25bn between them.
So, assuming Wednesday’s auction raises €0.75bn (optimistic), the IGCP will have raised about €2bn since the start of the year from the market in bonds. Rumour has it that the agency has about €4bn in cash. So that’s €6bn, excluding bills. So what does Lisbon’s debt management agency, the IGCP, need, and by when? The answers are sobering.
The European Central Bank still faces a stand-off with Dublin. The FT reports today the warning by Lorenzo Bini Smaghi, an ECB executive board member, that Ireland cannot expect to renegotiate the terms of its bail-out. The matter has become an issue in the country’s election campaign.
RTE, the Irish broadcaster, has now posted the full interview with Mr Bini Smaghi. It’s a great example of slick, central bank transparency. Diplomatically but firmly, Mr Bini Smaghi warns Ireland’s politicians that if they imposed losses (a “haircut”) on Irish senior bank bondholders, “immediately you would have a run on the banks”. Irish account holders themselves would worry about the security of their savings. The end result could be a collapse of the banking system – and the Irish taxpayers would face an even larger bill.
Irish taxpayers had to bear responsibility for the crisis, he made clear. They supported a low tax system that created the good times; it was only right that they should shoulder the cost when things went wrong.
Mr Bini Smaghi denied the ECB had pushed Ireland into last year’s bail-out,
If the Irish bail-out was intended to calm markets, it has failed. Yields on Irish debt are the most stable they have been for weeks, shifting a few basis points and staying above 8 per cent. The cost of credit insurance has risen and the ECB is apparently still buying Irish bonds.
Euro officials will be worried, and Irish officials furious. This suggests that Ireland’s lack of funds was not what was driving bond yields up. Did EU officials pressure Ireland to accept a bail-out for nothing?
Ireland is not Greece, and the markets know it. After the Greek bail-out, there was a dramatic, if temporary, fall in yields of about 4 percentage points. Of course, relief centred on more than just Greece’s small economy: the bail-out proved that eurozone members would stick together.
The Irish bail-out – arguably not needed – was different.
Ireland’s bank bail-out plans came as a relief to the European Central Bank, after providing another example of the increasingly political role being played by the euro’s monetary guardian. Alarmed at the massive amounts of liquidity it was pumping into Irish banks, the ECB lobbied hard behind the scenes for action to shore up the country’s financial system.
A successfully completed rescue, helped by the International Monetary Fund, would reduce the immediate pressure on the ECB, which welcomed Dublin’s decision in a statement late on Sunday – but not allow the Frankfurt-based institution to escape the political area. It is pushing hard for bolder reforms of the eurozone’s system of government – demanding tougher surveillance of fiscal and other economic polices, backed up with sanctions, to prevent crises from erupting.
Fresh ECB involvement would be required were the eurozone’s financial crisis to engulf Portugal or Spain. Even if it does not, the ECB is still likely to be active in buying government bonds under an emergency programme launched when the eurozone crisis was at its most intense in May. “The ECB has become part of the game to an extent it was not before,” said Jörg Kramer, chief economist at Commerzbank in Frankfurt.
Greece is poised to accept tough conditions, including widespread job cuts and labour market reforms, in order to secure the third and fourth loan tranches of its €110bn bail-out by the European Union and the International Monetary Fund. George Papaconstantinou, finance minister, said on Monday the socialist government tried “to preserve the country’s interests as best we could,” in discussions with the “troika” – representatives of the European Commission, European Central Bank and the Fund.
The troika’s latest monitoring mission came amid rising concern in Athens that a future transfer might be blocked – a move that could trigger an immediate default and a disorderly restructuring of Greece’s €340bn sovereign debt. “It’s a difficult negotiation every time . . . bearing in mind that the next loan tranche is at risk,” Mr Papaconstantinou said.
Felix Salmon asks whether €90bn will be enough for Ireland. By his methodology, he is right to ask. He assumes the status quo will continue, and that the bail-out funds will be all that Ireland can access.
Ireland’s annual budget deficit is €19bn and this is a three-year plan, so that’s €57bn, he argues. Let’s call it €60bn. That leaves €30bn for the banks, by this thinking. The black hole in commercial real estate is valued at €20-25bn alone, he says. And that’s before we consider residential mortgages.
But this isn’t Argentina. Ireland is not defaulting on its debt: it is choosing not to raise money in the markets at punitive rates. There’s no reason why it couldn’t approach markets in June next year, when the state next needs to auction debt.
In addition to raising money in the markets, Ireland will be raising more in taxes and spending less.