bail-out

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. Read more

“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?

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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. Read more

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.” Read more

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. Read more

Ralph Atkins

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, Read more

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. Read more

Ralph Atkins

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. Read more

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. Read more

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. Read more

It’s official. European and IMF officials have convinced Ireland to apply for funds; the application has been approved; Ireland’s corporate tax rate is safe; and Reuters puts the size of the bail-out at about €85bn, attributing to a “senior EU source”. Negotiations on amounts and interest rates haven’t yet happened. Outside the eurozone, funds have also been offered by Sweden and the UK – the BBC reports the UK’s contribution to be about £7bn. All loans and funds are expected to be repaid.

Speaking in Brussels, EU economic and monetary affairs commissioner Olli Rehn said eurozone finance ministers welcomed the government’s application. “Providing assistance to Ireland is warranted to safeguard the financial stability in Europe,” he said. The ECB has issued a statement welcoming the move, BBC television reports, saying they are confident the aid will contribute to a more stable banking sector in Ireland.

Irish finance minister Brian Lenihan told RTE radio on Sunday afternoon that available funds would probably split into two: a loan to the government and a “very large contingent fund” for Irish banks, which won’t necessarily be drawn upon. The size of the latter would be “tens of billions” but “certainly will not be a three-figure sum [in billions]“. Read more

Mutiny, or playing by the book? Austria is threatening to withhold its part of the EU loan to Greece, saying the country has failed to get its finances in order. “From the Austrian point of view, there is no reason to release the (aid) contribution in December with the (Greek) numbers as they are at present,” finance minister Josef Proell told a ministers’ meeting in Vienna according to the national Austria Press Agency.

On Monday, Eurostat again revised up past and future Greek budget deficits. Last year’s deficit is now thought to be 15.4 per cent of GDP, compared with previous estimates of 13.6 per cent. This year’s deficit has been revised up to 9.4 from 7.8 per cent. Read more

Greece is set to receive its €9bn second tranche of its Europe-IMF bail-out, following payment of the first tranche in May. The first quarterly review mission visited Athens from 26 July – 5 August 2010, declaring itself impressed with fiscal and structural reforms. The staff-level agreement made in Greece requires formal approval to release the funds.

Access to capital markets remains a key challenge – Greece can only access short-term funding at the moment – and the review encourages continued policy implementation to regain access:

Our overall assessment is that the programme has made a strong start. The end-June quantitative performance criteria have all been met, led by a vigorous implementation of the fiscal programme, and important reforms are ahead of schedule…

The contraction in the economy is in line with May programme projections: GDP is expected to decline by 4 percent in 2010 and some 2½ percent in 2011. Inflation is higher than expected – we have revised our estimate for 2010 to 4¾ percent – pushed up by indirect tax increases. With no signs of second-round effects, inflation is expected to decline rapidly…

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Simone Baribeau

Brad Sherman, a Democratic representative from California, wants you to pay more for your home.

Mr Sherman today objected to the FHFA’s plan to roll back the temporary increase in the conforming loan limits put in place during the housing market crash.

“Nothing could destroy this recovery more than a double dip in home prices,” he told Edward J. DeMarco, Acting Director of the FHFA, the group that controls Fannie Mae and Freddie Mac, the government sponsored enterprises, at a hearingRead more

Simone Baribeau

Why no public/private solution?

The Congressional Oversight Panel convened a hearing to speak with the lawyers from the Federal Reserve and NY Fed (and others) about the decision to bail-out AIG.

By all accounts, the Fed was blindsided by AIG’s liquidity situation. Though Michael Finn, the Office of Thrift Supervision’s northeast regional director, said there had been an OTS/NY Fed staff meeting to discuss the OTS’s concerns about AIG’s liquidity, representatives from the Fed and the NY Fed said they were unaware of the risks AIG posed to its counterparties until the Lehman Brothers weekend. Sarah Dahlgren, an executive vice president of the NY Fed, said that, until a couple days before the group’s collapse, it was not believed to be one of the top ten risks to counterparties.

And even then, AIG seemed to be a problem with a private sector solution. Read more

Simone Baribeau

$21bn.

That’s the amount the Congressional Budget Office estimates the Federal Reserve’s credit programmes cost US taxpayers.

Of course, that’s not on a cash basis. The CBO has previously estimated that the Fed will be paying the Treasury around $70bn a year in 2010 and 2011 (compared to payments of between $18bn to $34bn from 2000 to 2008) because of the expected higher yields of the riskier-than-normal assets the US central bank bought to stabilise the economy during the crisis.

But, of course, there is risk. They might pay out less. They might not pay out at all. And, in many cases, the price the Fed paid for them wasn’t discounted for the associated risk. Now the CBO has estimated the amount the Fed overpaid – $21bn. Here’s there breakdown. Read more

The Senate has unanimously approved an amendment which requires the US executive director of the IMF to reconsider bailing out foreign nations where public debt exceeds GDP. That means Greece. And perhaps Spain, Portugal, the UK and even—ironically—the US, in future.

Proposed on May 12, Senator Cornyn’s amendment applies to the Restoring American Financial Stability Act of 2010, and:

requires the Obama Administration to evaluate any proposed bailout of a foreign nation where that nation’s public debt exceeds its annual Gross Domestic Product, and then to certify to Congress whether the bailout loan will be repaid. If the Administration cannot certify that the bailout loan will be repaid, it will be required to oppose the bailout and vote against it at the IMF.

The US is exposed to the eurozone crisis via the IMF, which pledged €30bn toward the €110bn Greek bail-out, and €220bn toward the eurozone Read more

The ECB paid euros to receive dollars from the Fed, promising to reverse those transactions in eight days’ time. It is the first usage of the revived, crisis-era, swap facility from the Fed. The idea is to help European banks to access dollar funding more easily through the ECB.

The Bank of England, Bank of Japan, Bank of Canada and Swiss National Bank did not use the facility this week. Read more

There are eight working days until Greece will need its first tranche of payments. Who’s paying what?

The very bottom row – “Shortfall” – shows the size of the hole in committed funds. Luckily, eurozone politicians must be quite familiar with budgetary gaps by now. Read more

Earlier, we showed how the bail-out breaks down by country. This shows how it breaks down by time. The 2011-2012 boxes shows estimates of the remaining split, based on the fact that both years have similar levels of government debt maturing.

As far as we know, the debt will be drawn in parallel between the eurozone countries and the IMF, in a ratio of 8:3. The first tranche should arrive in Greece before May 19, when €8.5bn debt maturesRead more