Mark Carney, the incoming governor of the Bank of England, was grilled by MPs and his ECB counterpart Mario Draghi faced awkward questions. By Tom Burgis, Ben Fenton and Lina Saigol in London with contributions from FT correspondents. All times are GMT.
Another barrage of warnings this morning from European Central Bank policymakers about the dangers of a Greek debt restructuring. Jürgen Stark, executive board member, told Bavarian radio that Greece was “not insolvent” and that a restructuring “wouldn’t be a solution to the problems that Greece needs to overcome”. But Athens should not assume international bail outs were a “bottomless well” he warned.
A different – and novel - argument was made by Lorenzo Bini Smaghi, his board colleague, the gist of which was that eurozone governments should not allow themselves to be pushed around by financial markets.
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.
A senior Portuguese banker has said that the European Central Bank pressed the country’s lenders to stop increasing their use of its liquidity – setting in train events that led Lisbon to ask for a bail-out this week.
António de Sousa, head of the Portuguese Banking Association, said that the message from the ECB and Portugal’s central bank not to expand their exposure to ECB funding further came a month ago.
Cyprus is showing signs of stress. Credit ratings, yields, the banking sector and sentiment are all signalling distress. This tiny island economy, roughly a tenth the size of Portugal, might defy the PIIGS acronym by needing help sooner than its eurozone peers Spain or Italy.
Redrawing the sovereign ratings map clearly showed what the ratings agencies thought. See the blue circle on the map, right. This heatmap colours countries that have been heavily downgraded since the start of the year more red, and those that have been more heavily upgraded, green. Spain and Ireland are reddish. But Cyprus is clearly in the Portugal-and-Greece camp of dark red (high downgrades).
Next, yields. Bond yields are the cost of debt to the government, so rising yields are bad news. And they are certainly rising in Cyprus. Compare two auctions of six-month debt, one in January and the other in March. Yields rose from 2.02 per cent to 2.74 per cent in those two months. This level is higher than yields on the last two-year debt offering in January of 2010.
The sums involved in propping-up Ireland’s banking system are so great – and the chances so small of them falling dramatically any time soon – it was inevitable the European Central Bank would want to find a better, longer term solution.
Currently, the total amount of ECB liquidity and “emergency liquidity assistance” provided by the Irish central bank, both essentially on an ad-hoc basis, is not far south of €200bn.
Hence news at the weekend that the ECB is looking at some kind of facility for eurozone banks in restructuring is not surprising. We have known for some time that the ECB was looking at ways to deal with “addicted banks” – those totally reliant on its liquidity and unable to fund themselves normally in financial markets. Ireland’s banks clearly fall into that category.
I said previously that any eurozone bail-out should ideally happen after 2013. Events have overtaken me. It would be best, now, if vulnerable euro member states could hang on for a couple more years. And all because of domestic German politics.
Angela Merkel’s coalition partners, the Free Democrats, resisted the idea of paying in so much capital to the eurozone rescue fund so quickly. As a result, the eurozone rescue fund will be capitalised later, and more slowly.
Cast your mind back to the good old days, when a high yield meant 6 per cent and nervous market talk might culminate in whispers of a bail-out. Compare and contrast with the situation now, where two states have long since passed the point of bail-out and there is real and present danger of a default.
Much focus is on Portugal, lined up somewhat unwillingly for the next cash injection. It must make an unappealing prospect as two already-medicated patients have just taken a sharp turn for the worse. Yields on Irish bonds rose nearly an entire percentage point during trading yesterday to touch 10.7 per cent. As a reminder, Irish yields were about 8 per cent at the time of the bail-out. And it bears repeating: Irish yields are above bail-out levels even though Ireland has been bailed out. Ditto Greece.
Eurozone leaders are due to begin a scheduled meeting in Brussels about now. They’ll have plenty to discuss. A possible bail-out of Portugal will certainly be on the agenda but it might not make the top of the list. After all,
It would be better for sizable eurozone bail-outs to occur after July 2013. This is the implication of a strange state of affairs in Brussels: namely that policymakers have agreed how to fund the future ESM to its full value, but not its predecessor, the EFSF.
Only about €250bn of the existing €440bn European Financial Stability Facility is available to bail out beleaguered eurozone sovereigns. This is because the fund wants to lend with an AAA rating, but several contributing eurozone sovereigns are rated lower. Increasing the rating is achieved, in effect, by overcollateralising each loan. Now it has been agreed to increase the lending capacity of the EFSF, but no word yet as to how. Apparently, further overcollateralisation has been ruled out: according to Citi’s Jurgen Michels, the lending capacity of the eurozone’s transitional measures (currently the EFSF and EFSM) shall never exceed €500bn.
The ban on further overcollateralising the rescue fund might seem odd, since that is partly the solution agreed for the European Stability Mechanism.
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.