Tom Burgis

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.  

Ralph Atkins

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. Read more

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

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. Read more

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. Read more

Ralph Atkins

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. Read more

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.

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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, Read more

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. Read more

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

If it is approved, the nascent agreement reached in the small hours of Saturday morning will address many of the symptoms of the eurozone’s disease. Note, though, that the fundamental issue of bond haircuts was not addressed. Euro leaders’ hard work leaves them on target for what was a very tight March 24/25 deadline. Measures include:

  • Increase the effective lending capacity of the EFSF from ~ €250bn to €440bn. The Fund already had €440bn at its disposal in theory, but needed to hold back a proportion in order to issue AAA-rated debt. Discussions are ongoing on how to achieve this.
  • Give the EFSF the right, “as an exception”, to intervene in primary debt markets – though with such strict conditionality that some analysts say this will make little effective difference. The right, which will extend to EFSF successor, the ESM, is not a full substitute for the ECB’s bond-buying programme, since the ECB buys bonds in both the primary market (government auctions) and secondary market (resale of already-issued bonds).
  • Lower the rates charged by the EFSF on bail-out loans to take into account debt sustainability of recipient countries. Rates should remain above facility’s funding costs and in line with IMF pricing principles.
  • Specifically, for Greece: reduce the interest rate on rescue loans from 5.25 to 4.25 per cent and increase the average maturity of Greek bail-out loans from 4 to 7.5 years.
  • €500bn funding confirmed for the ESM, EFSF successor.
  • Further explore the idea of a financial transaction tax.

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A look at the data on Greece and Ireland should stay the hands of policymakers keen to bail-out Portugal. If those two bail-outs were intended to reassure markets, they have failed. Clarity on bondholder rights might be a better target.

Ireland was bailed out in November. Despite knowing €85bn is on tap, markets priced Ireland’s ten year cost of debt at a record high yesterday: government bonds trading in the secondary market closed at 9.39 per cent. See green line on chart, right. (Note: this number does not affect the Irish government directly since they do not finance their loans from the resale market: it is a proxy for the rate the government would have to pay to borrow from the market at auction.) These record levels are more than a percentage point higher than levels that prompted the bail-out, and just higher than the previous record which occurred post bail-out (since yields, bizarrely, rose).

Greece was bailed out in May. But Greece’s ten year cost of debt touched a record 12.82 per cent during yesterday’s trading. Their ten year debt closed at 12.68 per cent, second only to a rough patch in January. Bail-outs are useful when there’s a temporary cashflow problem – but continued and rising market stress should tell us that something else is at play. 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

Weaning Irish banks off emergency funding from the ECB will take longer than hoped, after Irish authorities suspended plans to force the country’s troubled banks to sell off huge portfolios of loans.

The country’s banks need to offload as much €100bn ($139bn) of legacy assets as they undergo a drastic clean-up of their balance sheets following the huge losses they suffered during the financial crisis. The ECB wanted the deleveraging to be undertaken quickly so the banks could whittle down their reliance on emergency funding, which has risen to about €140bn.

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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

Irish banks borrowed €51.1bn in special funding from their central bank in December, latest data show – a €6.4bn increase on the previous month. The ECB will be pleased, however, to see that Irish banks borrowed €4bn less from Frankfurt, with loans falling to €132bn during the month. It is too early to say whether Irish banks are increasingly looking to Dublin instead of Frankfurt for support – but the ECB would certainly welcome that.

In Ireland’s bail-out, €17.5bn of the €85bn package was from the Irish government itself, put into the c. €25bn contingency-bank-fund pot.

Confidence in Ireland could plummet today if the PM faces a vote of no confidence. Political uncertainty, as Belgium has shown, can seriously undermine the market’s faith in a country’s finances. And market reaction seems to be the main call to action for EU politicians. And just when we thought focus had switched to Portugal.

Now Ireland, as we know, has been bailed out already. Its funding is pretty well lined up – importantly, from diverse sources. The weak point is the banks. As long as any handover is smooth and quick, a change of government could be relatively painless for Ireland. Read more

Ireland’s fate should be a cautionary tale to those pushing Portugal towards a bail-out. Ireland’s bail-out – arguably not needed – didn’t work.

Government bond yields – a measure of market stress – rose above 8 per cent, and Dublin found itself inundated with offers of cash. This unlimited funding should have been enough to reassure markets, but it was not, proving a cash shortage was not the problem. Politicians ignored this, and the offers became more insistent. Ireland accepted a loan, but markets were unimpressed and yields stayed above 8 per cent. A month later, yields returned above pre-bail-out levels of about 8.4 per cent. Now they are nearer 9 per cent. The Irish bail-out was misdirected, targeting the symptom and not the cause. Bond markets were worried about bondholder rights, not a cash crunch. Making cash available while remaining vague on bondholder rights was a mistake. Read more

Chris Giles

Gordon Brown has staked his claim to be the saviour of advanced economies in the crisis, by claiming in his new book that he pressed the case for recapitalising banks around the world. For this foresight, the former British prime minister has received adulatory reviews by nobel prize-winning economists.

“Hang on a second,” Mervyn King, governor of the Bank of England, has a right to say. One of the latest Wikileaks US embassy cables shows King was pressing in March 2008 for significant bank recapitalisations and a stigma-free method to allow banks to get rid of their unwanted toxic assets without resorting to central banks. That is well before Brown’s actions that Autumn.

Here is the summary from the 17 March cable:

“King said there are two imperatives. First to find ways for banks to avoid the stigma of selling unwanted paper at distressed prices or going to a central bank for assistance. Second to ensure there’s a coordinated effort to possibly recapitalize the global banking system. For the first imperative, King suggested developing a pooling and auction process to unblock the large volume of financial investments for which there is currently no market. For the second imperative, King suggested that the US, UK, Switzerland, and perhaps Japan might form a temporary new group to jointly develop an effort to bring together sources of capital to recapitalize all major banks.”

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