Ralph Atkins

Berlin’s approach – and that of the European Central Bank – to handling the eurozone crisis, has come under strong attack from Peter Bofinger, economics professor at Würzburg university and an independent adviser to the German government. Without a profound change of strategy there was a “major risk of an unraveling of the euro area,” he has said.

A “dangerous” adjustment process is being forced on eurozone countries, he told a Financial Times/Credit Suisse conference in Frankfurt. The weakest spot is Greece, which faces rising unemployment and debt levels. As a result, political opposition to euro membership would grow, according to Prof Bofinger. “Sooner or later we will have a discussion in Greece: ‘why not leave the euro?’” A new currency could then be devalued and much of the government’s debt cancelled out. Once Greece had left, others would follow. 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

Rumour has it that certain European investors are no longer willing to provide Irish banks with overnight funding. If true, this could trigger the much-discussed bail-out (for it’s unlikely to end in default). A bail-out might still impose losses on bondholders, though, after recent discussions at the EU.

Until now, Ireland didn’t need any extra funding till mid-2011. Shenanigans in the secondary (resale) bond market were troubling, then, but did not need to affect the country’s cost of debt. Just as long as debt auctions took place once things had calmed down. 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…

 Read more

It was hardly a surprise when Ukraine passed the bar for a $15.5bn IMF bailout. Desperate to plug a budget gap and stay financially afloat, Kiev caved in to unpopular but economically necessary austerity measures in recent weeks.

While painful for average cash-strapped Ukrainians, a nod from the IMF should reopen the door to international debt and capital markets. But in which currency?

Ukraine was expected in coming months to try (again) to raise some $2bn on international debt markets through a eurobond issue. Earlier this month, it cancelled a similar sized issue after balking at the prospect of paying more than 8 per cent on 10 year debt. Ukraine now hopes that with the IMF deal in place, it can secure cheaper money. But there’s a growing question for bankers, bond investors and fund managers eyeing the country: could Ukraine opt for rouble bonds instead? Read more

Ralph Atkins

The European Central Bank is becoming masterly at making a virtue out of its modesty. Its latest boasting is about how little it has been spending on buying eurozone government bonds. Figures just released showed the ECB bought bonds worth only €176m last week – the lowest weekly amount since the programme started in early May. In the first week, it had bought €16.5bn.

ECB policymakers have hinted that the programme would be scaled back significantly. But the message from the ECB’s governing council is that this is a sign of strength, not weakness. Athanasios Orphanides, central bank governor of Cyprus, told a press conference in Nicosia that eurozone government bond spreads would ease as confidence in its economy and banking system returned. “I personally feel happy that the programme didn’t have to be activated to the same degree as earlier,” he said.

As a strategy, such chastity could, arguably, prove as effective in rebuilding financial market optimism as doing the opposite: that is, buying on a large scale and trumpeting its activism, which might have been the instinct of other central banks. Certainly, it fits with the emphasis Jean-Claude Trichet, ECB president, has recently placed on the ECB acting as an anchor of stability. Read more

There are worries that a €11.5bn loan from the Irish central bank won’t be repaid, after it was discovered the loans were secured against Anglo’s loans to property developers. The Irish Independent reports:

Fresh doubts have emerged about the taxpayers’ final bill for bailing out Anglo Irish Bank after the Department of Finance admitted an €11.5bn loan given to the bank is secured on highly risky property loans. The Government has already earmarked €22bn for the nationalised bank, but if the €11.5bn loan remains unpaid it would bring the total bill to €33.5bn. Read more

Everything a start-up could need: an office in Luxembourg, a website that’s impossible to find on Google, a jazzy logo and now a new boss. The new company even has €440bn to call upon. What could possibly go wrong?

Meet Klaus Regling, former Director-General for economic and financial affairs at the European Commission. He is a German national who has worked for the IMF in Washington and Jakarta, as well as in the private sector. Read more

James Politi

Remember Ben Bernanke, Fed chairman, and Hank Paulson, then treasury secretary, heading up to Capitol Hill in September 2008 in desperation, begging lawmakers to spend a whopping $700bn to save the financial system? That may seem like distant history by now, but that money came in very handy again today.

After the death of Robert Byrd, the Democratic senator from West Virginia, yesterday, the prospects for passage of the massive financial reform bill, whose different versions were so ably reconciled during a series of marathon negotiating sessions on Capitol Hill last week, suddenly hit a wallRead more

If rumour is true, things are looking up for the 100,000 Hungarians more than 90 days past their mortgage due date. What’s left of Hungary’s international loan may end up in a mortgage-relief fund, intended to allow people to rent their homes, reports Reuters.

The new fund – reported in daily Magyar Hirlap and not yet confirmed by officials -  would buy property (that would otherwise stand to be repossessed) from commercial banks, allowing mortgage-holders to rent the property. The paper also said that the bad loans of households would be replaced by state loans, though it did not name a source. Read more

Is it ECB reluctance to buy sovereign bonds that is shaking markets’ faith in Greece?

Insuring against default on Greek debt is again at an all-time high, closing yesterday at 1,012 and apparently passing the 1,100 mark today. These levels surpass even those in May, which prompted a €110bn bail-out, followed by a €440bn Europe-wide fund.

There is plenty of cash, clearly, but Ralph has often warned of ECB discomfort with the bond purchases. Is the market taking falling bond purchases as a lack of commitment? And, if so, would Greece have been better off without the policy?

The exceptionally strong correlation of -98 per cent is noteworthy (caveat 1. correlation is not proof of causation; 2. this is based on just six weekly data points). The figure is the correlation between the average Greek CDS price over a week (from Markit) and weekly ECB bond purchases (from SocGen).

The real test Read more

Greece was so last month. As attention shifts to Spain, one argument runs that the country will receive greater concern from ‘core’ European countries than Greece. But why? Read more

Simone Baribeau


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

“We think it is difficult for Asian central banks to hike significantly ahead of the Fed given that rising interest rate differentials complicate foreign exchange / liquidity management,” say analysts at Citigroup.  Expectations of Fed and ECB rate rises have been pushed back, too.

Trade disruptions have already been noted, lending credence to this report, via Marketwatch: 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