European Central Bank data, out Thursday, showed that the amount of cash that businesses and households are parking in Spanish banks rose in September for the first time since the spring.
Deposits held by Greek and Italian banks also rose last month, while those parked in German banks dipped slightly.
One swallow does not make a summer. But residents of the Eurotower will be cautiously optimistic that the fact that banks in Greece and Spain are no longer haemorrhaging deposits shows that one of the aims of the ECB’s Outright Monetary Transactions programme is being fulfilled with the central bank yet to buy a single bond.
The European Central Bank has now agreed to distribute the profits on its Greek government debt holdings. But Mario Draghi has been adamant that no similar deal will be offered to Lisbon, or indeed Dublin.
Earlier this month, Mr Draghi said any ECB offer on Greek debt was “unique” and that the central bank did not want to repeat the experience.
But will Portuguese or Irish taxpayers buy the ECB president’s line?
On the evidence of a press conference in Brussels today with an understandably careworn Olli Rehn, EU Commissioner for Economic and Monetary Affairs, it appears not.
The eurozone debt crisis will overshadow the European Central Bank’s monetary policy decision making on Thursday. It is fighting on several fronts. I posted earlier on the wording on inflation risks and interest rates. Here is what Jean-Claude Trichet, president, might say on other topics. As ever, there is always room for surprises…
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.
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,
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.
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.