Claire Jones

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. Read more

Claire Jones

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. Read more

Ralph Atkins

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… Read more

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

Deja vu? No, ratings agency Standard and Poors has cut Portugal’s credit rating for the second time in less than a week, this time one notch to BBB-, leaving the rating with a negative outlook. Last week the agency cut by two notches – the most it could reasonably cut, given an explicit indication that they would be “unlikely” to cut by more. The agency left the rating on negative creditwatch, but that is usually interpreted to mean a further cut is likely in three months, not three days.

Greek ratings, meanwhile, have been cut deeper into junk territory with a two notch downgrade to BB-. The rating remains on negative creditwatch meaning a further cut is likely if there is no improvement; typically, that would be within three months, but in the current climate, who knows?

In both cases, the downgrades have been prompted by the structure of the permanent eurozone rescue fund, the ESM, which was confirmed at the end of last week by eurozone leaders. Two things in particular. One is the issue of subordination Read more

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

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.

 Read more

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

Ralph Atkins

Moody’s, the credit rating agency, has created a political storm in Athens by downgrading Greece’s government bonds by a further three notches. At B1 (down from Ba1), Greek bonds now “lack the characteristics of a desirable investment,” in Moody’s terminology.

But they are still acceptable for use as collateral in European Central Bank liquidity operations. Last May, the ECB suspended the minimum credit rating requirement for Greek debt – on the grounds that it had confidence in the country’s economic rescue plans, whatever the credit rating agencies thought. In other words, Greek banks could continue to obtain unlimited liquidity from the ECB, using their government bonds as collateral.

What is more, Moody’s announcement does not change anything in terms of the “haircut” – or discount – applied by the ECB to Greek bonds when calculating how much liquidity banks can obtain. Read more

Moody’s rating agency has just downgraded Greece’s government bonds to B1 from Ba1, placing the debt on negative outlook, meaning further downgrades are likely. The move takes Greek debt from borderline junk to “highly speculative” territory.

Fitch and S&P still rate Greek debt three notches higher at BB+ (the equivalent of Ba1, Moody’s previous rating), but this might not last long. Fitch last downgraded on January 14 and has a negative outlook on the rating, while S&P last downgraded in December but has the rating on credit watch negative (meaning a downgrade is imminent, if there is no material improvement). Read more

ECB executive board member Lorenzo Bini Smaghi roundly rebuffs the conclusion reached by a thinktank this week: namely, that Greece would have to restructure its debt. Read the accompanying article, or watch Ralph’s interview:

Ralph Atkins

Talk of a Greek debt restructuring is becoming ever harder to avoid for European policymakers. A paper just published by the respected Bruegel think-tank concludes “that Greece has become insolvent and that further lending without a significant enough debt reduction is not a viable strategy”.

According to Bruegel’s calculations, even on optimistic assumptions the primary surplus required to reduce Greece’s debt ratio to 60 per cent of GDP in 20 years would be 8.4 per cent of GDP, rising to 14.5 per cent under a cautious scenario. As Bruegel’s economists write: “Over the last 50 years, no country in the OECD (except Norway, thanks to oil surpluses) has ever sustained a primary surplus above 6 per cent of GDP.”

Greece’s problems have been exacerbated by deep investor mistrust and its heavy reliance on overseas financing. The good news is that the situation in  other eurozone “peripheral” countries is not as acute. As Bruegel also notes, the European Union establishment has also moved away from complete denial about the Greek problem. Read more

Do the markets know something we don’t?

S&P cut Ireland’s credit rating by one notch today, taking it to A- (still several notches above Moody’s and Fitch, at equivalent peggings of Baa1 or BBB+ respectively). Yet markets continue to relax, with the Irish ten-year cost of debt falling 20 basis points today, a fifth of one percent; at 5.45pm they were 8.8 per cent.

The cost of debt for Spain, Portugal, Italy, Belgium and Greece have all fallen, too. Greek yields are below 11 per cent for the first time since early November.

Gary Jenkins, head of fixed income for Evolution Securities, says: “It is interesting that while the story [that the EFSF mandate will be widened to allow debt buybacks] has been doing the rounds for three weeks now, yesterday was the first day since then that we have witnessed yields moves of such a magnitude, which does make one wonder if there has not been a leak ahead of the European leaders’ summit on Friday.” Read more

Ralph Atkins

A debt restructuring in Europe “is not in the plan,” Jean-Claude Trichet, European Central Bank president, has just told Bloomberg Television. The ECB would certainly hope that was not the case – it would worry about contagion effects.

But Mr Trichet’s choice of words did not appear to rule out the possibility in every eventuality. Perhaps that was wise: the consensus among financial market economists is that the level of Greece’s public indebtedness makes some kind of Greek rescheduling inevitable in coming months or years.

The ECB’s thinking towards Greece etc has not necessarily changed, however. Read more

Chris Giles

Last week, the Swiss National Bank let it be known that it no longer accepted Portuguese sovereign debt as collateral in its open market operations. An official from the SNB said: “Only securities that fulfil stringent requirements with regard to credit rating and liquidity are accepted as collateral by the National Bank”.

The Bank of England has almost identical criteria for accepting euro-denominated sovereign bonds in its market operations. They have to be rated Aa3 or higher on the Moody’s scale or higher than that by at least two other ratings agencies and traded in liquid markets.

Portuguese and Irish sovereign bonds fail this test.  But the Bank does not apply a mechanical rule and, as its daily collateral list shows, it is still smiling on Portugal and Ireland, but not Greece. In a market notice from the time of the Greek crisis, the Bank asserts its discretion, insisting it “forms its own independent view on collateral it takes in its operations”. Read more

Rumour has it that the ECB is buying Greek bonds again. Bloomberg news wire quotes a single person with knowledge of the transactions, who said purchases were mostly in maturities of five years.

The news comes as yields on 10-year Greek government debt surpass the record levels last seen in the May bail-out. Back then, yields spiked from about 8 per cent to more than 12 per cent, before falling equally sharply back following bail-out talks. This time, yields have grown slowly and steadily (see chart). These yields are what the market charges on reselling government debt: they are not the actual cost of debt to the government as at auction. In the absence of continuous auctions, however, they are a good proxy.

The cost of debt in the four “peripheral” countries – Greece, Portugal, Spain and Ireland – all reacted strangely to Ireland’s bail-out. The bail-out was intended to reassure markets, but yields did not fall as much as expected and since then have risen in all cases. Only in Spain are yields now tempering. Read more

It jumped last but – not to be outdone – Moody’s has slashed five notches off its Ireland rating, taking it to Baa1 (which is equivalent to Fitch’s BBB+ and about three notches above junk). They’ve also slapped a negative outlook on it, meaning a further downgrade is likely in the next two years if there is no improvement. A multi-notch downgrade was likely – the ratings agency said so itself – though it has come relatively late in the game, after similar cuts by S&P and Fitch.

S&P now offers Ireland the highest rating at A, two notches above Fitch and Moody’s. Under the original ECB collateral requirements of A-, this would mean Ireland’s bonds could still be used – just – as collateral at the central bank. As it is, the “temporary” lowering of collateral requirements to BBB- is still in force, so Ireland need not worry. (As with Greece, the ECB would probably make an exception for Ireland even if its ratings were cut below this level.) 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

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