Welcome back to our continuing coverage of the eurozone crisis. In the early hours of the morning, eurozone leaders emerged from their summit in Brussels with a deal designed to stem the sovereign debt crisis. The markets seem pleased but big questions on the details remain. We’ll bring you reactions, news and commentary as we get it throughout the day.
All times are London time. By Tom Burgis on the news desk in London, with contributions from FT correspondents around the world.
18.34: It’s time to wrap up the live blog for today. But keep reading FT.com through the evening for:
- More news on the eurozone rescue plan and reactions from around the world
- A Lex note on why the recapitalisation plan fails to resolve European banking’s vicious circle
- Market reports through the US afternoon
- Comment pieces coming later from Martin Wolf, Philip Stephens and a special guest
18.13: Der Spiegel has a nice tale about whether or not Angela Merkel did in fact apologise to Silvio Berlusconi for appearing to smirk when asked publicly if she still had faith in his leadership.
18.07: Chatham House has just published a paper arguing that international debt bailout systems are ill-equipped to handle any further instability.
“As the problems in the eurozone deepen and threaten to spread globally, action is required to strengthen financial safety nets beyond what was agreed by EU Heads of State on 27 October 2011.”
Read the full report by Stephen Pickford, former managing director at the UK Treasury and former executive director at the IMF.
18.00: An evening update of the day’s developments:
- At the end of trading in Europe, the FTSE Eurofirst 300 finished 3.69 per cent higher for the day at 1,020. US stocks rose too, with GDP numbers that matched expectations adding to a positive reception for the EU’s moves
- Despite the ebullience in equities markets, concerns remained over soveriegn debt in the eurozone. Italian government bond yields first sank to 5.7 per cent, before rebounding to 5.9 per cent, near their euro-era highs
- Questions remain over the details of the eurozone deal, notably over the terms of the new bonds that will replace existing Greek debt as part of the agreed 50 per cent “haircut” (see 13.17), how banks will go about raising new capital and where the cash to fund the various eurozone plans will come from
- European officials are keen to involve China and other Bric nations in a fund to buy eurozone debt, though here too there are no firm plans yet
17.28: Over to Athens, where Kerin Hope, the FT’s Greece correspondent, was at the finance minister’s press conference.
“Evangelos Venizelos has broken a week-long silence on the new Greek haircut much to the relief of Athens businesspeople and bankers. Flanked at a press conference by exhausted-looking advisers, the finance minister gave a few pointers on the benefits to Greece of Thursday’s deal:
- A €8bn slice of Greece’s first bail-out loan will be disbursed by mid-November, just in time to avert a funding crunch that would have delayed payments of wages and salaries at the end of the month, and to enable debt managers to pay back about €2bn of debt maturing at the beginning of December.
- A second loan package amounting to €130bn over the next three years will include funds to support the latest fiscal adjustment programme, recapitalise the country’s struggling banks and provide some liquidity for cash-strapped businesses.
- €30bn of this amount would be used as security – a “sweetener” backed by the EFSF in order to encourage participation in the new bond swap that Greece will propose by the end of this year.
- Greece will save €4.5-5bn annually on debt servicing costs – about 2.2 per cent of gross domestic product – thanks to a reduction in interest rates on the new funding.”
Kerian adds:
“Mr Venizelos took a robust position on the possibility that several of Greece’s largest banks would be nationalised in the next few months, as they would be forced to seek a capital injection from the bank stability fund set up last year by the European Union and International Monetary Fund. The interests of the Greek people would take precedence over those of the banks’ owners and shareholders, he said.
He also held out hope that Greeks would be spared further harsh austerity measures next year, provided that the 2012 budget is implemented fully. Mr Venizelos then rushed off to give a more detailed briefing to the cabinet.”
16.49: One focus of attention remains the Italian banking system and how it will cope with the higher capital requirements. Rachel Sanderson in Milan (see 15.01 and 14.19) has comments from the central bank (my emphasis).
“The Bank of Italy said that any recapitalisation programme ‘must be undertaken to avoid excessive deleveraging, with the aim of containing any eventual impact on the Italian economy. To achieve this objective, the central bank expects banks to limit distribution of dividends and bonuses.’
In a big change to its previous position, the central bank said it would also be possible for banks to use contingent capital (Cocos) if it was in line with EBA guidelines.
There are grave concerns about extra capital calls putting pressure on Italian banks being able to support vital sovereign debt purchases, while they are already facing substantial discounts on the Italian sovereign debt they already hold.”
16.44: The Greek government is making its first comments of the day.
“We must not lose this chance. It’s too big,” Evangelos Venizelos, finance minister, told reporters in Athens. “We will push ahead with all structural reforms.”
16.30: The star of the show – the euro itself – earlier hit a seven-week high of $1.4149.
Neil Dennis, FT markets reporter, says:
“The euro is currently trading near its highest levels of the day, up nearly 2 per cent at $1.4145 versus the dollar, while European equity markets are being led by France’s impressive 5.3 per cent gain. The EU deal really seems to eased a lot of nerves and in morning trade on Wall Street, the Dow Jones Industrial Average is up 2.1 per cent, thanks also to a better than expected third-quarter US GDP reading.”
16.19: Experts at the Council on Foreign Relations, a US think tank, are holding a conference call on the eurozone plan.
Sebastian Mallaby, a CFR international economy specialist, echoes concerns elsewhere about whether the 50 per cent writedown on Greek is “voluntary” or not.
This matters because if it is voluntary, CDS – insurance against a default – are not triggered, which is the outcome Europe’s political leaders favour. But that would mean that banks holding the bonds would miss out on an insurance payout from the swaps, which would be triggered only if the writedown were involuntary. Whether one can “volunteer” to take a 50 per cent cut on the value of one’s bonds in the teeth of negotiations with European leaders is perhaps a matter for debate.
In any case, Mr Mallaby reckons that “a voluntary writedown is in some ways more destabilising than an involuntary one”.
As for the much-vaunted plan to raise Chinese funds for a special vehicle to buy eurozone debt (one way in which the eurozone’s bailout fund could be “leveraged” four- or five-fold), Mr Mallaby says: “I don’t see why China would want to shoulder a bunch of risk in Europe when Germany has the cash and Germany’s refusing to do it.”
To be clear, Germany is chipping in to the bailout funding, but has strictly capped its contribution. Mr Mallaby reckons any Chinese or other Bric contribution agreed in time for next month’s G20 meeting would be “peanuts”.
15.51: Amid all this talk of credit default swaps, haircuts and Europeans dashing to Asia to beg for funds, one important group risks being overlooked. As Jaguar, posting a comment at 3.39pm on this blog below, notes:
“Now we can see what we have been thinking for a long time – that those politicians cannot find a solution because there is no solution there to be found. Federation is out of the question; Greece is technically bankrupt; there is not enough money available to avert disaster. Little wonder then that so many comments and trips to Asia and elsewhere are suggesting financial support from China, the BRICs together and anyone else with cash to spare!
Meanwhile there is no thought for all those who are presently paying for the total EU debt – us.”
15.48: Should anyone be thirsting for more details on CDS on Greek debt (see 13.43), the International Swaps and Derivatives Association, the body that referees the use of such instruments, has issued an updated Q&A on the Greek debt plan. The thinking so far appears to be that the haircut plan will not trigger a so-called “credit event” in CDS on Greek bonds.
15.21: The Brics angle to all of this is intriguing: what role, if any, will wealthy developing countries play in financing Europe’s response to the crisis, in particular the plan to buy distressed sovereign bonds? What conditions might be attached to such largesse? Gerrit Wiesmann, FT correspondent in Berlin, reports:
“Only hours after eurozone leaders disbanded, Klaus Regling, the boss of the EFSF, Europe’s bailout fund, boarded an aircraft to Asia in order to bang the drum for the currency bloc’s up-and-coming investment opportunities: sovereign bonds in part guaranteed by the EFSF, and stakes in a special-purpose investment vehicle which would be dedicated to buying a eurozone country’s bonds.
One German official said Mr Regling had been dispatched to ‘conduct market tests’ in order to assess what mixture of sovereign risk and EFSF-backing investors – private institutions as well as sovereign wealth funds – might be partial to. Mr Regling’s one-man road-show has been circling the globe ever since the EFSF started selling its own bonds at the start of the year. The auction proceeds have been used to fund assistance packages for Ireland and Portugal, and in future also Greece.
The new sales pitch was said to be complicated because risk-appetite varied from investor to investor, and riskiness from one eurozone sovereign to another. As a result, eurozone finance ministers would only be able to detail how these new instruments would work in a month’s time.”
15.08: Some FT video just through, with more reaction to the euro developments. Richard Milne, capital markets editor, asks Guillaume Menuet, director of Citi Economics, if investors are likely to stay satisfied once they have digested the detail of the announcement.
15.01: Rachel Sanderson in Milan (see 14.19, has the first comments today from the Bank of Italy, Italy’s central bank, delivered by Annamaria Tarantola, deputy director of the Bank of Italy responsible for banking oversight:
“The Italian banking system is solid, it is moving in an efficient direction and it is capable of supporting businesses and families even during the most acute phase of the financial crisis.”
14.47: Spurred by the eurozone package and healthy US GDP numbers, the Dow Jones Industrial Average has passed 12,000 points.
14.43: High Frequency Economics, a widely-cited research house not usually known for a bearish or bullish bias, warns funding the euro summit package agreed last night would have a drastic impact on the eurozone economy.
“The programme is in place but the funding is not. Funding all of this will, in our opinion, break the economy and cause a depression the likes of which the Euroland has never seen. No-one seems to be thinking about this,” writes chief economist Carl Weinberg.
“The un-discussed question is this: Where is the money going to come from to do all this? Thus far, the only money has put on the table has been from the banks and other private investors. They have agreed to accept a 50 per cent hair cut on Greek government bonds. That money will come from their capital base, which in turn will be supplemented and replaced … with what? Well in many cases that money will come out of banks’ profits – which means out of the profits of shareholders – and from reducing banks’ balance sheets. That means less credit for everyone, at least for banks whose assets are loans to the private non-bank sector. For banks that cannot increase their capital base, the money may come from their governments. Where will governments, already running deficits without exception, get their money? They will borrow it, of course, so it will come of the savings of people and businesses – monies that otherwise would have been used for current consumption or investment in the future of the economy. In other words, it will reduce GDP and that means it will cost the economy jobs and income, opening the door to lower wages and thus lower prices.”
Mr Weinberg adds:
“Seen from the funding side, the euro package will divert €1,300bn worth of savings from private sector investment and spending. That must mean a reduction of Euroland’s €9400bn GDP by €1300bn, or 13.8 per cent over the period in which it is financed … if, indeed, all the monies can be raised. In our view, this is a reason to expect a double-digit drop in GDP if this latest scheme is funded over the next year. That would be an economic depression of historic size with catastrophic consequences. At minimum, the long-term funding costs of the public sector will soar as this scheme is financed, and not just yields on PIIGS [Portugal, Italy, Ireland, Greece and Spain] bonds but even the yield paid on the mighty Bund. The increases in bond yields should begin right away.”
14.33: In Brussels, EU officials and journalists are walking around in a daze following the euro-summmit’s 6am finish on Thursday morning, reports the FT’s Stanley Pignal:
“None look quite as tired as José Manuel Barroso, Commission president, and Herman Van Rompuy, European Council president, who went from the summit straight to the airport to catch a private jet to Strasbourg. They are there to brief the European parliament, which once a month decamps there from its usual Brussels base.
Van Rompuy told MEPs: ‘Markets will now see our strong determination and will now give us the time needed … This isn’t the end of the crisis, but it may be that we’ve made a start in terms of what we can do as institutions and what we can do collectively.’
Barroso for his part announced a title bump for Olli Rehn, the Economic and Monetary Affairs Commissioner, who becomes one of eight vice-presidents of the Commission.
“Rehn will also exercise the commission’s responsibilities in the external representation of the Euro area,” the Commission said in a statement.
That should give the Finn an added role in eurozone summits. However, it stops well short of making him a new “Mr Euro” sitting both in the Commission and in the Council, which represents member states, as some had called for.
After making their own speeches, Barroso and Van Rompuy got to listen to MEPs venting their views on last night’s deal.
“If these decisions had been taken a year ago, we wouldn’t be in this position today,” Martin Schulz, leader of the Socialist bloc in the parliament, castigated them.
The Eurosceptic European Conservatives and Reformists group chairman said it was “like rearranging the deck chairs on the Titanic”.
14.19 Italian banks are due to comment later on Thursday after the Milan stock market closes about demands from Brussels that the system requires €15bn in additional capital. Rachel Sanderson reports from Milan:
“Italy’s five largest banks – UniCredit, Intesa Sanpaolo, Monte dei Paschi di Siena, Banco Popolare Italiana and UBI Banca – are in close talks with the Italian banking association and the Bank of Italy ahead of making a statement around 1730 Milan time. Banca Popolare di Milano, Italy’s sixth largest bank by assets, is already due next week to launch a rights issue of €800m, bigger than its market valuation, under pressure from the Bank of Italy.
Still, the mood in Italy was made clear by the head of Italy’s banking association, Giuseppe Mussari, late on Wednesday who said that he had sent a letter to the European Commission and other EU authorities expressing his ‘profound perplexity’ that the Italian banking system should require more capital.
Italian banks are smarting at the edict from Brussels after the system, under pressure from Mario Draghi, the former Bank of Italy governor who is now heading to the European Central Bank, pressed them to raise €10bn of capital in the spring this year.
Sharp falls in their share prices since, rising funding costs and a squeeze on liquidity as a result of the eurozone contagion means many are still looking exposed.
Attention is most closely focused on UniCredit, Italy’s largest bank by assets, which raised €7bn from 2007 to 2009 but was the only large Italian institution to fail to go to the market this spring. Analysts estimate it requires €5bn-8bn of capital to put it safely within the new EU limits.
Senior bankers familiar with UniCredit say if a market window presents itself, the bank, which operates in 22 countries, may be prepared to undertake a rights issue. Otherwise, it is expected that Federico Ghizzoni, its chief executive, will present a plan to shrink itself within EU limits by asset disposals and cost cuts in its cost-heavy Italian operations.”
13.43: Over on FT Alphaville, Lisa Pollack has produced a primer on how Greek credit default swaps (CDS) – insurance against a default and the subject of much gnashing of teeth – work.
13.38: Further to the questions (see 12.45) about what a more tightly knit eurozone means for non-euro members of the EU, Beth Rigby of the FT’s UK politics team tweets:
13.30: Here are all those banks covered by the new capital requirements decided by EU leaders in full (on page 6)
13.17: 
Fresh from an all-night session of summitry, Peter Spiegel, FT Brussels bureau chief, has a pressing question: when is a haircut not a haircut?
“That’s the question many are asking after European leaders reached a headline-grabbing deal early this morning that would have Greek bondholders accept a 50 per cent reduction in the face value of their bonds. The problem is, without details on how the deal will be worked out, it’s impossible to determine how real that reduction is.
Greek bondholders will take their haircut in a bond swap programme. It will work something like this: a private investor trades in his €100 Greek bond for a new €50 Greek bond. There’s your 50 per cent face value haircut.
But what’s the interest rate on that bond? And how quickly will it get paid off? A €50 bond that has – just for argument’s sake – an annual interest rate of 20 per cent (which is near what current Greek bonds are now trading at) wouldn’t be much of haircut at all.
It’s doubtful new bonds will have anywhere near that kind of annual interest rate, which is known as coupon in bond-speak. In the July bond swap, for example, the new bonds had coupons starting at 4 per cent. But the key to understanding why the early morning deal is incomplete is to understand how powerful changes in coupons and maturities can be to a value of a bond. It can drastically change the net present value (NPV) of the new bond you’re getting. And the dirty little secret about the new deal? These things haven’t been decided yet.
Peter was among a small group of reporters who met the chief negotiator for Greek bondholders, Institute of International Finance managing director Charles Dallara, before he flew back to Washington this morning:
“Dallara was very clear that the lack of final details on the bond swap and NPV determination gave him quite a bit of room to manoeuvre: ‘The specific elements of the deal – and here’s where you may be a little bit surprised, but this is where we decided to end last night – the specific elements of the deal, that is to say the structure of the new claim on Greece, remains to be negotiated. So we’re not able to give you definitive numbers that this is the coupon.’
Dallara says his opening offer to European negotiators was a bond swap that would have amounted to about a 46% reduction in net present value, and depending how the swap is structured, Dallara could still theoretically get what he wanted: ‘That is very crucial to us and we feel confident we protected our interest in containing the net present value loss. We’re not able to put a specific number on it, because that will depend. We’ve done multiple options of coupons and constructions built around this €30bn package and we feel confident that within the framework of that envelope that we can reach agreement on the particulars that protect the NPV loss. We didn’t reach agreement on that largely because the heads [Germany’s Angela Merkel and France’s Nicolas Sarkozy] did not feel it was appropriate for them to deal with this level of detail. We discussed that particular issue last night directly with Chancellor Merkel and President Sarkozy.’
So while the deal will certainly cut Greece’s debt levels, it remains impossible to judge just how much of a hit Greek bondholders will really take. Remember that the highly-touted July 21 deal kept markets happy for a few days until they began to look at the details of what had been agreed. While last night’s has stronger underpinning than the July deal, we’ll be keeping a close eye on the details.”
13.02: As traders digest the EU’s plans, Rob Budden, the FT’s deputy markets editor, takes the temperature on the bourses:
A man looks at an electronic board displaying a rise in major market indices around the world, outside a brokerage in Tokyo earlier today
“For the moment at least, markets are giving the thumbs up to the summit’s early morning announcements with a good old-fashioned ‘risk on’ rally. France’s banks are leading the charge with Credit Agricole up over 20 per cent and the Eurofirst 300 up around 3.3 per cent. Meanwhile Italian 10-year bond yields have fallen 12 basis points to 5.81 per cent. Reflecting concerns of the costs of a deal on the core countries, German Bund yields, correspondingly, are up 13bp at 2.16 per cent.”
12.50: This just in from the British Bankers’ Association welcoming the eurozone agreement:
“We look forward to this bringing about the necessary stability to the system and note that early market sentiment around the world is positive. Bank recapitalisation has taken place here and so UK banks already meet the new requirements without having to raise further funds. We believe the eurozone should now focus on a quick implementation of the recovery plan and on building economic recovery.”
And Megan Murphy, the FT’s investment banking correspondent, has pulled together all the banking reaction from across Europe.
12.45: After the summit, the questions. Markets are rallying on the eurozone plan but several big posers remain:
- Why are the markets so chipper when informed opinion (see 11.11) largely agrees that the summit failed to deliver any resembling a comprehensive solution to Europe’s economic woes?
- Will China ride to the rescue? US markets closed up yesterday before there was anything concrete from Brussels, seemingly on the belief that Beijing would chip in to a fund to buy struggling eurozone debt. Nicolas Sarkozy, France’s president is due to chew this over with Hu Jintao, his Chinese counterpart, today
- What news of CDS? There was much talk ahead of the summit about the risk of a cut in the value of Greek bonds triggering a “credit event”, potentially causing further unease about banks’ finances
- How much capital do the banks really have to raise? Banking stocks have rallied today but there are questions about exactly what kind of assets will qualify for the newly raised capital buffers – and queries about Italian lenders, given their exposure to national debt
- And beyond all this, whither Europe? Many, including former UK prime minister Sir John Major on the op-ed page of today’s FT, see a clear road ahead towards fiscal union to complement monetary union. Are we heading for a two-track Europe, with the 17 members of the single currency knit tightly in the centre and the other 10 EU members banished to the periphery of decision-making? What would that mean for Croatia, Turkey and other aspirant future members?
Are you an investor, a trader, a voter, a protester? Do you run a European country? We are very keen to hear your views on all these developments in the comments section at the bottom of this blog.
12.17: Aside from the markets, there is of course an intricate political dimension to the the eurozone plan – and how it will play out within the domestic politics of member countries. For the first time in a long while, Silvio Berlusconi, under extreme pressure in the run-up to the summit, appears to have Italy’s opposition parties on the back foot, reports Guy Dinmore, the FT’s correspondent in Rome:
“The eurozone summit cautiously welcomed the Italian prime minister’s commitments to a package of measures aimed at cutting state spending, raising money by selling assets and promoting growth. Italy’s opposition leaders had been banking on a rejection of what they expected to be a mealy-mouthed list of vague promises with no firm timetable. They were disappointed. This has put them in a tricky position — do they try to block the reforms and look churlish in the eyes of many Italians who are losing faith with the entire ruling elite?
From initial statements they appear to be betting that differences within Mr Berlusconi’s own fractured coalition will sink the proposed reforms even without opposition intervention, thus paving the way for new elections, perhaps next spring. Given reports about the desperate state of relations between the prime minister and Giulio Tremonti, finance minister, as well as tensions with the Northern League coalition partners, opposition hopes of an internal government collapse may yet be realised.
Meanwhile reaction from the trades unions — much less powerful these days — was more predictable, with leaders issuing a call to arms to resist forced redundancies in the public and private sector, while complaining they were never consulted.
Mr Berlusconi knows he has to deliver. He will not escape the scrutiny of Brussels and that of Mario Draghi, who is off to Frankfurt to run the ECB from next Tuesday. Jose Manuel Barroso, president of the European Commission, has given Mr Berlusconi his orders. ‘The key is implementation. It is not enough to make commitments, it is necessary now to check if they are really implementing,’ Mr Barroso warned last night.”
11.52: The Institute of International Finance, which represented banks that hold Greek bonds in the haircut negotiations with European governments, has put out a statement.
Josef Ackermann, chief executive of Deutsche Bank and IIF chairman, says:
“We are very pleased with the agreement reached. It was appropriate for all parties to move on the July 21 decisions in light of the changed circumstances. The Greek economy has weakened considerably since that time and the different parties are taking additional difficult measures to lay the basis for stabilization and renewed growth. European leaders are also doing more, and as all parties have recognized that not only the future of Greece but the future of Europe was at stake. The outcome is a good one for Greece, Europe and the investors, and we look forward to its early implementation.”
Charles Dallara, IIF Managing Director, adds:
“This voluntary substantial reduction in Greek debt by the private sector, along with additional official support, provides an historical opportunity for Greece to revitalize its economy and reap the benefits of the difficult measures the Greek people have undertaken. We look forward to work with the Greek and European authorities to translate this framework into a concrete agreement that can deliver an early reduction in Greece’s debt and place it squarely on a path toward debt sustainability. Throughout the process we have enjoyed strong support from the IIF’s Board of Directors and from many leaders of other financial institutions.”
11.11: We’ll have a round-up of all the latest developments from the morning shortly, but for now two FT comment pieces offer trenchant interpretations of the eurozone plan.
Wolfgang Münchau writes on the FT’s A-List:
The day may yet come when the eurozone finally agrees a comprehensive package to end the crisis, but this was not the day. What policymakers agreed at 4am Brussels time on Thursday came close to what they set out to do. They secured a “voluntary” deal with the banks, and they agreed the outer perimeters of a system to leverage the European financial stability facility. But none of this is going to end the crisis.
And Gavyn Davies opines:
In typical European fashion, a summit deal which seemed out of reach at midnight last night was triumphantly unveiled at 4am. The deal does not, and was not intended to, have any effect on the core problems facing the eurozone. There is still an urgent need to restore growth to economies which are hamstrung by uncompetitive business sectors, and continuous fiscal tightening. Recession still looms, especially in the southern economies.
For the latest from the markets, see FT Alphaville.
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