08 November 2011

European rescue package: truth and fallacy

It occurred to me that the EUR100 bn private sector participation to the latest Greek rescue might no be as large as trumpeted by European leaders on 27th October. 
The statement:
“…we invite Greece, private investors and all parties concerned to develop a voluntary bond exchange with a nominal discount of 50% on notional Greek debt held by private investors.”
The facts:
1. Greek’s sovereign debt holders split:
  • Commercial banks: EUR81 bn
  • ECB: EUR45 bn
  • EU/IMF: EUR65 bn
  • Others (SWFs, asset managers, central banks, public sector funds): EUR159 bn
2. As per EBA data published in July stress test, Greek banks shared 59% of the total held by commercial banks, i.e. EUR48 bn. The reduction in Greek debt will be at least partly compensated by a bank recapitalization (I estimate it at around EUR30 bn – same as the EBA): the net effect on the Geek sovereign debt reduction is therefore rather minimal at approximately EUR18 bn (assuming that Greece and not the EFSF recapitalizes). 
3. According to a research published by Barclay’s Bank in July, EUR11.3 bn are held by EZ Insurance companies: 50% is EUR5.7 bn.
4. Non-Greek European banks will take a EUR16.5 bn loss.
5. Remains private assets managers and smaller holders of Greek bonds which I believe are not significant: say EUR 30bn to be generous or a EUR15 bn loss.
The total losses realized by the private sector would therefore amount to EUR55 bn, far from the EUR100 bn trumpeted.
If non-Greek European private sector banks would write-down +/- EUR16.5 bn, one may wonder why the EBA requires them to raise EUR76 bn whilst they are profitable enough (but for a few exceptions) to absorb losses on Greece and reach the 9.5% Basle III capital requirements.
Because, there is more to come; then EUR106 bn will not be enough; watch non-performing private sector loans in Greece and elsewhere as well as Italy, France, Portugal, Belgium, etc. sovereign debt… Italy’s interest rates on its debt are close to unsustainable at 6.6% and France together with Belgium are rapidly going the same way: any 1% increase translates into +/- EUR19 bn additional interest payment in a full year for Italy and EUR17 bn for France.
The EUR1 tr EFSF will not be enough, nor the EUR200 bn recapitalization recommended by the IMF: but for a euro split/collapse, the only remaining solution would be for the ECB to monetize sovereign debt for BIGSPIF. Germany has already started to eat its hat; when enough will be enough for Germans?…
BIGSPIF: Belgium, Ireland, Greece, Spain, Portugal, Italy, France 
07 November 2011

European Banking Authority: The EBA details the EU measures to restore confidence in the banking sector


The Institute of International Finance: Press Statement on Euro Area Stablization Measures


European Commission: Euro Summit Statement

03 November 2011

Eurozone as we have known it: end of story

1. Greece

Tuesday’s announcement by the Greek Prime Minister, Giorgios Papandreou, of an impeding referendum on the second rescue package concluded a few days before sent market rolling and policy makers tangling in despair and frustration.

It was doubtful that this rescue package would work, but at least it was buying (wasting) a bit more time.

Interesting enough Wednesday’s evening discussion between Merkel, Sarkozy and Papandreou ended up for the first by mentioning the exit of euro for Greece if Greeks vote no to the rescue package, which so far was dumb impossible… As I wrote to JC Juncker in July, Europe lacks credibility and its first task should be to reinstate it: For 2 years, the opposite way has been followed by a succession of denials and scapegoating.

If I were Greek, I would go straight away to my bank and get all my cash to hide it under the mattress; so, expect a run on Greek banks that are bankrupted anyway with their load of junk Greek sovereign debt.

November-December 2011 debt redemption schedule:
11 November: EUR 2 bn (26 wk T bills) + 49 mio interest
18 November: EUR 1.6 bn (13 wk T bills) + 18 mio interest
12 December: EUR 2 bn (26 wk T bills) + 50 mio interest

23 December: EUR 2 bn (13 wk T bills) + 46 mio interest

According to Papandreou, Greece has enough money to survive until mi-December, so just after the referendum due to take place 4th December.

Well, if there is a referendum (there are rumors it would be called off; what a farce!!): Papandreou called a vote of confidence for Friday; if he does not win then new elections would be called and the referendum becomes history. The EU and IMF would provide Greece with its EUR 8 bn 6th tranche from the first EUR 110 bn rescue package.
Alternatively a Government of national union could be formed with the opposition. This would be the best outcome for the EZ and the euro.

2. Italy

Friday’s bond auction witnessed an interest rate increase to 6% (so before Papandreou referendum announcement) and since, borrowing costs have reached a record high (10 year bonds reached a high of 6.399% today), not seen before the creation of the euro. The cost of debt is not sustainable.

Wednesday evening Berlusconi could not get cabinet approval when his Northern League ally refused to increase the retirement age from 65 to 67 years as demanded by Merkel-Sarkozy for the G20 meeting in Cannes, which castes doubts about Italy’s ability to implement unpopular measure to reduce its (slowly) mounting debt.
Whilst Italy’s economic situation is on many indicator much less worse than France’s, its weak political system, large legacy debt and slow growth are making the country the target of markets.
France is however not far behind.

3. France

On many indicators, France is in a worse situation of Italy: debt increase (will soon catch up Italy), primary budget deficit, trade balance and unemployment.

The 2012 budget is based on a 1.75% real GDP growth that will not be reached: the consensus stands at 0.9%. This means finding EUR8-9 bn to maintain the objective of deficit reduction down to 4.7% in 2012 and 3% in 2013. However, most of the rumored measures are in the form of tax increase and not economies. Yet with the previous EUR11 bn deficit reduction announced a few weeks ago, EUR1 bn was made of cost cutting whilst EUR10 bn were tax increases. France has always the tendency to increase taxes instead of reining in it overload civil service (in particular with local authorities which has boomed for the past 10-15 years).
Markets are taking notice and spreads with Bunds have trebled since early July:
France is next in line (together with Belgium) and is at risk of loosing (should loose) it AAA rating which is the cornerstone of the EFSF together with Germany’s AAA. Any downgrade will pressure rates at which the EFSF borrows ; yet, Wednesday, the EFSF had to postpone a EUR3 bn bond issue schedule in the next fortnight and 10 yr spread over German Bunds increased to 1.5% from 0.7% in September.

The current crisis exemplified, if needed to be convinced, that the construction of the EU and EZ is a Franco-German affair. Whilst Germany is clearly in the driving seat (in the end who gets the money decides), there still is an appearance of equality between the two countries: would France loose its AAA, this balance would be shattered and Germany could, politely, pursue its own interest, eastwards…


France is the hidden weak link of core EZ and this begins to appear openly. I very much doubt that France will be able to abide by its budget deficit forecast without number muddling (France can always call on the CDC – a large French state-owned financial institution- to get a couple of billions euros).

After this crisis, the EZ cannot be the same: the way it works, decisions taken, budgets voted, Maastricht criteria respected (or even more stringent ones: no budget deficit), money spent, will make the EZ, if it survives, a different planet. Even its perimeter can be challenged. I still believe that a narrower EZ with a euro DM is a possible outcome: the question is, would France be part of it?
Anyway, Europe will be German or will not be.
03 Novemberg 2011


Bloomberg: Europe’s Financial Crisis Deepens as Greek Government Teeters


Bloomberg: Berlusconi Arrives at G-20 ‘Empty-Handed’ After Vowing Economic Overhaul


Financial Times: EFSF postpones €3bn bond issue