Archive for the ‘Eurozone’ Category
Across the continent, European leaders warned that 2012 was likely to be tougher than 2011.
Germany:
Angela Merkel told German voters “next year will no doubt be more difficult than 2011.” In her televised address, she said Europe was experiencing its “harshest test in decades” but would ultimately be made stronger by the crisis.
France:
In a sombre address on national television Nicolas Sarkozy said “This extraordinary crisis, without doubt the gravest since the second world war, is not over … you are ending the year more anxious for yourselves and your children.”
Italy:
Prime Minister Mario Monti said in his end-of-year address last week that Italy had hauled itself back from the “edge of the precipice” but he said more needed to be done to reform labor markets and the service sector to restore competitiveness to the stalling economy. President Giorgio Napolitano urged Italians to make sacrifices to rescue the country’s public finances. “Sacrifices are necessary to ensure the future of young people, it’s our objective and a commitment we cannot avoid. No one, no social group, can today avoid the commitment to contribute to the clean-up of public finances in order to prevent the financial collapse of Italy.”
ATHENS. The spotlight opens on George Papandreou, who is at home in bed, tossing in his sleep.
Papandreou (waking up): Great gods! Will these nights never end? Will daylight never come? I heard the cock crow hours ago, but my indolent and totally corrupt people are still snoring away! Curses on this debt crisis! Curses on Pasok! I can’t even sack my own public servants.
The spotlight switches to the top floor of Papandreou’s home and reveals the Troika of Creditors, who are armed with iPads and studying a pile of dusty Greek ledgers.
First Creditor: It really is quite remarkable. Until last month more than 1,000 dead pensioners were receiving payments from Greece’s biggest pension fund.
Second Creditor: And what about this? The Greek state considers 637 types of job to be so arduous that the people doing them get early retirement.
First Creditor: What sort of people?
Second Creditor: Steam bath attendants. Radio technicians. Hairdressers.
First Creditor (thoughtfully): One could look at things another way. International civil servants such as us get generous pensions and early retirement, too.
Second Creditor (stiffly): We’re not in Athens to look at things another way.
Third Creditor: Absolutely right. We’re here to look into the questions that really matter. For example, the difference between who owns swimming pools and who declares ownership of swimming pools in their tax returns. (He displays a Google Map.) The two categories do not exactly overlap – at least, not in the suburb of Ekali.
Second Creditor: Let me guess. Ten thousand swimming pools and only 1,000 owners.
Third Creditor: You underestimate the addiction to fiction of the pool-loving Greek. Ekali has 16,974 pools. But according to the tax returns there are only 324 owners.
The spotlight switches to Papandreou.
Papandreou (despairingly): Who do we owe all this money to? How much do we owe? Let me add up the interest … It’s a nightmare, these debts are deeper than the Bay of Salamis! Sometimes I wish I were back at Amherst, playing Bob Dylan songs on my guitar. But I mustn’t give up! It was Andreas, that father of mine, who got my country into this mess. I’m not like him. I’m not really a socialist at all. But it’s my duty to save Greece. I know! I’ll call a referendum!
The spotlight switches back to the Troika of Creditors.
First Creditor: Did someone say the word “referendum”?
Second Creditor: No, we’re not in Ireland.
FRANKFURT. Jean-Claude Trichet and Mario Draghi are seated at a table. The Chorus of the Clouds watches from above.
Leader of the Chorus: Oh, mortal central bankers, you who wish to instruct yourselves in our great wisdom, take heed that you must know how to hold your own, how to withstand extreme market pressures, and how to press on without admitting to fatigue. Then you will enjoy the greatest of blessings, to live and think more clearly than the common herd and to shine in the contests of words.
Trichet (briskly, to Draghi): So, we’re clear about the first rule of central banking.
Draghi: Buy Greek bonds and call it the removal of impediments to the transition mechanism of a price stability-oriented monetary policy.
Trichet (stares at Draghi): All right, then, the second rule. It is, mon cher Mario, that one should never speak ill of one’s colleagues, especially at the European Central Bank. Here in Frankfurt we have done more than any institution in Europe, or in the entire world, to keep the euro alive. Every single one of us deserves credit.
Draghi: With that sentiment I am in complete, utter and total agreement.
(A pause.)
Trichet: All the same, I have my doubts about old Axel.
Draghi: Me, too. What on earth is he playing at?
Trichet: I don’t mind him opposing the bond purchase programme. You expect nothing less from a Bundesbank president.
Draghi: It’s natural.
Trichet: But he shouldn’t express his opposition in public.
Draghi: It’s unnatural.
Trichet: He’s having a terrible effect on German opinion. He’s making our job twice as difficult.
Enter a slave bearing a tray.
Slave: A letter from Axel Weber, master.
Trichet (opens letter and reads): Well, he has solved our problem. He’s resigning.
Draghi: Not before time.
Trichet: He’ll be lecturing in America before you can say Schuldenbremse. (Thinks.) Of course, this will clear the way for someone else to step into my shoes here.
Draghi (innocently): What’s your size?
Leader of the Chorus (to Draghi): Tell us boldly what you want of us. Then you cannot fail to succeed. When we have finished teaching you, your glory among mortals will reach even to the skies.
Draghi: Well, there is a rather delicate business in Rome …
ROME. Silvio Berlusconi is hosting his last bunga bunga party as prime minister. A throng of television personalities and showgirls surrounds him. Enter a slave.
Slave: The nurses’ uniforms are ready, master.
Berlusconi: Grazie. Here, Vlada, you’re good with figures. Answer me a question.
Vlada the Heart-Stealer: What is it, Papi?
Berlusconi: Why is the number eight so significant in my life?
Vlada the Heart-Stealer: Well, you once said you did eight of us in one night.
Berlusconi: Brava! But tonight that’s not what I have in mind. The reason is that there were eight traitors in my party who deserted me in parliament. My enemies are like bedbugs, advancing on me from all corners. They are biting me, they are gnawing at my sides, they are drinking my blood, they are yanking at my coglioni, they are digging into my backside! Now I must make the supreme sacrifice for the good of my nation. Now I must fulfil my destiny as the Jesus Christ of politics. Now the curtain will fall on the greatest premiership that Italy has known.
Vlada the Heart-Stealer: Come, come, Papi, no giving up! The thing to do is to find an ingenious way through.
Berlusconi: A way through? I only wish one would come to me.
Vlada the Heart-Stealer: Are you holding something?
Berlusconi: No, nothing whatever.
Vlada the Heart-Stealer: Nothing at all?
Berlusconi: Nothing except … The Italian people know what I have done for my country. The restaurants, the beauty salons and the private jets are all full. I’m not finished yet. Mark my words, if my enemies think they can destroy my entire career, they will be sorely disappointed. I am the most persecuted man in the history of the world, but they will never get me.
Enter the Chorus of the Clouds.
Leader of the Chorus: Old man, we counsel you, if you have a successor, send him to us to learn in your stead.
Berlusconi: He’s called Mario Monti.
Leader of the Chorus: Can you make him obey you?
Berlusconi: If he refuses, I’ll turn him out. I’ve got the numbers in the Senate.
Vlada the Heart-Stealer: Eight?
Berlusconi (wearily): Not tonight, Vlada.
BRUSSELS. Angela Merkel, Nicolas Sarkozy and David Cameron are finishing dinner at a summit.
Merkel: What delicious cheese!
Sarkozy (to himself): That’s her second helping.
Merkel: You really should try some, David, it will calm you down.
Cameron: I tell you, I will not hold a referendum, I will not agree to a new treaty, I will not support a financial transactions tax, and I will not listen to lectures from that ventriloquist’s dummy of yours!
Merkel (producing dummy from her handbag): Oh, I think Herman’s rather sweet. (To dummy). Give us one of your haiku.
Herman Van Rompuy (speaking through Merkel):
The fiscal compact
Is agreed. But Belgium still
Lacks a government.
Merkel (puts dummy back in bag): We’ve been practising all week.
Sarkozy (fawningly): He has a most accommodating nature, Angela.
Merkel (pleased): Even when he was quite little, he amused himself at home with making horses, carving boats and constructing small chariots of leather. He had a wonderful understanding of how to make frogs out of pomegranate rinds.
Cameron: I tell you, I will not hold a referendum, I will not join the eurozone and I will not give money to the European rescue fund! (Sighs.) It was a lot more fun with Boris in the Bullingdon Club. Killing foxes with chilled bottles of Taittinger Brut …
Merkel (to Sarkozy): You and I need to get down to business. So tell me the truth, Nicolas, was DSK set up?
Sarkozy (sweetly): As you have put it so eloquently, Angela, there is no Europe without the euro. (To himself.) Merde, she must have been gossiping with Carla.
Merkel: Well, that’s that, then, I’m glad to say we have an agreement. Europe will have a fiscal union in 250 years’ time, and I’ll have a bit more cheese.
Cameron: I tell you, I will not hold a referendum, I will not …
Merkel (turning to Cameron): What, are you still here?
ATHENS. Merkel, Sarkozy and Draghi are playing cards in the House of Thoughts. The Chorus of the Clouds watches from above.
Sarkozy (pausing before he deals): What about your ante, Mario?
Draghi: Oh, sorry.
Draghi places a €10 note on the table. Sarkozy inspects it.
Sarkozy: The serial number begins with a Y.
Merkel: Mein Gott, it’s Greek!
Sarkozy: Throw it away.
Draghi: How can I? They’re still in the eurozone, you know.
Merkel: Tell me about it.
Leader of the Chorus: What a thing it is to love making mistakes! For this old Europe, having loved its mistakes, now wishes to withhold the money that it borrowed.
Sarkozy continues dealing.
Merkel (to the Leader of the Chorus): Why didn’t you warn us earlier?
Leader of the Chorus: We always do this to those whom we perceive to be lovers of mistakes. We precipitate them into misfortune, so that they may learn to fear the gods.
Draghi (folds hand): I’m out.
Merkel (aghast): You can’t be!
Sarkozy: It’s you and me alone, Angela. What’s it to be? Eurobonds or the end of the euro?
Merkel (to Draghi): I sometimes think he’s worse than Chirac.
Enter Cameron, running wildly.
Cameron: Oh, Europeans, do not be angry with me! Do not destroy me! Pardon me, I’ve gone crazy through babbling. Bring me a torch, someone!
Sarkozy and Merkel: In the name of the gods, what are you doing?
Cameron: What am I doing? What does it look like? (Cameron sets the house on fire.)
Merkel: You’ll destroy us!
Sarkozy: He’ll never destroy us. I’m raising you a million euros, Angela.
Merkel (slowly folding her hand): You’ve won this round, Nicolas. But I’ll win the war.
The House of Thoughts is ablaze.
Leader of the Chorus: Lead the way out, for we have sufficiently acted as Chorus for today.
Any number of people — including yours truly — have compared the eurozone’s current trials and tribulations to those of the Great Depression. The FT’s Wolfgang Münchau goes much further back in time: all the way back to the Thirty Years War of 1618 to 1648.
The comparison makes for thought-provoking reading:
Both the eurozone crisis and that terrible war occurred amid sudden power shifts; they were triggered by seemly trivial events; and they became incredibly complicated. They are also marked by sudden regional power shifts . . .
The eurozone, too, has been subject to an internal power shift in the past five years, with the relative rise of German economic power. The eurozone crisis also had a comparatively trivial trigger, a fiscal meltdown of a small country at its outer perimeter . . . When the eurozone’s modern rulers assembled in Brussels this month to sign the modern equivalent of a peace treaty, they were interrupted by the cross-current of a much older conflict – a UK-versus-the-rest dispute. So instead of one peace treaty, they ended up with two overlapping and interacting conflicts. Europe is once again getting absurdly complicated.I do not wish go overboard with the parallels. The German regions lost between 20 and 45 per cent of the population between 1618 and 1648, as a direct and indirect consequence of the war. What is happening in the eurozone today is not war, nor likely to lead to one. And, no, I am not predicting that the crisis will last 30 years. It might, however, end in an economic devastation of a similar scale, especially if the German-imposed austerity policies are implemented everywhere and in full.
But what remains unchanged from those times are the underlying cultural conflicts between Protestants and Catholics, north and south, Britain versus the Continent. The many decades of European integration have not ended this fundamental mistrust. This is also one the reasons why the Europeans have created such an irrationally unbalanced monetary union. Its rules were not the result of a rational economic argument, but designed to allay very old German suspicions.
I see the most disturbing parallels between the way the 30 years war has ended and the way Europe’s political leaders are setting about to resolve the current crisis . . . The war brought about the fragmentation of continental Europe, followed by 300 years of utter carnage.
The crisis management in the eurozone may also end in fragmentation. I see the three following scenarios as the most plausible outcomes: a political union with a joint debt instrument; the status quo enforced by eternal austerity; or a break-up.
No matter which is chosen, it may also lead to an unstable equilibrium. A political union would solve the narrow crisis, for sure, but may weaken democratic legitimacy, and may thus become unstable. German-imposed austerity is the solution most likely to trigger political extremism and violence. It is also inherently unstable because it imposes the economic doctrine of one country on another. A break-up of the eurozone will, at worst, destroy the European Union itself or, at best, return us to the situation of the early 1970s.
The treaty of Westphalia ended the 30 years war in 1648. It was the early modern period equivalent of what Herman Van Rompuy, the president of the European Council, would nowadays call a comprehensive resolution. Neither addresses the underlying conflicts. The 30 years war shows that we Europeans have been delaying making the necessary hard decisions for a long time.
Plus ça change, plus la même chose.
“Without the euro, the ECB ceases to exist. That is true of no other eurozone institution. It gives it the incentive to act. It is also acting on a large scale.”
– Martin Wolf, December 28, 2011
Regular readers of this blog are well-acquainted with the thoughts of Martin Wolf, the Financial Times’ chief economics commentator. Wolf has long been among the most vocal critics of the European Central Bank, charging that its refusal to act as the eurozone’s lender of last resort has worsened the currency union’s crisis and made it impossible to resolve that crisis.
It is therefore with considerable interest that, as suggested by the above quote, he seems to have changed his mind regarding the intentions and efficacy of the ECB’s policies and actions. Simply stated, without the euro, the ECB has no raison d’être. Like any and all institutions, it will do whatever is necessary to ensure its survival.
Wolf seems to have been greatly influenced by Mario Draghi (the ECB’s new president) who, in his interview with the FT on December 18, argued that the ECB had taken important actions during the previous week:
“We cut the main interest rate by 25 basis points. We announced two long-term refinancing operations, which for the first time will last three years. We halved the minimum reserve ratio from 2 per cent to 1 per cent. We broadened collateral eligibility rules. Finally, the ECB governing council agreed that the ECB would act as an agent for the European Financial Stability Facility (EFSF).”
Wolf’s interpretation is as follows:
Thus the ECB is determined to fund banks freely, at low rates of interest, thereby subsidising them directly and the governments they lend to, indirectly.Why lending to banks that use the money they borrow to lend to governments is good, while lending to governments directly is bad, is hard to understand. The only obvious difference is that in the case of lending via banks, the intermediaries may themselves go broke. That makes them unavoidably unreliable conduits. Yet if this complex procedure gets round theological objections to direct financing of governments, those who believe some financing of governments is now needed should be content.
In short, the recent decisions of the ECB look like a clever way of relieving the funding constraints suffered by banks and vulnerable sovereigns. This does not redress solvency concerns directly, though the subsidy may be large enough to make a difference even here, particularly for the banks. But it should mitigate – if not eliminate –liquidity constraints, which have proved of rising importance over the last year and half.
Focus on the European Central Bank
Well, so much for my forecasting how equity markets would initially respond to stronger than expected demand from eurozone banks for funds from the ECB’s emergency loan program (“longer-term refinancing operations,” or LTROs).
More than 500 banks borrowed a total of €489 billion in three-year loans –- equivalent to about 5 per cent of eurozone GDP and the largest amount provided in a single ECB liquidity operation. The euro and stocks initially surged, but enthusiasm then waned.
The sentiment reversal may be attributable to the fact that only about €190 billion was fresh liquidity; the remainder comprised funds that were switched from shorter term ECB lending programs.
At a time when the ECB is being heavily and widely criticized for not doing enough — for refusing to act as the lender of last resort for the eurozone — a new and diametrically-opposed concern is beginning to surface. That concern is, as Gavyn Davis puts it, is the explosion in the ECB’s balance sheet. Every time that the ECB lends euros to a bank, it does so in exchange for collateral — “of an increasingly dubious nature,” according to Davis — pledged to the ECB by the bank. These transactions show up in the ECB’s balance sheet, which, as shown in the following chart, has balloned this year.
Says Davis,
The increase from August [2011] to February [2012] will be about €700-800 billion, which is an extraordinary amount for a central bank which is supposed not to believe in QE [Quantitative Easing]. There is another three year liquidity injection due to take place in February, and this may well be even larger than today’s action.The bulk of the borrowers under these facilities will presumably come from the peripheral economies, and the collateral offered will include single A asset-backed securities and also bank loan portfolios for the first time. Although this collateral will of course have been subject to haircuts before being accepted by the ECB, there can be no doubt that the ECB’s potential exposure to defaults in the peripheral economies will once again have ratcheted higher.
The first sentence in the next paragraph is of special interest in that ECB President Draghi (as did his predecessor) has repeatedly stated that serving as a lender of last resort isn’t within the EBC’s remit. If you find yourself confused, all I can say is: join the club.
The ECB’s justification for this action is that it is, and should be, the lender of last resort to the eurozone banking system. That seem fair enough. In the absence of today’s action, there would have been risks of bank failures in 2012 as banks tried to raise the money needed to redeem €600 billion of their own debt, which reaches maturity during the year. With their access to long term funding largely closed, banks would have been forced to reduce their balance sheets in order to meet these obligations, and this deleveraging would have involved forced sales of sovereign bond holdings and reductions in bank lending. Either way, the eurozone’s crisis would have deteriorated further.
Deleveraging would also have caused a shrinkage in broad money (M3) which the ECB is desperate to prevent or mitigate. What will now happen instead is that the monetary base will expand rapidly as central bank funding for the banking sector replaces private funding, and this is likely to prevent the large drop in M3 which would otherwise have occurred.
As I’ve argued on more than one occasion, money supply growth isn’t inflationary if the velocity of money (the rate at which economic transactions take place) isn’t rising.
Questions will be asked, especially in Germany, about whether this liquidity injection will be inflationary. It is probably better described as anti-deflationary. The money multiplier in the eurozone economy (ie M3 divided by the monetary base) is likely to drop, so M3 will stay subdued. Inflation risks will not crystallise until the rise in base money translates into much more buoyancy in bank lending and broad money growth. That may or may not ever happen.
Davis closes with the following:
. . . the ECB is certainly preventing banks from selling sovereign debt that they otherwise would have sold, and it is doing this by expanding its own balance sheet. The alternative to ECB action would have been to increase the size of the EFSF/ESM at a direct cost to government credit ratings. The ECB is also keeping alive banks which would otherwise have failed, and that would have involved new injections of capital from sovereign governments.
The truth is that, in the present state of the eurozone debt crisis, sovereigns and governments are now inextricably interlinked. It is hard to save one without being accused of saving the other. The ECB is not eager to admit it, but it is trying to save both.
If you’re interested in further pursuing the leveraging-up of the ECB’s balance sheet, I recommend reading a briefing note recently published by the UK-based Open Europe think tank. Among the key points in “The battle for the heart and soul of the ECB” are the following:
The ECB has taken on large amounts of low quality collateral in return for providing loans to banks, and has seen a massive surge in the number of asset-backed securities it has taken on to its balance-sheet. Though not all of these assets are bad or ‘toxic’, they are extremely difficult to value. At the same time, the number of banks which are becoming reliant on the ECB is alarming and hopes that the functioning of the European financial markets will ever return to normal are diminishing – creating a long-term threat to Europe’s economy.
Through its government bond buying and liquidity provision to banks, the ECB’s exposure to the PIIGS has now reached €705bn, up from €444bn in early summer. This is an increase of over 50% in only six months and shows how, contrary to popular belief, the ECB is already intervening quite heavily in the markets. It also highlights how the eurozone crisis continues to transfer risks away from private creditors to taxpayer backed institutions. It remains unclear how the ECB would cover losses in the event of asovereign default.
Moving forward, the ECB could offer a liquidity boost to Europe’s economy but little more. The term ‘lender of last resort’ is often misused or misunderstood – the ECB cannot fully backstop sovereign states or return them to solvency. At best it could ease the pressure on illiquid states, but even this depends on the legal constraints on the ECB’s defined role and being seen to give in to political demands that would hurt the ECB’s credibility and independence.
Earlier this month, the European Central Bank announced an emergency loan program known as “longer-term refinancing operations,” or LTROs. The program will become operational tomorrow (Wednesday). The Financial Times says that the ECB expects strong demand for the loans, which will be available in “unlimited” quantities.
The purpose of the program, which enables banks to avail themselves of three-year loans at extremely favorable interest rates, is to ease the severe strains in the eurozone’s financial system. If demand for the loans is strong, it should reduce the likelihood that banks will substantially shrink their balance sheets (by selling assets and reducing new loans to their customers) to meet their funding needs (which are especially large in early 2012). The hope, then, is that the LTRO will improve the economic performance of countries in the eurozone. It’s important to note, however, that this provision of additional liquidity doesn’t attack the eurozone’s fundamental problem: severe and persistent balance-of-payment imbalances among its members.
The funding problem that the LTRO is aimed to ease is having a contagion effect. Asset sales by European banks have put pressure on securitized mortgage prices in the U.S. Instead of selling distressed assets in their home markets, the banks are selling assets elsewhere (as encouraged by their governments).
- The ABX, an index of prices for securities backed by 2006 vintage subprime mortgages, has fallen 29 per cent since the start of the year, to trade at levels not seen since late 2009.
- European banks alone hold about $100 billion in US mortgage-backed securities that are not backed by Fannie Mae and Freddie Mac, according to data from Deutsche Bank.
In combination with the sharp drop in Spanish short-term interest rates that took place today, the imminent start of the LTRO program may be responsible for the sharp rally in the U.S. equity markets. If demand is as strong as the ECB expects, contagion fears could ease, allowing for a short-term bounce in the stocks of financial institutions holding mortgage-backed securities.
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A Financial Times video explains the workings of the eurozone’s financial plumbing and how it might leak if one or more countries exit from the currency union’s membership. The hard-copy is here.
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Excerpts from an FT editorial:
Europe’s economic prospects are deteriorating frighteningly fast, and the world outlook is darkening in step with the Old World’s woes. Unless the world’s leaders manage to pull together soon, we should brace ourselves for a second phase of the credit crisis that will be even worse than the first.
[...] A credit crunch is gaining force, and Europe’s economy grinding to a halt because of it. This is making the twin crises – bank and sovereign – harder to resolve and is hitting emerging economies whose credit is drying up and whose export markets are withering. If the ECB cannot stimulate growth, governments must do so, and fast.Today the whole world badly needs Europe to grow. Long-term growth and rebalancing are sine qua non for overcoming the debt crisis, but short-term recovery is a greater priority. Austerity by those who must should now be compensated by stimulus from those who can.
My sentiments, exactly.
This time, it raise a caution flag for the EFSF:
The ‘AAA’ rating on debt issues of the European Financial Stability Facility (EFSF) largely depends on France and Germany retaining their ‘AAA’ status. The revision of the rating Outlook on France to Negative last Friday implies that the risk of a downgrade of EFSF debt has increased.
We affirmed France’s ‘AAA’ status but warned that that there is a slightly greater than 50% chance of a downgrade within the next year or two. This is therefore also the case for the ‘AAA’ ratings assigned to the EFSF’s debt issues, unless additional credit enhancement mechanisms are introduced.
The ‘AAA’ ratings assigned to EFSF debt issues rely on the EUR726bn of irrevocable and unconditional guarantees provided by the euro member states, and on the conservative guidelines the EFSF sets itself regarding debt management and liquidity risk.
Of the guarantees and over-guarantees from ‘AAA’ rated member states, France and Germany provide EUR369.6bn, or over 80%. Although the EFSF could potentially remedy a downgrade of a small ‘AAA’ guarantor by increasing the size of its cash reserve or through additional credit enhancements, this would be far more challenging if a larger guarantor like France or Germany were downgraded. The primary source of ratings risk for EFSF debt issues is therefore the possibility that one or more of its largest ‘AAA’ guarantors is downgraded.
Because we do not assign Outlooks to the ratings of individual debt issues, but rather to our issuer ratings, the change in the French issuer rating Outlook cannot immediately be reflected in changes to our assessment of EFSF debt issues. We rate EFSF debt issues but not the EFSF itself, as it is the former rather than the latter that benefit from sovereign guarantees.
Under the amended Framework Agreement announced at the EU summit on 21 July, ‘AAA’ rated euro member states provide EUR451.5bn of guarantees and over-guarantees, giving the EFSF a maximum lending capacity of EUR440bn.
France is the most exposed of the ‘AAA’ euro member states to a further intensification of the eurozone sovereign debt crisis. It provides EUR158.5bn of guarantees plus over-guarantees to the EFSF guarantee pool under the framework agreement.
When we revised France’s rating Outlook, we noted that an increased likelihood that contingent liabilities arising from the crisis will be crystallised onto France’s balance sheet, material slippage from fiscal targets, and a re-assessment of France’s economic growth potential, could each trigger a rating downgrade. Conversely, economic and fiscal performance in line with our base case expectations, along with a resolution of the eurozone debt crisis, would be likely to result in a revision of the Outlook to Stable.
Where there’s a will, there’s a way — at least for a while. These days, anything and everything is believable.
From the Wall Street Journal (no link):
Governments in Europe are tying themselves in knots to prop up their banks, desperate to blunt the cost and embarrassment of a fresh wave of taxpayer-funded bailouts.
In Italy, for example, the government is encouraging banks to buy public properties that the banks then can use to borrow money. As part of a broader deficit-reduction program in Portugal, the government essentially is borrowing money from bank pension funds and could use some of the funds to help state-owned companies repay bank loans.
Governments in Germany and Spain also are using unorthodox measures to support their ailing banks.
A closer look at Italy:
The Italian government has been among the most innovative at finding ways to help its banks conserve capital or come up with fresh funds.
A provision tucked into the Italian government’s budget law last month is designed to defuse some of those pressures. It allows the banks to use their government bonds to purchase army barracks, office buildings and other state-owned real estate that the government has been trying to sell.
The government would then lease the properties back from their new owners. And the banks can package the income-producing properties into asset-backed securities, which can be pledged as collateral with the ECB in exchange for loans, analysts say.
Italy’s real-estate-for-sovereign-bonds maneuver also gives a boost to the government. Not only can it rid itself of unwanted properties, but the government also will be able to retire the bonds that banks use to purchase the real estate—thereby reducing Italy’s heavy debt load.
. . . and Germany:
Commerzbank AG is in talks with the finance ministry to transfer part or all of its troubled real-estate finance unit Eurohypo into a government-owned “bad” bank. The bank and government are in talks about ways to structure the deal so it isn’t considered a bailout, possibly by protecting the government against some losses or paying the government a nominal fee, according to people familiar with the matter.
That is an important stipulation. Commerzbank executives have repeatedly promised they won’t take more taxpayer money, following a 2009 bailout that still has the bank 25%-owned by the government. But Commerzbank needs to come up with €5.3 billion in new capital by next summer in order to meet the demands of European regulators.
. . . and Portugal:
the government is planning an intricate financial maneuver that could give the country’s banks some relief from the mountains of unpaid loans they hold from Portugal’s state-owned companies. The state just closed a plan to transfer banks’ future pension responsibilities to the state balance sheet in exchange for €6 billion in assets, which include cash, stocks and bonds. Most of the money will help the government meet deficit targets.
But about €2 billion may be shifted to struggling government-owned companies, such as transport providers. Under the plan, these companies would use the funds to pay off debts to Portugal’s banks.
. . . and Spain:
In Spain, the government used €5.2 billion in funds from the country’s deposit-guarantee plan to clean up nationalized lender Caja de Ahorros del Mediterraneo and broker its sale to Banco Sabadell SA earlier this month.
Instead of raising more money through a Spanish government bailout fund, a central-bank spokesman said that tapping the deposit-insurance plan would leave the country’s budget goals this year intact. The deposit-guarantee fund will be refilled early next year, and the government will provide a back-stop in the meantime.