Euro zone News

Greece Pays Bond Investors 5 Times Spain Yield Spread (Update1)

By Caroline Hyde and Sonja Cheung

March
29 (Bloomberg) -- Greece, the European Union’s most indebted member,
offered more than five times the yield premium of comparable Spanish
debt to lure investors to its first bond sale since a bailout was
agreed to for the nation. Greece priced the 5 billion euros ($6.7
billion) of seven- year bonds to yield 310 basis points more than the
benchmark mid-swap rate, according to a banker involved in the
transaction, who declined to be identified before the sale is
completed.

The bonds’ 6 percent yield equates to 334 basis points more than seven-year German bunds,
Europe’s benchmark government securities. That compares with a yield
premium, or spread, of 61 basis points for similar-maturity Spanish debt and 114 basis points on Portugal’s government bonds due 2017, according to composite prices on Bloomberg. Italy’s seven-year bonds
yield 45 basis points more than bunds, the prices show. “Greece’s
borrowing costs exceed those of Spain and Portugal as it still needs to
convince the market that it can roll over existing debt,” said Michiel De Bruin,
who will probably buy the securities for the $28 billion of assets he
helps manage as head of euro government bonds at F&C Investments in
Amsterdam. “Only then is it likely that borrowing costs will
fall.” Prime Minister George Papandreou’s
government must raise about 53 billion euros this year, 15.5 billion
euros of it by the end of May. Failure to do so could spark a new round
of the fiscal crisis and trigger the use of the aid plan to help Greece
finance its budget deficit by standing behind the nation’s debt crafted
by EU leaders in Brussels March 25.


Default Swaps
The sale pushed up the cost of default insurance on Greece’s debt. Credit-default swaps on the nation climbed 15.5
basis
points to 310.5 basis points, according to CMA DataVision. The price of
the swaps soared to as high as 428 basis points on Feb. 4 when it
seemed likely Greece’s debt crisis would spread to its southern
European neighbours. “This deal is likely to be first of many to get
Greece through its April and May funding needs,” said Peter Chatwell,
a fixed-income strategist at Credit Agricole CIB in London. The 6
percent yield on Greece’s new notes compares with 6.30 percent on the
nation’s 5 billion euros of 10-year benchmark bonds issued March 4. The
country’s five-year notes sold on Jan. 26 now yield 5.76 percent,
Bloomberg data show. “This looks a lot more confident than their other
recent issues, which came with a decent discount,” said Toby Nangle, director of asset allocation at Barings Investment Services Ltd. in London.


Worst Performers
Greek government bonds are the worst performers in the 16- nation euro
region this year, handing investors a loss of 0.11 percent, compared
with gains of 0.58 percent and 1.97 percent from Portuguese and Spanish
debt, according to Bloomberg/EFFAAS indexes. Petros Christodoulou,
head of the debt management agency in Athens declined to comment on the
bond sale in an interview today, other than to say it would be of
“benchmark size.” The aid mechanism removes the risk of Greece failing
to repay bond investors and “should tighten the spreads materially,” he
said in an e-mailed response to questions on March 26. Papandreou
demanded financial aid from the EU to help Greece reduce its borrowing costs, which he says were unsustainably high. Today’s bond sale pushed the extra yield
investor require to hold 10-year Greek notes rather than benchmark
German bunds 13 basis points wider to 318 basis points. The gap was 239
at the start of this year and as high as 396 in January. A basis point
is 0.01 percentage point.


Euro-Area Countries
Euro-area countries would grant more than half the loans and the International Monetary Fund
would provide the rest in the deal struck last week to help stabilize
the euro, which has weakened 6 percent against the dollar this year.
Papandreou says he never expects to seek assistance. It’s
“counterproductive” to speculate about the scenarios, including
developments on spreads, that would spur an aid request under the new
facility, he said. Goldman Sachs Group Inc. Chief European Economist Erik Nielsen
estimates Greece will ultimately need an 18-month package of as much as
25 billion euros, with the IMF providing about 10 billion euros of
that. French Finance Minister Christine Lagarde
said March 27 in Cernobbio, Italy, that the EU’s strategy shows the
“determination” of policy makers to “keep the euro stable.” Her German
counterpart, Wolfgang Schaeuble,
said in a Welt Online interview the same day that EU countries seeking
IMF help must remain an exception and in the longer term “Europe must
be able to solve” fiscal problems by itself. Greece faces about 12
billion euros of debt repayments in April, with 8.2 billion euros of
five-year bonds and about 3.9 billion euros of bills maturing that
month. It must repay 8.5 billion euros of 10-year bonds in May.


Extending Maturity
“The seven-year tenor on Greece’s new bond is the only viable option,
as it does need to extend the average maturity of its debt,” said Marc Ostwald,
a fixed-income strategist at Monument Securities Ltd. in London. “I
hope that the country boxes clever, and doesn’t upsize the offering as
it did in January. If Greece does ramp up the deal size, a lot of long-
term investors could be put off.” While those are the only bond
maturities Greece faces this year, the country needs an average of
almost 2 billion euros a month to cover the budget deficit and interest
payments on existing debt, its deficit reduction plan shows.


Budget Cuts
Greece aims to cut its shortfall
by four percentage points in 2010 from last year’s 12.7 percent of
gross domestic product, before satisfying the EU’s 3 percent limit by
2012. “The announcement of the bailout mechanism for Greece should end
the immediate liquidity and therefore default risk for Greece,” Laurence Mutkin,
head of European fixed-income strategy in London at Morgan Stanley,
wrote in a report to clients. “However, we think that the longer term
trajectory for Greece remains uncertain.” Credit-default swaps pay the
buyer face value in exchange for the underlying securities or the cash
equivalent should a company or country fail to adhere to its debt
agreements. A basis point on a contract protecting $10 million of debt
from default for five years is equivalent to $1,000 a year. Greece
hired Alpha Bank AE, Bank of America Merrill Lynch, Emporiki Bank SA,
ING Groep NV and Societe Generale SA to manage the sale of new bonds,
according to two other bankers.

Financial Times
By: Martin Wolf

Ever since the federal
republic was founded, Germany has had two over-riding strategic
objectives: sound money and European integration. These were the twin
imperatives learned from the calamities of the early 20th century. The
euro embodies these aims. Now they conflict with each other.Is the
right answer to rescue sinners, thereby strengthening the cohesion of
the eurozone, but threatening monetary stability? Or is it to let
sinners default, thereby strengthening monetary credibility, but
weakening cohesion? Germany could avoid such choices before the single
currency: uncompetitive countries simply devalued.Unfortunately, the
domestic German debate assumes, wrongly, that the answer is for every
member to become like Germany itself.

But Germany can be
Germany - an economy with fiscal discipline, feeble domestic demand and
a huge export surplus - only because others are not. Its current
economic model violates the universalisability principle of Germany's
greatest philosopher, Immanuel Kant.The idea that countries are in
difficulty because of their own sloppiness is easy to reach in the case
of Greece. According to the latest Economic Outlook from the
Organisation for Economic Co-operation and Development, gross public
debt was 115 per cent of gross domestic product last year, the general
government deficit was 12.7 per cent of GDP and the current account
deficit was 11.1 per cent.This, then, would be a classic case for
intervention by the International Monetary Fund. Normally, the latter
would offer temporary liquidity support in return for a devaluation and
fiscal stringency. Yet the German government rejects the idea that an
outside body should dictate policy to a country that shares Germany's
money. It suggests, instead, that a European Monetary Fund should be
created, to provide conditional liquidity support. Under the direction
of the other members of the eurozone, the EMF would dictate fiscal
policy to the sinner.Members of the German government also want
penalties to be imposed. Among the ideas are: suspension of European
Union subsidies, the "cohesion funds", to countries that fail to
observe fiscal discipline; suspension of voting rights in ministerial
meetings; and even suspension from the eurozone.

A less
controversial idea is to enforce fines already permitted under the EU's
"stability and growth pact".Yet, establishing the EMF would require a
new treaty, as would exclusion from eurozone institutions (while a
country could not be stopped from using the euro itself). Fining
countries in fiscal difficulties has proved unworkable in the past.
Today, most members would need to be fined. Dream on!We must note an
even greater difficulty. The notion that the big threat is fiscal
indiscipline is false.Greece is a special case. Today's fiscal excesses
are not the result of fiscal indiscipline, but of private indiscipline.
The latter, moreover, was an inherent element in the workings of the
eurozone itself. It is how the eurozone economy balanced, at a
reasonable level of overall demand, in the pre-crisis period.The point
is best understood from the financial balances of eurozone members in
2006, before the crisis, and 2009, at its height (see charts). The
balance between income and expenditure in the private, government and
foreign sectors must sum to zero.

In 2006, Germany, the
Netherlands and Austria ran huge private surpluses, relative to GDP,
while the private sectors of Portugal, Ireland, Greece and Spain ran
huge deficits. Fiscal positions seemed under control everywhere:
Ireland and Spain even ran substantial (albeit illusory) fiscal
surpluses. Meanwhile, the private surpluses of Germany and the
Netherlands were offset by huge capital outflows. In all, we see
private disequilibria, but the illusion of fiscal stability, with
countries more or less in line with treaty criteria for fiscal
deficits.Then came the crisis: overextended private sectors retrenched.
By 2009, the private sectors of almost every member were running a huge
surplus: they are all Germans now! So what are the offsets? The answer
is: fiscal deficits. The picture for Ireland and Spain is dramatic. In
the short run, it is impossible to shift external balances quickly,
particularly when domestic demand in the surplus countries is so weak.

Now
Germany insists that every country should eliminate its excess fiscal
deficit as quickly as possible. But that can only happen if current
account balances improve or private balances deteriorate. If it is to
be the latter, there needs to be a resurgence in private, presumably
debt-financed, spending. If it is to be the former, there are two
choices: first, current account balances must deteriorate elsewhere in
the eurozone, entailing a move to smaller private surpluses in
countries like Germany. Or, second, the overall balance of the eurozone
must shift towards surplus - a "beggar my
neighbor" policy.In
practice, the most likely outcome of such fiscal retrenchment would be
a slump in countries with large external and fiscal deficits. Given the
lack of competitiveness of such external deficit countries and the
weakness of demand elsewhere in the eurozone, such slumps might become
very long-lasting. The question is whether populations would put up
with this. If not, political crises will emerge, with inherently
uncertain consequences.Let me put the point starkly: Germany's
structural private sector and current account surpluses make it
virtually impossible for its neighbors to eliminate their fiscal
deficits, unless the latter are willing to live with lengthy slumps.

The
problem could be resolved by a eurozone move into external surpluses. I
wonder how the eurozone would explain such a policy to its global
partners. It might also be resolved by an expansionary monetary policy
from the European Central Bank that successfully spurred private
spending in the surplus countries and also raised German inflation well
above the eurozone average.Germany is in a trap of its own devising. It
wants its neighbors to be as like itself as possible. They cannot be,
because its deficient domestic demand cannot be universalized. As
another great German philosopher, Hegel, might have said, the German
thesis demanded a Spanish antithesis. Now that the private sector's
bubble has burst, the synthesis is a eurozone fiscal disaster.
Ironically, Germany must become less German if the eurozone is to
become more so.

martin.wolf@ft.com

Via Batman:

It is an interesting way of looking at the Euro problem. Germany wants
everyone to be Germany or France for that matter. However, If you have
a Germany or France you must also have a Greece, Ireland, or Spain. As
far as an EMF, this may help but it still would not be able to print
Euros. I propose an ECT; European Central Treasury. If Monetary Policy
is controlled from Frankfurt , fiscal Policy should also have a place
there.

Via batman

‘Greek Roadblock’ Complicates Trichet’s Exit Strategy (Update1)

By Christian Vits
March 4 (Bloomberg) -- The European Central Bank
may have to decide just how much it’s prepared to allow Greece to
dictate monetary policy for the euro region as a whole.
As Greece’s
struggle to cut its budget deficit keeps the euro close to a 10-month
low, ECB officials will today debate whether to slow the withdrawal of
emergency measures used to fight the global financial slump. While
President Jean-Claude Trichet says Greece won’t get special treatment,
he will still have to plot a course that avoids unsettling markets
further.
"With a Greek roadblock on the exit lane, the ECB will have
to drive carefully," said Carsten Brzeski, an economist at ING Group in
Brussels who used to work at the European Commission, in a telephone
interview. "The one-size-fits-all approach isn’t functioning when there
are divergent trends in the member states."
Trichet is facing the
biggest crisis in the euro’s 11-year history just as the ECB tries to
mop up the unlimited liquidity pumped into the economy last year. As
Greece’s fiscal turmoil sparks a surge in bond yields across Spain and
Portugal, whose deficits are also among Europe’s highest, some ECB
policy makers say it’s time to wean banks off emergency funding as the
rest of 16-nation bloc pulls out of recession.

Tighter Terms?

Officials
will today discuss tightening the terms of its unlimited fund
offerings. They agreed in December to stop awarding such loans over six
and 12 months. The ECB hasn’t yet said when it will stop its
unrestricted offerings of seven-day, one-month and three-month funds.
At the moment, banks can get as much money as they want at the ECB’s
main rate of 1 percent.
Before the crisis, banks had to bid for cash through an auction.
All
52 economists surveyed by Bloomberg News expect the ECB to keep the
benchmark rate at 1 percent at 1:45 p.m. in Frankfurt today. Trichet
will brief reporters 45 minutes later.
The euro, which has plunged 9 percent in the past three months, weakened 0.4 percent to $1.3644 at 8:55 a.m. today.
Greece’s
crisis has exacerbated a divergence in euro-region bond yields,
complicating the ECB’s task and sparking a debate about the future of
the currency itself. Billionaire investor George Soros said Feb. 28 it
"may not survive" the crisis.
The extra yield investors demand to
hold Greek 10-year debt instead of German equivalents jumped to 396
basis points in January, the highest since 1998. The average gap over
the past decade was 34 basis points. The Spanish and Portuguese spreads
are about five times their respective 10-year averages.

Fast Exit?

While Trichet told reporters on Jan. 14 that "no government, no state can expect any special treatment from us,"
the
threat of a spillover from Greece into other countries will encourage
the ECB to be cautious today, says Goldman Sachs Group Inc.’s Erik
Nielsen. Moody’s Investors Service yesterday put the credit ratings of
five Greek banks, including National Bank of Greece SA, on review for a
possible cut.
"While there is a clear desire to return to normality
and regain control of the interest-rate instrument, tensions
surrounding Greece and the banks in general are likely to inject some
concern that a too-fast exit could be dangerous," said Nielsen, Goldman
Sachs’s London-based chief European economist.
The ECB will probably
keep offering banks unlimited funds over seven days, he says, and may
cap the money offered over one month and three months by reintroducing
bidding. Goldman on March 2 revised its forecast to say the ECB will
start raising rates in the first quarter rather than the end of this
year.
The ECB will also discuss lending back covered bonds to banks, said three people familiar with the deliberations.

Holding Off

Signs
that the euro region’s recovery is faltering may also give Trichet an
excuse to slow the ECB’s exit. Confidence among households and
companies worsened unexpectedly in February, bank loans to companies
slid for a fifth month and French consumer spending fell.
"Holding
off would be sensible," said Ken Wattret, chief euro-area economist at
BNP Paribas SA in London. "Growth is low, fragile, not driven by
domestic demand and inflation is low. So they’ve got time."
Trichet
today unveils the ECB’s new staff projections. In December, the ECB
forecast the euro region to grow 0.8 percent this year and 1.2 percent
in 2011. The European Commission said last week it may fail to gather
strength for most of the rest of the year.

ECB Reaction

Trichet
will also be prodded for a further reaction to Greece’s latest round of
deficit cutting measures after EU leaders last month told the ECB to
work with the European Commission on the issue. Prime Minister George
Papandreou, who meets German counterpart Angela Merkel in Berlin
tomorrow, yesterday announced 4.8 billion euros ($6.6 billion) of cuts.
The
ECB’s response in a statement yesterday was that the Governing Council
"welcomes the convincing additional and permanent fiscal consolidation
measures" announced by Greece and appreciates their "envisaged very
swift implementation."
"The ECB’s hands are not tied, but Greece
clearly influences the bank’s policy," said Klaus Baader, co-chief
European economist at Societe Generale SA in London. "The ECB acts very
cautiously and will continue to do so."

Snapman wrote:

Batman wrote:

Germany is playing hard ball. I like to see this. The
ECB will be heavily influenced by the country's decision to buy Greek
bonds or not.

Even though the bailout terms have been reached, it is odd to me that 1. Greece has not drawn the funds yet, and 2. The IMF gave them financing at 5% about 200 basis points less then what Greek 10 year debt has been trading at for some time.

Batman wrote:

Snapman wrote:

Batman wrote:

Germany is playing hard ball. I like to see this. The
ECB will be heavily influenced by the country's decision to buy Greek
bonds or not.

Even though the bailout terms have been reached, it is odd to me that 1. Greece has not drawn the funds yet, and 2. The IMF gave them financing at 5% about 200 basis points less then what Greek 10 year debt has been trading at for some time.

Could this just be a ploy by the Germans to give Greece more time to go to the Capital Markets for financing of short-term paper?

Batman wrote:

Batman wrote:

Snapman wrote:

Batman wrote:

Germany is playing hard ball. I like to see this. The
ECB will be heavily influenced by the country's decision to buy Greek
bonds or not.

Even though the bailout terms have been reached, it is odd to me that 1. Greece has not drawn the funds yet, and 2. The IMF gave them financing at 5% about 200 basis points less then what Greek 10 year debt has been trading at for some time.

Could this just be a ploy by the Germans to give Greece more time to go to the Capital Markets for financing of short-term paper?

There supposed to be the big auction today for them, didn't follow up yet how it did, but that is very vital for greece. Other than that I don't know what it means if greece didn't take money to repay debt, maybe they are looking for somethign cheaper...

Hedge funds cash in on uncertainty around European banks
Results of stress-testing at banks in all 27 EU countries will be published on 23 July – and hedge funds are aiming to profit
(1)
Tweet this (20)
Comments (1)
Elena Moya
guardian.co.uk, Sunday 11 July 2010 16.58 BST
Article history

Hedge funds are preparing to profit when bank stress test results are published on 23 July, whether they spark a jump or a plunge in share and bond prices. Photograph: Michael Leckel/Reuters
Hedge funds and other investors are preparing to profit from the latest chapter of the European sovereign debt crisis: the publication of the results of bank stress tests on 23 July.

Investment banks have been compiling research notes designed to ensure speculators get the most out of the uncertainty, regardless of the test results. These may underline the soundness of the European recovery and trigger a jump in bond and share prices, or indicate a gloomier scenario and cause a plunge in value.

Analysts and investors reckon the tests will also challenge government officials and their willingness to support their weakest financial institutions.

"The real test is of the official sector itself," said Credit Suisse in a recent note. "Our best case would be one in which it was demonstrated the resources of the European financial stability facility were available to fund bank bailouts; our worst case would be one in which no evidence was given of available funding."

Investors perceive the tests as being too little, too late. The US carried out a similar check on its banking system last year, concluding that banks needed a recapitalisation of $75bn (£50bn). US banks have subsequently enjoyed a period of stability – despite the fact that some of them are still battling with the effects of the credit crunch.

In Europe, speculation about the exposure to volatile southern European bonds has hit the share price of banks such as Santander. The tests are expected to show banks' exposure to sovereign debt, but may leave out bigger parts of their balance sheets, such as loans or other fixed income products, a hedge fund manager said.

"I think this is all nuts, an over-simplification of what's going on," he said. "But it could happen that the market calms down for a few days, and it falls again."

Investors are focused on regional lenders in Spain and Germany. The cajas – Spain's regional non-profit savings institutions – have attracted much recent attention, despite the government's attempt to overhaul the sector. The cajas will now be allowed to issue a certain type of equity, as well as to reduce the number of political-appointees to their boards. The government is also pushing for mergers within the sector, hoping to reduce the number of cajas from 43 to about a dozen. A fund has been established to help finance those mergers - under some stringent conditions. According to a document seen by the Guardian, the cajas will have to cut their number of branches by an average 25%, and their workforce by as much as 18%, to access the funds.

In Germany, the publicly owned Landesbanken are also under scrutiny after booking more than $34bn in credit losses and writedowns during the credit crunch, according to Bloomberg data. The Landesbanken may need a recapitalisation of as much as €37bn (£31bn), compared with €12bn for the cajas, according to estimates by Credit Suisse.

Any figure above or below market estimates may determine the market reaction to the results in the short term – more than the actual health of European banking system in itself.

Snapman wrote:

Hedge funds cash in on uncertainty around European banks
Results of stress-testing at banks in all 27 EU countries will be published on 23 July – and hedge funds are aiming to profit
(1)
Tweet this (20)
Comments (1)
Elena Moya
guardian.co.uk, Sunday 11 July 2010 16.58 BST
Article history

Hedge funds are preparing to profit when bank stress test results are published on 23 July, whether they spark a jump or a plunge in share and bond prices. Photograph: Michael Leckel/Reuters
Hedge funds and other investors are preparing to profit from the latest chapter of the European sovereign debt crisis: the publication of the results of bank stress tests on 23 July.

Investment banks have been compiling research notes designed to ensure speculators get the most out of the uncertainty, regardless of the test results. These may underline the soundness of the European recovery and trigger a jump in bond and share prices, or indicate a gloomier scenario and cause a plunge in value.

Analysts and investors reckon the tests will also challenge government officials and their willingness to support their weakest financial institutions.

"The real test is of the official sector itself," said Credit Suisse in a recent note. "Our best case would be one in which it was demonstrated the resources of the European financial stability facility were available to fund bank bailouts; our worst case would be one in which no evidence was given of available funding."

Investors perceive the tests as being too little, too late. The US carried out a similar check on its banking system last year, concluding that banks needed a recapitalisation of $75bn (£50bn). US banks have subsequently enjoyed a period of stability – despite the fact that some of them are still battling with the effects of the credit crunch.

In Europe, speculation about the exposure to volatile southern European bonds has hit the share price of banks such as Santander. The tests are expected to show banks' exposure to sovereign debt, but may leave out bigger parts of their balance sheets, such as loans or other fixed income products, a hedge fund manager said.

"I think this is all nuts, an over-simplification of what's going on," he said. "But it could happen that the market calms down for a few days, and it falls again."

Investors are focused on regional lenders in Spain and Germany. The cajas – Spain's regional non-profit savings institutions – have attracted much recent attention, despite the government's attempt to overhaul the sector. The cajas will now be allowed to issue a certain type of equity, as well as to reduce the number of political-appointees to their boards. The government is also pushing for mergers within the sector, hoping to reduce the number of cajas from 43 to about a dozen. A fund has been established to help finance those mergers - under some stringent conditions. According to a document seen by the Guardian, the cajas will have to cut their number of branches by an average 25%, and their workforce by as much as 18%, to access the funds.

In Germany, the publicly owned Landesbanken are also under scrutiny after booking more than $34bn in credit losses and writedowns during the credit crunch, according to Bloomberg data. The Landesbanken may need a recapitalisation of as much as €37bn (£31bn), compared with €12bn for the cajas, according to estimates by Credit Suisse.

Any figure above or below market estimates may determine the market reaction to the results in the short term – more than the actual health of European banking system in itself.

Stress tests come out on July 23rd, Maybe we get a leak on 19-21.