Troika Statement on Conclusion of Review Mission

“The restructuring of the banking sector has yielded significant savings on the capital to be invested by the taxpayer (from private sector investment and the liability management exercises) and it has also allowed Irish banks to access international money markets without the use of the guarantee”

Lovely bit of spin there. Where is the kitchen sink gone ?

@ Seafoid
Spin all right.
Can anyone explain to me how the State paid 4.5 billion for 15% of Bank of Ireland when Wilbur and his pals got 35% for 1 billion.

@all

Winston is roight impressed with the outcome of the negotiations with Oceania. Dashing home for a celebration with a feast of fresh october nettle soup with a dash of … er .. EFSF … er … thyme ….

@Bond

S’pose BoI can afford to hand back that building on College Green soon then …

@DOD
Reports suggest that Lorenzo is definite for BOI.

With the State about to become involved in credit unions it appears that all financial institutions will be either under the control of,or influenced by,Mickey Noonan. Perhaps they should have let Lowry build the giant casino in godknowswhere as we are all gamblers now.

And on the weekend summit…doomed, even if it goes ahead at all. See Telegraph and WSJ.

@seafoid

Every time you get a covered bond away, yes, you raise funds without relying on the guarantee but don’t forget that you do so by pledging assets to the cover pool, but it makes the unsecured lenders’ position less secure, which makes them even more reliant on the state guarantee. That is generally true unless you are replacing equivalent funding via asset pledge, like covered with another covered after redemption.

If you recall, a significant part of the argument for paying all unsecured unguaranteed bonds in full at maturity was that to do otherwise would make bank funding via unsecured issuance in the EZ almost impossible.

The strategy has resulted in that consequence anyway as covereds are more or less the only thing banks can issue.

It would be nice if people who were pushing that argument would at least put their hands up and admit the reality. It wouldn’t stop them using different arguments – like the rumoured ‘phone message’, ‘letter’ or ‘MoU side letter’ (interest in confirmation of the actual existance of which is lower than whale droppings). 😉

@Grumpy

Every time you get a covered bond away, …..but it makes the unsecured lenders’ position less secure, which makes them even more reliant on the state guarantee.

In other words depositors (being unsecured) are downranked evey time a covered bond is issued.
But does this apply in the case of Irish depositors in BOI, where the covered bond in the UK is covered by UK mortgages? i.e Would BOI UK losses (in extremis) be ringfenced to BOI UK? Tricky question, I know.

Not as off-topic as you might initially think:

Both gold and copper off today, now sitting on last ditch potential technical support. My screen sez copper down over 6%.

That can be interpreted as a move against both expectations of inlation / negative real interest rates, and global GDP rises.

Or just noise.

Italy – Germany spread now above 4%. Is the ECB still at the opera? Surely it’s not the fat lady.

@PR Guy

Both FF and FG are fans of Hegel – the former gives dosh, which they borrow recklessly, away to get elected; FG promises not to take away the dosh, which they have to borrow recklessly, gifted by the former when it is their turn to get elected. Labour are fans of the marxian bridesmaid theory of value – if they can’t get in with the former they’ll shack up with the latter and do what they are told by either. This is the history of the ‘Free’ State but the sefs don’t see much ‘free’ about it at the moment.

Might it be time for a change? An Admin with none of this dastardly troika included.

@Grumpy
Copper is not kept on CB balance sheets…………………

@seafoid

Think it’s probably just usual market trade. Gold looking v interesting one way or the other. Might check out some sentiment metrics later.

@Joseph R

Unless something occurred very quickly, you would usually expect substitution assets to be added to the pool to compensate.

@ Bond

Following the judgement of the German constitutional court in the breach of the bailout rule complaint, Merkel must obtain the approval of the Finance Committee of the Bundestag – as set out in implementing legislation – on any major changes to the EFSF and/or decisions regarding expenditure. What she has cancelled, according to reports, is any attempt to gain a mandate for the summit from that committee this evening as it is unclear what that mandate should be.

German sources are also briefing that there can be no agreement on the leverage issue in relation to the EFSF.

In the latter context, the decision by Sarkozy to re-open the issue of a banking licence for the EFSF is quite extraordinary. In any negotiation, to seek from one’s opponent something that is obviously not in his/her gift means, in effect, that you are not negotiating but demanding. Whatever the tactic is, it is not working and who can blame Berlin!

Le Monde in an unsigned leader this morning castigates Sarkozy for not doing what he promised to do i.e. to introduce reforms on the lines of those put in place in Germany over the past ten years. The French deficit is now over 5%.

The markets tomorrow and Monday should have an interesting day.

The Troika report could not come at a timelier moment as far as Ireland is concerned. Our tentative grasp on the “mercantilist core” of the EZ may just hold.

The Bundestag has now become the executive as far as the major foreign policy issue affecting Germany is concerned. This is unheard of in any democracy that expects to function correctly.

@ Ceterisparibus

“Can anyone explain to me how the State paid 4.5 billion for 15% of Bank of Ireland when Wilbur and his pals got 35% for 1 billion.”

It is a lot of money to part with simply to be able to go forth and spin to the world “the fact” that, the whole of the Irish banking sector did not have to be nationalised. Along with the Anglo losses it must set another dubious world record for waste of tax payer money.

A few of us on here realised how desperate the government were in this regard and obviously Wilbur figured it out too. The talk of twin pillars of the Irish banking system and bailout money available has them believing that the government will pump even more tax payer ‘free’ money into the operation to maintain the spin.

@Robert Brown
Agree…and it may be all for nought if the Euro imploded anyway.

The latest I see is a second summit after the one this weekend when nothing will be agreed.

Central Bank all illuminated tonight and people scurrying about. That usually happens when the Troika is in town or we’re headed to a budget. Wonder what thy’re up to.

@Gavin

Not much. It would in principle make me more inclined to buy Irish gilts rather than less.

Currently, expediency might suggest you focus your efforts on the Anglo por notes though.

As far as the main headings go, it was to be expected that the Troika would give us a gold star. The budget in December 2011 together with export-led growth this year and more-or-less neutral GNP, what appears to be stabilising unemployment (June 2010 to Sep 2011 is practically flat) mean that we’re likely to meet our fiscal targets this year. Budget 2012 will be tough and growth prospects next year are shaky because of external events.

However the DoF says “the Government is pleased that the staff mission has assessed the Programme to be on track and all measures in the Programme have been fully implemented.” Maybe I missed it but the statement from the Troika says no such thing though again, in terms of the main headings we are on target.

The legal reform bill was published in October which is Q4, not Q3 and it still has to be debated and as we have seen the legal sector is unhappy and is lobbying against it. Let’s see how watered down the bill gets. And frankly, there is not a great deal in the bill that will drive down costs.

The Irish Times reports that a bill to reform the medical sector was published in September. Anyone know what that paper is talking about?

Where were the measures to increase participation in the labour market?
Where is the initiative to improve the quality of credit information available on individuals?
Where is the reform of local authority expenditure?
Where is the comprehensive spending review – Micheal Martin was told it wasn’t complete last week.

The Memorandum of Understanding has a list of chores to be completed in Q3, 2011. How fecking difficult is it for the Troika to assess compliance with each chore and point out that some haven’t been complied with. Yes the budget is being more or less met this year but what about the other “stuff”.

And where does the DoF get off saying “all measures in the Programme have been fully implemented”

And are we all staying quiet about unsecured unguaranteed senior bonds, particularly those at IBRC (Anglo and INBS)

I missed the presser this afternoon but has the IMF sat on its hands now as well?

@Seafóid
The real irony is that for the ‘textbook bailout’ , they didn’t use it to create sustainable principles (i.e. ones that would last, and scale to all the PIIGS)….and the deep irony is, our fortune has declined since the bailout…due to the chaotic uncertainty around bailout principles threatening/causing global recession.

And the triple irony is…the ECB precipitated matters due to concern over ELA…with their _fundamental_ concern being that there was too much liquidity/money in the domestic economy. The supposed policy measure to address this, deleveraging,is allowed to include all sorts of bizarre tricks, which shrink domestic bank balance sheets…but don’t actually drain liquidity from the economy.

Yet the ECB has quit huffing and puffing about it(recall the MOU wanted massive,rapid deleveraging)…and we get glowing reports.

We gotta retain talent. That’s the same talent that f***ed the whole place up.

Back to the DOF statement above

Over the course of the quarter the Government have undertaken several significant structural reforms including the publication of the Public Service Pensions (Single Scheme) and Remuneration Bill, the Legal Services Regulation Bill and the Competition (Amendment) Bill . The purpose of these Bills is to improve competition and reduce costs.

It may reduce cost in 40 years time but hardly this year or next.
So what will the legal bill do when implemented?
Save the legals the cost of a €2000 wig. That will sure help everybody.

several significant structural reforms

The DOF and PS has as much committment to structural reform as the developers of Priory Hall had to construct sound buildings.

@ ceteris

‘The folk in Brussels may be po faced but they are not completely thick. They know that this equaltion has too many unknowns. When the US Sec of State is reduced to ‘lecturing’ the Pakistanis you know the old order is dying .

@ All

This FT report seems to be the most accurate summary available on what is going on. It must be assumed that Sarkozy is insisting on going ahead with the meeting on Sunday in order to put further pressure on Merkel.

http://www.ft.com/intl/cms/s/0/19d1597c-fb43-11e0-8df6-00144feab49a.html#axzz1b7s8VY5Q

One cannot but have admiration for the stance taken by Germany as it is rooted in a dispassionate assessment of the facts. Greece cannot repay its debts. France cannot retain its AAA status without taking the necessary domestic measures to reassure the markets. The ECB cannot be turned into a currency printing operation. Let the cards fall where they may!

As to the markets, if the richest countries in the world are not a safe bet, where are these to be found? Which brings us back to the central conclusion of the paper by Philip Lane and his colleagues on the lack of safe assets in the international financial system.

@DOCM
Good assessment.
It’s peculiar that gold is dropping when it’s becoming increasingly obvious that there are no safe sovereign assets. Italy distinctly dodgy today going over 6% and French now at 3.14%.
I suppose the only thing to do is hope for the best and prepare for the worst.

@ All

Franco-German communiqué.

http://www.elysee.fr/president/les-actualites/communiques-de-presse/2011/communique-franco-allemand.12289.html

@DOCM

One cannot but have admiration for the stance taken by Germany as it is rooted in a dispassionate assessment of the facts.

That is rather benign view of the German position.
One has to wonder if the overdue Greek default was three years ago, when German bank exposure to the peripherals was much much higher, what would the German calculation be.

The fact is that the last three years have been used by Germany to pull its money back from the peripherals while the peripherals continued to purchase German exports.

A bit of a one-sided arrangement, if I may say so.

PS I am not a fan of the French position either. They were so eager to stuff the banks debts down the throats of the Irish, that Sarkozy proposed an increase in corporation tax as an apertif.
Now less than three years later, with the unplucked bank goose the only item on their menu, the French are being very protective of their palettes.

Plus la change.

Kantoos is interesting on this: http://kantooseconomics.com/2011/10/19/solvent-who-said-solvent/

The austerity goose is being cooked on the other foot it seems…

@ Joseph Ryan

The facts that I am referring to are those as they stand now. As to how we got to where we are, there is more than enough blame to go around.

@ Ceterisparibus

Yes. “At the latest Wednesday”. Otherwise, the translation is pretty accurate.

@DOCM
Thanks.

Report due from S&P on Friday is pretty dire for Ireland and others…better forget the smoke blowing from the troika and prepare…..

http://www.telegraph.co.uk/finance/financialcrisis/8839972/SandP-sees-downgrade-blitz-in-EMU-recession-threatening-crisis-strategy.html

Let’s just turn on the presses and have 5% inflation all around for a few years til the financial sector is reformed.

Crikey Bolshy, how are we going to explain this to David OD?

“The surprise nomination of Mr Visco, currently number three at the central bank, was confirmed by senior government sources on Thursday night and followed 24 hours of intense drama, with Italy’s prime minister twice changing his mind under pressure from the Bank of Italy and cabinet ministers.

A day earlier Mr Berlusconi had fixed on Lorenzo Bini-Smaghi, currently an executive board member of the European Central Bank. But after intense pressure from the Bank of Italy which had insisted on an insider, Mr Berlusconi gave the nod to Fabrizio Saccomanni, 68-year-old director general of the bank.

But only hours later, Mr Berlusconi – possibly acting under pressure from Giulio Tremonti, finance minister – told Giorgio Napolitano, the president who has the final say in the matter, that he would nominate Mr Visco, deputy director general, instead.

This leaves Mr Berlusconi contemplating a seriously uncomfortable showdown this weekend with Nicolas Sarkozy, president of France, who has publicly demanded the departure of Mr Bini-Smaghi from the ECB board to make way for a French candidate.”

I sense a fracture and it doesn’t help that behind the scenes the Americans are putting pressure on the Germans to go with the French flow (so I have been reliably told) and the Germans aren’t taking too kindly to this intervention. The PR machine will rev up again today with more comment to come from banks and possibly more public American interference.

Will be interesting to see where Italian bond yields go today – that’s the indicator to watch I think.

If this is “a comprehensive and ambitious global response to the current crisis in the euro area” I would hate to see them dither.

Anyway, I’m back to shorting French banks on my meagre spread betting stakes.

Sarko isn’t the only one doing his crust. Mr Papandreou is having kittens about the possible delay in announcing the (40% ?) haircut for Greece but of course, they can’t do that until the bank protection ducks are all flying in a row and right now, those ducks are just waddling about.

@ PR Guy

Nice link. I was at a big arts debate where a speaker from the platform went into the seeing-the-crisis-as-an-opportunity speech. She used the word ‘crisitunity’ with a straight face.

That’s now up their with other new favourite words: ‘flexicurity’ and ‘beaconicity’.

@Gavin Kostick

Crisitunity? I’ve not come across that one before. I will put it up there with ” comprehensive and ambitious global response ” and “got caught in the crossfire” as I can’t believe anyone can say those with a straight face either!

@David O’Donnell

“Greece 273: Ireland 494 Not really cricket – is it?”

But aren’t we ‘declared’ and they are ‘all out’?

@All

Did anyone understand the maths that Brian Hayes was trying to explain last night on VB on the ‘merits’ of paying €3.5bn of Anglo unguaranteed bond holder cash now and maybe renegotiating the €31bn promisory notes over a longer time frame – if I’ve got this wrong my apologies but I was sitting there trying to to do the PV calculations in my head and it wasn’t computing.

Where am I or Mr Hayes et al missing the point?

@JtO

previous thread …

http://www.irisheconomy.ie/index.php/2011/10/20/institutional-sector-non-financial-and-financial-accounts-for-2010/

@ All

For ease of reference, the link to the Thomas Klau article.

http://www.ft.com/intl/cms/s/0/84bd896c-f973-11e0-bf8f-00144feab49a.html#axzz1b7s8VY5Q

The most interesting idea, and which is likely to be the most controversial, is in the following sentence.

“He must prepare for a day when he shares important parts of fiscal and budgetary power with revamped eurozone authorities – likely to include a parliamentary assembly which could be embedded in the European Parliament”.

The idea of a European Parliament made up solely of directly elected members seemd like a good idea at the time but it has caused a rift to grow between the institution and national parliaments. This has to be bridged, especially in the light of the constitutional developments in Germany.

@Dear Lorenzo

A distinguished academic and former chief economist of the Paris-based Organisation for Economic Cooperation and Development, [Ignazio] Visco won out over Fabrizio Saccomanni, Draghi’s deputy at the BOI, Treasury Director General Vittorio Grilli and Lorenzo Bini Smaghi, Italy’s member of the European Central Bank’s executive board.

The government now faces the difficult task of finding a job which is acceptable to Bini Smaghi, who has refused so far to leave the ECB. Visco and Saccomanni had been expected to resign from the BOI’s executive board if Bini Smaghi had been given the job.

http://www.reuters.com/article/2011/10/20/italy-cenbank-idUSL5E7LK5TZ20111020

@DOCM

Le Monde appear to pushing the CIRA line on the Flag – or did anyone notice?

@JtO

“..Yates belongs to the smallest minority on the planet; bookies who went bankrupt..”

Just to educate you on the dynamics of a bookies business in Ireland today. Paddy Powers (as one of Yates’ biggests competitors) net profit margins – are how much do you think?

You might be surprised to know that Paddy Powers 2011 net profit margin is expected to be 2.1% and for 2012 the expected number is 2.2%.

Bearing in mind Paddy Powers share price hit new all times highs this week the market obviously believes these wafer thin margins are repeatable into the future. Yates made a similar bet – sadly he got it wrong.

Similar numbers for UK operators are c14% to c15% primarily on the back of operating out of much older establishments with significantly less in the way of rental costs which new Irish market entrants had to bear over the past 10 years, like Yates.

A business with a c2% net profit margin is less than your average food retailer – whose buisness model is very low on the risk table (people generally have to eat).

So a business whose net margins are lower than the supposed very low risk operator simply has to be super low risk – right?

Wrong I’m afraid – get the financing and the reveune expectations wrong and throw into the mix high fixed rental costs and 14.5% unemployment then the 2% margins can very quickly become 20% losses and then 40% losses.

Please don’t be so naive so as to believe everything your forefathers told you such as ‘you’ll never see a bookie with holes in his shoes’. I’m an avid horse racing punter and believe you me I’ve seen manys a bankrupt bookie around the race tracks of this country – they’re far from a small minority relatively speaking.

Yates argument in the article is correct – but he doesn’t go nearly far enough. I’ve stated here time and time again the issue with the mortgage disaster rests almost completely with the asset pricing problem. Property is a leverage driven maket -98% of transactions that happen in it simply would not do so aside from the actions of the banks. In a leverage driven market those in control of the leverage control the underlying asset prices. All the fundamentals suggest the banks mis priced the asset class for the best part of a decade as rental yield analysis was screaming this from about 2000 onwards – but the banks bulled on – contrary to mis selling Regulations.

The presentations at the most recent CBI conference in relation to mortgage distress now confirm this mis pricing to be the case – unfortunately 10 years after the event.

Additionaly Yates makes a small reference to the legal problems associated with mortgage contracts which again I’ve noted here it seems ad nausem.

The contract signed by the borrower and the lender is legally blind to the wider actions of the lender in the market. It makes no sense legally, economcially or socially that the lender can go out of their way at the individual bank level and collectively as a industry in compromising the market for all participants in stupidly financing the over supply in many parts of the country to an extreme level and by so doing ensuring the normal ‘out’ for the distressed average borrower in selling his/her property is denied.

The blame for this turn of events rests with the lenders and yet they come back with their grubby hand out looking for 100% of the loan to be repaid as if their actions in the wider market and a matter of indifference to the individual borrowers – a 10 year old would recognise that the banks have to bear a significant percentage of the blame for this turn of events but the law is blind to it. This is wrong.

@JtO

Think Willie-John would have done a better job with Christine – and, being the sound no bullsh1t norn_er that he is, he would not have bought the French bullsh1t peddled to FF late 2008 and early 2009. He’d have booming laughed them out the door ….

Alain has a flag, not a CIRA flag, and is set to judge the line on Sunday – we’ll see how the French respond after that …. when an All Black Depression will settle in over gay Paris.

That said, I’m a fan of French Rugby – but I’m All Black on Sunday. Best to Wales – pity about the boots this morning.

@DOD

Perhaps Bini Smaghi is about to experience an asymetric shock.
Lets see if he reacts with same flexibility that he proposes for lesser mortals.

@DOCM

re Thomas Klau article

As instability threatens its immediate neighbourghood, the re-united nation is ending its flirtation with soft nationalism and reviving the euro-federalist thinking that formed the ideological basis of West Germany’s post-war success. A new generation of German politicians is coming to realise that even after 1989, the old axiom holds: politically and financially, no investment offers Germans a better return than investing in a stable European order.

Is there genuine evidence for the change that Thomas Klau refers to?
It has hardly manifested itself in this ‘euro rolling crisis’.

Looks like the Troika are backing big haircuts for Greece.

“The assessment by the European Central Bank, the International Monetary Fund and the European Commission, obtained by Bloomberg News, said more government aid will be needed and deeper private-sector involvement, or PSI, as is now being considered by European leaders, “also has a vital role in establishing the sustainability of Greece’s debt,” it said.

Giving scenarios using discount bonds with an assumed yield of 6 percent and no collateral, Greek debt can be brought to just above 120 percent of gross domestic product by the end of 2020 if 50 percent discounts are applied.

“Given still-delayed market access, large scale additional official financing requirements would remain, estimated at some 114 billion euros ($158 billion),” it said. “To get the debt down further would require a larger private sector contribution” of at least 60 percent to reduce debt below 110 percent of GDP by 2020.”…..from Bloomberg

Now why did all markets rise substantially today…especially DAX?

@ Joseph Ryan

The frank answer is that for the moment the case is unproven. But the indicators are that Klau is correct. When Jacques Delors in an interview uses the disparaging term “Merkozy”, and one assumes that he is not out of touch with political sentiment either in France or Germany, something seems ready to give. Maybe we will have a better idea by Sunday evening.

The driving political force in Germany is, in my view, the realisation that “chaos in Berlin” as the routine headline in the German press is not a good augury for the future of “alleingang”, still less the pretence of proceeding hand in hand with Sarkozy.

@DOCM
re When Jacques Delors in an interview uses the disparaging term “Merkozy”,..

Thanks for that. I was not aware of it. Very disparaging even in cartoons but coming from Delors!

Interesting tweet from Papandreou …
In a message on Twitter on Friday, Papandreou said there were “serious doubts” about a deal being reached tomorrow. “It is our strategic priority to remain in the eurozone,” Papandreou said. The second goal, the premier said, is the implementation of decisions made on July 21, when EU leaders hammered out a second bailout package for Greece.

At home, Papandreou remains under pressure from some PASOK MPs to find a way of getting other parties to share the burden of carrying out structural reforms and enforcing unpopular measures. The Socialists are concerned that their party is suffering irreparable damage in terms of its public support because it is shouldering a disproportionate amount of responsibility for Greece’s effort to get out of the debt crisis. Among the suggestions made by lawmakers are for Papandreou to find a way to bring other parties into a coalition government.

However, a group of 28 PASOK deputies issued a statement supporting Papandreou in which they called for him to form a “national plan to exit the crisis” when he has completed talks with European leaders.

The move reflects the growing divergence in views within PASOK about how the government should move forward.

Strategic priority????? Are they planning an exit????

@Ceterisparibus
Where do they flippin’ put it all? Honestly?! They are blessed with a warm climate, lovely home grown food and a sort of wine. How on earth can they possibly ‘overspend’ that much?

Should be an interesting few days. The disagreements between the IMF and ECB are now fully out in the open. The IMF are basically calling for real haircuts for bondholders, while the ECB are left to complain:

The ECB does not agree with the inclusion of these illustrative scenarios concerning a deeper PSI in this report.

Much of the media reporting on the Greek deal has been weak, but that on the PSI element even weaker. It is commonly stated that Greece has already obtained a 21% haircut due to the July deal. This is not true, not least because of the collateral it is forced to buy in the form of zero-coupon bonds. The 21% NPV loss is relevant to the banks, from an accounting perspective, but not for Greece where its annual interest and principal repayments are what matter. The July deal has a set schedule of payments for the newly issued bonds, and this schedule of payments is independent of the discount rate used to calculate NPV, for example. The PSI deal has become even more expensive for Greece since July as the cost of the zero-coupons has gone up by about €10bn (from €42bn to €52bn) due to falling interest rates. Also, not surprisingly, the banks mainly want to use the Par Bond option, rather than the Discount Bond option in the PSI deal, since the principal is guaranteed, and this further increases the cost for Greece, unless the banks “voluntarily” rebalance among all the 4 options proposed.

So given that the recession in Greece is worse than expected (by the EU, not by most observers), and that future growth is expected to be lower, and privatization revenue lower, and achievable fiscal consolidation lower, and cost of zero-coupons higher etc. etc. the obvious is being stated by the IMF that some real debt write-off is needed. It is important to note that in the scenario outlined by the IMF there is no collateral involved. This is huge change and would immediately make any such involvement by the banks non-voluntary. Others have drawn scenarios (e.g. UBS) which indicated that the newly issued bonds would need to be for 40 years (not 30) and at an interest rate of 1.5% (not the 4% to 6% range in the July deal) to get a debt reduction of a size that would matter to the markets.

There’s really a range of outcomes that could happen. At one extreme is some tweaking of the discount rate which would be for optics only and would only have an impact on bank accounting, not Greek liabilities, but would get a few headlines (“Haircut increased to 35%” etc.). At the other extreme is a deal where all newly issued replacement bonds are 40 yr 1% bonds, with no collateral/zero-coupons needed. Then there’s everything in the middle.

Throw in huge disagreements on how to leverage the EFSF, and on who should pay for bank recapitalizations, and you can see how a busy few days are in store for all involved. My guess is that the IMF will dangle a carrot of increasing their own credit-line facilities for Italy and Spain (to be announced at G20 meeting in a couple of weeks), but want to see real, not fake, PSI before that happens. At some point the French and the ECB are going to be forced to back down and yield to the laws of arithmetic.

@ Bryan G

I enjoyed your post especially the bit about real PSI in Greece.

Somewhere in all this, am I right in thinking there’s a massive fear of anything that looks like a Greek credit event and an unknown (or perhaps known by a few?) but potentially huge set of liabilities being triggered in the event of one?

Am I also right in thinking that the American banks (as well as French, UK and German) also stand to lose big time – not just from their direct exposure to Greek sovereign debt – if various derivative/CDS contracts all go belly up (and that the amount of this exposure has been seriously piling up this year as more and more speculators have been diving in)?

It would be of great interest to me if anyone out there could articulate the potential consequences of a Greek ‘credit event’… in words that we mere mortals can understand 🙂

Meanwhile, there are certainly distressing noises coming out of senior Greek politicians. Other than getting the next tranche, which has now been approved, I think they fear the other potential outcomes from this weekend.

@all

Mornin all ….

By the way, odious Irish vichy_banking Debt renders the Sovereign debt unsustainable …

Just a pleasant reminder – down falls the rain – and into the deep valley of unsustainable debt limped the lumpen ragged proletarian hordes … down, down, down falls the rain ….

… and NO_ONE is held accountable around here; NO_ONE has been before a proletarian jury; NO-ONE is responsible; WHITE COLLAR CRIME does not, apparently, exist in Ireland; & the local upper_echelon spinners spin successfully away & hoard what they can of the proceeds of the FINANCIAL RAPE of a SUPINE Irish CITIZENRY.

@Eureka
I don’t believe the problem is Germany, I think the problem is France and the ECB – the Germans want large PSI and, I supect, institutional losses too. They don’t want the German state to pay for keeping Greece on a never-ending bailout (through the ESFS). The French, it appears, do (want the Germans to pay for it 🙂 ).

@ All

The post by Brian G sums up, in my opinion, the situation and underlines the unwillingness of other countries of the EU, and especially those in the EZ, to actually stump up any cash to aid Greece.

Even to non-economists, the contours of the conundrum facing the leaders of not only the EZ but the entire international financial community are by now quite clear. The overhang of sovereign debt is such they are confronted with a vista too terrible to contemplate, in political terms at least, the need to introduce drastic budgetary cuts to bring the standard of living – of cosseted Europeans in particular – into line with what they are actually earning, the only countries where this is not required being the AAA rated – excluding France whose rating is not now, nor has been for some time, justified – within the EZ. (That ideology is taking over from rational thinking can be gauged from the fact that the head of the CSU shot down publicly an agreement made by his own finance minister with the junior partner in the coalition to reduce income taxes from 2013 in Germany).

The Greek situation is dramatic not because of the level of the country’s indebtedness but the fact that it is a member of the euro. The various economic analyses suggest that countries with weaker economies in a currency union need to run a more or less constant primary surplus and limit the level of government borrowing to about 30% to 35% of GNP! Seen against this background, the enthusiasm for being able to “return to the markets” needs to be tempered considerably.

Major countries that have the capacity to issue debt in their own currency (the notable examples being the US and the UK) do not face the same constraints. Investors know that there are market mechanisms which enable them to hedge their risks and to be assured that they will not face a total wipe out.

Another point being lost sight of is the impact of dramatic haircuts on Greek debt on holders – especially pension funds – of it by their own citizenry. cf.

http://www.ft.com/intl/cms/s/0/e2d04e90-fb1c-11e0-bebe-00144feab49a.html#axzz1b7s8VY5Q

The immovable object and the irresistible force! It seems that Germany may have a two-way bet on the outcome; if the statements by some influential leaders, e.g. Issing, are any guide.

@Joseph Ryan
Say Greece’s debt is 329 bn and about 200 bn of this is super senior (troika), so about 129 bn of PS debt. Say you want to write down to 80% of Greek GDP (about 240 bn). That means you need to write down Greek PS held debt by 106%…

It clearly doesn’t work (even allowing for NPV, you need to get to a situation where the total stock of debt is 80% of GDP). If you want to get to 60% of GDP (the Maastricht limit), the figures are even more stark.

Personally, I don’t see a solution that involves only PSI, a fixed exchange rate, growth policies for Greece (the cost of growth policies is more than Greece can afford, it seems to me, within a fixed exchange rate).

CDS are, I believe, a sideshow as they were for the Icelandic banks, Lehmanns etc.

Greece is only the breeze before the real storm. The EZ political leadership are in much deeper waters than even they understand.

‘Italian debt is the bone that is stuck in the Eurozone throat at the moment, it can’t be swallowed, and it won’t be spat out. Really it is a sort of nightmare scenario and while some sort of fix may be agreed next Wednesday, my feeling is it won’t be too long before we are back exactly where we are now, only with a little less fire-power left. Latest solution ask the IMF to chip in something to help “bulk up” the numbers’

http://www.facebook.com/pages/Edward-Hugh/103632406357698?v=wall

@Hogan

“It clearly doesn’t work (even allowing for NPV, you need to get to a situation where the total stock of debt is 80% of GDP). If you want to get to 60% of GDP (the Maastricht limit), the figures are even more stark.”

That’s Greece.

Our local wallahs would have us believe that 115% debt/GDP is going to work. Insane?

@ David O’Donnell

I read the article with great interest.

I note that Aviva are able simply to declare they are moving 950 jobs over to the UK. The Irish trade union UNITE, of course, opposes this, but I’ve yet to see any UK union object to taking these jobs. Capital is acting globally and workers movements seem to be struggling to keep up.

Time for a return of the Wobblies?

@Gavin Kostick

And this one for The Great Squid – and in particular for its Top Hibernian Blue Ridge Spinner – echoes of 1929 Shenandoah and Blue Ridge .. Height of Fictitious Goldie Sacks Capital – and they still at it …

@Hogan

re:
“Say Greece’s debt is 329 bn and about 200 bn of this is super senior (troika), so about 129 bn of PS debt. Say you want to write down to 80% of Greek GDP (about 240 bn). That means you need to write down Greek PS held debt by 106%…”

Why are you making a distinction in the write down between super senior (Troika) debt and ”normal’ PS debt. I would have thought that the write down would be across the board? No? Just a question.

If as you infer the write down will exclude ‘super senior’ debt (amount?) clearly the 50% / 60% haircut numbers being talked are far too small to make any impact on the situation.

You may well be right on CDS being a sideshow and I would not disagree with you that the ‘solution for Greece’ as distinct from a ‘solution to Greece’ seems virtually impossible without the three elements you mention.
PSI, devaluation and growth.

@Joseph Ryan

It seems the real sticking point is the write down on official debt…
http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_22/10/2011_411416

Sorry. quotation marks around last comments- that was Edward Hugh talking

Interesting that the Troika issue two kinds of reports. I wonder what the “highly confidential” report on Ireland actually says.
Labour must be nervous – they’ll be associated with all the pain but come 2013 there’s a real chance the rescue fund will be kaput

@Ceteris
Your link
http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_22/10/2011_411416

The attitude of the ‘former European Central Bank vice-president Lucas Papademos ‘ astounds me. It is an extraordinary statement.

For institutional, political and legal reasons, there can be no debt restructuring resulting in losses that would burden official debt holders,” that at the end of July accounted for almost a third of Greek government debt.

At the end of 2010 Greek Govt debt was debt was €329B. Lets say it is approx €360 at present.
This means that ‘official’ funding of approx €120 billion.
Why do ‘official’ funders not get hit like everybody else?
‘For institutional, political and legal reasons’ read to hell with everybody else, we want our money back!!!. All 120 billion of it.

Meanwhile about €3,000? billion has been wiped off European stockmarkets this year.

@ Joseph Ryan

Therein lies the crux of the matter. A 60% write-off for the ECB would amount to 72b so their capital base would be seriously damaged (if not wiped out) forcing the e27 to part with more money.

@Ceterisparibus & Joseph Ryan
The link from ceteris pretty much covers it.

The capital base of the ECB is, IIRC, about 4 bn euro. Supporting a massive amount of covered bonds and bought sovereign debt already. Guess who is in line to recapitalise the ECB?

Whatever level of debt they decide is appropriate for Greece is going to be seen as a ceiling.

@ CP/Hogan/Joseph

Just so we’re clear on the numbers, the ECB has around 50bn in Greek government bonds, all of them bought at a significant discount to par as is, probably at around an average cash price of 65-70 cents (ie they actually should redeem at around 75bn). So a 60% haircut would probably generate losses at the ECB of around 20bn.

@Bond Eoin Bond
Of course. Thanks.

Still a rather large hole in the ECB balance sheet. Though they might make a few bob on IRL. (in theory anyway.

Correction on the BNP figure quoted above. Correct figures

BNP ….198 b.
Credit Agricole…136 billion
SOC Gen… 47 billion
BPCE…38 billion

Total 419 billion.

@Bond/Ceteris

The ECB however are not the only ‘official’ funders. Per the FT article (Papademos), the Greek debt of €366 at the end of July breaks down:
30% ~100B Greeks banks/Institutions/Pension funds/citizens
30% ~100B Official funders
40% ~146B Les Aurtes.
The ECB loss might be only €20 but (if one is to believe the FT article) there are others.

@PR Guy

The proposal to leverage Sovereign wealth funds, if one ignores the wealth fund part, sounds very similar to the ESBies proposal that Philip Lane and others proposed.

It says a lot about European solidarity (one of the first Treaty articles if my memory serves me), that a relatively Europe has to put out the begging bowl to keep itself afloat.

May I also say that I think Italy, Spain and Portugal are correct in refusing to take on ‘euro aid’ to help out their weaker banks. That is what was forced on Ireland. Europe needs PSI-debt writedown. It is that simple.

Meantime Germany in particular in continuing to gather in its crops from the periphery.
http://blog.thomsonreuters.com/index.php/tag/spain/

But the mechanism

@ DOCM

‘But the blame game as to how the international financial community got us into this mess is best left until it the mess is sorted out. It does not, to coin a phrase, move the process forward’

That is, of course, the message which the plutocrats are putting out. They would like us to keep trusting their figures, their paid analysts, and their captured politicos and civil servants. They would like us to keep believing that their central banks are ‘sober and responsible’, when all the evidence is that the CBs themselves were the first to be captured.

What the general public is beginning to perceive is that there is a vaccuum where democracy should be, and that behind the glossy 21c spin are the same old parlour games of the wealthy.

Sarko is now in a rather similar place to where the late MoF was this time last year. He can jet about as much as he likes, but the French banks are getting found out, and there is SFA he can do other than to kick the can a bt more.

Eureka is not far off the mark. I don’t think bankers will get the same treatment as the late dictator of Libya, but this shambles is not going to be easily or politely contained.

@ All

French TV has just announced a “conseil de guerre” post the Merkel-Sarkozy bilateral meeting with Trichet, Lagarde and Barroso (and, presumably Van Rompuy but they forgot to mention him).

One assumes that, against the background of a draconian Greeke haircut, the outcome will impinge on what exactly – apart from turning itself into a printing press – the ECB can do to offer its “continuing support”.

@Hogan, Eoin

“we have assumed that the ECB were buying at market price to make a market. What if they were not?”

The ECB has not been buying at “market prices”. They have been providing artificial demand so there is always a bid at a new distorted, or rigged if you like, ‘market price’ which is above what the market price would be without their intervention. They are no more buying at market prices than butter would be bought at ‘market prices’ if it were destined for a European butter mountain. The ECB is via the SMP paying higher than ‘real’ market price in order to become custodian of a European bond mountain – some of wich might go rancid.

Also don’t forget the book profit on gold holdings if you want everything marked to market.

@DOCM
“The other leg of the proposal, that the fiction that sovereign bonds can be held by banks as zero risk not requiring capital provision be brought to an end, is also actually coming to pass before our very eyes.”
The problem with this is that it renders a number of fully funded social welfare systems insolvent and so requiring a top-up from their funder.

@ DOCM

‘As Jospeh Ryan remarks above, the idea of opening some kind of window to private – in particular sovereign fund – investors that unblocks the fundamental creditworthiness of the core economies of the EU is very close to the idea for ESBies propounded by Philip Lane and his colleagues. The other leg of the proposal, that the fiction that sovereign bonds can be held by banks as zero risk not requiring capital provision be brought to an end, is also actually coming to pass before our very eyes’

Creditworthiness apllies to individuals and corporate entities. Sovereign creditworthiness is critical, unless we re talking about some banana republic.

The creditworthiness of many EZ sovereigns has been threatened by the activities of their globalised financial sector. Despite the great technocratic show of Basel 2 etc, the reality is that the EZ states failed to regulate financial activity, and are now paying the price.

@Hogan

“The problem with this is that it renders a number of fully funded social welfare systems insolvent and so requiring a top-up from their funder.”

Is an insolvent, previously thought of as fully funded, social welfare system the same thing as an unfunded one?

PS liquidity provision is not printing, it is not even QE, though it might be argued that the ECBs collateral requirements allow it to be so (by valuing assets above market prices). Then again, there’s not much point in providing liquidity at market prices – by the time you provide the liquidity, the ‘borrower’ is already bust (you mark him to market). The ECB should be maintaining the fiction that toxic is worth more than it really is. It is, after all, the banker’s bank.

I won’t say the Emperor has no clothes yet, but he’s looking a bit dishevelled.
It’s all about confidence.

The educated classes know the EZ is in deep doo doo, and try as they may, the PTB will not succeed in putting Humpty Dumpty back together again.

Video interview on this page is relevant

http://www.zerohedge.com/contributed/bank-america-lynching-countrywides-equity-likely-worthess-and-it-will-rape-fdic-insured-

@ Hogan
When you say “open a window” does this mean that traders go up to the ECB and borrow money from them to lend to Greece (in the form of buying their bonds)? Sorry if it’s a dumb question.

@ Ceterisparibus
Great link
“She says she is on a diet and then helps herself to a second helping of cheese,” the French president allegedly said after a dinner meeting with Mrs Merkel.

You just gotta love it. The comment that cold bring down the Euro.

So – taking a step back here’s what we’re looking at. The Euro is fu***d. There won’t be any more bailout money after 2013 for us I think. (Not sure if it will run out before then).

We’ll have our Greek moment in 2012. Interesting times!

If the following report is correct then Barrosso really is as he was recently described in Der Spiegal

“”That’s why the challenge we have is a European challenge and not simply a Greek one, and is a challenge which is not just for the future of Europe but for the existence of Europe,» he said.

“In the next few days our decisions are historical. They have to be decisive, and they have to create a Europe of cohesion and move beyond the prejudices to a Europe where we work together in solidarity.”

Government spokesman Ilias Mossialos stated that the Prime Minister’s meeting was conducted in a very positive atmosphere, in the presence of Mossialos and of Alternate Finance Minister Filippos Sachinidis.

Mossialos stated that Barroso told Papandreou he supports Greece’s effort and that Greece is an indispensable part of the eurozone.”

And Papandreou has some neck. Solidarity means Angela writing unlimited cheques for the remainder of the decade. I suppose you cannot blame him for trying but he must realize that the game is up. He would be wise to have cognizance of events in the Arab world this week.

…but then the Germans were the reason we needed the Eurozone in the first place…..
Even if this breaks up we have come a very long way. Sometimes a thing has to fall apart first before coming together again in a better more stable way.

@Ceterisparibus

The Telegraph are in their element – that’s a great link!

Further evidence that the IMF have put their foot down and demanded real haircuts. This changes the dynamic that has pervaded till now, whereby Schauble (and Dutch and Finn buddies) would talk tough on PSI at the FinMin level, only for Merkel to give way and agree with Sarkozy & Trichet (who would trot out the “destroy the Euro” & “nuclear meltdown from contagion” arguments) at the Heads of State level. Now that Lagarde is batting for the opposite side she seems to be doing quite a good job.

@PR Guy

For Greek CDSs, the figures I’ve read show about €80bn in gross CDS contracts outstanding, with a €5bn net payout needed if Greece defaults. Thus from a system-wide perspective after everything is netted out the €5bn loss is not significant. On an individual bank/insurance company basis, losses could be higher, though.

Also the private bank with the biggest exposure to Greece (as of last July) was BNP, which had €5bn outstanding. It has capital reserves of nearly €60bn however. Some French banks either fully or partially own Greek banks, so their aggregate exposure is higher that the raw exposure to the Greek sovereign, which for banks other than BNP is €2bn or less.

It is important to put things in context however. Irish taxpayers pumped about 40% of GDP into failed Irish banks. The equivalent amount for the EZ as a whole (with a GDP of about €9.4tn) would be about €3.8tn. So it’s all small beer really, when scaled against Irish taxpayer support.

@Joseph Ryan

One of the better recent articles about Greek PSI is the WSJ one “How far can eurozone push Greek bondholders” by Richard Barley. Should be accessible if reached via Google (though a selective cookie delete browser plugin is always useful).

@DOCM

I think they wheeled out that former ECB guy (Papademos) to do a PR job for the ECB with his opinion piece in the FT. It wasn’t very convincing. It would save a lot of time/ink/pixels if the ECB just said “We want the taxpayer to make all public and private bondholders whole, no matter what happens”, and left it at that. At least the bit where they argue that doing this is all in the taxpayers’ best interest should be preceded by en editorial comment like “Warning – some readers may find the following statements disturbing”…

Dr Merkel on a diet eh? That comment from Silivio obviously hit a nerve.

If she wants to just lose some weight though she could continue supporting Greece etc. as is and lose and arm and a leg.

It’s going to be an interesting week. I sold French banks on Friday afternoon – let’s hope I can buy them back cheaper at some point this week.

@PR Guy

re “That comment from Silivio obviously hit a nerve”
Tut, tut.
There may well be ‘another Troy for her to burn’.
http://www.online-literature.com/keats/818/

@ PR guy
Think it was Sarkozy said it.

@Joseph Ryan – very appropiate poem.

@Eureka – I was referring to the ‘lardy – ***’ comment made previously by Silvio (and apparently she had him in a private meeting this morning prior to lecturing him about Italy’s debt with Sarko – wouldn’t you just love to be a fly on the wall in some of these meetings).

@All – Van Rompuy this morning: “Our meetings of today and Wednesday are important steps, perhaps the most important ones in the series to overcome the financial crisis, even if further steps will be needed”

This is PR-speak for “it won’t be sorted by Wednesday and we will need even more meetings to try and sort it out but we’ll try and kick the can down the road again for now (probably until Christmas)”

Did I see/hear something over the past couple of days suggesting Bank of America had somehow moved a very large CDS exposure from one area of the bank to some retail banking part?

I notice that, various EU leaders speaking, the word of the day in their summit briefing is “decisive”. Listen out for it. They really are a bunch of parrots…. probably dead parrots at that. Do you suppose that when they start talking about SPV’s, wealth funds, leveraging, etc. that Kenny actually has a clue what they’re on about or does he have someone from the MoF giving him a running explanation?

@Gavin Kostick

I wish I could put Silvio down to ‘laddishness’ rather than ‘effing idiot’ 🙂

@David O’Donnell

I obviously don’t know all the in jokes on this blog. Who is Blind Biddy? She sounds like an aunt of mine who has a nasty habit of playing with weapons that she shouldn’t really be touching. Bazookas in the main.

I’m still struggling to believe this €108 billion figure to recap all the European banks. Surely it’s higher than that…. or are they only planning on recap for some of the banks. Which ones will get what? Surely they aren’t just going to leave the markets guessing tomorrow? That might cause a bit of mayhem…

@ PR guy
Apologies.
No wonder she’s reportedly fond of Enda. You can say what you like about him but he has standards of decency. European politics suck

@PR Guy
“Did I see/hear something over the past couple of days suggesting Bank of America had somehow moved a very large CDS exposure from one area of the bank to some retail banking part? ”
Yes, from the former Merrill Lynch (still being run as a standalone to some degree) to BoA proper. This has a couple of interesting effects if BoA has a higher rating than ML – it reduces the amount of cash collateral that has to be put up and it means that losing trades (from the BoA POV) become senior to other creditors of BoA in the event of a wind-up of BoA.