Wednesday, 29 February 2012

Greek selective default = update

The latest update from the Guardian on Greek downgrade

Eurozone crisis live: reaction to S&P's Greek downgrade


S&P says Greece is in "selective default" hours after Germany approves Greek bailout 2.0

ISDA to rule on whether Greek debt CDS should pay out
ECB (temporarily) suspends Greek collateral
IMF approves latest $4.33bn tranche to Ireland
Italy sells €6.25bn bonds at lower yields
Portgugal passes third bailout review


12.22pm: Angela Merkel the Germany chancellor looks like she's becoming more and more constrained on future eurozone bailouts, after the country's top court raised a hurdle to swift action in financial rescues.

The country's constitutional court has ruled that parliament may not delegate most decisions on disbursing bailout funds to a special committee meeting in secret, as Merkel had planned after a previous ruling bolstered lawmakers' oversight powers.

In a case brought by two opposition lawmakers, the court ruled that a nine-member sub-committee created to approve urgent action by the bailout fund was "in large part" unconstitutional because it infringed on the rights of other deputies.

The judges added the panel may approve price-sensitive debt purchases on the secondary market by the EFSF bailout fund, since confidentiality was essential in such operations. But they denied it the power to authorise loans or preventive credit lines to troubled states or for the recapitalisation of banks.

While not a show-stopper, the decision is likely to mean that parliamentary deliberations on future rescue operations could be slower and more cumbersome, since the full 41-member budget committee or the entire 620-member lower house will have to decide.11.46am: Nobody likes putting themselves through amedical - so no doubt Portugal finance minister Vitor Gaspar is feeling relieved today.

Portugal has passed the third review of its €78 bn bailout programme by the European Union and IMF, as it reiterated this year's fiscal goals will be met despite a worsening economic outlook.

Gaspar said:
The result was positive despite unfavourable conditions. The mission confirmed the fulfillment of the criteria demanded by the terms.

He added that the inspectors will recommend the disbursement of a new tranche of €14.6bn.

11.39am: Here's a date to strike from you diary. The leaders of the 17 eurozone countries have delayed a decision on whether to give their bailout funds more firepower.
The group was expected to meet to decide whether the currency's bailout funds would be allowed to give more than €500bn in loans on Friday afternoon - but maybe they all need to slip off for the weekend as they'll now look at this later in March.

The decision was highly anticipated as concerns mount that the safety net - which is already supporting Greece, Ireland and Portugal - is too weak to catch large other strugglers like Italy or Spain.

The European Commission, the International Monetary Fund and several euro countries want the new, permanent bailout fund, the European Stability Mechanism, to run in parallel with its predecessor, the European Financial Stability Facility.

11.09am: Italy has sold €6.25bn of five and ten year bonds - getting solid support with investors anticipating a fresh rally ahead of a fresh injection of liquidity by the ECB later this week.

The 10 year bond came in at an average yield of 5.5%, down from 6.08% last month, and raised €3.75bn. The remaining €2.5bn of five year notes will yield 4.19%, the lowest since May 2011.

Michael Leister of DZ Bank, says:
Clearly here we see the effect of domestic support and also of the ECB liquidity environment.
However, Marc Oswald of Monument Securities, counters:

The cover, as ever, was not exactly overwhelming, but they've sold the total volume that they wanted. The fact that the cover in the five-year wasn't particularly more than in January seems to nix the argument that the auction's been well-bid on the back of tomorrow's LTRO.
10.42am: It's not just Germany where sentiment is rising. Confidence in the eurozone economy has risen for a second consecutive month, which optimists hope signals only a mild recession during 2012.

European Commission economic sentiment indicator has ticked up one point to 94.4 - better than the 93.9 forecast.

Here's Howard Archer, chief european economist at IHS Global Insight:

A second successive modest increase in eurozone business and consumer confidence in February supports hopes that the eurozone economy is past the worst after GDP contracted by 0.3% in the fourth quarter of 2011. Even so, sentiment is still at a pretty low level and the eurozone is far from out of the economic woods. Indeed, we suspect that further eurozone GDP contraction is more likely than not in the first quarter of 2012.

Muted domestic economic activity, intensified fiscal tightening in many countries and still serious uncertainties and concerns over the Eurozone sovereign debt crisis continue to limit the upside for sentiment, while consumers are additionally worried over jobs. Consumers' purchasing intentions remain limited and weakened in February while businesses' employment expectations remain well below the levels seen in the early months of 2011 and were also generally softer in February.

He adds:

[the rise in confidence] reinforces belief that the ECB will remain firmly in "wait and see" mode at next week's March policy meeting and will keep interest rates unchanged at 1.00% in the near-term at least.

9.58am: A quick explanation on the ECB's (temporary) decision to suspend Greek collateral.
This is from the prolific Louise Cooper at BGC Partners:

My take is that it is just a technical response due to the fact that certain ratings agencies have lowered Greek ratings to SD [selective default] as CACs [collective-action clauses] have been introduced to some types of Greek government bonds.

The collateral will still be acceptable by the Greek central bank under 'emergency liquidity measures' and are expected to be acceptable to the ECB again once the 'collateral enhancement scheme' (EFSF buy-back scheme) is launched later this month.

Greece is seeking to swap more than €200bn in outstanding bonds for new debt in an effort to reduce its borrowing costs and reduce long-term debt. If Greece didn't get enough investors to agree to that deal, it would face default.

The CACs offer ways around that risk, by requiring all bond holders to participate in a bond exchange if a specified majority approves. However, that means the restructuring will not be voluntary and S&P has said just adding that clause retroactively to bonds, even if it isn't used, is enough to consider the terms of the bonds significantly altered and thus to place them in selective default.

9.36am: Here's one for eurozone crisis aficionados who love the detail behind how this whole thing plays out.

It begins:
An unidentified market participant has asked a committee of the International Swaps and Derivatives Association to rule on whether the passage of legislation approving collective-action clauses for Greek debt should trigger payouts on credit-default swaps tied to Greek sovereign bonds.

At stake are payouts from sellers of a net $3.2 billion of CDS on Greece currently outstanding, and the stigma associated with lending credence to an instrument policymakers have long reviled.

ISDA said in a statement the Determinations Committee will decide by 5 p.m. GMT on Wednesday "whether to accept the question for deliberation or reject it." Only after the committee has opted to review the case would the committee then consider whether sellers of Greek CDS should pay buyers of the protection.

8.44am: This from the European Central Bank this morning. Presumably this is all to do with the private sector involvement part of the bailout 2.0 agreement...

28 February 2012 - Eligibility of Greek bonds used as collateral in Eurosystem monetary policy operations

The Governing Council of the European Central Bank (ECB) has decided to temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by the Hellenic Republic for use as collateral in Eurosystem monetary policy operations. This decision takes into account the rating of the Hellenic Republic as a result of the launch of the private sector involvement offer.

At the same time, the Governing Council decided that the liquidity needs of affected Eurosystem counterparties can be satisfied by the relevant national central banks, in line with relevant Eurosystem arrangements (emergency liquidity assistance).

Marketable debt instruments issued or fully guaranteed by the Hellenic Republic will become in principle eligible upon activation of the collateral enhancement scheme agreed by the Heads of State or Government of the euro area on 21 July 2011, and confirmed on 26 October 2011, together with a number of other measures aimed at assisting Greece in its adjustment programme. This is expected to take place by mid-March 2012.

8.37am: It's pay day for Ireland, as the International Monetary Fund has approved a $4.33bn loan to the Celtic-tiger-turned-tigger - the latest instalment in a three-year $30.23bn programme to support the country through a period of tough financial reforms.
Ireland seems to have behaved itself well enough to receive its pocket money, according to IMF first deputy managing director David Lipton. He says:

The Irish authorities have continued strong implementation of their programme despite deteriorating external conditions.

At the same time, the challenges Ireland faces have intensified since the outset of the programme, with growth expected to ease to about 0.5% in 2012 owing to a slowing in trading partner activity.

The Irish authorities have responded by raising the fiscal consolidation effort adopted in Budget 2012, and the budget remains on track to meet an unchanged general government deficit target of 8.6% of GDP. If growth should weaken further, the automatic stabilisers should be allowed to operate to help avoid jeopardizing the fragile recovery

The IMF programme was approved in December 2010 as part of a larger $114bn financing package supported by the European Financial Stabilisation Mechanism, the European Financial Stability Facility, loans from the UK, Sweden and Denmark and Ireland's own contributions.

8.17am: Upbeat news from Germany - which is always assured to raise the spirits of everybody else in Europe.

German consumer confidence has increased again, its sixth rise on the bounce. The country's GfK index has increased to 6.0, its highest level since March 2011, as households said they felt significantly more positive about the prospect for their incomes.

ING's Carsten Brzeski reckons:

Looking at the available components shows that income expectations have increased significantly, while the German willingness to buy dropped somewhat. Today's increase bodes well for a further stabilisation of private consumption throughout 2012.
Although it is often said that the way to the German heart is through his car, the latest increase of fuel prices, approaching last year's record highs, has not undermined consumer confidence. Greek crisis, high fuel prices; it looks as if nothing can shatter German confidence. At least for the time being, the Eurozone biggest economy looks like a country full of optimists.

7.47am: Here's Michael Hewson, senior market analyst at CMC Markets UK, reacting to yesterday's events.

On S&P grading Greece "SD" (see below):

The market's reaction was one of complete indifference, such is the reality of life in this latest, but not unexpected twist in what has become the almost everyday routine of the European debt crisis.

And on the vote passing the Greek bailout in the German parliament:

Even though this bailout made it through the German parliament it is becoming very apparent that the German public is losing faith in the current bailout policy, and politicians worried about re-election could well start to reflect this mood. As such the scope for further bailout cash could well be much more difficult to attain as public opinion swings against further taxpayer cash for other European countries.

7.42am: Morning all.

It seems highly unlikely that you weren't all tuned in until past 9pm yesterday, but those who had something better to do may have missed Standard & Poor's issuing perhaps the only credit rating you'd never heard of.

Greece is now classed "selective default", or SD, which is one for the Panini sticker album. The move followed the Greek government's decision to add "collective action clauses" to its bonds, which give Athens the authority to force bondholders to take part in its debt restructuring, if they declined to take a voluntary haircut on their loans.

Standard and Poor's also put the rating of the EFSF bailout fund on a negative outlook, in line with its ratings on France and Austria.

The ratings tinkering came after a day in which the German parliament nodded through Greece bailout 2.0 - voting the plan through by 496 votes to 90, with five abstentions.
After the German vote, it is time of the Finns to debate the package today and then vote on it tomorrow.

And also today:

• The latest German inflation numbers with CPI for February expected to slip back slightly from 2.3% to 2.2%, while German Gfk consumer confidence for March is expected to pick up slightly from 5.9 to 6.

• The Irish Attorney General could introduce another curve ball into the whole save the eurozone process, with a decision expected today on whether an Irish referendum is required on the new EU fiscal compact.

Portugal is also due to publish its latest financial health check from the troika who have been assessing the country's progress under its €78bn bailout plan.

• Meanwhile, Italy is also set to sell €6.25bn of five and 10 year new bonds with yields expected to fall again - this time below 6% - depressed by the ECB's LTRO programme.

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