‘DRAGHI TO PRESENT PLAN TO BUNDESBANK HEAD’
Speaking of Draghi…a story has hit the wires tonight that the ECB president will hold talks with Jens Weidmann (president of the Bundesbank) in the ‘coming days’ to hammer out a new raft of measures to address the crisis.
According to Bloomberg News, Draghi’s plan includes a new bond purchase scheme, a cut in eurozone interest rates, and a new Long Term Refinancing Operation (ie, more cheap loans for the banks).
Having secured the backing of governments in Spain, France and Germany, Draghi is now seeking to win over ECB policy maker for a multi-pronged approach to reduce bond yields in countries such as Spain and Italy, the officials said on condition of anonymity because the talks are private.
The story has sent stocks rallying on Wall Street, where the Dow Jones is now up 201 points at 13089, a 1.57% gain.
Spoiler alert! Chris Adams of the FT reckons he knows how the talks will play out:
At which point the police show up.
And with that, we’re done. Hope you all have lovely weekends. See you again on Monday. Good night!
Europe’s financial markets closed for the week with some solid gains.
Spanish IBEX: up 248 points at 6617, + 391%
Italian FTSE MIB: up 386 points at 13596, + 2.93%
FTSE 100: up 54 points at 5627, + 0.97%
German DAX: up 106 points at 6689, + 1.62%
French CAC: up 73 points at 3280, + 2.28%
The mood in the City was pretty upbeat today – thanks to the stream of (mostly) encouraging comments from euro leaders.
Of course, traders and analysts also enjoyed a London 2012 feelgood factor…especially after minister Jeremy Hunt tried ringing his Olympics bell (video here – still funny after 25 viewings. Make that 28 viewings).
Some late breaking fashion news….
Greece is not the only euro zone country to be scoured over by a high level mission of troika auditors this week. As Helena Smith says a delegation of top ranking officials from the EU, ECB and IMF have also been in Cyprus.
Not only does the island republic require a much larger rescue package than originally thought, there are widely differing opinions on the measures the Greek Cypriot government will have to take to trim budgets.
This photo shows Delia Velculescu (right) the head of Troika IMF and European Central Bank official Philipp Rother at the House of Representatives in Nicosia, Cyprus, today.
Finance ministry officials now admit that the remote EU state will need around €11bn to recapitalise its banking system – and not the €2.3bn first estimated when it applied to the rescue fund.
Finance minister Vassos Shiarly was quoted as telling Stockwatch, a Nicosia-based financial website, that the bailout agreement with the International Monetary Fund, the European Union and the European Central Bank will be completed in September. Two to three months would be required to determine the amount that would eventually be needed, he said.
As in Greece where troika officials are not expected to complete a review of the country’s troubled finances until September, the drama on the Mediterranean isle has a post-summer come-back date.
Spanish bonds are still out of the danger zone, with the 10-year Bono yielding 6.76% despite the IMF’s warning this afternoon.
That’s a good moment to flag up the latest research paper from Re-Define, called Spiking skywards? Tackling rising yields in the Eurozone.
In it, Sony Kapoor explains how high yields don’t have a huge immediate impact on total Spanish borrowing costs (Spain pays an average of 4.1% on the stock of its outstanding debt which has an average maturity of 6.4 years).
But despite that, high yields are a serious threat to the real economy. Here’s why:
First, rising yields depress the market price of the large amounts of Spanish government bonds held by Spanish banks that weakens what is already a very fragile financial sector. This in turn casts a negative shadow on the Spanish sovereign given that Spain will need to backstop most of any losses that may accrue in the banking sector.
Second, rising yields and higher volatility increases the collateral haircuts that counterparties demand making life harder still for banks.
Third, sovereign yields remain critical for the transmission of credit to the real economy. Beyond the immediate negative impact that further fragility in the financial sector has on the ability and willingness of banks to lend to the real economy, sovereign yields continue to provide a de-facto floor for borrowing costs for large segment of the real economy.
The Italian stock market regulator has just announced that it is extending its ban on short selling until 14 September.
This ban was brought in on Monday, and expired tonight.
Larry Elliott’s news story about the IMF’s new report on Spain (16.30pm) is now online here.
A nugget out of Greece where local media are reporting that 25,000 Greeks migrated to Germany in 2011 alone! That equates to 0.6% of the country’s 5 million strong workforce, says Helena Smith who adds that with unemployment at a record 22% (and joblessness among young Greeks at an unprecedented 52%) the brain drain is only bound to get worse.
IMF: SPAIN FACES A LOST DECADE OF GROWTH
Spain faces a lost decade of growth, with the current double-dip recession lasting for at least another 18 months, the International Monetary Fund warns.
In its latest report on the Spanish economy, just released, the IMF warned that the scale of the Spanish downturn poses a threat to the rest of Europe.
The Fund said the outlook for Spain was “very difficult” and that the fresh austerity measures announced by the government of prime minister Mariano Rajoy would have “a significant impact on growth”.
The IMF now estimates that Spanish GDP will shrink by -1.7% in 2012, and a further -1.2% in 2013. It then sees a 0.9% expansion in 2014.
It also warns that Spain is threatened by several downside risks – including the danger that Rajoy’s policies fail to stop capital leaving the country; or the impact of “further stress” elsewhere in the euro area.
The euro is finishing the week in vigorous form, up almost a cent against the US dollar today at $1.236 – pushing higher since the Merkel/Hollande statement was released.
It is now up by 2.5 cents this week, with the big move coming yesterday when Mario Draghi signalled to business leaders in London that the ECB was prepared to do more to save the euro:
News in from Athens where our correspondent Helena Smith says troika officials are now holding talks with the socialist leader and former finance minister Evangelos Venizelos following their earlier meeting with conservative prime minister Antonis Samaras.
Venizelos, whose socialist Pasok party is participating in Athens’ left-right coalition government, has made clear that he will raise the politically sensitive issue of extending the debt-stricken country’s fiscal adjustment program from two to four years. With patience waning among international creditors over the lack of headway Athens has made in implementing reforms, Venizelos’ appeals are expected to fall on stony ground. Any prolongation will be costly with the EU’s core creditor members almost certain to baulk at handing out another 20 bn euro – the estimated cost of extending the program.
Meanwhile, the fall-out from remarks made by Greece’s former representative to the IMF, Panaghiotis Roumeliotis continue to inflame. The erstwhile envoy caused ructions earlier this week when he declared in an interview with the New York Times that Greece’s IMF-dicated fiscal adjustment program was doomed to failure. “We knew at the Fund from the very beginning that this program was impossible to be implemented because we didn’t have any — any — successful example,” he said. “The argument that is used usually by the troika in order to criticize Greece — and to ignore their mistakes — is that the deep recession is because of the nonimplementation of the structural reforms.”
The Brussels press corp are interpreting the Merkel/Hollande statement as a supportive gesture towards ECB president Mario Draghi:
The official statement from Merkel and Hollande is online now on the Élysée Palace website.
Here’s a rough translation:
France and Germany are fundamentally tied to the integrity of the euro area. They are determined to do everything to protect it.
MERKEL AND HOLLANDE ISSUE JOINT STATEMENT
BREAKING: Angela Merkel and François Hollande have issued a statement following their phone conversation, in which they said they were deeply committed to the integrity of the euro zone and pledged to do “everything” possible to protect the euro.
However, the statement also pointedly adds that eurozone countries and institutions (ie, the ECB) needs to deliver on their commitments “within the realm of their own competencies”. Sounds like a reminder to Mario Draghi that his powers only extend so far.
Here’s some reaction to the US GDP data (see 13.32).
Jason Conibear, market analyst at forex specialists, Cambridge Mercantile, argues that Obama will be breathing a sigh of relief, even though US economic growth is slowing:
American consumers are getting skittish again, but with the giant economy’s output still creeping upwards, politicians and policymakers will find the perfect excuse to do nothing.
So any sighs of relief will be tinged by the knowledge that while it could have been worse, things still aren’t getting better.
Weighed down by debt, high unemployment and spooked consumers, the US economy just can’t seem to get off the ground.
Robin Bew, chief economist at The Economist Intelligence Unit, agrees that the US public is reining in its spending:
Those data revisions mean the US economy only grew by 2.0% in 2012, not the 3% growth previously reported.
And Capital Economics reckons that the US GDP data is not bad enough to trigger another stimulus package from the Federal Reserve:
The 1.5% annualised rise in GDP in the second quarter shows that the economy has lost a fair amount of momentum this year. Nonetheless, the recent run of data probably hasn’t been quite weak enough to prompt the Fed into launching QE3 at next week’s policy meeting. QE3 later in the year is not a done deal either.
US GDP PUBLISHED
Just in – the US economy grew by 1.5% (on an annualised basis) in the last three months of 2012. That’s bang in line with expectations, and shows that economic growth slowed in the last three months.
That equates to almost 0.4% growth during the quarter – rather better than the 0.7% contraction suffered by the UK.
SPAIN “DISCUSSED €300bn BAILOUT” – REUTERS
Another interesting newsflash, this time out of Brussels, where Reuters are reporting Spain’s finance minister discussed the possibility of a €300bn bailout with his German counterpart earlier this week.
According to an “unnamed eurozone official”, economy minister Luis de Guindos broached the subject when he met with Wolfgang Schäuble on Tuesday night.
“De Guindos was talking about 300 billion euros for a full program, but Germany was not comfortable with the idea of a bailout now,” the official told Reuters.
“Nothing will happen until the ESM is online. Once it is operational we will see what the borrowing costs for Spain are and maybe we will return to the question,” the official said.
It’s certainly plausible. We reported back on Monday that the possibility that Spain would need a €300bn rescue package would be on the table when de Guindos and Wolfgang Schäuble met.
The news that de Guindos apparently brought up the issue has sent the euro rallying to a two-week high of €1.2337.
A €300bn bailout would take Spain out of the financial markets until the end of 2014, assuming it comes on top of the €100bn bank bailout already agreed.
Reuters’ Brussels bureau is certainly churning out the exclusives – also reporting that the European Central Bank and national central banks are considering taking “significant losses” on the value of their Greek bond holdings, in an effort to keep Greece in the eurozone.
The central banks dodged taking a haircut in the debt restructuring earlier this year, but some officials now believe this is the best (or even the only) way to relieve Greece’s debt burden and give it more time.
“The big mistake was that we didn’t manage to haircut the Greek government bonds that were in the investment portfolios of the national central banks. That was really, really stupid,” the official told Reuters.
There’s a problem, though. Some central banks can’t afford to take a loss (even though they bought Greek bonds at a significant discount to their face value.
Interesting! Wolfgang Schäuble, German finance minister has welcomed Mario Draghi‘s pledge yesterday to do everything necessary to preserve the eurozone.
Schäuble cautioned, though, that the European Central Bank should not take unilateral action, saying:
The precondition is that politicians also take and implement the necessary measures to overcome the financial and confidence crisis.
It’s more talk, rather than action, but it’s helping to calm the markets (Spanish 10-year bond yield is now down at 6.75% – a whole percentage point lower than the record high set this week).
Nouriel Roubini, meanwhile, warns that it will not be enough for the ECB to simply restart its bond-buying efforts (the Securities Markets Programme). The SMP’s budget needs to be larger, and the purchases need to be more permanent than before, he argues:
We’re hearing that the long-awaited meeting between prime minister Antonis Samaras and troika officials has just concluded in Greece.
Athens correspondent Helena Smith reports that the meeting was a “high-wire act” for Antonis Samaras:
The Greek prime minister, who began the talks with troika officials in his office at 11 AM local time, is acutely aware of what is at stake: if the visiting EU-IMF debt inspectors don’t like what they hear there will be no more rescue loans for an economy whose reserves are fast drying up. Default and bankruptcy would inevitably loom.
Here’s a photo of the Troika officials leaving the talks:
The three leaders backing the power-sharing administration find themselves stuck between a rock and a hard place with the Greek media describing an atmosphere of “shock and awe” when the country’s finance minister Yiannis Stournaras presented them on Thursday with a list of the sort of cost-cutting measures the troika want to see. Unable to decide and with opposition from the far-left anti-bailout front mounting, Samaras and his partners — Evangelos Venizelos of the socialist Pasok and Fotis Kouvellis of the Democratic Left — agreed to reconvene on Monday in what has been billed as a final attempt to “finally agree” on the measures.
Troika officials are waiting with baited breath. The monitors, who will return to Greece to continue their assessment of its debt-choked economy in early September, are clearly in no mood for compromise with many acknowledging that after a total €240bn being committed in bailout funds to the country and little sign of reform progress in return, patience is running thin.
The Greek government spokesman Simos Kediokoglou was laconic after the talks. “The prime minister was informed by the troika representatives of the progress made so far in their meetings and of the initiatives that have to be taken for the Greek [fiscal adjustment] program to be put on track,” he said. Analysts said everything would now rest on the outcome of talks between political leaders on Monday.
It rather appears that there is a battle of wills taking place in the eurozone this morning. First the Bundesbank opposes Mario Draghi (see 10.20am); then Le Monde reports that the ECB and the EFSF are planning ‘co-ordinated action’ (see 10.59am); and now the leaders of France and Germany are about to discuss the crisis.
Steve Collins, global head of dealing at London & Capital Asset Management, summed it up well:
Just in – François Hollande and Angela Merkel are to hold a telephone call at noon BST (so in around 30mins time) to discuss the decisions made at the EU Summit at the end of June.
Over in Greece another round of crisis talks are taking place.
Helena Smith our correspondent in Athens says a long-awaited meeting between prime minister Antonis Samaras and troika officials is currently underway.
(Earlier we had mistakenly reported that talks between Samaras and EU president Jose Manuel Barroso were continuing today – sorry about that)
German chancellor Angela Merkel and French president Francois Hollande are set to discuss the ECB plan today, according to Le Monde.
The paper also says the ECB and the EFSF bailout fund are preparing co-ordinated action to support Spain and Italy. Le Monde says the EFSF could be used to buy Spanish and Italian debt on the market, with this function taken over by the replacement bailout fund, the ESM, when it comes into force.
The report seems to have brought a bit of optimism back to flagging bond markets.
Germany’s finance minister Wolfgang Schaeuble will apparently be issuing a statement on the general euro situation today, a spokeswoman has said.
According to Reuters, the German government’s position on euro area instruments – presumably the ECB and the bailout funds – remains unchanged. So what Shaeuble plans to say is unclear.
She also repeated that the EU treaty does not envisage a banking licence for the bailout funds, which appears to back up the Bundesbank comments from earlier.
As for specific countries, she said there had been no request from Spain for further help, while Germany’s position on Greece staying in the euro had also not changed. Yesterday, you may recall, Citigroup said it believed there was now a 90% chance of Greece leaving.
Of course, Italy’s success with the six month bond is a drop in the ocean and not much of an indicator of what is to come. Nicholas Spiro of Spiro Sovereign Strategy said:
Sentiment-wise things have improved markedly, particularly at the shorter end of the Spanish and Italian yield curves. The Treasury has Mr Draghi’s market-moving comments yesterday to thank for this. The more positive tone going into today’s auction has clearly helped. Although Monday’s sale of longer-dated paper will be a more accurate gauge of sentiment towards Italy, the Treasury will be fairly pleased with today’s result. While demand was stable, yields actually fell, reversing the recent trend.
Nothing has changed with regards to Italy’s dire predicament. The Treasury is still only some 50% of the way through its bond issuance programme for this year, the recession continues unabated and there is considerable uncertainty about the post-Monti political landscape. Most worryingly in our view, Italy’s bond market is at the mercy of what happens in Spain.
That last comment is perhaps the most worrying of all…
Meanwhile Draghi’s comments on saving the euro at any cost seem to have helped in one respect.
Italy’s auction of €8.5bn worth of six month bonds saw the yield fall to 2.454%, the lowest since May. A month ago the yield at the auction was 2.96%. The cover was the same as June at 1.6 times.
The country should be able to get six month bonds away. A more severe test will come on Monday when it auctions up to €4.75bn of five and ten year bonds, and a €750m three year bond.
The Bundesbank has popped the Draghi Rally!
Germany’s central bank has given a strong indication in the last few minutes that it is not impressed by Mario Draghi’s comments yesterday – particularly the implication that the ECB might start buying Spanish or Italian government bonds, or even launching a full-scale quantitative easing package.
A Bundesbank spokesman described the idea of the ECB buying government bonds as “problematic”, as it creates “false incentives” (Dow Jones reports). It would apparently be “unproblematic” for the EFSF bailout fund to buy government bonds.
The Bundesbank has also reiterated that it opposes the notion of giving the European Stability Mechanism a banking licence (which would allow to increase its firepower by leveraging its assets via the ECB).
This has had a predictable impact on the markets, pushing up the yields on Spanish and Italian bonds, and sending the euro lower.
The Bundesbank’s intervention is not really a surprise – it would be more newsworthy if they had changed their stance, as Sony Kapoor of the Re-Define thinktank points out:
Mario Monti’s office has just announced that the Italian PM will meet with French president Francois Hollande next Tuesday. No word of what’s on the agenda yet – will update if we hear more.
Spain’s unemployment crisis has worsened.
Data released this morning showed the jobless rate has hit 24.6% – the highest level since records began in the mid-1970s (following the end of the Franco dictatorship).
There are now 5.7m people officially out of work in Spain.
As economist Shaun Richards points out, it’ll take more than warm words from the ECB to get them into work:
Speaking of Spain, this week’s Economist front page is worth a look:
With the Olympics kicking off tonight, we can expect analysts and commentators around the world to start their Olympics/eurozone analogies in earnest.
Here’s an early frontrunner (no pun intended) from World First chief economist Jeremy Cook
Here’s some more reaction to Draghi’s remarks yesterday to get your teeth into.
Gary Jenkins at Swordfish Research says:
Blimey. What would the reaction be if they actually did something? It was Draghi Day yesterday. At the risk of repeating myself, I didn’t think he said anything particularly new. More he took all the best bits of his utterances of the last few months. So it was Draghi’s greatest hits if you like. But he did it with gusto and got the applause of the audience that he craved.
There is a part of me that thinks that with Spanish two year debt touching 7% and with contagion across to Italy they were looking into the abyss but without being able to use the ESM they had to use talk to try and pull Spanish bonds back and get themselves through the summer months.
At some stage the market may demand to see their hand via some action rather than words but I don’t think that is the main challenge the ECB faces. The main one is somehow, however they get yields down, they must also persuade the market to fund the likes of Italy and Spain on an on-going basis at yields that are sustainable for the countries in the face of a very difficult economic environment and without possibly the move towards a full fiscal union. Yesterday was probably about short covering / index realignment than a fundamental shift in the confidence level of investors.
While Michael Hewson at CMC Markets said of Draghi’s comments:
It gave the impression that the ECB stands prepared to do something about capping rising peripheral bond yields, with interpretations ranging from a restart of the dormant SMP program to giving the ESM a banking licence if, or when, it is ratified by the German constitutional court on 12th September.
As it stands the Securities Markets Program is already at the limit of the ECB’s mandate, but Germany reluctantly went along with it to buy time for vulnerable nations to implement reforms. The piecemeal purchase of Spanish and Italian bonds is one thing, given the size of the bond purchases relative to the size of the European bond market, but to be effective in driving both Italian and Spanish yields down the ECB would have to go “all in”, given that the Italian bond market is the third largest bond market in the world.
Given investors’ fears of subordination after the Greek PSI the ECB could find themselves on the end of a bond rush as investors seize the opportunity to unload their holdings en masse to the only available buyer.
It would seem unlikely that Germany would countenance any of these measures in any way, and for that reason caution remains the watchword.
Nevertheless, attention will now inevitably shift the focus towards next week’s ECB rate meeting to see if Mr Draghi’s deeds match his rhetoric, or whether he is simply trying to buy more time for when the ESM becomes available.
Markets across Europe open up
It comes after strong gains yesterday, with Spain and Italy’s markets both closing up 5% on Thursday
FTSE up 10 points at 5583
DAX up 11 points at 6594
CAC up 7 points at 3215
FTSE MIB up 97 points at 13308
IBEX up 56 points at 6425
Good morning and welcome to another day of our rolling coverage of the eurozone crisis.
The Draghi bounce appears to be holding today, after the ECB president said in a speech in London yesterday that the organisation would do “whatever it takes” to save the euro.
Spanish 10 year bond yields are still below the 7% threshold considered unsustainable, and falling, currently down 10bps at 6.86%
While Italian 10 year bond yields have dropped below 6% for the first time in a week, down 5bps at 5.98%
And the exchange rates are also maintaining yesterday’s good gains.
€1 is worth $1.23 and £1 is almost worth $1.57
It is a quieter day today, as we wind down for the weekend, but we will be keeping a close eye on the following:
Italy is issuing €8.5bn of six-month short-term bonds
Germany’s latest Consumer Price Index is published
The US reveals its latest GDP figures, expected to be down slightly
[UPDATE: European Commission President José Manuel Barroso is NOT holding further meetings with Greek PM Antonis Samaras, as we earlier said. Apologies]
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