Greek jitters are back. After a brief and bizarre market rally in the middle of last week, stock markets across Europe are in the red today again, after a bloody Friday.
A key indicator of contagion risk – sovereign bond yields – have also spiked. Spanish, Portuguese and Italian bonds have all risen today, with peripheral debt soaring to a year high over German bunds.
Analysts at Capital Economics are now positing that Grexit risk will be positive for gold as safe haven plays come to the fore. Here’s their reasoning:
For a start, the gold price has held up well despite signs that the US economy is rebounding in the second quarter, clearing the way for the Fed to start hiking rates later in the year. One explanation for gold’s resilience is that the potential negative of higher US interest rates is already being offset by some fresh support from safe-haven demand.
More importantly, we are only just starting to see signs of contagion from Greece to other bond and equity markets in the euro-zone. A Greek default alone may no longer be a huge surprise and the sums involved would be small in the global scheme of things. However, if the uncertainty undermines investor confidence in the rest of the region, the gold price is likely to climb a lot further. What’s more, if Greece does default, the focus may soon move on to the far more serious issue of potential Greek exit from the euro-zone itself.
Greek banks bleed €400m today
Mr Draghi’s address has ended. The ECB president said he would continue providing funds to Greek banks as long as they stay solvent. That solvency has become inreasingly creaky as money continues to flee the financial system. According to banking sources speaking to Reuters, €400m left banks today alone. But that’s still not as much as feared, according to the same sources, who say the outflows remains “contained.”
Deposit flight is something of a double-edged sword for the Greek government. Hard-Left Syriza MPs told Ambrose Evans-Pritchard last night that it represents a “trump card” in the country’s negotiations, as shrinking deposits place the ECB and eurozone members further on the hook for a Greek default. Current eurosystem funding for Greece stands at €116bn. Having said that, the ECB could well retaliate and cut ELA at any time, setting in motion the steps towards a Greek euro exit.
Greeks: we’re still waiting
A number of creditor voices have told the Greeks “the ball is in their court”. But Athens doesn’t seem to be singing from the same hymn sheet. A statement from the PM’s office today says the government is still waiting to hear on their proposals from Brussels.
More debt restructuring for Greece?
Mr Draghi provides short shrift to the issue of further debt alleviation for Greece, as has been requested by Athens, with the support of the IMF. The ECB chief is less forthcoming. He notes Greece’s current debt servicing costs are half that of other member state countries. The average maturity is around 30 years. This is “pretty good” he notes.15.45
Greece will make its repayments to creditors – Draghi
Default “all but a certainty” for Greece
Analysts at Fathom Consulting think a missed Greek payment to its creditors is now an inevitability. The only question is “against whom will Greece default, first? And will it do it outside of, or within the euro?”
They also speculate that post-default, the government would be forced to impose capital controls,and a “unity government” would then be coerced to agree a new bail-out agreement.
There are soft and hard deadlines – the IMF and ECB payments due this and next month are most definitely the latter. And of course, the second bailout expires on 30 June.
Default however is not the same as Grexit – in theory. In practice capital controls will likely be implemented in effect cutting Greece out of the euro – a ‘Cyprus-style’ solution.
Our base case scenario is that following capital controls a unity government will sign the third bailout, but we cannot discard the possibility that Grexit will take place (35%).
Finally, we retain our long-held view that Grexit, were it to be allowed to occur, would not be the end of the matter. Contagion would spread through the euro area, and perhaps wider still.
Why no QE for Greece?
A Spanish parliamentarian asks the president about Greece’s exemption from the ECB’s QE programme. He explains there are three main reasons:
1. The ECB doesn’t buy bonds of countries under review for the IMF as was the case with Cyprus
2. The ECB does not buy bonds below a certain sovereign rating. “This has been consistent and constant through the years” says Mr Draghi.
3. Finally, the ECB won’t buy more than 33pc of the bonds of a government whose holdings it already owns. This makes it “impossible” for the ECB to increase its holdings.
But Draghi adds, all these three conditions are under review if a successful conclusion at the staff level with Greece’s partners can be brokered.
He adds he does not think the parties are “that far” from a successful conclusion.
Never waste a good Grexit crisis
Mr Draghi continues on the theme that the euro is an “unfinished construction” and requires a “quantum leap” forward. He urges the politicians of the eurozone member states to explain this to their electorates.
Draghi continues that “some of the sacrifices, poverty, and unemployment was due to the fact the construction was unfinished.”
Draghi heckled by Greek MEP
Not for the first time, the ECB president is being shouted down by a Greek parliamentarian over his institution’s role in the ECB.
He is forced to defend the “significant” aid the ECB and the institutions have provided Greece. He adds the ECB is a rules-based institution and cannot engage in the monetary financing of eurozone governments. And it would be unfair to “blame” Greece’s current drama on other actors.
The chairman of the debate continues to shout down questions from the Greek MEP. Draghi says he is ready to engage with the parliamentarian, but perhaps for another day.
ECB “has tools” to deal with a Grexit
Mr Draghi is asked about contagion risk. He answers, begrudgingly:
A default is unchartered waters. We have all the tools to manage the situation as best as we have done in other situations, perhaps less dramatic.”
“The consequences in medium to long term to the union is not somehting we are in a position to forsee.”
Draghi: ECB doing “all it can” for Greece but ball is in their court
Mario Draghi has just sat down from his initial address. He insisted the ECB is the central bank of Greece and points out that the ECB has provided more support for Greek banks than any other member state in the euro at 116bn equivalent to 166pc of Greek GDP. Mr Draghi continued that there needs to be a “strong and comprehensive agreement soon”.
The ECB has also been under pressure from Athens to raise the limit on the amount of Greek debt the government can issue. But Mr Draghi said any such move would only come if there is a “credible conclusion to the current review, and implementation which would imply disbursement.”
He added there was no “pre-set ceiling” on the amount of emergency funds Greek banks could access. Mr Draghi also echoed the comments of the Commission and the IMF in saying the “ball is in Greece’s court” but the central bank was doing “all it can” to ensure success over bail-out talks.
The Italian added the euro needed a “quantum leap” to ensure a stronger insitutional framework.
Draghi urged to ignore “irresponsible” commentators
Mario Draghi has just begun his address in front of parliamentarians. He’s promised us “a few words on the current situtation in Greece”. Hold tight.
Introducing the ECB president, the parliamentary speaker urged Mr Draghi to ignore the recent “irresponsible” comments from foreign commentators. Naming no names, but that might be a dig at this piece from GermanWolfgang Munchau in the FT this morning, where he calls for Greece to cut their losses and choose a Grexit.
Grexit, of course, has pitfalls, mostly in the very short term. A sudden introduction of a new currency would be chaotic. The government might have to impose capital controls and close the borders. Those year-one losses would be substantial, but after the chaos subsides the economy would quickly recover.
Comparing those two scenarios reminds me of Sir Winston Churchill’s remark that drunkenness, unlike ugliness, is a quality that wears off. The first scenario is simply ugly, and will always remain so. The second gives you a hangover followed by certain sobriety.
So if this were the choice, the Greeks would have a rational reason to prefer Grexit. This will, however, not be the choice to be taken this week. The choice is between accepting or rejecting the creditors’ offer. Grexit is a potential, but not certain, consequence of the latter.
S&P: Greek default won’t lead to downgrade
Rating’s agency Standard & Poor’s has just put out a note saying a “selective” Greek default on the ECB next month will not lead to a sovereign downgrade. Athens owes €6.7bn to the central bank in maturing bonds over July and August. Here’s what the agency has to say:
Our sovereign ratings pertain to a central government’s ability and willingness to service financial obligations to commercial (nonofficial) creditors and we consider the ECB to be an official creditor.
The bonds in question are the result of a bond swap in early 2012 whereby the ECB exchanged an approximate €50 billion par amount of Greek government bonds it had purchased through the now-defunct Securities Market Program, for an equivalent par amount of new bonds. Some of those new bonds are falling due in July and August. This swap effectively allowed the ECB to avoid the impact of the Greek sovereign default that immediately followed.
To our knowledge, the ECB has retained the totality of the new Greek sovereign bonds it received in the 2012 swap. Therefore nonpayment of those bonds would not directly affect any commercial creditors. In such an event, Standard & Poor’s would therefore not move its sovereign rating on Greece to ‘SD’ (selective default). All other things being equal, however, such nonpayment would likely constitute a negative factor in our analysis and could lead to a lower, albeit nondefault, long-term sovereign rating than the current ‘CCC’ rating.
Mario Draghi is due up in front of MEP’s any minute now. You can watch live here.
All eyes on the ECB
At 2pm today, ECB chief Mario Draghi will be addressing the European Parliament. He’s due to talk about the effects of QE, but expect Greece to come up in the Q&A from parliamentarians.
The central bank could potentially pull the trigger on a Grexit if it feels the Greek government is not making sufficient progress on its bail-out talks. Officially, Greece’s programe ends at the end of this month. This could then give way to the ECB voting to withdraw the life support it has been providing the financial system. Without this cash, Greek banks are likely to go bust in a matter of weeks, triggering a bank run and leading to the imposition of capital controls.
In a dangerous precedent, the ECB threatened to withdraw the money from Cyrprus unless it submitted to a bail-out for its banks back in 2012.
The ECB’s governing board needs to vote by a 2/3rds majority to cut pull the plug. In the absence of any such vote, the central bank can intensify the squeeze by hiking the collateral rules on the securities banks post to gain access to ELA. This decision could be taken as early as tomorrow.
Here’s why some think the ECB is the real villain in Greece’s debt drama
Stock markets hit by Greek jitters
All major world indices are in the red for the day this lunchtime.
Confusion reigns as ever in Athens/Brussels
Greek documents leaked
Greek paper Kathimerini have got hold of the proposals from Athens which were subject to only 45mins of discussions last night. In the documents, the government plans to hit the proposed 1pc primary budget surplus target – this has been a key sticking point, with previous targets falling short of creditor demands.
The text says the government will hike VAT to yield €1.4bn for the state coffers, but would not increase rates on “basic goods, such as medicine, energy and fresh food”. They also plan to make administrative efficiencies amounting to €2.3bn.
The measures also include €200m in defence spending cuts, and €71m in pension cuts for 2016. According to reports at the weekend in Germany, Athens planned to offset its pension spending with military cuts. The plan was given the provisional go ahead by Jean Claude-Juncker and Angela Merkel, but was torpedoed by the IMF who are insisting on pension sustainability as a point of principle it seems.
The measures also include a luxury tax on private yachts, a tax on TV advertisments and a hike on corporate profits.
You can read them in full here.
EU: Greek numbers don’t add up
In a departure from the usual platitudes, the Commission has laid out in full the gaps between their demands and Greece’s proposals.
Brussels has hit back at Athens’ pension cuts, saying they provide only €71m in cuts in 2016, that is less than 0.04pc in GDP. The Troika want 1pc.
The package from the institutions “makes full economic sense” said a spokeswoman.
“They meet the needs of the Greek people, Greek government and 18 member states who are democratically accountability,” she added.
It is also a “gross misrepresentation to say creditors want cuts to individual pensions”.
“There is scope to discuss the prosposals, provided the numbers add up.”
Spokeman Margartis Schinas said the following:
“President Juncker made a last attempt this weekend to find a solution that would allow for a positive assessment in time for the Eurogroup on June 18. The talks did not succeed as there remains a significant gap between Greek plans and the institutions.”
“The Commission is a mediator not a creditor. The creditors are the 18 democracies of the eurozone and the IMF. Our role was to create the conditions for a unanimous agreement between Greece and its partners.”
“Mr Juncker is disappointed despite his consistent and great efforts to facilitate talks, progress was not evident. But we stand ready if there is something new, to engage, and president’s office is open 24/7. If there is anything new we would be happy to act as a mediator.”
Greeks and EU speak live
Two press conferences going on now. Athens’ government spokesman isHERE.
While the daily Commission briefing has just started HERE.
We’ll have updates on both.
Greece on the “brink of disaster” – former PM
George Papandreou, the former Greek premier who was forced into a bail-out programme in 2012 has told CNBC the country is again on the brink of another disaster, and has hit back at the austerity demands still being made by the country’s paymasters.
Mr Papandreou, who called for a popular vote on the country’s bail-out deal in 2011, but was threatened by France and Germany, has also supported a move to hold a referendum on a new bail-out, saying it would be “positive” for the Greek people.
When I called for it in 2011, my desire was that this was owned by the Greek people, that they really felt and that we would then have a mandate to quickly move in and make these reforms and we would have broken down a lot of the resistance in some of the vested interests that didn’t want the reforms because we would have a popular vote in favour of the changes.” said Mr Papandreou.
What happened is that we didn’t have a referendum so that the resistance to the changes and the political cost of the parties pushing for reforms or was too big so that a lot of the, very often we didn’t do as much of it as we needed.
So we lost the momentum, the reform momentum I think at that point. If we want to gain it again, we need to have a wider consensus. Now there is a wider consensus in Greece amongst parties. All the spectrum now, if there’s an agreement, there’ll be a positive vote in the Greek parliament, but I again would want to see much wider reforms and have the people own them, really believe that this is their programme, it’s a Greek programme. As a matter of fact I said let’s not make it a programme of the institutions or the Troika or the European creditors, let’s make it a greek programme because it’s in our interest to really see a reformed and modern democracy.
You can read the transcript in full here.
Greek bail-out negotiators begin emergency meeting in Athens
Europe must be prepared for Greek “state of emergency”
The European Commission should brace itself for a “state of emergency” in Greece from July 1 if Athens does not reach an agreement with its creditors,
Germany’s EU Commissioner Guenther Oettinger has said creditor powers need to prepare themselves for social unrest and access to emergency supplies in Greece if no deal is struck by June 30.
“We should work out an emergency plan because Greece would fall into a state of emergency,” said Mr Oettinger, who is also a senior member of Chancellor Angela Merkel’s Christian Democrats said, citing the need to ensure access to energy and medicine.
“I think that the Commission needs to work out a plan that could avert a worsening of the situation in the event that Greece leaves the euro zone, in the event of a bankruptcy.”
Greece’s current bail-out programme expires at the end of the month. Without a new deal, the European Central Bank could cut off the emergency funds it supplies the banking system, forcing the government into capital controls, and ultimately the issuance of an alternative curency.
Mr Oettinger told reporters that Athens needed to come up with suggestions on pension reform to move the talks forward.
“The offer is still valid to hold Greece in the euro zone. But for that to happen Greece will have to move its positions on pensions and its general budget consolidation.”
“Tsipras is swindling the whole world”
Some of Greece’s harshest critics have been the poorer, newer members of the eurozone who have long resented providing more bail-out funds for a country whose inhabitants are on average, richer than theirs.
Slovakia has emerged as a very vocal dissenter of Greek largesse. The vice-chairman of the country’s finance committee has accused the Greek premier of “swindling the whole world” with his demands.
“Alexis Tsipras is swindling the whole world and this cannot go on forever,”Jozef Kollar told EU Observer.
“Politics should not be limited to political correctness – it should be based on economic reality. And in reality, the drachma would be a rescue for Greece.”
Slovakia guarantees around €1.1bn of Greek debt. The country’s PM Robert Fico told national television last week: “Let no one ask Slovaks who earn €550 to €600 [a month] and get pensions of €250 to €300 to put money together and send out a €1 billion”.
Greek markets shake
Athens stocks have continued their precipitous declines from the end of last week, opening down 6.6pc this morning as bail-out talks reach a nadir
Greeks call emergency parliamentary meeting
Schaeuble is “ready” for Grexit
That’s according to chief German hawk Hans-Wener Sinn, who thinks the German finance minister is ready to accept the consequences of a Greek euro exit and “to write down what has to be written down.”
Speaking to ARG German television, Mr Sinn said as whole, the eurozone’s finance chiefs were not prepared to let Grexit happen due to the losses they would make on their loans to Greece.
But the position of Mr Schaueble, who has taken a hardline against Greece, has reportedly opened up a rift with his premier Angela Merkel. Mr Schaeuble has brushed off talk of a rift, but he is thought to favour a “velvet divorce” for Greece, according to sources who spoke to Ambrose Evans-Pritchard last week.
Mr Schauble is the proponent of a “velvet divorce” for Greece: an orderly exit from the euro and a return to the drachma, with the ECB playing a crucial role in stabilizing the new currency. Germany and other creditors would then step in with a “Marshall Plan” to put the country back on its feet within the EU.
What Mr Schauble is not prepared to accept is a breach of contract by Greece on the terms of its previous “Troika” rescue, which he fears would lead to moral hazard and the collapse of fiscal discipline across Southern Europe. He is backed by much of the ruling Christian Democrat party (CDU) and its Bavarian allies (CSU)
Mrs Merkel appears to have concluded that “Grexit” is fraught with risk and would inevitably be blamed on Germany, leaving a toxic political and emotional legacy.
She has repeatedly stated that Greece must be kept in monetary union at all costs. Syriza insiders view her – paradoxically – as their greatest ally in the EMU power structure.
Greek markets tank on bail-out fears
Greek stocks have taken a hit this morning, opening down by 6.5pc on fears that a default is now closer than ever. Banks have taken the biggest hit, down by 12.5pc at market opening.
Yields on Greek debt, which despite not representing the actual borrowing costs of the government, have also soared – a key indicator for default risk
IMF: Greece will probably need a debt haircut
IMF chief economist Olivier Blanchard waded into the debate last night, seeking to defend his institution’s role in Greece’s drama. Representatives of the IMF walked away from Brussels last week, citing “major differences” in all areas with Athens.
Writing on his blog, Mr Blanchard said Greece will struggle to meet all its funding needs without carrying out the level of cuts and reforms the Fund is demanding.
He also suggested that “Any further decrease in primary surplus target would probably require [debt] haircuts.”
A write-off of that kind has been all but ruled out by European creditors, whose leaders would struggle to convince their parliaments to sign off on any deal which would see their taxpayers take a loss on Greek debt.
Here’s more from Mr Blanchard:
The Greek government has to offer truly credible measures to reach the lower target budget surplus, and it has to show its commitment to the more limited set of reforms. We believe that even the lower new target cannot be credibly achieved without a comprehensive reform of the VAT – involving a widening of its base – and a further adjustment of pensions.
We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners. We are open to alternative ways for designing both the VAT and the pension reforms, but these alternatives have to add up and deliver the required fiscal adjustment.
On the other hand, the European creditors would have to agree to significant additional financing, and to debt relief sufficient to maintain debt sustainability.
We believe that, under the existing proposal, debt relief can be achieved through a long rescheduling of debt payments at low interest rates. Any further decrease in the primary surplus target, now or later, would probably require, however, haircuts.
Greeks hit Troika brick wall
Coming out of last night’s aborted Brussels talks, the Greek government issued one of its “non-papers” saying they had presented measures which they feel are sufficient to cover the funding gap needed to meet budgetary targets this year.
However, that still seemed to fall short of what creditors are demanding. The Troika are demanding roughly 1pc worth of GDP cuts in pensions and VAT hikes – this is around €1.6bn each, but represents one of Syriza’s most entrenched “red lines” throughout the interminable debt talks.
The press officer for finance minister for Yanis Varoufakis is not impressed – claiming the differences, which could mean the difference between Greece’s fate in or outside the euro – are “ridiculous”.
Here’s that non-paper in full
1. The Greek Government has submitted its proposals on time [06.01.2015], as well as two detailed documents relating to debt sustainability and the fiscal gap.
2. The Greek delegation, in fact, which has been in Brussels since Saturday, submitted to the institutions additional proposals that cover the fiscal gap and the primary surpluses. Proposals which pave the way for the final agreement covering the three pillars – fiscal, financial and developmental.
3. The government reiterates, in no uncertain terms, that no reduction in pensions and wages or increases, through VAT, in essential goods – such as electricity – will be accepted. No recessionary measure that undermines growth – the experiment has lasted long enough.
4. It should be noted that the IMF insists on asking for pension cuts of 1% of GDP, i.e. 1.8 bn per year! And another 1% [1.8 billion euros additionally] through the increase in VAT! Measures that affect the lower and working classes and which demonstrably lead to a new recession cycle.
5. The Greek government delegation remains ready to conclude the negotiations and to achieve a mutually beneficial agreement.
Tsipras: We have no right to bury our democracy
More from that interview with the Greek PM in local paper Efsyntakton.
Mr Tsipras says his government, which swept into power in January does not have the right “to bury democracy in the place it was born”.
Here’s a rough translation:
We will wait patiently until the institutions get realistic. But if some perceive as a weakness our sincere desire for a solution, and the steps we have to cover the difference, let’s ponder:
We carry on our backs the dignity of a people but also the hope of the peoples of Europe. Is the load too heavy to ignore. It is not a matter of ideological obsession. It is a matter of democracy.
Speaking to his aides on Friday, the Syriza leader seemed to rule out calling snap election or even holding a referendum on a bail-out deal, insisting his government has a mandate to secure the country’s future in the eurozone.
Good morning and welcome to today’s rolling live coverage of the latest in Greece’s bail-out negotiations.
Yesterday evening seemed to mark a fresh nadir in the five-month talks, as negotiations between Greek representatives and creditors broke down after just 45 minutes in Brussels.
Following the stunted talks, the European Commission released a tersely worded statement in which they said: “talks did not succeed as there remains a significant gap between the plans of the Greek authorities and the joint requirements of Commission, ECB and IMF.”
That gap is approximately €2bn in fiscal measures, with the bulk of the differences coming in the scale of pensions cuts and reforms demanded by the IMF.
One of the men at the talks last night, aide to Prime Minister Tsipras Nikos Pappas has just tweeted the following this morning. It’s in Greece but here’s rough translation:
“We found equivalent measures and were refused. The IMF insists on reductions in pensions. Logical error with wrong information.”
[“source – telegraph.co.uk”]