Euro-Area Leaders May Accept Greek Default (Eurozone Summit)

[Ghost Dog]

Source: Bloomberg

July 21 (Bloomberg) -- ... Spooked by a bond market selloff last week, leaders empowered their 440-billion euro ($633 billion) rescue fund to buy debt across stressed euro nations after eight hours of talks in Brussels. The fund can also aid troubled banks and offer credit-lines to repel speculators. Leaders pledged a 160 billion euro aid package for Greece, eased the terms of its existing loans and cajoled bondholders into footing part of the bill.

...

“These measures are welcome because they create the best possible conditions for Greece and other peripheral countries to put their houses in order and hence limit the risk of contagion,” said Marco Valli, chief euro-area economist at UniCredit SpA in Milan. “Still, the market will continue to price some probability that troubled countries will not be up to the challenge. Implementation risks to debt reduction are still considerable.”

...

Today’s package still doesn’t “make a significant dent” in Greece’s debt and may disappoint investors by failing to boost the size of the rescue fund, said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “We doubt that this package alone will bring an end to recent contagion effects and prevent the broader debt crisis from continuing to deepen over the coming months.”

For now, Merkel and her allies have succeeded in their drive to make investors co-finance bailouts after voters balked at the cost of saving spendthrift nations. Banks said they will participate in bond exchanges and buybacks to help Greece, with the leaders estimating their contribution at 37 billion euros.

Read more: http://www.bloomberg.com/news/2011-07-21/euro-area-leaders-may-accept-greek-default.html

---

( See also: http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x88754 )

Full Statement:

We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole and its Member States. We also reaffirm our determination to reinforce convergence, competitiveness and governance in the euro area. Since the beginning of the sovereign debt crisis, important measures have been taken to stabilize the euro area, reform the rules and develop new stabilization tools. The recovery in the euro area is well on track and the euro is based on sound economic fundamentals. But the challenges at hand have shown the need for more far reaching measures.

Today, we agreed on the following measures:

http://www.telegraph.co.uk/finance/financialcrisis/8653614/Eurozone-debt-crisis-the-statement-in-full.html

[Ghost Dog]

1. Reuters reports:

... Acknowledging that the rescue package might lead credit rating agencies to declare Greek debt in limited default -- the first such event in the euro's 12-year history -- Sarkozy said euro zone nations stood ready to protect Greek banks from the fallout, by providing credit guarantees if needed to ensure the banks can still obtain liquidity from the European Central Bank.

"We have agreed to create the beginnings of a European Monetary Fund," Sarkozy told a news conference after eight hours of talks on widening the remit of the rescue fund, the European Financial Stability Facility.

European Council President Herman van Rompuy, who chaired the fifth summit on the crisis since February, said the leaders agreed the EFSF would be allowed to buy bonds in the secondary market if the ECB deemed that necessary to fight the crisis.

The EFSF would also be allowed for the first time to give states precautionary credit lines before they were shut out of credit markets, and lend governments money to recapitalize banks -- both moves which Germany blocked earlier this year.

/More... http://uk.reuters.com/article/2011/07/21/us-eurozone-idUSTRE76I5X620110721

[muriel_volestrangler]

2. Other reports on this:

Eurozone agrees new 109bn euros Greek bailout

The ECB chief, Jean-Claude Trichet, declined to "prejudge" whether it would amount to a default.

But the eurozone will back up any new Greek bonds issued to the banks with guarantees if the deal is seen as a "selective default" by rating agencies.
...
It also included a 2% reduction in the Irish Republic's interest payments, something that the Republic's Prime Minister, Enda Kenny said would save it a "substantial" 600-800m euros a year.
...
But economics Professor Nouriel Roubini, from New York University's Stern School of Business, said although the summit called Greece's debt restructuring an exceptional case "a year from now Portugal and Ireland will need the same debt relief".

http://www.bbc.co.uk/news/business-14239794

In addition to the €109bn in new loans from international lenders, the agreement includes a commitment from Europe’s leaders to support Athens until it is able to return to the financial markets – a potentially unlimited guarantee that could see European taxpayers fund Greece for years.
...
But the contribution by private creditors will only be known when bondholders decide if they will take part in the proposed programme.

Bondholders will be given four options – three forms of debt exchange and one rollover plan – with different durations and interest rates. On top of that, an additional €12.6bn is expected to come in commitments from bond owners to sell their holdings at a reduced price as part of a bond buy-back programme.

Because the bondholder programmes amount to a 21 per cent reduction in the bonds’ value, they are widely expected to trigger a selective default, a move long resisted by Jean-Claude Trichet, head of the European Central Bank, and Nicolas Sarkozy, the French president, who fear the breach could prompt investor panic.

http://www.ft.com/cms/s/0/952e0326-b3af-11e0-855b-00144feabdc0.html

Private creditors who hold Greek debt that matures in the coming years will "voluntarily" turn in their bonds and accept new ones that mature far in the future. The Institute of International Finance, a banking trade group, said its members had committed to participate in the exchange.

The banks, Germany and France's largest institutions among them, offered to take new 30-year or 15-year Greek bonds. The offer includes a menu of four different flavors of bonds with varying coupons and types of insurance—some would be backed by triple-A-rated collateral. Some of the bonds on the menu include a 20% discount to principal.

The euro-zone leaders said the private sector's "contribution" would amount to €37 billion through 2014 and €106 billion through 2019, though it didn't detail the calculation. They also said a debt buyback program would yield an additional €12.6 billion by taking Greek debt off the markets at discount prices.
...
The precise nature of the private-sector contribution is murky. But it appears that a relatively small portion of it would come from actually renouncing principal the creditors are owed. A large part will come from accepting to be repaid late at low interest rates.

http://online.wsj.com/article/SB10001424053111903554904576459310597648944.html?mod=WSJEurope_hpp_LEFTTopStories

[Ghost Dog]

3. Larry Elliott (Guardian): It may be a solution, but doubts remain

Perhaps they finally get it. That was the first reaction to the stories emerging from the emergency meeting of eurozone heads of government in Brussels. All the right buttons were hit: lower interest rates for Greece, Ireland and Portugal; an agreement by private-sector creditors to accept a writedown on their Greek debt; a "Marshall plan" for Europe to boost growth; big steps towards closer financial integration.

Bitter experience has shown, though, that it is best to wait the final details of any European deal before passing judgment. There are two reasons for caution: the problems facing European policymakers are big and complex; and their track record so far has been one of dogged prevarication, a Micawberish optimism that "something will turn up".

...

So what's the bad news? Clearly, on past form there is a risk that the plan is more spin than substance. According to the rumours, Greece's private-sector creditors will voluntarily take a 10% loss on Greek debt. If true, that is not nearly enough to solve Greece's solvency problem, unless of course the European "Marshall plan" proves as generous as that announced by Harry Truman in 1948, which was worth 5% of US national output. That seems unlikely. Nor is it obvious that German taxpayers will willingly bankroll the expansion of the EFSF, which, with the crisis lapping at the shores of Spain and Italy, needs to be at least tripled in size to €1.5tn.

Most importantly of all, there's the question of whether there really will be a sea-change in policy. The hope is that the package will help Europe's policymakers get ahead of the game for the first time since the Greek crisis first erupted in May 2010, but a study of the small print means any celebrations should be put on ice. Paul Krugman noted that it was hard to see where economic recovery would come from, given the avowed determination to stick to agreed fiscal targets and to cut budget deficits in those countries not subject to bailout programmes below 3% by 2013. As such, this looks less like a game-changer and more like Austerity Lite, a rather more sophisticated version of muddling through.

/... http://www.guardian.co.uk/business/2011/jul/21/eurozone-summit-deal-analysis-larry-elliott

[Ghost Dog]

4. Evans-Pritchard (Telegraph): Europe steps up to the plate

... France and its allies abandoned their long struggle to prevent a Greek default, opening the way for the first sovereign insolvency in Western Europe since the Second World War. Objections from the European Central Bank were swept aside. Germany has obtained its fig leaf concession: burden-sharing for bankers.

As a quid pro quo, Germany has dropped its vehement opposition to debt sharing and crossed the line in the sand towards fiscal federalism. It has agreed to turn the eurozone's €440bn bail-out fund (EFSF) into what amounts to a European Monetary Fund, and arguably into an EU Treasury in embryo.

...

The wording lets the EFSF intervene pre-emptively to cap Spanish and Italian bond yields, whatever the cost of moral hazard. These countries can therefore piggy-back on the AAA credit rating of the EMU core. This was the crucial measure needed to calm nerves after 10-year Italian and Spanish yields punched through the systemic danger line of 6pc last week.

...

Chancellor Angela Merkel said the goal was to "go to the root of the problems", but she may not find it easy to secure political assent for such sweeping concessions from her own parliament. The accord is a spectacular volte-face. Her mantra until now has always been that "collectivisation of risks" would be a grave error.

/... http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8653579/Europe-steps-up-to-the-plate.html

[Ghost Dog]

5. (Spiegel): Saving the Euro: Sarkozy Gets His European Monetary Fund

In the weeks prior to the summit, Merkel had repeatedly insisted that there was no need for the special summit and she made it clear that she was not enthusiastic about participating . As recently as Tuesday, she warned that one should not expect any "spectacular" moves. And the Thursday agreement does indeed fall short of being spectacular , but it provides the clarity that was so badly needed.

The new package provides for €109 billion worth of credit for Athens. The majority of the fund comes from the euro backstop fund known as the European Financial Stability Facility (EFSF) and from the International Monetary Fund (IMF). Private creditors are to contribute an additional €50 billion by 2014 via a combination of debt buybacks and swaps. The level of private involvement in the plan is much higher than had been expected and reflects the position that Germany had been insisting on for months. It can be seen as a personal success for Merkel.

At the same time, the EFSF is to be granted additional, pre-emptive competencies to prevent the euro crisis from spreading to additional countries. Among other measures, the EFSF will have the ability to buy state bonds on secondary markets -- from banks and insurance companies for example -- in order to support debt-ridden euro-zone countries. It is a further step in the direction of the kind of transfer union that Germany has long insisted must be avoided.

Euro-zone leaders were eager to avoid such bond purchases becoming business-as-usual. Prior to taking such a step, the European Central Bank must identify a country's debt predicament as being extreme and all euro-zone member states must grant their approval. Each national government would hold veto rights. But the new EFSF powers meant that French President Nicolas Sarkozy also had something to celebrate. "We have agreed to create the beginnings of a European Monetary Fund," Sarkozy crowed.

/More... http://www.spiegel.de/international/europe/0,1518,775892,00.html

[Ghost Dog]

7. (Deutsche Welle) Solving the eurozone crisis one step at a time

The large gesture that so many had expected to come out of Thursday's eurozone summit in Brussels did not occur. The idea of decisively defending the eurozone against attacks by speculators by issuing so-called Eurobonds with the same interest rate for strong as well as weak states remains a dream. A massive increase of Europe's common bailout fund will also have to wait. The rhetorical call of "one for all, all for one" has not been translated into political reality.

...

The demands and expectations of the past two days move between these extremes. As Chancellor Angela Merkel said, there is no silver bullet. The participation of private banks and financial institutions is indeed a new development. The goal is to limit Greece's temporary credit default to just a few days and secure it with Europe's bailout fund, the European Financial and Stability Mechanism (EFSF). DW's Christoph Hasselbach DW's Christoph Hasselbach

Greece should be made more competitive with a "Marshall Plan." It is not just the Greeks who will be lent a helping hand, but also the other countries that have been bailed out. Portugal and Ireland will also receive more advantageous loan conditions so that they do not suffocate. Compared to the current situation, that's quite a lot.

...

Despite all that, I prefer the more careful approach. The dramatic step that many are demanding would also have dramatic consequences if it goes wrong. And interestingly enough, those who are calling for the dramatic solution are the ones who won't have to bear the brunt of the consequences. Three emergency summits and subsequent readjustments are preferable to a dramatic step forward - just as Europe stands on the cliff's edge.

/... http://www.dw-world.de/dw/article/0,,15258612,00.html

[Ghost Dog]

9. Merkel says Germany has ‘historical duty’ to support euro

BERLIN — German Chancellor Angela Merkel says it is Berlin’s “historical duty” to support the euro currency and praised the new eurozone agreement on a second bailout for Greece.

Merkel said Friday that the deal reached Thursday in Brussels to help Greece was a “significant” step that would help Europe and support the currency used by the 17-nation eurozone.

She says “the euro is good for for us, the euro is part of Germany’s economic success, and a Europe without the euro is unthinkable.”

/... http://www.washingtonpost.com/business/markets/markets-rise-on-second-109-billion-package-of-aid-for-struggling-greece/2011/07/22/gIQAJQbGTI_story.html

[Ghost Dog]

13. Shenanigans.

--> Oddly, nefariously, the original WaPo link to this piece I posted in this thread this morning now redirects to has been overwritten by the semi-literate story "Fitch agency says Greek deal to put country in default, but bond insurance not trigerred".

The original AP report can be seen here:

http://www.thehindu.com/news/international/article2284812.ece

and elsewhere. But not apparently at WaPo.

[Ghost Dog]

6. And from the semi-literate far-right nutcases at ZeroHedge:

... Now the second part of the mechanism was never an issue further demonstrated by the plunge in net notional in Greek CDS as core banks no longer needed to hedge exposure and instead opted to divest their holdings. This is merely a red herring that attempts to confuse the issues associated with the first, and far more important concept: the nuances of the EFSF and its imminent expansion. And expand it will have to, because in reality what is happening is that the net debt of the countries will end up growing even more over time for one simple reason: this is not a restructuring of existing debt from the perspective of the host country! Simply said Greek debt will continue growing as a percentage of its GDP, meaning it, and Ireland, and Portugal, and soon thereafter Italy and Spain will be forced to borrow exclusively from the EFSF. Therein lies the rub. In a just released report by Bernstein, which has actually done the math on the required contributions to the EFSF by the core countries, the bottom line is that for an enlarged EFSF (which is what its blank check expansion today provided) to be effective, it will need to cover Italy and Belgium. As AB says, "its firepower would have to rise to €1.45trn backed by a total of €1.7trn guarantees." And here is where the whole premise breaks down, if not from a financial standpoint, then certainly from a political one: "As the guarantees of the periphery including Italy are worthless, the Guarantee Germany would have to provide rises to €790bn or 32% of GDP." That's right: by not monetizing European debt on its books, the ECB has effectively left Germany holding the bag to the entire European bailout via the blank check SPV. The cost if things go wrong: a third of the country economic output, and the worst case scenario: a depression the likes of which Germany has not seen since the 1920-30s. Oh, and if France gets downgraded, Germany's pro rata share of funding the EFSF jumps to a mindboggling €1.385 trillion, or 56% of German GDP!

The Europarliament, ECB and IMF may have won their Pyrrhic victory today... But what happens tomorrow when every German (in a population of 82 very efficient million) wakes up to newspaper headlines screaming that their country is now on the hook to 32% of its GDP in order to keep insolvent Greece, with its 50-some year old retirement age, not to mention Ireland, Portugal, and soon Italy and Spain, as part of the Eurozone? What happens when these same 82 million realize that they are on the hook to sacrificing hundreds of years of welfare state entitlements (recall that Otto von Bismark was the original welfare state progentior) just so a few peripheral national can continue to lie about their deficits (the 6 month Greek deficit already is missing Its full year benchmark target by about 20%) and enjoy generous socialist benefits up to an including guaranteed pensions? What happens when an already mortally wounded in the polls Angela Merkel finds herself in the next general election and experiences an epic electoral loss? We will find out very, very shortly.

/... http://www.zerohedge.com/article/fatal-flaw-europes-second-bazooka-bailout-82-million-soon-be-very-angry-germans

(The European Parliament, btw, has so far had next to nothing at all to do with this process).

[pampango]

8. Europe Must Choose a Currency Union or a Financial Union

http://www.nytimes.com/2011/07/22/business/europe-must-choose-currency-or-financial-union.html?_r=1&partner=rss&emc=rss

If there was one lesson to be learned from the European sovereign debt crisis, it was that monetary union by itself cannot work indefinitely. If Europe really wants to preserve the advantages of the euro currency, it will need far more fiscal and economic integration. Nations will have to give up a significant amount of sovereignty.

It appears that the deal will mean solvent European nations will have to write some very large checks. Lenders will suffer losses, and some banks may need more bailouts, which Europe will pay for through a collective fund that will be authorized to borrow money backed by European states individually and collectively.

The deal Europe now advocates will force losses on banks. Major banks have signed on to plans that will force them to accept lower interest rates and extended maturities or — if they prefer — somewhat higher interest rates on bonds whose principal would be reduced by 20 percent. In return, Europe as a whole would effectively guarantee eventual principal repayment.

Other parts of the communiqué issued by the European leaders after their summit meeting in Brussels promise there will be more central control over national budgets and tax policies. Call it the federalization of Europe.... If there was little enthusiasm in Europe for such centralization of power, there was even less for the obvious alternative: abandon the euro.

Those realities will continue to pressure Europeans toward either abandoning the currency union or accepting much more financial union. For now, anyway, they are choosing the latter course.

[Ghost Dog]

11. Maybe that should read "Currency Union AND a Financial Union"

Thanks, pampango.

I'm hoping to see more comment and analysis on this from US voices posted here throughout the day.

[Ghost Dog]

10. Greek bailout boosts global markets

... Economists at Barclays Capital said the summit results were "more than expected but not enough to make us sleep comfortably". "The official statement lacks detail in key areas such as private sector involvement for Greece and collateral requirements. Also, the envisaged reforms of the EFSF lack detail and we are struck that, given the additional tasks envisaged for the EFSF, the size of the EFSF is not even discussed in the document."

The euro rallied to a two-week high against the dollar, hitting $1.4440 before steadying around $1.4409. The FTSE 100 index in London climbed nearly 40 points to 5938, a gain of 0.65%, with insurers Aviva and Legal & General and banks Barclays and Royal Bank of Scotland leading the gains. Spain's Ibex and Italy's FTSE MIB index gained nearly 1%. The yield, or interest rate, on government bonds fell in Greece, Spain, Italy and Portugal.

Gary Jenkins, head of fixed income research at Evolution Securities, said: "We questioned whether the proposals agreed in the euro area leaders' summit would go down as the day they saved the eurozone and took the first steps towards a fiscal union or whether it would be the traditional short-term sugar rush proposal which does not stand up to scrutiny or the test of time ... It might actually be somewhere in between."

"The proposals were slightly better than expected but maybe not good enough to take away the possibility of further contagion if the economic situation deteriorates. They did take Greece off the naughty step, put their arms around them and basically said 'take your time, pay us back whenever you can'. By extending maturities and reducing interest rates they have certainly given more support to Greece, Ireland and Portugal."

/... http://www.guardian.co.uk/business/2011/jul/22/greek-bailout-boosts-global-markets

[Ghost Dog]

12. EU Leaders Push Rescue Deal

... “The European Financial Stability Facility has gone from being a single-barreled gun to a Gatling gun, but with the same amount of ammo,” Willem Buiter, chief economist at Citigroup Inc. told Bloomberg Television’s “The Pulse.” “It needs to be increased in size urgently.”

...

“The proposed debt exchange implies a 20 percent net present value loss for banks and other holders of Greek government debt,” Fitch said today. “An exchange that offers new securities with terms that are worse than the original contractual terms of the existing debt and where the sovereign is subject to financial distress constitutes a default event.”
‘Expressly Voluntary’

The International Swaps & Derivatives Association, by contrast, said participation of private bondholders in the Greek rescue plan “should not trigger credit-default swaps” on the nation because it’s “expressly voluntary.”

Credit-default swaps on Greece plunged 500 basis points to a six-week low of 1,500 as of 12:15 p.m. in London, the biggest decline on record. That’s down from an all-time high of 2,568 basis points on July 18 and signals a 72 percent chance the government will default within five years, a figure that approached 90 percent earlier this month.

/... http://www.bloomberg.com/news/2011-07-22/european-leaders-try-to-persuade-investors-on-accord-to-halt-debt-turmoil.html