Wednesday, January 25, 2012

Morning update - Wednesday Edition !

Well , we have reached January 25th , the Eurogroup Fin min meeting has come and gone with no Greek PSI deal in sight ! What seems to be the case is that the so called private investors have dug the heels into the ground and are attempting to hold the haircut line at 50 percent - which would reflect the deal reached on the Greek haircut from way back in October. In contrast , the IMF and EU have pushed hard for a much  deeper haircut - one which would require a haircut much closer to 75 - 80 , once the coupon on the bond and duration is taken into account. With time  eroding away , a mexican standoff has been reached - of course until one side blinks. well , pit this in the category of a possible trial balloon , it seems the public sector creditors MAY be prepared to take part in the haircuts after all ! Consider the excerpt from Greece's Kathimerini below :

European economy and finance ministers continued to push for a compromise by private holders of Greek debt on Tuesday during the Ecofin meeting in Brussels, but it appears that the European Central Bank will have a key role in the restructuring process.
“The current state of the negotiations with the private creditors is that we are a bit short of where we want to be,” German Finance Minister Wolfgang Schaeuble told reporters after the Ecofin meeting. “As long as we do not have debt sustainability, there will not be a new program,” he added, effectively playing the Greek default card.
However Kathimerini understands that although no such decision has been made by the ECB yet, Monday’s Eurogroup meeting decided in favor of the lender’s participation in the haircut as the only way for talks on the debt restructuring not to fail.
An indication of this came in a statement by Finance Minister Evangelos Venizelos, who argued that among the topics discussed was the search for an indirect way of increasing the participation of the so-called “official” sector -- the Greek government, the European Union, International Monetary Fund and ECB -- in a way that would not entail an increase in loans to Greece.
Although he stopped short of saying it in clear terms, the only such way is the ECB’s participation in the 50 percent haircut. At the moment, the ECB holds 45-50 billion euros in Greek bonds and its participation in the haircut would signify a benefit of 10-12 billion euros for Greece.

     Now the reason I describe this as a trial balloon is based on the report in today's The Telegraph live blog that the ECB remains opposed to losses on its Greek debt holding despite pressures to restructure them - might the position of the ECB just be another example of " comments in the bazaar " , to paraphrase German FM Schauble's apt description of negotiating positions subject to change ? In that regard ( and if one really , really  wonders where the pressure might be coming - also consider which nations outside Europe hold the largest quotas at the IMF  ) , note Christine Lagarde's comment / warning that if a haircut on private sector debt is not enough ( it isn't of course ) , public holders of debt will have to participate in renegotiation - adding that equilibrium between private and public sector in Greek debt renegotiation is  a " concerning question ". Yes Christine , if one is a private investor , why the ECB gets a pass probably is a  concerning question ! 

     Meanwhile GDP in the Uk slipped 0.2 percent in Q4 2011 , construction sector output decreased 0.5 percent in Q 4  2011 and output of the production sector fell 1.2 percent in Q 4 2011  - this makes the call from the Bank of Canada governor that Europe is already in recession plausible , especially Europe Ex- Germany. The contraction of the UK economy follows yesterday's announcement that the debt of the UK exceeded one trillion for the first time ! The combination of expanding public  debt and a contracting economy makes PM Cameron's position dicey regarding any expansion of doling taxpayer money to the IMF or agreeing to any Financial Transaction Tax which may further hamper a weakening UK economic picture. 

     The most important question up to this point has been will Germany continue to be the paymaster of the Eurozone ? A more subtle question is has Germany lost its sway of morale persuasion over the Eurozone and greater 27 Country European Union ? In that regard , consider the following commentary , sourced from Der Spiegel , The Guardian and Naked Capital - and wonder whether Germany has lost its perceived leadership role in guiding europe though the present dark days : 

With Spain also struggling and Italy under increasing pressure, the continuation of contagion appears to be taking its toll on the politics of Europe with Germany’s ability to control the situation diminishing. As Spiegel reports:
Berlin has been unflinching it its efforts to both increase fiscal discipline in the euro zone and to avoid throwing more money at the European debt crisis. Increasingly, though, Germany’s EU partners are unwilling to play along. Chancellor Merkel now finds herself confronted with powerful opponents
A large alliance of the finance ministers, heads of government and central bankers from almost all of the 17 euro-zone member states has been calling for the European Stability Mechanism (ESM) to be enlarged — significantly. The permanent euro backstop fund, which will go into effect this year and will ultimately replace the temporary European Financial Stability Facility (EFSF), needs to encompass fully €1 trillion ($1.3 billion) instead of the planned €500 billion, Italian government officials have told their German counterparts.
At the same time, widespread resistance in Brussels to German plans for a new system of financial regulation within the EU is becoming more assertive. Merkel’s proposal for all EU member states to pass balanced budget initiatives — known in Germany as a “debt brake” — has been torpedoed as has the idea to allow the European Commission to bring countries that stubbornly violate deficit rules before the European Court of Justice.
Indeed, the balance of power in Europe has shifted. As long as Italy was ruled by a clown like Silvio Berlusconi, it hardly had any voice in efforts to save the euro. But ever since Monti, a respected financial expert, took over, the front of Merkel opponents is stronger than ever, all the more so because quite a few experts endorse Monti’s position.
Sarkozy is now getting the support of prominent economists from around the world. Christine Lagarde, the head of the International Monetary Fund (IWF) is calling for more money for the euro backstop fund as is Mario Draghi, the president of the European CentralBank (ECB), who has been in regular contact with his compatriot Monti. In a Monday appearance in Berlin, Lagarde said “we need a bigger firewall.”
Germany also appears to be losing support from even its strongest allies. Last week the Dutch central banker Klaas Knot gave an interview blaming Germany for the failure of the EFSF in which he stated:
The most important obstacle lies in Germany, not in the Netherlands, we haven’t moved in the right direction and it’s also clear that measures needed are happening too slowly and are too limited in size.
To add to that, Luxembourg’s new foreign minister gave an interview with German media yesterday in which he called the fiscal compact a ‘waste of time and energy’.
Is the failure of austerity-centric policy finally taking its toll on Germany’s ability to steer Europe’s response to the financial crisis? This would certainly explain why Mario Monti seems so sure that his country will be receiving the fiscal and monetary backstops. The outcomes from next week’s EU summit will provide more clues.,1518,811155,00.html  Merkel's Fiscal Pact a Waste of Time and Energy  merkel cast doubt on saving Greece from financial meltdown