November 13, 2012

Greeks Get Time but Not Money

Yves here. This post by Delusional Economics continues with his cataloguing of the slide of the Eurozone into an economic and political abyss. What is striking is the contrast between his matter of fact tone (which at this point is fully warranted, these self destructive actions have become depressingly routine) and the horror of what is happening, that millions of people are faced with desperation and are prepared to take desperate measures in retaliation.

By Delusional Economics, who is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

So here we go again. Greece needs even more money, and once again the EU needs to decide what to do about it.
Eurozone governments will not agree to disburse more money to debt-ravaged Greece on Monday, despite the country approving a tough 2013 budget, because there is not yet a consensus on how to make its debts sustainable into the next decade.

Finance ministers gathered in Brussels should, however, give Athens two more years to make the budget deficit cuts demanded of it, a concession that will require funding of around 32 billion euros, according to a draft document prepared for the meeting.
Yes, I know it’s not a surprise, but it does present immediate problems because the European commission is stalling until the release of the final report , the Bundestag, amongst others, is yet to vote on the next tranche and Greece has a €5 billion bond redemption on Friday.
The latest news from the Eurogroup meeting is:
.. [the] Eurogroup ended with eurozone finance ministers agreeing to extend Greece’s fiscal adjustment period by two years but deciding to put off until next week final decisions on the disbursement of the next Greek bailout tranche and the method to make the country’s debt sustainable.

The ministers are due to meet again on Tuesday, November 20 to wrap up the loose ends regarding the Greek program.

Eurogroup chief Jean-Claude Juncker and European Monetary and Economic Affairs Commissioner Olli Rehn praised the Greek government for passing the latest package of fiscal and structural reforms but International Monetary Fund managing director Christine Lagarde suggested that some “chapters” remain to be settled.
I’m not sure how you can decide on more time without deciding how exactly it will be funded, but there you have it.

Greece will be allowed to issue more short-term debt to roll over Friday’s paper but there is much to decide. This is yet another “can kick” into the new year. Options available for such a kick are the aforementioned additional time and money, the lowering of the interest rate and/or lengthening of maturity on Greece’s €53bn bi-lateral loan and/or allowing Greece to buy back its own debt with a loan from the ESM. All technically doable but as we’ve seen from Europe many times before ideology and politics tend to create significant roadblocks for any course of action . As usual we just have to wait for the next instalment of the slow moving train wreck.

Also announced yesterday was the Greek bank recapitalisation plan:
Greek banks will use a mixture of common shares and convertible bonds in order to meet international capital adequacy requirements, according to a long-awaited plan to recapitalize the country’s troubled lenders.

The plan, released Monday, says the banks must use common shares to achieve a core Tier 1 ratio of 6%, but can use convertible bonds to top up their capital needs beyond that and in order to reach a minimum 9% level.

The shares, which will be offered in rights issues that are expected to take place early next year, will be offered at a 50% discount to their 50 day average market price. The bonds will carry a 7% annual coupon, that will rise by 50 basis points per year and which will be converted to shares at the end of five years.

Under the terms of the plan, Greece’s bank rescue fund, the Hellenic Financial Stability Fund, will underwrite the coming rights issues and effectively take control of the four big banks, which combined account for three quarters of the banking system’s assets.
Unsurprisingly Greek bankers don’t appear too happy with the plan, as Kathimerini reports:
Senior bank officials told Kathimerini that the terms do not allow for any optimism in terms of attracting private investors to participate in the recap process. Any banks that fail to collect at least 10 percent of the capital required from private investors will come under the full control of the state’s Hellenic Financial Stability Fund (HFSF). Therefore current shareholders will definitively lose their assets as they will have no right to pay back the state capital and regain control.
Actually given the state of the banking system and the economy anything short of full nationalisation seems pointless, but finding 10% private investors is likely to be difficult so that maybe the final outcome anyway.

In other news, Angela Merkel has visited Portugal amidst growing political disquiet and the Spanish government appears to have finally conceded to the EC that its estimates are far too optimistic:
Spain’s deficit targets need to take into account Europe’s recession, the country’s economy minister said on Monday.

“We need to take into account that Europe is in recession and in these circumstances we must look not just at nominal targets but at structural ones,” Luis de Guindos said in Brussels.
And like Portugal before it, public backlash on the social fallout from the economic retrenchment is forcing the hand of the government:
Spain’s largest banks said Monday they had agreed to a two-year freeze on evictions of homeowners “in extreme financial need,” amid a public uproar following the suicides of two homeowners facing expulsion.

The decision by the Spanish banking association AEB, for what it called “humanitarian reasons,” came as leaders of the governing Popular Party and the opposition Socialists were to begin working on a bipartisan deal to change Spain’s mortgage laws, some of which date back to the early 1900s.
And on it rolls ….

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