Wednesday, June 13, 2012

Moody's drop Spain from the A rank , Egan -Jones cuts Spain to CCC+ and yes , Spain is not Uganda ( Uganda is rated B by Egan - Jones ) . Around the horn in Europe - as usual , Germany shoots down the pipe dreams about eurobonds / joint liability , deposit insurance schemes and the European Redemption fund - what will the folks talk about at this month's Special summit now that Germany has alredy rejected everything before it has even been formally tabled - news and data of the day from europe as well !

( follow the bouncing bailout ball as Merkel and Germany dip , twist , turn and squirm as the heat gets put to Merkel - both externally and from her Opposition  to once again bailout Europe , this time by agreeing to the Redemption fund scheme  ) 

Officials in Berlin say privately that Chancellor Angela Merkel is willing to drop her vehement opposition to plans for a “European Redemption Pact”, a “sinking fund” that would pay down excess sovereign debt in the eurozone.
“It is conceivable so long as there is proper supervision of tax revenues,” said a source in the Chancellor’s office. The official warned that there would be no “master plan” or major break-through at the EU summit later this month.
Mr Merkel rejected the Redemption Pact last November as “totally impossible”, even though it was drafted by Germany’s Council of Economic Experts or Five Wise Men and is widely-viewed as the only viable route out of the current impasse.
Fast-moving events may have forced her hand. She is under immense pressure from the US, China, Britain, and Latin Europe to change course as the crisis engulfs Spain and Italy, threatening a global cataclysm.
Jose Manuel Barroso, the European Commission’s chief, warned that Europe faces a “social emergency” . Countries sticking to reforms are engulfed by forces beyond their control.


2012 Eurozone funding requirement by country

Here are the amounts of debt that the major Eurozone nations will need to issue this year. Let's put things in perspective. Spain's requirement for 2012 is to raise €35.5bn. With the new €100bn aid to the banking system, Spanish banks will have no trouble absorbing this debt. Even with higher haircut requirements due to the downgrades, Spain's banks will be able to finance a big portion of these bonds at the ECB.

Italy on the other hand will have a tougher time. At €120bn, the nation's requirement is the highest in the Eurozone. As Italy undergoes a severe recession and faces more auctions, the markets' attention will inevitably shift in that direction.


Wolf Richter
“I believe, no,” is how Italian Prime Minister Mario Monti answered the question if Italy would seek a bailout—lacking the bravado and vehemence with which Spanish Prime Minister Mariano Rajoy had claimed for the longest time that Spain wouldn’t need one. Until it needed one. The question was hot. It followed the kerfuffle that ensued when Austrian Finance Minister Maria Fekter had let it slip Monday that Italy, given the high rates it has to pay on its debt, might also need “support.”
Monti was addressing restive German taxpayers on Bavarian public radio: He understood that Germans were looking at Italy as “a merry and undisciplined country,” but Italy was much more disciplined than other countries, he said, and wasn’t all that merry.
Italy is paying twice, he said: for the bailouts of other countries and very high rates for its own sovereign debt. Germany pays only once, namely for the bailouts, because it pays practically no interest on its debt. But he promised his German listeners: “The budget deficit this year will be low, only 2%.” And next year, a surplus is scheduled. “The country is changing,” he said.

A full-fledged bailout of Italy is a theoretical construct, anyway. As the third largest economy in the Eurozone, it’s too big to get bailed out by the Eurozone. Of the 17 member states, five, if Cyprus is included, are already being bailed out. Leaves 12, including teetering Italy, to pay for them. If Italy falls, the two major countries left standing to bail all of them out would be Germany and France. An impossibility.

And Italy is desperate. “Schnell, Frau Merkel,” screamed the front-page headline of the Italian business daily Il Sole 24 Ore.

“Hurry up, Ms. Merkel,” an open letter to German Chancellor Angela Merkel, was a plea to do what it would take to save Italy—and thus the Eurozone. “Great Germany is losing its sense of history ... and solidarity with European partners,” the article admonished, despite the hundreds of billions of euros that German taxpayers already committed to the bailouts. It called for immediate action, which would be in Germany’s own interest, and had “at least three” demands:

1. European-wide deposit insurance. Problem: it doesn’t exist yet, and no bank has paid into the fund; thus, it would be taxpayers, particularly Merkel’s voters, who’d have to transfer their wealth to bail out banks and depositors in other countries.
2. Give banks direct access to the bailout fund EFSF. Problem: it was sold to voters as a bailout mechanism for countries, not corporations.
3. Unification of bond yields via Eurobonds. Cost of borrowing would be the same for all countries, raising it for Germany and France, and lowering it for Spain and Italy. A bit “more complicated” to implement, it would require constitutional reforms of all countries as they would give up part of their national sovereignty. A “European constitution” would have to seal it. “Leaders in every country, including France and Germany, must have the strength to convince their electorates of the short- and medium-term benefits.”

And it threatened Germany with economic demise, having learned how to do that from Greece: “Germany cannot maintain its health and strength amid the debris of small and large European countries.” Wondrous benefits, on the other hand, would emerge from a political and fiscal union—run by bureaucrats in Brussels, I presume: Europe would suddenly become “a fierce competitor” that would be able to “ensure income and jobs for a new generation.” If not, “you”—that’s Ms. Merkel—“would be overwhelmed by a spiral of defensive interventions that jump from one country to the next.” And it concluded, “It’s clear to everyone that the United States of Europe is a reality.... Faccia presto, signora Merkel.”

It would be a debt and transfer union. Debt would be transferred into one direction and wealth into the other—unless strict controls were instituted. If countries were to guarantee the debt of other countries, guarantors would have to be able to control how much can be borrowed; or else, Greece for example, could borrow cheaply and without limit while someone else would ultimately have to pay off its debt. So, any kind of common debt, be it Eurobonds or other instruments, would require a supra-national entity that decides to what extent a country is allowed to borrow.

Once the budget is in deficit, elected national representatives would lose their ability to fund infrastructure projects, boondoggles, subsidies, corporate handouts, wars ... a fundamental democratic activity, messy as it can be. Instead, they’d have to go begging to the board of bureaucrats who speak different languages and hail from different countries. That board would wield enormous power over each country as it decides what gets funded and what doesn’t, based on whim or political persuasion. National politicians do that too, but they’re part of the country and have to run for reelection.

The US had hundreds of years and a civil war to figure out how to manage its common good. The Eurozone is a group of 17 independent nations with ancient cultures. Uniting them into a federal arrangement will take decades, if it’s even possible. But the debt crisis is here now. Italy is running out of options. Spain is hopelessly in trouble. Greece has hit the wall. And turning that fiasco overnight into a healthy United States of Europe is an illusion.

In Greece’s chaotic wake bobs the Republic of Cyprus, the fifth Eurozone country to get a bailout. A massive banking scandal, tight connections to Greece, corruption, too much debt, and a lousy economy took it down. But tiny Cyprus has one thing—and it’s huge—that other debt sinner countries don’t have. Read.... Manna for Bankrupt Cyprus.


German Vote on ESM Fails; Still Not Ratified by Germany, Austria, Belgium, Estonia, Slovakia, Netherlands; Political Football Over Financial Transaction Tax

The Wall Street Journal reports European Economics Commissioner Olli Rehn expressed concern Monday that Germany, Austria, Belgium, Estonia, Slovakia, and the Netherlands were dragging their feet in ratifying the ESM.

In the meantime, the Journal reports Spain May Tap EFSF.

The article states "Power broker Germany has yet to complete the process but is expected to do so soon."

That is a distinct downplay of what is really happening.

Political Football Over ESM

In Germany, Chancellor Merkel does not have the votes to ratify the ESM. She needs help from opposition parties. Those opposition parties want a financial transaction tax before they will sign.Last Sunday German opposition fumed before fiscal pact talks 
 A media report that German Chancellor Angela Merkel is not serious about implementing a European financial transaction tax threatens to undermine an initial deal struck last week with the opposition over the EU's planned fiscal pact.

Der Spiegel weekly reported on Sunday that Merkel's Chief of Staff, Ronald Pofalla, had said such a tax would not get passed in the current legislative period so the centre-right coalition could support the idea in principle knowing it would not have to act on it any time soon.

Last week, the government and opposition parties agreed on the outlines of a transaction tax proposal. On Monday, further talks between senior party members are due to take place and Merkel wants these to form a basis for a final deal when party chiefs meet on Wednesday.
Of course, Merkel responded she was really serious about financial transaction taxes as per this headline on Monday: Merkel strongly backs financial market tax

My take is a financial transaction tax is a very poor idea, and given political blackmail, it is hard to tell just how committed Merkel would be to such silliness.ESM Passage Takes 90% of EMU Voting Rights 

Bear in mind the ESM does not require 100% passage, but rather 90% of the percentage votes. Germany, France, Italy, and Spain each have have veto power. Of that group all but Germany signed.

Austria, Belgium, and the Netherlands combined could block it. So could a combined Belgium, Netherlands, and Slovakia.

If common sense prevails (theoretically possible but highly unlikely in practice), the ESM will not pass.

German Vote on ESM Fails

The Chicago Tribune reports German parties fail to resolve row over fiscal pact
 Germany's government and opposition parties failed on Wednesday to resolve a row holding up parliamentary ratification of both the EU's new fiscal treaty and the euro zone's permanent rescue fund, and will resume talks next week.

The delay is potentially embarrassing for Chancellor Angela Merkel because she has insisted that Germany's European partners sign up to the tougher budget rules enshrined in the compact.
The bailout fund, the European Stability Mechanism (ESM), which may be used to provide help for Spain's ailing banks, is meant to start working from July 1 but cannot do so without the approval of Germany, the euro zone's biggest economy.

Merkel wants parliament to approve the two items at the same time, but needs opposition support for the fiscal treaty. The opposition Social Democrats (SPD) and Greens are pressing for a financial transaction tax as well as more steps to generate European growth and jobs in exchange for their support.

"The (next) meeting on June 21 will take the whole day," said conservative lawmaker Volker Kauder, a close ally of Merkel, noting that the parties had managed to agree on many points but some were still open.

Some in the SPD have previously threatened to delay the bill until the autumn. Countries have until the end of the year to ratify the fiscal compact.
How Politics Works

The universal sad state of affairs in politics is that passing something stupid (such as the ESM), requires the passing of something else that is also stupid (in this case the Financial Transaction Tax).

In the end, stupidity is inevitably compounded.

Financial Transaction Tax is Bad Idea 

Please see Why the Tobin Tax is a Bad Idea; Sweden's Experience With the Tax for my reasons on why the tax is a bad idea.

No, it would not directly affect me much, if at all, should it pass in the US. Rather, I am concerned about indirect effects as noted in the above link.


These Three Spanish Banks Will Be Downgraded Tomorrow

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As is well-known in the ratings world, sovereign downgrades never come alone: first the sovereign is cut, then sovereign-supported domestic banks (the sovereign is the threshold rating), then general financial companies like insurance firms and specialty fins. Such downgrades are particularly painful when they go through a major threshold such from A to B as they spring various collateral and margin calls into action. One thing we do know is that the last thing undercapitalized Spanish banks can afford now is even more margin calls, and even greater collateral haircuts. However, this is precisely what will happen for the following 3 banks tomorrow: Banco Popular Espanol, Banco Santander and BBVA, all of which are currently at the oldsovereign rating of A3 and tomorrow will see their rating cut to Baa3, and we fully expect the other three Moody's rated banks: Caixa, Banco Financiero y de Ahorros and Sabadell to be cut anywhere between 1 and 3 more notches, sending them into junk territory. We can only hope that the ESM or whatever Spanish bank bailout scheme is operational tomorrow as suddenly all of the banks below will find themselves without any willing counterparties around the world.

And for those who want a great interactive rating infographic of all European banks, one can be found at the WSJ after the jump below.


And here is the Cyprus announcement:
London, 13 June 2012 — Moody’s Investors Service has today downgraded Cyprus’s government bond ratings by two notches to Ba3 from Ba1, and has placed the ratings on review for further possible downgrade.
The key driver for today’s rating action is the material increase in the likelihood of a Greek exit from the euro area, and the resulting increase in the likely amount of support that the government may have to extend to Cypriot banks. The two-notch downgrade reflects Moody’s assessment that this risk is exacerbated by the fact that the country’s finances are already strained and access to the international markets is still denied.
Moody’s decision to maintain Cyprus’s sovereign bond ratings on review for further downgrade reflects the need to assess the substantial downside risks to the banking sector and the sovereign as a result of a Greek euro exit. These risks have the potential to rise in the aftermath of the Greek elections on 17 June 2012.
The key driver of Moody’s two-notch downgrade of Cyprus’s government bond rating is the significant deterioration in the country’s outlook as a result of the material increase in the likelihood of a Greek exit from the euro area. The immediate result is a further increase in the likely amount of government support that the Cypriot banks may require due to their exposure to the Greek government and economy as well as the deterioration in domestic macroeconomic conditions.

Moody’s prior Ba1 rating for Cyprus incorporated an assumption that the Cypriot government would need to contribute capital support equivalent to around 5-10% of GDP to the country’s banks. The rating agency now expects this to be materially higher. For Cyprus Popular Bank alone, Moody’s expects most, if not all, of the €1.8 billion in recapitalisation costs to be borne by the government, which will increase debt levels by just over 10 percentage points of GDP.
Moody’s has reflected the increased risks emanating from the increased likelihood of a Greek exit in the ratings of the three largest Cypriot banks, two of which were downgraded on 12 June 2012, with all banks being placed on review for further downgrade. The close linkage between the government and the banking sector means that these increased risks for the banks may lead to much larger recapitalisation costs to the government, and Moody’s needs to reflect these in the Cypriot sovereign’s ratings.


Egan Who Just Gave Spain The Triple Hooks

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And so, the little rating agency that could, just gave Spain the triple hooks, downgrading the country from B to CCC+, negative outlook. As a reminder, the Uganda credit rating is B: it sure is no Spain.
Synopsis: KINGDOM OF SPAIN EJR Sen Rating(Curr/Prj) CCC+/ CC Rating Analysis - 6/13/12 EJR CP Rating: C Debt: EUR805.9B EJR's 1 yr. Default Probability: 18.0% Spain continues to be weakened by high funding costs (6.75% for 10yr today), the gov. deficit of 9.6%, an estimated decline in GDP of 1.7% (per the Economy Ministry), the 24.4% unemployment, the IIF's recent estimate of additional bank loan losses up to EUR260B, and possible depositor withdrawals. Over the past four fiscal years, that is from 2008 to 2011, Spain's GDP declined from EUR1.09 trillion to EUR1.07 trillion. Meanwhile, its debt mushroomed from EUR519B to EUR806B. With the EUR100B infusion for Spain's banks, the debt to GDP will rise to 90% plus future additions for the government deficit, support for its regions and additional support for its banks. Social benefits are a major problem; while payments to the govt have been down EUR 3B (2008 to 2011), payments from the government have been up EUR 29B). As a result, Spain is short about EUR50B per year for social payments, EUR35+B per year for interest, and an additional EUR 30B for asset growth; hence the EUR110+B per annum increase in debt. As we expected, Spain requested support for its banking sector and will probably need cash for weaker provinces. Assets of Spain's largest two banks exceed its GDP. We are slipping our rating to " CCC+ " ; watch for more requests for support from the banks and money creation.

Spain Loses Final A Rating With Moodys Downgrade To Baa3, May Downgrade Further - Full Text

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And so the final Spanish A rating tumbles. Why is this kinda, sorta a big deal? Because as we explained in the end of April, "If all agencies downgrade Spain to BBB+ or below, the ECB could increase haircuts by 5% on SPGBs. The key aspect in terms of the Spanish downgrade(s) is the ECB's LTRO. If all three rating agencies move Spain to BBB+ or below then under the ECB's current framework it moves into the Step 3 collateral bucket which requires an additional 5% haircut across the maturities. In classifying its risk management buckets, the ECB uses the highest of the ratings to determine an asset's position (unlike the sovereign benchmark indices which use the lowest rating, in general). Fitch and Moodys currently rate Spain at A and A3 respectively, with both having a negative outlook in place leaving only a small downgrade margin before Spain migrates to the lower ECB bucket."

And now the collateral squeeze is on, unless of course the ECB changes the reules one more time.

Full Moody's statement.

Moody's downgrades Spain's government bond rating to Baa3 from A3, on review for further downgrade

London, 13 June 2012 -- Moody's Investors Service has today downgraded Spain's government bond rating to Baa3 from A3, and has also placed it on review for possible further downgrade. Moody's expects to conclude the review within a maximum timeframe of three months.

The decision to downgrade the Kingdom of Spain's rating reflects the following key factors:

1. The Spanish government intends to borrow up to EUR100 billion from the European Financial Stability Facility (EFSF) or from its successor, the European Stability Mechanism (ESM), to recapitalise its banking system.This will further increase the country's debt burden, which has risen dramatically since the onset of the financial crisis.

2. The Spanish government has very limited financial market access, as evidenced both by its reliance on the EFSF or ESM for the recapitalisation funds and its growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn obtain funding from the ECB.

3. The Spanish economy's continued weakness makes the government's weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years.

Moody's has today also downgraded the rating of Spain's Fondo de Reestructuración Ordenada Bancaria (FROB) to Baa3 from A3 and placed the rating on review for possible further downgrade, in line with the sovereign rating action. The FROB's debt is fully and unconditionally guaranteed by the government of Spain. Moreover, the provisional short-term rating of the Spanish government has today also been downgraded to (P)Prime-3 from (P)Prime-2. Similarly, FROB's short-term rating was lowered to P-3 from P-2.The review for downgrade will focus on the outcome of the ongoing external audits of the Spanish banking system, the conditionality and details of the EFSF/ESM loan agreement, and the specific execution strategy developed for the banking system's recapitalisation. Moody's will also consider any further initiatives at the euro area level. In addition, Spain's rating -- as well as the ratings of other euro area countries -- could be adversely affected if the risk of a Greek exit from the euro area were to rise further.


The first key driver underlying Moody's three-notch downgrade of Spain's government bond rating is the government's decision to seek up to EUR100 billion of external funding from the EFSF or ESM. A formal request will be presented shortly, but the euro area finance ministers announced on 10 June their willingness to accede to that request. The sum of EUR100 billion is twice the size of Moody's previous base case estimate, and in line with the rating agency's adverse case estimate.While the details of the support package have yet to be announced, it is clear that the responsibility for supporting Spanish banks rests with the Spanish government. EFSF funds will be lent to the government which will use them to recapitalise Spanish banks. This borrowing will materially worsen the government's debt position: Moody's now expects Spain's public debt ratio to rise to around 90% of GDP this year and to continue rising until the middle of the decade. Stabilising the ratio will be a key challenge for the Spanish authorities, requiring years of continued fiscal consolidation. As a consequence, the government's fiscal and debt position is no longer commensurate with a rating in the A range or even at the top of the Baa range.

The second driver of today's rating action is the Spanish government's very limited financial market access, as evidenced both by its reliance on the EFSF or ESM for the recapitalisation funds and its growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn require funding from the ECB to purchase these bonds. In Moody's view, this is an unsustainable situation. In the absence of positive developments that shore up investor sentiment, such as a resumption of growth or rapid progress in achieving fiscal consolidation objectives, neither of which is likely in the current environment, the government is likely to become increasingly constrained with regard to the terms under which it is able to refinance maturing debt. If unchecked, Moody's believes that the risk of the government losing access to private debt markets on affordable terms and needing to seek direct support from the EFSF/ESM will continue to rise.Given the experience with private-sector involvement (PSI) in Greece and the intentions expressed by euro area officials around the development of the ESM, Moody's believes that the debts of euro area sovereigns that are fully dependent upon official sources to fund their borrowing requirements represent speculative-grade risk. Support would, if needed for a sustained period, be likely to be made conditional on loss-sharing with private investors or in extremis withdrawn altogether.

Moody's action to place the government's rating one notch above speculative grade reflects the rating agency's view that Spain has moved much closer to needing to seek direct support from the EFSF/ESM, and therefore much closer to being positioned within speculative grade.

Moody's decision to leave the government's rating in investment grade reflects the underlying strength of the Spanish economy and the government's clear desire to reverse the debt trajectory through a strong fiscal consolidation programme. Moody's also acknowledges several factors that differentiate the current programme from the support packages extended to Ireland, Portugal and Greece. In particular, the size of the support package is significantly smaller than it is in the other cases. The maximum amount of EUR100 billion equates to around 10% of Spain's GDP, compared with more than 54% of GDP in the case of Ireland, 114% of GDP in Greece and 46% of GDP in Portugal. Moody's therefore also considers the issue of subordination of bondholders to the senior creditor EFSF/ESM to be less of a negative factor. Senior creditors account for 37% and 40% of total public debt in Ireland and Portugal, while the respective share in Spain is 11% (in case the maximum amount was drawn).


Moody's has today also placed Spain's Baa3 government bond rating on review for possible further downgrade in order to assess the implications of several factors on the Spanish government's ability to continue to fund its borrowing requirements in the private debt markets. These factors are as follows:

- The clarification of the remaining open questions regarding the size and terms of the banking support package.

- The ultimate size of the government's liability following the results of the independent valuations and audits of all the Spanish banks, which are expected on 31 July.

- Any further initiative at the euro-area level, in particular those relating to steps towards a fiscal and banking union.

- The impact of the banking support package on Spain's ability to restore market confidence in the banking sector and by extension in the government bond market.


Social security funds crumbling

By Christina Kopsini
Social security funds are near breaking point, as caretaker Labor and Social Security Minister Antonis Roupakiotis said on Wednesday that he was not able to tell whether the funds would be able to pay their dues this summer.
“For July I expressed the prediction that based on the data we have... pensioners should be worried,” said Roupakiotis, a former head of the Athens Law Association. “However the finances of all social security funds and especially those subsidized by the state budget are in a bad state.”
He went on to say that the Manpower Organization (OAED) needs 260 million euros to pay unemployment benefits. He also dubbed the unemployment benefit “humiliating” and stressed that only one in five jobless people receives it.
Finally, Roupakiotis pointed out that some 500 employees at unions have remained without a salary for months and that social tourism programs, which provide subsidized holidays to workers, have been suspended.


Corporate capital flight grows in last two months

By Dimitra Manifava
The phenomenon of the flight of corporate capital abroad in both legal and illegal ways has grown considerably in the last two months.
The main reasons for this are that companies are trying to save on taxes and to protect their funds from a possible Greek exit from the eurozone. Consequently, the practice has resulted in a loss of funds for the Greek economy, not to mention the loss of tax revenues.
Inspections of intra-group transactions, which the state has begun after overcoming a number of obstacles, could bring significant revenues into the public coffers. The United Kingdom, for instance, enjoys annual tax revenues of 2 billion euros from monitoring such transactions.
Greek government sources say there are three main ways in which local and foreign-owned companies take their money out of the country. One of the common practices followed in the last two to three years by major business groups is the return of share capital to shareholders. Instead of paying them a dividend, which is taxed, they return capital to shareholders that usually ends up outside Greece.
Recently the Coca-Cola Hellenic Bottling Company (CCHBC) attributed this practice to the fact that the Finance Ministry had not issued the necessary circulars clarifying the new way of taxing dividends. Other large business groups that have already gone ahead with capital return or have decided to do so include toy retailer Jumbo, Motor Oil, S&B Industrial Minerals and others.
Another practice is the creation of subsidiaries, mainly in Northern Europe countries. In several cases they are seen as so-called “ghost” companies as they have no commercial activity and parent companies simply transfer funds to them.
There is also the good old -- and illegal -- way of transferring capital abroad, usually by small entrepreneurs: Money goes into a bag and the businessman makes a brief trip to neighboring Bulgaria and opens an account there. Bear in mind that any method of transferring funds outside the banking system is considered money laundering.

Although in the other two cases there is no margin for containing the phenomenon, owing to existing laws, that is not the case with the intra-group transactions. Development Ministry sources placed the blame once again on the Finance Ministry for delays observed in the monitoring of company transactions with their subsidiaries.
Although the law regarding their monitoring was passed in 2008 by then Deputy Development Minister Christos Folias and amended a year later, the necessary ministerial decisions for the law’s application are still pending. The same sources have attributed that to the lack of political will on the part of the political system as well as pressure from the business world.
The problems in monitoring intra-group transactions were the subject of a recent two-day working meeting held in Athens with the participation of officials from the Development and Finance ministries, the European Commission’s Task Force for Greece, and inspectors of intra-group transactions from the UK, Germany, Denmark and Poland.
The meeting showed that even in countries that are advanced in such screening, the average time for the examination of a case comes to eight months. This is why certain countries opt to focus their monitoring on very big companies with specific characteristics. For instance, the UK screens some 50 companies every year, and identifies violations in 95 percent of them.


Hollande promises growth, warns Greece it must stick to commitments

French President Francois Hollande warned Greeks on Wednesday that some eurozone countries are prepared to let Greece return to the drachma if it shows a lack of willingness to meet its bailout commitments.
Hollande, whose victory over Nicolas Sarkozy provided many Greeks with hope of a change in economic policy within the eurozone, firmly backed Greece remaining in the euro. “I am in favor of Greece remaining in the eurozone but Greeks should know that this requires there be a relationship of trust,” Hollande said in an interview with Mega TV.
“There will be countries in the eurozone that would prefer to see an end to Greece’s presence in the single currency if there is an impression that the Greeks want to distance themselves from the agreed commitments,” he added.
Hollande pledged that at an EU leaders’ summit later this month, steps would be taken to boost growth in the eurozone and that Greece would benefit from these measures. “We will adopt growth measures that will have an impact on Greece if it chooses to remain in the eurozone and meet its commitments.”
In an interview with Stern magazine, German Finance Minister Wolfgang Schaeuble expressed sympathy with ordinary Greeks suffering from the crisis but said that Greece did not have any other options but to reduce wages in order to regain competitiveness. “In a crisis... the little man suffers and the rich feather their own nests,” he said. “It is not easy to cut the minimum wage in Greece when you think of the many people who own a yacht.”
Schaeuble said that regardless of the result of the elections on June 17, the next government’s targets would be the same. “An election result will not change anything about the real situation of the country, which is in a painful crisis due to decades of economic mismanagement,” he said.


July pensions paid as normal, Roupakiotis says
13 Jun 2012
The interim government can guarantee pensions for July, but not beyond that. (photo:Eurokinissi)
The interim government can guarantee pensions for July, but not beyond that. (photo:Eurokinissi)

The payment of pensions in July will take place as normal, caretaker labour and social insurance minister Antonis Roupakiotis told reporters on Wednesday, during his first and last press conference for journalists covering the ministry.
Based on the information supplied by the management of social insurance funds, Roupakiotis said that there would be no problem with the payment of the pensions in the following month but refused to give any assurances concerning August, saying that this was beyond the remit of the caretaker government and minister.
The labour minister confirmed that social insurance fund finances were in a poor state and that the largest social insurance fund IKA would need 1.4 billion euro from the state budget to pay for pensions, while the Manpower Employment Organisation (OAED) would need a further 260 million euro to pay unemployment benefits, despite the fact that only one in five unemployed received unemployment benefit.
Noting that most Greeks paid their social insurance contributions at the end of each month, Roupakiotis said that the financial picture that emerged reflected the true capabilities of social insurance funds and that the payment of contributions had been impacted by the state of the economy. An increase in unemployment by one percent resulted in losses amounting to 450 million euro for the social insurance funds, he added.
The labour minister focused especially on the climate in the labour market, which he said was not so much the result of abolishing the residual duration of collective agreements as of the constant rejection of sectoral labour agreements by employers, who were daily replacing these with company and individual contracts "with significantly less favourable terms". He noted that in many cases, there was even pressure on individual employees to force them to accept these personalised contracts. (AMNA)


With Greece Back Down To Just €2 Billion In Cash, Zeit Suggests A Third Greek Bailout May Be Coming

Tyler Durden's picture

Shifting away from the theatrical travesty for a moment, we move to the other such travesty: Europe, where while nothing has been fixed, despite what the BIS is trying to do with the EURUSD which is now up 100 pips in a straight line since the Dimon testimony started, we find that while the world is concerned about Greek elections, the real gamechanger may be the old and known one: Greek cash, or the lack thereof, and more specifically yet another bailout for the country. RTE reports that as of today Greece has about €2 billion in cash left, pro forma for the recent cliffhanger cash infusion from Europe which almost did not come, which is expected to last the country for just about one more month.

"Greece has about €2 billion to pay salaries and pensions until July 20, media reports said today. The finance ministry declined to comment on the reports. Greece is heading into a Sunday election which could lead to it leaving the euro zone."

Of course, there is the natural probability that this is merely electoral propaganda: "Greece's European peers have warned Athens in stark terms that further loan payments could halt if promised reforms, including an unpopular privatisation drive, falter. Should this happen, many analysts warn that Greece could be forced to ditch the euro and print its own currency to pay pensions and salaries." Oddly, this is despite Spain proving to the world that one has much more leverage when demanding bailouts in the context of preserving Europe. And the irony is that this may not be enough. As Greekreporter informs us : "Greece might soon need a third financial aid program from its Eurozone peers, the German weekly Die Zeit reported Wednesday, citing unnamed financial and government sources. As Greece has fallen behind the goals of the consolidation and reform program agreed with the EU and the IMF, especially regarding tax revenue and privatisation proceeds, discussions are underway in the EU to give the country more time to reduce its deficit, the paper said." In other words 2012 is 2011 is 2010 is 2009 is 2008: the bailout wagon rolls along, while the "other people's money" is getting ever less and less and less.


In order to extend the deficit-reduction timetable, Greece would need tens of billions more in aid, Die Zeit said. The German parliament might already have to deliberate on a new program this summer.

Eurozone officials have told MNI that if the new Greek government shows sincere commitment, “some adjustments could be made to the bailout program.”

The sharp deterioration in the country’s growth outlook leaves room to extend the period for the consolidation effort, one source noted. The working scenario has been for an extension of two years, which means Greece would have to bring its deficit down to 3% of GDP by 2016 instead of 2014, the official said.

“It is a well known secret in Brussels that the E130 billion second bailout program won’t be enough,” another source said

To paraphrase: this means a third Greek bailout will be needed even if New Democracy, which too has promised to renegotiate the memorandum.

This summer will be interesting.

and yes this summer will be interesting - so will the fall......

Forget Three Months: Italy May Have Two Weeks Tops, As "It Already Is Where Spain Is Heading"

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Yesterday, Austrian finance minister Maria Fekter ruffled the unelected Italian PM's feather by saying "forget Spain, Italy is next in the bailout line" - a statement which as expected was promptly loudly refuted, mocked, and scorned by everyone possible: the type of reaction that only the truth can possibly generate in Europe. So far so good: after all the typical European reaction to any instance of the truth is loud screams of "lies, lies" and promptly sticking your head deep in the sand. However, this time around Italy may not have the benefit of the doubt, nor the benefit of some sacrificial replacement of a prime minister: Silvio is long gone, and at this point switching one banker figurehead with another will do precisely nothing. Which is why this morning's assessment from Bloomberg economist David Powell is spot on: "Italy would probably be forced into receiving a bailout if it were to face another two weeks like the last seven days." But the punchline: "The bad news for Italy is the country’s stock of debt is already as large as Spain’s may become after years of fiscal turmoil. In other words, Italy already is where Spain may be heading."
Surely Powell must be joking: has he notheard that Spain is not Uganda, and that there is "no risk" Spanish contagion will shift to Italy? Apparently not: which is actually what happens when one does the math and relies on facts instead of bluster, rhetoric and propaganda.
From Powell:
The seven-year sovereign yield has increased to 589 basis points from 538 basis points a week ago. That figure can be used as a proxy for the level with which the average cost of debt will eventually converge, as long as the current maturity profile is maintained, because the average age of the nation’s bonds is seven years.

The country would violate the IMF’s definition of solvency if its average cost of debt were to surpass 680 basis points. The fund defines debt as sustainable if the debt-to-GDP ratio starts to decline before the end of the forecast horizon.A rise to that level would push the ratio up to about 131 percent in 2016 and marginally higher the following year, according to Bloomberg Brief estimates. Those calculations use the projections of the IMF for growth, inflation and the primary budget deficit. If the average cost of debt were to remain at 5.89 percent - the present level of the seven-year yield - the debt-to-GDP ratio would peak in 2014 at126 percent. It would then decline to 124 percent by 2017.

The picture would deteriorate if the IMF’s economic growth forecast for this year were to prove too optimistic. It has estimated a contraction of 1.9 percent.

That looks like a best-case scenario. Output already declined 0.8 percent quarter over quarter during the first three months of the year.

The PMI data suggests the second quarter will be worse. The readings for the manufacturing sector were lower in April and May than they were at the start of the year. The figures for January, February and March came in at 46.8, 47.8 and 47.9, respectively. They were 43.8 and 44.8 for the following two months.

It gets worse...
The debt-to-GDP ratio already violates the proxy of national solvency derived from the research of Carmen Reinhart and Kenneth Rogoff. They have found sovereign debt becomes detrimental to economic growth, on average, when the ratio surpasses 90 percent.

The good news for Italy is the country has avoided a real estate bubble capable of bringing down the domestic banking system and the government has already closed the primary budget deficit. The major problem for Spain has been a recapitalization of the  nation’s lenders and several years of persistent budget deficits may push the country’s debt-to-GDP ratio toward the territory of insolvency.

...And much worse.

The bad news for Italy is the country’s stock of debt is already as large as Spain’s may become after years of fiscal turmoil. In other words, Italy already is where Spain may be heading.

A sharp rise of funding costs is capable of making the size of the liabilities of Italy start to look relatively as large as thoseof Greece.

And so the temporal bogey is set at +/- 14 days, as the bond market sets its sights on the exits in preempting the Nash equilibrium defection out of Italy.

Now, we look forward to blaring denials out of Italy that all of the math above is simply idiotic and that we should trust them, because all is fine. Also: Italy is not Somalia.

and Uganda rebuts Rajoy's text comment from the weekend.....

"Uganda Is Not Spain"

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Nobody can forget how over the weekend Spanish PM Rajoy told economy minister de Guindos to keep a stiff upper lip, and that, lest someone forget, Spain is not Uganda.
Two days later nobody is laughing: Spanish bond yields just pushed to Euroarea records, Fitch just downgraded the bulk of Spanish banks, and it looks like Spain may need a second bailout before the details of the first one are even ironed out. However, one entity is not amused. Uganda. Or perhaps, is very amused, depending on one's perspective.

The Stream spoke with Ugandan blogger Rosebell Kagumire, who started the hashtag#UgandaisnotSpain in response to the PM's remarks:

Many felt insulted at the implication that Uganda is economically weak.


Greece may be in need of a third bailout soon according to German press reports

- Greece may need a new double-digit billion Euro aid package
- EU is discussing giving Greece more time to curb the budget deficit

JPMorgan Explains Why There Is No Deus (gr)Ex Machina For Europe

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Just because there aren't enough traumatizing events in the next week to look forward to, the market has already set its sights on the next "big" (let down) event in Europe - the EU summit on June 28/29, which will only benefit just one class - Belgian caterers. But for some odd reason there is hope that Europe will, miraculously and magically, after years of failing at this, come to some understanding over either Eurobonds, a fiscal union, a deposit insurance, banking union, or some or all of the above (expect many daily rumors regarding any of the above to incite small but violent EUR and ES short covering rallies). However, as we have been observing for the past 3 years, and as David Einhorn summarized visually, nothing will come out of this latest summit. JPM explains why the one thing that can save Europe is a non-starter, and will be for years.

From JPM's David Mackie:

Consider Eurobonds as an example. In theory, it would be possible to create a system whereby a centralised debt management agency issued joint and severally guaranteed debt and then allocated funding to national governments. The size of the allocation and the interest rate would depend on an agreed path of fiscal and structural reform. To the extent that sovereigns deviated from the agreed path, the borrowing cost would go up. So far, so easy. But, there are a myriad of practical problems, in addition to the key issue of how the debt management agency would make its decisions. Government deficits and debt are a reflection of many things:

    • the size of the public sector,
    • the generosity of public sector remuneration,
    • the efficiency of public administration,
    • the generosity of the welfare system
    • and the extent of tax evasion.
    The differences across Euro area countries regarding all of these things are huge. How they are dealt with is a monumental task.
    And so on. Good luck to all those hopeful that absent a full-blown market collapse, and EURUSD trading sub parity, both of which are precisely what Germany wants, needs and will get, European countries will hand over their sovereignty to Germany.
    Ironically, only by crashing and burning, can the market be fixed.
    *  *   *


    More Gruel, More Gruel

    Tyler Durden's picture

    From Mark Grant, author of Out of the Box
    It is really rather pathetic. The Prime Minister of Spain today called for a deposit guarantee fund, pleaded for the EU to take over the budget of Spain and said Spain would cede its sovereignty over its banks. This is all just one thing; a cry for money and money at any cost. The poor fellow has obviously lost whatever self-respect that he had and is behaving no differently than some street urchin begging for alms. What can be seen from this kind of behavior is the desperate state that Spain is in and it is reflected in his desperate pleas for help. I would speculate that so much has been hidden and so many balance sheets falsified that Spain has suddenly found itself in a sea of their own making which could be termed, “Dire Straits.” When Rajoy termed the bailout for Spain as a “Victory for Europe” I knew that he had left “sense and sensibility” behind and headed into the land of Don Quixote where windmills were imagined to be giants and fantasy had replaced reality. The problem is, unlike the creation of Miguel Cervantes, this guy is the Prime Minister of Spain and not some aged senior chasing after the Knights Templar in his later years.

    More Gruel Please Sir

    I am reminded of that famous scene in Oliver where a second serving is asked for and the commotion that it causes. The European Union can now be viewed as three distinct groups. The bailed-out countries that are trying to renegotiate their agreements, pleading for more money, and asking for more integration in the hopes of getting more gruel. This is all characterized by some grand plan of course so that they can con the wealthier nations out of their money under the banner of the Three Musketeers, “All for one and one for all” which really just means; “give me your money so I can live just like you do and thank you so much.” Then the second group is the Brussels Sprouts which want to take over power from all of the national governments and run Europe out of Belgium and wave flags, have parades and dine on Beluga caviar accompanied by splits of champagne. They believe their own rhetoric and think that Europe is going to be some commonality where the people in Berlin and the people in Lisbon have the exact same standard of living and I think there will be a revolution in Germany before that is allowed to happen. Then the final category is Germany, the Netherlands, Finland and Austria which everyone else wants to pay for this enterprise as Germany passes out just enough to maintain control and makes certain well defined noises to keep everyone begging for more while they refuse to partake in any of the nonsense bandied about by the poorer nations as they are not going to destroy their own economy for the sake of some grand scheme that would raise their cost of funding to an average of Europe while lowering their standard of living to a mean of Madrid and Athens; it is just not going to happen and no delusions should be maintained.

    It is not that hard to figure out, this dis-jointed Europe, just watch what the Germans actually do and don’t pay too much attention to what they say; that is the trick of it. The whole thing is a double con game but the people with the money, as in the rest of life, are who is in control and not the beggars with outstretched hands hanging about on the corner. Spain has fallen, Italy is under siege and France wants to join the have-nots in the hope that Germany will pay for all of the promises made by Hollande to the French people during their election. As Italy falters France may be the next nation to come under closer inspection especially if Hollande proceeds to implement more government spending and the lowering of the retirement age along with his other Socialist programs. Again I remind you to pay little attention to the rhetoric but watch what Germany does and that will set the program for the future. They can vote all they want in Brussels and draw up all kinds of grand plans they desire but if Germany does not want to accept them then it is little more than semi-polite conversation over well-dressed cucumber sandwiches in various capital of Europe.

    June 17

    This is the day of the elections in Greece as Democracy rears its ungainly head. One way or another; the outcome is likely to be unsettling. If the leftist party wins then a game of chicken will ensue with Germany doing a down and dirty calculation on how much it will cost them and offering just that much and no more. Then the young leader of the new Greek government will probably overplay his hand and Germany will turn off the monetary spigot. This will then lead to a second game of chicken where Germany tries to get Greece to leave as Greece dares them to throw them out. The rhetoric will get quite testy and we will all watch to see who blinks first. Greece will regain the spotlight but the cost of the performance will be high. There is $1.3 trillion riding on this bet which is the total amount of Greece’s unpaid bills and a default will cause havoc past what I think the Germans will calculate. Europe seems to believe its own jargon these days and I fully expect any EU offers to miss the mark by a wide margin and then the demons will leap from the Trojan horse.


    Germany Pulls The Punchbowl As Usual

    Tyler Durden's picture

    If yesterday was a repeat of the market action from that day three weeks ago before the last FinMin conference, when everyone expected Germany to announce it had agreed to a bank deposit guarantee, then today is, logically, day after. Because just like back then, so now, Germany has once again made it clear that it will first see the EUR crushed, and all off Europe begging for a bailout (as in the case of Spain - when presented with reality, they all will beg the one with the cash to come to the rescue). To wit from the German Finance Minister, via Stern magazine:
    • Schaeuble Rejects European Redemption Fund: Stern Magazine
      • German finance minister says redemption fund would violate EU treaties, in interview with Stern magazine
      So contrary to the ridiculous hopes floated yesterday, and the even more ridiculous market levitation in response, there will be no banking union, no deposit guarantee, and no redemption fund. Well, there will be: on either of two conditions. European countries give up their sovereignty, which will likely never happen - this is, after all Europe - or it may if the respective local stock market are trading just north of zero,or if the bailout targets pledge their gold as decribed before. After all, it is quid pro quo Clarice.
      Everything else is merely noise to make the required market crash to activate Germany's grand master plan, gentle and orderly.


      Wednesday, June 13, 2012 4:02 AM

      Greece Withdrawals Up Again Due to "Uncertainty"; Situation Not Under Control; US vs. Greece

      Here is an interesting headline from the Greek website Ekathimerini:Withdrawals up again due to uncertainty.
       The political polarization and uncertainty regarding Greece’s position in the eurozone generated a fresh spike in bank withdrawals last week.

      In the last few days, withdrawals have increased again as bank clients convert their money into foreign bonds (mostly German) or opt for various alternative investments based on the US dollar in mutual funds.
      In May, deposit withdrawals were estimated to have amounted to 5 or 6 billion euros. Bank officials say the situation remains under control, pointing at the completion of the first phase of the recapitalization plan with the disbursement of 18 billion euros to the country’s four main commercial banks that has strengthened them considerably.
      What about Capital Controls and Border Controls?

      Reuters reports Euro zone discussed capital controls if Greek exits euro
       EU officials have told Reuters the ideas are part of a range of contingency plans. They emphasized that the discussions were merely about being prepared for any eventuality rather than planning for something they expect to happen - no one Reuters has spoken to expects Greece to leave the single currency area.

      But with increased political uncertainty in Greece following the inconclusive election on May 6 and ahead of a second election on June 17, there is now an increased need to have contingencies in place, the EU sources said.

      Belgium's finance minister, Steve Vanackere, said at the end of May that it was a function of each euro zone state to be prepared for problems. These discussions have been in that vein, with the specific aim of limiting a bank run or capital flight.
      In May, deposit withdrawals were estimated to have amounted to 5 or 6 billion euros. Bank officials say the situation remains under control, pointing at the completion of the first phase of the recapitalization plan with the disbursement of 18 billion euros to the country’s four main commercial banks that has strengthened them considerably.
      What about Capital Controls and Border Controls?

      Reuters reports Euro zone discussed capital controls if Greek exits euro
       EU officials have told Reuters the ideas are part of a range of contingency plans. They emphasized that the discussions were merely about being prepared for any eventuality rather than planning for something they expect to happen - no one Reuters has spoken to expects Greece to leave the single currency area.

      But with increased political uncertainty in Greece following the inconclusive election on May 6 and ahead of a second election on June 17, there is now an increased need to have contingencies in place, the EU sources said.

      Belgium's finance minister, Steve Vanackere, said at the end of May that it was a function of each euro zone state to be prepared for problems. These discussions have been in that vein, with the specific aim of limiting a bank run or capital flight.
      • It is 100% certain that no good can possibly come to those who do leave "excess cash" in bank accounts. 
      • It is 100% certain the need for safety overrides the check-writing convenience of keeping "excess cash" in banks.

      One can easily argue that "all" deposits, not just "excess" deposits should be in a foreign bank. However, a rational-thinking person might also worry about confiscation by other European banks.

      Regardless, it is 100% certain the sensible thing to do is to remove money from Greek banks. That certainty is the true driver of capital flight.

      U.S. vs. Greece

      Some might argue the US is in the same boat as Greece. After all, what good can leaving money in a US bank do?

      Such arguments are misplaced.

      In the US, there is not a safer place to keep excess cash, at least up to the FDIC limit. In the US, it is 100% certain the dollar is not on the verge of a forced devaluation to "wollars". Finally, common sense suggests having enough liquid assets in cash for emergencies.

      In Greece, the "need" for safety overrides the "desire" for convenience.

      No Mad Rush Yet - Why?In light of the above, inquiring minds might be wondering why the capital flight in Greece has been relatively orderly.

      The simple explanation is people cannot or do not think. Those who do carefully consider probabilities long ago decided to yank their money. Others are just now thinking, which explains the continued capital flight.

      Those who have not yet yanked their deposits from Greek banks have either not considered the compelling risk-reward setup for immediately pulling out all excess cash or they foolishly believe political promises that Greece will stay on the euro.

      What Is Being Rescued?

      My friend Pater Tenebrarum comments on the situation in Velvet Glove, Iron Fist 

       The idea of imposing capital controls and limiting the free movement of people across borders are likewise threats that must make every thinking person wonder what the hell the whole 'rescue operation' is supposed to be 'rescuing'. After all, these are basic tenets of the EU treaties the possible suspension of which the eurocrats are discussing here. This is what the EU was established for in the first place: to enable the free movement of people, goods and capital. If these are suspended, then what is it that is being rescued?

      It seems rather obvious to us that when citizens can no longer get their property from the banks and can no longer move their bodies and capital freely within the EU, then what is 'protected' are not they, but the solely the bankers and the political and bureaucratic elite.
      Situation Not Under Control

      When bank officials feel the need to state "the situation remains under control", rest assured it is 100% certain that things are not under control. Threats of capital controls and restriction of movement prove just that.


      11.15 More from German finance minister Wolfgang Schaeuble, who was praising the Italians earlier and is now dishing out tough love to the Greeks:

      In an interview with the magazine Stern, He said he has "huge sympathy" for the man on the street in Greece, but that doesn't mean they don't have to put up with austerity:

      QuoteThings are rarely fair in a crisis ... the little man suffers and the rich feather their own nests.

      I have really huge sympathy for the man on the street in Greece. But I cannot spare him. It is not easy to cut the minimum wage in Greece, when you think of the many people who own a yacht.

      If the country wants to regain competitiveness, then it (the minimum wage) must fall.

      Whoever is elected on Sunday will not be able to escape tough decisions in Greece, he added.

      QuoteAn election result will not change anything about the real situation of the country, which is in a painful crisis due to decades of economic mismanagement. They have to take tough measures.

      10.50 Some more bank lending figures which don't paint a pretty picture for Greece and Spain:

      ECB lending to banks in euros rose by a further €8.5bn last week, saidSimon Ward, chief economist at Henderson Global Investors.

      That was "consistent with continued deposit flight from the periphery, necessitating increased borrowing from the ECB and national central banks. Lending has increased by €52.8bn over the last five weeks," he said.

      QuoteGreece and Spain probably account for the bulk of the €52.8bn lending rise over the past five weeks. Calendar May figures show an increase in Banco de Espana lending to banks of €26.3bn. Banca d’Italia lending, by contrast, was little changed – up by only €0.6bn.

      The gap between the €52.8bn system-wide rise over the past five weeks and the €26.3bn Spanish increase in May suggests that Greek banks have suffered an outflow of up to €26bn, equivalent to 6pc of their total assets at the end of April and 15pc of their domestic deposit base.

      10.30 Cyprus, which yesterday was reported to be talks with Russia about a loan to help shore up its banking system, weakened as a result of its exposure to Greece, has said today it won't necessarily have to go to the EU for a bailout.

      Central bank governor Panicos Dimitriades said:

      QuoteThere are also other options, we will seek the best terms for the economy.

      10.20 Italy has sold €6.5bn of one-year bonds but at far higher interest rates, demonstrating the nervousness of investors.

      Interest rates for the one-year bonds rose to 3.972pc compared to the 2.34pc paid in an auction on May 11.

      The rise in the borrowing cost does not bode well for tomorrow's auction of longer-term government debt.

      Nicholas Spiro, managing director of Spiro Sovereign Strategy, said:

      QuoteContagion is back with a vengeance and Italy is bearing the brunt of the fallout from Spain's request for external assistance.
      Although a warm-up for tomorrow's bond auction, today's sale underscores the externally driven deterioration in Italy's perceived creditworthiness. The concession is staggering, with Italy now paying almost 4pc to issue 1-year paper.
      10.00 Eurozone industrial production figures are out, and show a fall. Across the region, industrial production was down 0.8pc on the previous month, Eurostat figures show.

      09.45 Reuters has seen a draft of the conclusion for the EU leaders summit on June 28-29, and perhaps unsurprisingly, it says there's a need for "much stronger banking and fiscal integration, underpinned by enhanced eurozone governance."

      QuoteRecent developments have demonstrated the need to take the EMU (Economic and Monetary Union) to a further stage.

      The new stage will build on deeper policy integration and coordination. There is a need for more specific building blocks centred around a much stronger banking and fiscal integration, underpinned by enhanced euro governance.

      09.20 Jose Manuel Barroso, president of the European Commission, has been speaking at the parliament in Strasbourg today, about the need for further eurozone integration and most pressingly for a banking union (although as Ambrose Evans-Pritchard reports in today's Telegraph that plan has already been shot down by Germany).

      09.10 Some serious news from Greece - banks are seeing customers withdraw money at an increasingly rapid pace ahead of Sunday's elections.

      Senior bankers told Reuters thay daily deposit outflows from the country's biggest banks have been between €500m and €800m over the past few days, with the pace accelerating yesterday.

      Lex van Dam, hedge fund manager at Hampstead Capital, said:
      QuoteThe situation in Europe continues to be close to total melt-down. Interest rates in Spain and Italy have reached unsustainable levels again and Germany is not going to accept eurobonds for many years. Very hard for the market to do well with that backdrop.
      08.55 Italy, as we can see from the bond yields below, has been sucked into the investor fears over Spain - despite the country bringing in Mario Monti last year to replace Silvio Berlusconi and get the country's finances back under control.
      German finance minister Wolfgang Schaeuble has today given his backing to the country, saying it can ride out the debt crisis if it carries on with its reforms of government spending.
      He told the newspaper La Stampa:
      QuoteIf Italy continues on the path Monti has set out on it will not be in danger. Italy has progressed greatly under Monti's government. That is acknowledged throughout Europe and on the markets.
      Mr Monti does not seem to be so confident however - he met with the leaders of the parties backing him last night to urge them to give their unified support for the reforms to the country's economy.
      08.40 Taking a look at bond yields, Spain and Italy are getting a little bit of relief this morning.
      While yields on 10-year Spanish government bonds are still trading at 6.6pc, close to an unsustainable level, they are down 5 percentage points this morning.
      Italian yields also fell, slipping 8 percentage points to 6.057pc.
      08.15 Spanish PM Mariano Rajoy is addressing the Spanish parliament about country's €100bn banking bailout at the moment - it's cause for celebration, he says:
      QuoteWe should celebrate the fact that our European partners have helped us. All the countries in the European Union have supported their banks.
      The bailout is a credit for the banks which the banks will pay.
      07.40 More from Alexis Tsipras, the Greek left-winger who is causing panic all across Europe.

      The leader of the Syriza party, who as we report in the 07.10 post, wants to rip up the terms of Greece's bailout package and bring an end to austerity, has written a piece setting out his stall (£) in this morning'sFinancial Times.

      He said he is "committed" to keeping Greece in the eurozone, and sets out how his party will sort of the Greek tax system so the country actually collects the revenue it needs to pay for its state spending.

      It's worth a read - it is an examination of Greece's specific problems rather than a list of complaints about the EU, as you might expect.

      QuoteI strongly believe we will get a clear democratic mandate from the people of the Hellenic Republic on Sunday. With that mandate we will take immediate action to end Greece’s corrupt and inefficient political and regulatory systems that have ravaged our economy over the past decades.

      Syriza is the only political movement in Greece today that can deliver economic, social and political stability for our country. The stabilisation of Greece in the short term will benefit the eurozone at a critical juncture in the evolution of the single currency. If we do not change our path, austerity threatens to force us out of the euro with even greater certainty.

      The systemic fiscal problems of Greece are, in large part, a problem of low public revenues. Myriad tax concessions and exemptions granted to special interests by previous administrations, along with a low effective tax rate on personal income as well as capital, explain much of the problem. So too does the highly ineffective method of tax collection.

      Under our plan for reconstruction and growth, we are committed to following a programme of pragmatic and socially just fiscal stabilisation.

      Alexis Tsipras gives a press conference at the in central Athens on Tuesday (Photo: AFP)

      07.20 A Greek exit from the eurozone may be exactly what's needed in order to convince Germany to step in and save the day, George Osborne suggested yesterday - as this blog reported at the time.

      QuoteI ultimately don't know whether Greece needs to leave the euro in order for the eurozone to do the things necessary to make their currency survive.

      I just don't know whether the German government requires Greek exit to explain to their public why they need to do certain things like a banking union, eurobonds and things in common with that.

      I would suspect that if you had a eurozone finance minister here, they wouldn't really know the answer to that.

      07.05 Spain's borrowing costs rose to their highest since the birth of the euro yesterday, as bond markets punished eurozone sovereigns amid continuing concerns over Madrid’s bail-out and a Greek exit.

      Meanwhile, rating agency Fitch downgraded 18 of the country’s banks. It said the Spanish government would “significantly” miss its targets for cutting its deficit.

      07.00 Banking union? What banking union? Germany's central bank shot down EU proposals for a European banking union yesterday, and warned that eurozone liabilities could not be shared without a shift towards fiscal and political union. Ambrose Evans-Pritchard reports:

      Andreas Dombret, a key board member of the Bundesbank, said the grand plan by Brussels is premature and unworkable as constructed. "It has to follow a deeper fiscal union as it would imply significantly increased risk sharing amongst countries."

      Mr Dombret said a pan-EMU deposit-guarantee scheme and a debt resolution fund would require "a genuine, democratically legitimated fiscal union" and a new treaty.

      The Bundebank's vice-president Sabine Lautenschlaeger hammered home the point in what is a clearly co-ordinated push to check the plan. "The result would be a pooling of the governments' liabilities through the back door," she said.

      "Whoever is footing the bill must also have a right of control, particularly when it comes to the large sums that are seen in banking crises," she added, alluding to rulings by German courts that unquantifiable EU liabilities breach Germany's constitution.

      and Greece , Ireland and Portugal should have boiling blood when they see Spain's sweetheart deal and compare with their own deals  in three , two , one......

      When the Spain bailout was announced, the head of the European Commission made a big show of saying that the money would be provided on good terms for the lenders.
      That appears to have been a crock.
      Based on scuttlebutt printed in El Mundo (via Sharecast), here are some of the contemplated terms:
      • No payments until 2017
      • 3% interest rate
      • 10-year repayment schedule through 2017
      Given that Spain's 10-year bonds are currently trading at yields over 6%, that's what's called a sweetheart deal.
      These details are not official and El Mundo did not cite specific sources. So they should viewed with skepticism.


      More details of the bank aid to Spain have been proposed. The details seem to show an evolution in the thinking of officials. Spain would be given a considerably longer repayment schedule than the other aid recipients, fifteen years and a five year grace period.  Spain, when it finally asks for the funds, will be charged 3%.  
      However, the old tension between wanting to support the banks and wanting to punish remains unresolved as the reports suggest the banks will charged 8.5% for the aid.  Besides getting past the Greek elections, the next big event for the Spain saga is the private auditors bank assessment due next week.
      Recall the IMF's stress test results (based on 4% economic contraction and 20% decline property prices), but it did not address the value of the bank assets.  Prime Minister Rajoy still seems to be in denial and this is troubling even though Spanish bonds are consolidating the recent plunge today.  
      On June 10, Rajoy was still pretending that this year's new deficit target of 5.3% could still be reached.  Fitch's warning yesterday that Spain's deficit will overshoot was gratuitous. Of course it will and not just because it is going to eventually take the EU's offer.  Even before the offer, the EC warned Spain's deficit would be closer to 6.4% this year and 6.3% next year.    

      The EU's offer will require Italy, which is having its own difficulties to participate.  Italy share is about 18 bln euros.  Leaving aside the fiscal hole this leaves Italy, but how can it be expected to fund Spain at 3% when costs it considerably more to raise the funds in the first place?  

      Italy sold one year bills today, raising 6.5 bln euros but at nearly 4% compared with 2.34% a month ago.  Italy sells bonds tomorrow.    Although Italy has a primary budget surplus, to service its outstanding debt requires it to sell around 35 bln euros a month in bills and bonds.  

      There continues to be rumblings about the possibility of another LTRO from the ECB.  This seems decidedly unlikely.  In fact, by further tying the banks and the sovereigns, the LTRO is a bit of doubling up.  The Spanish banks, for example, that gorged themselves on government bonds earlier this year, now are experiencing the virtuous circle in reverse.  The sell-off in Spanish bonds, with yields rising to new EMU-era records, has not only made it more difficult for banks to raise funds, but it is also weakening their balance sheets.