http://www.telegraph.co.uk/finance/financialcrisis/9468862/Debt-crisis-ECB-buying-Spanish-and-Italian-debt-makes-no-sense-says-Belgian-bank-governor.html
The agreement struck earlier this year projects that Greece's debt to GDP ratio will near 120% in 2020. At the time, officials, including at the IMF, claimed this was meant the definition of sustainable. Investors were rightly skeptical. A Dow Jones report says the IMF is re-considering its position and now is interested in redefining sustainable to mean a 100% debt/GDP ratio.
Given that the private sector took a substantial haircut earlier this year, there is not much more savings that can be achieved imposing another "voluntary" haircut on them. Instead, the official sector, which holds about three quarters of Greek debt, needs to participate in some fashion IF Greece's debt profile is going to change substantially. And the IMF appears to be reaching the point that Greece's debt profile must change substantially IF it is to continue to participate in assistance programs.
The IMF recognizes the limited options that are available. None of them will sit well with government officials.
1. Reducing interest rates on official loans. This runs into resistance if the rate Greece pays is below the for countries like Spain and Italy to raise the funds in the first place. Moreover, no reasonable reduction in rates will be sufficient by itself to bring the debt/GDP ratios to sustainable levels.
2. ECB and national central banks accept a 30% haircut on Greek bonds. This had been discussed earlier in the year. Since, for example, the ECB bought Greek bonds at a discount, it could surrender profits and not violate the prohibition against transfer payments, It defended its refusal to participate in the PSI on grounds that its purchases were for the conduct of monetary policy. It seems reasonable that it forgoes profits on the same grounds However, other members of the euro system cannot make such a compelling argument. Nor can such an argument be made regarding the bilateral loans, for which the government's can take a haircut.
11:03AM BST 11 Aug 2012
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Luc Coene told Belgian newspapers De Tijd and L’Echo that buying the bonds of these countries would only serve to weaken the ECB and do nothing to resolve underlying issues of competitiveness.
“It makes no sense for the ECB to start financing those countries,” said Mr Coene, “It would only lead to the ECB taking on the whole public debt of Spain and Italy onto its balance sheet," he said.
"That would in turn weaken the ECB and do nothing to resolve the underlying problems."
Mr Coene also said that the central bank's efforts to calm markets last summer with around €135bn of additional debt purchases on the secondary market via its Securities Markets programme took away the pressure on politicians to act.
“We haven’t forgotten what happened in August of last year: We bought Italian bonds and right after that the Italian government reneged on its pledges," he said.
“The conclusion is clear: When you take away the market pressure, you take away the pressure on politicians to act.”
Spanish and Italian borrowing costs edged up on Friday, following a week of steady falls on hopes that Spanish PM Mariano Rajoy would make a formal request for EU aid, which would then trigger action from the ECB.
President Mario Draghi initially disappointed markets at his monthly press conference by reiterating that "the ECB cannot replace governments," and that countries would have to request assistance from the European Financial Stability Facility (EFSF) before the ECB could step in.
"Even if we were ready to act now, there would not be the grounds for doing so," he said.
and......
http://www.telegraph.co.uk/finance/financialcrisis/9468890/Silvio-Berlusconi-says-euro-exit-would-be-a-disaster-for-Italy.html
11:18AM BST 11 Aug 2012
Silvio Berlusconi, the former Italian prime minister, has said that an exit from the euro by Italy “would be a disaster”.
In an interview with French newspaper Liberation, Mr Berlusconi said that his political allies are united in support for the euro and have backed Mario Monti, the current prime minister, to push for more stimulus measures since austerity and budgetary discipline aren’t enough.
Should any country leave the single currency, it is possible that the euro would “disintegrate”, Mr Berlusconi said. He advocated greater political unity with the direct election of the European Union president in addition to fiscal and economic harmonisation.
Italy’s economy shrank a worse-than-expected 0.7pc in the second quarter, the fourth consecutive quarter of contraction. The year on-year fall was 2.5pc. Italian factory output in June slumped 1.4pc compared to May and 8.2pc on a year-on-year basis.
Mr Monti has already passed more than €20bn in austerity measures during his term, relying heavily on tax hikes which are believed to have deepened the country's recession.
The country's official statistics agency ISTAT does not break down its GDP reports, but said that the agricultural, industrial and services sectors all contracted. Confindustria, the lobby group representing employers, now predicts GDP will contract 2.4pc during 2012, while the official estimate is for a fall of just half that size.
and.....
Is the Official Sector Initiative next for Greece?
Guest post by Marc Chandler (www.marctomarket.com)
The agreement struck earlier this year projects that Greece's debt to GDP ratio will near 120% in 2020. At the time, officials, including at the IMF, claimed this was meant the definition of sustainable. Investors were rightly skeptical. A Dow Jones report says the IMF is re-considering its position and now is interested in redefining sustainable to mean a 100% debt/GDP ratio.Given that the private sector took a substantial haircut earlier this year, there is not much more savings that can be achieved imposing another "voluntary" haircut on them. Instead, the official sector, which holds about three quarters of Greek debt, needs to participate in some fashion IF Greece's debt profile is going to change substantially. And the IMF appears to be reaching the point that Greece's debt profile must change substantially IF it is to continue to participate in assistance programs.
The IMF recognizes the limited options that are available. None of them will sit well with government officials.
1. Reducing interest rates on official loans. This runs into resistance if the rate Greece pays is below the for countries like Spain and Italy to raise the funds in the first place. Moreover, no reasonable reduction in rates will be sufficient by itself to bring the debt/GDP ratios to sustainable levels.
2. ECB and national central banks accept a 30% haircut on Greek bonds. This had been discussed earlier in the year. Since, for example, the ECB bought Greek bonds at a discount, it could surrender profits and not violate the prohibition against transfer payments, It defended its refusal to participate in the PSI on grounds that its purchases were for the conduct of monetary policy. It seems reasonable that it forgoes profits on the same grounds However, other members of the euro system cannot make such a compelling argument. Nor can such an argument be made regarding the bilateral loans, for which the government's can take a haircut.
3. Another option that the IMF recognizes is for the 50 bln euro Greek bank recapitalization to be taken off the government books (and debt accounting) and "re-allocated" to the ESM. This of course assumes that the ESM is not blocked by the German Constitutional Court. However, this too would likely require unanimous agreement, which still gives the German parliament a veto.
In fact, it is this procedural point that may lie behind German willingness to support Draghi's proposal which were conditional on countries formally requesting EFSF/ESM assistance. German parliament can reject the proposals and/or influence the drafting of the memorandum of understanding.
This issue is not going to be resolved this month. It is yet another item that will likely be addressed next month. However, it shows an evolution of IMF thinking and rightly recognizes that in order for Greek debt/GDP ratio to be dramatically reduced, the official sector needs to participate more fully. Of course, "official sector" is simply a euphemism for tax payers.
A sufficient official sector haircut could require a central bank or even the ECB to need to be recapitalized. That is accomplished by a transfer of funds from the government(s) to the central bank. The resolution of the debt crisis in part involves the distribution of pain and loss. The creditors, now largely in the public sector, will likely have a turn too.
In fact, it is this procedural point that may lie behind German willingness to support Draghi's proposal which were conditional on countries formally requesting EFSF/ESM assistance. German parliament can reject the proposals and/or influence the drafting of the memorandum of understanding.
This issue is not going to be resolved this month. It is yet another item that will likely be addressed next month. However, it shows an evolution of IMF thinking and rightly recognizes that in order for Greek debt/GDP ratio to be dramatically reduced, the official sector needs to participate more fully. Of course, "official sector" is simply a euphemism for tax payers.
A sufficient official sector haircut could require a central bank or even the ECB to need to be recapitalized. That is accomplished by a transfer of funds from the government(s) to the central bank. The resolution of the debt crisis in part involves the distribution of pain and loss. The creditors, now largely in the public sector, will likely have a turn too.
