Greece post - mortem after Merkel visit - the view from Greece and Germany ..... Around the horn in Europe today - October 10th , Spain dropped two notched to BBB - by S&P .... just a matter of time before we see another spin cycle in sovereign debt widenings....

http://www.telegraph.co.uk/finance/financialcrisis/9600476/IMF-fears-credit-shock-in-Spain-if-Rajoy-blocks-rescue.html

By Ambrose Evans-Pritchard

9:45PM BST 10 Oct 2012

15 Comments

The fund said sovereign debt woes were spilling into the broader Spanish economy, risking a “pernicious feedback loop” for private companies. The danger is another bout of capital flight combined with a “credit shock” as banks deleverage drastically to meet higher capital ratios.

Olivier Blanchard, the IMF’s chief economist, said Madrid was courting fate by trying to muddle through without a bail-out – and without the tough terms it would bring – now that borrowing costs had fallen on hopes of bond purchases by the European Central Bank.

Mr Blanchard said investors had most likely anticipated a rescue by the ECB and the European Stability Mechanism (ESM). “If so, we can’t be sure that yields will stay low for much longer,” he said.

The IMF said capital flight from Spain reached €296bn (£238bn) in the 12 months to June, or 27pc of GDP. It matches the intensity of “sudden stop” crises seen in emerging markets.

Banks in Spain, Italy, and the EMU fringe cannot easily make up the shortfall by turning to the ECB because they are short of usable collateral.

The biggest risk is that Europe’s banks will have to slash balance sheets by €4.5 trillion by the end of 2013, largely concentrated in the Club Med bloc.

The fund said Europe’s failure to flesh out promises for a banking union – needed to break the “vicious circle” between banks and states – risked a violent credit crunch, slashing an extra 4pc off output in southern Europe next year. Most economists say a shock of this magnitude would push Spain into a death spiral.

The IMF said asset shrinkage could be limited to €2.3 trillion but only if the eurozone showed “unflinching commitment to implement already adopted measures”. This means sticking to its June summit deal to clean up legacy debts from banking crises in Spain and Ireland, preferably with a pan-EMU deposit insurance scheme .

Mr Rajoy and French president Francois Hollande seized on the warning , demanding the AAA core stands behind its pledge to let the ESM recapitalise Spain’s banks directly. “We have to show we’re serious people and that we do what we say we are going to do,” said Mr Rajoy . Germany, Austria, Finland, and Holland reneged on the accord two weeks ago .

The Franco-Spanish tete-a-tete comes two days before leaders of a newly-dubbed “Mediterranean Front” gather in Malta to thrash out a Latin strategy and plot ways to break the German lockhold on policy. Portugal’s prime minister, Pedro Passos Coelho, will join France, Spain, and Italy for the first time, suggesting that the free-market advocate may have lost its enthusiasm for the German austerity view. Diplomats say the meeting marks a break with EU tradition. For decades, France and Germany pre-cooked agendas before EU summits.

The Latin revolt has been made easier by the IMF’s admission that the fiscal tightening is doing more damage than expected, and may be self-defeating in some countries if not offset by monetary stimulus.

Vitor Constancio, the ECB’s vice-president, said the EU must be careful not to push austerity beyond the therapeutic dose. “The whole balance has to be continuously under observation,” he said, marking a shift in ECB thinking.

http://www.zerohedge.com/news/2012-10-10/sp-downgrades-spain-bbb-negative-outlook-european-support-wanes

http://www.zerohedge.com/contributed/2012-10-10/spanish-bonds-ecb-haircut-now-hinges-once-and-all-dbrs

Spanish bonds' ECB haircut now hinges once and for all on DBRS

Submitted by AVFMS on 10/10/2012 18:21 -0400

• European Central Bank

From 14 June 2012

http://www.aviewfrommyscreens.com/2012/06/14-jun-2012-in-broken-dream-edwin.html

The guys at Moody’s were behind their peers’ curve anyway (see 11 Jun post “Unfinished Sympathy”), but have now taken the lead by putting the Kingdom right away on junk outlook. ECB Haircut increase from 4 to 9 % in 10 YRS and probably worse from 1.5 to 6.5% in LTRO-laden 3 YRS paper (ECB link p.73) is thus now hinging on DBRS’ views (Eurosystem credit assessment framework ECAF link).

Spain at AL neg since 08 Aug 2012

Haircut table download

S&P Downgrades Spain To BBB- (Negative Outlook) As European Support Wanes

Submitted by Tyler Durden on 10/10/2012 17:02 -0400

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Just two weeks after Egan-Jones started the party, S&P has downgraded Spain to BBB- (with a negative outlook). As we discussed here when Egan Jones pushed all-in with Spain to CC, of course, Moody's (Baa3 Neg) will likely follow shortly with Fitch (BBB Neg) deciding to avoid the office-raid and keep its French parents happy. The main reasons - and concern going forward, via Bloomberg:

• *S&P MAY CUT SPAIN IF POLITICAL, EUROZONE SUPPORT WANED
• *S&P MAY CUT SPAIN IF NET GOVT DEBT RISES ABOVE 100%/GDP '12-'14

Full Statement (via S&P)

Overview

• The deepening economic recession is limiting the Spanish government's policy options.
• • Rising unemployment and spending constraints are likely to intensify social discontent and contribute to friction between Spain's central and regional governments.
  • Doubts over some eurozone governments' commitment to mutualizing the costs of Spain's bank recapitalization are, in our view, a destabilizing factor for the country's credit outlook.
  • We are therefore lowering our long- and short-term sovereign credit ratings on Spain to 'BBB-/A-3' from 'BBB+/A-2'.
  • The negative outlook on the long-term rating reflects our view of the significant risks to Spain's economic growth and budgetary performance, and the lack of a clear direction in eurozone policy.
  Rating Action
  On Oct. 10, 2012, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the Kingdom of Spain to 'BBB-' from 'BBB+'. At the same time, we lowered the short-term sovereign credit rating to 'A-3' from 'A-2'. The outlook on the long-term rating is negative.
  Rationale
  The downgrade reflects our view of mounting risks to Spain's public finances, due to rising economic and political pressures. The central government's policy responses are likely to be constrained by:
  • A severe and deepening economic recession that could lead to increasing social discontent and rising tensions between Spain's central and regional governments;
  • A policy setting framework among the eurozone governments that in our opinion still lacks predictability. Our understanding from recent statements is that the Eurogroup's commitment to break the vicious circle between banks and sovereigns, as announced at a summit on June 29, does not extend to enabling the European Stability Mechanism to recapitalize large ongoing European banks. Our previous assumption (which was a key factor in our decision to affirm our ratings on Spain on Aug. 1, 2012) was that official loans to distressed Spanish financial institutions would eventually be mutualized among eurozone governments and thus Spanish net general government debt would remain below 80% of GDP beyond 2015.
  • In our view, the capacity of Spain's political institutions (both domestic and multilateral) to deal with the severe challenges posed by the current economic and financial crisis is declining, and therefore, in accordance with our rating methodology (see "Sovereign Government Rating Methodology And Assumptions," published June 30, 2011), we have lowered the rating by two notches.
    With local elections approaching and many regional governments facing significant financial difficulties, tensions between the central and regional governments are rising, leading to substantially diluted policy outcomes. These rising domestic constraints are, in our view, likely to limit the central government's policy options.
    At the same time, Spain is enduring a severe and, in our view, deepening economic recession as reflected in our real GDP forecast of -1.8% in 2012 and -1.4% in 2013 (see "The Eurozone's New Recession--Confirmed," published Sept. 25, 2012). The pace of private sector deleveraging, together with the government's budgetary consolidation measures, is likely to lead to an even deeper contraction of investment and consumption in both the public and private sectors. While exports have expanded significantly (in July, Spain recorded its first monthly current account surplus since August 1998), we do not think their contribution to incomes and employment will offset the impact of deressed demand on the Spanish labor market and, via reduced tax revenues, the government's fiscal performance.
    Moreover, since 2008 the policy responses from Europe's monetary and political authorities have not, in our opinion, been effective in permanently reversing the tight financing conditions faced by large parts of the Spanish private sector. While lending rates have declined in recent months for blue chip corporate borrowers, small and medium sized enterprises (which employ 76% of the national workforce) are paying average interest rates of 6.6% as of August (TEDR, Tipo effective definicion restringida) on borrowings up to five years, versus 4.8% in 2009.
    
    

    In our view, the shortage of credit is an even greater problem than its cost. According to data published by the Banco de Espana, loans to nonfinancial domestic enterprises have declined by €161 billion from the end of 2008 through August 2012 (though this decline also reflects write-offs, repossessions, and reclassifications). We estimate this to equal about 15% of GDP. While this weakness may be as much a function of demand as it is of supply, its effect on the real economy has been debilitating, with no visible reversal, as banks shrink their loan books in order to meet strict capital requirements.

    In our opinion, the 2013 state budget is based on overly optimistic growth assumptions (government real GDP forecast of -0.5%). Fiscal targets are likely to be undermined by a continuous decline in employment, as well as the government's proposal to possibly index pensions before year-end 2012, and to raise them in 2013. In our view, meeting the government's deficit targets in 2012 and 2013 will require additional budgetary consolidation measures, which in turn could amplify the economic recession, particularly if a more determined eurozone policy response is unable to materially improve the financing conditions in the economy and stabilize domestic demand.

    Although we think the recently passed National Reform Program will ultimately help to strengthen the economic fundamentals and resilience of the Spanish economy, these benefits may only be felt over the long term. In fact, the current deterioration in economic and financial conditions could raise fiscal risks in the near-to-medium term before the growth enhancing structural reforms take root. Therefore, we view the Spanish government's hesitation to agree to a formal assistance program that would likely significantly lower the sovereign's commercial financing costs via purchases by the European Stability Mechanism and ECB as potentially raising the downside risks to Spain's rating (see "A Request For A Full Bailout Would Not Affect Spain's Sovereign Ratings, published Aug. 22, 2012).

    
    

    Overall, against the backdrop of a deepening economic recession, we believe that the government's resolve will be repeatedly tested by domestic constituencies that are being adversely affected by its policies. Accordingly, we think the government's room to maneuver to contain the crisis has diminished.

    The uncertain trajectory and timing of eurozone policy making is affecting business and consumer confidence--and hence the capacity of the Spanish economy to grow. A key outcome for Spain will be whether eurozone policies can contribute to stabilization in its domestic financial system in a timely manner, in particular by reversing the net outflow of funds in the economy experienced during 2011 and 2012. Following the audit of the banking sector, we believe that an improvement in financial conditions hinges in part on the resolve of policymakers to make progress on the integration of the eurozone, starting with the implementation of agreements reached at the summit on June 29. We believe implementing these agreements could help to stabilize the eurozone and contribute to arresting any further weakening in the creditworthiness of sovereigns in the so-called periphery.

    We continue to view the governments, including Spain, that are receiving official assistance as vulnerable to delays or setbacks in the eurozone's plans for  support framework. This includes pooling sufficient common resources to support sovereign lending facilities and the creation of a banking union with a single regulator and a common resolution framework. In this light, our current net general government debt projections reflect our assumption that official loans to distressed Spanish financial institutions will eventually fall on the government balance sheet and project Spanish net general government debt will reach about 83% of GDP in 2013.

    
    

    Outlook

    The negative outlook reflects our view of the external and domestic risks to Spain's financial position, and the impact we believe this may have on the  sovereign's creditworthiness.

    We could lower the ratings if, all other things being equal, we observed that:

    • Political support for the current reform agenda was waning, for example due to an even steeper than anticipated GDP contraction, accompanied by further increases in unemployment that undermined the government's willingness to implement additional reforms
    • Eurozone support was failing to engender sufficient confidence to keep government borrowing costs at sustainable levels and to stem capital outflows;
    • Net general government debt was likely to rise above 100% of GDP during 2012-2014 due to deviations from the government's fiscal targets, weakening growth, one-off debt increasing items, or if interest payments rose above 10% of general government revenues during this period.

    We could revise the outlook on the rating to stable if we saw that the government's budgetary and structural reform measures, coupled with a  successful eurozone support program, stabilize Spain's credit metrics.

and this cut leaves Spain just one notch above junk with Moody's set to complete its review by the end of the month......

http://www.telegraph.co.uk/finance/financialcrisis/9600539/SandP-downgrades-Spains-credit-rating.html

By Rebecca Clancy

10:23PM BST 10 Oct 2012

7 Comments

S&P warned that rising unemployment and harsh austerity measures are likely to intensify social unrest and cause further friction between Spain's central and regional governments.

"The downgrade reflects our view of mounting risks to Spain's public finances, due to rising economic and political pressures," said the rating agency in a statement.

"In our view, the capacity of Spain's political institutions (both domestic and multilateral) to deal with the severe challenges posed by the current economic and financial crisis is declining, and therefore, in accordance with our rating methodology (see "Sovereign Government Rating Methodology And Assumptions," published June 30, 2011), we have lowered the rating by two notches."

The downgrade to BBB- from BBB+ late on Wednesday leaves Spain one notch above "junk" status. S&P also attached a "negative outlook", which warns of a possible downgrade in the medium term.

S&P said it would downgrade the country's debt status further if political support for Madrid's reform agenda weakens, if eurozone support fails to prevent Spain's borrowing costs hit unsustainable levels or if debt tops 100pc of economic output or debt payments surpass 10pc of general government revenues.

The rating agency also expressed doubts that all of the eurozone countries would give their backing to 17-nation bloc's attempts to recapitalise Spain's troubled banking system, which S&P said would force the country's debt burden to "balloon".

"Against the backdrop of a deepening economic recession, we believe that the government's resolve will be repeatedly tested by domestic constituencies that are being adversely affected by its policies," S&P said.

"Accordingly, we think the government's room to contain the crisis has diminished."

The euro fell against the US dollar after the news, trading down 0.1pc late in the session on Wall Street.

The downgrade comes after Spain announced five austerity packages in less than a year and is fighting for time to avoid a full-fledged rescue.

Concerns over the creditworthiness of the government have risen since the country requested €100bn (£80bn) in aid to bail-out its banks.

The rating agency also expressed doubts that all of the eurozone countries would give their backing to 17-nation bloc's attempts to recapitalise Spain's troubled banking system, which S&P said would force the country's debt burden to "balloon".

"Against the backdrop of a deepening economic recession, we believe that the government's resolve will be repeatedly tested by domestic constituencies that are being adversely affected by its policies," S&P said.

"Accordingly, we think the government's room to contain the crisis has diminished."

The euro fell against the US dollar after the news, trading down 0.1pc late in the session on Wall Street.

The downgrade comes after Spain announced five austerity packages in less than a year and is fighting for time to avoid a full-fledged rescue.

Concerns over the creditworthiness of the government have risen since the country requested €100bn (£80bn) in aid to bail-out its banks.

The cut puts S&P in line with rival rating agency Moody’s, which has the recession-hit country on review for another downgrade.

http://www.zerohedge.com/news/2012-10-10/overnight-sentiment-listless

Overnight Sentiment: Listless

Submitted by Tyler Durden on 10/10/2012 06:46 -0400

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The overnight session has been largely listless, with the market digesting a less than impressive start to earnings season by Alcoa, which reported declining cash flows, and various other negative earnings preannouncements out of major industrial companies. The IMF has not helped the somber mood with its analysis that by the end of 2013 European banks will need to dispose of up to $4.5 trillion in assets. Asian weakness (even the SHCOMP couldn't rally much on further easing rumors for the simple reason that the PBOC will simply not ease with QEternity out there and a food price hike over the horizon) has dominated the trading session so far. What little goods news there was came out ironically out of Italy and France, both of which reported better than expected August Industrial Production data. Italy IP rose 1.7% on expectations of a -0.5% drop, and up from -0.2% last, while the French Industrial Production posted a surprising surge, following weeks of poor data out of the country, with IP up 1.8% on expectations of a -0.7% print, and up from last month's 1.0%. However, even France warned not to read too much into a number driven by, well, cars and drinks.

"One of the main causes of the overall rise was an increase of 9.9 percent in auto sector output. Another driver was the rise in output of food oils and in beverage production during a month when high summer temperatures boosted demand for drinks. One statistics office official cautioned against reading too much into an August output figure because it is peak month in the summer holiday season and many factories are closed or on limited production, meaning small increases in one area or another can have a large impact on the overall reading. More broadly, industry output over the three months to the end of August was only 0.2 percent higher than the preceding three months and 2.0 percent lower than the same three-month period a year earlier." Elsewhere, Germany had a solid 5 Year auction, while Italy borrowing costs for a 3 and 1 year Bill rose. And that more or less captures the main events.

For the rest we go to DB's Jim Reid with a more comprehensive recap.

In Europe, Greek PM Samaras said that Merkel’s visit yesterday to Athens “has improved [Greece’s] credibility” after the German Chancellor reaffirmed her commitment to keep Greece in the euro. Merkel described the process of Greece’s fiscal consolidation and reforms as being “extraordinarily hard for its people” but warned that “much remains to be done”. Meanwhile, the IMF, in its fiscal monitor report, said that a deeper than expected recession in Greece would “complicate attainment of the ambitious reduction targets”. IMF executive director Menno Snel said on Tuesday that European countries should consider restructuring the Greek debt they hold if the country’s financial burden proves to be unsustainable (Reuters). Also in its fiscal monitor report, the IMF said Greece’s debt would fall to 152.8% of GDP by 2017, compared with a troika target of 137%.

Staying on the periphery Spanish finance minister de Guindos stressed that the yields of Spanish bonds are about 200 basis points above fair value, citing yesterday’s IMF financial stability report which said that yields were unfairly pricing in a risk of a Eurozone breakup. De Guindos also defended the government’s economic assumptions which budget for a 0.5% GDP contraction next year, against the IMF’s latest estimate of -1.3%, saying that “I respect the IMF projections, but they aren’t any different than the projections (other) analysts make”.

Elsewhere Juncker made some positive statements on the reforms progress in Greece and Portugal, and on the latter he expressed confidence that the country would return to capital markets by next year. Draghi yesterday said that the OMT has reduced the “crisis of confidence” that had gripped the Eurozone. He also confirmed that the OMT was strictly conditional on the “strict and effective” compliance of a country to ESM/EFSF programmes.The ball is still firmly in Spain’s court for now.

***

http://www.telegraph.co.uk/finance/financialcrisis/9597960/Angela-Merkels-visit-to-Greece-what-the-papers-say.html

By Szu Ping Chan

9:52AM BST 10 Oct 2012

6 Comments

Bild

Germany's biggest selling tabloid newspaper doesn't do subtle, and today is no exception. Angela Merkel may be many things, it says, but she's not a Nazi.

The paper attacks the "disgusting" protests against Merkel in Athens yesterday. And just to rub salt in German wounds, it adds: "we always pay more". In this case, €30m more to support administrative reform in Greece.

The paper highlights the stark contrast between the calm of yesterday's meeting inside Maximos Mansion and the protests outside.

"It looked different, very different," the paper says. "They wore Nazi uniforms, army jackets. One poster read: 'Merkel, Hitler's Daughter.' Another stated: 'Get out of our country, you b----.'"

Handelsblatt

Handelsblatt looks at German politician Bernd Riexinger's appearance with Syriza leader Alexis Tsipras yesterday, and the resulting political backlash:

CDU (Angela Merkel's party) and FDP (Merkel's junior coalition partner) have criticised the participation of the Left party leader Bernd Riexinger in the demonstrations against the visit of German Chancellor Angela Merkel (CDU) in Athens.

"It is unprecedented and outrageous, as the chairman of the parliamentary party represented the anti-German protests in Athens as a stage used for policy making against the interests of their own country," Gerda Hasselfeldt, the chairman of the CSU parliamentary group said in parliament.

_{Alexis Tsipras, right, the leader of Greece's main opposition Syriza party, accompanied by Bernd Riexinger, left, co-leader of Germany's Left party Die Linke, walk during a protest in Athens on Tuesday (Photo: AP).}

Süddeutsche Zeitung

Süddeutsche Zeitung leads with Merkel's message yesterday that Greece's tough medicine will pay off. It also highlights Samaras's promises to implement reforms.

Die Welt

"Merkel promises Athens a little help" was one of several headlines in today's Die Welt.

The paper says that the German Chancellor had warm words for her Greek counterpart on the brief visit to Athens.

Away from the reportage, a journalist from the paper told BBC Newsyesterday that Germany was being "kicked in the f----" by the Greeks.

Kathimerini

In Greece, Kathimerini's front page talks of light at the end of the tunnel for the country, but highlights that the German Chancellor did not commit to paying its next tranche of aid. Nor did she mention the idea of giving Greece more time to implement austerity measures.

The paper also reports yesterday's protests against Mrs Merkel. "However, there were no riots," the paper points out.

Ta Nea

There were "warm words for Greece," Ta Nea reports, but no concrete commitments. It says:

Given the climate of hostility that has poisoned relations between Greece and Germany in the past two years, the first visit of Chancellor in Athens achieved at least the minimum: it conveyed to the German public the message that the Chancellor has not written off Greece from the eurozone.

To Vima

"Relief and satisfaction". That's how Greek newspaper To Vima reports yesterday's meeting. Merkel is a "powerful ally" for Greece, the paper says, not only in its "quest for the disbursement of the next tranche of its bail-out, but also to win an extension on its fiscal adjustment".

...and finally...

Eagle-eyed journalist James Creedon at France 24 highlights this coincidence from yesterday's meeting:

That result? 4-2 to Germany, although Samaras - that's Georgios - not Antonis - scored an equaliser before Germany prevailed.

and...

http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_09/10/2012_465374

Coalition sees positives in Merkel visit

 German Chancellor provides qualified support, words of encouragement to Athens

The release of Greece’s next tranche of bailout funding should be secured in November if the government agrees on its latest austerity package with the troika and pushes ahead with 89 structural reforms that form part of its bailout commitments, German Chancellor Angela Merkel informed Prime Minister Antonis Samaras during a brief but significant visit to Athens on Tuesday.

Merkel’s visit did not provide an expression of unquestioning support for Greece’s continued eurozone membership, but there were words of encouragement for Greeks and their government from the German chancellor, who acknowledged the large fiscal adjustment made since 2010 and a renewed effort to implement reforms.

The Greek side felt Merkel’s trip underlined the government’s efforts to rebuild trust with the country’s eurozone partners and doused the possibility of a euro exit. According to sources, Athens was also encouraged by the emergence of an apparent timeline for the disbursement of the next loan installment and the consideration of Greece’s request for the 13.5 billion euros in spending cuts and tax hikes demanded by the troika to be spread over more than two years.

Finance Minister Yannis Stournaras, who attended a Eurogroup meeting on Monday, confirmed last night that the request for an extension is “on the table” and that eurozone finance ministers have asked the government to find ways of plugging the financing gap that this could create. He added that he expects Greece to receive its next tranche, worth 31.5 billion euros, next month.

Greece hopes to have agreed on the austerity package with the troika before the European Union leaders’ summit on October 18 and that a decision on releasing the funds for Athens could be taken at a subsequent emergency Eurogroup meeting. Sources said that all of these issues were discussed in Tuesday’s meeting between Samaras and Merkel.

At a press conference, Merkel said Greece must honor its commitments to its international creditors, noting that “much has been achieved but much more remains to be done.” She stressed she was not visiting Greece “as a teacher, to give grades” but “as a good friend and a real partner.”

The German leader acknowledged that “this period is very difficult for Greeks” but called for citizens to be patient. “Much of the road has been completed but it is worthwhile for Greece to finish the course as if it doesn’t things will be much harder later.”

Merkel added that Germany was prepared to help Greece implement measures to boost growth. “We will do everything possible to provide Greece access to credit from the European Investment Bank,” she added, noting that the bank’s capital had been boosted by 10 billion euros. Samaras also emphasized the importance of restoring growth to the economy to boost employment, particularly among young Greeks. “The recession is the enemy,” he said. “Greek people are bleeding but we are determined to remain in Europe,” he said, adding that those who had bet on Greece leaving the euro had failed. Hailing Merkel as “a friend of Greece,” Samaras said her visit has “broken our international isolation” and “turned a new page in ties between Greece and Germany.” “Greece has boosted its credibility,” he said. Merkel suggested that Europe also had something to prove in this area. “It is in our common interest that we in Europe once again win back our credibility and solve our problems together,” she said. Samaras took the unusual step of meeting Merkel at Athens International Airport and traveling to his office at the Maximos Mansion in the same car as her. The vehicle carrying the two leaders was part of a large convoy that made its way through Athens amid stringent security. After her meeting with Samaras, Merkel held talks with President Karolos Papoulias and then met Greek and German businessmen before returning to Berlin. and.... http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_09/10/2012_465375 IMF: Adjustment must be abrupt  Front-heavy program the only way to restore market confidence in Greece, senior official says By Tom Ellis Greece will have to move ahead with an abrupt fiscal adjustment as that is the only way it can regain the confidence of the markets, a senior International Monetary Fund official told Kathimerini on Tuesday. Although the IMF recommends that countries with significant debts and deficits apply a gradual fiscal adjustment -- that being the optimal way of reducing the impact of an economic recession -- in Greece’s case, the complete lack of trust on the part of the markets means a stricter approach is required, the head of the Fund’s Fiscal Affairs Department, Carlo Cottarelli, said on the first day of the IMF’s annual congress in Tokyo. “The fiscal adjustment should be gradual if the economy can take it, if it is not under pressure from the markets. But if the markets will not lend it any money, then the adjustment will unfortunately have to be much more front-heavy,” Cottarelli told Kathimerini in explanation as to why there is no milder adjustment being made in Greece’s case. The Fund’s fiscal director said the adjustment will have to be constant, otherwise markets would start to dispute its fiscal sustainability, but warned that without a streamlining effort, the recession would be deeper due to doubts over the government’s ability to solve its fiscal problems. “The target of the program in Greece is the return to sustainable budgets and to growth through a combination of structural reforms and fiscal adjustment,” Cottarelli stressed. He urged for safety clauses for the weakest sections of society which, as he said, are increasingly bearing the cost of the streamlining as unemployment increases. The director of the IMF’s Research Department, Olivier Blanchard, said that for countries like Greece, the effort constitutes “a marathon race and not a sprint,” and acknowledged that although an adjustment is necessary, there is no doubt that it has consequences on demand and output. His deputy, Joerg Decressin, stated that “the objective for Greece is a program that is viable, that will help the Greek people and gradually see the economy out of recession.” and..... http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_10/10/2012_465420 Greek reform pledge on trial as state sales resume By Anthony Deutsch 7 Harry Papachristou As Greece's privatization program resumes this month, nearly half a year behind schedule, at stake is not just the billions of euros it needs to raise, but the credibility of its commitment to reforms demanded by its creditors. Greek politicians are under intense pressure at home to resist foreign calls to sell state assets on the cheap and raise fast cash to pay down government debt. More challenging still will be efforts to use privatization as a tool to uproot corrupt business practices and restore foreign investors' confidence in Greece. The 15-month-old Hellenic Republic Asset Development Fund aims to transform dozens of state businesses to increase value before leasing or selling them through a series of tenders. The first major sales - gambling company OPAP, state gas business DEPA and several prime real estate projects - could be completed as early as the first quarter of 2013, putting the fund back on track after wildly missing a 3 billion euro target this year. It now expects to generate just 300 million in 2012. Many hope privatization proceeds will help break the cycle of austerity and recession in Greece, where economic output has declined by almost a quarter since 2008 and unemployment is nearing 25 percent. Greece, the most indebted eurozone nation relative to GDP, has repeatedly missed targets set under its EU/IMF bailouts and risks being forced out of the single currency. If successfully executed, economists say the privatizations could add an annual 3.5 percent to GDP from 2013, enough to return Greece to growth, and create 150,000 long-term jobs. A leading fund official said the delays had been largely down to the need to get companies in a state to sell. "As the interest for Greece is waning, you can't proceed with tenders where the assets are not 100 percent clean and attractive,» the official said on condition of anonymity."We're having a deep dive in all the companies to single out all the major issues the companies have, to deliver them to the market,» he said. Wooing foreign investment To create greater transparency and attract foreign investors, the fund was set up in July 2011 as an independent agency, with English as its official language. Its core task is raising 19 billion euros by 2015, but more important will be how Greece is perceived by international markets to be meeting criteria for its 173 billion euro bailout. "It is absolutely critical we send a signal of change,» the top official said. The privatization fund got off to a rocky start, with repeat general elections in May and June having stalled activity by more than five months. Its first head, Costas Mitropoulos, quit less than a year into the job, citing a lack of political will. "The newly elected government has not given ... the necessary level of support,» he wrote in a July resignation letter. «On the contrary, in an indirect but systematic manner, the government has acted to undermine the authority and credibility of the fund." A high-level Greek official speaking on condition of anonymity said the current privatization target, down from an initial 50 billion euros, is still unrealistic because «the credibility of Greece is at a low». Investors are more interested in high-yield government bonds than sinking money into 30-year infrastructure projects with uncertain outcomes, the official said, citing conversations with major U.S. fund managers. Winds of change Still, there are signs business practices are changing for the better in a country one official jokingly called «the last Soviet-style economy in Europe». One good example came early this year. Russian oil executive and former energy minister Igor Yusufov strolled into the fund's Athens office «with a buxom blonde woman on one arm and a gold watch on the other. He offered 250 million euros in cash (to buy the entire Greek gas network)», said a person who was in the room. In pre-crisis Greece, a deal might have followed, enriching powerful individuals but robbing the Greek people of the true value of the state assets. Instead, Yusufov's investment vehicle, Fund Energy, was dropped from the tender process for DEPA, the public gas corporation 14 companies are now bidding for, which is expected to fetch more than four times that amount. Fund Energy did not confirm the details of its prior involvement. It complained at the time that its exclusion from the tender process was «unlawful», but said this week it was still interested in Greek energy assets. The privatization program requires a raft of bureaucratic reforms. At least 77 technical regulations, government decrees and ministerial guidelines must pass through Greece's notoriously slow legislature, including the creation of new market regulators. In September, the first small deal was reached when the fund said it would raise at least 81 million euros from the long-term lease of a shopping mall that once housed the broadcast center for the Athens 2004 Olympics. Next month, the sale of the highly profitable State Lotteries operator is expected, followed by the state's remaining 33 percent in football betting monopoly OPAP and a controlling stake in DEPA. Other businesses and properties slated for privatization are regional ports, airports and a multi-billion-euro, top seaside property at the site of the former Athens airport of Hellenikon. "The finance minister and the prime minister are very keen to show the Europeans things are moving ahead, and a key priority is to show privatization is being accomplished,» said Wolfango Piccoli of Eurasia, the political risk consultancy. "It's a huge priority for the government. Not just revenue, but most important is to send a signal."

and.....





http://www.telegraph.co.uk/finance/debt-crisis-live/9597581/Debt-crisis-live.html

11.09 Italy has held a short-term bond auction this morning, in which borrowing costs rose. It sold bonds due in three months and a year that raised €11bn.

The country sold €3bn in three-month bonds at a rate of 0.765pc compared to 0.7pc in the last similar auction in September.

The Treasury sold €8bn in 12-month bonds at a rate of 1.941pc compared to 1.692pc also in the September sale.

Commenting on the sale, Nicholas Spiro of Spiro Sovereign Strategy said:

Italian sovereign debt continues to benefit from a more credible ECB-backed fiscal backstop and investors' willingness to differentiate more between Spain and Italy. However, today's sale, with a slight uptick in yields, is a reminder that Italy is by no means out of the woods. Although demand held firm, the fact that yields rose at a sale of short-dated paper is concerning and underscores the fragility of investor sentiment.

10.56 More unrest afoot in Greece. The country's main public and private sector labour unions have called a 24-hour strike on October 18 to protest against austerity measures. The strike coincides with a European summit.

10.43 Klaus Regling, head of Europe's new bailout fund - which launched yesterday, has been speaking to German newspaper, Die Zeit. He told the paper that Spain does not look like it's about to seek a rescue package because yields on its sovereign bonds have fallen. He said:

It depends on the government in Madrid and on market developments. The yields on the capital market have fallen for Spain, therefore the country is not currently disposed to getting aid.

10.25 The Telegraph's Szu Chan has compiled this round-up of what the European papers had to say about Angela Merkel's visit to Greece yesterday and the ensuing protests.

She writes that "disgusting" protests, "outrageous" support from Germany's left wing leader for his Greek counterpart and "relief and satisfaction" is some of the media reaction following Mrs Merkel's meeting with Antonis Samaras.

Germany's biggest-selling tabloid, Bild, is the paper that attacks the "disgusting" protests, and just to add salt in German wounds, it adds "we always pay more".

10.15 Christian Noyer, a European Central Bank official, has pushed back against calls for an ECB interest rate cut. In its latest forecasts for the European economy on Tuesday, the IMF said there was room for the ECB to lower rates to boost growth. But, Mr Noyer said the transmission of monetary policy was more important than the policy rate.

He added that the ECB's bond-buying programme, as well as progress towards a European banking union, should help allay fears about a break-up of the eurozone.

09.32 Spain's ongoing crisis has spurred nationalist tensions, with the ruling parties of Catalonia last month seeking guidance from Brussels on the legality of secession from Spain.

In the latest step in a growing political battle between Barcelona and Madrid, Spain's parliament yesterday voted to block Catalonia from holding a referendum on independence.

08.46 Relief for those on some of the lowest salaries in Italy. Mario Monti, the Italian prime minister, has unexpectedly cut the lowest income tax rates.

Italy will reduce by a percentage point the two lowest income-tax rates. The rate will drop to 22pc from 23pc for earners of less than €15,000 per year, and to 26pc from 27pc for earners of between €15,001 and €28,000.

The Italian government also said it would halve a planned increase in sales tax rates to a single percentage point. It is still promising to meet the budget goals it has agreed with the European Union, saying Italy will balance its budget in structural terms next year.

08.15 Last night, the IMF issued a stark warning, saying that risks to the global financial system have increased as capital flight threatens to tear the eurozone apart. Bruno Waterfield, The Telegraph's man in Brussels, has more:

The IMF praised "significant and continuing efforts" by the eurozone, including proposals for a "banking union", the creation of a €500bn (£403bn) bail–out fund, and a European Central Bank pledge "to do whatever it takes" to protect the single currency.

But, in an important message to EU leaders ahead of a Brussels summit on deepening fiscal integration, banking union and bank recapitalisation next week, the IMF issued a stark warning that the lack of decisive action by European governments and institutions risked tipping the global economy into deeper crisis.

"Incremental policy making has been insufficient to fully allay market tensions, despite the recent market rally since end July," the report said. "Merely muddling through imposes increasingly higher costs, as the unchecked forces of fragmentation continue to gather speed and undermine the very foundations of the union – a common monetary policy, and economic and financial integration."