As I expected there doesn’t seem to be any clear consensus on anything of real importance coming out of the latest meeting of European financial ministers. The only real resolution was for the Greek collateral deal for Finland, but once you read the details you have to wonder why they would even bother:
The deal will force Finland to pay in billions of euros into a new, permanent €500bn bail-out fund in 2013, the year it comes into operation; all 16 other eurozone countries are allowed to make payments into the new fund over five years.
In addition, Finland would be forced to forfeit most of the profits it would be due on bail-out loans to Greece and, if Greece were to default, Finland would not be able to access its collateral for more than 15 years.
The collateral will also come in a much more roundabout manner than the original cash deal Helsinki struck with Athens this summer. Mr Regling said Greek government bonds would be given to Greek banks, which would then turn them over to an independent trustee. The trustee would sell the bonds and use the proceeds to invest in highly rated debt, which would only then be held as collateral for Finland.
Apart from that there was little else. There is obviously still no agreement on exactly what to do about Greece because if there was there would have been an immediate announcement, instead the ministers agreed that they should agree on something at a later date once they get more information:
Euro zone finance ministers are reviewing the size of the private sector’s involvement in a second international bailout package for Greece, a move that could undermine the aid program and hasten the threat of a Greek default.
Ministers also agreed after a meeting in Luxembourg that Greece could wait until mid-November until it receives the next installment from its existing emergency aid program, piling more pressure on Athens to tackle its debt problems.
Jean-Claude Juncker, the chairman of the Eurogroup ministers, said they were reassessing the extent of the private sector’s role in the planned second package for Greece, a centerpiece of the deal struck on July 21 to rescue Athens.
The ministers are now hinting that private holders are looking at a larger write down from their holding of Greek bonds. The number is still up in the air, but the commentary seems to suggest somewhere in the vicinity of 50%:
Private bondholders agreed to a 21 percent write-down on their Greek debt holdings but EU and German officials have suggested the “haircut” may have to be increased — possibly to as much as 40 or 50 percent — in light of a new funding shortfall and changed market conditions.
“Ultimately, Greece would need to see its debt written down by more and with that you need probably some kind of shoring up of the banking sector,” said Alec Letchfield, chief investment officer at HSBC Asset Management.
Political resistance to pouring more public money into euro zone bailouts is growing across northern Europe.
“Greece is bankrupt,” said Michael Fuchs, a deputy parliamentary floor leader in German Chancellor Angela Merkel’s Christian Democrats, reflecting a growing mood in Berlin.
“Probably there is no other way for us other than to accept at least a 50 percent forgiveness of its debts,” Fuchs told the Rheinische Post newspaper.
As I mentioned yesterday, Dexia, a large French-Belguim bank, is on the verge of collapsing due to liquidity issues. Dexia, amongst other banks, has until this time been resisting making adjustments to its balance sheet beyond 21 percent:
Dexia SA (DEXB), BNP Paribas SA and Societe Generale SA are resisting pressure from regulators to accept more losses on their holdings of Greek government debt amid criticism they haven’t written down the bonds sufficiently.
While most banks have marked their Hellenic debt to market prices, a decline of as much as 51 percent, France’s two biggest lenders and Belgium’s largest cut the value of some holdings by 21 percent. The practice, which doesn’t violate accounting rules, may leave them vulnerable to bigger impairments in the event of a default, or if European governments force banks to accept bigger losses than signaled in July
The announcement of the new collateral seems to be the straw that broke the camel’s back, as WSJ reports the French and Belguim governments have just announced Dexia needs more help:
It’s déjà vu all over again for Dexia. Just like in 2008, Franco-Belgian municipal lender Dexia is in need of a bailout.
Except this time, the support looks like a stop-gap to allow an orderly wind up. The question now becomes whether this means taxpayers will be called on to take losses so that bondholders can be spared.
The French and Belgian governments, both part-owners of Dexia thanks to the previous bailout, committed Tuesday to safeguarding the bank’s depositors and creditors. Even if this support calms markets short-term, the maneuver poses the danger of transferring more risk from the private sector to the public one. That game, which caused Ireland so much pain, can only go on for so long.
Supposedly, this was the news that caused the DOW surge, with the S&P jumping 4.1%. Someone else will have to explain why because as far as I can tell this bank (and a few subsidiaries) just collapsed into another taxpayer funded blanket which will inevitably lead to further counter-party problems all across Europe.
The other thing that was supposedly being discussed at the minister’s meeting was the leveraging of the EFSF. As far as I can tell absolutely nothing has changed on that subject. Some of the supra-European establishment members have made some vague statements about some form of resolution on the issue but others are making it pretty clear there is still no plan at all:
Austrian Finance Minister Maria Fekter said she’ll resist pressure to use the euro area’s bailout fund to buy bonds in the secondary market, saying such an initiative would risk turning it into a “bad bank.”
“I don’t support this because I don’t want to make the facility into a bad bank,” Fekter said when asked about the possibility in an interview today in Luxembourg, where European Union finance ministers are meeting.
And from Trichet:
European Central Bank President Jean-Claude Trichet said on Tuesday he opposed the ECB financing bailout funds for the crisis-hit euro zone, dismissing one policy response government officials are mulling.
To convince markets they have the firepower to tackle the crisis, policymakers have been considering an option to turn the existing 440-billion-euro ($580 billion)European Financial Stability Fund (EFSF) into a bank so that it could access ECB funds, potentially giving it far more liquidity.
Trichet rejected this idea.
“I’m not in favor of bailout funds refinanced by the ECB,” he told the European Parliament.
And finally, let’s not forget that technically the first round of EFSF changes have still not been ratified. Once again from the last of the minnows:
Parties in Slovakia’s centre-right government coalition failed to find consensus on Tuesday on supporting a plan to strengthen the euro zone’s EFSF bailout fund but will continue talks on the matter, one of the party leaders said.
‘So far there has been no agreement on the euro bailout fund, talks will continue, we have a week left,’ said Bela Bugar, head of the Most-Hid party.
A junior coalition member, the liberal Freedom and Solidarity party, has been opposing an agreement of European leaders on beefing up the European Financial Stability Facility, bringing the Slovak coalition to the brink of collapse and raising doubt over the plan’s future.
Do equity traders even read the papers?
And in late breaking news, Moody’s downgrades Italy!