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News : EU Economy Last Updated: Jul 13, 2011 - 9:03 AM

Eurozone finance ministers discuss plans for buybacks of Greek bonds; Italy comes under market siege; Greece reports deficit of 28% in H1 2011
By Finfacts Team
Jul 12, 2011 - 6:19 AM

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Signature of the Treaty establishing the European Stability Mechanism (ESM): Michael Noonan, Irish finance minister, signs the new treaty for the establishment of the European Stability Mechanism (ESM), a bailout facility that will take effect from mid-2013, with Evangelos Venizelos, Greek deputy prime minister and finance minister, on his left, Brussels, July 11, 2011.

Eurozone finance ministers at the monthly meeting of the Eurogroup in Brussels on Monday evening, discussed a plan for Greek bond buybacks and refused to rule out a temporary default. Meanwhile, also on Monday, Italy, the single currency area's third-largest economy, came under market siege and in Greece, the finance ministry in Athens reported a budget deficit of 28% of GDP (gross domestic product) in the first half of 2011.

In Rome, the embattled government of Silvio Berlusconi, Italian prime minister, won the assurance of the country's main opposition parties that they wouldn't obstruct parliamentary approval of proposed new austerity measures.

On the markets, the spread between the yields on Italy's 10-year sovereign bonds and German Bund equivalents, rose by more than 100 basis points, or 1%, to a record high of 285.6, compared to a week ago.

Italy has a public debt of 120% of GDP and about half of it is funded locally. On the private side, Italians are among Europe's biggest savers. However, the economy has effectively been at a standstill for the past decade.

Average GDP growth over the past decade has been less than 0.25%, compared with 1.1% across the Eurozone.

Last May, in a sweeping broadside against Italy’s economic and social failures over the past decade, Mario Draghi, the ECB president-designate and outgoing head of the Bank of Italy, lambasted the failure of governments to implement reforms and defeat the “vested interests oppressing the country.”

Draghi highlighted the lack of reforms to promote growth, noting that Italy’s GDP had risen less than 3% over the past decade, compared with France’s 12%; productivity in Italy flatlined over the period, while rising by 9% in France, and real earnings of workers had been “virtually stationary” against another rise of 9% in France, he said.

The governor said the poor results “apply to north and south alike” and education levels were “among the lowest in the western world, even with equal expenditure per student,” while the employment rate of women in Italy was almost the lowest.

“The intertwined vested interests oppressing the country in so many ways must be eliminated,” Draghi said.

In Athens on Monday, the Greek finance ministry said preliminary data shows that for the January - June 2011 period, the budget deficit amounts to €12.78bn compared to the target of €10.37bn in the 2011 Budget. During the same period in 2010, the deficit amounted to €9.99bn.

The ministry said expenditures are lower than the budget target (€35.93bn) by €644m while total revenues have a shortfall by €3,05bn compared to the budget target (€25.56bn).

In Brussels, after a 9-hour meeting, the Eurozone ministers issued a six-paragraph statement pledging to flesh out details of a new strategy to end the 21-month-old crisis “shortly,” without setting a timeline.

"Ministers stand ready to adopt further measures that will improve the euro area's systemic capacity to resist contagion risk, including enhancing the flexibility and the scope of the EFSF (European Financial Stability Facility, the bailout fund that was established in 2010), lengthening the maturities of the loans and lowering the interest rates, including through a collateral arrangement where appropriate," they said in the statement.

Reuters reports that one national official said they were moving closer to sharing the cost of easing Greece's debt burden with investors even if credit ratings agencies were to declare a selective default.

"I would read this as an acknowledgement by the member states that a selective default is going to be difficult to avoid. It removes an obstacle to the participation of the private sector," the official said, speaking on condition of anonymity.

Ministers setup a working group to propose ways to finance a new multi-year program for Greece, reduce the cost of servicing its €340bn debt -- almost 160% of GDP -- and improving its sustainability.

“There are a variety of ways of enhancing the flexibility,” Olli Rehn, the European Commission's economic and monetary affairs commissioner, told reporters at a post-meeting press conference. Buybacks are “one of those. I would at this stage not exclude any option. But instead we are exploring these possibilities.”

Jean-Claude Juncker, chairman of the Eurogroup of finance ministers and Luxembourg prime minister, told the reporters that there would clearly be private sector involvement in the new bailout and talks on how to do this would be concluded as soon as possible.

"If the weight of Greek public debt is corrected downwards, if the interest rates are lowered and if the maturities are lengthened, then you might well get the impression that this will be of great help to Greece," he said.

In a stinging open letter to Juncker, George Papandreou, the Greek prime minister, complained that  a “cacophony” had sowed “panic” that overwhelmed the recent budget cuts while European partners had responded too slowly to the crisis, giving primacy to domestic concerns over the common currency.

"Crunch time has arrived and there is no room for indecisiveness and errors such as taking decisions that in the end prove 'too little, too late' to convince the markets we are serious; (and) making compromises that satisfy our internal political 'red lines' that in the end substitute tactical politics for sound management of the crisis,"
he wrote.

Papandreou said the French bond- rollover plan was potentially “too expensive, too little and too dangerous” and might tip Greece into formal default.

The journey from implacable opposition to debt default could be viewed as moving on but is still at an early tentative stage.

"I think we have to accept that a voluntary contribution is not realistic," said Dutch Finance Minister Jan Kees de Jager, last week in reference to the French plan for a 'voluntary' extension by banks of Greek debt maturities. This plan was scuttled by the credit ratings agencies, which made clear that the forced rollover of existing debt would trigger defaults. 

"If a compulsory contribution gives rise to a short and isolated rating event, then it's not so bad," he said.

Germany then returned to a previous Greek bond-swap proposal the ECB has already rejected.

Last Thursday, Jean-Claude Trichet, the ECB president, made clear that the idea of a Greek default, in full or even partial and short-term, was totally unacceptable.

"No credit event, no selective default, no default. That is the present message of the (ECB) governing council,"
he said.


The Institute of International Finance, which represents about 400 of the world's biggest banks, said last week that the "private financial community is ready to engage in a voluntary, cooperative, transparent and broad-based effort to support Greece given its unique and exceptional circumstances...The involvement of private investors will complement parallel official financing and liquidity support and will be based on a small number of options. These options will include a roll-over or extension of maturities and the re-investment of creditor claims into long-dated instruments with principal collateralization. In addition, it would be important to consider possible debt buyback proposals, which could, along with further fiscal adjustment, begin to reduce the stock of debt and help pave the way toward improved debt sustainability."

Italy Spooks the Markets:

Need To Provide Debt Relief in Europe: Myles Bradshaw, SVP & Portfolio Manager at PIMCO believes Greece and Spain will restructure in an orderly fashion:

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