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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
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
"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
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
"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
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
"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: