Posts Tagged ‘Ireland’

George Soros on European Fiscal & Banking Crisis and EU Summit on June 28-29, 2012

Monday, June 25th, 2012

Here I present key take-aways from George Soros’ in depth Bloomberg interview on the current European fiscal and banking crisis, Angela Merkel, the Spanish bailout, and Greece leaving the Eurozone.

The video is also below:

Banking & Fiscal Issues

  • “There is an interrelated problem of the banking system and the excessive risk premium on sovereign debt – they are Siamese twins, tied together and you have to tackle both.”
  • Soros summarizes the forthcoming Eurozone Summit ‘fiasco’ as fatal if the fiscal disagreements are not resolved in 3 days.
  • There is no union without a transfer.
  • Europe needs banking union.
    • Germany will only succumb if Italy and Spain really push it to the edge (Germany can live in the present situation; the others cannot)
    • Europe needs a fiscal means of strengthening growth through Treasury type entity
      • What is needed is a European fiscal authority that will be composed of the finance ministers, but would be in charge of the various rescue mechanisms, the European Stability Mechanism, and would combine issuing treasury bills.
        • Those treasury bills would yield 1% or less and that would be the relief that those countries need in order to finance their debt.
        • Bill would be sold on a competitive basis.
        • Right now there are something like over €700bn euros are kept on deposit at the European Central Bank earning a 0.25% because the interbank market has broken down, so then you have €700bn of capital that would be very happy to earn 0.75% instead of 0.25%, and the treasury bills by being truly riskless and guaranteed by the entire community, would yield in current conditions less than 1%.
        • Governments should start a European unemployment scheme, paid on a European level instead of national level.
        • Soros’ solutions, however, are unlikely to prove tenable in the short-term as he notes “Merkel has emerged as a strong leader”, but “unfortunately, she has been leading Europe in the wrong direction”.
          • “Euro bonds are not possible because Germany would not consider euro bonds until there is a political union, and it should come at the end of the process not at the beginning.
          • This would be a temporary measure, limited both in time and in size, and thereby it could be authorized according to the German constitution as long as the Bundestag approves it, so it could be legal under the German constitution and under the existing treaties.
          • The political will by Germany to put it into effect and that would create a level playing field so that Italy and Spain could actually refinance debt on reasonable terms.

Scenario Discussion

  • LTRO would be less effective now
  • At 6%, 7% of Italy’s GDP goes towards paying interest, which is completely unsustainable
  • Spain may need a full bailout if summit is not successful
    • Financial markets have the ability to push countries into default
    • Because Spain cannot print money itself
    • Even if we manage to avoid, let’s say an ‘accident’ similar to what you had in 2008 with the bankruptcy of Lehman Brothers, the euro system that would emerge would actually perpetuate the divergence between creditors and debtors and would create a Europe which is very different from open society.
    • It would transform it into a hierarchical system where the division between creditors and debtors would become permanent…It would lead to Germany being in permanent domination.
      • It would become like a German empire, and the periphery would become permanently depressed areas.

On Greece

  • Greece will leave the Eurozone
    • It’s very hard to see how Greece can actually meet the conditions that have been set for Greece, and the Germans are determined not to modify those conditions seriously, so medium term risk
    • Greece leaving the euro zone is now a real expectation, and this is what is necessary to strengthen the rest of the euro zone, since Greece can’t print money
    • By printing money, a country can devalue the currency and people can lose money by buying devalued debt, but there is no danger of default.
      • The fact that the individual members don’t now control the right to print money has created this situation.
      • A European country that could actually default. and that is the risk that the financial markets price into the market and that is why say Italian ten-year bonds yield 6% whereas British 10-year bonds yield only 1.25%.
  • That difference is due to the fact that these countries have surrendered their right to print their own money and they can be pushed into default by speculation in the financial markets.

On Angela Merkel

  • Angela Merkel has been leading Europe in the wrong direction. I think she is acting in good faith and that is what makes the whole situation so tragic and that is a big problem that we have in financial markets generally – she is supporting a false idea, a false ideology, a false interpretation which is reinforced by reality.
  • In other words, Merkel’s method works for a while until it stops working, and that is what is called a financial bubble
    • Financial bubbles look very good while they are being formed and everyone believes in it and then it turns out to be unsustainable…
    • The European Union could turn out to have been a bubble of this kind unless we realize there is this problem and we solve it and the solution is there.
    • I think everybody can see it, all we need to do is act on it, and put on a united front, and I think that if the rest of  Europe is united, I think that Germany will actually recognize it and adjust to it.

On Investing

  • Stay in cash
  • German yields are too low
  • If summit turns out well, purchase industrial shares, but avoid everything else (consumer, banks)

Conclusion: We are facing conditions reminiscent to the 1930s because of policy mistakes, forgetting what we should have learned from John Maynard Keynes.

Goldman on the Irish Bailout…European Contagion

Monday, November 22nd, 2010


The Irish bailout being unveiled this week will determine the performance of both the Euro and the global equity markets.  Irish and Portuguese bond spreads had been widening over the past four weeks, since Ireland again became the focus of bearish investors.  Sources claim that the current bailout will be less than 100 billion euros, and will cover the entire country’s budget needs for the next three years.  Ireland’s current budget deficit is about 19 billion euros/year. The problem is that the Irish banking system may need more help than analysts expect.  The system has more than half a trillion in assets.  According to Reuters, the hole in the commercial real estate sector is greater than 25 billion Euros alone.  This does not include potential residential losses.

To make matters worse, a Irish debt resolution could also simply shift bearish speculation to Portugal according to Citigroup and Nomura.  According to Bloomberg, “Portugal’s bonds currently yield 6.88%, compared to 8.26% for Ireland and 11.62 % for Greece.” Growth in Portugal may slow to 0.2% in 2011, which could make the deficit worse and increase worries about the country’s sovereign debt.

Zero Hedge recently provided Goldman’s perspective on the Irish bailout: “For what it’s worth, here is Goldman’s take on the Irish bailout. Since it was Goldman’s endless currency swaps that allowed Europe to lie about their deficits and true debt levels, this should be interesting…

From Francesco Garzarelli

Earlier tonight, Ireland applied for conditional funding assistance and will therefore be the first Eurozone sovereign accessing the EU-IMF support framework instituted in May. The latest European Economics Analyst provides background. There are still several uncertainties surrounding the deal, including the government’s political support (a by-election is due this Thursday), and negotiations on the banks. The yield spread between 5-yr Irish government bonds and their German counterparts has fallen by around 100bp from the 600bp highs reached on 11 November. At this point, we see scope only for a further 50bp tightening. That said, we think that this represents an important step towards a resolution of EMU sovereign woes, and a gradual relaxation of the risk premium that has built up in Italy and Spain, and in Eastern Europe.

Main Points

According to EU sources quoted by the newswires, the size of the package will be in the region of EUR 80-90bn. But this has still to be finalized, including the implications, if any for the Irish banks’ debt.  The amount is broadly in line with our estimates, and can easily be covered. Consider that the EFSM is endowed with EUR 60bn and EFSF has borrowing capacity of EUR 428bn (the portion guaranteed by Germany and France amounts to EUR 220bn). Additional IMF funding is available for up to 50% of the total amount drawn from the EFSM/EFSF with a ceiling of EUR 250bn. Both the UK and Sweden have announced they stand ready to provide bi-lateral loans.
Discussions on the cost of funds are also underway. We expect the EFSF (AAA-rated) to borrow in the region of 2.5% at the 5-yr maturity.  Assuming the terms are in line to those applied to Greece (which should represent a ceiling, given the different credit position of the two countries), the funding cost to Ireland would be along these lines:

  • EFSM/EFSF: Up to 3-yr maturity, Euribor or fixed swap + 300bp; Above 3-yr, Euribor or fixed swap +400bp; 50bp handling fee; (3-mth Euribor is currently 97bp)
  • IMF: Up to 3-yr maturity, SDR rate + 200bp; Above 3-yr, SDR rate + 300bp; Commitment fee, 50bp (est.) + 50bp service charge; (the Euro SDR rate is linked to 3-mth Euripo and is currently around 26bp)
    Using these figures and under a no IMF funding hypothesis, the savings for Ireland relative to the secondary market rates as of last Friday’s close would be in the region of 100bp (notice that the ECB has been intervening in this market, and that this is not indicative of primary access costs).
  • Ireland April 2013 yields 6.30% (bid); corresponding Eurozone funding 2.00%+300bp=5.00%
  • Ireland April 2016 yields 7.40% (mid), corresponding Eurozone funding  2.40%+400bp=6.40%

These, we stress, should be taken as ceilings. A ballpark of 60-30 from the EFSM/EFSF and IMF would result in funding cost closer to 3.5% on a 3-yr horizon.

Broader Market Implications

As discussed in our notes over the past fortnight, and in our latest Fixed Income Monthly, EMU Spreads: Navigating the Issues, we are of the view that the activation of external help should not lead to an escalation of systemic risk as seen in the aftermath of the Greek multi-lateral ‘bail-out’. A pre-agreed institutional framework is now in place, and the ‘stress tests’ have provided information on the distribution of risks across the Euro-zone banking sector.

Other than the evolution of the Irish discussions (size of the package and terms), the near term focus will also remain the Iberian peninsula. A workers strike in Portugal this Wednesday will re-kindle the debate on the much needed structural reforms. Spain unveiled a list of these last Friday, but investors remain uncomfortable about the contingent liabilities stemming from the non-listed cooperative banks.

Our opinion is that Portugal remains a possible candidate for external help, should market pressures remain high. But its systemic relevance is much smaller than that of Ireland’s or Greece’s (the largest foreign creditor is Spain). We remain of the view that Spain is in a different debt sustainability position, and the depth of its domestic market should allow it to withstand market pressures.

We continue to recommend holding 30-yr Greek paper, and would look for opportunities to re-establish long positions in intermediate maturity Italian and Spanish government bonds relative to the ‘core’ countries.

Finally, it is worth recalling that the EFSF will not pre-fund, and its funding instruments will have broadly the same profile as the related loans to Ireland. Its issuance program could lead to a marginal cheapening of bonds issued by supra-national institutions such as the European Investment Bank, the German-based KfW and the French CADES. Note, however, that these institutions have borrowing programs of EUR 60-70bn per annum, while the corresponding annual EFSF issuance would be likely quarter of that amount.”

European Union Proposes $928 Billion Crisis Aversion Plan…It’s About Time!

Sunday, May 9th, 2010

After months of avoiding the debt refinancing troubles of Greece, the European Union came together this weekend in a crisis summit to address the falling Euro and credit malaise in the EU.  Describing short investors as a “wolf pack” plaguing the continent, ministers vowed to counter financial markets from causing the Greek debt crisis from spreading.  The plan offers $805 billion (600 billion) to the continent (440 billion euros from EU, 100 billion from IMF, 60 billion Euro stabilization fund) for crisis measures.  This comes after the IMF approved a 30 billion Euro bailout for Greece today.

If the IMF commits 220 billion Euros, the plan could reach $928 billion!

Why 600 billion Euros at the outset?  European economists predict that if Ireland, Portugal, and Spain eventually come to require bailouts similar to Greece’s, the total cost could be some 500 billion euros.

Let’s avoid another Lehman Brothers…

Greece

According to Reuters, “European Union finance ministers on Sunday promised to counter the “wolfpack” of the financial markets as they sought agreement on a 600 billion euro ($805 billion) plan to keep Greece’s debt crisis from spreading.

The compromise measure under discussion included loan guarantees by euro zone countries worth 440 billion euros, a 60 billion euro stabilization fund and a 100 billion euro top-up of International Monetary Fund loans, EU sources said.

Financial markets have been punishing heavily indebted euro zone members, threatening to plunge them into Greece’s plight. The safety net being assembled was meant to protect other countries with bloated budgets, such as Portugal, Spain and Ireland.

Jitters over euro zone finances have set global markets on edge, and provided a backdrop for a nearly 1,000-point drop in the Dow Jones industrial average on Thursday, whose trigger remains a mystery.

Hopes the EU package would successfully tackle the crisis helped lift the euro, which gained almost 2 percent against the U.S. dollar and 3 percent on the yen in early Asia trade. U.S. stock futures also surged at the start of trade on Sunday.

Moving swiftly to bolster Greece and instill some confidence in shaky markets, the IMF approved a 30 billion euro rescue loan as part of a broader combined EU-IMF bailout for the country totaling 110 billion euros. The IMF said 5.5 billion euros from the three-year loan would be disbursed immediately.

To secure the funds, Greece has committed to budget-cutting measures so sharp that they have already caused violent protests.

“Today’s strong action by the IMF to support Greece will contribute to the broad international effort underway to help bring stability to the euro area and secure recovery in the global economy,” IMF Managing Director Dominique Strauss-Kahn said in a statement.

‘WOLFPACK BEHAVIORS’

But whether the coordinated international actions would settle global markets, which have been roiled in recent days, remained to be seen. Policymakers around the globe have become worried about the knock-on effects should the crisis spread.

“We now see … wolfpack behaviors, and if we will not stop these packs, even if it is self-inflicted weakness, they will tear the weaker countries apart,” Swedish Finance Minister Anders Borg told reporters in Brussels as he arrived for the EU meeting.

Britain’s finance minister Alistair Darling stressed the need to stabilize markets, while ministers from France, Spain, Finland and other euro zone states vowed to defend their shared currency.

U.S. President Barack Obama and German Chancellor Angela Merkel spoke by phone earlier on Sunday about the importance of EU members acting to build confidence in markets.

Economists estimate that if Portugal, Ireland and Spain — three other heavily indebted euro zone countries — eventually come to require bailouts similar to Greece’s, the total cost could be some 500 billion euros.

As details of the financial barriers that the EU was putting up to ward off speculators against Greece and other debt-laden countries became public, G20 finance officials held a teleconference to discuss the crisis.

Last week, fears that a euro zone debt crisis could rock banks and the global economy like the September 2008 collapse of U.S. bank Lehman Brothers swept through markets, pushing global stocks to near a three-month low. It was unclear whether the EU crisis package would stem the tide.

“All in all this is good news, but it is unlikely in itself to calm markets; it’s all too ‘slow-burner’ stuff,” said Erik Nielsen, chief European economist at Goldman Sachs. He said he expected the European Central Bank would soon need to take some type of emergency action.

EU sources said ECB governors met to discuss the crisis, but no details were available.

MARKET TURMOIL

The 16 nations that use the single currency have been criticized for contributing to market uncertainty by responding too slowly to the crisis in Greece.

An IMF board source told Reuters that some board members had shared those concerns and raised worries that the crisis could spread to other euro zone countries.

A euro zone summit last week asked for a European stabilization mechanism.

Some economists said the move was welcome, but that it would cure the symptoms, rather than the disease.

“By putting in place additional safeguards for the euro area financial system, governments finally appear to be rising to the challenge of the sovereign debt crisis,” Morgan Stanley said in a research note to clients.

“But, like the measures taken before — for the benefit of Greece — a stabilization fund is just buying time for distressed borrowers,” it said.”

Eurozone Credit Risk, Defined

Friday, March 5th, 2010

Great description of Eurozone Credit Risk

Eurozone Sovereign Risk (CA Research)