Brussels 5am: Half a bazooka unleashed
At least I can say I was there, when weary eurozone leaders put pen to paper on what they claimed was their “Bazooka”. Unfortunately, we’ve all been here too many times not to be a little wary of some of the claims made for the plan.
On the upside, there were more numbers than we were expecting. As EU President Herman van Rompuy said on his way out of the building: “the deal was better than most people expected”.
Greek haircut
The high drama was mainly about the side deal with bankers on Greek debt. At midnight the bankers’ lobby the IIF released a statement saying nothing had been agreed. Charles Dallara was then invited into a side meeting with “Merkozy”, where the haircut, discount, write off in the value of Greek debt was eventually agreed “voluntarily” at 50 per cent.
This changes Greece’s debt dynamics. Greek debt will now be at about 120 per cent of GDP in 2020 rather than 153 per cent. A significant change, though hardly Greece out of the woods. Fifty per cent also suggests more ‘hair-loss’ than haircut. But it might not be the end of things.
It’s not just that, the deal will be subject to a kind of bond holders’ vote. It took all sorts of negotiating tricks to get 90 per cent of the bankers to accept a 21 per cent snip. There are many things that could go wrong with actual bankers rather than their negotiators.
An important detail here is that the supposedly “voluntary” nature of this means that all parties including ISDA can pretend that this is not a “credit event” – a key French demand. That means the Credit Default Swaps will not be triggered. Hurrah, you might think. But what on earth is the point of his market when the insurance doesn’t pay out on technicality and legalism surrounding coercion?
Bank recapitalisation
This part of the deal was part announced by the European Banking Authority – 106bn euro of fresh capital to be met by next June. If not from the markets, then from national governments or then the EU’s own bailout facility. Many banks will be handing out a cap to China or the Gulf nations in an attempt to copy Barclays in maintaining their self determination from part nationalisation. Many will fail, I predict, and be part nationalised. Britain appears to have hogged much of this capital by being first in the queue.
Again details will be ironed out by finance ministers probably next week.
’1 trillion euro’ bazooka
This was announced with a flurry last night by President Sarkozy and the EU council and Commission President. The European Financial Stability Facility (EFSF) based in Luxembourg (again see my report from its offices) will be supersized, but not through the European Central Bank. Actually, and tellingly, the 1tn euro figure is not actually mentioned in the Eurogroup summit statement. The “leverage effect…could be four or five times,” said the communique. It depends on the precise methodology. Leaders agreed to explore two different methods. Firstly, the German-style first loss insurance scheme. This is not a free lunch, the greater the leverage the higher the likelihood of actual losses here. How far can this be pushed without crushing France’s AAA?
Second, a pot pourri of Special Purpose vehicles to be jointly invested in by the EFSF (itself a Special Purpose Vehicle) and sovereign wealth funds and, I presume, the IMF. There can be no coincidence that Sarko will call Hu Jintao today, and the head of the EFSF is flying to China tomorrow.
It looks like my recent report about whether France could be saved by Chinese Sovereign Wealth Funds was rather appropriate. Viewers may recall that the head of the China SWF, was rather conditional about his support for Europe, lambasting the work ethic on this continent.
All of which leaves the IMF. Germany tried to push this at the G20 finance minister’s meeting in Paris a fortnight ago. The US and Britain pushed back, basically arguing it was up to Germany and the eurozone to maximise its bailout, before diverting the resources of the IMF.
I saw Christine Lagarde at about 4.30am. She was rather tight lipped. The truth is that a 1tn euro bazooka is not enough to calm markets about Italy and Spain. There is a presumption of funding from the IMF and the Bric nations that still makes next week’s G20 summit a vital moment.
‘Emergency oxygen’ to Italy
One last point: towering above all of this, was the continuation of the ECB’s backdoor bailout to Italian and Spanish bonds. Many Germans think this is illegal, unconstitutional and dangerous. But it is the only thing that has prevented Italian yields spiralling out of control.
The German government may have protested, and Merkel may have changed the language agreed by officials in the communique. But make no mistake Germany gave a nod and a wink on this, and lo and behold, incoming ECB president Mario Draghi confirmed that the bond purchases would continue.
There will be a political backlash against this in Germany. But it means the emergency oxygen supply to Italy continues, even if the surgery has been postponed.
So to conclude, I was mildly impressed. But this could still unravel on the detail. And it needs the goodwill of the rest of the world.
As I heard from outgoing ECB President Jean-Claude Trichet upon leaving his last European Summit: “there is no room for complacency. There is hard hard work ahead,” as he exited into the early morning, and stage left.
There are 8 comments on this post
Just one big question, how much of the 1-Trillion Euros is the British taxpayer expected to pay for?
In addition, what happens when, not if, Italy and then Spain default?
Who will have to pay for all this in the end? I do not see the Chinese footing the bill.
I just had one thought that may solve some of the problems for those countries that are heavily in debt. A mention was made in a previous blog about the land lease act during the WW-II. Why don’t Greece and the other countries with serious debt issues sell their land to the main contributory states in Europe, such as Britain, Germany, France and the Netherlands? That would help them ease their debt burdens and after a period of however long it takes for them to get back on their feet, they could start to buy back the land in order to repay the loans that they received?
@Gary, I think you meant “Lend-lease”.
http://en.wikipedia.org/wiki/Lend-Lease
Whatever the name, the resultant effect would quite possibly stop the collapse of the Euro and a subsequent decline into armed conflict that would undoubtably lead to mass genocide of european countries and possibly north african ones too!
Because the EU and its Eurozone are integral parts of the ‘world’s most successful peace process’, it must be a comfort to us that such a massive series of deals has been put together. It’s saved our bacon too: the consequences of failure are too terrible to contemplate.
Curiously they’ve also selected the route of Bank re-capitalisation & credit guarantees that was initiated in the UK in 2008, copied by the US and now selected for the Eurozone.
Faisal – An impressive analysis. I’d be interested when you have the time in your analysis of what the closer economic integration of the Eurozone is actually likely to mean in practice. I can certainly see why the Germans & to a lesser extent the French want a greater control over those economies like Greece & Italy that are costing their taxpayers potentially significant sums largely because of profligacy & dysfunctional administration & governance. But does it actually involve some kind of convergence of these economies? If so, how might that affect the UK? My suspicion is that the Germans may believe they can do to Southern Europe what they have done in the former DDR. If so, I suspect they are in for either an expensive disappointment or a very long haul.
“What sort of market is it” one where the deals made behind CDSs is so large, possibly larger than the haircut and which should a default be formally exercised create an almightly BANG
[...] As I explained from Brussels last week, the half-bazooka announced by the EU needs the help of China…. Would you commit your nation’s collective savings in these circumstances? [...]
[...] As I explained from Brussels last week, the half-bazooka announced by the EU needs the help of China…. Would you commit your nation’s collective savings in these circumstances? [...]