Italy is facing a EU bailout within 6 months

While the Italian press is rife with big headlines on Berlusconi's clusterfuck and his conviction  to seven years in prison and a lifetime ban on holding public office; the italian economy is deteriorating faster and faster.
The Italian government is giving few signs of intelligent life and treasury investors are starting to lose patience.
All things considered is not surprising that Mediobanca, Italy’s second biggest bank, said its “index of solvency risk” for Italy was already flashing red as the worldwide bond rout continued into a second week, pushing up borrowing costs.

The report warned that Italy will “inevitably end up in an EU bail-out request” over the next six months, unless it can count on low borrowing costs and a broader recovery.

As Ambrose Evans Pritchard noted:

“Time is running out fast,” said Mediobanca’s top analyst, Antonio Guglielmi, in a confidential client note. “The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration.”

Italy’s €2.1 trillion (£1.8 trillion) debt is the world’s third largest after the US and Japan. Any serious stress in its debt markets threatens to reignite the eurozone crisis. This may already have begun after the US Federal Reserve signalled last week that it will begin to drain dollar liquidity from the global system.

The ECB has already backed away from earlier plans to steer credit to small businesses in the Club Med bloc. The Italian banking association said it was bitterly disappointed by the latest break down in eurozone talks on a banking union, warning that it leaves Italy’s lenders at the mercy of a confidence crisis.

Andrew Roberts from RBS said the world has become “a dangerous place” as Fed tightening marks an inflexion point in global liquidity.

Borrowing costs of 5pc could prove crippling for Spain and Italy, both suffering from contraction of nominal GDP.

Mediobanca said the trigger for a blow-up in Italy could be a bail-out crisis for Slovenia or an ugly turn of events in Argentina, which has close links to Italian business. “Argentina in particular worries us, as a new default seems likely.”

Mr Guglielmi said Italy’s industrial output has slumped 25pc from its peak in the past decade, while disposable income has dropped 9pc and house sales have dropped to 1985 levels.

The 1992 crisis was defused by a large devaluation, allowing Italy to restore trade competitiveness at a stroke. Mediobanca said: “The euro straitjacket is clearly not providing a similar currency flexibility today. With the lira devaluation Italy managed to inflate debt away, which it cannot do today. It could take more than 10 years to revert to pre-crisis output levels.

Household Wealth in Europe

The ECB has finally published the all-country report which gives us an indication of where household wealth is located and where in the future bailouts private wealth will be confiscated. The data is from 2009-2010 so especially in the PIIGS countries it could be overinflated after 3 years of austerity still is a powerful indicator of major unbalances in the Eurozone.

Italian median household wealth was indeed over three times larger than Germany’s. But that wasn’t the problem. The problem was Cyprus.

Cypriot households (CY), as measured by both their median and average wealth, were the second richest in the Eurozone. Median household wealth of €266,900 was over five times Germany’s median of €51,400. 

Average household wealth reached a phenomenal €670,900, 3.4 times Germany’s €195,200, and just shy of Luxembourg’s €710,100. Rarefied levels of wealth achievable only by small countries with huge and murky banking centres, or lots of oil. Few countries in the world are in that elite club.

And Germans based on median household wealth, were the poorest in the Eurozone.

It wasn’t that Cypriot households earned a lot of money—they earned the same as German households! They just knew how to hang on to it. At least until their bubble blew up.

By now, wealthier German households, those who own property and stocks, are significantly better off than they were in 2010, and they have since pulled up the average. Median household wealth, however—almost none of them own property or stocks—has certainly been left behind, again.

In the meanwhile in Cyprus real estate values, after a mind-boggling bubble, have been plunging for over two years; and billions in bank deposits have evaporated. 

Spanish household wealth has also been caught in a downward spiral of devastating unemployment and an exploding housing bubble—Spanish households lead the survey with a homeownership rate of 83%. In 2010, homeowners valued their homes at bubble prices. By now, much of the home equity Spaniards were clinging to has dissipated—with dramatic impact on household wealth.

Central bank sources told the FAZ that the Bundesbank and the ECB, to avoid stirring up a storm at an inconvenient time, kept this explosive wealth data secret until after the Cyprus bailout had been decided. But the data also explains the political motivation for the haircuts of account holders in Cypriot banks.

Eu Wide Bank Confiscation Approaching

What happened in Cyprus is unfortunately going to be replicated all over Europe, the reason is simple at the end there is not enough money to bailout Spain and Italy, the system used so far in Portugal, Greece and Ireland is not sustainable, let us even suppose for one moment that Germany is willing to help Italy and Spain, it will not work, there is not enough money to sustain those rapidly decomposing economies and even if Germany would mortgage its future it would only kick the can down the road for few more years.

The crisis is systemic and the jump-ship set of mind is already in place all over Europe.
Italy and Spain are doomed, France is on the brink.
Cyprus has been correctly addressed as a guinea pig for future bail (out-in) but at the end all minds go to Italy with its large savings base and Spain with his colossal bank crisis.
This week Italy's largest bank CEO contemplated such a move and alarm bells should start ringing all over Europe:

From Bloomberg: Unicredit says global rule needed

Cutting large deposits in failing banks, along with other liabilities such as bonds, to offset losses is acceptable as long as small savers’ funds remain protected, Ghizzoni told reporters in Vienna late yesterday. The European Union has to introduce identical rules in all of its member states and ideally those rules would be coordinated globally, he said.

Unicredit knows the Cyprus effect is coming to Italy and Spain and it is asking a global coordination to ring fence the EU from massive capital flows.
What is scaring is that we have moved from a world where property and savings were guaranteed to a world where property is no longer safe and where starting from bankers to politicians a framework is being created to justify or legalize such confiscations as necessary.

From Reuters: EU to push for losses on big savers at failed banks.

The European Parliament will demand that big savers take losses if their banks run into trouble, a senior lawmaker told Reuters, adding momentum to a policy unveiled as part of a Cypriot bailout.

Now the likelihood is rising that tough treatment of big depositors will be written into a new EU law, making losses for large savers a permanent feature of future banking crises.

"You need to be able to do the bail-in as well with deposits," said Gunnar Hokmark, an influential member of the European Parliament, who is leading negotiations with EU countries to finalize a law for winding up problem banks.

"Deposits below 100,000 euros are protected ... deposits above 100,000 euros are not protected and shall be treated as part of the capital that can be bailed in," Hokmark told Reuters, adding that he was confident a majority of his peers in the parliament backed this line.

The law, which will also introduce means to impose losses on bondholders, is due to take effect at the start of 2015. Germany wants provisions for bailing in bondholders and others in the same year, though that may be delayed.

Hokmark urged savers to check their banks' health before taking the risk of depositing money.

"If you put your money in Royal Bank of Scotland ... or Deutsche Bank, depending on how that bank is working you are taking a risk," he said. "You need to be aware that you are taking a risk.

Looking ahead, the implication is that no one should place more than €100,000 in any bank (but then since every rule can be twisted according to the moment's necessity who know if 100.000 will still be the threshold in 1 year time).
So no one will invest in Europe especially in questionable Southern European banks.
Instead, expect capital flights to resume in different, more creative forms.
Pressure is going to rise on offshore banks as well to undermine their attractiveness and willingness to accept deposits from EU citizens, proof enough is this week leaks on offshore accounts.
A major campaign has started to coral money inside the EU in anticipation of the Great Confiscation and Great Depression approaching.
My only tip if you have money inside the EU is time to move out before the trap is in place.

Russian Depositors use loophole to take billions out of Cyprus

Another very disturbing piece of news has emerged today, it appears that large amounts of money in the order of billions have been withdrawn from Laiki and Bank of Cyprus during the one week blockade; should this be confirmed the hole in the two banks could be much larger than thought; which in exchange would guarantee a total wipe out of the two banks' deposits.
If the purpose of all this was to punish dirty Russian capitals in Cyprus well it seems it failed miserably.

From FAZ, Google translation edited:

Despite the closed banks and a lock for payments in the past week, more money flowed out of Cyprus than in previous weeks, Frankfurter experts report.

Prior to the escalation of the crisis in Cyprus accruing on the payment system targetting liabilities of Cypriot central bank to the European Central Bank (ECB) had increased daily at approximately 100 to 200 million euros. In the days after Parliament rejection of the stabilization program, the daily risk has risen to more than double.
Just in the last week so cash assets have been withdrawn from Cyprus in the billions, regardless of the fact the Cypriot central bank had issued a lock.

Cyprus Central Bank Board nonetheless left exemptions from capital controls
such as transfers for humanitarian aid reasons and "special payments", which are not defined in detail.
The unusually high outflows from Cyprus in recent days indicates that the central bank of Nicosia has interpreted this capital control rather liberally.

From Reuters:

While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.

No one knows exactly how much money has left Cyprus' banks, or where it has gone. The two banks at the centre of the crisis - Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus - have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks' largest depositors.

Euro Template to Confiscate European Bank Accounts

As reported in my previous post, signals are there already that Cyprus will not be an isolated case and that similar confiscations will be applied to other nations in the Eurozone.
Of course having the luxury of the Eurogroup leader to agree with you and stating it publicly the day after is something unexpected.
Mr. Dijsselbloem, Leader of the Eurogroup and Dutch Finance Minister stated that Cyprus will become the new template for resolving Eurozone banking problems.
Markets did not appreciate the candour of Mr. Dijsselbloem (apparently it is pronounced Diesel-BOOM), his explosive remark did not take long to bring down the markets and put an end to the insane optimism following the Cyprus bailout deal.


Talking with Reuters, on the resolution model just put in place in Cyprus:

A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors, the head of the region's finance ministers said.

"What we've done last night is what I call pushing back the risks," Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times hours after the Cyprus deal was struck.

"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'. If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders," he said.

After 12 hours of talks with the EU and IMF, Cyprus agreed to shut down its second largest bank, with insured deposits - those below 100,000 euros - moved to the Bank of Cyprus, the country's largest lender. Uninsured deposits, those accounts with more than 100,000 euros, face losses of 4.2 billion euros.

Uninsured depositors in the Bank of Cyprus will have their accounts frozen while the bank is restructured and recapitalised. Any capital that is needed to strengthen the bank will be drawn from accounts above 100,000 euros.

The agreement is what is known as a "bail-in", with shareholders and bondholders in banks forced to bear the costs of the restructuring first, followed by uninsured depositors. Under EU rules, deposits up to 100,000 euros are guaranteed.

Translation:

It is now officially dangerous to have a big bank account in Europe. In other words being an Uninsured Depositor.


After the not so amiable reaction of the financial markets Mr. Dijsselbloem (Diesel BOOM) has clarified his remarks on the Eurogroup's website:

Statement by the Eurogroup President on Cyprus

25/03/2013 - Statement

Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday.

Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.

I'm sure now all the Ininsured Depositors feel very reassured, Thank you sir!

Post-Rescue Cyprus Depression

So the rescue of Cypriot troubled banks has been finally approved after 1 week of absolute lunacy in Cyprus, for those not aware yet a quick recap on the key points approved yesterday night:

Key points of the deal:

Laiki bank will be fully resolved – it will be split into a good bank and bad bank. The good bank will merge with the Bank of Cyprus (which will also take on Laiki’s circa €8bn Emergency Liquidity Assistance – a last-resort funding system outside the usual ECB operations). The bad bank will be wound down over time with all uninsured depositors (over €100,000) taking significant losses (no percentage yet but some could lose all their money above the threshold).

The Bank of Cyprus will be recapitalised using a debt to equity swap and the transfer of assets from Laiki. Uninsured depositors will take large hits in this process – again no percentage but reports suggest up to 40%.

These actions will be taken using the new bank restructuring plan passed in the Cypriot Parliament on Friday. Crucially, no further vote will be needed in the Cypriot parliament since there is no direct deposit levy.

The banks will not receive any of the €10bn bailout money, the entire recapitalisation will be done using the tools outlined above.

Significant capital controls are likely to be in place when banks reopen, creating a risk of Cypriot euros being “localised”.

Further tax increases may be included in the detailed plan to be drawn up between the two sides.

  and as a consequence an entire country will be sliding very fast in a Great Depression:

From SocGen:

Depression for Cyprus: Our Cypriot GDP forecast entails a drop of just over 20% in real GDP by 2017. This forecast had already factored in much what was agreed, but did not account for the additional uncertainty shock generated by the past week’s appalling political mess. Risks are clearly on the downside and Cyprus will in all likelihood require additional financial assistance further down the road. Accounting for less than 0.3% of euro area GDP, any downward revision to Cyprus will be barely visible on the euro area aggregate.

Cyprus’ position as a financial centre is over. There are few other alternatives for growth. One option that remains is tourism, but with a significantly overvalued currency it is not clear to what extent Cyprus can take advantage of this.
The capital controls will severely hamper liquidity in the economy, while it will be very difficult for the small island to trade with the rest of the world (it is far from self-sufficient, importing almost everything). The collapse in GDP could be anywhere between 5% and 10% this year, depending on how long capital controls are imposed and the resulting collapse in tax revenue could make the government’s position worse. There is a strong chance Cyprus could become a zombie economy – reliant on eurozone and ECB funding to function, possibly requiring further bailouts.

Capital controls are severe and could de facto lead to Cyprus being seen as out of the euro. Ultimately, money is no longer fungible between Cyprus and the rest of the Eurozone and, at this point in time, it’s hard to argue that a Euro in Cyprus is worth the same as a Euro elsewhere. The real problem though may not be imposing the controls but removing them – Iceland still has capital controls in place, five years after it installed them (despite having the advantage of a devalued currency).

The €10bn bailout will push Cypriot debt to GDP to 140% - if Cypriot GDP falls by just 5% this year, that rises to 148%.

In the meanwhile the bailout deal is already rising anti-Euro sentiments all over the country,  one of the most influential voices speaking against the Euro and the EU is the Orthodox Church Leader Archbishop Chrysostomos II who commented on TV that "with the brains in Brussels... the Euro can't last," certainly the fact that the Orthodox Church of Cyprus lost over 100 million euro holdings in the Bank of Cyprus must have contributed to his anger toward the EU and the Cyprus politicians: "those that brought the place into this mess, should sit on the stool. " (blaming the outgoing government, Ministers of Finance, the Central Bank, and the Executive Directors of Banks).
May his prayer be accepted! When the full scale of social devastation inflicted on Cyprus will be apparent a chopping block would be more suitable than a stool!

After Cyprus levy; are Italy and Spain next?

Cyprus crisis is reaching his climax this weekend but regardless of how it will develop served well in distracting the media and the EU population from the bigger fishes frying in the EU pan, Italy and Spain.
So despite dimmed lights on the Italian political disaster and the Spanish banking Armageddon it is worth highlighting the following news:

Via El Pais (Via Google Translate),
The Minister of Finance and Public Administration, Cristobal Montoro, has advanced on Tuesday that the government will impose a type "moderate" to bank deposits to compensate communities that saw their tax autonomy canceled after the Executive created a state tax 0% rate.  This tax on bank deposits, which has nothing to do with Cyprus, does not affect savers but requires credit institutions to pay for that capture deposits. 

"The autonomous communities receive timely and therefore financially compensation shall implement a moderate rate in the state tax on bank deposits," said the minister, adding that this kind "will not be much higher than 0%" . 

The Minister of Finance has clarified that such "moderate" will have no tax collection effort, "but that these regions serve to offset the revenue loss to see."  So, he assured that the amount will correspond to the amount "exact has been undermined by the cancellation of regional taxes". 

Subsequently the Spanish Minister of Finance & Public Administration announced a tax or bank levy (probably 0.2%) to be imposed on bank deposits, without details on which deposits will be affected or timing.

and on Italy:

In an article on Handelsblatt the chief economist of Commerzbank says: Italy should bring a unique wealth tax.

It is a myth to talk of crisis-strapped states. Even the German Institute for Economic Research (DIW) and the chief economist of Commerzbank, Joerg Kraemer says the numbers suggest a different view.

Kramer relies on surveys of the European Central Bank. Net financial assets of the Italians are 173 percent of gross domestic product (GDP). This is significantly more than the net financial assets of the Germans, which corresponds to 124 percent of GDP, said Kramer for Handelsblatt Online.

"So it would make sense, in Italy for a one-time property tax levy," suggested the Bank economist. "A tax rate of 15 percent on financial assets would probably be enough to push the Italian government debt to below the critical level of 100 percent of gross domestic product."

Italian Elections increase doubts over long term reforms

Italians head to the polls on February 24-25 and never before the political scenario has been so chaotic and appalling.

We are witnessing new political movements like the 5 Stars movement climbing up to third place in a matter of months and never before we have seen Germany actively entering the Italian political debate to try and keep Berlusconi at bay.

 

All this is adding up to financial uncertainty on the future of Italy and at large of the Eurozone.

Pier Luigi Bersani, who heads the centre-left PD was considered the assumed new prime minister just a few short weeks ago, at least in the Chamber (the lower house of parliament).

It's all up in the air now as Silvio Berlusconi's PDL has staged a massive rally in the polls.

Berlusconi has been on a rampage lately blaming Germany and Chancellor Angela Merkel for the unemployment problems in Italy, promising to refund the hated IMU (property tax) and more exotically declaring that tax evasion is justified.

Beppe Grillo's Movimento 5 Stelle (Five Star Movement) which has been largely ignored in the Italian press has been wildly popular at rallies. Grillo has a chance to come in second place.

Mario Monti, who heads the centrist Con Monti per l’Italia (With Monti for Italy) coalition, is running a very distant 4th.

Poll Blackouts

Officially, pollsters cannot post poll results in a blackout period before the election. That blackout period started February 9. Below Reuters' 8th of February polls.



Those results are misleading because they do not include undecided voters, and the undecided vote is a very large 20-25 percent!

With such little difference between Berlusconi and Bersani, and with huge rallies for Beppe Grillo and Berlusconi, any outcome is possible.

Germany Warns Against Berlusconi

Of potentially more importance, Berlin Warns Italians against Berlusconi

Here are a few examples from the story.

German Finance Minister Wolfgang Schäuble reportedly said (but later denied) "Silvio Berlusconi may be an effective campaign strategist, but my advice to the Italians is not to make the same mistake again by re-electing him."

Polenz, a senior member of Chancellor Angela Merkel's Christian Democrats, said: "Italy needs political leaders who stand for the future. Berlusconi is certainly not one of them."

One Italian bank even went so far this week as to issue a report arguing that a Berlusconi election would almost certainly force the country to apply for emergency bailout aid from the EU. Mediobanca, Italy's largest investment bank, wrote that "a last-minute Berlusconi victory would scare the market sufficiently to put pressure on the spread."

"Silvio the Savior"

Spiegel reports Berlusconi's Faithful: 'Only Silvio Can Save Italy'

Adoration of Berlusconi in Italy remains widespread. In the parallel universe occupied by his followers, there is no room for doubt about Berlusconi and lines are clearly drawn. Silvio is good and the others are bad.

These fans gather at his speeches, like the Saturday rally in Palermo, where thousands crowded into the venerable Teatro Politeama. There were women in long fur coats and fine gentlemen in three-piece suits. Dock workers like Ferrante squeezed with them through the entrance, everyone pushing and shoving each other like adolescents at a rock concert. The hundreds who didn't make it in must stand outside.

Fully a quarter of Italians are prepared to vote for Berlusconi again. It is an astounding degree of homage paid to man who faces allegations of abuse of power and bribery; who faces the scandal surrounding the underage escort Karima el-Marough, alias Ruby Rubacuori; who has been blasted for blatantly misogynistic comments; and who broke many promises as prime minister. Instead, the opposition, left-leaning judges and even the Germans are blamed for all that is not right with Italy.

At best, Bersani will win the Chamber and lose the Senate. That would likely result in a hung parliament.

Anti-German sentiment in Italy is high already. The entrance of German politicians into the battle may fuel that sentiment in a major way.

It is conceivable "Silvio the Savior" pulls off a stunning upset win in both the Chamber and Senate, but a Senate victory would still require a coalition (no party will come close to a majority).

It may be difficult if not impossible for any party to form a Senate coalition if Monti's party does poorly as expected.

Regardless Berlusconi there seems to be no good outcome for Italy.

Italy is the most corrupt developed country

Here the new report on world corruption, the Transparency International's Corruption Perceptions Index 2012, outlines how corruption is a major threat.
Corruption destroys lives and communities, and undermines countries and institutions.
The Corruption Perceptions Index scores countries on a scale from 0 (highly corrupt) to 100 (very clean).
While no country has a perfect score, two-thirds of countries score below 50, indicating a serious corruption problem in the world.
Italy ranked 72nd worst than South Africa,Bosnia Ghana and Macedonia, the only developed country aside from Greece to be ranked so bad.
 In Transparency's words: "Corruption amounts to a dirty tax, and the poor and most vulnerable are its primary victims."



Corruption translates into human suffering, with poor families being extorted for bribes to see doctors or to get access to clean drinking water. It leads to failure in the delivery of basic services like education or healthcare. It derails the building of essential infrastructure, as corrupt leaders skim funds.

Spain considering eviction moratorium

El Pais (via Google translate) reports Government will give a two-year moratorium to end evictions.

Social pressure, political and, above all, the shock of facts so overwhelming as two suicides in recent weeks, the second on Friday, has led the government and the PSOE to move faster. Both contacts for accelerated progress towards an agreement to halt evictions more extreme than in any case, will not materialize until next week. That agreement, however, will not be retroactive and would apply to mortgages signed, but not those that are in foreclosure. It would not serve to cases like Egaña Amaya, the woman who committed suicide in Barakaldo.

The Prime Minister, Mariano Rajoy, solemnized the idea during an election rally in Lleida: "These days we see terrible things, inhuman situations, a person committed suicide when she would be evicted. It is a difficult subject, you have to take it with all seriousness and humanity. The government is talking to many people, we talked this morning with the PSOE. I hope we can talk on Monday of the temporary cessation of evictions affecting the most vulnerable families. And the threshold of exclusion, to better implement the code of good practice, so you can renegotiate the debt and remain in housing. It is a difficult subject, I hope we can give good news to the whole of the Spanish."

The problem with an eviction moratorium is obvious. People will have no incentive to pay their mortgages for the next two years. This will bring further stress the Spanish banking sector and in turn to the Spanish government.

Cyprus crisis getting ugly!

Cyprus' banks are in worse condition than imagined, and the bailout amounts has jumped again.
How can a tiny country get in so much trouble in such a short time?
The real-estate and construction bubble, fed by corruption and abetted by banks, burst two years ago. Home sales and prices have collapsed. Some 130,000 homeowners (in a country of 840,000 souls) are tangled up in a nationwide title-deed scandal.
It is estimated that 50,000 homes would be dumped on the market—though only 4,876 homes were sold during the first nine months of the year! Losses have gutted banks. Unemployment has reached record levels. And the construction industry, once a major employer, is being annihilated.
The index of building contracts, after a two-year downhill slide, has reached the lowest point in its history, and “activity is expected to continue dropping,” lamented the Federation of Associations of Building Contractors (OSEOK).
Contractors are going out of business. Over the last four months, the crisis has deepened. And now there are only enough pending construction projects for seven months, and after that, there are no projects.
Locked out from the financial markets since early summer 2011, Cyprus was bailed out by Russia last November with a €2.5 billion loan. In June, as the banks began to topple under a mountain of Greek debt and rotting mortgages, Cyprus asked for a bailout.
The Troika took a look and figured €6 billion for the banks and €4 billion for the government. €10 billion in total.
But in August, Central Bank Governor Panicos Demetriades told parliament that the banks alone would need €12 billion!
Then Russian Finance Minister Anton Siluanov told last week: Cyprus would indeed seek a €15 billion bailout from the Troika, and an additional €5 billion from Russia, for a total of €20 billion.
A vertigo-inducing 107% of GDP.
But he cautioned that Russia and the Troika would need to coordinate the loans—thus throwing a monkey wrench into Christofias’ efforts to use the negotiations with Russia as a lever against the Troika to get a better deal and more lenient conditions.
Conditions that the Troika had already spelled out in a memorandum.
In short,  a privatization of state-owned enterprises, a 15% cut in the public payroll by the end of 2013, a 10% cut in benefits, elimination of the automatic Cost of Living Adjustments (CoLA) that index salaries to inflation, and an increase of contributions to pension plans.
The CoLA elimination would also hit private sector employees, as would the elimination of the 13th month salary.
“You cannot tell someone they won’t receive a 13th salary. It automatically means you paralyze the market” declared communist President Christofias during a TV interview.
He would, however, try to cooperate with the Troika. “We aren’t just saying ‘no’ to them,” he added. “We are giving them counterproposals.” They focus apparently on a VAT increase, a luxury car tax, taxes on cigarettes and alcohol, disincentives for public sector workers to take early retirement, and a 5% wage cut for those earning over €1,500.

Bunga is Back!

Our Bunga buddy is back, warming up for the soon coming Italian circus of dancers, pimps, crooks and wise guys (i.e. Italian elections in May); here he is again blessing us with his wisdom:

• *BERLUSCONI SAYS EURO A `SCAM' WITHOUT CENTRAL BANK BACKING IT
• *BERLUSCONI SAYS GERMANY LEAVING EURO WOULDN'T BE A TRAGEDY
• *BERLUSCONI: BAILOUT CONDITIONS WOULD LEAD ECONOMY TO COLLAPSE
• *BERLUSCONI SAYS ITALY RISKS HEADING TOWARD 'ENDLESS CRISIS'

It appears he has a new plan (Allow Germany to leave) and start the printing press to inflate the country out in thin air while sedating the population with horny shows and lame soap operas.
Vote Bunga!

Spain bank-run reaching disastrous levels

The central bank of Spain just released the net capital outflow numbers and they are disastrous.

During the month of June alone $70.90 billion left the Spanish banks and in July it was worse at $92.88 billion which is 4.7% of total bank deposits in Spain.

For the first seven months of the year the outflow adds up to $368.80 billion or 17.7% of the total bank deposits of Spain and the trajectory of the outflow is increasing dramatically.

The Spanish ten year now yields a 6.81% and their thirty year is yielding 7.34%.

Spain has now set up a fund for its regions to tap of $22.6 billion and this may not even be close to what is asked for or required with the regions needing some $50-75 billion in assistance. Many of the regions in Spain are not paying suppliers or their other local debts and the situation is clearly out of control.

On top of this Bankia, late Friday, reported out bad loans of $8.24 billion and an operating loss of $5.58 billion causing the government to promise to inject $5-6 billion into the bank immediately to prevent its collapse.

Furthermore, Spain has the highest unemployment rate in Europe, even higher than in Greece, with a 25.1% jobless rate. For those under twenty-five the job situation is extreme with a 53% unemployment rate.

Between December of 2011 and the end of March 2012 the Spanish banks bought $109 billion of the Spanish sovereign debt. Much of this was facilitated by the ECB who lowered the collateral rules and handed the money to the Spanish banks in such a size that very bad things will result if Spain hits the wall and defaults.

Then since March the trend has reversed and the Spanish banks have sold $21.3 billion of Spanish sovereign debt with $11.7 billion in July alone as capital flees from the Spanish banks.

The Great European Divide

If the recent quarrel between Italy and Germany is a clear signal that  political divisions are growing in the dysfunctional Euro family, the graphs below from Goldman Sachs clearly illustrate how the economic divide is already there and widening by the day.
I have highlighted some parts of the report which sound an alarm bell for the month to come.

Goldman Sachs: Focus: Europe’s ‘red line’: Segmentation of the Euro interbank market is significant
Bottom line: A ‘red line’ has descended across Europe, running along the Pyrenees and the Alps. Banks south of this line have difficulty accessing Euro interbank markets, whereas banks north of that line remain better integrated and retain market access. As Mr. Draghi emphasised at last week’s ECB press conference, this segmentation is interfering with monetary policy transmission and thus affecting macroeconomic outcomes. Monitoring the intensity and geographical location of the ‘red line’ will remain crucial going forward, not least to assess the effectiveness of the policy measures announced by the ECB last week.

“… financial fragmentation hinders the effective working of monetary policy”. Mr. Draghi’s comments at last week’s ECB press conference have placed the segmentation of Euro financial markets at centre stage. In this daily, we explore the nature of that fragmentation, focusing on the Euro interbank markets.

From hot to cold: The periphery is being frozen out. Charts 1 and 2 show the row country’s bank claims on the column country’s banks, in 2008 Q1 and 2012 Q1 respectively. The numbers capture these claims expressed as a percentage of the column country’s (quarterly) GDP in 2008 Q1. Of course, representing the data in this form is not a neutral choice. But the basic insights revealed are not sensitive to our choice of scaling variable.
The charts are presented in the form of heat maps: ‘hot’ colours (red) reflect a high degree of financial interaction, whereas ‘cold’ colours (blue) point to financial isolation.

In 2008 Q1 before the failure of Lehman, integration of Euro interbank markets was high: i.e. Chart 1 is predominantly red. With the notable exception of Greece, banks in all Euro area countries have significant claims on all other Euro area countries. Ireland, Spain and Italy are all well-embedded into the Euro interbank markets.



In 2012 Q1 as the European sovereign crisis has intensified, integration has broken down: i.e. Chart 2 is predominantly blue. In particular, the three programme countries (Greece, Portugal and Ireland) have become isolated. Spain (and to a lesser extent Italy) are also drifting towards greater isolation, whereas among Germany, France and the Netherlands integration remains significant, albeit still diminishing.



A ‘red line’ has emerged in Euro interbank markets – and is shifting northwards. To draw on the credit rationing literature in economics, banks in the periphery have been “red-lined”, i.e. simply on account of their residency, they are being excluded from the Euro interbank markets.
This red line has long isolated the program countries. And it is now moving northwards: Italy and (especially) Spain are vulnerable. A ‘red line’ running along the Pyrenees and Alps cleaves the big-4 countries at the heart of the Euro area in two. Given the deep recessions being suffered in Spain and Italy, the implications for borrowers and the real economy – as well as for the ability of monetary policy to ease tight financing conditions – are self-evident.

Source: Goldman Sachs

September will be Crunch Time for Europe

"September will undoubtedly be the crunch time," one senior euro zone policymaker said. "In nearly 20 years of dealing with EU issues, I've never known a state of affairs like we are in now," one euro zone diplomat said this week. "It really is a very, very difficult fix and it's far from certain that we'll be able to find the right way out of it."

As eurocrats take their mandatory vacations for a job well done, Europe will enter hibernation mode, until September which according to Reuters "is shaping up as a "make-or-break" month as policymakers run desperately short of options to save the common currency."

Reuters explains why September will also be known as the popcorn month:

In that month a German court makes a ruling that could neuter the new euro zone rescue fund, the anti-bailout Dutch vote in elections just as Greece tries to renegotiate its financial lifeline, and decisions need to be made on whether taxpayers suffer huge losses on state loans to Athens.

On top of that, the euro zone has to figure out how to help its next wobbling dominoes, Spain and Italy - or what do if one or both were to topple.

Since the crisis erupted in January 2010, the euro zone has had to rescue relative minnows in Greece, Ireland and Portugal as they lost the ability to fund their budget deficits and debt obligations by borrowing commercially at affordable rates.

Now two much larger economies are in the firing line and policymakers must consider ever more radical solutions.

In Reuters' own words, the life raft is about to go pop:

The euro zone does not seem to have enough cash in the current setup to deal with a scenario of Spain and Italy needing a rescue, and a sense of doom is growing among some policymakers. Fighting the crisis, said the euro zone diplomat, is like trying to keep a life raft above water.

"For two years we've been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak," the diplomat said. "But now the leak has got so big that we can't pump air into the raft quickly enough to keep it afloat."

Compounding the problems, Greece is far behind with reforms to improve its finances and economy so it may need more time, more money and a debt reduction from euro zone governments.

But Greece is, once again, just the beginning.

Sept. 12 is a crucial date in the European diary. On that day the German Constitutional Court is scheduled to rule on whether a treaty establishing the euro zone's permanent bailout fund, the 500 billion euro European Stability Mechanism (ESM), is compatible with the German constitution.

A positive ruling is vital, because Germany is the biggest funder of the ESM, and the euro zone would be powerless to protect Spain or Italy without the ESM.

On the same day, parliamentary elections are held in the Netherlands where popular opposition to spending any more money on bailing out spendthrift euro zone governments is strong. The Dutch vote may complicate talks on a revised second bailout for Greece, which also has to be agreed in September.

All this, and much more, is finally coming to a head, as the time for can kicking is running out.
A full timeline of the incoming events, courtesy of Deutsche Bank is listed below:

August:

• 13 August: Italy auction. Bills
• 14 August: Italy auction. Bonds
• 14 August: Euro area Q2 GDP flash estimate, from Eurostat.
• Mid-August: French Constitutional Court/Fiscal Compact. In Mid-August the French Constitutional Court is due to rule whether  the Fiscal Compact, which euro area countries are due to endorse by the start of 2013, needs to be ratified into the French Constitution. If so, a joint vote by the French Assembly would be required. Signals are that this would happen in September if required. See accompanying article on France in this issue of Focus Europe.
• 16 August: Spain auction. Bonds
• 20 August: Greek bond redemption. Greece is due to repay EUR3.1bn of GGBs. Following the PSI, these would be GGBs owned  by the ECB and EIB. While agreement on how to reconfigure the second loan programme is unlikely before September, it is unlikely the EU will hold-out from paying funds to Greece to repay the ECB/EIB. In a consolidated sense, the official sector’s exposure to Greece remains the same, but the creditor changes (to the EFSF). Alternatively, Greece could issue T-bills and the  Greek banks could absorb them with the assistance of ELA from the Greek central bank.
• 21 August: Spain auction. Bills
• 28 August: Spain auction. Bills
• 28 August: Italy auction. Bonds
• 29 August: Italy auction. Bills
• 30 August: Italy auction. Bonds
• End-August: DBRS rating on Spain/Ireland. By the end of August, the DBRS ratings agency is due to have concluded its review  of Spanish and Irish sovereign ratings.

September:

• September: Moody’s due to conclude review of Spanish sovereign rating. Logically Moody's should wait until there is clarity on  direct recap before making a decision on Spain’s rating. Since governments have not made progress fleshing out a direct recapitalisation facility — indeed, have created some ambiguity as to whether it will be non-recourse — there is a distinct risk that Moody's, in another move to be “ahead of the curve”, decides to downgrade Spain within the next 3 months. Moody’s currently rates Spain Baa3, the lowest investment grade rating.
• September: Detailed bottom-up Spanish bank stress tests due for publication.
• 6 September: Spain auction. Bonds
• 6 September: ECB Governing Council meeting. If we are right about the outcome of the 2 August ECB meeting (dominated by “quantity” measures), we suspect that revisions to staff forecasts for growth and inflation are likely to be a basis for a 25bp rate  cut.
• 11 September: Greece auction. Bills
• 12 September: German Constitutional Court ESM ruling. The German Constitutional Court is to rule on the complaints lodged  against the ESM and fiscal compact. The chances of the ESM being vetoed are low. However, the Court might again strengthen the German Parliament’s prerogatives as regards future European integration (see Focus Germany, 20 July). Germany is the last approval needed for the ESM to come into effect. Then the first instalment of the capital has to be paid by the ESM members  within 15 days of the ESM treaty entering into force. There are three other countries where Constitutional Court queries are outstanding — France, Austria and Ireland. France’s Constitutional Court will be deciding by mid-August. Neither Austria (which  may take another 3-6 months) nor Ireland are large enough to hold back the ESM — the ESM will come into force when countries representing 90% of the subscribed capital have approved it. Both Germany and France have an effective veto power in that case.
• 12 September: Dutch Election. In April, the VVD/CDA minority government failed when Geert Wilders' PVV party withdrew its  support amid negotiations for the 2013 austerity budget. A crisis was averted when three smaller parties came forward to give support to a budget, but an early election was unavoidable. Domestic austerity and European crisis issues will likely play  important roles in the election. Compared to the configuration of parliament at the October 2010 election, the latest opinion polls (Maurice de Hond) show PM Rutte's VVD liberal party vying with the Socialist Party for the dominant party position. Both would  gain 31 seats in the 150 seat parliament on the latest polls. This is an unchanged position for VVD, but a doubling of SP seats. SP are gaining at the expense of all other parties except VVD and neo-liberal D66. This may reflect a backlash against the  austerity for 2013 which has broad party political support. SP have also taken a stance against euro rescue initiatives, voting against the ESM alongside the PVV and extracting a pledge from Dutch FinMin De Jager that parliament will vote on any future  direct bank recapitalisation disbursements. Given the typical distribution of the vote among several parties, the questions are  what coalition emerges from this election, how long it takes to form a government and what policies will it support? Markets in particular will be watching the ramifications for domestic fiscal policy (the 2013 Budget is a week after the election) and euro  rescue initiatives.
• 12 September: Italy auction. Bills
• 13-14 September: G20 Finance Ministers and Central Bankers meeting. In Mexico.
• 13 September: Italy auction. Bonds
• 14 September: ECOFIN meeting. This is very likely the finance ministers meeting when adjustments to Greece's second loan programme will be considered. The remaining EUR23bn recapitalisation of the Greek banks is due to complete by the end of September, assuming a positive review of the loan programme. This is also when finance ministers should have their first discussion on the proposals for a common bank supervisory regime under the ECB. Any delays, with knock-on delays for a direct bank recapitalisation mechanism, will disappoint the market. Options for a reconsideration of Ireland’s legacy bank bailout policies may also be discussed (decision not due until October ECOFIN meeting).
• 15 September: Eurogroup meeting. Coinciding
• 18 September: Greece auction. Bills
• 18 September: Spain auction. Bills
• 20 September: Spain auction. Bonds
• 25 September: Spain auction. Bills
• 25 September: Italy auction. Bonds
• 26 September: Italy auction. Bills
• 27 September: Italy auction. Bonds

Greece banking system is officially bankrupt

The latest opinion polls, as per Credit Suisse, show Syriza soar from 52 seats to a hugely dominant 128 seats.









Greece After Elections - current opinion polls...







Just few hours ago this was the biggest danger to the Eurozone a left party willing to reject the current status quo and repudiate previous contracts.
But things have been moving fast and ECB President Draghi just admitted that while the ECB Governing Council would like Greece to stay, they will not take any further extraordinary measures to save it.

Bloomberg: Draghi Signals ECB Won’t Keep Greece in Euro Area at Any Cost

European Central Bank President Mario Draghi indicated that while his “strong preference” is that Greece stays in the euro area, the bank won’t compromise on its principles to prevent an exit.

“The ECB will continue to comply with the mandate of keeping price stability over the medium term in line with treaty provisions and preserving the integrity of our balance sheet,” Draghi said in a speech in Frankfurt today. Since the euro’s founding treaty does not envisage a member state leaving the monetary union, “this is not a matter for the Governing Council to decide,” Draghi said.

The comments are the closest Draghi has come to conceding Greece could leave the euro region. Greece faces a fresh election on June 17 that may boost parties opposed to the conditions of its international bailouts, raising the specter of its exit.

“The Governing Council’s strong preference is that Greece will continue to stay in the euro area,” Draghi said.

What does it mean it became just to clear when Reuters came out with the following piece of news:

From Reuters:

The European Central Bank has stopped monetary policy operations with some Greek banks as they have not been successfully recapitalized, euro zone central bank sources said on Wednesday.

The ECB declined to comment.

The ECB only conducts its refinancing operations with solvent banks. With no access to ECB funds, the banks concerned must go to the Bank of Greece for emergency liquidity assistance (ELA).

It was unclear exactly how many banks were affected.

One person familiar with the matter said four Greek banks' capital was so depleted they were operating with negative equity capital. According to its own rules, the ECB cannot provide liquidity to banks in such a situation.

What it means is that we are practically witnessing an attempt to control the default of Greece and the bankruptcy of its banking system which in a matter of hours or days unless by hook or crook something is implemented will happen.

Greece cannot bailout its banks, we are facing a total collapse of a banking system unless a sudden injection of money will materialize from somewhere.

Eventful days worth being monitored closely not only for Greece but for the entire world economy.

Spain Debt Explosion and Italy's Democracy Implosion

Spain Debt Explosion

Spanish authorities had to come to reality with the regional debt time bomb. It was known that spanish debt was far bigger than their current official data suggested.
Today's news, via the WSJ, confirm that the Spanish government may take over some regions' finances, in an attempt to shore up investor confidence (just as Ireland did with its banks and we know how well that worked out?)
This leaves Spain's Debt/GDP nearer 135% than its 'official' 68.5%.
The WSJ notes comments from a top government official that "there will soon be new tools to control regional spending" and that they may take over at least one of the country's cash-strapped regions this year.  The simple truth as acknowledged by Rajoy is that Spain has lost the trust of financial markets.
It seems that CDS markets have been ahead of the reality in Spain's true credit situation as it is perhaps a little easier to manipulate a few regional bonds than an entire sovereign CDS market.
The velocity of the most recent move suggests some short-term action by the politicians/ECB soon enough though their failed attempt today suggests the wholesale exit of real money is a hole too big for even the ECB to comfortably fill.

Italy's Democracy Implosion

In the meanwhile Monti's government in Italy is starting a crusade against political parties, it has been now some weeks that media have been bombarding the Italian political parties on the corruption issue.
Admirable effort indeed, pity that all Italian newspapers have discovered the rotten state of Italian affairs only 2 weeks ago when an Independentist party Lega Nord which has been shouting for decades its slogan of "Roman Crooks" has been discovered to run multiple fraud and embezzlement operations effectively stealing taxpayer money to cover audacious financial gambles in exotic places as far as Tanzania.

Before Monti government this story would have not even risen eyebrows today is enough to start calls for a major purge of political parties via erasing the public financing that keep them alive.

Let us be clear all Italian parties are corrupted and rotten and what the Lega did has been done by everyone else as a normal practice.

What Italy is facing though is a big illusion, thinking that all this is happening to clean up the country of corrupt and useless politicians is the perfect ruse for the angered and frustrated Italian citizen crying for the blood of those guilty to bring the country to bankruptcy.

Yes, Italian politicians are guilty of betraying the country for their petty interests, as guilty as the Italian citizens who supported them blindly in exchange for favours and the promise of an undeserved job or a blind eye to their stealing and defrauding.

What though is not highlighted by anyone are the real motives behind all this.

This is an attempt to get rid of political parties completely or weaken them to such a state that they will abandon even the slightest opposition to whatever Monti want to do with the country.
This has been happening already since Berlusconi's majority is still in the Parliament approving laws being passed by Monti.
Nonetheless austerity laws are eroding support to parties fast, and some parties have started to raise their voice against Monti fearing a total loss of public support. The most loud protests, surprise, surprise were coming from the Lega and we know how it ended.
Next step for Monti will be to cut the parties' life support, which is public financing, money given to parties by the state and that allow them to operate, once removed the public financing, political parties will be dead and an already ailing democracy will be buried in favour of a soft dictatorship. 
Deserved end for the politicians, not so much for the younger generations that will pay the price.

Italy Exposure to Derivatives

It was nothing more than a footnote in the Morgan Stanley financials; a $3.4 billion pay-out by Italy to settle a derivatives contract made in 1994. Say goodbye to 50% of the tax hikes imposed by the Monti government because that is what was wiped out by this payment. It is also interesting to note that that Mario Draghi, currently President of the European Central Bank, was the Director-General of the Italian Treasury when this derivative was formulated. Then comes the bomb, only mentioned in a brief article on Bloomberg, and not noted anywhere in the Press. Marco Rossi Doria, an undersecretary in Monti’s administration, tasked with responding to a parliamentary interrogation on derivatives, admitted that the Italian Treasury had $211 billion in "notional" exposure to derivatives, which is around eleven percent (11%) of Italy’s total GDP. This new exposure now brings Italy’s actual debt to GDP ratio to a whopping 144.3%.
Expect further corrections of Monti's government in the following months, the ransack of Italy to cover derivatives contracts is likely to continue for years.

Eurozone Unsustainable Debt could bring Germany to leave the Euro

Eurozone crisis can has been temporarily frozen by the ECB but is on track to come back home with a revenge. There are many signs that the ECB intervention could have actually made things worst in exchange for some months of relative calm on the markets. Let us not forget that as far back as September 2011, PIMCO’s Co-CIO, Mohamed El-Erian (one of the most connected of the financial elite) noted that French Banks were running REAL leverage levels of almost 100-to-1.

El-Erian said French banks are a particular cause for concern, noting that "credit markets now put their risk of default at levels indicative of a BB rating, which is fundamentally inconsistent with sound banking operations." He adds that bank equity now trades at a 50% discount to tangible book value on average, while the ratio of market capital to total assets has fallen to 1%-1.5%, compared with 6%-8% for "healthier banks."

http://www.marketwatch.com/story/pimco-french-banks-could-tip-europe-to-recession-2011-09-22

The ECB managed to swap out its Greece debt into new debt. But it won’t be able to do this with the remainder of PIIGS’ debts. Instead, the ECB plans on shifting any of the losses from these debts onto the individual EU national banks:

ECB Balance Sheet Jumps Above €3 Trillion

The mix of bond purchases and loans has exposed the ECB and the 17 national central banks that make up the euro to losses in the event of defaults or bank failures. Last month, the ECB was forced to swap its €50 billion Greek bond portfolio for new bonds to shield the banks from potential losses in the event of any forced write-­downs.

If banks that have borrowed from the ECB can't pay the money back and the collateral they have posted falls in value or becomes worthless, the ECB would be on the hook for losses. Most of these losses would be spread across national central banks according to their size, meaning Germany's Bundesbank would face the largest exposure.

http://online.wsj.com/article/SB10001424052970203458604577265373668388122.html?mod=googlenews_wsj

Germany is certainly aware of this since it has already put up a firewall that would allow it to walk out of the Euro at any point. Obviously it doesn’t want to, but when the ECB will try to shift the losses from its PIIGS exposure onto Germany’s shoulders, Germany will have no choice.  The reality is that the ECB is far too small to cover the astonishing amount of debt a look at the chart below gives an idea of what kind of figures we are talking about.



A solution would be for the ECB to start printing money but it is blocked form doing so from Germany who made clear will walk away from the Euro rather than trigger an hyperinflation.

Greek Restructuring Deal Explained

An interesting and detailed report on what really happened in Greece and how this deal will affect Europe in the following years:

From OpenEurope (pdf version)

A small step forward, but the Greek restructuring deal could prove to be a pyrrhic victory
Open Europe has responded to the agreement between the Greek government and its private creditors which laid out how much and under what format the country’s massive €360bn debt burden should be written down. The deal involved private sector bondholders agreeing to a 53.5% nominal write-down, while so-called Collective Action Clauses (CACs) will be used meaning that Greece is now technically in a state of default – precisely what EU leaders have spent two years trying to avoid. While marking a small step forward, Open Europe notes that the deal is unlikely to save Greece, and that the country is still on course for a full default in three years’ time, if not sooner.
Open Europe’s Head of Economic Research Raoul Ruparel said,
“With the use of CACs Greece has entered a coercive restructuring or default – something which Greece and the eurozone have spent two years trying to avoid. While the financial markets can handle the triggering of CDS that this will entail, at some point serious questions need to be asked over the amount of time and money which policymakers have wasted on what has ultimately amounted to a failed policy. Instead, Greece should have undergone a full restructuring combined with a series of pro-growth measures.”
“There will be plenty of optimism in the corridors of power around the eurozone today, some of it justified – Greece has avoided a chaotic and unpredictable meltdown. However, this deal could end up being a pyrrhic victory: the debt relief for Greece is far too small which means that another default could be around the corner, while the austerity targets are wholly unrealistic and kill off growth prospects. Furthermore, Greece’s debt will end up being almost completely owned by eurozone taxpayers and by exempting official taxpayer-backed institutions from the write-down, the deal has created a distorted, two-tier bond market.”
Breaking down the key figures
Greek law bonds (Total €177bn) – voluntary participation 85.8% (€152bn) – with CACs 100% (€177bn)
Foreign law bonds (Total €29bn) – voluntary participation 69% (€20bn) – CACs unknown (to be settled by 11 April)
Total private sector involvement (PSI) participation so far – with CACs 95.6% (€197bn)
Total level of nominal write-down achieved so far – €105.4bn (This is short of the €107bn assumed under the EU/IMF/ECB troika debt sustainability analysis, meaning that more foreign law bondholders will have to participate or not be repaid).
Money needed to push PSI through - €93.7bn
‘PSI LM Facility’ (Bond sweeteners for private creditors) - €30 billion
Bond Interest Facility (EFSF bonds to pay off accrued interest) - €5.7 billion
Bank Recapitalisation Facility - €23 billion
ECB Credit Enhancement Facility - €35 billion
Under this scenario Greece is getting a €105.4bn write down, but taking on at least €58.7bn in new debt straight away. The EFSF, the eurozone bailout fund, is also taking on a further €35bn (by issuing additional bonds) to ensure Greek banks can still borrow from the ECB.[1]
What will this deal mean for Greece and the eurozone?

• The debt write-down offered to Greece is far too small to allow Greece any chance of recovery. Of the total amount (€282.2bn) that is entailed in the various measures now on the table to save Greece – through the bailouts and the ECB – only €159.5bn, or 57% will actually go to Greece itself. The rest will go to banks and other bondholders.
• The use of CACs will almost certainly trigger the pay-out of Credit Default Swaps (CDS) in relation to Greek debt. Despite the opacity and secrecy surrounding the CDS market, there is little evidence to suggest that financial markets will be unable to cope with paying out on Greek CDS. Sellers of CDS have had plenty of time to prepare for this eventuality. Any who are not fully prepared or cannot bear the cost were likely taking irresponsible risks or have much deeper solvency problems.
• Greek banks have taken substantial losses. These banks will be recapitalised, but ‘only’ by €23bn. In contrast, to meet the 9% capital requirements set by the European Banking Authority, Greek banks could need between €36bn and €46bn. It is unclear if further money will be forthcoming, but valid questions will continue to be asked about state of Greek banks.
• For the most part, Greek pension funds (which held around €30bn in Greek debt) have seen their assets reduced significantly. Some public sector pension funds did refuse to take part voluntarily. But they are likely to be forced to do so by the CACs. Importantly, it is unclear where Greek pension funds will recover their money from – the political fallout of having to cut pensions would only add to social unrest.
• The Greek government’s threat to default on the remaining foreign law bonds – held by bondholders who have refused to take part in the voluntary restructuring, hoping to be paid out in full – seems credible. However, since most of Greek debt will now be in the form of new bonds and EU/ECB/IMF loans (which do not have cross default clauses related to the old foreign law bonds), Greece can default on these old bonds without being judged in default generally or on the rest of its debt.[2]
• The upcoming Greek elections at the end of April mean that the future of the second bailout package is still uncertain. The two main parties, New Democracy and Pasok, have been losing ground to both far-left and far-right parties. The hope is that these two leading parties will be able to form a coalition government with a clear majority in parliament. Even if they do not win the majority of votes, they may still have a majority of the seats due to the electoral structure in Greece. Even so, it will be a close run election and without a strong majority in parliament, every future vote on new austerity measures, of which there will be many, will be a hard fought battle – not conducive to political stability.
• Under recent proposals, the total level of budget cuts Greece is expected to undergo stands at a massive 20% of GDP by 2013. Historically, no country has ever gone through such a large level of fiscal consolidation – successful or otherwise – especially without the option of currency devaluation. For example, the extensive fiscal consolidation seen in Ireland during the 1980s and 1990s totalled ‘only’ 10.6%.
• Athens is highly unlikely to meet its debt targets by 2020. This means that combined with the poor growth prospects due to continuous austerity, Greece will almost inevitably need either another bailout in three years’ time, or be forced to default on its outstanding debt.
• In parallel, the deal sets the eurozone up for a political row involving Triple-A countries. At the start of this year, 36% of Greece’s debt was held by taxpayer-backed institutions (ECB, IMF, EFSF). By 2015, following the voluntary restructuring and the second bailout, the share could increase to as much as 85%, meaning that Greece’s debt will be overwhelmingly owned by eurozone taxpayers – putting them at risk of large losses under a future default.
• Therefore, this deal may have sown the seeds of a major political and economic crisis at the heart of Europe, which in the medium and long term further threatens the stability of the eurozone.