IMF is Pushing Privatization of State Assets While Rating Agencies Threaten to Push European Nations into Junk Bond Territory
Euro Zone Debtors Under Pressure Over New Risks
Reuters - Financial markets piled pressure on heavily indebted euro zone countries on Monday as investors worried about heightened risks in Spain and Greece and ratings agencies stoked new concerns over Italy and Belgium.
Italy, which has the euro zone's biggest debt pile in absolute terms, was hit by credit ratings agency Standard & Poor's decision on Saturday to cut its outlook to "negative" from "stable".
In an explanatory statement, S&P said it did not expect Rome to seek financial help from the EU or IMF due to the "absence of significant imbalances". The sheer size of its public debt effectively made it too big to bail out.
Government sources said Rome would bring forward to next month planned decrees to slice 35 to 40 billion euros ($50-$56 billion) off the budget deficit in 2013 and 2014, in an effort to reassure markets.
"We've kept things in order and the bases are all there for us to continue to do so," Economy Minister Giulio Tremonti said.
Fitch Ratings warned it may downgrade Belgium's AA+ credit rating if the caretaker government misses its deficit targets due to a lack of political consensus on a balanced budget. The country has not had a proper government since a general election last June but is enjoying an economic boom.
A weekend rout of Spain's ruling Socialists in regional and municipal elections raised fears of clashes over deficit curbs between central and local government as Madrid fights to avoid following Greece, Ireland and Portugal into a bailout.
The premiums charged by investors to hold Italian and Spanish 10-year bonds rather than safe-haven German bunds rose to their highest levels since January, at 186 and 261 basis points respectively, before easing slightly.
"The key point is that the crisis seems to be taking hold even of peripheral countries regarded as solid," said WestLB rate strategist Michael Leister.
"Sentiment is that there appears to be no end to it now Italy is being scrutinized by the ratings agencies."
The euro briefly fell below a key support level at $1.40, hitting a two-month low against the dollar. Similar concerns hit stocks, with the Milan exchange falling 3.3 percent and the broader FTSEurofirst 300 index losing 1.6 percent on the day.
The shared European currency has lost as much as 6.5 percent against the dollar over three weeks, mainly through debt worries and despite a favorable interest rate differential.
Indeed, investors are trimming their expectations of how aggressively the European Central Bank will raise rates as a result of spreading stress in the sovereign bond market, according to Euribor futures data.
NO SURRENDER
The Greek government launched a long-stalled privatization program and announced other deficit reduction measures in a drive to win disbursement of a crucial 12 billion euro EU/IMF aid tranche next month and cut its budget gap to 7.5 percent of gross domestic product this year.
Greece will sell its full stake in OTE telecoms immediately, and in Hellenic Postbank and the two main ports of Piraeus and Thessaloniki by the end of this year, raising up to 5.5 billion euros.
Earlier, stratospheric Greek debt yields rose still further, with 10-year bonds yielding more than 17 percent as investors worried about continued talk of "voluntary" debt reprofiling.
The Greek yields do not reflect Athens' real borrowing costs because the country is surviving on IMF/EU loans and trading in Greek bonds is thin, but they are a barometer of market anxiety about some form of restructuring.
"We are taking the necessary decisions to avoid the danger and to change the country," Prime Minister George Papandreou told the cabinet, according to a spokesman. "The battle goes on, and in this fight no cowardice is allowed."
Visiting inspectors from the European Commission, the European Central Bank and the International Monetary Fund are withholding judgment on Greece's compliance with its rescue program until they see progress on spending cuts, revenue increases and privatizations.
Among planned new belt-tightening measures were deeper cuts in public sector wages, more consumer tax increases and even the taboo issue of dismissing full-time civil servants.
Market sentiment has darkened due to public disputes among the IMF, the ECB and Jean-Claude Juncker, chairman of euro zone finance ministers, over whether some form of debt restructuring should be brought into the policy mix.
"CREDIT EVENT"?
The European Commission's top economic official, Olli Rehn, sought to play down talk by Juncker of a "soft restructuring" that scared markets after last week's Eurogroup meeting. Rehn said any relief from bondholders would be on a voluntary basis.
"A voluntary extension of loan maturities, so-called reprofiling or rescheduling on a voluntary basis, would also be examined on the condition that it would not create a credit event," Rehn told reporters.
Market experts say any attempt to modify debt maturities while avoiding a credit event that would trigger default insurance payouts and downgrades by ratings agencies would be likely to face legal challenge.
Austerity measures imposed under the IMF/EU bailouts or to avert a bailout are taking a high political toll on governments across Europe.
Spain's ruling Socialists suffered their worst election result since the restoration of democracy in 1978, slumping to 27 percent of the vote, 10 percentage points behind the conservative opposition Popular Party.
Italy's center-right government lost ground in local elections last week, and a weekend opinion poll in Greece showed that for the first time since Socialist Prime Minister George Papandreou took office in 2009, the center-right opposition New Democracy party has drawn level with the ruling Socialist party.
The unpopularity of rescuing euro zone debtors was reflected in another disastrous regional poll result for German Chancellor Angela Merkel's center-right coalition on Sunday.
Her Christian Democrats slumped to just 20 percent in Bremen, Germany's smallest federal state, while the liberal Free Democrats, junior partners in government, scored just 2.6 percent and lost their seats in the local assembly.
Greek Default Would Hit Others in Euro Zone
Reuters - A Greek debt default would hurt other peripheral euro zone states and could push Portugal and Ireland into junk territory, Moody's said on Tuesday, warning it would classify most forms of restructuring as a default.
Markets have piled pressure on heavily indebted euro zone countries this week as investors worry not just about Greece but also about Spain, where the government suffered a major defeat in regional elections at the weekend, and after ratings agencies warned about the health of Italy and Belgium.
"A Greek default would be highly destabilizing and would have implications for the creditworthiness of issuers across Europe," Moody's Investors Service's chief credit officer in the region, Alastair Wilson, told Reuters in a telephone interview.
"This would result in more highly polarized credit worthiness and ratings among euro zone sovereigns, with the stronger countries retaining very high ratings and the weaker countries struggling to remain in investment grade."
In recent days, Standard & Poor's cut its outlook to "negative" from "stable" for Italy, which has the euro zone's biggest debt pile in absolute terms, while Fitch said it might downgrade Belgium's AA+ credit rating. Belgium has not had a proper government since elections last June though it is enjoying an economic boom.
JUNK?
Wilson said the focus after any Greek default would be on Portugal and Ireland, which like Greece have agreed to receive international bailouts from the European Union and the International Monetary Fund.
Asked if these two countries would risk falling into junk territory in the event of a Greek default, he said:
"Potentially yes...If there were to be a Greek default, there could potentially be multi-notch downgrades to the weakest sovereigns."
He said Spain, Italy and Belgium were not in the same category as Portugal and Ireland, but would also come under significant market pressure and could face rating downgrades.
"It would be expected though that even the slightly stronger euro zone sovereigns would come under significant market pressure and very likely face higher cost of accessing the wholesale funding market," Wilson said.
He declined to say how likely it was that Greece would actually default on its debt.
Greece announced on Monday 6 billion euros worth of new fiscal steps to cut its budget deficit as well as plans to jumpstart privatizations, in an effort to convince lenders it can pay off debt without a restructuring.
Finance Minister George Papaconstantinou said Greece would not be able to honor its obligations if it did not obtain the next tranche of bailout loans. The IMF has made clear it cannot disburse money if Greece's 2012 EU funding is not assured.
The three major ratings agencies, Moody's, Fitch and S&P, have all warned they would probably consider even a "soft" debt restructuring by Greece, in which investors were given the option to accept a deal but not explicitly forced to accept one, a default.
In a statement on Tuesday, Moody's said:
"A Greek default might take many forms, including changes in terms and conditions, selective 're-profiling' and large-scale 'voluntary' debt buybacks at high discounts, which Moody's classifies as distressed exchanges."
Wilson said that even forms of debt restructuring such as voluntary swaps of bonds, with credit enhancements for old bonds to support their net present values, were highly likely to be classified as defaults.
Moody's also said the Greek banking sector would need recapitalization in case of a sovereign default, as well as continued liquidity support from the European Central Bank. It warned that a sovereign default was likely to be accompanied by some form of default on bank debt.
Fitch cut Greece's credit rating by three notches on Friday, pushing the country deeper into junk territory, and warned that any kind of debt restructuring imposed on investors would amount to a default.
"The longer the current state of uncertainty affecting Greece persists, the greater the temptation on the part of both the Greek and the euro area authorities to try to undertake some form of debt restructuring," Moody's said.
IMF Says Greece Must 'Reinvigorate' Reform Drive
Reuters - The IMF warned Greece on Wednesday that it would fail to shore up its finances unless it redoubled reform efforts, and euro zone officials dismissed suggestions that a mild debt restructuring might help.
European finance ministers broke a taboo this week by acknowledging for the first time that some form of restructuring might be required to ease Greece's debt burden, which at 150 percent of annual output is among the highest in the world.
Some have said that private creditors could be asked, on a voluntary basis, to accept later repayment of their Greek debt but ministers have also made clear that their first priority is ensuring Prime Minister George Papandreou's government steps up reforms.
"The program will not remain on track without a determined reinvigoration of structural reforms in the coming months," Poul Thomsen, an International Monetary Fund envoy who arrived in Athens last week to assess its progress in meeting fiscal targets linked to its European Union/IMF bailout.
"Unless we see this invigoration, I think the program will run off track," he said, using some of the strongest IMF language since Greece sealed the 110 billion euro ($155 billion) rescue one year ago.
After Thomsen spoke, Greek Finance Minister George Papaconstantinou vowed to press ahead with budget consolidation efforts. He raised the prospect of firing some public sector employees and said the government would seek talks with the opposition to discuss ways out of the crisis.
Facing a third straight year of recession, Papandreou's government is struggling to reduce rampant tax dodging and has come under pressure to sell off tens of billions of euros in state assets to plug gaping budget holes.
Under its rescue terms, Athens was to cut its deficit to 7.6 percent of GDP this year. Without further measures, Thomsen said, Athens would not be able to get it much below 10 percent.
Concerns about Greek debt pushed the euro below $1.42 and sent the risk premiums on Greek 10-year bonds to their highest level in a week. The cost of insuring government debt against default also rose.
COSTS AND BENEFITS
Euro zone ministers have not spelled out how a "reprofiling" of Greek debt, as some have labeled it, would work.
Convincing private holders of Greek bonds to voluntarily accept later repayment could be difficult and require costly guarantees to avoid a hit to banks.
Such a move would buy Greece more time but not reduce its overall debt burden. Many economists believe it would be followed by a more aggressive restructuring involving "haircuts," or forced losses, of 50 percent or more from 2013, when policymakers have said they could opt for radical steps.
Jean-Claude Juncker of Luxembourg, who chairs meetings of euro zone finance ministers, raised the prospect of a "soft restructuring" earlier this week, but European governments do not appear to be united behind the idea.
Jyrki Katainen, prime minister-elect of Finland, said on Wednesday that such a step "would not solve anything." And Greece's Papandreou said Tuesday that the costs would "far outweigh any potential benefits."
The European Central Bank holds up to 50 billion euros in Greek bonds on its own books and has warned that even a mild restructuring would put the stability of the euro zone at risk.
"I'm opposed to soft restructuring because I don't know what it means. Nobody knows what it means," Lorenzo Bini-Smaghi, a member of the bank's executive board, said in Milan.
Speaking in Athens at the same conference as Thomsen, ECB board member Juergen Stark warned policymakers that it was an "illusion" to think such a move would resolve Greece's problems.
UNDER PRESSURE
European politicians, however, are under pressure from angry taxpayers to share out the burden of their bailouts to include banks that have lent to Greece by buying the country's bonds.
Euro zone countries, together with the IMF, bailed out Greece and Ireland last year, and approved a new 78 billion euro rescue for Portugal Monday.
Governments have pledged not to force any losses on private holders of Greek debt before 2013, when a new anti-crisis facility -- the European Stability Mechanism (ESM) -- is due to take effect. But they say a voluntary debt exchange before then might be an option.
"During the crisis, it was almost exclusively European taxpayers that ultimately bore the risk of investors' decisions. That is inadmissible," German Finance Minister Wolfgang Schaeuble said in a speech in Brussels.
"It was right to stop financial markets from disintegrating in the past but it would be wrong to cushion their losses in the future," he added.
Because Greece is not expected to be able to return to the capital markets next year, as envisioned under its 2010 aid package, it faces a 27 billion euro funding gap next year.
This could be filled by additional money from the EU and IMF, stronger Greek privatization revenues and/or through some form of debt relief -- either looser terms on the EU's loans or debt maturity extensions for private creditors.
Wednesday, Athens appointed advisers for 15 privatization projects including the sale of its 34 percent stake in Europe's biggest betting company OPAP.
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