Greece Referendum on European Bailout – 5 Points you Want to Know

6 Jul, 2011
World Economy and Markets

Greece Referendum is set to become the hottest media topic related to the European Debt  Crisis in the coming months.In a totally surprising move Greek Prime Minister George Papandreou called a referendum and a parliamentary confidence vote on 31st October just a week after  the European leaders had agreed on a package to .Papandreou’s personal and government popularity have plunged amid fresh austerity measures that sparked a wave of social unrest.The PM is calling this vote probably to bolster his government as it loses support of the masses.Mr Papandreou, whose ruling Socialist party has suffered several defections as it pushes waves of austerity measures through parliament while protesters rally outside, said he needed wider political backing for the fiscal measures and structural reforms demanded by international lenders.

a) Recapitalize the Eurozone Banks

b) Agreed on a €100bn loan to Athens and Offered a 50% haircut on Greek Debt

c) Promised to increased the size of EFSF to almsot 1 Trilion Euros

This new Referednum promises to set the cat amongst the piegons once again and set off a new wave of crisis.

Here are some points that you need to keep in mind with this referendum

1)  The confidence vote will conclude late on Nov. 4, while the referendum will likely be held after the details of the European accord are tied up.The Referendum is supposed to occur early next year.It will be only Greece’s second in almost 40 years,the first being to oust the Monarchy.Referendum Legality is also being questioned since it can be only held for matters of national importance and not for Economic Matters.

2) The chances of the referendum passing are low as Most Greeks oppose last week’s European deal to address the country’s debt crisis.According to the poll, 58.9% of Greeks judge the new European deal as “negative” or “probably negative” for Greece, while nearly two-thirds said they felt unease, fear or rage at the decisions reached by European leaders.54.2% of Greeks thought a national referendum should be called to approve the new aid deal, compared with 40% who said Parliament should decide.

3) Total Default on Greek Bonds could occur if the Bailout Referendum Occures resulting in a Lehman style Event though probability of that happening is low.What is certain is that till the Referendum happens the Global Financial Markets will be plunged in Volatility

4) The popularity of all major political parties is low with 14-22% approval ratings.Nobody knows whether such unpopular politicians can convince the public of anything let alone a complex referendum which will be decided by emotional appeals rather than a logical cost benefit analysis

5) European Leaders were blindsided by this sudden decision of the Greek government and many consider it a betrayal after going through such painstaking negotiations over the past few months to hammer out a deal.Some consider it as Blackmail by Greece to the whole European Union.Sarkozy is “dismayed” by the Greek plan, Le Monde newspaper reported, citing unnamed people close to Sarkozy.

 

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Greek Debt Deal – Bondholders take 50% Loss- Who Wins and Loses

5 Jul, 2011
Europe,Italy,Spain

According to reports coming from Europe where the summit of major European leaders took place to resolve the growing debt crisis,a deal has been reached on Greek debt.The Euro 350 billion debt which dwarfs the size of the negatively growing Greek economy has been a major source of instability in the last 2 years.The private holders of the Greek government bonds have agreed to take a  50% writeoff on their holdings.This means that if they hold Euro 100 of bonds they have become Euro 50 now as the rest has been written off as bad debt.Not that it was not apparent as Greek CDS and Greek bonds were touching all times lows in the secondary market.In fact the only buyers of Greece bonds were the European Central Bank and the Greek banks.The capital markets had been going up in the last month in the hope of some sort of resolution.The deal does not look like a win win as there will be some big losers in this deal (though they were already losing for some time).Nicolas Sarkozy announced the deal which would be voluntary in nature so that the CDS would not be invoked.Here are the winners and losers from this deal

Losers

1) Greek CDS Holders – They would be one of the biggest losing part as ISDA will not invoke that this is a credit event in which the Greek bonds have defaulted despite the 50% haircut

2) Greek Citizens – They would have been better off if a more sustainable path had been paved since the estimates still call for Greece to have 120% debt to GDP ratio by 2020.This means that they will have to live in a generation of austerity and poverty

3) Greece Pension Funds and French Banks – The French Banks like BNP Paribas,Credit Agricole have the biggest holdings of the debt.So also Pension Funds in Greece and other places which will be suddenly seeing a big hole in their assets column

Winners

1) Euro – The currency has managed to survive this phase of the crisis and has managed to surge at least till now.

2) Italy,Spain and Portugal – The contagion to the bonds of these countries will be contained since Greece has not done a messy default.The yeilds on the bonds of these countries might go down at least temporarily

 

Greek bondholders to take 50% haircut – Marketwatch

French President Nicolas Sarkozy said at a press conference in Brussels that the 50% haircut will be a voluntary agreement.An involuntary writedown could have potentially constituted a “credit event” that would have required the payout on billions of euros in credit default swaps, instruments used to insure debt against non-payment.

Thursday’s deal means that Greece’s debt burden will fall by around €100 billion ($140 billion). Media reports earlier this week had put a possible haircut on Greek government bonds at between 40% and 60%.Sarkozy also announced that the European Financial Stability Facility will see an increase in firepower by four- or five-fold.

An expanded bailout fund is seen as crucial in ensuring that the debt crisis doesn’t engulf Spain and Italy.

Why did it take Spain 3 years to stops/changes subsidies to Solar Power Plants getting Feed in Tariff through Fraud

15 Apr, 2011
Solar Energy,Spain

Spain has started cracking down on Solar Power Plants which are making huge profits through illegal Feed in Tariffs which they should not get.Note Spain had seen a massive boom in solar installations in 2008 due to unusually large ROI driven by high Feed in Tariffs.FIT are electricity rates which are higher than wholesale electricity rates paid to renewable energy power plants in order to make them competitive with cheaper fossil fuel power plants.Seeing a huge increase in the subsidy burden Spain has pretty much killed the solar market in 2009,however the problems of Fiscal Deficit has made Spain reconsider the tariffs being given to even older solar power plants.After a lot of controversy,Spain changed the FIT rules in the middle of the game through a retroactive FIT Law drawing howls of protest from solar investors like pension funds which have sued the government.

Spain is now also pursuing the solar industry by cracking down on power plants which connected after 2008 but got the FIT for 2008 power plants.Almost 304 solar power plants have been deemed illegal.Spain is reviewing the all the 9000 plants and till now almost 30% of the plants being reviewed have had their subsidies stopped or FIT changed.Don’t know why it took Spain 3 years to crack down on subsidy fraud when everyone knew that massive solar fraud had taken place during the boom as everyone rushed to put up a solar power plant during the solar gold rush.

Spain watchdog halts premiums for 304 solar plants

Spain’s energy watchdog ruled on Thursday to provisionally suspend paying premiums to 304 solar plants which failed to show they were up and running before subsidies were capped in 2008.

The National Energy Commission (CNE) recalled in a statement that it had provisionally suspended another 347 solar plants on March 29.Last year the CNE began investigating 9,041 photovoltaic plants, of which 840 have waived a premium of 475 euros ($683.9) per megawatt-hour and accepted one of 326 euros/MWh.Spain’s benchmark wholesale power market price on Thursday was 44.43 euros/MWh.Of the remainder, 2,021 plants have been examined and 651 suspended. The government has the final say on suspensions.

Are Bond Markets signalling Greek Contagion Redux?

16 Aug, 2010
Germany,Italy,Spain,USA

While Stock Markets have declined by 15% from the peak in the USA and around 5-10% in the bigger European markets,the Bond Markets are signalling a bigger decline.US 10 year Treasury yields have been falling like a rock touching a 2010 low of 2.67% down from almost 3.8% during the 2010 high.This almost 30% decline in US yield is due to a combination of factors like expectations of more monetary easing by Fed,deflation worries and disappointing US economic data.In lockstep with the the US Treasury yields,the German bunds have also been rising.The rise in German Bunds is despite very strong German economic data.The German economy expanded at the fastest pace in 23 years on Rising Exports.So the fall in Bund yield is confusing when seen in terms of the US Treasury and Economy  relationship.The rise in German Bonds gets explained due to the rise in PIGS yields.The bond market has been selling the PIGS bonds leading to a rise in the yields to nearly the same level when the Greek Contagion hit the markets.

Spanish,Italian,Ireland and Greek Bonds Decline

Spanish 10 year   Bond Yields have climbed to 427 basis points while Greek ones are ruling at 810 basis points.Ireland which was the first ones to feel the effects of the GFC has also seen widening credit spreads of its Bonds.Italian Bonds are also seeing declining interest from buyers leading to higher yields for these as well.Compared to PIGS,German Bunds have hit a record high reflecting the 2 track economy of the European Union.

Spanish Bonds Fall on Economy Concern; Bunds Yield Record Low – Businessweek

Spanish bonds fell and the extra yield investors demand for holding Greek debt instead of German bunds rose to the most since May on concern flagging growth in nations on Europe’s periphery will crimp the region’s recovery.

German securities extended their gains, pushing 10-year yields to a record low, as falling stocks overshadowed data that showed the nation’s gross domestic product grew the fastest in two decades. Spain’s GDP rose less than forecast, while a report yesterday showed the Greek economy shrank for a seventh quarter.The yield spread between 10-year Irish bonds and benchmark German debt widened to 294 basis points today, the most since June 29, as investors bet the government will have to inject more capital into banks including Anglo Irish Bank Corp

Italian bonds declined after the demand fell at sales of the country’s five- and 15-year securities.

The yield on the 10-year Italian bond rose to the highest level in 10 days. Italy received bids worth 1.27 times the securities offered at a sale of 5 percent 2025 bonds, compared with a bid-to-cover ratio of 1.74 the last time the securities were sold on May 13.

Spanish Regional Debt a Cause of Big Worry

Spanish Banks have been in the news for their weak accounting and massive losses.After Restructuring the Cajas with a Multi Billion Euro Bailout,now the Spanish Government faces the Specter of defaulting regional government.Catalonia has been locked out of the Debt Market since March just like as BBVA was locked out recently.While the Spanish Financial Sector hangs on the ECB Funding Lifeline,the Regional Governments has no such Lifeline.Galicia and Madrid are the other regions facing major financing problems.While the provincial governments have agreed to cut fiscal deficits to 2.4%,the Market does not have a lot of confidence in these regions ability to rein in the costs.Fitch has put all the 10 regions on a possible downgrade notice.These regional governments have a backstop in the form on the Central Government which is itself facing questions of funding itself.

Spanish Crisis Faces Second Front on Regional Debt  – Bloomberg

Prime Minister Jose Luis Rodriguez Zapatero may face a second front in his battle to contain Spain’s fiscal crisis as borrowing costs for the country’s regional governments climb.

Catalonia, which accounts for a fifth of Spanish gross domestic product, has been shut out of public bond markets since March and the extra yield it pays over national government debt has almost tripled this year. Galicia, in the northwest, has asked to freeze payments of debt it owes the central government and the Madrid region postponed a bond sale last month.

European Crisis is alive and kicking – IMF Rejects Hungary Bailout while Moody downgrades Ireland

19 Jul, 2010
Europe

The recent recovery in Euro from 1.2 to 1.3 USD and the strength of the stock markets would make you think that the Greek Contagion is behind us.However that is far from the truth as most parts of Europe continues to see a distressed banking sector  and deteriorating public finances.Hungary which has been under a crisis since 2008 receiving IMF aid to stave off bankruptcy is under the headlights again.IMF and EU abruptly called off talks with Hungary over further aid.In a statement they said that the Hungarian government needs to take more measures to reduce the fiscal deficit.Hungary has seen a change in government with the new administration criticizing the old one for lying about the health of the public finances.It has recently passed a new bank tax to raise more money to reduce the fiscal deficit.However none of these plans seems to have assured the IMF and EU teams which left Hungary .The abrupt departure may have something to do with the new bank taxes which will hurt the European parents of local banks as well.In a predictable reaction,Hungary’s stock market and the currency forint fell sharply in trading.

Forint hit by breakdown of talks with IMF, E.U. – Marketwatch

The Hungarian forint fell sharply on Monday after a mission from the International Monetary Fund left Budapest over the weekend after the conclusion of talks with the government was postponed. “While there is much common ground, a range of issues remain open,” the IMF mission said in a statement. “The fiscal deficit targets previously announced — 3.8% of GDP in 2010 and below 3% of GDP in 2011 — remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives.”

Bank Backs New Tax – WSJ

Hungary’s controversial tax on financial institutions has won support from an unlikely quarter: Hungary’s largest independent retail bank.OTP, Hungary’s largest lender by assets, is in favor of the tax— which aims to raise nearly $1 billion this year to plug a hole in the government budget—even though it will hurt profits.The new tax is the cornerstone of a plan to narrow the budget gap and restore confidence after June’s market turmoil, when Hungary’s politicians hinted the deficit could be larger than expected. The forint fell and the cost of insuring Hungarian debt jumped. OTP’s shares also plunged. The tax is to stay in place next year and perhaps in 2012, then be phased out.Foreign banks have called the new tax unfair, and have taken their case to the International Monetary Fund and European Union, saying the tax would hurt their ability to help Hungary.

Ireland gets a Moody’s Downgrade as well

Ireland which has been at the forefront of the European crisis got a downgrade from Moody’s though it is still a stable one.Ireland’s financial and real estate sector faced a massive fall in the aftermath of the Lehman crisis.The government has to tighten its budget severely leading to a sharp fall in GDP.Ireland had a large financial sector which was hit hard by the crisis.The Moody’s downgrade as usual comes more a sharply lagging indicator.

Moody’s Cuts Ireland to Aa2, Cites ‘Loss of Financial Strength’ – Businessweek

Moody’s Investors Service downgraded its rating on Ireland’s government bonds to Aa2 from Aa1, citing the government’s “gradual but significant loss of financial strength.”The agency has a “stable” outlook on the country’s debt, it said today in an e-mailed statement. Moody’s also cut its rating on Ireland’s so-called bad bank, the National Asset Management Agency to Aa2, with a stable outlook.Ireland’s recession and real-estate slump eroded tax revenue and left the country with the widest budget deficit of any euro-area nation. While the government has cut state workers’ pay and raised taxes in a bid to narrow the shortfall, the cost of aiding the banking industry is adding to pressure on the public finances.

German Exporters make Hay from Euro weakness as Global Trade Imbalances grow even Bigger

14 Jul, 2010
Europe,Germany,Green Investing

Germany which reluctantly agreed to Greek bailout plan now emerges as surprise winner from the crisis

Germany which was a reluctant member of the massive $1 trillion Bailout plan for Greece has emerged surprisingly as a beneficiary from the European crisis started by a run on the Greek sovereign debt. Germany with its prudent fiscal and monetary policies was not in favor of a bailout and had to be cajoled/threatened by the rest of European Union to bailout Greece.It was even rumored that France threatened to leave the EU to force Germany to acquiesce to the Bailout.Germany which is the world’s 3rd largest economy and a European powerhouse would have to bear  the brunt of the bailout bill.This made the German public averse to supporting the Club Med countries which were seen to be living profligately.Angela Merkel and German members of the European Central Bank were the seen to be most opposed to the idea and only the IMF carrot brought them to the table.There was also the fact that French and German banks have the biggest exposure to PIGS debt.With German banks already running huge losses from the US subprime crisis,another European contagion would have probably wiped them out.

President Nicolas Sarkozy ‘threatened to pull France out of euro’ – Telegraph

Sarkozy demanded a “commitment from everyone to suppport Greece…or France would reconsider its position in the euro,” according to one source cited by El Pais.Another source present at the meeting between Zapatero and his party members and cited by the paper said: “Sarkozy ended up banging his fist on the table and threatening to leave the euro…This forced Angela Merkel to give in and reach an agreement.”The European Union and International Monetary Fund agreed a 110 billion euro rescue plan for Greece last week. But Germany, which must shoulder a good deal of the burden, had proven reluctant to commit itself to a plan.

German Exporters making Hay from Euro Weakness as Global Imbalances grow Bigger

The Euro has weakened significantly from December 2009 when it ruled at 1.5 Euro/USD level.The almost 20% peak to trough fall has led to Germany’s already strong exporting machine to generate even greater exports.While the rest of the European countries like Spain,Greece and Portugal don’t really have the industry to benefit from Euro weakness,Germany formidable industrial machine is in a great position to benefit.German companies like Siemens,BMW,SMA Solar etc are seeing massive growth in 2010 which is being reflected in German Stock Market strength.Germany already benefits hugely from the single European currency as it derives significant revenues from exporting to other European countries.Its Export Surplus which was one of the causes of the Greek Contagion will rise more this year.The global imbalances of huge export surpluses of China,Germany and Japan on one hand and huge import deficits of countries like Italy,Spain and US on the other hand continue to grow bigger.How and when it will end is uncertain,but it will have to end one day and it will be messy end to that.

Germans Show No Way to Give Up on Euro Spurring Boom – Reuters

Rising share prices and foreign sales at Bayerische Motoren Werke AG and Siemens AG show why it may be worth keeping the single currency even as some voters balk at the cost of rescuing Greece and demand a return to the deutsche mark. As exporters benefit from the lower labor costs and currency stability fostered by the euro’s 1999 introduction, unemployment has dropped close to an 18-year low and the DAX Index is the 16- nation bloc’s best performing major benchmark this year.The result has sharpened Germany’s trading edge over the euro-region economy’s southern periphery. Europe’s largest economy became 13 percent more competitive against its neighbors in the 11 years through 2009, mirroring similar declines in Spain and Greece, according to a wages-based indicator designed by the European Central Bank.

Euro membership has nevertheless sheltered Germany, which relies on exports for 41 percent of gross domestic product, from the ravages of the global financial crisis, said Juergen Pfister, chief economist at Munich-based lender Bayerische Landesbank. Prior to the euro, the mark was a haven in times of turmoil and prone to volatility, surging about 50 percent against the Italian lira in the first half of the 1990s.“The deutsche mark would have appreciated massively as a result of the financial crisis, harming German exports and making the 2009 recession much worse,” said Pfister. “The euro provides stability.”

China imports widen US trade gap – FT

A surge in imports from China pushed the US trade gap sharply wider in May, adding to a stream of weak data that has put Barack Obama’s administration under pressure for its ­inability to right the faltering economy and stimulate the stagnant jobs market.The trade deficit grew by 4.8 per cent to $42.3bn, according to commerce department figures, the highest since November 2008 and at odds with the consensus of economists, who forecast the gap would shrink in May.

Tuesday’s trade figures provided more bad news because they showed the overall trend was towards a widening trade deficit, in spite of the administration’s efforts to create jobs by increasing exports.Imports from China, which is the country’s most politically sensitive trading partner, rose by nearly 12 per cent. That inflated the US trade gap with China by more than 15 per cent to $22.3bn, the biggest since last October.

Official Chinese figures last week showed that exports from China had surged 44 per cent year-on-year in June, lifting its monthly trade surplus to $20bn. Such imbalances infuriate US politicians, despite China’s decision last month to end its near-two-year peg to the dollar.

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