Sovereign debt bubble thread

[Sheilbh]

Gavyn Davies in the FT says this raises more questions than answers.   But it's certainly the first time I've felt any sort of hope that the Eurozone might actually resolve this crisis.  Inevitably, therefore, the Finns are vetoing key bits of it

More questions than answers after the summit
June 29, 2012 4:55 pm by Gavyn Davies

This blog contains Gavyn's initial response to the eurozone summit. As more news emerges, he may add further comments below if his assessment changes during the weekend.

In the wake of yet another summit, we need to ask our usual question: is this the eurozone's game changer, or in football parlance the "Balotelli moment"? Clearly, there have been some late night concessions from Germany, which could turn out to be very significant in the long term. Spanish and Irish debt ratios will markedly benefit as the costs of their bank bail-outs are removed from the sovereign balance sheets and absorbed by the eurozone.

The markets have welcomed these developments, and rightly so. In particular, the opening sentence of the statement, which says boldly and simply that "we affirm that it is imperative to break the vicious circle between banks and sovereigns", could prove to be a major breakthrough. Some think it might be the beginning of a Euro-tarp.

But my fear is that, as so often in the past, the devil will prove to be in the detail. The more carefully one examines the text of the statement, the more questions are raised about how the proposed measures will actually work.

In particular, it is debatable whether there are any terms for direct eurozone recapitalisation of Spanish banks which will be acceptable both to the Spanish government and to the German Bundestag. (The latter will be empowered to "monitor" the new arrangement, according to Mrs Merkel's spokesman.) And the shortage of remaining funds in the EFSF/ESM, which I discussed here last week, has certainly not been solved.

I would like to discuss each of the key points raised by the summit separately.

1. Direct bank recapitalisation by the ESM

This is clearly the critical new development which potentially allows the costs of recapitalising troubled banks to fall on the eurozone as a whole, rather than on an individual sovereign country. It could therefore represent a very large step towards debt mutualisation, and it directly addresses the point which the markets so disliked in the Spanish bank deal two weeks ago. The statement says that this can only be done after the eurozone's new bank supervisor is "established", and that this should only be "considered" by the Council before the end of the year. In view of the disputes which could arise over this thorny issue, the risks of slippage are considerable.

The ESM will need to negotiate precise terms for each of the bank injections, and these terms will in effect determine the extent of any transfer of funds across national boundaries. As James Mackintosh argues in an important piece, Germany will have an incentive to wipe out existing shareholders and bondholders in Spanish banks so that they will obtain greater ownership for each euro of rescue money expended. The incentives on Spain will be the exact opposite. So this could prove very contentious indeed.

Furthermore, the statement says that conditions will be set for these bank injections, including "economy wide" conditions. This is mysterious but could mean that conditions will be required from the sovereign, for example that the ESM would be compensated if there are any losses on the capital injected into the Spanish banks. That would seem to meet Mrs Merkel's pre-summit demand that sovereigns can only deal with sovereigns, not with foreign banks.

I understand that such conditions would obviously eliminate the whole principle of breaking the link between the sovereign debt crisis and the banking crisis, but I suspect that Germany will be quite demanding is setting these terms. Otherwise, there could be great problems with the constitutional court in Karlsruhe.

2. Seniority of debt

The markets initially became excited by this, but should not have done. There is very little change here. The statement "reaffirms" (a word which in effect implies "this is not new") that the Spanish bank injection, made by the EFSF and then transferred to the ESM, will not gain seniority status over private debt holders. Careful observers knew that already, since it has always been the intention, stated in the preamble to the ESM treaty. The key point is that there is no general change intended for the seniority of ESM debt, so this problem is not alleviated.

3. ESM support for the Spanish and Italian bond markets

The final paragraph of the statement gives the strong impression that the ESM will in future be able to stabilise these bond markets in a "flexible and efficient" manner. This appears to be a major victory for Mario Monti, but actually it does not contain anything really different from the status quo. Ever since last year, the EFSF/ESM has been empowered to buy both primary and secondary market debt, on a request from a member state, which then has to sign a Memorandum of Understanding. This memorandum involves less onerous conditions than a full Troika programme.

There is also an emergency procedure available, which can be triggered by the ECB. It has always been a bit obscure whether this requires a formal request from a member state. Today's statement reminds everyone that there should be conditions written into a Memorandum, so the basic principle appears to be unchanged.

Another point to bear in mind is that any bond buying by the ESM may result in less bond purchases by the ECB under the Securities Markets Programme. This is a key objective of the ECB, and it means that net support for the bond markets may not increase very much.

4. The availability of funds for the ESM

German Finance Minister Schauble emphatically said yesterday to the Wall Street Journal that there would be no increase in the size of the ESM, and that position has been maintained by Germany at the summit.  Furthermore, Mrs Merkel has repeatedly stated that there will be no "joint financing" of eurozone debt (ie eurobonds, or eurobills) before full fiscal union has taken effect. Again, there is no change in that position. Indeed, that is the basis for the German government's insistence that they have not taken on any extra "joint liabilities" as a result of this summit.

In summary, the summit has given the ESM some new tasks, but no new money with which to discharge these tasks.  And many details are obscure. To quote the lyrics of the great Johnny Nash:

There are more questions than answers
Pictures in my mind that will not show
There are more questions than answers
And the more I find out the less I know
Yeah, the more I find out the less I know.

[MadImmortalMan]

Missed this last month.

http://www.reuters.com/article/2012/06/08/argentina-dollar-idUSL1E8H8EJA20120608

Argentina loses a third of its dollar deposits

* Argentines reacting to foreign exchange restrictions

* About $100 mln in dollars withdrawn every day

* Rush toward greenback started in November

By Jorge Otaola

BUENOS AIRES, June 8 (Reuters) - Argentine banks have seen a third of their U.S. dollar deposits withdrawn since November as savers chase greenbacks in response to stiffening foreign exchange restrictions, local banking sources said on Friday.

Depositors withdrew a total of about $100 million per day over the last month in a safe-haven bid fueled by uncertainty over policies that might be adopted as pressure grows to keep U.S. currency in the country.

The chase for dollars is motivated by fear that the government may further toughen its clamp down on access to the U.S. currency as high inflation and lack of faith in government policy erode the local peso.

"Deposits keep going down," said one foreign exchange broker who asked not to be named. "There is a disparity among banks, but in total it's about $80 million to $120 million per day."

U.S. dollar deposits of Argentine banks fell 11.2 percent in the preceding three weeks to $11.5 billion, according to central bank data released on Friday. The run on the greenback has waxed and waned since November, after President Cristina Fernandez won a second term on promises of deepening the state's role in the economy.

From May 11 until Friday, data compiled by Reuters from private banks showed $1.9 billion in U.S. currency had been withdrawn, or about 15 percent of all greenbacks deposited in the country.

Feisty populist leader Fernandez was re-elected in October vowing to "deepen the model" of the interventionist policies associated with her predecessor, Nestor Kirchner, who is also her late husband.

Since then she has limited imports, imposed capital controls and seized a majority stake in top energy company YPF.

A spokesman for the central bank said on Friday that the rate of dollar withdrawal from Argentina's financial system shows signs of slowing.

"We have seen a tendency toward fewer withdrawals, to about $90 million (per day) over the last week from $120 million the week before," the spokesman said a day after the bank lifted daily reserve requirements on dollar deposits to help banks respond to steady drum beat of withdrawals.

DITCHING HER DOLLARS

The near-impossibility of buying dollars at the official rate is driving some savers and investors to pay a hefty premium in the black market.

Many are taking what dollars they can get their hands on and stashing them under the mattress or in safety deposit boxes, fearing moves by the government to forcibly "de-dollarize" the economy. Officials have strongly denied any such plan.

The president's battle to slow capital flight and fatten the central bank reserves needed to pay the public debt has prompted even tighter controls in recent weeks, making it almost impossible to buy dollars at the official rate. The effects have been felt throughout the South American country's economy.

For example. Argentines, who normally pay for new homes with stacks of dollar bills, have been struggling to get their hands on U.S. currency since Fernandez started imposing stringent controls on dollar buying late last year. [ ID :nL1E8H6EZ8]

She wants Argentines to end their love affair with the greenback and start saving in pesos despite inflation clocked by private economists at about 25 percent per year.

Fernandez set an example on Wednesday by vowing to swap her only dollar-denominated savings account for a fixed-term deposit in pesos.

But savers in crisis-prone Argentina are notoriously jittery. Memories of tight limits on bank withdrawals and a sharp currency devaluation remain fresh a decade after the country's massive sovereign debt default.

"There is a lot of fear, considering everything that has happened before," another foreign exchange broker said. "Confronted by risk, whatever kind of doubt, depositors pull their dollars out of the bank and wait to see what happens.

Everybody's favorite sovereign default lovechild isn't really doing so great.

[The Brain]

TL;DR

[Admiral Yi]

TL;DR

More populist nonsense; country fucked.

[Sheilbh]

Everybody's favorite sovereign default lovechild isn't really doing so great.

Who, ever, anywhere outside the Casa Rosada has claimed Argentina's doing great?

[MadImmortalMan]

Everybody's favorite sovereign default lovechild isn't really doing so great.

Who, ever, anywhere outside the Casa Rosada has claimed Argentina's doing great?

That I've seen? Mostly some default-happy kids on euot. 

[Tamas]

After learning that not only in Portugal there is legal obligation to pay a month-worth sum of bonus money at the start of summer, and before Christmas to all employees, but also their constitutional court just decided that removing this was unconstitutional, I have come to fully support Germany in not being willing to accept run-away euro inflation to save these regimes.

It boggles the mind. WTF imaginary fairy-tale world have they built up there with loaned money?!

[Sheilbh]

After learning that not only in Portugal there is legal obligation to pay a month-worth sum of bonus money at the start of summer, and before Christmas to all employees, but also their constitutional court just decided that removing this was unconstitutional, I have come to fully support Germany in not being willing to accept run-away euro inflation to save these regimes.

That's quite common in continental Europe.  It exists in Austria for example.  Though I think most countries prefer a 13th month of salary - that's in Switzerland, Belgium and others.  My company helped work these out for expats and it just changes salary calculations so you divide a salary by 14 rather than 12.  It doesn't lead to someone being given a salary of, say £24k a year, with an extra £4k in Christmas and Summer payments.  Rather they're given £24k across the year over 14 payments.

The Constitutional Court ruling in Portugal was because the government abolished it for public sector workers but not private sector workers.  They held that that went against the principle of equality of treatment in Portuguese law. 

Having said that the Portuguese government's generally been pretty respected by Germany and others for their austerity measures.

[Sheilbh]

Also no-one wants runaway inflation, we're just suggesting there's room for a bit more of an expansive attitude towards inflation:
http://www.wolframalpha.com/input/?i=inflation+germany+eurozone+usa

[Iormlund]

The 14-pay thing is the norm here. One at Christmas, one at the start of summer (used to be 18th July in commemoration of Franco's uprising against the Republic). As Sheilbh says, it's just another way of dividing your total salary.

[Tamas]

The 14-pay thing is the norm here. One at Christmas, one at the start of summer (used to be 18th July in commemoration of Franco's uprising against the Republic). As Sheilbh says, it's just another way of dividing your total salary.

if it just decreases your monthly wage in effect, than what's the point? If it does not decrease it, it is then a state-enforced competitive disadvantage for all affected employers.

Regardless, having perks which are constitution-guaranteed seem... very socialist

[Syt]

After learning that not only in Portugal there is legal obligation to pay a month-worth sum of bonus money at the start of summer, and before Christmas to all employees,

That's quite common in continental Europe.  It exists in Austria for example. 

You also get tax breaks on the extra salaries.

[Tamas]

After learning that not only in Portugal there is legal obligation to pay a month-worth sum of bonus money at the start of summer, and before Christmas to all employees,

That's quite common in continental Europe.  It exists in Austria for example. 

You also get tax breaks on the extra salaries.

if the east euro countries would manage to be more stable and less corrupt, they would steal even more jobs, I am sure.

[Admiral Yi]

You also get tax breaks on the extra salaries.

That's not quite as neutral then as Shelf and Iormlund were suggesting.

[Sheilbh]

if it just decreases your monthly wage in effect, than what's the point? If it does not decrease it, it is then a state-enforced competitive disadvantage for all affected employers.

Well that's all employers.

It decreases your monthly salary but not your annual salary and it significantly increases your salary at points when most people need money most (Christmas and/or Summer).  As Syt says in Austria there's also tax benefits.  The 14 month payments have a separate tax allowance and are taxed separately for payroll and personal taxes.  So in terms of effect on net pay it comes from being taxed differently.

I think that used to be the case in Portugal but they've started taxing it the same as an austerity measure - which is fine because it wasn't only affecting public or private sector workers.

Generally though it's really about salary delivery and structure not salary amount.