Monday, February 13, 2012

European Update

We are pleased to introduce another recurring column, the European Update. The column will provide a look back at major European events from the previous week as well as provide a road map of the week ahead.

Greece Passes Austerity Measures

After a week of negotiations Greek political leaders finally agreed on a set of measures to cut €3.3 billion which was approved by Greek Parliament on Sunday. The measure is designed to appease official creditors in order to secure their most recent bailout package.

European Finance Ministers will meet on Wednesday to determine whether the measures are sufficient. Without the bailout funds Greece will likely be unable to pay €14.5 billion of bonds maturing on March 20th. European Finance Ministers have warned that a deal must be done by this Wednesday in order for Greece to have the funds by March 20th. The ministers will likely want to know specifically where the pledged cuts will occur, as well as endorsements of the terms of the bailout from all Greek party leaders.

As Greek parliament passed the austerity measures, riots grew in Athens; with police reporting 130 stores looted and 34 buildings set ablaze. Prime Minister Papademos has warned that, without the bailout, a hard default would drag the country “into a spiral of recession, instability, unemployment and misery.” Papademos continued to note that any politician who votes against the measure does not belong in government.

ECB Approved Broadening Collateral

On Tuesday the ECB approved measures to widen the collateral acceptable to post against its unlimited offering of three-year loans. The broadening of collateral means that the uptake for the LTRO could be much greater. The original LTRO saw banks take €489bn in three-year loans from the ECB at a low 1.00% rate. The Financial Times estimates that broadening the acceptable collateral could boost uptake by €200bn. The total pool of eligible collateral is near €14 tn.

One central bank noted that, in effect the provision means that they will accept BB- credit rating as collateral when previously they would only accept BBB-.

S&P Downgraded Italian Banks

On Friday S&P downgraded 34 Italian banks, including the nation’s largest three, Unicredit, Intensa and Monte dei Paschi. UniCredit and Intensa both saw their ratings fall from A to BBB+ with a negative outlook. Italy’s credit rating was cut two levels on Jan 13 to BBB+. S&P cited the effect of the debt crisis limiting the banks’ ability to roll over debt in wholesale market.

IMF Warns About China’s Vulnerability to Europe

An IMF report released yesterday indicated financial volatility from Europe could drag China’s growth down by as much as 4 percent below the baseline scenario. The contagion would be felt primarily through trade, with knock-on effects to domestic demand. This scenario would see global growth fall by 1.75%. The report notes that the effect could be mitigated with a stimulus amounting to 3% of GDP in 2012-13, which would lessen the impact to 1% slowing of GDP from the baseline.

See Page 6 of the IMF’s China Economic Outlook

Ahead this Week

The Greek Government is likely to reshuffle on Monday, replacing those who defected and voted against the austerity package.

Tuesday: Italian BTP auction and Greek Spanish T-bill auctions.

Wednesday: Eurozone finance ministers will meet to determine Greece’s eligibility for the most recent bailout package.

EU 4Q GDP released.

Portugal T-bill auction.

Greece expects to finalize the “private sector involvement” in its bailout, involving private creditors to take a write-down amounting to nearly 70% loss in NPV. The formal offer is expected to be made Friday.

French and Spanish bond auctions.

Spain 4Q GDP released.

€1.6bn Greek bonds mature.

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