Greece manages to scrape up funds for another payment to the IMF

The Greek government managed to scrape together enough cash to pay off $222 million that was due to the International Monetary Fund yesterday.

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To raise the cash, the government has been borrowing from pension funds and also from the reserves of local governments. The government is also placing a surcharge on withdrawals of cash and financial transactions. This surcharge will not only raise revenue but also discourage capital flight. Greece is also considering a special levy on the country's 500 richest families to collect more cash.

Next Tuesday, Greece faces an even larger payment of 770 million euros to the IMF. Greece also is required to pay salaries and pensions later next week. Greek officials have been talking with their creditors and EU officials to help push for a release of funds from their bailout loan, but so far creditors have insisted Greece must present and implement reforms that have been demanded as part of the original bail-out agreement. The reforms include changes to pensions and in the labor market that so far the government has refused to countenance and would go completely counter to their election pledges. Alexis Tsipras, the Greek Prime Minister, discussed with French President Francois Hollande how negotiations could be fast forwarded.

Greek officials are meeting with members of the Troika, the European Commission(EC), European Central Bank(ECB), and International Monetary Fund(IMF) or as they are now called "The Institutions" before a meeting of the Eurozone's 19 finance ministers next Monday at which the group could decide whether Greece has done enough to merit release of the remaining 7.2 billion euros of their bailout loan. In Brussels, technical talks had been extended beyond yesterday. An unidentified Eurozone official claimed that there had been visible progress after weeks of stalemate. The Greek Finance Minister Yanis Varoufakis was in Rome to discuss issues with the Italian Finance Minister, Pier Padoan and was then to talk with Spanish finance minister Luis de Guindos. Prime Minister Tsipras consulted with EC president Jean-Claude Juncker yesterday and they both affirmed that "constructive talks should continue."

Tsipras and Juncker issued a joint statement that seems to indicate that Greece may be reconsidering its opposition to demands for pension reform. The two spoke of the remaining reforms Greece needed to implement. These included modernizing the pension system "so that it is fair, fiscally sustainable, and effective in averting old-age poverty". The EC will no doubt stress the fiscally sustainable aspect aspect. The Troika have been demanding pension reforms that Greece has so far resisted. The other main issue was labor market reform and that also the two agreed must be addressed and they said they had discussed "the need for wage developments and labor market institutions to be supportive of job creation, competitiveness and social cohesion."

While the statements sound optimistic, there are reports members of the Governing Council of the ECB are growing impatient at Greece's reluctance to agree to and implement reforms demanded. They also worry about their exposure to Greek bank debt and are reluctant to bend the rules any further to help Greece out of its cash difficulties. German Finance Minister, Wolfgang Schaeuble, who has taken a hard line against Greece said that it was in Germany's interest to help Greece but not at any cost and that just giving more aid without changing the conditions under which Greece was operating made no sense. He also said that Greek demands for World War II reparations were nonsense. We should find out next week whether there is any breakthrough in negotiations. If there is a breakthrough, it would appear that is because Greece has basically caved in to the demands of the Troika.

European banks get ready for possible Grexit

Both banks and brokers are dusting off contingency plans for a possible Greek exit from the eurozone (Grexit). While most think that Greece will remain in the zone, the snap elections to take place January 25 may make such an exit more likely.

The latest poll shows the leftist anti-bailout party Syriza increasing its lead over the ruling coalition of Prime Minister Antonis Samaras' New Democracy. Syriza has the support of 31.2 percent versus 28.1 percent for New Democracy. This 3.1 percent lead compares with a 2.6 percent lead in an earlier January poll. To win an outright majority the leading party would require from 36 to 40 percent of the vote. Syriza is not expected to achieve that, but under the Greek system the party getting the highest vote count receives an extra 50 seats and this will make it easier for Syriza to form a coalition with one or more smaller parties. The survey was carried out from January 13-15 and so is quite recent.

 Syriza opposes the austerity requirements imposed by the Troika , the European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB), as part of the Greek bailout terms. It also wants to write off some of the Greek debt.The Troika has spent $284.23 billion bailing out Greece. Many think that Greece will stay within the eurozone even if Syriza wins and Tsipras himself says that he wants to stay in the eurozone, as do a considerable majority of Greeks. Banks, nevertheless, want to be prepared just in case Greece does eventually leave. Citigroup, and Goldman Sachs are among those who are running tests to ensure that their trading platforms could deal with a new Greek currency , probably the drachma.

 Malcolm Barr, of J.P. Morgan writes: “The region has come far enough since the heights of the crisis to withstand a Greek euro exit intact. Though there would be a shock to confidence and growth, we would not expect others to follow a Greek euro exit." J.P. Morgan believes that if Greece did exit the eurozone, the euro would fall from 1.181 to the US dollar now to just 1.05 if the ECB balance sheet expands by 4 trillion euros to stem any contagion.The company thinks that, unlike 2012, the structures now in place could deal with any strains Grexit would create.

 Tsipras has been busy modifying some of his more radical policies. He even penned an op-ed in the Handelblatt, a German business newspaper. In it he claims that Syriza sought a new deal for Greece but within the framework of the eurozone. The deal would allow Greece to finance growth and by doing so make it possible to sustain payment on its debts. Tsipras complained: “The truth is that Greece’s debt cannot be repaid as long as our economy is subjected to constant fiscal water-boarding.” A Syriza victory would encourage other leftist parties such as Podemos in Spain to continue the focus on jettisoning austerity programs to allow for growth.

European Central Bank to supervise most larger banks in Euro area

The European Central Bank(ECB) has now assumed responsibility for most larger banks in the euro area. The banks under supervision represent 82 per cent by assets of the euro bank sector.

The supervising group the Single Supervisory Mechanism(SSM) operating out of Frankfurt, Germany is expected to improve and strengthen the financial stability of the euro area banking system and increase the the safety of the credit institutions within the area. The chair of the the supervisory board of the ECB, Daniele Nouy said that more than 900 banking experts had been hired for the new SSM unit and claimed: "We now have a unique opportunity to develop a culture of supervision that is truly European, building on the best practices of supervisors from across the euro area."
Sven Giegold, Green Parfty economic and finance spokesperson for the European Parliament said that the SSM represented a "a milestone for more financial stability in Europe." He claimed the new supervision would prevent the lax national supervision of banks in some countries that had contributed to the financial crisis faced by some countries in Europe. An audit of 130 EU banks in October of this year showed that only 25 institutions failed the stress used. While some banks in Italy, Greece, and Cyprus had poor results, the ECB felt that the banks could take action to rectify their situations. The banking supervision group has its own website here with much more information.
  The SSM took over supervision today after a year of preparation that included the stress test mentioned earlier. As of now, 120 larger banking groups will be under supervision. However, the other approximately 3,500 banks will set standards and monitor the standard of national supervision and work closely with national authorities.
 The ECB supervision of banks is a compromise solution to the EU financial crisis. President Hollande of France had wanted to issue Eurobonds as a solution to the crisis. German chancellor Angela Merkel opposed the bond solution. At the 2012 Euro summit a banking union was created that would involve banking supervision, deposit insurance, and European level settlements. Many German economists regarded this development as very much like the eurobond solution but under another name: They saw the proof of this in the decision at the summit to allow the European Stability Mechanism rescue fund to help banks directly, as soon as pan-European banking supervision could be set up with the involvement of the European Central Bank. In other words, European taxpayers would have to pay the debts of ailing banks.
In September 2012 the president of the European Commission supported by France suggested a plan for the banking union. The ECB would take over supervision of all 6,000 banks in the euro zone beginning of July of 2013. Germany vetoed that plan. Some German economists think that the ECB is not the riight body to supervise the banks. Thomas Hartmann-Wendels, professor of banking at the University of Cologne claims:. "The ECB has no mandate to do so. The European treaties specify that it can exercise banking supervision only in special cases, but not general banking supervision. And there are obvious conflicts of interest between monetary policy and banking supervision."
 Critics ask if the ECB could at the same time recommend closing a bank that would no longer be viable if this would put financial stability in jeopardy? Might the bank also raise a benchmark interest rate when it knew that doing so might cause some banks it monitored would have difficulty coping as a result? Germany was able to retain national supervision over its savings and cooperative banks. However, the national regulators will be working within a network with ECB supervisory staff. It remains to be seen how effective and acceptable the SSM will be given the concerns of some critics.

Relatively small number of European banks fail stress test

Although 25 of 130 lenders subject to the European Central Bank (ECB) stress test failed, the Eurogroup president Jeroen Dijsselbloem maintained that the test shows that the banking crisis in the region is already in the past.

Dijsselboem, who is also minister of finance of the Netherlands, said: “I definitely think the banking crisis is behind us. I am never free of worry, so I do feel that banks have to keep on working managing their risks, strengthening their capital ratios where necessary also in the future.” Although there was a total shortfall of about $32 billion many banks had already taken steps to cover that amount this year. Dijsselboem said that the numbers were manageable.
A Bloomberg article gives details of the banks that failed the test. Nine of them were in Italy. The banks were concentrated in areas such as Greece and Cyprus, with the latter country the site of the worst performing bank. Italy, Greece, and Cyprus have all faced financial difficulties.
 The ECB will become the supervisor of regional banks on November 4. Dijsselbloem said that the success of banks in going to capital markets will lead investors once again to invest in European banks and that the stress results will support this trend.
Another article claims that only 13 of the big Eurozone banks were "sick". While analysts predicted that financial markets would be relieved at the results, some analysts were concerned that the stress test was not tough enough despite the claim by the ECB that the assessments were quite rigorous. The test results are not likely to force the closure of any banks. Those judged to have too little capital will have two weeks to draft plans to increase their capital and up to nine months to meet the minimum requirement.
While the tests showed that 25 banks in all failed the test, a dozen of those banks had already rectified their situation.These banks raised capital by issuing new shares, or sold risky investments or loan businesses and thus reduced the amount of capital needed. Neil Williamson of Aberdeen Asset Management said: “Generally speaking, the absolute number that needs to be raised is not large. There are still plenty of question marks about some banks.”
 Monte dei Paschi di Siena in Italy, the world's oldest bank had the largest capital deficit. The bank already received a government bailout. There is speculation that the bank would seek a purchaser. The board of the bank has hired UBS and Citigroup as advisers to define a plan to solve the bank's problems.
  Martin Baccardix, a financial analysts said: " From these tests we can hope that banks will trust one another and that there would be transparency. What is more important to see going into 2015 is whether the banks are going to be prepared to lend more money to business to create more money in an economy that has been flat for several quarters and is threatening to turn back into recession. If that can be held off, then the ECB will be able to look at this test as an incredible success to engender confidence - [which is] everything in the banking system, no less so than here in Europe."
 In 2010 and 2011 similar reviews passed some banks that later had to receive bailouts. Many analysts considered that national supervisors of regional banks were too easy on their banks and unwilling to deal with problems. With the ECB taking over supervision this problem may be solved. However, this also will involve less national control over financial institutions.

Alan Greenspan claims that Euro zone cannot survive in current form

Greenspan remarked::“What has been happening is not sustainable,” “We have to focus far more quickly on how to get the deficits down, because unless we do that, we cannot continually fund these things because it’s all being funded by printing money.” The band aid solutions used have failed and avoid structural issues such as uncompetitive labor markets and high deficits. Certainly the high deficits are a factor but the austerity measures are certainly reducing labor benefits and wages and selling off public assets at fire sale prices.

Greenspan said:.“Most of the ‘successes’ in this problem have been finding ways of funding the deficits, not reducing them. As long as there are deficits…you are creating ever more debt and that is not projectable indefinitely in the future,” While that is true enough perhaps the austerity measures designed to reduce deficits increase unemployment and spin the economy into decline reducing tax revenue and increasing deficits even more.

Spanish borrowing costs have risen to 7 per cent and at the same time Spanish credit has been downgraded by Moody's. Costs of Italian borrowing also increased to 5.3 per cent. For more see this article. at BNN. Markets are quite volatile as investors await the results of Greek elections on Sunday.

Paul Krugman on what ails Europe

An op-ed in the New York Times by the well-known liberal U.S. economist Paul Krugman is titled "What Ails Europe?" Krugman writes from Lisbon in Portugal.

In Portugal Krugman notes that unemployment stands at 13 per cent. While this is bad enough the situation is worse in Greece, Ireland and perhaps in Spain as well. Even the whole of Europe may be sliding back into a recession.

Krugman maintains that several of the stories explaining Europe's situation are simply not true. Both what he calls the Republican narrative and the German narrative are false.

According to the Republican narrative pushed by the likes of Mitt Romney Europe has spent too much on the poor and that too much welfare state spending has ruined the economy and plunged states into debt.

Krugman mentions that Sweden which still has an extensive welfare state is nevertheless doing well economically. NOTE; The welfare state in Sweden has been cut back however. Those countries in the most trouble Greece Ireland Portugal Spain are not in the top five of 15 European euro zone nations. Only Italy is in the top five and still has less of a welfare state than Germany which is one of the strongest economies. These facts surely show that the welfare state spending per se was not the trouble.

The German story is all about the fiscal irresponsibility of nations having debt problems. The story fits Greece to an extent but not the other countries having problems. Italy's deficits happened long ago and Spain and Ireland actually had surpluses. Countries such as the U.S. and Japan can run huge deficits without apparently facing any huge crisis. NOTE: Some analysts might claim that those countries just have not faced up to their crisis as yet!

In spite of their debts the U.S. and Japan as well are able to borrow at very low-interest rates. Krugman sees Europe's main problem as having a common currency without the institutions that are required for the common currency to work properly.

The common Euro led investors to invest huge amounts of capital into countries around the edges of Europe a flow that was unsustainable. These large flows caused both costs and prices to rise making some countries uncompetitive. This in turned resulted in large trade deficits.

The countries involved cannot devalue their currencies and restore competitiveness because they are tied to the Euro. The nations only have painful choices whether they stay with the Euro or leave the zone.

Krugman thinks that Germany could help by reversing its imposition of austerity policies but will not do so. Probably it is not politically doable in any event. What is important for Krugman is that people should realise that the conventional wisdom about the too expensive welfare state and fiscal irresponsibility lead to failed policies that often make the situation worse. For more see the article. Even though these policies make the situation worse over the short term they do weaken labor and do cut spending on social programs. This leaves more of the economic pie for the one per cent. The theory is that once labor costs are low enough and the countries implement more policies favorable to financial capital that investment will flow back into those countries

Fitch ratings: France still triple A but outlook negative

    Several other European countries were also downgraded by placing them on a rating watch negative review. The agency expects to complete the review for Spain, Italy, Belgium, Slovenia, Ireland and Cyprus by the end of January.
    The move by the rating agency will put more pressure on Eurozone leaders to do more to solve the two year debt crisis in Europe. Although European leaders have agreed to form a tighter fiscal union but the debt crisis for several countries has not been resolved.
   There has been resistance to using the European Central Bank as a backup. The ECB has not as yet made a commitment to buy bonds of the countries needing debt financing. Fitch claims that the meeting of European leaders did not produce definitive policy solutions to the crisis. For more see this article.


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New European Union plans soothe markets for now

    New plans call for a closer fiscal union that will ensure  any countries which violate debt guidelines will be punished. However the target for setting the new rules is next March. The leaders also agreed to add 267 billion to funds meant to ease the lending crisis.
    Stock markets have reacted favorably so far although Italian and Spanish bond prices fell in spite of the fact that the European Central Bank is supposed to be buying them. Bond holders want the Bank to intervene even more to ensure that countries in trouble with debt can pay their bills. A demand that bondholders should share in any losses was diluted in the new plan.
   The UK will be excluded from the planned new fiscal union. The UK had demanded a veto over any new financial regulations it disapproved. Not surprisingly other leaders did not agree to this condition.
   While the new agreement was regarded as positive for banks, investors still wonder how some nations will be able to finance their burgeoning debts. In 2012 Euro Zone countries must repay over 1.1 trillion Euros in debt. Banks too will need to refinance very large amounts.
   A Citigroup economist predicted“deep euro-area recession and strained financial markets” next year with the economy actually shrinking throughout the year. The IMF is expected to play an expanded role in lending in the zone with funds being sought from outside Europe to help out. However as the IMF will no doubt impose reforms involving cutbacks and austerity as the price for loans it is not clear how economies with these loans can be expected to grow. For more see this article.

Rating agency S and P puts 15 European countries on credit watch

Rating agency Standard and Poor has put 15 Euro zone countries on review for a possible downgrade of their credit ratings. Even Germany and France could lose their triple A ratings. The move sent Asian stocks into a decline. See this article.

The agency said that there was the risk of a deepening crisis in the region. The agency also cited disagreements among officials and policy makers about how to solve the crisis increases the risks.

Four months earlier S and P cut the U.S. credit rating from AAA to AA+ because of the failure of political discussions on how to tackle the U.S. deficit. Some analysts and bondholders were irritated at the timing of the S and P announcement as European Union leaders have a meeting in Brussels Dec 8th and 9th to deal with the crisis. For much more see this Bloomberg article.