Greek show still on the road

By Mike Peacock
November 8, 2012

The Greek government pulled it off last night, winning parliamentary approval for an austerity package which offers yet more deep spending cuts, tax rises and measures to make it easier and cheaper to hire and fire workers. But boy was it tight. With the smallest member of the coalition rejecting the labour measures, Prime Minister Antonis Samaras carried the day by just a handful of votes. The overall budget bill is expected to be pushed through parliament on Sunday.

So the show remains on the road and this government has shown more resolve than its predecessors which may buy it some goodwill from its lenders. Attention today turns to the monthly policy meeting of the European Central Bank, a key player in negotiations to put Greece’s debts back on a sustainable path.  Mario Draghi could well rule out taking a haircut on the Greek bonds it holds, something the IMF has pushed it and euro zone governments to do but which Germany and others won’t countenance.  However, the ECB could forego profits it has made on Greek bonds it bought at a steep discount. Those profits have to be funneled through national euro zone central banks and would only be realized when the bonds mature but it would still help.

Greece is set to get two more years to make the cuts demanded of it and EU economics chief Olli Rehn told us yesterday that lengthening the maturities on official loans to Greece and lowering interest rates on them could be done but a haircut was out. There is the possibility of a meeting of the Eurogroup Working Group (the expert officials who prepare for euro zone finance ministers’ meetings) but it seems less likely that a deal will be struck at next Monday’s Eurogroup meeting, with officials now giving themselves until the end of November to come up with something. There were suggestions that Washington had urged big decisions to be put off until after the presidential election. True or not, that roadblock is now out of the way.

The ECB is expected to leave rates at a record low 0.75 percent even though Draghi was decidedly gloomy about the state of the currency bloc’s economy on Wednesday. Nonetheless, he is champing at the bit to put his bond-buying plan into action and probably wants to keep focus on that rather than a rate cut which wouldn’t do much to revive the economy. On that front, if he gives any further detail on how he will demonstrate the ECB will not be a preferred creditor on any bonds it buys it will be of serious interest to investors.

A Reuters poll last week gave an 80 percent chance the ECB will hold its main rate at 0.75 percent, though most of the 73 analysts polled expected a cut to a new record low of 0.5 percent within the next few months. Draghi is not likely to say much about Spain while its request for help is pending

Spain will sell up to 4.5 billion euros of three-, five- and a 20-year bond, the longest dated issue to be sold since mid-2011. The latter will be of keenest interest, giving a gauge of any revival in long-term investor interest in Spain rather than the in one minute, out the next merchants. Madrid will have cleared its entire 2012 issuance needs barring a disaster today so pressure on Prime Minister Mariano Rajoy to seek help quickly from the euro zone rescue fund, after which the ECB would intervene, is still largely absent. Given the parlous state of Spain’s economy, the odds still are that he will at some point but who knows if it will be before the year-end.

 

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