MacroScope

Greek bailout deal tantalisingly close

By Mike Peacock
December 12, 2012

The Greek bond buyback has fallen a little short, leaving Athens and its lenders to plug a 450 million euro hole. The euro zone and IMF had given Greece 10 billion euros to buy back enough debt at a sharp discount so that it could retire 20 billion euros worth of bonds and knock that amount off its debt pile. Without that, the deal to start bailout loans flowing to Athens again would fall through.

Due to the discount working out slightly more generously than expected, Greece fell slightly short but it’s impossible to believe the currency bloc will throw itself back into turmoil over a few hundred million euros. Athens will confirm the state of play this morning. One source said German “bad banks” had not tendered most of their holdings and could be tapped again. A solution will be found and probably in time for the EU leaders’ summit on Thursday and Friday. IMF chief Christine Lagarde came close to saying as much last night, welcoming the bond buyback and leaving the loose ends to the Europeans.

More preparatory work for the summit gets underway today with EU finance ministers meeting to try and bridge a gap over plans to regulate euro zone banks cross-border – part one of building a banking union. The European Central Bank is set to be the overarching regulator but Germany wants its scope severely constrained, while others want it to be able to intervene in any euro zone bank, at least in theory. This does not have the power of Greece or Italy to move markets but an inability to agree on the least contentious part of a banking union would not send a good signal.

A compromise floated by EU president Cyprus recommends recommends banks with assets of 30 billion euros or with assets larger than one fifth of their country’s economy be supervised directly by the ECB rather than national supervisors with the proviso that the ECB has the authority to go further. That would leave out most of the German savings banks under national control – a key demand for Berlin. We’ll see if it flies today.

After Mario Monti declared over the weekend he would dissolve the Italian government, yesterday saw him trading barbs with Silvio Berlusconi but we’re essentially in a holding pattern now. We know that the budget bill will be passed then campaigning will get underway for February elections. After an initial sell-off, markets have already calmed and barring a calamity here or in Greece the essential fact remains that the ECB’s declaration that it could intervene in the bond market in whatever scale is needed continues to underpin things.

Italy sells a hefty chunk of T-bills today and Spain’s Rajoy and de Guindos appear in parliament, and are watching Italy with a little nervousness, but for now the crisis level Spanish and Italian yields of the summer are a thing of the past. However, at some point next year the ECB is probably going to have to show its hand for that to remain the case.

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