Category Archives: Spain

EU Daily | Monti under fire as crisis deepens

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It’s now not over until the ECB writes the check, the whole check, and nothing but the check.

Monti under fire as crisis deepens

(FT) — “We are not standing down,” said Susanna Camusso, leader of the leftwing CGIL. Workers are to down tools next Friday over pension reforms passed in December and will strike again when parliament debates Mario Monti’s controversial labour reform legislation. Rather than feeling mollified by concessions made by Mr Monti over changes to rules on the firing of workers for economic reasons, Ms Camusso made it clear the union felt emboldened by its mobilisation. “The text is very bad,” Emma Marcegaglia, head of Confindustria, told the Financial Times, saying it would be better to scrap the entire labour reform legislation if it were not amended in parliament. A senate committee will start examining the bill on Wednesday.

Shaken Spain seeks to restore confidence

(FT) — Luis de Guindos, the economy minister, has said in interviews with local and foreign media that Spain does not need a bailout of the kind provided to Greece, Ireland and Portugal by the European Union and the International Monetary Fund. Mr de Guindos told Germany’s Frankfurter Allgemeine Zeitung that the government’s next step would be a reform of the health and education systems “that is, a rationalisation of spending in the autonomous regions”. Spain needs to cut more than 3 percentage points of gross domestic product from its public sector deficit, reducing it from 8.5 per cent of GDP in 2011 to 5.3 per cent this year in line with EU targets. In 2013, the deficit is supposed to fall further to 3 per cent of GDP.

Spain Economy to Start Growing From 2013, de Guindos Tells Ser

(Bloomberg) — Spain’s economy will start growing next year, Economy Minister Luis de Guindos says in interview with Cadena Ser radio station today.

Labor situation to stabilize from final quarter of this year, de Guindos says.

Italy Fights Spain for Investors as ECB Boost Fades: Euro Credit

(Bloomberg) — Competition between Italy and Spain for international investors’ funds will heat up this quarter as domestic buying stoked by the European Central Bank fades.

Italian and Spanish bonds slumped last week after demand dropped at a Spanish bond sale and Prime Minister Mariano Rajoy said his country is in “extreme difficulty.” The decline reversed a first-quarter rally sparked by more than 1 trillion euros ($1.3 trillion) of ECB loans to the region’s banks via its longer-term refinancing operation. Spain’s 10-year yield spread to German bunds widened to the most in four months, while Italy’s reached a six-week high.

“Spain and Italy are coming back down to earth after an incredible first quarter,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole SA in London. “The LTRO bought some time, but not a massive amount of time. Now the second quarter will be harder than the first unless policy moves convince foreign investors to come back in.”

Italian 10-year bonds fell for a fourth week, with the yield advancing 40 basis points to 5.51 percent. The yield difference over bunds widened to 378 basis points, compared with an average of 381 basis points in the first quarter. Spain’s 10- year yield spread to Germany reached 410 basis points last week after averaging 333 basis points in the first three months.

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Irish payment coming due at month end

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Lots of ‘restructuring talk’ going on- looking like another ‘bondholder tax’ of sorts?

From Reuters:

Analysts are divided as to whether Ireland’s national debt, which is forecast to peak at 119 percent of GDP in 2013, is sustainable. A policy paper by Ireland’s European partners and the IMF is being drawn up on a possible deal to refinance the promissory notes, IOUs used to recapitalise failed lenders Irish Nationwide Building Society and Anglo Irish Bank, Noonan said. Ireland would then seek the political support of its European partners. “I would like to see a situation where the repayment schedule on the Anglo Irish debt was more affordable and that would mean, in very simple terms, re-engineering the repayment schedule so we would have a longer time to repay at lower interest rates,” Noonan said. There was no prospect of a writedown of part of the principle, Noonan said. “It will have to be repaid,” he said, while warning that the talks on refinancing the promissory notes were unlikely to reach a conclusion soon. “It is a project where, if we’re successful, it will be in the medium term rather than immediately.”

Kenny cautions on delay in €3.1bn bank debt repayment

By Arthur Beesley and Kilian Doyle

March 13 (Irish Times) — Taoiseach Enda Kenny has rejected calls for Ireland to follow Spain’s lead on demanding concessions from Europe, insisting the two countries were in completely different positions.

With no breakthrough imminent in the Government’s long campaign with Europe to restructure Ireland’s banking debt, Irish officials have privately raised the possibility of delaying a postpone a €3.1 billion bank debt repayment which falls due at the end of this month.

Minister for Finance Michael Noonan left open that possibility as he arrived in Brussels yesterday for talks with his EU counterparts, saying it was a long way to the end of the month and that nothing was ruled in or out.

Speaking in the Dáil today, the Taoiseach said he did not wish to give the public false hope the promissory note due to be paid on March 31st will be scrapped.

“This country is in a bailout programme, Spain is not,” said Mr Kenny. “So the money to pay the salaries of the gardaí, the teachers, the nurses and all of the other people in the country here comes from Europe.”

Euro zone finance ministers agreed last night to give Spain more leeway in cutting its deficit after the Madrid government said it would not meet its deficit target. Spain’s deficit target for 2012 will now be 5.3 per cent of GDP instead of the original 4.4 per cent agreed under new EU regulations.

Sinn Féin president Gerry Adams urged Mr Kenny to follow Spain’s lead. “I can’t,” the Taoiseach replied. “Spain is not in a bailout situation. It’s got excessive deficit and it’s got challenges itself. It’s got to get its deficit down by the end of 2013. Ireland is in a programme and has to get our debt down by 3 per cent by 2015.”

Mr Kenny insisted negotiations are under way to restructure the terms of Ireland’s European debt. However he said they were difficult, complex and very technical. “When you speak of the €3.1 billion in respect of the promissory notes, I’ve made it perfectly clear we are not going to raise any undue expectations here,” Mr Kenny added.

In Brussels today, however, EU economics commissioner Olli Rehn indicated in unambiguous terms that a delay in repayment of the debt would not be acceptable. His stance mirrors that of the European Central Bank, which is also resisting any delay.

“I actually wonder why this has to be asked at all because the principle in the European Union and in the long European legal and historical tradition is – in Latin – pacta sunt servanda, respect your commitments and obligations,” the commissioner said.

“The European Union is a community of law and that assumes by definition that each and every member state respects the commitments it has undertaken and this is valid in the case of Ireland as well. Any possible negotiation on the medium- to long-term solution is a separate issue.”

Dublin has been trying for months to renegotiate an EU-approved arrangement under which it is recapitalising the former Anglo Irish Bank and the former Irish Nationwide Building Society with expensive IOUs known as promissory notes.

A key consideration in this debate, a senior European official said yesterday, is whether any deal would help Ireland realise fiscal targets set under its EU-IMF bailout in a scenario in which economic growth is forecast to slow down.

Also in question is whether loss-incurring tracker-mortgages issued by other Irish banks could be moved as part of any restructuring deal to Irish Bank Resolution Corporation, as the former Anglo and Irish Nationwide are now known.

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Talk of other member nation haircuts slowly surfacing

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Talk of widespread haircuts getting more serious. As previously discussed, this has the potential for catastrophic global financial meltdown.

Analysis: Greek default may be gift to other euro strugglers

By Mike Dolan

Mar 7 (Reuters) — Greece’s tortuous debt restructuring and threat of retroactive laws to compel reluctant creditors heaps regulatory risk onto investors but may make voluntary sovereign debt revamps more attractive and likely for other cash-strapped euro sovereigns and their creditors.

Thursday could mark a climax of the Greek debt workout with private creditors due to respond to an offer that would see them effectively write off more than 70 percent of the face value of their bonds in return for new debt with a series of sweeteners.

With Greek government bonds currently trading at less than 20 cents in the euro and the risk of a total wipeout if Greece decided to unilaterally refuse all payments, a majority will likely go for it. Legally-binding majorities are another matter.

Athens said this week it aims for 90 percent acceptance but if the takeup is at least 75 percent then it would consider triggering so-called “collective action clauses” retroactively inserted into the bonds issued under Greek law — about 85 percent of the 200 billion euros being restructured.

Those clauses in practice force all affected creditors to comply.

But it’s this distinction between debt issued under domestic laws and that sold under internationally-accepted English law that some say has consequences for other troubled euro nations eyeing Greece’s so-called Private Sector Involvement, or PSI.

A GIFT FROM GREECE

In essence, English-law Greek bonds, as is the case for many emerging market sovereigns, trade as if they were senior to local-law debt — at almost twice the price in fact right now. That’s because the terms of foreign-law bonds cannot be altered by an Athens parliament, and agreement for debt swaps is needed bond-by-bond, unlike local laws that aggregate majorities across all debtors and make blocking minorities more difficult to muster.

A paper released this week by Jeromin Zettelmeyer, deputy chief economist at the European Bank for Reconstruction and Development, and Duke University Professor Mitu Gulati reckons this legal gulf could well encourage other debt-hobbled euro zone countries and their creditors into mutually acceptable and beneficial debt restructurings.

This would involve an agreed switch in the legal status of the debt in return for relatively modest haircuts.

“Holders of local-law governed bonds in other euro zone countries that are perceived to be at risk might want to make a trade for English-law governed bonds,” the economists wrote. “Depending on how much these bondholders would be willing to pay to make this trade, it could serve the interest of the country as well to make it.”

The sovereign gets a chance to reduce a crippling debt burden while bondholders get greater contractual protection in any future restructuring.

Given that the Greek precedent of retroactive legislation vastly increases the allure of foreign-law bonds, which credit rating firm Moody’s says now make up less than 10 percent of all euro zone government bonds, a window of opportunity may open up.

“Effectively, this is a large gift from the Greeks to the parts of the euro zone that face debt crises. By conducting its debt exchange in the way it did, Greece has in effect resurrected the plausibility of purely voluntary debt-reduction operations in Europe.”

Although Berlin, Paris and Brussels insist the Greek case is a one-off and European Central Bank liquidity has insulated the wider banking system, Portugal’s 10-year bonds still trade as low as 50 cents in the euro and many creditors reckon it will be very difficult for the country to avoid some restructuring.

Even the 10-year debt of fellow bailout recipient Ireland, which many investors reckon has the underlying economic capacity to go back to the markets next year, is still trading at less than 90 cents in the euro and many doubt its imminent market return.

“We still expect a sizeable growth undershoot and deficit overshoot and expect that Ireland will need a second financing package (which may include PSI) beyond 2013,” economists at Citi said on Monday.

What’s more, if Europe’s new fiscal pact is rejected by voters in a planned referendum there in the coming months, Ireland would lose access to the financial backstop of the European Stability Mechanism and likely unnerve many investors.

Yet voluntary debt swaps with some debt relief stemming from more modest haircuts than Greece may well be the best way to ensure these two countries avoid outright default and return to private financing in a reasonable amount of time.

And if such exchanges were wholly voluntary, it would also mean credit default swap insurance would not pay out — a stated aim for many euro policymakers concerned about the speculative nature of a market where it’s possible to buy insurance on something you don’t own.

One danger is that the prospect of countries opting for such a swap may scare creditors in larger countries like Italy and Spain where currently no bond haircut is expected by the market, thanks in large part to the ECB’s liquidity injections.

And the upshot for many economists is that there will be a longer-term price to pay for governments for tinkering with the rules of the game, as many investors view it, via the likes of retroactive bond legislation and obfuscation of CDS markets.

“Investors will expect a premium for bearing this regulatory risk,” Morgan Stanley’s Manoj Pradhan told clients in a note, adding that only central bank liquidity floods were now obscuring the resultant higher financing costs and there would be a dangerous blurring of lines between macro and market risks.

But given that indiscriminate cheap lending was seen as at least partly responsible for the credit binge and bust of the past five years, maybe higher risk premia are not all bad.

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EU Leaders to Agree on Rescue Fund, Balanced Budget

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No let up on the austerity demands, which are now to be legislated via balanced budget rules.

EU Leaders to Agree on Rescue Fund, Balanced Budget

Jan 29 (Reuters) — European Union leaders will sign off on a permanent rescue fund for the euro zone at a summit on Monday and are expected to agree on a balanced budget rule in national legislation, with unresolved problems in Greece casting a shadow on the discussions.

The summit – the 17th in two years as the EU battles to resolve its sovereign debt problems – is supposed to focus on creating jobs and growth, with leaders looking to shift the narrative away from politically unpopular budget austerity. The summit is expected to announce that up to 20 billion euros of unused funds from the EU’s 2007-2013 budget will be redirected towards job creation, especially among the young, and will commit to freeing up bank lending to small- and medium-sized companies.

But discussions over the permanent rescue fund, a new ‘fiscal treaty’ and Greece will dominate the talks.

Negotiations between the Greek government and private bondholders over the restructuring of 200 billion euros of Greek debt made progress over the weekend, but are not expected to conclude before the summit begins.

Until there is a deal between Greece and its private bondholders, EU leaders cannot move forward with a second, 130 billion euro rescue program for Athens, which they originally agreed to at a summit last October.

Instead, they will sign a treaty creating the European Stability Mechanism (ESM), a 500 billion-euro permanent bailout fund that is due to become operational in July, a year earlier than first planned. And they are likely to agree the terms of a ‘fiscal treaty’ tightening budget rules for those that sign up.

The ESM will replace the European Financial Stability Facility (EFSF), a temporary fund that has been used to bail out Ireland and Portugal and will help in the second Greek package.

Leaders hope the ESM will boost defenses against the debt crisis, but many – including Italian premier Mario Monti, IMF chief Christine Lagarde and U.S. Treasury Secretary Timothy Geithner – say it will only do so if its resources are combined with what remains in the EFSF, creating a super-fund of 750 billion euros ($1 trillion).

The International Monetary Fund says an agreement to increase the size of the euro zone ‘firewall’ will convince others to contribute more resources to the IMF, boosting its crisis-fighting abilities and improving market sentiment.

But Germany is opposed to such a step.

Chancellor Angela Merkel has said she will not discuss the issue of the ESM/EFSF’s ceiling until leaders meet for their next summit in March. In the meantime, financial markets will continue to fret that there may not be sufficient rescue funds available to help the likes of Italy and Spain if they run into renewed debt funding problems.

“There are certainly signals that Germany is willing to consider it and it is rather geared towards March from the German side,” a senior euro zone official said.

The sticking point is German public opinion which is tired of bailing out the euro zone’s financially less prudent. Instead, Merkel wants to see the EU – except Britain, which has rejected any such move – sign up to the fiscal treaty, including a balanced budget rule written into constitutions. Once that is done, the discussion about a bigger rescue fund can take place.

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Italy Bond Auction Fails to Match Spain Success

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The banking system can’t fund all the euro member nations under current regulatory restrictions, including capital requirements and diversification rules.

The 3 year variable rate funding from the ECB may have helped some banks with room on their balance sheets, but with general liquidity concerns, buy more national govt debt, but that would be a one time adjustment. Once the banking system is ‘topped off’ it only buys more national govt bonds to replace maturing issues, or to add to its balance sheet should its capital increase.

Italy Bond Auction Fails to Match Spain Success

By Valentina Za

Jan 25 (Reuters) — Italy’s three-year debt costs fell below 5 percent but its first bond sale of the year failed to match the success of a Spanish auction the previous day, reflecting the heavy refinancing load Rome faces over the next three months.

Italy raised the maximum planned amount of 4.75 billion euros at the auction but did not live up to market expectations raised by a Spanish tender on Thursday where Madrid raised 10 billion euros, twice the planned amount, at lower rates.

Both Italy and Spain are benefiting from half a trillion euros of cheap three-year funds the European Central Bank injected into the banking system in an unprecedented move last month. Investors, however, remain more cautious towards Rome in the light of its much larger refinancing needs.

“The auction metrics look robust on aggregate, although not as spectacular as yesterday’s Spanish supply,” said Michael Leister, a strategist at DZ Bank in Frankfurt.

Italian bonds rallied after domestic banks awash with ECB money snapped up Spain’s bonds on Thursday. The mixed results of the Italian sale tempered market enthusiasm and Italy’s 10-year yields rose back above 6.60 percent in the secondary market, after falling below 6.50 earlier in the session, to their lowest level in more than a month.

“This will serve to dampen some of the markets’ enthusiasm in the wake of yesterday’s Spanish auction … It doesn’t defeat the notion that the ECB extraordinary liquidity provisioning will support peripheral debt but it perhaps tempers expectations as to what degree these operations will support,” said Richard McGuire, a strategist at Rabobank in London.

LOWEST SINCE SEPTEMBER

Italy sold its November 2014 three-year benchmark bond at an average rate of 4.83 percent on Friday, down sharply from a yield of 5.62 yield at an auction just two weeks ago.

In a sign of improving funding conditions, this was the lowest yield at a three-year auction since September last year though fellow debt struggler Spain only had to pay 3.384 percent on three-year bonds on Thursday.

The bid-to-cover ratio fell to around 1.22, versus an already weak 1.36 ratio at the end-December sale, showing anemic demand for the paper. This time, however, Italy sold the top planned amount of its three-year benchmark.

Rome also sold debt due in July 2014 and August 2018.

The ECB’s liquidity boost, evident also at an Italian bill sale on Thursday where one-year yields more than halved, leaves Italy’s Treasury better placed to refinance some 90 billion euros of bonds maturing between February and April.

That is more than Spain aims to issue in medium and long-term maturities in the whole of 2012.

What analysts now describe as a challenging task may have been an impossible one at the end of November, when market fears of a financial collapse pushed Italy’s short-term debt costs towards 8 percent.

Under the leadership of a new technocrat government, Italy has embarked on a bold austerity push aimed at balancing the budget in 2013.

Analysts at Barclays Capital noted in a report that third-quarter budget data showed a decline in current expenditures for the first time ever, when excluding debt servicing costs.

But Prime Minister Mario Monti must now convince markets it can revive Italy’s ailing growth rate by overcoming entrenched resistance to its liberalization program.

Analysts warn that sentiment on the markets remains fragile with worries over a deal with private investors to voluntarily write down half of the value of their Greek debt lingering in the background.

“Looking beyond this one auction, the issuance challenge for Italy remains significant. Market pressures are most apparent in the 10-year sector of the curve which will face supply in two weeks time,” Citi analysts wrote in a research note.

Italy will sell five- and ten-year bonds at the end of January. On this longer maturities demand from foreign investors plays a bigger role but analysts say Italy would be able to shift only part of its funding burden to the short-term ahead of a second three-year liquidity tender at the end of February.

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ECB Wants New Capital Rules Amid Credit Crunch Fears

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It’s supports the notion that they understand that for govt debt to go down with the current institutional structure they need private sector debt (and/or exports) to increase.

However with the private sector necessarily pro cyclical (which is what Minsky boils down to),
at best this policy will keep mainly keep things from getting worse than otherwise.

ECB Wants New Capital Rules Amid Credit Crunch Fears

December 15 (MNI) — The European Central Bank, fearful of a looming credit crunch, is pushing regulators to alter new recapitalization rules in a way that will dissuade banks from shrinking their balance sheets to reach the 9% core tier 1 ratio required by the middle of next year, well-placed Eurosystem sources told Market News International.

In late October, the European Banking Authority (EBA) said it was requiring the region’s biggest banks to establish an exceptional and temporary buffer: the ratio of their highest quality capital to the assets on their balance sheet, weighted for risk, must reach 9% by the end of June 2012.

Eurosystem central bank officials as well as some EU governments are concerned that this new capital requirement could lead to a massive deleveraging by banks in Europe, which would entail selling off assets and significantly tightening conditions for lending.

There is widespread fear that such a development would depress loans to households and businesses. Some say it is already partly to blame for the big selloff in sovereign government bonds last month that led to sharply higher borrowing costs for Italy and Spain.

The original idea behind the EBA directive was that banks would need to maintain a constant 9% ratio over the entire period during which the requirement was in force. They could do so either by raising new capital — a big challenge in current market conditions — or by dumping assets and not acquiring new ones, which turned out to be the easier route.

“If you combine [asset] disposals with an aggressive fiscal tightening, you are creating the conditions for a sharp contraction,” a Eurozone central banker warned. He projected that the combined hit on GDP from fiscal tightening and bank retrenchment could be as much as two full percentage points. “That means a recession next year,” he said.

In recent public comments, ECB President Mario Draghi expressed concern about the potentially pernicious impact of bank deleveraging to meet the new capital targets. “We want to make absolutely sure that this process does not aggravate the credit tightening that is going on now,” the ECB president said. “It is important that banks raise capital, but not in a way that affects lending.”

Sources said that under a new proposal intended to address this problem, banks would be required not to reach a 9% ratio but to raise a specified, fixed amount of capital by the mid-2012 deadline.

Based on figures banks provided to the EBA as of end-September, the regulators would calculate the amount of capital a bank would have needed to hit the 9% capital ratio at that time. Banks would then be required to raise that level of capital regardless of what they had done with their assets since then or what they might do with them in the future.

Because banks would be required to raise the same amount of core tier one capital regardless of subsequent balance sheet moves, they would no longer have the same incentive to dump assets as a means of meeting the capital requirement.

A senior EU source said that a recent letter from the chairman of the EBA and the Polish EU presidency had noted that bank deleveraging was hurting the recovery, and it laid out a plan by which the 9% ratio would be calculated on the basis of risk-weighted assets on banks’ books as of September 30.

If the plan is approved, “you won’t see a change to the actual ratios or the sums [to be raised], but there will be a clarification that this should not be achieved through asset disposal,” this source said. “It should slow the aggressive [asset] disposal, which many people think is killing any chance of an upswing.”

After releasing new figures last Thursday on the total capital shortfall of European banks, totaling E114.7 billion, the EBA told banks to raise the money from investors, retained earnings and lower bonuses. Banks may only sell assets if the disposals do not limit overall lending to the economy, the EBA said.

However, it is not clear how bank regulators and supervisors would enforce this and whether there would be a level playing field, a well-placed Eurosystem source said. A new EBA requirement of the type now being discussed could address this issue, he said.

The decision on whether to switch from a capital ratio to a fixed amount of capital that each bank must raise lies in the hands of supervisors and regulators. It is too early to tell whether regulators will adopt the recommendation, since deliberations are still going on, another Eurosystem source said.

In its own effort to ensure the Eurozone’s economy won’t be starved for credit, the ECB last week announced a radical set of new liquidity measures, including a looser collateral framework and refinancing operations with a maturity of three years.

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Spanish Voters Set to Throw Out Socialists in Election

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As previously discussed, there is virtually no political support to leave the euro,
as it’s not intuitively obvious the euro is the problem.

It is intuitively obvious, however, that the problem was irresponsible govt
and so the move towards responsible govt- aka austerity- continues.

The euro economy can be easily ‘fixed’ and in short order.
The ECB can, one way or another, facilitate all funding needs and end the solvency issue.
And the Stability and Growth Pact (SGP) can be modified to allow deficits sufficient to sustain aggregate demand.

Currently Germany continues to be obstructing the elimination of the solvency issue,
even as market forces are now begining to weaken German bonds.
And there are no member nations yet supporting readjusting the SGP to allow higher deficits.

So my best guess is Germany will soon recognize what most of the financial community has recently been voicing- ECB bond buying combined with austerity is not inflationary- opening the door to the ECB bond buying being an EU sanctioned policy of the institutional structure to ensure solvency.

That will trigger a massive ‘relief rally’ that will fade as the reality of the depressing nature of the
austerity takes over.

It could also sideline the discussion of Greek haircuts and default discussion in general.

Spanish Voters Set to Throw Out Socialists in Election

November 20 (Reuters) — Spaniards are expected to throw out the Socialists they blame for a disastrous economic situation in an election on Sunday and to vote in a center-right party likely to dole out more bitter medicine in the form of public spending cuts.

Opinion polls show the People’s Party (PP), led by Mariano Rajoy, has an unassailable lead over the ruling Socialists, who have led the country from boom to bust in seven years in power.

Voters are angry with the Socialists for failing to act swiftly to prevent the economic slide and then for bringing in austerity measures that have cut wages, benefits and jobs.

Yet people are now resigned to further slashes in spending on health and education in the midst of a European debt crisis that has toppled the governments of Ireland, Portugal, Greece and Italy and pushed Spain’s borrowing costs ever higher.

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CNBC’s John Carney on Krugman and MMT

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>   
>   (email exchange)
>   
>   On Sat, Nov 12, 2011 at 2:19 PM, Stephanie wrote:
>   
>   John Carney loving on us again

Yes!

Paul Krugman Goes MMT on Italy

By John Carney

November 11 (CNBC) — It seems pretty clear that the school of thought known as Modern Monetary Theory has made a big impact on Paul Krugman’s thinking.

As Cullen Roche at Pragmatic Capitalism points out, just a few months ago the spread between bonds issued by Japan and Italy, which have similar debt and demographic issues, was perplexing Krugman.

“A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%.

…I actually don’t have a firm view. But it seems to be an important puzzle to resolve.”

But today’s column is basically right out of MMT.

“What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of Third World countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.”

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Euro Zone Strikes Deal on 2nd Greek Package, EFSF

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The markets like the announcement. Of course they also liked QE2…

Unfortunately, as previously discussed, without the ECB the EFSF isn’t sustainable. It’s like trying to lift up the bucket by the handle when you are standing in it.

Nor is it cast in stone yet, but all subject to details.

Also, the positive market response, if it continues, only encourages the continuing austerity measures that are weakening the euro economy and forcing already unsustainable deficits higher.

And, again, it’s a case of ‘the food was terrible and the portions were small.’

Starting with the 50% private sector loss on Greek bonds-

Presumably that ‘works’ if it indeed brings Greek debt down to 120% of GDP from 160% by 2020. But that implies the austerity measures won’t continue to reduce GDP and cause the Greek deficit to increase, as continues to be the case.

It presumes the 50% haircut will be considered sufficiently voluntary to not be a credit event that triggers a variety of global default clauses.

The rest of the ‘package’ presumes markets won’t reduce the presumed credit worthiness of member nations who fund the EFSF.

It presumes private sector funds will recapitalize the banks that lost capital on the write downs.

It presumes the EFSF won’t be needed to fully fund Portugal, Spain, and Italy.

It presumes banks and other investors required to be prudent and financially responsible to shareholders will continue to buy other euro member nation debt even after seeing the euro zone members allow Greece to default on half of their obligations.

That is, how could any bank now buy, for example, Italian debt, in full knowledge that euro zone policy options include a forced write down of that debt. And not in extreme, unforeseen circumstances, but under current conditions.

And how can prudent investors invest in the banks when they’ve just seen euro zone remove some 100 billion euro in equity by decree?

The problem is, it takes a presumption of general improvement to presume additional losses will not be incurred by investors.

And it takes a presumption of general improvement to presume the EFSF will be successful.

And that requires the presumption that continued austerity measures will result in a general improvement.

Even as all evidence (and most theory) is showing the opposite.

Euro deal leaves much to do on rescue fund, Greek debt

By Luke baker and Julien Toyer

October 27 (Reuters) — Euro zone leaders struck a last-minute deal to limit the damage from the currency bloc’s debt crisis early on Thursday but are still far from finalizing plans to slash Greece’s debt burden and strengthen their rescue fund.

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GERMAN COALITION SOURCES: MERKEL SAYS LEVERAGING EFSF VIA ECB IS RULED OUT

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The news out of Europe has turned from mixed for the last week or so to troubling.

On the one hand they seem to realize that the answer is the ECB writing the check, and on the other they seem to be saying they don’t want to do that. And on the one hand they say Greece won’t default, and on the other is a serious discussion of the ramifications of default. And as the haircut talk on private holders of Greek debt has gone from 21% to 50% and maybe more, the ECB says they will keep their Greek bonds which will presumably mature at par, but at the same time additional ECB capital calls are under consideration due to what they call increased risk of loss.

The idea that the EFSF alone writing checks to support Portugal, Spain, and Italy would weaken the credit worthiness of the core has also been discussed, which is why talk of ECB support had materialized.

Meanwhile, even as the austerity continues to bite, perhaps to the point where the austerity is now causing deficits to be larger, additional austerity measures continue to be demanded and imposed.

And where the banks stand with regard to solvency is anyone’s guess as well.

In other words, it’s all moving further away from any sense of resolution, with uncertainty about as high now as it’s ever been, as is the potential for a catastrophic financial event.

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