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The next handout to Greece may include extending the maturity on rescue loans to 50 years and cutting the interest rate on some previous aid by 50 basis points, according to two officials with knowledge of discussions being held by European autorities.
The plan, which will be considered by policy makers by May or June, may also include a loan for a package worth between 13 billion euros ($17.6 billion) and 15 billion euros, another official said. Greece, which got 240 billion euros in two bailouts, has previously had its terms eased by the euro zone and International Monetary Fund amid a six-year recession.
“What we can do is to ease debt, which is what we have done before through offering lower interest or extending the maturity of loans,” Dutch Finance Minister Jeroen Dijsselbloem, who heads the group of euro finance chiefs, said yesterday on broadcaster RTLZ. “Those type of measures are possible but under the agreement that commitments from Greece are met.”
Greek 10-year bonds rallied, with yields falling 33 basis points to 7.96 percent as of 4:02 p.m. Brussels time, the biggest drop in seven months. The Athens Stock Exchange Index jumped 2.4 percent.
New money would help Greece fill a financing gap that has vexed European Union and IMF authorities working to make sure the rescue programs stay on schedule. European Union PresidentHerman Van Rompuy said last month that Greece must continue to tighten its belt even as “the people of Greece are still suffering from the consequences of the painful but nevertheless needed reforms that are taking place.”
Under the eased terms, all the bailout-loan repayments would be extended from about 30 years and rates would be cut by 50 basis points on funds from the 80 billion-euro Greek Loan Facility, which was created for Greece’s first bailout in 2010, said the officials, who requested anonymity because talks are still in preliminary stages.
As Greece seeks to meet its aid conditions and unlock more money from its existing bailouts, it’s also looking for ways to make the most of 50 billion euros that was set aside for bank recapitalization. The country had hoped some money might be left over for other financing needs. That now looks less likely because the Greek banks will need more capital, according to an EU official close to the bailout process.
Greece is contesting requirements on how it should stress-test its banks, an exercise taking place before a European Central Bank review later this year, according to two officials. Hellenic banks face a mandate to keep their core tier 1 capital at 9 percent of risk-weighted assets, which Greece contends is too high. This has led to delays in its bank-assessment process, which in turn will determine how much money the banks need.
To win further easing of rescue terms, Greece is waiting for the EU statistical agency to confirm in April that it had a primary budget surplus, the balance before interest payments, in 2013. That’s the trigger set for possible debt relief. Greek Prime Minister Antonis Samaras said Jan. 30 that Greece’s primary surplus last year was more than 1 billion euros, higher than expected.
‘Not for Now’
Euro-area officials have mentioned the prospect of cutting interest rates further on the Greek Loan Facility part of the bailouts, “but this conversation is not for now,” EU spokesman Simon O’Connor wrote in an e-mail yesterday. He said focus remains on how Greece can meet its current bailout terms.
Samaras’s office declined to comment on the talks for a possible third aid package.
Officials from the so-called troika of the IMF, the European Commission and the ECB are due to return to Athens this month to renew work on whether Greece has qualified for another installment of money.
There are currently no plans for the troika of the IMF, the European Commission and the ECB to return to Athens in the near future because there is no prospect for an immediate completion of the ongoing review of the Greek program, according to two of the officials.
Finance Minister Yannis Stournaras aims for the review to conclude and a loan disbursement to be made before March, according to an e-mailed transcript of comments to reporters.
“Currently there’s no rush to decide anything,” Steffen Kampeter, deputy to German Finance Minister Wolfgang Schaeuble, said in an interview in Frankfurt this week. “We will be presented with all necessary data at the end of April, beginning of May. Only then will we be able to have a clear picture of Greece’s performance.”
To contact the editor responsible for this story: James Hertling at email@example.com
Yannos Papantoniou warns that the widening economic gap between the eurozone’s northern and souther members could lead to the monetary union’s collapse. – Project Syndicate
ATHENS – As the eurozone debt crisis has steadily widened the divide between Europe’s stronger northern economies and the weaker, more debt-laden economies in the south (with France a kind of no man’s land economy in between), one question is on everyone’s mind: Can Europe’s monetary union – indeed, the European Union itself – survive?
While the eurozone’s northern members enjoy low borrowing costs and stable growth, its southern members face high borrowing costs, recession, and deep cuts in incomes and social spending. They have also suffered substantial output losses, and have far higher unemployment rates than their northern counterparts. Unemployment in the eurozone as a whole averages about 12%, compared to more than 25% in Spain and Greece (where youth unemployment now stands at 60%). Indeed, while aggregate per capita income in the eurozone remains at 2007 levels, Greece has been pushed back to 2000 levels, and Italy today finds itself somewhere in 1997.
Europe’s southern economies owe their deteriorating circumstances largely to excessive austerity and the absence of measures to compensate for demand losses. Currency devaluation – which would boost the competitiveness of domestic industry by lowering export prices – obviously is not an option in a monetary union.
But Europe’s stronger economies have resisted pressure to undertake more expansionary fiscal policies, which would lift demand for its weaker economies’ exports. The European Central Bank did not follow the lead of other advanced-country central banks, such as the US Federal Reserve, in pursuing a more aggressive monetary policy to cut borrowing costs. And no financing has been offered for public-investment projects in the southern countries.
Moreover, fiscal and financial measures aimed at strengthening eurozone governance have been inadequate to restore confidence in the euro. And Europe’s troubled economies have been slow to undertake structural reforms; improvements in competitiveness reflect wage and salary cuts, rather than productivity gains.
While these policies – or lack thereof – have impeded recovery in the southern countries, they have yielded reasonable growth and very low unemployment rates for the northern economies. In fact, by maintaining large trade surpluses, Germany is exporting unemployment and recession to its weaker neighbors.
As Europe’s north-south divide widens, so will interest-rate differentials; as a result, conducting a single monetary policy will become increasingly difficult. In the recession-afflicted south, continued fiscal consolidation will demand new austerity measures – a prospect that citizens will reject. Such impasses will lead to social tension and political crisis, or to new requests for financial assistance, which the northern countries are certain to resist. Either way, financial and political instability could lead to the common currency’s collapse.
As long as the eurozone establishes a kind of wary equilibrium, with the weaker economies stabilizing at low growth rates, current policies are unlikely to change. Incremental intergovernmental solutions will continue to prevail, and Europe’s economy will soldier on, steadily losing ground to the US and emerging economies like China and India.
For now, Germany is satisfied with the status quo, enjoying stable growth and retaining control over domestic economic policy, while the ECB’s limited powers and strict mandate to maintain price stability ease fears of inflation.
But how will Germany react when the north-south divide becomes large enough to threaten the euro’s survival? The answer depends on how Germans perceive their long-term interests, and on the choices of Chancellor Angela Merkel. Her recent election to a third term offers room for bolder policy choices, while forcing her to focus more on her legacy – specifically, whether she wishes to be associated with the euro’s collapse or with its revival.
Two outcomes now seem possible. One scenario is that the economic and political crisis in the southern countries spreads, inciting fears in Germany that the country faces a long-term threat. This could drive Germany to withdraw from the eurozone and form a smaller currency union with other northern countries.
The second possibility is that the crisis remains relatively contained, leading Germany to pursue closer economic and fiscal union. This would entail the mutualization of some national debt and the transfer of economic-policy sovereignty to supranational European institutions.
Of course, such a move would carry considerable political costs in Germany, where many taxpayers recoil at the notion of assuming the debts of the fiscally profligate southern countries, without considering how much Germany would benefit from a stable and dynamic monetary union. But a new grand coalition between Merkel and the Social Democrats could be sufficient to make this shift possible.
Even so, there could be victims. Indeed, the continued failure of smaller countries like Greece and Cyprus to fulfill their commitments reinforces the impression that they will forever be dependent on financial assistance. The exit of one or two of these “undisciplined” countries could be a requirement for the German public to agree to such a policy shift.
Europe’s north-south divide has become a time bomb lying at the foundations of the currency union. Defusing it will require less austerity, more demand stimulus, greater investment support, deeper reforms, and meaningful progress toward economic and political union. One hopes that modest recovery in the south, aided by strong German leadership in the north, will steer Europe in the right direction.
Despite the ECB’s recent “stunning” rate cut, which sent the EUR modestly lower by a few hundred pips, the resultant resurge in the European currency has left the European Central Bank even more stunned: just what does it have to do to force its currency lower and boost Europe’s peripheral economies, especially in a world in which every other major central banks is printing boatloads of money each and every month?
We hinted at precisely what the next steps will be two days ago when in “Next From The ECB: Here Comes QE, According To BNP” we said “BNP is ultimately correct as the European experiment will require every weapon in the ECB’s arsenal, and sooner or later the ECB, too, will succumb to the same monetary lunacy that has gripped the rest of the developed world in the ongoing “all in” bet to reflate or bust. All logical arguments that outright monetization of bonds are prohibited by various European charters will be ignored: after all, there is “political capital” at stake, and as Mario Draghi has made it clear there is no “Plan B.” Which means the only question is when will Europe join the lunaprint asylum: for the sake of the systemic reset we hope the answer is sooner rather than later.”
Two days later the answer just appeared when moments ago the WSJ reported that the ECB’s Praet hinted more QE is, just as we predicted, on the table.
The European Central Bank could adopt negative interest rates or purchase assets from banks if needed to lift inflation closer to its target, a top ECB official said, rebutting concerns that the central bank is running out of tools or is unwilling to use them.
“If our mandate is at risk we are going to take all the measures that we think we should take to fulfill that mandate. That’s a very clear signal,” ECB executive board member Peter Praet said in an interview Tuesday with The Wall Street Journal. Annual inflation in the euro zone slowed to 0.7% in October, far below the central bank’s target of just below 2% over the medium term.
He didn’t rule out what some analysts see as the strongest, and most controversial, option: purchases of assets from banks to reduce borrowing costs in the private sector. “The balance-sheet capacity of the central bank can also be used,” said Mr. Praet, whose views carry added weight as he also heads the ECB’s powerful economics division. “This includes outright purchases that any central bank can do.”
The ECB could do more if necessary, Mr. Praet said. “On standard measures, interest rates, we still have room and that would also include the deposit facility,” he said. The central bank’s deposit rate has been set at zero for several months. Making it negative would effectively levy a fee on commercial banks that park funds at the ECB.
The ECB purchased safe bank bonds and government bonds at the height of the global financial crisis and the euro debt crisis, but in small amounts compared with other major central banks.
Of course, there are some legal hurdles:
The ECB’s charter forbids it from financing governments.
But, wily as always, the ECB appears to have found a loophole:
The ECB must respect its legal constraints, Mr. Praet said, however its rules “do not exclude that you intervene in the markets outright.”
And sure enough, the Euro tumbles just as mandated by the ECB’s talking head: let’s see if it actually stays lower this time.
And now check to the Germans, who will be positively giddy that first Europe accused it of unfair export-led growth, and now the ECB is openly contemplating tearing off the Weimar scab.
Looks like things in Europe are about to get exciting all over again.
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- With Angela Merkel’s Germany at the helm, Europe will remain a tortoise | Timothy Garton Ash (theguardian.com)
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