Edward Hugh here. This is a post which was originally published at A Fistful of Euros.
Sometimes it surprises me what some people consider to be news. Tony Barber points out today in the FT Brussels blog that the EU has the power to mount bailouts of any member country under “exceptional circumstances”. As Tony rightly points out, under Article 122 of the EU’s Lisbon treaty, which came into effect last December, when a member-state is:
“in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council [of national governments], on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the member-state concerned.”
So there it is, as he says, “in black and white”, whatever the propaganda smokescreen some widely quoted but anonymous “EU Officials” have been mounting for the press in recent days.
What Tony omitted to mention is that Article 122 of the Lisbon Treaty is simply another version of article 119 of the [Foundation] Treaty of the EU (which was presumably incorporated directly into the Lisbon Treaty. Article 122 stated the following:
Where a Member State is in difficulties or is seriously threatened with difficulties as regards its balance of payments either as a result of an overall disequilibrium in its balance of payments, or as a result of the type of currency at its disposal, and where such difficulties are liable in particular to jeopardise the functioning of the common market or the progressive implementation of the common commercial policy, the Commission shall immediately investigate the position of the State in question and the action which, making use of all the means at its disposal, that State has taken or may take in accordance with the provisions of this Treaty
This was the article cited in justification for the assistance to Latvia and Hungary, and as I pointed out in February last year, give the grounds to justify the issue of EU Bonds (as was in fact done). Now some recent statements of EU Officials point to the fact that help was given to Hungary and Latvia was only given as a result of the fact they were suffering from a “Balance of Payments” crisis, since the crisis those countries (Latvia and Hungary) was described in this way, and that this help would not be available to members of what is now being called the Euro Group of countries. They say this, correctly, since these countries can’t (almost by definition) suffer a Balance of Payments crisis, since the Eurosystem funds trade and current account deficits almost automatically. Precisely, there “danger signal” problems can’t arise. But what can arise are funding problems for the government debt which eventually arises in their wake, which is where we are now in the cases of Greece, Ireland, Portugal and Spain.
So we move on to the second line of defence, which is “as a result of the type of currency at its disposal”. This wording was no doubt adopted to cover cases of those countries with so called “vulnerable currencies”, but when you stop and think about it, it perfectly describes the predicament of those countries, who given the lack of an adequate (red light flashing) warning mechanism on balance of payments and reserves issues, now find themselves in a much deeper problem and with no currency of their own to devalue. The definition fits the case like a glove.
The thing is, as Tony Barber points out:
Article 122 stresses it would be EU national governments, acting on advice from the Commission, that would take the decision to rescue Greece – or Ireland, Portugal and so on. There is nothing in the treaty requiring the ECB to state its opinion one way or the other. So, on this question, it is important to listen to eurozone political leaders, above all Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, as well as Commission president José Manuel Barroso.
So look tot he statements of national leaders and EU Commission Officials for road maps on how this particular topic will develop.
The ECB Is Here To Help
But there is another area we need to think about, and that is liquidity provision. Here the ECB can be of enormous help. Basically, as I outlined in my Debt Snowball post, the critical debt to GDP ratio depends on two factors: growth in nominal GDP and the interest rate spread on government bonds. Now, EU Bonds (or whatever) can help with nominal GDP, since they can be used for fiscal support, and to provide domestic demand to an economy during the correction, but the ECB liquidity provision to the banks can also help to keep spreads under control, and thus reduce the cost of borrowing for national governments.
If we are all Europeans, and all in this together, isn’t this what our leaders should be doing – for those countries willing to make sacrifices and trying to put their house in order – providing fiscal and demand support via the powers of the Commission, and liquidity support via the spreads. Is this not what M. Trichet meant when he said “we are here to help” – it would be a strange form of Union where the main collective institutions were working against the interests of the individual members.
Surely it is this sense that we should read yesterday’s statement by ECB council member Axel Weber (one of the leading pretenders to M Trichet’s thrown) that the bank will discuss reverting to long-term refinancing auctions after March,according to a report in the German newspaper Boersen-Zeitung.
After the end of the first quarter, “we will talk about returning to the auction process in the refinancing operations with longer maturities,” Weber said, according to the newspaper.
This makes perfect sense, as any other approach would be near suicidal, given the difficulties we are now all facing. Flexibility is the word.
And it is in this sense we should be looking at another piece of news that has generated considerable interest today. According to reports, investors placed about €20bn in orders for the new Greek five-year, fixed-rate bond – four times more than the government had reckoned on offering. A sign of success? Hardly, since if you look at the interest spread they needed to offer, it is clear that Greece is being made to pay dearly for all those years of fiscal profligacy, with the bond carrying a record high interest rate spread relative to the rate for German bonds, the eurozone’s benchmark. The terms were described by Bloomberg as “generous”.
Greece sold 8 billion euros ($11.3 billion) of bonds at premium yields to ensure the country’s first debt issue since being downgraded was a success. The five-year securities yield 6.2 percent, the Greek ministry of finance said late yesterday in an e-mailed statement. The ministry said it received 25 billion euros in orders, after offering 0.3 percentage point more yield than on the nation’s existing debt with similar maturities. The new bonds yield 3.5 percentage points more than the benchmark mid-swap rate, after being first offered at 3.75 percentage points. That compares with 3.2 percentage points on Greece’s 3.7 percent notes due July 2015, according to ING Groep NV prices on Bloomberg. The yield on Greece’s existing five-year bonds declined 7 basis points yesterday to 5.88 percent. That narrowed the difference with comparable German debt, the European benchmark, to 358 basis points, from 365 basis points last week, the widest since Greece joined the euro in 2001.
“It showed we have the ability to raise funds that we need,” according to Spyros Papanicolaou, head of the Greek debt agency. “We expect the spread to start to tighten after the sale, because Greece has been misread and misjudged.”
But Mr Papanicolaou needs to read the Credit Rating Reports (and particularly Moody’s) more carefully (or alternately he could read my blog). In fact Moody’s (who stand apart from the other agencies on this one) argued only last month that investors’ fears that the Greek government may be exposed to a liquidity crisis in the short term are totally misplaced. As they said in their press release “the risk that the Greek government cannot roll over its existing debt or finance its deficit over the next few years is not materially different from that faced by several other euro area member states”. And they took this view since it is obvious, as a member state of the Euro Group they can receive liquidity via the ECB (one of the strongest liquidity providers in the world), and if they implement an EU Commission approved correction programme, then the ECB is obliged to help them. It makes no sense at all, for any of us, to make this correction process more difficult.
And Spain Will Need All the Help It Can Get, From Both The EU Commission and the ECB
Now finally, one piece of news few seem interested in. Santos Gonzalez, President of AHE (Spain’s Mortgage Association) has come out today and warned that Spain’s banks do not have the financial capacity to assume the outstanding debt of property developers, which amounts to around 325,000 billion Euros, This he says “gravely endangers the viability of the Spanish property sector as well as Spain’s financial industry”.
The problem is growing, according to Gonzalez, since the need to refinance 15,000 million euros worth of interest payments annually against assets which are continuously losing value becomes unsustainable. The numbers are not so much what matters here as the growing number of people who are coming out and talking publicly about the problem. Unfortunately the links are in Spanish, but the gist of the problem is that the number mentioned is around 30% of Spanish GDP, and if the government have to mount a bailout of this order (as I have long been arguing they will need to, and this is only for the developers) then Spanish sovereign spreads are going to be in for a very bumpy ride. Maybe English language journalists should broaden their horizons a little.
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