This is my effort to help fit the pieces together to get a better picture of the capital markets.
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
The establishment of a procedure for an orderly default as part of the ESM:
For member states that are covered by an ESM programme, but despite complying with it are unable to achieve debt sustainability, the possibility of budgetary interventions is not sufficient. Therefore, there must also be the option of an orderly default in order to reduce the burden on taxpayers ( in the other eurozone states), and also to provide the affected country with an opportunity for a fresh start. In the present ESM Treaty the possible participation by private creditors through socalled "collective action clauses” (CACs) is not sufficient.
The ESM should consider the request made by a member state for relief loans against the criteria of debt sustainability. If this is negative, the affected member state would instead receive loans for a limited time only, during which the procedure for an orderly default would be prepared.
In order to make sovereign defaults possible where they are unavoidable, the threat of instability in the financial system resulting from such a default must be able to be credibly excluded. A plan to maintain the stability of the financial system in the event of an orderly default needs to be developed in close co-operation with European banking regulators. This would determine which banks would be restructured and/or recapitalised, which will necessitate the drawing up of Europewide rules on bank restructuring.
Document here: s3.documentcloud.org/documents/267781/brusselsembed.pdf
The European Central Bank threw Portugal a temporary lifeline on Monday by buying up its bonds, traders said, as market and peer pressure mounted for Lisbon to seek an international bailout soon.
A senior euro zone source told Reuters on Sunday that Germany, France and other euro zone countries were pushing Portugal to seek an EU-IMF assistance program, following Greece and Ireland, in a bid to prevent contagion spreading to much larger Spain, the fourth biggest economy in the euro area.
The interest rate premium on Portuguese sovereign debt fell on Monday after rising sharply late last week as traders said the ECB intervened to buy government bonds on the secondary market.
"They're buying five-years and 10-years in Portugal, whatever people are offering really," one trader said.
Another trader said the ECB appeared to be buying Greek and Irish bonds too. EU sources say the central bank has not yet bought Spanish government debt.
Spanish Economy Minister Elena Salgado said Portugal did not need to apply for aid because it was meeting its commitments to reduce its budget deficit. And the European Commission said no discussion was currently under way on assistance for Portugal or any other country. Spain knows it is next!
(Reuters) Ireland risked a fresh complication to radical plans to overhaul its financial sector on Tuesday with a controversial new banking law facing a possible constitutional veto by the country's top court.
The legislation gives the state wide-ranging powers to restructure the banking industry as part of an 85 billion euros ($112 billion) EU/IMF bailout package.
But its scope has raised objections from the European Central Bank (ECB) and opposition politicians, who warned it will make Finance Minister Brian Lenihan a "one-man legislature.
President Mary McAleese has held off signing the bill into law amid until she hears advice about its constitutionality on Tuesday from the Council of State, a panel of top political figures including the prime minister, attorney general and High Court President.
She will then decide whether to ask the Supreme Court to rule if the law or parts of it is constitutional, a move which could delay plans by government for junior creditors in Irish banks to swallow losses on their investments.
Her decision is expected later on Tuesday or Wednesday. The cut-off date for her to either sign the bill or send it to the court is Thursday.But today we also read (again from Reuters):
Allied Irish Banks' junior bondholders will have to take a big hit in a future restructuring, the European Commission warned on Tuesday as it rubber-stamped billions of euros in state aid for Irish banks.
Brussels' threat triggered a fall in Irish sovereign debt, stoking fears the continuing financial crisis means more pain, including the spectre of forced discounts for investors, despite an 85 billion euro ($112 billion) EU/IMF bailout.
The EU and IMF agreed on Sunday to help bail out Ireland with loans to tackle its banking and budget crisis in a bid to protect Europe's financial stability.
Ireland, facing widespread public anger over its handling of the crisis, formally requested the aid on Sunday evening.
"The European authorities have agreed to our request," Prime Minister Brian Cowen said. "I expect that agreement to be finalised shortly, within the next few weeks."
The size of the rescue by the European Union and the International Monetary Fund has yet to be negotiated but is likely to be smaller than Greece's 110 billion euro ($150 billion) bailout last May.
"I would say we are talking about 80-90 billion euros," a senior EU source said, adding that this sum would include money to support the Irish banking sector.
EU Economic and Monetary Affairs Commissioner Olli Rehn said the European Commission, European Central Bank and IMF would prepare a three-year package of loans by the end of the month.
"Providing assistance to Ireland is warranted to safeguard the financial stability in Europe," Rehn told Reuters.
"The programme under preparation will address both the fiscal challenges of the Irish economy and the potential future capital needs of the banking sector in a decisive manner."
Britain, which is not part of the euro zone, said it would offer some 7 billion pounds ($11.19 billion) in bilateral aid.
SPIEGEL: But the German economy benefits from the fact that German industry has focused primarily on foreign markets and wages have hardly gone up in years. The Americans see this as unfair.Schäuble: The German export successes are not the result of some sort of currency manipulation, but of the increased competitiveness of companies. The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. There are many reasons for America's problems, but they don't include German export surpluses.Amen, brother. The US fingerpointing serves no end but political ones, and the last I checked finances, when left to politics, suffers a severe fate.
SPIEGEL: Last week, the US Federal Reserve Bank decided to flood the economy with $600 billion in new money. Will this stimulate the economy as hoped? Schäuble: I seriously doubt that it makes sense to pump unlimited amounts of money into the markets. There is no lack of liquidity in the US economy, which is why I don't recognize the economic argument behind this measure.Okay, thought I was the only one confused by the Fed's actions. Guess not. Confused might be the wrong word - inability to swallow the logic is perhaps a better way to phrase it.
SPIEGEL: Sounds good. But first the measures will have to be approved by the individual governments, on the one hand. On the other hand, it's completely unclear what the participation of private investors will look like. Schäuble: We are in the process of working out the details within the German government and at the European level. It's already clear today that the new mechanism will not apply to old debt but only to new loans. I imagine that all bonds issued by euro countries will contain clauses in the future that specify exactly what happens to the claims of creditors in case of crisis.Found this interesting. I imagine it could look like something of the old Landesbank structure given the grandfathering of debt and, therefore, the implicit guarantees. This would serve to bifurcate the debt after an adoption, with "old debt" trading tight to "new debt" and the possibility - in the event of a restructuring - of massive international legal arguments and cases.
It would appear that sovereign debt concerns in Europe are beginning to push themselves back into the forefront. Investors are dumping both Irish and Greek bonds, driving yields and CDS premiums to near record levels.
Yesterday, Irish credit costs hit a record high as bonds fell after the resignation of Jim McDaid, a member of parliament for Ireland's Fianna Fail party. The resignation added to concerns that the government would fail to muster the votes for planned spending cuts and tax hikes.
“Investors are worried about political factions coming into agreement about getting fiscal policy back on track,” said Andrew Wilkinson, senior market analyst for Interactive Brokers.
Despite higher yields and rising CDS premiums on Irish and Greek debt, the Euro has been holding up quite well. Six months ago, when the EuroZone crisis was in full swing, the Euro currency traded below $1.20. Currently, however, the EUR/USD is trading at $1.4015.I would posit that they never went away. The difference now is that I believe folks have determined that the EU will allow an "orderly" restructuring of sovereign debt. Do they have a choice? I have long maintained that with many of these governments, fiscal austerity will be promised - but delivered is another story. The people will not change their ways because the government has told them to. They have been through this many times (at least those countries most affected) and will simply run the ruling party out of town. Euro might hold these levels, but I am not convinced. Still like the commodity/rate currencies over the USD or EUR.
The European Central Bank increased its purchases of government bonds last week amid rising concerns in financial markets about the ability of Greece, Ireland and Portugal to repay their debts.
Despite spending more than €61 billion ($79.58 billion) since May on government bonds, the ECB has failed to prevent yield spreads between government debt in Greece, Ireland and Portugal and their safer German equivalents from hitting or approaching record highs, making it harder for struggling countries on Europe's fringe to finance their mounting debt levels.
The latest increase in debt purchases "is an illustration that the sovereign-debt crisis is surfacing again, but it's not as severe as May," says Carsten Brzeski, economist at ING Bank in Brussels.
On Monday, yields spreads between Irish and German 10-year bonds—a key measure of investors' perception of the risk associated with Irish bonds—exceeded four percentage points, a record, and more than double the spread that existed on May 10 when the ECB started buying government debt.
Portuguese yield spreads also hit a record Monday, at more than four percentage points above safer German equivalents. That spread was just 1.89 percentage points on May 10, a sign, some analysts said, that the ECB hasn't been able to affect market sentiment. Greek spreads are near record highs at more than nine percentage points above German government bonds.
