• FTSE 100 hits eight-month high despite storm clouds ahead
• Pimco: Greek deal will come under pressure soon
• Two new political parties in Greece
4.25pm: While I was away, the market rally rather ran out of umph. The euro has lost ground again — hitting a low of $1.3012. That reflects a general strengthening of the dollar, after last night’s upbeat report from the Federal Reserve.
$1.30, though, is one of those key ‘support’ levels that chartists and traders are fond of. Drop through that, the theory goes, and the euro could soon lose more ground (the last time this happened, at the start of January, the euro didn’t climb back for almost three weeks).
4.16pm: I”m back from the Open Europe debate at CMC Market’s offices (writes Graeme Wearden). There was an interesting discussion, with Megan Greene of Roubini Global Economics and Julian Callow of Barclays Capital taking opposing positions over the future of the Eurozone, and Raoul Ruparel of Open Europe slamming Greece’s latest aid package and the European Central Bank’s handling of parts of the crisis.
My earlier tweets summarised some of the action (not that 140 characters is the best format to explain the future of the Europe). So here’s a proper summary:
Greene argued that Greece and its lenders will muddle along together within the eurozone until Germany has held its next Federal elections in the autumn of 2013. Greece will probably miss some targets, and the troika will probably reluctantly keep funding it. Then, once Germany’s elections are over (and Europe has reinforced its firewall) Greece will refuse to implement further austerity and the Troika will refuse to hand over more funding.
Consequence — a ‘divorce’ in which the Troika extends Greece a bridging loan to cushion the impact of quitting the euro.
Greene didn’t claim that this would be easy or painless, but pointed out that:
Many of the consequences of default — sovereign default…and bank runs, are happening anyway.
Ultimately, Greene predicts that the eurozone will end up as a ‘rump’ dominated by Northern Europe, with Greece, Portugal, Ireland, Italy, Spain and maybe Cyprus all leaving.
This process would take many years — a reinforced firewall would be big enough to take Italy and Spain out of the financial markets for a couple of years if needed, but not the decade that structural reforms need to work.
Julian Callow, though, argued that the consequence of a Greek exit were too serious for European leaders to allow it. He believes that this means the eurozone will continue (although it faces a turbulent few years). He warned that Portugal and Ireland would immediately feel intense pressure if Greece quit, probably leading to a capital flight from those countries, and possibly even Italy and Spain too.
He agreed that Greece will probably need another rescue package, but believes that “from the perspective of the Greek public” it is best to continue with the current plan.
We are clearly going down the road of [further] debt restructuring in Greece, and possibly elsewhere. That is the lesser of two evils.
Ultimately, Callow’s argument is that eurobonds and closer fiscal integration will hold Europe together, as this will be in the best interests of Germany. He added:
Currency unions need political union and that is where we are heading now. It will take many years, and there be many challenges, but that is the way we will go.
Returning to Megan Greene’s prediction that a Troika bridging loan would help Greece in its return to the drachma. She argued that this would put even greater pressure on Greece to make reforms, as it could not cope without the funding if it were withdrawn (as could happen if Greece match whatever commitments were made).
Greece isn’t self-sufficient in food. You could see mass starvation in Greece if it was cut off from this bridging loan. It’s far-fetched but possible.
At this point Simon Nixon of the Wall Street Journal, who was chairing the event, said he had heard similar concerns from one European official.
Open Europe’s Raoul Ruparel warned that the upcoming Greek elections would present an early hurdle, with voters unlikely to deliver a clear winner:
It now appears that New Democracy cannot win a majority, and it has suggested that it won’t work with Pasok. Will there be a stable Greek government that can implement reforms?
We have to question where a stable Greek government will come from.
He also argued that, despite all the noise and fury over Greece’s second financial package, the actual net debt restructuring was relatively small.
2.12pm: More from Greece, where the cabinet is about to convene to formally endorse the latest rescue package. Helena Smith in Athens reports:
Going into the meeting, officials were tight-lipped about the EuroGroup’s decision to mete out installments in “doses” (as reported earlier) so as to keep the pressure up on Greece.
Evangelos Venizelos, the country’s finance minister who lead negotiations on the part of Athens, is expected to give cabinet colleagues a detailed analysis of the €130bn loan agreement. “He will send over his signature electronically [approving the package] tomorrow,” said a finance ministry official.
Once effected into law by the cabinet, the deal will have to be ratified by the 300-seat parliament, hopefully officials say, before the end of the month.
Well-briefed sources said the cabinet will also discuss the “measures needed to compensate for the destruction” wrought on Athens last month when thousands of hooded youths went on the rampage to protest a vote in parliament on further spending cuts in exchange for aid. More than 180 buildings — mostly shops and banks — were damaged in the mayhem with at least 500 people losing jobs as a result.
1.49pm: From the Open Europe conference, Graeme has tweeted the following:
At @OpenEurope event, Roubini’s Megan Greene predicts Greek euro exit in 2013 after German elections + Portugal following 12 months later
— Graeme Wearden (@graemewearden) March 14, 2012
On Italy and Spain, Megan Greene predicts two years of ‘appalling’ economic data. They have ‘fighting chance’ of staying in euro
— Graeme Wearden (@graemewearden) March 14, 2012
Raoul Ruparel of @OpenEurope sees Greek political trouble ahead with election looming: ‘Where will stable government come from?’
— Graeme Wearden (@graemewearden) March 14, 2012
1.43pm: Wall Street has edged higher as the US market joins in with the general mood of cautious optimism.
The Dow Jones Industrial Average is up around 14 points in the first few minutes of trading, following its gains yesterday after the US Federal Reserve’s positive comments on the country’s economy. There has been little impact from US import price figures, which showed a 0.4% month on month increase in February compared to predictions of a 0.5% rise. Benign, is the word being used.
The FTSE 100 is up around 19 points at 5975, but has not yet crossed the 6000 threshold for the first time since early July last year. Germany’s Dax is 1.3% higher while France’s Cac is ahead by 0.8%.
Hopes that the eurozone crisis has stabilised, at least for the moment, has combined with the upbeat comments about the US to give investors some relief from recent economic traumas.
But to continue with the storm clouds theme, Spanish bond yields are edging higher, with concerns about the country ditching its tough budget deficit targets. Where Spain goes, others may follow.
12.07pm: As the crisis has abated, I’m heading off to an event called “Will the euro survive 2012 and beyond?”, organised by Open Europe.
Will leave the blog in the capable hands of my colleagues – back mid-afternoon.
12.05pm: Meanwhile, says Helena, skyrocketing crime in Greece is such that the newly installed public order minister (also known as the minister for citizen protection) will hold talks with Athens’ mayor today to discuss the issue.
The soaring crime rate is yet another offshoot of the financial crisis and with tourist-dependent Greece also preparing for its first flux of visitors, security concerns have taken centre stage. Aides close to Michalis Chyrsohoidis, who took over the post of public order minister in a mini-reshuffle last week, say criminal activity has assumed epidemic proportions especially in Athens where break-ins, robberies and murders (one every 48 hours) have skyrocketed. Robberies shot up by 125 % alone in the greater Athens region in 2011.
The minister, who has ordered that convoys of police on motorcycles be immediately increased, is worried that extremists may also exploit the social turmoil that has come with galloping unemployment (youth joblessness has exceeded 50%) and deepening poverty. Without giving any warning, leftwing urban guerrillas recently left an explosive devise on a subway train in Athens.
The device, which almost certainly would have left casualities had it exploded, only failed to detonate because of a fault.
There are some details of that incident here.
On Tuesday, the culture and tourism minister Pavlos Geroulanos revealed that German bookings had nosedived by 30 % compared to this time last year (German visitors normally top the league tables of arrivals in Greece) while British bookings had dropped by about 10 % – in both cases because of the bad image that has come with media coverage of repeated riots sparked by outrage over austerity.
The culture ministry, itself facing more cuts, has appealed to the finance ministry for funds to recruit international PR firms in the hope of improving the country’s image before the tourist season begins.
On a personal note, Helena says, potential tourists should not be worried about security. Outside of Athens, especially on islands (which continue to remain idyllic) there is little sense of the crisis. Given that around 18 % of GDP is derived from the sector, which also provides one in five jobs, Greece needs “solidarity” tourism more than ever.
11.51am: Here’s another sign that the eurozone has entered a more tranquil phase — the media couldn’t manage a single question at the EC’s regular midday briefing today (reports Luke Baker, Reuters Brussels’ bureau chief).
The #eurozone crisis must be over – not one question at the European Commission’s midday briefing. Embarrassed spokespeople all round. #euco
— Luke Baker (@LukeReuters) March 14, 2012
11.16am: Jean-Claude Juncker has confirmed that Greece’s will now start to receive the funds from its second rescue package.
Here’s the full statement, issued in the last few minutes:
The euro area Member States have today formally approved the second adjustment programme for Greece. All required national and parliamentary procedures have been finalised. Member States have also authorised the EFSF* to release the first instalment for a total amount of €39.4bn, which will be disbursed in several tranches.
* – That’s the European Financial Stability Facility (the bailout fund that will be merged with the European Stability Mechanism this summer.
The point about ‘several tranches’ is important too. To keep receiving the money, Greece will need to keep hitting targets set by its lenders.
This second programme constitutes a unique opportunity for Greece that should not be missed. The Greek authorities should therefore continue demonstrating strong commitment and to keep up the implementation momentum by rigorously pursuing the adjustment effort in the areas of fiscal consolidation, structural reforms and privatisation, strictly in line with the new programme.
This will allow the Greek economy to return to a sustainable path, which is in the interest of everyone.
10.45am: There weren’t many signs of turmoil in the Italian bond markets this morning, where an auction of three-year debt went well.
Italy’s borrowing costs fell to their lowest level since October 2010, as investors flocked to buy the €6bn of bonds on offer. The yield (effectively the interest rate) on the three-year debt dropped to just 2.76%.
Earlier this morning, Italy’s deputy economy minister welcomed the fact that Italian bond yields have moved closer to the German equivalent, attributing it to a return of “foreign buyers”….
…some, no doubt, looking to put the European Central Bank’s offer of cheap three-year loans to work.
10.36am: The most lively story of the morning is the news that a banker at Goldman Sachs has quit, and blasted the “toxic and destructive” environment that he claims exists at the Wall Street titan.
The departure of Greg Smith, who used to run the firm’s United States equity derivatives business in Europe, the Middle East and Africa, was announced in the pages of the New York Times.
There’s one part of his allegations that could be relevant to the eurocrisis:
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
Notoriously, one of Goldman’s many clients was Greece (although the country isn’t mentioned directly in Smith’s letter) who received a helping hand to polish up its public finances before it joined the euro. That work, which appeared to disguise the full extent of Greece’s borrowings from Goldman, has been heavily criticised since.
10.19am: This morning’s UK unemployment data shows some early signs that Britain’s labour market is stabilising, and a glimmer of optimism for George Osborne. But there was also proof that the UK is suffering from the youth unemployment crisis gripping much of Europe.
The number of people claiming unemployment benefit rose by 7,200 last month, while the wider jobless total in the three months to January rose by 28,000 to 2,666m.
Unemployment among the under-25s also continued to rise, the ONS said, with 1.04 million 16 to 24-year-olds unemployed in the three months to January. That took Britain’s youth unemployment rate to 22.5%, a record high since records began in 1992.
9.59am: It’s official, folks. The European Union has formally approved the second financial aid package for Greece.
More to follow (we believe Jean-Claude Juncker, head of the eurogroup, may make a statement soon)
9.44am: There are intriguing political developments in Greece this morning, where two new political formations will shortly be announced.
Our correspondent Helena Smith explains that Greece’s great economic crisis has already begun reshaping the country’s political landscape. The announcement of the two parties is further proof that the nation’s entire political make-up may shift in upcoming general elections.
Politicians expelled from the socialist Pasok and centre right New Democracy for opposing EU and IMF fiscal policies are behind the two forces.
Louka Katseli, the former national economy minister and a veteran Pasok MP is lined up to launch her party, expected to be called Democratic Socialism, at lunchtime today. Educated in the US, Ms Katseli, who taught economics at Yale, is hoping to lure at least ten dissident MPs from Pasok – the number of seats needed to win parliamentary representation. Her timing could not be worse for Evangelos Venizelos, the finance minister who is to be formally bequeathed the reigns of the party leadership this Sunday.
Panos Kammenos, a former conservative deputy who broke ranks with New Democracy over its endorsement of austerity in exchange for the aid now propping up the Greek economy, will also formally announce the birth of his own party, Independent Greeks, today. Media reports suggest that at least six MPs who were expelled from New Democracy for rejecting the terms of Greece’s latest EU-IMF sponsored bailout will sign up to the political formation.
Meanwhile, there is growing speculation that the elections may be put off until May (either the 6th or 13th) to enable the government to ratify the latest €130 billion rescue program in parliament and pass a raft of reforms demanded in return for the loans. Antonis Samaras, the leader of New Democracy, is pressing for the poll to be held on April 29 but with Easter also looming there appears to be a growing consensus that there may not be the time to enact the reforms that foreign lenders say are vital for near bankrupt Greece to regain its competitiveness.
9.16am: As I mention stormclouds in the headline (to callitwhatitis’s chagrin in the comments below), perhaps I should list a few.
For Greece, there are two immediate issues. One is the general election expected in late April or May. Based on current polling, no party will win a clear majority. That will mean a coalition, which might make it harder to implement austerity reforms.
The second potential hurdle is the next set of austerity measures. Yesterday, Reuters published a confidential memo that showed Greece must cut the equivalent of 5.5% of GDP from government spending in 2013 and 2014 to keep on track.
Government officials quickly claimed that this was ‘no news’ (see yesterday’s blog) as the latest ‘memorandum of understanding’ voted through parliament included the necessary 5.5% cuts. Without that agreement, as we understand it, Greece would not have got agreement for its second aid package.
However (as I should perhaps have made clearer at the time), Greece has not yet said where those cuts will take place. They are likely to fall on defence and welfare.
Newsmeeting calls – more storm clouds to follow.
8.46am: Asian markets were also upbeat today, with Japan’s Nikkei closing above the 10,000 mark for the first time in seven months.
That means the Nikkei has gained 17% during 2012. Good news? Perhaps, not, according to Okasan Online Securities chief strategist Yoshihiro Ito, who warned the WSJ that :
The market is technically overheated, but hopes for further gains are outweighing negativity thus far.
The Nikkei, though, still has some way to go before it reaches a new record high. That was set in late December 1989, when the index closed at 38,915.87.
8.35am: Mohamed El-Erian, who runs Pimco, the world’s biggest bond trading firm, is warning this morning that the Greek crisis has only entered a haitus.
In the Financial Times, he writes;
Many investors wish to wave a final goodbye to the disruption the Greek debt crisis has had on market valuations. Meanwhile, European politicians are already trying to move away from the dramas on the periphery and focus on restoring growth in Europe. Both impulses are understandable. Unfortunately, they are premature.
The debt reduction agreement put in place last week is the biggest sovereign restructuring ever. Yet it only goes part of the way in helping Greece overcome its core problem of too much debt and too little growth. And it won’t be long before this latest deal also comes under pressure.
So, El-Erian argues, European leaders need to use the window of opportunity created by the biggest sovereign restructuring ever to fix their firewall.
The Brussels top brass insist that we’ve entered a quiet patch. Yesterday, EC president Jose Manuel Barroso called for an end to “constant drama” over the euru.
We’ll see what we can do….
8.26am: In London, the FTSE 100 hit an eight month high at the start of trading. The blue-chip index jumped 24 points to 5980, levels not seen since last July, shortly before fears over the eurocrisis sent markets tumbling.
Other markets also rose, with Germany’s Dax breaking over the 7,000 mark with a 0.6% gain. The Stoxx Europe 600, which tracks financial stocks across the region, jumped by 1.2%.
So all very cheerful. Analysts reckons traders are taking heart from a clutch of good economic data on Tuesday (which culminated with the US Federal Reserve taking a more positive view of America’s economy):
Michael Hewson of CMC Markets explains:
The improving US economy has, in all probability, saved the Fed from finding itself in what could have been a very difficult political position, in an election year, and having to consider further QE.
As such any faint hope that markets might have had of further QE between now and the November elections appears to have gone….
…The situation in Europe will continue to act as a headwind
8.15am: Good morning, and welcome to our rolling coverage of the eurozone debt crisis.
After the drama of recent weeks, there’s an air of calm this morning. Stock markets are rallying on relief that Greece’s second rescue package has been agreed, and are also cheered by encouraging bank stress test results released by the US Federal Reserve last night.
EU policymakers may feel that they’ve put the worst of things behind them, for a while at least.
But the situation remains tense, with Spain, Italy and Portugal all facing challenging months ahead. Ditto Greece, where a general election campaign is gearing up.
And with UK unemployment data due this morning, the state of the British economy will also be under scrutiny.
We’ll be tracking the latest events and expert views as usual – let us know what you think too.