Eurozone crisis Blog – Financial crisis skewed economic integration

16.09 Financial crisis has skewed eurozone integration, says Schroders’ head of global and international equities Virginie Maisonneuve. “The birth of the single currency in 1999 was the ultimate manifestation of an integrated regional economy, but the financial crisis has highlighted serious structural flaws and revealed a two-speed Europe, driving a wedge between the region’s core and its periphery.” Setting an interest rate for the entire region has had a perverse impact on peripheral Europe, particularly Ireland, whereas for other countries a low real interest rate encouraged excessive risk-taking and leverage, she adds.

15:40 The debt relief package agreed in Brussels has been well received by the market, says Stéphane Monier, global head of fixed income and currencies, Lombard Odier Investment Managers. But some doubts remain, he says, as rating agencies will most likely place Greece in selective default rating. In particular, doubt remains as to whether Greece or other peripheral countries will deliver on their promised reforms.

14:20 Finland’s Ministry of Finance says that the country’s share of the bailout agreed yesterday is at least €1.4bn, report local media. They estimate that at least two thirds of the agreed support programme will be funded by the euro countries, as the IMF will not want to be seen to bind itself too closely to any single one of its members. Finland’s share of the previous Greek bailout was €1.5bn. Finland is the only Nordic EU member state using the euro. Parliamentary elections earlier in 2011 saw the anti-EU True Finns party gain more than 19% of the vote, but a recent TNS Gallup poll of 1,000 Finns found 70% want to remain in the eurozone.

13:25 The EFSF firepower would have to rise to €1.45trn, backed by a total of €1.7trn guarantees, says a report from Alliance Bernstein, as the agency will likely become the sole source of lending for all the EU’s peripheral economies. “As the guarantees of the periphery including Italy are worthless, the guarantee Germany would have to provide rises to €790bn, or 32% of GDP,” says the AB report. Effectively, the ECB has left Germany holding the responsibility for the entire European bailout.

12:50 Rival sovereign rating agencies Moody’s and Standard & Poor’s both refused to comment on any potential rerating of Greece following its earlier reclassification by Fitch. Moody’s was unavailable for comment, while a spokesperson for Standard & Poor’s says the ratings agency is not commenting at present.

12:48 The new financial rescue plan for Greece will have an indirect cost for France of some €15bn until 2014, French prime minister François Fillon says. This will only be an indirect cost as France will participate in the plan through the EFSF rescue fund, Fillon adds.

12:44 Positive market reaction following the latest Greek bailout is unlikely to last, suggests Threadneedle senior bond fund manager Dave Chappell: “The new framework may appease market fears for now, but one must not forget that amongst the fanfare, we are witnessing the first Western developed country default in over half a century. A more robust growth profile than is currently expected is now key for the prospects of calm returning to the financial markets.”

12:35 Euro bonds portfolio manager at Fidelity International David Simner says yields on 10 year Italian government bonds are now 5.25%, having been at 6% on Monday, in a sign the market reacted positively to news of the Greek bailout agreement being reached. Concerns remain on Greece’s solvency as the potential write-down of debt is not large enough, but he adds “the Rubicon has been crossed” by allowing write-downs of sovereign debt, meaning further such write-downs will be less difficult to achieve in future.

12:09 Ratings agency Fitch has classified the EU-IMF programme of financial support for Greece as an event of ‘Restricted Default’. The agency refers to the programme as described in the Institute for International Finance proposal issued at the Summit. Fitch says there is no specific timeframe in which a ‘Restricted Default’ becomes an actual default scenario, as it is not known when a Greek default may occur. 

12:01 Ratings agency Fitch will place Greek sovereign debt in to a restricted default rating, reports Reuters.

11:55 Kathleen Brooks, research director at says that the moves to shore up Greece yesterday still leaves Athens with an unsustainable debt load that risks bigger haircuts for bondholders in future. She adds that the stronger powers of the EFSF may account for nothing unless it also has much more  than €440bn of funds with which to combat the crisis, especially if Spain’s banks need recapitalising. 

11:35 Despite today’s improved optimism on the eurozone, Standard Life Investments’ money markets and FX director Ken Dickson warns the euro’s rally is only temporary: “Currencies, like those of the dollar and of emerging markets, which the market believes to be good value, are also the currencies where forecasts are positive. In the same way, currencies that are expensive, the euro and the yen, are expected to fall through the year.” Sovereign credit problems will eventually hurt the euro-area more than the US, he adds.

11:14 A joint statement issued by the EU and the Institute of International Finance (IIF) reveals which banks will be expected to take on some of Greece’s debt. From core Europe, five German banks are included: Allianz, Munich Re, Deutsche Bank, Commerzbank and Bayern LB. Three French banks have signed up, BNP Paribas, AXA, and Société Générale, and three Swiss banks, Swiss Re, Zurich Financial, and Credit Suisse. The UK’S HSBC and Standard Chartered will be expected to participate, as well as Dutch banking group ING, Belgium’s Dexia, Sweden’s SEB and Spain’s BBVA. From the periphery, two Italian banks will take on the debt, Generali and Intesa SanPaolo. Six Greek banks meanwhile will be responsible for bearing the sovereign’s burden: Alpha Bank, National Bank of Greece, Eurobank EFG Group, Piraeus Bank, Bank of Cyprus and Hellenic Bank. Further afield, Turkey’s AK Bank, Canada’s Scotiabank, Banco de Credito de Peru, National Bank of Kuwait and Korea’s KB Financial Group will also participate.

10:50 Despite yesterdays’ historic deal by the eurozone members to bail out Greece a second time, asset manager Iain Stewart at Newton believes that the country ultimately will default. The manager of the Newton Real Return fund says: “We have little new to add to the debate on the specifics of Greek debt dynamics, other than to agree with most commentators that some kind of default is ultimately inevitable, and probably desirable for Greece. The important point is that, although the detail of how, and in which sectors, debts have been allowed to build up may be subtly different in Greece, Portugal, Ireland, Iceland and even, for that matter, the UK and US, all are a result of the sort of monetary distortions – cheap money has led to a mispricing of risk for both borrowers and lenders.”

10:25 Japan’s finance minister Yoshihiko Noda has welcomed Europe’s deal to save debt-stricken Greece, saying his government will continue to buy debt issued by the European Financial Stability Facility rescue fund to help the eurozone contain its debt turmoil, Dow Jones reported from Tokyo. “We’d like to contribute [to the EFSF] at the same pace if that could help stabilize the economies of the EU,” Noda said at a news conference. “I value the fact that a certain level of conclusion has been forged. I hope the implementation [of announced steps] will lead to economic and financial stability in the EU.”

Friday 22 July 2011, 08.45: InvestmentEurope continues coverage of the Euro crisis today with regular updates and analysis of market reaction to the proposed deal

16.51:It is not known how long today’s EU summit meeting will go on, but as the meeting last night between France and Germany lasted seven hours, discussions could continue for some time yet. A spokesperson for German Chancellor Angela Merkel said she will hold a press conference after the close of the summit. Read InvestmentEurope’s wrap up of the day’s events, and an outlook for coming days, in the news section of the site. Comments to the Editor welcome at

16.36: The Brussels summit draft statement shows the EFSF rescue fund would be allowed, for the first time, to help states earlier with precautionary loans, to recapitalise banks and to intervene in the secondary bond market. “To improve the effectiveness of the EFSF and address contagion, we agree to increase the flexibility of the EFSF,” according to the draft. It listed three key steps, all of which Germany had previously blocked.

16.31: Gary Jenkins, head of fixed income at Evolution Securities: If they are correct, the proposals “all look pretty sensible at first glance”. Longer maturities for Greece, Ireland and Portugal, combined with lower interest rates are positive for those countries, and probably negative for Bunds, he says.Referring to the ability to buy bonds in the secondary market, he notes that did not do much good when the ECB did it, but maybe there is more commitment now. Clarification is needed on private sector involvement, he adds. “Does this mean banks only? So a non-bank holding short dated Greek debt gets repaid on time and in full?” It might still mean a default from the agencies, but that could be a minor inconvenience if private sector involvement is limited to banks.

16.19: Eurozone leaders were set to give their financial rescue fund sweeping new powers to prevent contagion and help Greece overcome its debt crisis, according to the draft conclusions of an emergency summit Thursday, Reuters reports

16.11: Hardeep Dogra, portfolio manager on the Schroder ISF Global Managed Currency fund, warns that the draft report that leaked out of Brussels in the past couple of hours contains a number of positives, but notes the proposals remain in draft rather than the full officially published agreement. He would like to see more precise details. For example, the expanded role of the European Financial Stability Facility (EFSF) is welcome, especially as it seems suggestions from the IMF about its role have been taken to heart, including the ability to play an active role in the secondary market. 

Performance of dollar v. euro over 1mth



16.02: Today’s summit is a “do-or-die moment” for the euro, says Coutts’ global head of economics and asset strategy Carl Astorri. “The market has put a gun to the heads of eurozone leaders by pushing the extra yield that France has to pay over what Germany pays on its government debt to its highest in eurozone history,” he says. Failure to act decisively risks tipping the global economy back into recession.

15.57: Darren Williams, senior European economist at Alliance Bernstein says assuming the draft proposal is reasonably close to what is finally agreed, taking into account it was drafted by the European Commission and not necessarily in accord with individual governments, the resolutions are “as much as one could have hoped for”. Further clarification is needed on what private sector involvement in a Greek bailout would look like and flexibility proposed within the EFSF, he says, but those details may emerge later.

15.48: Goldman Sachs has detailed the exposure individual banks across Europe have to the debt of Portugal, Ireland, Italy, Greece and Spain, as well as the exposure these countries have to each other. European banks overall have €736bn of exposure to sovereign debt of the countries concerned.

See the List of banks

15.32: Stuart Thomson at Ignis Asset Management: “The most important shift over the next few months will be the deterioration of economic conditions within the core economies. The combination of global economic slowdown in the second quarter, coupled with the ECB’s misguided interest rate hikes and the heightened interest rate and financial market volatility is expected to lead to further slowdown for this week’s key economic data. Our central view on Europe remains that the sovereign debt crisis with strong growth in core Europe is difficult but manageable, as long as politicians continue to extend and pretend. But all pretence is lost when activity amongst the core economies slows to zero.”

15.19: Swiss politicians are wrangling over how to keep the rising Swiss franc in check. Investors seeking a safe haven from both the Euro and US debt crises have sent the currency soaring, squeezing exporters and threatening jobs. The Swiss central bank last intervened in June 2010, but commentators say it may not have the firepower to test markets again.

Performance of Swiss franc v. euro over 1mth:


15.11: From a draft statement from the Brussels summit: “We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole. We also reaffirm our determination to reinforce convergence, competitiveness and governance of the Euro area.”

Full statement here.

15.00: Contributors to the second Greek bailout, worth €115bn, will come from the EFSF, the IMF, private sector bondholders and Greek privatisation revenues, Reuters reported, citing sources. EU leaders said their aims were to make Greece’s debt more sustainable and prevent contagion from poisoning access to the bond market for other euro zone states.

14.45: A draft document circulating at the summit says the ‘Marshall Plan’ for investment in Greece sets at 3.5% the interest rates for rescue loans to assisted countries, while the maturities have been extended to 15 years from 7.5 years. Private sector participation likely, says Dow Jones.

14.40: ECB is willing to give way on a default. Euro jumps to 1.4240 from 1.4190.

14.25: Europe’s finance ministers have reached a draft summit agreement inspired by the Marshall Plan created following the Second World War. It will focus on investment and growth stimulation, according to UK newspaper The Guardian. Existing loans in the EFSF will be extended from seven and a half years to 15.

14.20: Professor of Economics based in Athens Yanis Varoufakis tweets that there is little difference between pursuing a bank levy or forced swap for Greek bonds. “Both options are barking up the wrong tree,” he says.

14.10: The Finns want Greece to put up collateral for any further loans, according to UK newspaper The Daily Telegraph. A Finnish diplomat says this is a ‘red line’, and that Greece has €300bn in state property that can be collateral.

13.55: Ireland’s political leader Enda Kenny is confident of getting an interest rate cut, on the tails of a Greek rejig, according to the UK’s Channel 4 economics editor Faisal Islam who says he’s seen comments from Kenny at today’s meeting in Brussels.

13.40: Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management, does not expect a breakup of the euro, but there is a possibility that the constituents of the eurozone could change in the next five years. Debt restructuring will be seen by EU leaders as a lesser evil than the breakup of the currency.

13.36: It seems the EU leaders will allow selective default in a Greek bond swap and buyback. Market commentators are talking about an IMF report on the 2001 Argentina crisis: “An important lesson (from that) is that market-based and voluntary financial engineering operations, such as debt swaps transacted at current market yields, do not work during a crisis. Voluntary debt swaps (and debt buybacks) done during a crisis can be likened to the case of an individual who, unable to service mortgage undertaken when interest rates were low, decides to refinance it at a much higher interest rate in exchange for temporary relief…”

13.29: Angelos Damaskos, chief executive of Sector Investment Managers and fund adviser for the Junior Oils Trust says he has liquidated one third of the fund’s bond portfolio and is investing the proceeds and cash holdings into equities. He also expects a eurozone crisis won’t negatively impact the fund’s portfolio: “Independent of market conditions and the European financial crisis, the companies we have invested in should prosper in an environment of growing demand for oil,” he says.

13.24: Willem Sels, HSBC Private Bank: “Policymakers have dragged their feet in trying to assuage the markets probably because they felt they could. Greece, Ireland, and Portugal combined are not really big enough to derail the European economy. In terms of Eurozone GDP combined they make up just over 5.5% – less than a fifth of the size of Germany. However, Italy is a different proposition altogether, as it is probably is too big to fail – or too big to save.”

13.11: Stuart Thomson, Ignis Asset Management: “The desperation of politicians caught between the ECB and single currency constitutions and market chaos is evident. And the longer politicians prevaricate, the greater the widening of peripheral spreads in the near-term.”

12.58: Clive Lennox, head of foreign exchange trading at Clear Currency:
“All indications are that an agreement for a package will be hammered out at today’s EU Summit. It is likely that last minute positioning before and during the Summit will drive the currency markets as investors speculate on the outcome.”

12.53:Francisco Garzarelli of Goldman Sachs says it is “decision time or bust’, but notes the high expectations of a favourable outcome from the summit. If all goes according to plan, he believes almost all the widening in intra-EMU spreads seen since Moody’s downgrade of Portugal could be corrected. He doubts there will be any further positive developments before September, as any decision has to be put before national parliaments. Also, concerns over the pace of global growth remain are affecting weaker borrowers. Investors may want to reduce risk in a recovering market.

12.51: Online stockbroker TD Waterhouse reports that financial stocks were among the most traded by its customers in the week ending 19 July as the European Banking Authority announced the results of its stress tests across Europe.

12.44: Hans Peterson, SEB head of Investment Strategy says his house view is that the euro will survive. “It’s a solidarity pact between stronger and weaker countries. There is no alternative. Also it is an important asset in which countries in surplus can invest.”

12.40: World First foreign exchange chief economist Jeremy Cook:
“You could argue that we have already seen the effect on the core that the IMF warned of, with the yields on Italian debt rising close to the 6% level. For a problem that was said to be confined to the periphery it is having a dramatic effect elsewhere.”

12.30: Russell Investments does not expect the summit to produce “a neat, holistic, immediate resolution” but it wants to see ” a clear display of unity amongst the European national leaders, and solid commitment by the ECB to play a constructive role.”

12.20 Russell Investments head of capital markets research for EMEA John Velis says “a default, withdrawal, or ejection of one of the peripheral, highly indebted countries of the Eurozone would be catastrophic for the European and ultimately the global economy and financial system.”

12.15 EU’s de facto leaders, France and Germany have agreed a possible way forward through the Greek debt crisis. Reuters reports willingnesss to contemplate temporary debt default

InvestmentEurope’s team of writers will provide ongoing updates of latest industry thoughts around today’s crisis talks on the future of the euro.

Please return throughout the day for updated comment

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