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Posts Tagged ‘Moral Hazard’

Citi’s Buiter: Greece will be forced out of the euro regardless of who wins the Sunday elections | ZeroHedge

Posted by satyrikon στο 16 Ιουνίου, 2012

New Democracy. Syriza. Doesn’t matter. According to Citi’s senior political analyst Tina Fordham, chief economist Willem Buiter, and global economist Ebrahim Rahbari, «any new Greek government, regardless of its composition, will struggle with implementation challenges related to the imposition of further austerity measures demanded by the Troika in exchange for further assistance,» and as a result, they «consider it likely that a new troika deal would ultimately fall apart and lead to Grexit.»

Citi notes that there is growing sense among European leaders that «promotion of economic growth can no longer be subordinated completely, even in fiscally unsustainable euro area member states, to the requirements of fiscal austerity,» but no one has any idea what that means.

This seems to be the current thinking, according to Citi:

 
 

The only operational, practical consensus on growth is that austerity policies should not be unnecessarily pro-cyclical. If a deficit target is overshot because of bad luck (economic activity and government revenues are weaker than expected despite full adherence to all conditionality) rather than bad faith (there has been a failure to implement agreed measures or policies), the shortfall will not have to be made up immediately – in the original time frame. More time will be given to achieve the original objectives without the need for deeper and faster austerity than originally envisaged. Bad faith (non-compliance) will, for incentive-compatibility or moral hazard reasons, continue to be punished with demand for enhanced and faster austerity.

Warning. Also, reminder: «And of course, reduced austerity does not mean no austerity, let alone the reversal of austerity…fiscal policy will remain contractionary overall – just less contractionary.»

Citi’s doesn’t think Greece is able to handle any more austerity, and its rapidly deteriorating fiscal condition is hastening a day of reckoning. On how and when Greek membership in the euro ends:

 
 

A possible trigger would be the determination by the IMF following the first or second assessment, that it cannot disburse its next installment due under the current programme because the Greek programme is not fully funded for 12 months after the assessment. In that case some of the smaller core euro area member states that have made their contributions to the Greek EFSF programme conditional on the IMF disbursing would probably drop out too. The Greek sovereign would then be forced to default. Then the ECB would stop funding the Greek banks through the Eurosystem and through the Greek ELA. With neither the Greek sovereign nor the Greek banks having access to the lender of last resort, we believe Greece would probably leave the eurozone, as some liquidity through the issuance of New Drachma is better than no liquidity.

The Citi team says that «more generally, we are concerned at the prospect of formerly wealthy countries becoming ‘new, critical fragile states.'» This is where things get really messy. They don’t think the ECB, EU, et al. will even let Greece go financially when things get really bad as described above. More like this:

 
 

In order to prevent such a scenario, we believe that even if “Grexit” were to occur, Greece would stay in the European Union and receive some form of Troika or other external assistance, most likely through the Balance of Payments facility run by the European Commission and the IMF for non-euro area EU member states. Since 2008, Latvia, Hungary and Romania have been under such programmes. Support from the EIB, and from Structural and Cohesion funds would also be likely to be forthcoming. We would also expect the ECB to continue to support the Bank of Greece after a Grexit. After all, the Greek central bank would exit the Eurosystem with considerable euro-denominated debt to the Eurosystem (this could be its Target2 net debit balance – something around €100bn, or its share of the total losses suffered by the Eurosystem as a result of Greek exit, however this would be established, net of the capital it has paid into the ECB, which would, in principle, be refundable on exit).

And the darkness is spreading through Europe. The «seeds of dystopia» are being planted:

 
 

Throughout the euro area periphery, and indeed beyond it in the ‘soft core’ of the euro area, the potential for the so-called “seeds of dystopia” referred to in the WEF Global Risks report remains a key long-term risk to European political stability and competitiveness, as youth unemployment rises and the social contract between states and citizens erodes. The burdens of this adjustment fall disproportionately on young people, as evidenced in youth unemployment exceeding 50% in Greece and Spain and unacceptably high everywhere in the periphery and the euro area at large. We continue to take the view that political change in Europe will continue to take place in the ballot box, but note the rising risk of frequent changes in government, street violence and other upheaval in a more fraught environment undermining both political and social consensus when it is most needed. However, unlike in the Middle East and North Africa, European countries do not have an age pyramid, but rather an inverted one, making it less likely that inter-generational conflict will propel rapid change in political outcomes towards more growth and employment-friendly policies.

 

Citi’s Buiter: Greece will be forced out of the euro regardless of who wins the Sunday elections | ZeroHedge.

Posted in ΕΠΙΚΑΙΡΟΤΗΤΑ | Με ετικέτα: , , , , , , , , , , , , , , , | Leave a Comment »

Fitch Follows S&P, Slashes Spain By 3 Notches To BBB, Only Moody Is Left – Step 3 Collateral Downgrade Imminent | ZeroHedge

Posted by satyrikon στο 7 Ιουνίου, 2012

 

Fitch Follows S&P, Slashes Spain By 3 Notches To BBB, Only Moody Is Left – Step 3 Collateral Downgrade Imminent

First it Egan-Jones (of course). Then S&P. Now Fitch (which sees the Spanish bank recap burden between €60 and a massive €100 billion!)joins the downgrade party of rating agencies that have Spain at a sub-A rating. Only Moody’s is left. What happens when Moody’s also cuts Spain to BBB or less? Bad things: as we explained on April 30, when everyone has Spain at BBB or less…

If all agencies downgrade Spain to BBB+ or below, the ECB could increase haircuts by 5% on SPGBs

The key aspect in terms of the Spanish downgrade(s) is the ECB’s LTRO. If all three rating agencies move Spain to BBB+ or below then under the ECB’s current framework it moves into the Step 3 collateral bucket which requires an additional 5% haircut across the maturities. In classifying its risk management buckets, the ECB uses the highest of the ratings to determine an asset’s position (unlike the sovereign benchmark indices which use the lowest rating, in general). Fitch and Moodys currently rate Spain at A and A3 respectively, with both having a negative outlook in place leaving only a small downgrade margin before Spain migrates to the lower ECB bucket.

Italy’s position is marginally more precarious in that it shares Spain’s A3 rating from Moody’s but is rated lower at A- by Fitch, and is similarly outlook negative from both agencies. One would hope ECB pragmatism would prevail and move to be more accommodative on its collateral haircut rules on sovereign debt.

The weakness of the eurozone’s growth outlook is undermining the efforts of many sovereigns to rein in budget deficits, thereby highlighting the self-defeating nature of the fiscal compact as currently defined. Including the political impact, this has potential to lead to further downgrades

via Fitch Follows S&P, Slashes Spain By 3 Notches To BBB, Only Moody Is Left – Step 3 Collateral Downgrade Imminent | ZeroHedge.

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