Tuesday, January 22, 2013

Eurozone - Obviously enjoying the silence

At the first Eurogroup meeting of the year, Eurozone finance ministers gave the green light for the next tranche of the Greek loan and appointed a new Eurogroup president but postponed all other crucial and controversial issues.

Last night’s first Eurogroup meeting of the year reflected the general mood of important policymakers in the Eurozone: relax and take it easy, the worst of the crisis is over. Contrary to many meetings before, last night’s meeting was not heavily-loaded with crucial decisions. In fact, there were only two concrete decisions: i) Eurozone finance ministers took was to give the green light for the next tranche of the Greek loan, amounting to 9.2bn euro. 7.2bn euro will be for further bank recapitalisations and 2bn euro to finance the budget. And ii) Dutch finance minister Jeroen Dijsselbloem was officially appointed as successor of Jean-Claude Juncker as Eurogroup president. On all other issues, conclusions were postponed.

As regards Cyprus, the adjourned game continues. In fact, the Cypriot government already (unofficially though) asked for help last summer. Many Eurozone countries, above all the German, however, are hesitant to offer financial aid to a country they suspect to be a money laundering paradise. The German government was already reported as wanting to see Russia chipping in to the bailout, extending financial aid provided in 2011 when Russia provided a €2.5bn euro loan to Cypriotic banks.

No official figures have been put forward yet but wire reportes refer to a bailout package of around 17bn euro (which would be around 100% of GDP). A €17bn bailout would mean that Cyprus' debt - currently over 70% of GDP - would reach 170%, way more than the troika of international lenders has ever accepted as "sustainable" for other bailout states. One crucial question is therefore whether Cyprus, or better holders of Cypriotic government bonds, should receive a haircut. A Greek-style haircut could create new turmoil on bond markets as it would “aufheben” the earlier promise that the Greek haircuts were one-offs (even if the ESM Treaty includes the option of exceptional private sector involvement). Moreover, as most bondholders are probably the banks themselves, a Greek-style haircut could increase the recapitalisaiton needs. However, a bailout out without any private sector involvement should be hard to sell politically in some Eurozone core countries. As a consequence, privatisations and eventually some baill-in of bank debt owners could become part of any bailout agreement.

The other controversial issue of the coming weeks and months remains the direct bank recapitalisation by the ESM once the single supervisory mechanisme is up and running. Unsolved issues are obviously how much money the ESM could spend on bank recapitalisation without jeopardising the financial capacity to bailout more governments, whether ESM should be the first or rather the final line of defence, whether the ESM should be allowed to fund “legacy assets” (mistakes from the past) and whether direct bank recapitalisation could be applied retroactively (for Spain and Ireland).

Eurozone policymakers are obviously enjoying the calm on financial markets. The copious time spent on and the obsession with the right pronunciation of the name of the new Eurogroup president, Dutch finance minister Jeroen Dijsselbloem,suggests that imminent pressure to deliver concrete results has faded away. Let’s hope it does not lead to complacency.

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