Archive for May, 2011

Again, it seems that the IMF and EU review mission teams are diligently and quietly working away on the ground in Athens whilst all hell is breaking loose everywhere else.

First up, the European Commission seems to be getting exasperated at the lack of meaningful progress by politicians in Greece. “Time is running out” said our Finnish friend, the Commissioner for Economic and Monetary Affairs, Olli Rehn. What Olli was hoping for yesterday, was consensus amongst the main Greek political parties to the latest round of austerity measures and privatisation programme. Despite a three-hour (or five-hour, depending on your sources) extraordinary meeting of the heads of the main political parties in Athens yesterday, under the auspices of the Greek president, no consensus was forthcoming; indeed from this perspective, political relations in Greece seem to be fracturing with recriminations getting  personal. What the EU wants is consensus to a road map of austerity and privatisation measures, it doesn’t want unpopular commitments unravelling a few months down the road as politicians jockey for advantage. Greece had its last elections in 2009 and the next ones are not due until 2013. The ruling PASOK party has 160 seats in a 300-seat parliament and it has additional allies in other parties but still the concern lingers that the €110bn bailout deal which was agreed in May 2010 may founder amidst political manoeuvres. If the EU was looking to early elections to provide a mandate for the bailout, then those hopes were dashed when the incumbent prime minister ruled out early elections after yesterday’s marathon meeting.

Next up, the IMF and their acting managing director, John Lipsky repeated the IMF’s mantra yesterday that restructuring is not foreseen as long as Greece adheres to the bailout terms. What we all want to know is whether or not the IMF will withhold its €3.3bn contribution to the next €12bn tranche draw-down by Greece from the €110bn bailout in June 2011, and if the IMF is demanding that the EU provide assurances to fund the remainder of Greece’s maturing debt in 2011 and possibly 2012. And we’re unlikely to get any comment from the IMF on this question before 6th June 2011 when the review mission in Athens is due to conclude its work.

There was a new voice adding shading to the debate yesterday when French president, Nicolas Sarkozy spoke in favour of bondholders sharing in the solution of Greek’s present woes. What he was calling for seems akin to the Vienna Initiative in 2009 where bondholders agreed to roll-over maturing debt. He specifically wasn’t talking about unilateral burning of bondholders. The national government perspective was backed up by Michael Meister, the CDU (Angela Merkel’s lot) finance policy spokesman who said Greece’s creditors may accept an extension of bond maturities if the Greek government adopts a more aggressive approach to cutting debt. With 10-year bonds trading at 55c in the euro and signs of growing turmoil in Greece, it’s hard to see bondholders being understanding.

The ECB has been silent on Greece in the past 24 hours.

So on Day 4 of GreekWatch what is the likely prognosis for the Greek patient?

(1) Greek politicians impose the austerity and privatization plans agreed with its creditors. This will certainly be attempted in early June in parliament but it seems messy without consensus. And unionists and protesters seem to be chomping on the bit to hit the streets during the hot summer months.

(2) Greek’s bondholding creditors agree to roll-over debt that matures in 2011 and possibly 2012. Seems unlikely given the likelihood of Greek default and Greece’s slow progress with complying with the bailout agreement

(3) The EU either picks up the entire tab for the next tranche or provides an assurance to fund the roll-over of Greek debt because the IMF won’t risk more funding and the immediate consequences of default will disproportionately affectEurope. This is messy because it may require an additional bailout (€60bn according to some estimates on top of the existing €110bn) and will require national parliament approval in Germany, Holland and Finland who all seem increasingly hostile towards Greece.

(4) Greece doesn’t get the next tranche at all and defaults which would probably lead to all Greek banks being nationalized and capital controls to prevent euros leaving the country/banking system. Given that Greece still has a primary budget deficit, it would need either immediately close that or else exit the euro.

(5) The IMF and EU provide the next tranche without receiving sufficiently tangible commitments from Greece, because the wider consequences of default outweigh €12bn.

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The IMF and EU review mission teams in Athens are remaining tight-lipped as they assess Greek progress to date and the feasibility of new austerity and privatisation plans. They must be the only people in this drama that are remaining tight-lipped.

First up, the ECB. Executive Board member, Jose Manuel Gonzalez-Paramo called yesterday for a repeat of the Vienna Initiative in 2009 which saw private lenders roll-over maturing debt. Next up, governor of the Dutch central bank and ECB governing council member, Nout Wellink expressed confidence in Greece’s ability to comply sufficiently with the wishes of the EU/IMF to see the release of the next drawdown. Greek central bank governor, Giorgos Provopoulos rowed in behind the positive sentiments of his colleagues in the ECB and described the possible exit byGreece from the euro as “entirely ridiculous” and he too expressed confidence in the success of the present efforts by the Greek government to comply with the bailout terms.

In Washington yesterday, the IMF’s weekly press conference was dominated by questions over Greece’s woes. The IMF’s Director of External Relations, Caroline Atkinson was adamant there was no question of Greece leaving the euro – “absolutely not. I would just point that I think there’s a broad view has been expressed about the absolute importance of Greece being a part of the Eurozone” but seemed more defensive than usual about the need for funding assurances from Greece (or the EU) before the IMF would release the next tranche of funding (tranche 5, totals €12bn of which the IMF’s contribution would be some €3.3bn) – “the other part of the discussion [the present review mission] is the financing part, including our own financing”. Now to be clear, Caroline didn’t say that Greece or the EU needed to provide assurances, for example on the funding of maturing debt in 2011, but she also didn’t dismiss the notion of the IMF requiring assurances which seems to give legs to suggestions in recent days that the IMF is seeking assurances from the EU that the EU will fund maturing Greek debt in 2011, and in the absence of such assurances, the IMF may withhold the next tranche of funding.

Elsewhere yesterday, the European Director of the IMF and the boss of Poul Thomsen (Greece and Portugal) and Ajai Chopra (Ireland), implied that the release of the next tranche would not be contingent on the EU putting funding in place to deal with Greek maturing debt in 2011 and 2012. However the same Reuters report claims that “he EU is preparing a new aid plan that would meet Greece’s funding needs in 2012 and 2013”

There was a rare meeting of Greek political leaders earlier today under the auspices of the Greek president. The last such meeting was in 2009. The publicly stated objective of the meeting was to secure consensus across all political parties to the proposed austerity measures and privatization programme. The meeting has ended without any such consensus. The Greek prime minister has stated that he will press ahead with the measures and will not seek early elections, as had been rumoured. There were public protests inAthenslast night and in some other key cities, smaller than the previous night due to heavy rain but the protesters say they will be back on the streets after 6pm this evening.

From the safety of the sidelines, economists Paul Krugman and the ECB’s former chief economist Otmar Issing seemed to be in agreement at a conference inCopenhagen that Greek default or restructuring was a very high probability event.

It was reported on Greek news service Capital.gr citing Dow Jones Newswires says that Greece is seeking an additional bailout package totaling €60bn on top of the existing €110bn package agreed last May 2010. It goes on to say “Greece expects to receive that next installment of aid, about EUR12 billion, by June 29. The government says it has enough cash on hand to continue operating until July 15”. Remember that the Review Mission presently on the ground from the IMF and EU expect to conclude their work by 6th June 2011 and it is expected that there will be a view by then as to whether the tranche draw-down will proceed. That’s why this GreekWatch series will conclude on 6th June.

In terms of explaining a bit more about the Greek domestic measures that are causing all the bother; today, the privatization of OTE (Organisation Telecoms Ellenos or Greek Telecoms Organisation), a major provider of telecoms in Greece and other south east European countries (Albania, Serbia, Bulgaria, Romania). The Greek government owns a 20% stake in the company that is worth an estimated €800m. German telecoms giant, Deutsche Telekom (DT) owns 30% of the company and the likelihood is that DT will buy whatever stake is put up for sale by the Greek government. OTE employs some 30,000 people and the unions and employees are not happy with the “privatization”. In fact they have now scheduled strikes for the start of June 2011 to make their feelings clear. The latest suggestion is that Greece will not dispose of the 20% stake but will sell an “option” for the future purchase of 10%, that is half the stakeholding.

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In what must be one of the most dramatic announcements by NAMA to date, its head of lending and corporate finance, Graham Emmett is reported to have told an audience in London on Tuesday this week, that NAMA would dispose of all of its assets in the UK by the end of 2013. Graham was speaking at the launch of the DTZ Money into Property UK report – his speech does not appear to be available yet so the best reporting is that by Property Week. This news is a bombshell because NAMA’s line previously, including that advanced by its CEO, Brendan McDonagh in an interview with Neil Callanan for the Financial Times in April 2011, was that it would dispose of only 25% of its UK portfolio by end of 2013.

NAMA’s UK portfolio is estimated to be worth €19bn at nominal value. It is unclear how much NAMA paid for these loans. NAMA’s average discount has been 58% but the expectation would have been that the UK discounts would have been far less than this. NAMA is understood to have received 100% of the nominal value of the loan for Richard Caring’s 20 Grosvenor Square building, for example. A 58% discount would imply a €8bn value at November 2009. Graham Emmett repeats the claim that the majority of NAMA’s UK portfolio is secured on assets located in London and the south-east ofEngland. NAMA has to date approved the disposal of €3.3bn of assets with “the majority” in theUK.

The reasoning for the rapid UK sell-off is, according to Property Week, the UK is a more liquid market than Ireland. The difficulties of disposing of property in a buoyant market first whilst nursing assets in other markets which continue to decline in value, was examined on here last week; a conclusion was that it would not be wise to dispose of assets in buoyant markets if the future rate of growth in those markets was greater than the declines in poorer performing markets.

UPDATE (1): 28th May, 2011. Emmet (two “m”s and one “t”) Oliver in the Irish Independent today seems to have been the only journalist to have gotten a reaction from NAMA to their Head of Lending’s statements in London. “NAMA will explore opportunities to dispose of assets in all markets over the coming years and will not restrict its disposals agenda to any one area or country, nor is it committed to exiting any particularly market by a particular time” was the NAMA reaction given to the lucky Emmet. Emmet is less fortunate with his spelling – NAMA’s Head of Lending, according to NAMA is Graham Emmett (two “m”s and two “t”s) and not as spelt by Mr Oliver.

UPDATE (2): 28th May, 2011. Actually the Irish Times today also reports a response by NAMA to Graham Emmett’s statements – “Last night, a NAMA spokesman said that “too much attention has been given to specific comments” and that it “may hold on to some assets for a longer time”, adding that the timescale would be set “by the appetite in any market to acquire assets at reasonable prices”.”

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The Nationwide Building Society has this morning published its UK House Price data for May 2011. The Nationwide tends to be the first of the two UK building societies (the other being the Halifax) to produce house price data each month, it is one of the information sources referenced by NAMA’s Long Term Economic Value Regulation and is the source for the UK Residential key market data at the top of this page.

The Nationwide says that the average price of a UK home is now GBP £167,208 (compared with GBP £165,609 in April 2011 and GBP £162,764 at the end of November 2009 – 30th November, 2009 is the Valuation date chosen by NAMA by reference to which it values the Current Market Values of assets underpinning NAMA loans). Prices in the UK are now 10.1% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of May 2011 being GBP £167,208 (or €190,073  at GBP 1 = EUR 1.1537) is 0.9% below the €191,776 which the Permanent TSB/ESRI said was the average nationally here at the end of December 2010 (the series was abandoned thereafter and the replacement series from the CSO doesn’t include prices).

With the latest release from Nationwide, UKhouse prices have risen by 2.73% since 30th November, 2009, the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued. The NWL Index stays flat at 886 (because only an estimated 20% of NAMA property in the UK is residential and only 29% of NAMA’s property overall is in the UK) meaning that average prices of NAMA property must increase by a weighted average of 12.6% for NAMA to breakeven on a gross basis.

The short-term outlook for UKresidential remains bumpy. Interest rates may need to rise to contain inflation that is beginning to take hold –  4.4% in February 2011, 4% in March 2011 and 4.5% in April 2011  – all on an annual basis. The UK target is 2% so the base rate which has been at 0.5% since February, 2009 may need be raised. The UK March 2011 Budget estimated growth in GDP of 1.7% and 2.5% in 2011 and 2012 and inflation of 4-5% this year falling to 2.5% in 2012.  Net debt will be 60% of GDP this year rising to 71% in 2012. Scary for the UK but paradise compared to the 100%+ in Ireland. The UK is also struggling with a deficit that was 11% last year (compared with 12% in basket-caseIreland) but there are swingeing cuts to public services in prospect to bring the deficit down to 4% by 2014/5. What all of this means for property prices is uncertain of course but the betting is that prices will come under modest pressure and may fall by less than 5% in 2011 – the Office for Budgetary Responsibility was saying 2.7% late last year but finances have deteriorated since then. The UK has plenty of micro-markets and the betting would be that London and the south-East will fare better than the North of England and elsewhere, Northern Ireland in particular.

What is interesting about the UK is that the real price of housing, that is, excluding high-ish inflation is some 40% off the peak in Q2, 20007. Massive quantitative easing has cushioned the 40% real fall from peak so that on a nominal basis, prices are only 10% off peak.

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Just a week after appointing receivers to assets owned by TD Mick Wallace’s M&J Wallace Limited, news this evening that ACC has appointed receivers to Galway-based construction and development company, Cordil Construction Limited. The company was founded in 2000 by Gerry Dillon and Pat Corrigan. Its developments includeFairhill Court (GalwayCity), Dun Eibhir (Furbo, Co Galway) andGalwayWestBusPark (Galway). The company is said to have debts of over €30m of which trade creditors are said to be owed €6m and banks are understood to be owed €21m. Galway News reports that the company employs 51 people directly and more than 400 at subcontractors and has operations inIreland and theUS.

RTE report that the company had previously stopped work on its sites because of credit problems and ”restrictions of Government contracts”. The name of the receiver does not appear in reporting

UPDATE: 1st June, 2011. The Irish Examiner reports that Aengus Burns of Grant Thornton is the receiver. The newspaper carries a report of a statement from Cordil’s Gerry Dillon who said that ACC Bank, a subsidiary of Dutch bank, Rabo had a floating charge over the company’s assets and was owed €5.5m. Cordil has loans from other banks but it was ACC that chose to launch recovery action, according to Gerry.

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The IMF and EU teams seem to be working away quietly on their review mission in Athenswhilst the discussions about new austerity measures and privatisations get louder. There were rumours yesterday evening that the Greek prime minister was considering a referendum on new austerity measures though that seems to have been dismissed today with the claim that he is only seeking “consensus” – remember the prime minister controls 160 of the parliament’s 300 seats so “consensus” is a PR exercise, but it is one advocated by the IMF and EU.

There were small-ish (by Greek standards) demonstrations on the streets yesterday evening when some 20,000 protesters across a number of cities staged peaceful protests. The protests are set to continue this evening. They are differentiated from other Greek protests by being non-union, non-political and are seen as a novel development based on the Spanish protests last weekend. It will be interesting to see if they grow. If the unions organise protests against the latest proposed austerity measures then the government will take that more seriously. Unions are also unhappy with the proposed privatisations and there have been sit-ins at TT Helenic Postbank (equivalent of our Bank of Ireland) and there have been calls for strikes at OTE (equivalent of our Eircom).

A Greek European commissioner broke ranks yesterday and issued a statement that claimed there had been recent discussions at EU-level aboutGreece leaving the euro. Those claims were roundly denied by senior politicians inAthens and by our Finnish friend, Olli Rehn inBrussels. “we either agree with our creditors on a program of tough sacrifices that brings results, and assume the responsibilities for our past, or we return to the drachma” said EU Commissioner for Marine Affairs and Fisheries, the free-thinking Maria Damanaki, in a statement.

German economist and adviser to Angela Merkel’s government, Peter Bofinger has issued an opinion that Greece needs to impose a 40% haircut on its €270bn debt and the rest needs to be converted into what he described as “euro bonds”. Meantime, German finance minister and key player in Greece’s immediate future, Wolfgang Schauble gave a brief interview with German financial newspaper, Die Handelsblatt in which he warned that any Greek default would have dire consequences for the “financial system” and indeed, he compared a Greek default to the collapse of Lehman Brothers in September 2008 which is seen as a major cause of the consequent financial crisis.

There was a claim reported in Reuters that the main focus of current EU efforts is to convince private lenders to Greece whose debts are shortly maturing, to accept new debts in their stead, thereby producing a private sector re-profiling. It is not clear what incentives might be on offer to private sector lenders to extend their exposure to the troubled Greek state. Reuters report Greece’s €270bn of sovereign debt to comprise €50bn owned by Greek banks, €50bn owned by non-Greek banks, €35bn by (presumably non-Greek) insurance companies and €55bn in (presumably non-Greek) pension and other funds – that would still leave another €80bn floating around elsewhere

Jean-Claude Juncker, prime minister of Luxembourgbut more importantly leader of EuroZone finance ministers stated today that the IMF may not release its share of the tranche next month (approximately €4bn) because of an absence of undertakings by Greece or the EU that debt redemptions over the next 12 months will be underwritten. Diplomatic sources in Brussels reportedly told Greek online news outlet Capital.gr “the situation seems desperate but we should bear in mind that that the solutions forGreece,Portugal andIreland had been adopted is such desperate situations, when agreement seemed to be unreachable”

The Greek president, Karolos Papoulias has reportedly invited the leaders of the main political parties to a meeting tomorrow at 12 midday. The meeting is apparently aimed at reaching a national consensus on dealing with the new austerity measures and privatisation programme but that hasn’t prevented rumours that a Greek default or exit from the euro isn’t being privately discussed.

An IMF economist unconnected with the present review mission, Olivier Blanchard speaking in Argentina, said (via Dow Jones Newswires) that Greek’s program was on track, but that Greece would need additional funding beyond the existing bailout because the country would not be able to re-enter the debt markets in mid-2012 as originally planned. Olivier is more relaxed than some Europeans, that a Greek default won’t generate catastrophic contagion.

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Because domestic reporting on Greece’s current difficulties is abysmal, and international reporting is hit-and-miss, and because any restructuring or default in Greece is likely to have major ramifications for Ireland, there is a new temporary feature being launched today, a daily update on Greece as the countdown progresses to the decision on the release of the next tranche of its IMF/EU bailout on 6th June. If Greece fails to secure its next tranche of €12bn, the fifth since entering into a €110bn agreement with the IMF/EU last May 2010, then Greecewill be unable to repay €13.7bn of maturing debt in June 2011 and there will be some form of default. Already Moody’s is warning of dire consequences of any Greek default on other peripheral countries, including Portugal and Ireland. Standard and Poor’s today toned down the impact of a default on Ireland and this evening Taoiseach Enda Kenny dismissed any notion of a default here. Our 10-year bond closed at a record 10.99% mid-point today which suggests markets are not so sure.

The update will combine the best of international and domestic Greek reporting, and may help inform the debate here about strategy and tactics to deal with its own debt.

The players:
George Papandreou. Prime minister since 2009. Leader of PASOK, a centre-left “socialist” party. Controls 160 of the 300 seats in parliament, so can push through legislation and reforms.
Giorgos Papaconstantinou. The Finance Minister.
Antonis Samaras. Leader of the main opposition party, New Democracy, a centre-right party. Controls 91 seats in parliament, so a minority but if consensus is required, this is the party PASOK needs to talk with.
Poul (not “Paul”) Thomsen. IMF Mission Chief forGreece (andPortugal), the equivalent of Ajai Chopra inIreland. Both are officially Deputy Directors forEurope.
Labour unions. In Greece, these are many times stronger and vociferous than our own. Effectively they represent the Opposition on the street.

The bailout:
Agreed in May 2010
€110bn total with €30bn from the IMF and the remainder from the EU.
Four tranches thus far drawn-down by Greece totalling €53bn
Fifth tranche of €12bn due for draw-down in June 2011 but dependent on a positive outcome of the current review mission, reviewing progress to date and outlook
The effective interest rate on the bailout is understood be around 1% less thanIreland’s, or 4.8% approximately

The ruling PASOK political party finally gets its finger out and produces a tangible set of privatisation and austerity measures. But now, the opposition led by Antonis Samaras is being unco-operative and is criticising the austerity measures for being so severe as to affect growth. Opposition co-operation is not needed to get the measures through parliament but the IMF and EU want consensus, and if there isn’t consensus, protests are likely to spill over onto the streets.

Following their shock departure last Thursday, citing lack of progress by Greek authorities, the IMF & EU teams have returned to Athens to review progress and the feasibility of current plans to introduce more austerity and commence privatisations which are ultimately aiming to raise €50bn. The teams are scheduled to remain until June 6th when they are expected to issue pronouncements on the feasibility of Greek plans.

The OECD outlook today was mixed in its projections for Greece compared with the EU Spring Forecast. The OECD says Greek GDP will drop by 2.9% in 2011 and will rise by 0.6% in 2012. The EU Spring Forecast projected a 3.5% drop in 2011 and a rise of 1.1% in 2012.

This evening there are citizen gatherings in Athens,Thessaloniki and Patras modelled on the Spanish demonstrations. There have been calls for peaceful protest, thoughGreecehas a difficult history of violent protests in the past two years. The main focus of the protests is ongoing austerity.

A panel of Angela Merkel’s political party, the CDU, has called for wage and pension moderation in Greece. Greek pensions are still around 94% of average Greek income, while Germans’ are only 40%. At 39.6% Greece also recorded the highest increase in wages in the euro zone from 2000 to 2008, according to the panel head, Kurt Lauk said. In Austria by contrast, wages only rose by 2.9%. Greece raised its retirement age from 61 to 63 to 65 last year.

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