Crucial week for the future of the euro

The coming days seem crucial for the future of the euro for many, even in the European Union, as pressures on the Spanish economy are rising and scenarios about further support of Greece from its partners are giving and taking, along with the conflicting views of European policies on how to manage the debt crisis in the EU.

The meetings of EU president Herman van Rompuy with European leaders are particularly important, as he will try to find a common line before the ECB meeting and the decision of the German Constitutional Court about the Permanent Support Mechanism (ESM).

Specifically, on Tuesday September 4, van Rompuy will meet with Angela Merkel, and the next day with François Hollande in Paris.

Diplomatic sources cited by the French news agency report that Greece will be found high on the agenda of van Rompuy’s diplomatic contacts, who has made an informal request for a two-year extension of the loan program.

The issue of Spain will also be discussed, about which the EU has announced that it can release up to 100 billion euros to recapitalize commercial banks, while there is still an open issue regarding its appeal for a complete bailout package, and not just for the banking system.

On Friday, September 7, van Rompuy will come to Athens to meet with prime minister Antonis Samaras. On Saturday, he will visit Cernobbio on the shores of Lake Como in northern Italy, where he will meet with Italian prime minister Mario Monti.

Greece: The package of austerity measures 11,5 billion

At 12 pm today the cabinet will sit at the negotiating table for the adoption of the new measures. The staffs have formulated their own red lines and require equivalent measures against the proposed package of 11.5 billion euros. 

After the briefing they had from the government on Wednesday evening, members of financial staffs from PASOK and the Democratic Left were in continuous consultations on Thursday. 

In PASOK Protopapas, Koutroumanis and Sachinidis met with party president Venizelos on Thursday morning, but also held a meeting amongst themselves. In the Democratic Left, Chatzisokratis discussed the proposals with president Kouvelis and later convened the central secretariat of the party. During these meetings they discussed the proposed measures of the economic team that include: 

- elimination of the 13th and 14th pensions for all pensioners without exception

- elimination of the 13th and 14th salaries for civil servants

- decrease of pensions

- elimination of seasonal unemployment benefits

- reduction of benefits for people with disabilities

- implementation of age-related criteria in EKAS

- elimination of automatic wage increases in the security forces

- reduction of tax exemptions

 

Officials also discussed the increase of the pensionable age by one or two years, which is a “red line” for many MPs of the three governmental parties. 

PASOK and the Democratic Left also seem to require equivalent measures to total cuts in the bonuses of pensioners. Their members say "no" to cuts in OGA pensions. A former PASOK government member wondered who will vote for a reduction in disability benefits. 

On the ND side, disagreements lie in different issues. According to information, they rejected the Democratic Left’s proposal for the State not to pay the total of clergy salaries, but left an open window for the possibility of cuts in the salaries of bishops.

Hollande: Greece must remain in the Eurozone

For Greece there is no question of leaving the eurozone, said the president of France, Mr. Francois Holland after his meeting with Prime Minister Antonis Samaras at the Elysee Palace. He added that Greece must remain a member of Europe.

For the courtesy signing, the French president agreed to make joint statements with the Greek prime minister after their meeting at the Elysee Palace, which was not foreseen by the protocol of the French presidency.

Mr. Holland said that he recognizes the efforts made by the Greek people, but added that the Greek government must prove its credibility and Greek political will to continue the reforms.

All this, he said, so that they can withstand the Greek people. He also added that the report of the troika have to confirm that commitments are honored, not only the economic but also the reforms that Europe has done what should do.

On his part, the Greek Prime Minister Antonis Samaras, after he spoke in French to reporters, said that some wager close to the exit of the country from the eurozone. He notes that he was there to assure the President Hollande that Greece will do what it must and will manage to gain its proper place in Europe.

Mr. Samaras said that Mr. Hollande agrees on the issue of recovery and that is the only way that Greece and Europe to achieve their goals.

And closed by saying that the Greeks are proud people, we do not like to borrow and to depend on borrowed money. Europe means dignity and democracy, and the people who suffer should be helped to preserve democracy and dignity.

Change of climate in Greco – German relationships

The Greek government appears satisfied with the meetings in the German capital, as it believes the first crucial step towards the normalization of relations between the two countries has been taken, and that it will affect the overall climate against our country.

Samaras assured that whatever has been agreed with the Greek side and its partners it will be respected. His colleagues say that the package of 11.5 billion euro will be the last to be imposed on the Greek people and especially those who have lifted the biggest part until now.

Although much will depend on troika’s report, the government believes that the path to the exit from the euro would be stopped and that by the end of October we will get the next tranche and the extension.

Indicative of good the climate is the fact that after the formal meeting and working dinner, Merkel held a private meeting with prime minister Samaras, which lasted another 40 minutes.

Samaras affirmed that "Greece will remain loyal to its commitments and obligations".

The Greek delegation believes that this was the first major step, not only to restore the credibility of Greece, but also to remove the mistrust between the two countries. They believe that this will help to change the psychology in international markets towards our country.

During the meetings the two sides discussed all issues and Greeks officials presented the views of the Greek side, including the way the recession burdens the deficit in a vicious circle that can only be broken by returning our economy to the path of growth. Naturally, they discussed about the issues of privatization and structural changes, where the officials of the German government raised the question as to why the agreed commitments and timelines are not being met.

"From our side we showed the resolve that we will take the necessary steps in order to give perspective to our country. The prime minister made it clear that the key issue is the lack of recovery," a PM associate said.

The Greek delegation argued that already in five years of recession, GDP has fallen by 20% cumulatively and it will continue until 2015, reaching 30%. The government believes that the suffocation from lack of liquidity of the Greek economy must stop, as it leads to further reduction of incomes and worsening of the recession.

They agreed to create a Greek Development Fund, with the participation of a German bank and individuals, in order to provide development resources.

Another issue discussed with the German officials was the tackling of tax evasion. For this issue, secretary of State Yorgos Mavraganis will meet early September with the relevant minister of Switzerland, in order to implement an agreement on the taxation of savings, similar to that which has been applied with England and Germany.

Also, Samaras’ adviser Stavros Papastavrou will discuss with German officials the unfreezing of the memorandum previously agreed between Papandreou and Merkel. It was also agreed that the German government will provide expertise and help to structural changes and reforms in various sectors, such as health.

Juncker expressed his love and support to Greece and the Greeks, but... he notes: proceed with the reorganization and we will give you the next tranche

After his meeting with prime minister Antonis Samaras, Eurogroup head Jean-Claude Juncker expressed his confidence that the Greek government will do what is necessary, while he emphatically stood against the country's exit from the Eurozone and asked foreign dignitaries to stop the relevant statements.

The two politicians agreed on the need to implement the program of financial stability, advance structural reforms and accelerate privatizations.

The meeting was attended by Finance minister Yannis Stournaras and deputy minister Christos Staikouras. They discussed all the developments in our country and the eEurozone, the necessary steps to be taken to tackle the debt crisis, and the geostrategic conditions for stability, given the turbulent situation in Syria.

The PM said that he informed the Eurogroup president that "in the last two months we have changed a lot in the country and in the future we will change even more. We have expanded the agenda of privatizations and accelerated structural changes, and during the next few weeks we will close the package of 11.5 billion euros. Also, we spoke on efforts to tackle tax evasion, as well as on the safety of citizens and tackling illegal immigration."

Samaras stressed that it is particularly important for the three parties to support the policy. "Greece is turning over a new leaf politically, economically and socially. We will implement all objectives to get the country out of the crisis, but we ask to enter a development phase because due to continuous recession and massive unemployment, we cannot stabilize our economy. We emphasize liquidity and look for ways to stimulate the economy and strengthen the SMEs. The Greek people asked for the country’s stay in the European Union and that their sacrifices bear fruit."

The PM referred to those within and outside the country who gamble on its exit from the Eurozone and said "we will disappoint them with deeds, not words." He concluded his speech by saying that very soon “we will restore the credibility of the country and change the psychology of the international markets."

Eurogroup president Juncker acknowledged the country’s efforts to overcome its debt problem. He too addressed its critics abroad, saying that "the country is making great efforts to consolidate its finances, but this is not understood. After two years Greece faces a credibility crisis."

He said the priority of the country is the consolidation of public finances because they will restore its credibility. He argued that "with a serious policy of deficit reduction, the country can count on the disbursement of the next tranche." However, he explained that both the next tranche and the extension will depend on the Troika report. "The ball is in Greece’s court, and this is the last chance."

Replying to a relevant question, he said that "I do not support a third memorandum. The Troika will examine the way to fully implement the second program, and I don’t want to say that in the next six months Greece will not be given any help." But he refused to refer to his own suggestion for the extension, which he discussed with Merkel.

Juncker said that the measures to be taken by the country should be reliable and strong, acknowledged that "low wage earners have suffered enough and should not shoulder new burdens, but other social groups must contribute more."

He pointed out that Greece must proceed with its structural changes and noted that a lot of work has been done, especially in the labour market. He stressed that all professions must be deregulated even though there are reactions from powerful lobbies.

He clarified that "an exit from the Eurozone will not help Greece, while it will have a huge impact on Europe. If they stop talking about Greece’s exit from the euro, they will help with privatizations too." He concluded by saying that "I did not come here to give lessons to the government and I'm on the side of Greece."

Meeting Juncker - Samaras in Athens today

PM Antonis Samaras will meet at 5.30 pm today with eurogroup president Jean-Claude Juncker, who arrives in Greece at 1:00 in the afternoon.

The meeting is very important, as the prime minister will present the measures taken by the Greek government and attempt to persuade Juncker on his determination to meet the commitments of the country.

Samaras will also raise the issue of the fiscal adjustment extension. The Eurogroup president has repeatedly distanced himself from statements against our country and believes that there should be no departures from the eurozone.

After being convinced of the Greek side’s intentions he can affect the overall climate in view of the October summit and eurogroup meetings that will be crucial for the disbursement of the next loan tranche.

After the meeting at Maximos Mansion, Juncker will visit the Acropolis Museum and in the evening Samaras will host a dinner in his honor.

The PM, who takes off tomorrow for Berlin, did not convene a meeting of political leaders wanting to show that he takes responsibility for the policy to be followed from now on, and also to avoid any disagreements on the package of measures that would have had a negative impact.

The rough German stance discourages Athens

 

 

 

No governmental member expected that the renegotiation path of the memorandum would be easy, but the most pessimistic expected that the climate would improve after the determination shown by the government in the implementation of the 11.5 billion measures for the period 2013 -2014. Thus, unpleasant placements by members of the German government in recent days Eurozone, not only limit their expectations for the meeting between PM Antonis Samaras and Angela Merkel in Berlin, but are forcing the government to redefine its tactics on the request of an extension to the fiscal adjustment program.

 

Maximos Mansion learned Monday evening with embarrassment about German Foreign minister Guido Westerwelle’s placement - after meeting with Avramopoulos- that there is no room for renegotiation. It were preceded by similar placements by Finance minister W. Schäuble and parliamentary leader of the Christian Democrat party Volker Kauder.

 

Faced with this German attitude Samaras will redefine his tactics. Maximos Mansion already leaked that no decisions will be taken in the meeting and that the issue of extension will be officially placed in the European institutions during the upcoming summit in October.

 

Naturally, Samaras will set out the situation in the country, emphasize that recession is larger than estimated due also to the memorandums and will defend the need for changes to the agreed framework for the country to be able to meet its obligations and debts.

 

Until the extension is officially placed in the summit, Samaras wants to avoid negative statements by Merkel and the German political elite. He will seek to get Merkel's declaration that Germany is in favor of Greece’s stay in the eurozone. He will also try to convince the German leadership to depend its stance on extension to the troika report and the package of 11.5 billion euros and its adoption by the Greek parliament, that will be a testament of determination by the Greek government.

 

Thus, the prime minister and the economic team are completing the package of 11.5 billion euros, which will be extremely hard as it will include cuts in pensions over 700 euros, reduction and elimination of benefits for which the prime minister and political leaders had committed not to touch before the elections, significant cuts in payrolls of SOEs, a new type of redundancy in the public sector as well as significant reductions in welfare, health, education etc.

 

This was the subject of yesterday's meeting at Maximos Mansion. And since the argument of hard European and German elites against our country is that there can be no new funding, the Greek leadership has to develop proposals that the extension cost be restricted to the minimum to avoid having to pass it through the parliaments of member countries and it will be covered by the Greek economy when it enters a development phase. The prime minister will argue that Greece must remain in the euro at all costs and that it should take all necessary steps as hard as they might seem to restore its credibility.

 

Samaras will attempt to transfer the critical decisions so that when the package of measures is brought in parliament, MPs of the three parties that support the government will be found in front of the dilemma either to vote in its favor or to pave the way for the fall of the government and the country’s exit from the euro.

Crucial week for Eurozone and Greece

The first tour abroad as prime minister of Greece, Antonis Samaras has a mission to win the last chance that Greece has to escape the economic collapse.

The international press is full of scenarios for a possible exit of Greece from the euro area. Besides German media are trying to determine the cost of "buy out" of the Greek debt and refinancing of the deficits of Spain.

Many European politicians talks about “Babel” without a common line, the burden of decision falls in Germany, which enters the final straight for the elections of 2013 and therefore affected by the partisan balance in order to attract votes.

The appointment of Mr. Antonis Samaras with Mrs Angela Merkel is the most crucial of the three tests required to pass prime minister the next seven days. Mr. Samaras has realized that the choices are limited and there are no magic solutions to overcome the crisis.

The risk of running the country is very great and European partners are sure to make it absolutely clear through public statements and leaks to the intentions and to consider alternatives without Greece in reports published in major international media .

The prime minister knows that the leeway that has been limited. The decision taken at the highest government level and are known as the leader of PASOK Evangelos Venizelos and the chairman of the Democratic Left Fotis Kouvelis is to present the German chancellor plan to reduce state spending by 11.5 billion just for by the Memorandum.

Under this plan, Mr. Samaras will seek to conduct an initial exploratory discussion with Ms. Merkel on the possibilities of extending the fiscal adjustment program by 2016.

The Greek prime minister, according to reliable information, will try to refute the view expressed mainly by German Economy Minister Philipp Relser that a possible way out of the euro by Greece is manageable from the other 16 eurozone countries. The Greek effort will be to convince the German government that Athens did not ask Berlin to transfer even more money from the pockets of German taxpayers to the Greeks.

Juncker sees no Greek exit from eurozone

Luxembourg’s prime minister says Greece won’t leave the 17-nation eurozone, arguing that an exit wouldn’t be politically feasible and would carry unforeseeable risks.

Greece has been kept afloat by international loans but has fallen behind on implementing reforms and austerity measures demanded in exchange, feeding speculation about a possible euro exit.

But Luxembourg’s Jean-Claude Juncker (photo), who also chairs eurozone finance ministers’ meetings, was quoted Saturday as saying in an interview with Austria’s Tiroler Tageszeitung newspaper, “It will not happen unless Greece violates all the conditions and keeps to no agreements.”

Juncker said he assumes Greece will redouble efforts to reach its targets, so “there is no reason to assume that this exit scenario can become relevant.”

He said an exit would be “technically” but not “politically” feasible.

AP

Meetings Merkel, Hollande and Juncker with Greek Prime Minister Samaras

In the next week the Greek government is going to announce the new measure of austerity. After that the Greek Prime Minister Antonis Samaras will meet with German Chansellor Angela Merkel and President of France Francois Hollande and Eurogroup Chairman Jean – Claude Juncker.

Antonis Samaras is determined to put the Greek demands and particularly the extension of the fiscal adjustment program in front of the European partners. After a short vacation, he has returned to his office in Athens and will begin preparing for a difficult and crucial week.

The climate for our country is still not good, especially in Germany, as shown by the recent statements of Philipp Rösler and the articles of the international press. Financial Times report that Samaras will ask a two-year extension of the fiscal adjustment program and that the Greek government suggests ways that the additional funding will not be required to pass by the European Parliament, which would bring further entanglement.

The same newspaper notes that the patience of creditors against Greece is exhausted and another conflict between Athens and Berlin might further destabilize the markets, and that German officials have ruled out any additional funding in Greece and a growing number of politicians are asking for Greece's exit from the eurozone.

Just two days ago vice chancellor Rösler returned to harsh statements saying that there can be no extension for Greece, which must implemented what has been agreed. German magazine Der Spiegel says Greece should go bankrupt, since neither the IMF nor the eurozone can sacrifice their credibility by offering new help. However, the magazine criticizes the German government arguing that if their goal was to save Greece they have failed and the austerity measures only managed to exacerbate the crisis and increase the debt.

Samaras will meet Wednesday in Athens with eurogroup chairman Juncker and then on Friday in Berlin with Merkel and on Saturday in Paris with Hollande.

The Prime Minister's strategy is fixed and described as "stay in the euro at all costs." Until meeting with Juncker, Merkel and Hollande, the government should specify the measures of 11.5 billion eurso that will be presented by Samaras.

He will assure his interlocutors that he will promote privatizations and the reduction of the public sector at a fast pace. Whether he will manage to lift Merkel’s reservations remains a question. It is estimated that Juncker and Hollande are more positive about our country. The meetings will be crucial for the report of the troika who returns at the end of the month in our country. The goal is a positive report so that the eurogroup will give the green light for the next tranche of 31.5 billion euros.

It still has not been decided if Samaras will meet with Venizelos and Kouvelis, the leaders of parties which support the government, before the crucial meetings with the Europeans. As there are disagreements on certain measures related to the pressure from within their parties Samaras would not want to have a disagreement with the government's partners before the meeting with Juncker. He seems determined to assume full responsibility for the 11.5 billion euros package and the overall strategy to promote the plan for the rescue of our country.

Greece or eurozone* catastrophe**

The presence of Greece in the Euro zone will be discussed in the next few days between European heads of state.

 The Greek Prime Minister Antonis Samaras schedule a  travel to Germany and France, two months after his election. In these countries, the leaders will meet Chancellor Angela Merkel  and President Francois Holland. At the end of September, a European Summit of the Heads of state and Government of the European Union will take place in Brussels. This Summit is expected to have a key theme of the Greek crisis.

European leaders must decide on the future of Greece. The Troika has requested a new package of 11.5 billion euro to continue to provide funding. Analysts say that the new austerity measures are expected to increase even more the depression rates. As a result, Greek government may take additional measures in 2013.

Thus, Greece will enter in a death spiral that may induce others countries such as Spain and Italy.
At the same time, German politicians discuss publicly for Greece's exit from the Eurozone. Returning politicians and players in Brussels disagree with such a prospect. They believe that such a development would lead to severe risk of complete dissolution of the Eurozone.

Mario Monti, Italian Prime Minister, in an interview with Der Spigel was quoted as saying: "the tensions that have accompanied the Eurozone in the past years are already showing signs of a psychological dissolution of Europe".  Also he notes “If governments allow themselves to be entirely bound to the decisions of their parliament, without protecting their own freedom to act, a break up of Europe would be a more probable outcome than deeper integration"

Observers from around the world expect that developments in Europe will be rapid, after the meetings Samara - Merkel, Samaras - Holland and the Summit.
Discouraging is the official figure of the Greek Statistical Authority for the evolution of the Gross Domestic Product.

Discouraging is the official figure of the Greek Statistical Authority for the evolution of the Gross Domestic Product.
According to ELSTAT “available non-seasonally-adjusted data indicate that, in the 2nd quarter of 2012, the Gross Domestic Product (GDP) at constant prices of year 2005 decreased by 6.2% in comparison with the 2nd quarter of 2011. The GDP of the 1st quarter of 2012 is revised, based on 1st quarter 2012 data of the General Government accounts (compiled at the end of June), ας well as new estimates of the short term indices”.

The additional austerity measure include:
-  drastic reduction in the income criteria to be adopted for granting social benefits and welfare benefits to 30,000 euros or even lower at 25,000 (annual income). But then almost half of beneficiaries will lose their benefits from this year
-  halving the lamp sum of beneficiaries, even if they have already gone from their service. However extreme, officials are thinking of the possibility to request from those that managed to get the lamp sum at the last minute this year, to pay back part of it as "additional levy". This is because the economic team estimates that the 24 of the 37 Funds that give a lump sum pay excessive amounts of more than 2% to 83% of the paid contributions
-  a benefits plan under which the annual income that is as a criterion for their issuing, will also include presumptive items instead of the actual acquired incomes. Thus, most homeowners may lose their EKAS too. Officials are also considering of now giving it to pensioners aged 65 and over, instead of the current 60
-  the law that -as revealed by Proto Thema- is being prepared to place under redundancy the public servants involved in corruption or those that have harmed (intentionally or not) the State

The final proposals will be in the hands of the political leaders no later than Monday, August 20, to give them a period of at least 10 days until the arrival of troika.

 *  eurozone is a Greek word
** catastrophe is a Greek word, too

                                     

Shell withdrew its money from the Eurozone

According to Times of London the giant Shell has decided to withdraw part of their deposits from Europe, considering the Eurozone "high risk area".

The newspaper claims the statements made by Henry Simon, top financial executive of the company, who said that "no change in our determination to take the credit risk in Europe."

The amount for which reason becomes reaches 15 billion pounds, which will be transferred to U.S. financial institutions.

He however stated that it treated the same way all the member countries of the Eurozone, since the problems are not common.

Moody's against Spain and Cyprus

Before 24 hours European statements supported that Spain, Cyprus and Italy are the three new problems of Eurozone. The IPL wrote this. (Read details http://internationalpoliticalreview.blogspot.com/2012/06/italy-spain-cyprus-three-problems-of.html) Today Moody’s cuts Spain and Cyprus to one notch above junk.


* The IPR notice: now, the most crusial fact for the future of Europe is the Greek election, 17 June.



This is the Spain announcement:

London, 13 June 2012 — Moody’s Investors Service has today downgraded Spain’s government bond rating to Baa3 from A3, and has also placed it on review for possible further downgrade. Moody’s expects to conclude the review within a maximum timeframe of three months.


The decision to downgrade the Kingdom of Spain’s rating reflects the following key factors:


1. The Spanish government intends to borrow up to EUR100 billion from the European Financial Stability Facility (EFSF) or from its successor, the European Stability Mechanism (ESM), to recapitalise its banking system. This will further increase the country’s debt burden, which has risen dramatically since the onset of the financial crisis.


2. The Spanish government has very limited financial market access, as evidenced both by its reliance on the EFSF or ESM for the recapitalisation funds and its growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn obtain funding from the ECB.


3. The Spanish economy’s continued weakness makes the government’s weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years. …


The review for downgrade will focus on the outcome of the ongoing external audits of the Spanish banking system, the conditionality and details of the EFSF/ESM loan agreement, and the specific execution strategy developed for the banking system’s recapitalisation. Moody’s will also consider any further initiatives at the euro area level. In addition, Spain’s rating — as well as the ratings of other euro area countries — could be adversely affected if the risk of a Greek exit from the euro area were to rise further. …


RATINGS RATIONALE


The first key driver underlying Moody’s three-notch downgrade of Spain’s government bond rating is the government’s decision to seek up to EUR100 billion of external funding from the EFSF or ESM. A formal request will be presented shortly, but the euro area finance ministers announced on 10 June their willingness to accede to that request. The sum of EUR100 billion is twice the size of Moody’s previous base case estimate, and in line with the rating agency’s adverse case estimate.


While the details of the support package have yet to be announced, it is clear that the responsibility for supporting Spanish banks rests with the Spanish government. EFSF funds will be lent to the government which will use them to recapitalise Spanish banks. This borrowing will materially worsen the government’s debt position: Moody’s now expects Spain’s public debt ratio to rise to around 90% of GDP this year and to continue rising until the middle of the decade. Stabilising the ratio will be a key challenge for the Spanish authorities, requiring years of continued fiscal consolidation. As a consequence, the government’s fiscal and debt position is no longer commensurate with a rating in the A range or even at the top of the Baa range.


The second driver of today’s rating action is the Spanish government’s very limited financial market access, as evidenced both by its reliance on the EFSF or ESM for the recapitalisation funds and its growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn require funding from the ECB to purchase these bonds. In Moody’s view, this is an unsustainable situation. In the absence of positive developments that shore up investor sentiment, such as a resumption of growth or rapid progress in achieving fiscal consolidation objectives, neither of which is likely in the current environment, the government is likely to become increasingly constrained with regard to the terms under which it is able to refinance maturing debt. If unchecked, Moody’s believes that the risk of the government losing access to private debt markets on affordable terms and needing to seek direct support from the EFSF/ESM will continue to rise.


Given the experience with private-sector involvement (PSI) in Greece and the intentions expressed by euro area officials around the development of the ESM, Moody’s believes that the debts of euro area sovereigns that are fully dependent upon official sources to fund their borrowing requirements represent speculative-grade risk. Support would, if needed for a sustained period, be likely to be made conditional on loss-sharing with private investors or in extremis withdrawn altogether.


Moody’s action to place the government’s rating one notch above speculative grade reflects the rating agency’s view that Spain has moved much closer to needing to seek direct support from the EFSF/ESM, and therefore much closer to being positioned within speculative grade.


Moody’s decision to leave the government’s rating in investment grade reflects the underlying strength of the Spanish economy and the government’s clear desire to reverse the debt trajectory through a strong fiscal consolidation programme. Moody’s also acknowledges several factors that differentiate the current programme from the support packages extended to Ireland, Portugal and Greece. In particular, the size of the support package is significantly smaller than it is in the other cases. The maximum amount of EUR100 billion equates to around 10% of Spain’s GDP, compared with more than 54% of GDP in the case of Ireland, 114% of GDP in Greece and 46% of GDP in Portugal. Moody’s therefore also considers the issue of subordination of bondholders to the senior creditor EFSF/ESM to be less of a negative factor. Senior creditors account for 37% and 40% of total public debt in Ireland and Portugal, while the respective share in Spain is 11% (in case the maximum amount was drawn).






This is the Cyprus announcement:

London, 13 June 2012 — Moody’s Investors Service has today downgraded Cyprus’s government bond ratings by two notches to Ba3 from Ba1, and has placed the ratings on review for further possible downgrade.


The key driver for today’s rating action is the material increase in the likelihood of a Greek exit from the euro area, and the resulting increase in the likely amount of support that the government may have to extend to Cypriot banks. The two-notch downgrade reflects Moody’s assessment that this risk is exacerbated by the fact that the country’s finances are already strained and access to the international markets is still denied.


Moody’s decision to maintain Cyprus’s sovereign bond ratings on review for further downgrade reflects the need to assess the substantial downside risks to the banking sector and the sovereign as a result of a Greek euro exit. These risks have the potential to rise in the aftermath of the Greek elections on 17 June 2012.


RATINGS RATIONALE


The key driver of Moody’s two-notch downgrade of Cyprus’s government bond rating is the significant deterioration in the country’s outlook as a result of the material increase in the likelihood of a Greek exit from the euro area. The immediate result is a further increase in the likely amount of government support that the Cypriot banks may require due to their exposure to the Greek government and economy as well as the deterioration in domestic macroeconomic conditions.


Moody’s prior Ba1 rating for Cyprus incorporated an assumption that the Cypriot government would need to contribute capital support equivalent to around 5-10% of GDP to the country’s banks. The rating agency now expects this to be materially higher. For Cyprus Popular Bank alone, Moody’s expects most, if not all, of the €1.8 billion in recapitalisation costs to be borne by the government, which will increase debt levels by just over 10 percentage points of GDP.


Moody’s has reflected the increased risks emanating from the increased likelihood of a Greek exit in the ratings of the three largest Cypriot banks, two of which were downgraded on 12 June 2012, with all banks being placed on review for further downgrade. The close linkage between the government and the banking sector means that these increased risks for the banks may lead to much larger recapitalisation costs to the government, and Moody’s needs to reflect these in the Cypriot sovereign’s ratings.




  

Italy, Spain, Cyprus: three problems of European crisis

The economical problems for these three countries continue.

Spain - Italy: The bonds erased their morning profits and spreads rose again.
Spain:  The premium required by investors to hold the ten-year Spanish bonds rose by more than 20 basis points.
Italy: A rise was recorded by the Italian spread, too.
Bloomberg for Italy: "The third highest debt for a developed country after Greece and Japan."
EU official on Dow Jones Newswires for Cyprus: "the eurozone is vigilant about the Cypriot banks and everything is ready for an immediate help".