Saturday, 24 April 2010

euro: systemic chaos after german legal challenge


April 23, 2010

Euro suffers as Greek credit rating takes another dive

The euro skidded to its lowest level against the dollar in almost a year last night after Greece suffered another downgrade in its credit rating.

The currency slumped to $1.3260, a level not seen since May 7 last year. It also fell sharply against sterling — to 86.32p at one point, the lowest since January.

Announcing that it had cut Greece’s credit rating from “A2” to “A3”, Moody’s said that further downgrades would follow, unless Athens could restore market confidence.

The move came as it was confirmed that the Greek Government ran up a budget deficit of €32.34billion in 2009, representing 13.6 per cent of gross domestic product — far worse than expected.

Sarah Carlson, Moody’s senior analyst for Greece, said: “It is unlikely that the rating will remain at A3, unless the Government’s actions can restore confidence in the markets and counteract the prevailing headwinds of high interest rates and low growth.

“The revision of Greek debt and deficit statistics has further raised the bar for the Government to achieve the goals it laid out in the stability and growth programme. Moody’s now believes that debt stabilisation will, in all likelihood, eventually occur but that it may materialise at a higher price.”

The downgrade and the deficit figures sparked a further collapse in Greek government bonds and sent yields — which rise as the price falls — to a 12-year high.

The yield on ten-year bonds surged from 8.246 per cent on Wednesday to as much as 9.163 per cent, while that on five-year bonds, which was 8.256 per cent on Wednesday, surged to 9.818 per cent.

Economists said the moves strongly suggested that the market expected Greece to default on its debts, an outcome that Germany’s Foreign Minister has said would be critical for the euro.

Win Thin, a senior currency strategist at Brown Brothers Harriman & Co in New York, said: “The only surprise is that it wasn’t a multi-notch downgrade.” Nick Kounis, an economist at the bank Fortis, added: “It looks like a terrible situation just got worse.”

At the same time, the cost of insuring against a Greek default also rocketed, with the price of insuring €10million of five-year Greek government bonds hitting €650,000 at one point — up from €485,000 on Wednesday.

Greece, which has a national debt of some €300 billion and must refinance €8.5 billion of bonds maturing on May 19, began talks yesterday with the European Central Bank, the European Commission and the IMF about the conditions that would be attached to an aid package worth up to €45 billion.

Germany, which would be the single biggest contributor of support within the eurozone, has insisted on an interest rate of 5 per cent.

Gavan Nolan, vice-president of credit research at the Markit financial information services company, said: “It appears that Greece is all but certain to trigger the eurozone bailout mechanism — it is highly unlikely to refinance at current market rates.

“But investors are concerned on at least three points: whether the funds will be delivered; whether they will be sufficient to stave off default over the medium-term; and whether debt will be restructured.”

Meanwhile, public services in Greece came to a standstill for the third time in two months yesterday as government workers, actors and archaeologists took to the streets to protest deep public-sector salary cuts (John Carr writes).

There were isolated scuffles between protesters and police in two rallies in central Athens.

The demonstrations came on the second day of an inspection of the nation’s finances by a team of IMF and European Central Bank officials, who plan to announce their findings next month.

Schools and government offices were closed and hospitals accepted only emergency cases as doctors joined the strike.

Spyros Papaspyros, head of the civil servants’ union, promised “a wide front of social resistance” to come, particularly on the May 1 labour day holiday.

The unions and the left-wing parties have been talking of the crisis almost in class war terms, dismaying the left of the ruling Socialist Party, which has seen a dramatic fall in popularity since its near-landslide election victory in October.


Greek aid in doubt as German professors prepare court challenge

A quartet of German professors is to preparing to challenge the EU-IMF rescue for Greece at Germany's constitutional court as soon as the mechanism is activated, claiming that it violates the 'no-bail-out' clause of the EU Treaties.

The group will ask for an injunction to block the transfer of German funds until the court has ruled. It will demand a verdict on whether the European Central Bank has broken EU law by bending collateral rules to help Greece.

The warning comes as fresh details emerge on the scale of the bail-out. Germany's Handelsbatt cited sources in Berlin warning that the bill may be three times as high as thought, pushing the EU share to €90bn (£79bn) - with an extra €15bn from the IMF.

The brief respite on Greek debt markets has already given way to fresh capital flight. Yields on 10-year Greek bonds surged yesterday to 7.11pc, higher than a week ago. Portuguese bonds began to wobble after Brussels called for more austerity.

The legal challenge has far-reaching implications. It threatens to cloud the issue for weeks or months and may ultimately force Berlin to withdraw support, raising the risk of wider systemic crisis in Southern Europe.

Dr Karl Albrecht Schachtschneider, law professor at Nuremberg and author of the complaint, told The Daily Telegraph that he will be ready to file within days and will ask the court for an expedited procedure. A ruling could occur within a week, but may take as long as six months.

The complaint will argue that the rescue contains an illegal rate subsidy, threatens monetary stability as encoded in the Maastricht Treaty, and breaches the 'no bail-out' clause. Greece is clearly responsible for its own mess.

"It is a question of law. The duty of the court to defend the German constitution. They have no choice other than reaching a lawful decision. This may cause a great crisis in Europe but we already have a crisis," he said.

He will ask the court to freeze rescue aid while the case is pending. There is a precedent for this. It ordered Berlin to halt implementation of the Lisbon Treaty while it reviewed the treaty last year. Such a move would cause havoc on Europe's bond markets.

"This court hearing is going to be very dangerous," said Hans Redeker, currency chief at BNP Paribas. "It could lead to Germany itself being catapulted out of the currency union. Once investors begin to fear this, there will not be single euro in further financing for the EMU periphery."

Dr Wilhelm Hankel, professor of economics at Frankfurt University and one of the four litigants, said the EU-IMF bail-out throws good money after bad. "The whole manoeuvre merely delays the day of reckoning. It is not in Greece's interest to accept the money because the wage cuts and tax rises being imposed will lead to an endless economic depression. They should step out of the eurozone voluntarily, devalue, and restructure their debts with IMF help. That is the path of economic sense," he said. "In the end, the only way to save the euro is to shrink the eurozone. There are other candidates".

Dr Hankel said it would be risky politically for Berlin to transfer funds to Greece while the case was in the courts. "We're in a dark zone. Nobody knows," he said.

"This is a political court that will look for a way out by shifting responsibility on to the Bundestag. Our purpose is to stir up public opinion and put the government in extreme difficulty. Aid for Greece requires an extra budget: that will be very unpopular," he said.

The Greek rescue is political poison in the industrial heartland of the Ruhr where jobs are scarce and funding for schools is already under threat. The tabloid Bild Zeiting has captured the mood with articles calling for Greece to raise the retirement age to German levels of 67 and sell off its islands before asking for money.

The anger may cause Chancellor Angela Merkel's Christian Democrats to lose control of North Rhine-Westphalia in elections on May 9, shifting the balance of power in the Bundesrat.

Dr Hankel said the complaint would also aim to stop the ECB relaxing collateral rules to help Greek banks borrow cheaply at its lending window, a covert bail-out. "The ECB is breaching its own statute. It will be part of our complaint to prohibit this," he said. Greek banks increased reliance on ECB funding to €65bn in the first quarter.

Jean-Claude Trichet, the ECB's president, said the bank's decision to continue accepting bonds with a BBB- rating had nothing to do with Greece. He was undercut yesterday by Holland's ECB member, Nout Wellink, who said the decision was "of course" linked to Greece.

Dr Schachtschneider said the court tends to split 4:4 on EU matters. It nevertheless issued a trenchant ruling on Lisbon in June 2009 upholding German sovereignty.

This case is going to be a cliff-hanger.

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