Euro Mess

For the past four years, a prime concern among investors was the possibility of a financial meltdown in Europe similar to the one that followed the collapse of Lehman in the US. ECB President Mario Draghi alleviated that widespread fear in late July of this year when he promised to do “whatever it takes” to defend the euro. Since then, the Europeans seem to be making some progress in cleaning up the Euro Mess.
 

Last week, the finance ministers of the 17 EU countries in the euro zone agreed to give Greece the next installment (€44.6 billion) of its €240 billion in rescue loans--of which the country has received about €150 billion so far. The ministers reduced the interest rate charged for the loans by 100 basis points and agreed to a 15-year extension of their maturity. The deal allows Greece to avoid an imminent default and reduces the odds of the dreaded Grexit. However, Christine Lagarde, the managing director of the IMF, warned that the Fund would not approve the next disbursement of aid to Greece unless more loans were provided for Greece to enable it to buy back its debt at a discount.

Yesterday’s FT reported that the Greek government didn’t waste any time: “Greece has launched an aggressive debt buyback programme using up to €10bn of eurozone funds, hoping it will be enough for an international deal on a wider package that secures its place in the eurozone. By paying a bigger-than-expected premium over previous market prices for Greek bonds held by private sector investors, which are trading well below their face value, Athens could retire more than €20bn of its debt mountain after costs.” The 10-year Greek government bond yield has plunged from this year’s high of 43.9% on March 8 to 14.6% this morning.

Also yesterday, Spain made a formal request for about €40 billion from the euro zone's bailout fund to recapitalize its banks, well under the maximum amount of €100 billion authorized by the euro zone to recapitalize Spain’s banks. The request was approved. Today, finance ministers from all 27 EU governments will push for a deal on the setup of a new bank supervisor for the euro zone by January 1. Euro zone governments previously agreed that the creation of the supervisor must be a condition for allowing the bloc's bailout fund to pump capital directly into the region's banks.

News of the Greek buyback plan helped extend last month’s rally in other euro zone “periphery” countries’ bonds. This morning, the Italian 10-year government bond yield is down to 4.40%, a two-year low. The Spanish 10-year yield is down to 5.20%, the lowest since March. The Europe FTSE Eurosfirst 300 Banks Euro Index has rallied to a new high for the year in recent days. Also encouraging is that TARGET2, the ECB’s payments system, is showing that capital stopped pouring out of Spain, Italy, and Portugal in the past few months through October.

Today's Morning Briefing: Two Steps Forward. (1) The market has ADD. (2) Always something to worry about. (3) No Grexit for now. (4) Did you buy any Greek bonds at 40%? (5) Spanish banks get some rescue funds. (6) European financial indicators are upbeat. (7) TARGET2 showing less capital fright. (8) Now there are two plans to avert the fiscal cliff. (9) Let’s split the difference, and go on vacation where there are no cliffs. (10) The storm vs. the cliff. (More for subscribers.)