Slovakia to back new aid to Greece if conditions met

Slovakia said Tuesday it would back a second aid package for its eurozone peer Greece if it meets conditions set by the European Union's rescue fund, refuting reports that it might block the loan.

"We didn't agree with the first loan to Greece (...) but we are part of the European Financial Stability Facility (EFSF) and there are rules for every country," Slovak Finance Minister Ivan Miklos told journalists.

New European Financial Stability Facility Bonds Expected to Yield 70 BPS Over German Bunds

New EFSF bonds are expected to be priced by investors with a yield 70 basis points above the German sovereign bond.

This is according to a research note by Citi's Peter Goves, as reported by Tracy Alloway in the Financial Times Alphaville.

Goves explains, in an excerpt:

"The EFSM makes available €60bn from the European Commission, drawn from the EU budget. A key difference between the forthcoming EFSF bond is that the EFSM is an EU-wide mechanism and can be drawn upon by any member state."

As Alloway points out, the price/yield on EFSF will serve as a sort of proxy for investor sentiment on the fiscal health of the overall Eurozone.

Interestingly, the EFSF is actually not a classical super-sovereign entity—but a special purpose vehicle, as Goves goes on to explain:

"The EFSF in contrast is a vehicle (a Luxembourg-registered company) backed by (eurozone) intergovernmental guarantees of €440bn. In order to achieve AAA status, the EA member states guarantee 120% of their allocation for each bond1. What matters from an interest rate strategy perspective is what discount over existing curves investor might require to buy the debt given the uncertainty of the precise mechanics of the EFSF and what its future might hold."

One of the interesting facets of the yield analysis is the breakdown structure of the guarantors.

For example, when calculating the yield as a spread over the bund—which is expected to price at +70 BPS—it's interesting to note that the Germans are providing over 27 percent of the capital commitment for the backstop.

Furthermore, all of the EZ member states have agreed to commitment guarantees—even the PIIGS nations.

So, in effect, all the member states simultaneously are both potential beneficiaries as well as guarantors.

It's enough to give you a touch of vertigo.

Source: http://www.cnbc.com

China Supports EU Efforts At Financial Stability

China supports measures taken by the European Union and the International Monetary Fund to stabilize Europe's debt crisis, Vice Premier Wang Qishan said Tuesday.

China has also taken steps to help European nations combat the sovereign debt crisis, Wang said at the opening of the third China-EU High-Level Economic and Trade Dialogue.

Wang said the two sides "should have confidence and enhance cooperation to work together for a robust, sustainable and balanced growth," according to the official Xinhua News Agency.

Last week, EU leaders agreed to the creation of a permanent rescue mechanism for debt-laden countries in 2013 that would replace an existing bailout fund.

Ireland last month agreed to borrow up to euro 67.5 billion ($90 billion) from the EU and International Monetary Fund and implement severe spending cuts as its economy staggered under the weight of massively indebted banks.

The Irish rescue followed the EU-IMF bailout of Greece earlier this year and added to fears that other financially weak countries including Portugal and Spain would need bailouts, imperiling the future of the euro common currency.

China has also been involved in bailing out European countries, offering in October to buy Greece's debt. Last week, Portugal said that China had pledged increased support for its efforts to climb out of a financial crisis, reportedly promising to buy $4 billion in Portugese government debt.

The EU is China's largest trading partner, while China is the EU's second-largest trading partner behind the United States, Wang said. Two-way trade for the first 11 months this year reached $433.9 billion, an increase of 33 percent from the previous year.

Wang said global economic recovery is being hampered by weak demand, while world markets have excessive liquidity and are turbulent.

He reiterated that China would implement a prudent monetary policy to ensure the world's second-largest economy can maintain steady growth.

"China is taking a proactive fiscal policy and stable currency policy, while the EU is actively taking measures to combat the debt crisis," Wang said. "China and the EU should strengthen cooperation to promote strong, sustainable and all-around growth for the economies of China and EU and even the global economy."

Other officials participating in the talks include EU Competition Commissioner Joaquin Almunia, EU Trade Commissioner Karel De Gucht and China's Commerce Minister Chen Deming.

Wang said he expected "substantive" progress during the talks on a wide range of trade and economic issue, including recognition of China's market economy status and the loosening of EU restrictions on high-tech goods exports.

Wang said China and the EU should cooperate in a variety of sectors, including new energy and environment protection, while fighting protectionist measures.

"We need to jointly resist trade protectionism, advancing Doha round talks for balanced and all-around success," he said.

By The Associated Press

Source: www.npr.org

Leaving the euro: how would it work?

Nils Blythe
Business correspondent, BBC News

Would Ireland be better off if it left the euro and revived the Punt? Would the Greek economy recover more quickly with a new Drachma?

Much has been written about the theoretical attractions for financially troubled countries in exiting the euro-zone.

But the question of how a country would go about it is less well explored.

And the more closely you examine the question of "how" - as opposed to "why" - a country might leave the euro, the clearer it becomes that the practical difficulties are huge.

Capital flight

To establish a new currency a country would have to convert all existing euro-denominated savings at a fixed rate on a given date.

But savers and businesses would not wait passively for that date to arrive.

The main reason for creating a new currency would be to increase the country's competitiveness by making its exports cheaper.

So savers and investors would assume that the new currency would depreciate against the euro - probably very rapidly - and want to keep their savings in euros, or transfer them to another well-established currency such as the US dollar.

The first practical problem, then, is that if it becomes clear that a country is seriously thinking of leaving the euro a huge amount of money will leave the country.

This is sometimes referred to as "capital flight".

The overall effect would be to trigger huge transfers of deposits out of the country and wreck the banking system.

The government in question would almost certainly try to impose controls to prevent this kind of capital flight, but senior policy-makers are very sceptical about whether such controls would be effective in 21st century Europe.

But if a prolonged national debate about leaving the euro creates a risk of capital flight, would the alternative be to prepare in secret and announce it suddenly?

Such a plan might work in a totalitarian state, but does not allow for parliamentary debate, legislation and all the other processes of a modern democracy.

And the idea that huge numbers of new bank notes could be prepared and distributed in secret - ready for the appointed currency conversion date - is absurd.

Risky approach

However, suppose for a moment that these practical problems could be overcome, where would the country leaving the euro stand financially?

It would have a large national debt denominated in euros.

Remaining committed to paying interest on that debt in euros while tax revenues are generated in the new currency would be a big risk.

The alternative would be to announce that national borrowings have been converted into the new currency.

For overseas bond investors, this would amount to a default.

When the country wanted to borrow more it would almost certainly have to pay punitive interest rates to persuade bond market investors to participate.
Unbreakable currency?

The counter-argument to all this is that currency conversions have been achieved successfully in the past.

The euro came into circulation without too many hitches, albeit with many years of preparation.

East Germany's Ostmarks were converted into Deutschmarks.

But the key difference is that in these cases the currency into which savings were being switched was perceived to be stable. The incentive for capital flight did not exist.

This does suggest that if the fundamental problem is substituting a weak currency for a strong one, the most practical solution would be for the strongest members of the euro-zone to leave the currency union.

It means that - in purely practical terms - Germany could leave the euro while weaker countries could not.

But while some Germans clearly feel nostalgic about the Deutschmark, it seems massively unlikely that a German government would initiate the break-up of the euro.

The euro was not designed with any possibility of break-up in mind.

Governments can choose to shadow another currency and then change their minds - the UK did just that in 1992.

Governments can create a supposedly fixed link to another currency which - in extreme circumstances - can be unfixed.

But the point of a currency union is that it is supposed to be unbreakable.

And whatever the theoretical attractions of breaking up the euro might be, the practical difficulties of doing so should not be under-estimated.

Source: BBC
www.bbc.co.uk

George Osborne to give economic update on 29 November

Chancellor George Osborne is to give an update on the state of the economy to Parliament on 29 November.

The autumn statement will follow the release by the Office for Budget Responsibility of its own updated growth forecasts, giving Mr Osborne a chance to respond to the figures.

Mr Osborne has previously said he would scrap the pre-Budget report introduced by Gordon Brown when he was chancellor.

Mr Osborne has already announced the date of the 2011 Budget - on March 23.

The chancellor has said he will end the practice of having a pre-Budget report each autumn.

Under Gordon Brown, this became regarded as a mini-Budget in which draft tax and spending decisions were outlined.

Instead, Mr Osborne will comment on the OBR's latest analysis of the state of the economy, published that day.

The BBC's Business Editor Robert Peston said both MPs and the financial markets will be eager to see the OBR's forecasts for growth and government borrowing to see to what extent the coalition's deficit reduction plan is on track.

Initial estimates published last month suggest the economy grew at a rate of 0.8% between July and September - twice the rate expected by many analysts.

This followed growth of 1.2% in the second quarter of the year

Mr Osborne has said there is a "steady" recovery but Labour has said the cuts announced since the coalition came to power in May could endanger this.

Source: BBC
www.bbc.co.uk

Ireland 'in preliminary talks with EU on bailout'

he Republic of Ireland is in preliminary talks with EU officials for financial support, the BBC has learned.

It is now no longer a matter of whether but when the Irish government formally approaches the European Financial Stability Fund (EFSF) for a bailout, correspondents say.

The provisional estimate for EFSF loans is believed to lie between 60bn and 80bn euros ($82-110bn; £51-68bn).

Dublin says there are no talks on an application for emergency EU funding.

A spokesman for Ireland's department of finance said the country was funded until the middle of 2011, the public-service RTE broadcaster reported.

RTE had earlier said talks had been held on how a bail-out might happen in a theoretical worst-case scenario.

The European Commission would not formally comment on the matter.

Eurozone officials told the Reuters news agency on Friday that discussions were under way, with one saying that it was "very likely" Ireland would receive financial assistance.

The head of the International Monetary Fund (IMF), Dominique Strauss-Kahn, said on Saturday that it had not been asked for aid.

"So far I have not had a request, and I think Ireland can manage well," he told reporters at the Apec summit in Yokohama.

The IMF and EU had to step in with a 110bn-euro bailout package for Greece in May, sparking a Europe-wide sovereign debt crisis.

BBC business correspondent Joe Lynam says any bailout would not be agreed this weekend, but might though come as early as next month.

A meeting of the Eurogroup, composed of the EU member states whose currency is the euro, is scheduled for 6 December.

The Economic and Financial Affairs Council (Ecofin) - comprising the economics and finance ministers of eurozone countries - will gather the following day.

Lastly, the full European Council is to meet on 16 and 17 December.
By-election

Since 2008, Ireland has suffered the worst property collapse of all developed economies, with house values falling between 50% and 60%.

Our correspondent says the Irish government has also all but nationalised the country's banking system, which had lent recklessly at an estimated cost of 40bn to 50bn euros.

The country has promised the EU it will bring its underlying deficit down from 12% of economic output to 3% by 2014. Its current deficit is an unprecedented 32% of gross domestic product, if the one-off cost of bad debts in the Irish banking system is included.

The Irish government, which has a flimsy majority in parliament, is set to publish another draconian budget on 7 December, which will make spending cuts or tax rises totalling 6bn euros, and aims to bring the deficit down to between 9.5-9.75% next year, he adds.

That parliamentary majority is likely to be cut to only two on 25 November, when a by-election will be held that the governing Fianna Fail party is likely to lose.

The government had left the Donegal South West seat empty for 17 months but the Republic's second-highest court recently ruled that the delay was unreasonable. Three other by-elections are also required.

Investors fear the budget cuts are likely to worsen the country's already deep recession, leading to further losses to the government via falling tax revenues and higher benefit payments.

Source: BBC
www.bbc.co.uk

EU visits Dublin as worries mount

Meanwhile financial markets increasingly fear the government will default on its debts, with Irish bond yields hitting new record highs.

The Irish parliament will vote in December on the budget.

The country has promised the EU it will bring its underlying deficit down from 12% of economic output to 3% by 2014.

The Irish Republic's current deficit is an unprecedented 32% of gross domestic product, if the one-off cost of bad debts in the state-guaranteed Irish banking system is included.

The draft budget will include a record 6bn euros (£5.2bn, $8.4bn) of spending cuts, and aims to bring the deficit down to between 9.5-9.75% next year.

Full details of the budget - which needs the EU's endorsement - will be published on 7 December.

Unreasonable delay

However, concerns are mounting that the Dail may not pass the budget.

The opposition Fine Gael party, while agreeing that the budget needs to be brought under control, has said it does not plan to support the budget because it has no confidence in the government.

The government has delayed four by-elections to the parliament, which have the potential to deprive it of its majority of just three seats.

After a ruling by the Republic's second-highest court, the government has agreed to hold the longest-delayed by-election on 25 November.

The Donegal South seat has remained vacant for 17 months, which in the court's opinion is an unreasonable delay.

However, the government said it would not hold the other three elections until the Irish supreme court had heard its appeal against the lower court's ruling.
Buyers' strike

Whether or not the budget passes, markets are increasingly concerned that Dublin will find its debt trap impossible to escape from.

Investors fear that the budget cuts are likely to worsen the country's already deep recession, leading to further losses to the government via falling tax revenues and higher benefit payments.

And there is concern that there may be more big write-downs of bad debts to come from the Irish banking system.

Writing in the Irish Times, economist Morgan Kelly of University College, Dublin, warned that losses at the other state-guaranteed banks could more than equal the approximately 30bn euros that the Irish government has already suffered at Anglo Irish Bank.

The annual yield on the Irish Republic's benchmark 10-year bond hit a record high of 7.84% on Monday, as investors demanded a higher return to compensate them for the risk of a debt default.

The difference in yield between the Irish bond and its German counterpart - which measures their relative riskiness - also hit a new high of 5.56%.

Some investors warned that the Irish government may face a "buyers' strike" by bond investors when it next needs to borrow from the market by the middle of next year.

If so, the Irish Republic may have to turn to the EU's new sovereign bail-out fund.


Source:BBC
www.bbc.com