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Eurozone crisis live: ISDA says ‘no credit event’ in Greece, yet….

Ruling means credit default swaps not triggered, yet…
ECB’s €529bn loans alarm Bundesbank president
Eurozone unemployment at record high
Greek manufacturing slumps again
• EU summit begins in Brussels this afternoon
Today’s agenda

2.44pm: This might raise a wry smile. The European Commission has welcomed Greece’s commitment to ensure “independent and reliable statistics”.

The EC announced this afternoon that Greece has become the first nation to sign up to a document called “Towards robust quality management for European Statistics” (which was drawn up in April 2011).

Algirdas Šemeta, the European Commissioner responsible for statistics, has counter-signed the Greek Commitment on Confidence, and said:

Reliable statistics are essential for governments, businesses, citizens and the markets to take informed and rational decisions. Credible statistics are the basis for public trust in economic policies and programmes. I welcome Greece’s commitment to quality statistics, and will support all work to ensure that Greek data is of the highest quality possible.

The curious thing, though, is that last November the head of Elstat, Greece’s new independent statistics agency, faced an official criminal investigation.

Andreas Georgiou was accused of inflating the scale of the country’s fiscal crisis and acting against the Greek national interest — allegations he robustly denied. Georgiou then received the backing of the European Union, who said he had calculated the deficit in accordance with its standards.

Then, last week, the Greece’s parliament voted to hold an inquiry into claims the previous Socialist government inflated those same public deficit figures.

All very messy – underlying the importance of getting statistics right.

Incidentally, Twitter user @Finisterre67 harks back to days when Greece entered the euro, using statistics that proved far from accurate. That, it later emerged, involved Goldman Sachs – one of the ISDA members who voted against a credit event today.

@graemewearden ISDA member Goldman-Sachs helped cook the books that ushered Greece into EZ, now keen to see GR default. Sure way to profit?

— Finisterre67 (@Finisterre67) March 1, 2012

2.37pm: Rule of the day – if you want to really understand credit default swaps, read FT Alphaville’s Lisa Pollack.

She’s filed a news story explaining the likely reasons behind today’s ISDA decision. It’s partly to do with concerns over which bonds would be used to determine CDS payouts (as I said at 1.11pm, but, well, she explains it better), adding:

FT Alphaville has written posts about why we think the Isda Committee process is indeed conflicted, and we encourage you to think about it from the perspective of buyside firms, and other clients, rather than dealer banks. Also think about how incredibly important it is for major dealers, and Isda, to present a united front, “nothing to see here, move along, all of this works exactly how we thought it would.” Politicians are after this market. It has to be seen to work.

2.19pm: The Dutch finance minister Jan Kees de Jager (something of a hard-liner), has ruled out making a final decision on Greece’s second aid deal today, as he arrived at the eurogroup meeting in Brussels.

De Jager argued that the eurogroup can’t sign off the deal (which they approved in principle last week) until the bond swap with the private sector is concluded. Here’s the quotes:

We have to assess whether effective prior actions have been taken for the full amount….and of course the PSI deal will all have to be concluded and that is also not certain yet, so today is not the day we will definitely agree with the final bailout package for Greece.

Austrian finance minister Maria Fekter took a similar tone, saying:

We want to look at Greece’s progress. Things do not look bad, but we want to look at the [EU-IMF troika] report.”

Christine Lagarde, head of the International Monetary Fund, was more optimistic, though. She told reporters in Brussels that:

I have a positive impression about the good work that has been done in the last hours.

1.57pm: The euro has fallen back through the .32 mark against the US dollar in the last couple of minutes, down half a cent on its high earlier today. It’s also fallen against the pound, to 83.4p (from 83.8p earlier)

Foreign exchange traders have been predicting that the €529bn of 1% loans made by the European Central Bank yesterday would push the value of the euro down:

Ilya Spivak, currency strategist at FXCM, argued that:

Taken together, the two LTRO operations conducted this month and in December injected about €1 trillion in new liquidity into the markets, swelling the ECB’s balance sheet well beyond that of the Federal Reserve and putting aggressive upward pressure on the money supply.

Given the damage caused to the dollar by the Fed’s similar QE and QE2 efforts, a stronger euro would be far more surprising than a softer one.

1.47pm: Eurozone finance ministers have been arriving in Brussels this lunchtime (while we were all getting excited about the Greek credit event ruling).

Greece’s Evangelos Venizelos spoke to reporters on his way into the meeting, and explained that he is hoping for rapid progress on Greece’s debt swap deal with its creditors.

Here’s Venizelos’s comments:

After the decisions of the last Eurogroup for the adoption of the new support program of the Greek economy and the official launch of PSI, we are waiting for the response of the market.

As you know, the concrete form of the bond exchange is agreed with the private sector and everybody understands very well that we have four very important and attractive elements:

The Co-financing, the English law, the sweetener in cash and the GDP warrants. This is a very good, a unique offer. I am sure that the market understands very well how clear is my message.

1.38pm: Ed Conway, Sky’s economics editor, points out that the yield on Greek 10-year debt has shot up since ISDA’s announcement (although, as he points out, it’s a rather illiquid market). It’s currently yielding 38%.

Beware of paying much heed 2 an illiquid market, but 10yr Greek govt bond yield rocketing in wake of @ISDA decision…

— Ed Conway (@EdConwaySky) March 1, 2012

1.27pm: We’ve updated our Q&A on ISDA and the Greek credit event question, to reflect the latest developments.

1.11pm: You might wonder why ISDA was being bombarded with questions about Greek credit events now, when the debt-swap deal has not taken place yet.

One reason is that, when a credit event takes place, a small amount of the relevent bonds are traded between banks to determine their fair value. So, if a €10m bond was seen as being worth only €1m, for example, someone holding €10m of insurance through a credit default swap would be entitled to receive €9m.

However, if a debt swap takes place, then there may not be many of the “old” Greek bonds still in existance, as investors will have exchanged them for “new” bonds. Which, given Greece would have received the second financial package, might be valued a little higher.

And as Reuters Felix Salmon explains here, another complication is that bond-holders will receive a mix of new Greek bonds and securities issued by the EFSF.

The upshot, he says, is:

The whole point about credit default swaps is that they’re meant to behave in a predictable manner in the event of default; one thing we know for sure about Greece is that the behavior of its CDS is going to be anything but predictable. We don’t even know for sure whether they’ll be triggered, let alone what they’ll be worth if and when they are.

1.05pm: Here’s the list of the 15 ISDA members who agreed, unanimously, that a Greek credit event has not occured:

Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase Bank, Morgan Stanley, UBS, BNP Paribas, Societe Generale, Citadel Investment Group, D.E. Shaw Group, BlueMountain Capital, Elliott Management Corporation, and PIMCO.

12.59pm: The key part of ISDA’s ruling on Greece appears to be this line:

…the situation in the Hellenic Republic is still evolving and today’s EMEA DC decisions do not affect the right or ability of market participants to submit further questions…

So ISDA has basically decided that the act of inserting CAC clauses into Greek bonds to allow a haircut to be forced on bond-holders is not in itself a credit event. Triggering the CACs, though, is a very different matter.

12.44pm: Here’s the full statement issued by the International Swaps and Derivatives Association in the last couple of minutes, explaining why it does not believe a credit event has occured in Greece – and thus why Greek credit default swaps have not triggered:

The first submitted question (DC Issue 2012022401) asked whether the holders of Greek law bonds had been subordinated to the ECB and certain NCBs whose bonds were acquired by the Hellenic Republic prior to the implementation of new Greek legislation such that such subordination constitutes a Restructuring Credit Event.

The EMEA DC unanimously determined that the specific fact pattern referred to in the first submitted question does not satisfy either limb of the definition of Subordination as set out in the ISDA 2003 Credit Derivatives Definitions (the 2003 Definitions) and therefore a Restructuring Credit Event has not occurred under Section 4.7(a) of the 2003 Definitions.

The second submitted question (DC Issue 2012022901) asked whether there had been any agreement between the Hellenic Republic and the holders of private Greek debt which constitutes a Restructuring Credit Event.

The EMEA DC determined that it had not received any evidence of an agreement which meets the requirements of Section 4.7(a) of the 2003 Definitions and therefore based on the facts available to it, the EMEA DC unanimously determined that a Restructuring Credit Event has not occurred under Section 4.7(a) of the 2003 Definitions.

The EMEA DC noted, however, that the situation in the Hellenic Republic is still evolving and today’s EMEA DC decisions do not affect the right or ability of market participants to submit further questions to the EMEA DC relating
to the Hellenic Republic nor is it an expression of the EMEA DC’s view as to whether a Credit Event could occur at a later date, in each case, as further facts come to light.

As explained (I think!) at 9.37am – the first question focused on the primacy given to the ECB in the debt deal, while the second focused on the insertion of clauses in Greek bonds allowing Athens to impose a haircut on lenders.

12.42pm: Breaking news – the International Swaps and Derivatives Association has ruled that there has not been a credit event in Greece.

Credit Default Swaps will not pay out.

More to come….

12.05pm: No word from the ISDA conference call on Greece, but my colleague Josephine Moulds has written a handy Q&A explaining the situation, here

She’ll be updating it through the day, as the situation develops (especially regarding the second question posed today)

11.54am: The yield on 10-year Italian bonds just dropped below the 5% mark, for the first time since last September.

As this graph shows, yields shot above the 7% mark (the “danger zone” for bonds) last November, helping to push Silvio Berlusconio out of office.

Amazing what one technocratic PM and around a trillion euros of cheap loans from the ECB can achieve.

11.45am: Our Europe editor Ian Traynor has more thoughts about Angela Merkel’s apparent climbdown over enlarging the European bailout fund (see 10.38am). Despite Merkel’s popularity hitting its highest level since her Christian Democratic coalition with Liberals was formed in 2009, the move could cause ructions at home:

The German media are painting her presumed concession as a 180-degree u-turn; her Bavarian CSU allies, increasingly eurosceptic, are threatening to hold a special party conference on the issue, while her liberal FDP junior coalition partner is against reinforcing the firewall.

Merkel seems to think that the increased fund is not really needed because its point is not to help greece, but to immunise against contagion elsewhere. the risk of contagion, her officials say, is receding courtesy of the Italian Mario twins – Monti and Draghi.

Italian and Spanish bond spreads against the Bund have narrowed. Hence no need to increase the bailout fund. Complacent?

But she concedes the “psychological” need to boost the firewall because of the international pressure and because Berlin wants the IMF to boost its firefighting reserves.

The bigger the pot of money available for an emergency, though, the
stronger the deterrent and the slimmer the chances that it may need to
be used.

11.35am: Mario Monti is fighting back against attempts to derail his reofrm agenda, by calling a vote of confidence in the Italian Senate later today.

The vote, which Monti’s government should win comfortably, is a way of fast-tracking some 1,700 amendments posed by various senators to his deregulation bill.

As we reported at 8.32am, a phalanx* of lobbyists have been swarming around the government, attempting to prevent Monti shaking up the status quo.

* – anyone know the correct collective noun for lobbyists? An ‘undue influence’ perhaps….

11.21am: Sticking with Greece – it’s emerged that Lucas Papademos has been working unpaid since becoming the country’s prime minister last November.

Papademos revealed this fact in Brussels yesterday, where he met with Jose Manuel Barroso (hat-tip to Greek newspaper Ekathimerini).

You might remember that the Greek president gave up his own salary last month, in solidarity with the workers. We didn’t realise at the time that this included Papademos himself (although the 64-year old had previously worked upaid as an advisor to predecessor George Papandreou).

11.09am: Strikes are taking place in Greece again today, after the Greek parliament approved the latest pension and health care cuts late last night. This is on top of a 10% pay cut for state employees voted through late on Tuesday / early Wednesday.

The healthcare changes include forcing doctors to prescribe cheaper, generic drugs, rather than more expensive branded drugs, limit drug spending by state pension funds and extending pharmacy opening hours (a particularly sensitive issue, which had sparked a revolt among MPs in January).

Rupert Neate is in Athens, and reports:

Local media reports suggest some doctors are exploiting the Greek state by prescribing expensive branded drugs rather than generics so they can collect commission and fees from pharmaceutical companies. Generics account for 18% of drugs sold in Greece, compared to 80% in Germany, according to the Kathimerini newspaper. Greece spends eu24bn – or 10% of its GDP – on public health.

There’s another transport strike today with all tubes and trains not running in Athens. The locals say this really about ensuring extra work for the city’s thousands of taxi drivers, because normally people can’t afford cabs. The strike is unlikely to effect revenue collection from the railways as none of the locals appear to buy tickets and walk past the G4S ticket inspectors when challenged (the fine is meant to be 60 times the price of the ticket (€8 to the airport, €1.40 to anywhere else).

Doctors, nurses and other healthcare workers went on strike yesterday. Some government employees were also striking, including those working at the Acropolysis which was forced to close (but there are only a handful of tourists in Athens anyway because of the inclement weather, it’s snowing again today). Employees of the culture ministry called for a demonstrations every Thursday throughout March to protest against cuts.

The country’s two biggest unions – ADEDY (civil servants) and GSEE (labor union) called on workers to “once again unite their voices with those in Europe against neoliberal policies.” There was a very small protest in Syntagma Square outside the Parliament building during heavy rain on Wednesday.

10.59am: Ireland’s forthcoming referendum on the EU Fiscal Pact took its first casualty last night. Eamon O Cuiv, the grandson of the Republic’s founding father Eamon de Valera, resigned in protest at his party’s call for a Yes vote.

Henry McDonald reports from Dublin:

Fianna Fail deputy leader Eamon O Cuiv agreed to resign from his post over the party’s pro-treaty stance. He will also step dow as Fianna Fail’s spokesman on Communications, Energy and Natural Resources.

His departure from Fianna Fail’s frontbench is a blow to the Republic’s main opposition party as it prepares for its annual conference this weekend – the first since it was dumped out of power in last year’s general election suffering its worst defeat in history.

Fellow Fianna Fail TD Willie O’Dea stressed that the party was united on the issue of the referendum on the treaty.

O’Dea also said he believed Mr Ó Cuív would only be “temporarily” off the party’s front bench. He said while he sympathised with Mr Ó Cuív’s stance, he felt that opposing the treaty was not the right option.

Ó Cuív is also understood to have withdrawn his name from consideration for the position as Vice-President of the party. The position is to be decided at the party’s Ard Fheis this weekend.

10.38am: Germany appears to have dropped its opposition to enlarging the European firewall (as ballymichael was swift to flag up in the comments below). The word from Berlin is Angela Merkel has told her cabinet colleagues that Berlin must drop its veto to enlarging the firewall above €500bn.

Munich’s Sueddeutsche Zeitung reported that Merkel told colleagues that:

We will not be able to resist this pressure for very long.

Ian Traynor, our Europe correspondent, explains:

The conventional figure given for the topped up bailout fund is €750bn – €500bn from the new permanent European stability mechanism from July plus the existing €250bn that remains in the current temporary European Financial Stability Facility.

Merkel’s apparent u-turn comes despite a senior Berlin official insisting on wednesday that the time was not right to talk about boosting the eurozone’s firepower. Germany has been isolated in its resistance, with even euro crisis allies such the netherlands in favour of increasing the bailout fund.

The decision is to be taken at the end of march ahead of the spring meetings of the IMF and World Bank in Washington in April. The Americans, the Chinese, the British, and the IMF are all pressing the eurozone – and Germany in particular – to put up much more funds.

A €750bn pot would make Germany, as Europe’s largest economy, liable for €280bn.

According to Sueddeutsche Zeitung, Merkel is said to believe that the increased firepower is now not really needed for substantive reasons, but is required for “psychological” purposes.

One proposal from berlin is to allow both pots of money, the ESM and
the EFSF, to co-exist for one year, the newspaper added.

10.12am: The eurozone unemployment rate has hit a new record, showing the urgent need for EU leaders to make progress on a growth strategy at this afternoon’s Summit.

Eurostat just reported that unemployment across the 17 members of the single currency hit 10.7% in January. Across the 27 members of the EU, the rate came in at 10.1%.

Click here for a PDF showing the full results.

The youth unemployment situation remains dire, with 5.507 million people under the age of 25 unemployed across the EU – that’s 269,000 more than a year ago.

The worst youth unemployment is in Spain (at 49.9%), followed by Greece (48.1%) and Slovakia (36.0%).

The lowest levels were seen in Germany (7.8%), Austria (8.9%) and the Netherlands (9.0%).

9.47am: If you’re interested in the details of a Greek credit event and the triggering of credit default swaps, Lisa Pollack of FT Alphaville did a great two-part explainer here and here last week. It remains a great read – explaining how CDS holders could still lose out even if the contract are triggered, and warning that the CDS market could still be discredited even if ISDA does rule that a credit event has taken place.

9.37am: Just in – a second question has been posed over whether Greece has triggered a credit event.

You can see it here, on the website of the International Swaps and Derivatives Association [whose role includes deciding if bond issuers have defaulted on their bonds].

This question comes just a couple of hours before ISDA was due to hold a teleconference call to consider a different question on whether the proposed 53% haircut being taken by its lenders, and the insertion of Collective Action Clauses into Greek bonds (allowing Athens to force lenders to take the trim), equate to a credit event.

It’s an important question, as it would trigger Greek credit default swaps (although the net value of those contracts is now only around €3.2bn when last measured).

So how does the new question differ from the old one?

Well, the old question focused on the decision to allow the European Central Bank and National Central Banks to dodge the 53% haircut, and receive new loans. That put them above other creditors in the ‘pecking order’, it suggested.

The new question focuses on the bond-swap, or Private Sector Involvement, itself, asking whether a credit event has happened because:

a reduction in the amount of principal or premium payable at maturity or at scheduled redemption dates of the Designated Securities has been agreed between the Hellenic Republic and a sufficient number of holders of the Designated Securities to bind all holders of the Designated Securities.

ISDA hasn’t said whether it accept this second question, though.

Hope that makes sense, and isn’t too wordy. Will try and get some expert comment…..

In the meantime, the Wall Street Journal has an interesting piece about ISDA, calling it “A secretive panel of representatives from 15 large banks, hedge funds and investment houses” here.

9.31am: Britain’s manufacturing sector grew in February, but at a slightly slower rate than in January.

Markit just reported that the UK PMI came in at 51.2 last month, down from 52 the previous month,. That’s below forecasts, but still strong enough to suggest that the sector will post growth during this quarter.

9.12am: More gloom for Italy, where the unemployment rate has hit its highest level since at least 2004.

Instat reported that the seasonally adjusted jobless rate, which tracks people taking unemployment benefit, rose to 9.2% in January (from 8.9% in December).

That’s someway below the eurozone average (which hit 10.4% in December – we get January’s figures at 10am GMT). Youth unemployment, though, remained painfully high, with 31.1% of 15-24 year olds out of work

Italy’s other problem is the low percentage of people actually in work. The employment rate inched up to 57%, from 56.9% in December, someway below the eurozone average.

9.01am Greece’s manufacturing output has slumped to a record low level, according to Eurozone data just released.

Markit’s monthly PMI data [a survey of purchasing managers] for Greece came in at 37.7 for February, down from 41 in January. That’s the lowest level ever recorded for Greece since Markit began its survey 13 years ago, and another sign that Greece’s economy is slumping.

The overall figure for the eurozone came in at 49.0, just below the 50 mark that seperates expansion from contraction. So the wider eurozone manufacturing sector continues to shrink, but at a slower pace than in January.

The picture was pretty bleak in Spain, where the manufacturing PMI came in at 45.0. That’s the 10th month in a row where Spain’s manufacturing sector has shrunk.

Italy also contracted again, but at a slower rate. Its PMI of 47.8 is the highest since last September, but the seventh contraction in a row.

8.32am: Mario Monti, Italy’s technocratic prime minister, has warned that reforming the Italian economy will take many years.

Monti, who is aiming to erase Italy’s deficit in 2013, said in a Bloomberg interview broadcast this morning that he can only begin the task of deregulating the economy and overhauling its welfare system.

The former EU commissioner, who is expected to only serve one term as PM, said:

We will not complete a generational change — that is, a change which normally requires a generation — in 12 or 15 months…But it’s important to kick-start it.

Here’s a clip of the interview:

Monti has repeatedly promised to liberalise the sclerotic Italian economy, just as soon as he’d implemented tough spending cuts. But, as our correspondent Tom Kington reports from Rome, Monti’s much heralded liberalisation plan was looking like a damp squib this week after Italy’s tough business lobbies fought hard to water down the measures:

The bill, which emerged from Senate commission hearings earlier this week and is due to be voted on in the Senate, reveals Italy’s taxi drivers have got one over the prime minister who humbled Microsoft when he was the EU’s competition commissioner.

Original plans to give the right to determine taxi fleet numbers in Italian cities to a national authority were killed off, meaning local mayors maintain that right and will be unlikely to risk taxi drivers’ votes by upping numbers, which is bad news for anyone who has tried to call a cab in Rome on a rainy night.

Tom says that Maurizio Gasparri, a former minister in Silvio Berlusconi’s government, was in the forefront of the fight to keep the cabbies happy. Monti has also faced an army of lobbyists representing other business groups who “prowled the corridors outside the Senate commission, buttonholing senators when they dared to go to the bathroom”.

The scene, said Corriere della Sera, was a part souk, part tube station.

Tom continues:

Italian lawyers and architects have also been able to scotch plans hatched by the government to force them to give clients estimates for services.

One Italian think tank, the Bruno Leoni Institute, said, the watering down of the liberalisation package proves that Italy is “unreformable”.

8.18am: Germany’s patience with Mario Draghi may finally have snapped.

The president of the Bundesbank, Jens Weidmann, has warned the European Central Bank president that yesterday’s Long Term Refinancing Operation (in which €529bn was loaned to European banks on generous terms) poses significant dangers to the eurozone economy. In a letter to Draghi, Weidmann urged the ECB boss to return to safer monetary policies.

The letter was revealed by Germany’s Frankfurter Allgemeine Zeitung. It says that Weidmann warned that the ECB is risking its reputation, and was wrong to relax its collateral rules – which means banks can put up a wider range of assets in return for their loans.

Weidmann also warned that if banks are unable to repay these loans in three years time, the individual central banks who stand behind the ECB could not cover the losses. As Frankfurter Allgemeine Zeitung points out:

The letter is evidence of the growing unrest in the Bundesbank.

The letter comes as the boss of Standard Chartered, Peter Sands, warned that central bankers are sowing the seeds of the next crisis by offering so much liquidity today.

As we report here:

Breaking ranks from his fellow bosses, Sands, whose bank is focused mainly in Asia, said: “Banks are still going to have to refinance their loans in three years time. It’s not clear what the exit strategy is, nor is it possible to predict what the long-term consequences will be.”

He added that the crisis and the west’s policy response had accelerated the shift in “power and dynamism” from the developed world to emerging markets.

8.05am: Although the EU summit doesn’t begin until this afternoon, we should hear from Angela Merkel shortly. There’s also plenty of economic news this morning, and Ben Bernanke will be testifying to Congress again.

Here’s the agenda:

Angela Merkel addresses Bundestag on EU Summit agenda – from 8am GMT
Eurozone manufacturing PMI data – 9am GMT
UK manufacturing PMI data – 9.30am GMT
Eurozone unemployment data for January – 10am GMT
Eurogroup meets to discuss Greece – 1pm GMT
Ben Bernanke testifies to the Senate banking committee – from 3pm
EU summit begins in Brussels – from 4pm

7.55am: Good morning, and welcome to our rolling coverage of the eurozone debt crisis.

Later today, EU leaders will convene in Brussels to discuss the European economy. The summit is being billed as a chance to focus on growth and employment – two areas where the EU is struggling.

Before the meeting, the eurogroup (finance ministers from across the eurozone) will discuss Greece again – and consider whether it has met the conditions for its second rescue plan.

Another Greek development today: the International Swaps and Derivatives Association (ISDA) which oversees the credit default swap, will consider this morning whether a credit event has occured in Greece. This could finally decide whether Greek credit default swaps are triggered – although we may not get an answer until Monday.

There’s also a backlash gathering pace following the €529bn of cheap loans made by the European Central Bank yesterday. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds