The eurozone crisis is anything but sterilized

Mario Draghi hasn’t rescued the euro yet

German eurosceptics claim that the ECB’s Outright Monetary Transactions (OMT) programme is an abuse of power. The emergency asset purchasing measure, inactive since its inception in 2012, would force all eurozone members to share any losses involved in bailing out a struggling state. According to the plaintiffs in the case, this infringes on fiscal sovereignty.

The German Constitutional Court has deferred the judgment to the European Court of Justice (ECJ), though this has only delayed dealing with the problem rather than put it to bed. Nonetheless, the decision will please eurosceptics.

At present, the very existence of the OMT is acting as a safety net. Bond investors are suitably reassured and bond yields are at a sustainable level. Yet, an ECJ ruling has the potential to ruin the peace. If asked to contribute to the rescue fund, the Germans would have grounds to abstain, leaving struggling eurozone members unable to service their debt.

Were a member state to require access to the OMT funds, it is unlikely that proceedings would ever reach the stage where the German constitution is called into question. Troubled sovereigns are first required to apply for a credit line via the European Stability Mechanism. This requires clearance from all member states, which of course includes Germany. This roadblock should prove enough of a deterrent to prevent countries from accessing OMT in the first place.

The pending decision could irk bond markets, but there are more troubles on the horizon for Mario Draghi. The ECB is about to enter phase two of its investigation into the eurozone’s financial system. The asset quality review will highlight any weaknesses in the capital held by banks. In Italy, non-performing loans have risen 8% since 2007. In his January 5^th column, Wolfgang Munchau noted that the government was unlikely to implement the tax measures necessary to reduce unit labour costs. The difference in wage rates between member states is one of the fundamental problems currently plaguing the eurozone.

The Italian government faces debt-servicing charges of 70 per cent of GDP over the next 20 years. With tax receipts projected to remain flat throughout the period, this is a repayment schedule that has not been witnessed before in the eurozone.

Italy is stuck between a rock and a hard place. Incoming prime minister Matteo Renzi has announced a four-month reform programme, expected to include boosts to government spending. And yet, the country is already on the margins of the 3% primary deficit ceiling imposed by Brussels. Though inflation is reaching dangerously low levels, the ECB has made clear that it will not give highly indebted member states the means to inflate their problems away.

If the Eurozone crisis has taught us anything, it’s that confidence is a fragile thing. Given that growth in the currency union is stagnant and the central bank has made clear that it is unwilling to pull any more levers, the last thing that the periphery needs is more uncertainty. That Germany has the upper hand in OMT negotiations will plant a seed of doubt in the minds of investors. With a European parliamentary election in May and rigorous bank stress tests due before November, Draghi definitely isn’t out the woods yet.

Graphics page- UK Housing Bubble

BRIEF: Create a graphics page with 4 or more objects on a single narrative. Group project.

 We tried to examine issues relating to the UK housing supply. The graphs clearly show a link between construction figures and falls in house prices which are typical of a construction/housing bubble. We also wanted to include a more human element by looking at house price affordability across Europe- presumably the UK would fare poorly on this metric- but reliable house price figures were not available.

T-Mobile in strong debt issue

BRIEF: Pick a recent new issue of corporate debt and write a news report about its announcement. Make clear who the borrower is and at what interest rate; if possible say what the borrower intends to use the funds for. Talk about the way the market has been performing. 400 words. Time: 2.5 hours including research

T-Mobile USA has completed a robust $5.6bn bond issue amidst talk of a potential takeover.

The deal consisted of five senior notes. Four tranches, with maturities of 5.5, 6.5, 7.5, and 8.5 years were issued with a value of $1.25bn each. The remaining tranche, worth $600m, has a maturity of 9.5-years.

All securities opened sturdily with only the 9.5-year note pricing slightly below par. The yield-to-maturity for these bonds were 6.033%, 6.632%, 7.128%, 6.541% and 6.887% respectively. Moody’s rated the bonds at Ba3, three grades below investment standard.

The company sweetened the deal by offering a substantial 50 basis point new issue concession (this is the additional yield provided by new debt over the secondary market yield for the same security). By comparison, T-Mobile’s $500m transaction in August only offered a 25-30 basis point concession.

Although the issue performed strongly, growing takeover speculation dampened demand for the securities, according to a telecoms specialist at an asset management firm: “DT has always indicated they have been reluctantly involved in T-Mobile and they will continue to disengage as fast as they can.”

Dish, the satellite provider, and Sprint are leading candidates to acquire the telecoms company, but this would signal bad news for bondholders.

“If they do sell T-Mobile, that might not be a good event for any bonds that were bought above par, given the change of control language,” said the telecoms specialist.

A takeover is likely to increase the company’s debt burden, causing the value of existing bonds to fall. COC’s (change of control clauses) would allow the bondholder to sell the security back to the issuer at a set price. In this case, T-Mobile’s COC allows the holder to return the bond at a price of 101 in the event that the debt is downgraded by two ratings agencies.

The deal accounts for half the liability taken on by Deutsche Telekom (DT), T-Mobile’s parent company, when it acquired a 74% stake in pay-as-you-go carrier MetroPCS Communications. The remaining debt held by T-Mobile, which is resettable, is unlikely to be resold according to CreditSights.

Firms have been keen to capitalize on low interest rates by issuing debt, but the Fed is widely expected to taper its $85bn in asset purchases by 2014. This is the latest in a string of high value deals to hit the market in recent months. Earlier this year, Apple sold $17bn worth of bonds but this was surpassed last month by Verizon’s $49bn issue, the largest sale of corporate debt in history.

Cameron not happy with Brussels serving

BRIEF: Write an analysis of the latest situation in the euro zone crisis as if for the Financial Times. This may bring in some opinion but it needs to be based on the facts (500 words). Time: 3 hours including research.

Britain is again embroiled in talks with the European Council as the UK government attempts to protect the interests of domestically based banks.

With negotiations ongoing, there are concerns among Eurozone members that this will delay a significant ECB asset review. The series of balance sheet tests is designed to shore up inadequate capital ratios and is seen as a major step towards the formation of the EBA (European Banking Authority), which will supervise the region’s banking union.

The UK has fears that it will lose political influence in Europe when the EBA’s mandate commences. Britain accounts for over 36% of EU wholesale finance transactions within the European Council, yet it has the same voting weight as Germany that represents only 13% of the market.

In December, Britain was successful in getting members of the customs union to agree to “double-majority” voting. The new system means that any rules imposed by the EBA must be voted in by the majority of EU states in addition to a second majority of non-Eurozone countries only. This will ensure that the states that have adopted single currency cannot dictate terms to the remaining 11 EU countries.

In spite of this, the UK government wishes to safeguard the double majority provision from potential repeal when the EU commission conducts another review next year. This has angered EU officials, as many had considered the talks in December to be the final barrier to the EBA’s inception.

The move is another example of a growing divergence of interests that has emerged between core members of the Eurozone and the Conservative government.

Officials in Brussels are growing increasingly weary of Britain’s blasé attitude towards EU membership. Last year, at the height of the UK’s “Brexit” debate, European commissioner Michel Barnier criticized David Cameron for attempting to “cherry-pick” EU policy. In January, German foreign minister, Guido Westerwelle wrote in the Times: “Saying ‘You either do what I want or I’ll leave!’ is not an attitude that works, either in personal relationships or in a community of nations.”

The Eurozone debt crisis has undoubtedly highlighted the need for fiscal union and greater central supervision in the banking sector. Although the UK has largely been a spectator to the events that have unfolded on the continent, the stabilizing effects of a better-integrated banking system will benefit the UK in the long run. Nevertheless, it is conceivable that the vision for a “genuine” economic and monetary union will not be realized within the next decade.

In the meantime, Mr Cameron is tasked with renegotiating Britain’s position in Europe ahead of an “in/out” referendum in 2017.  With the formation of the EBA, of which the UK will not be a part, Britain is now at risk of being further marginalized by the Euro-wielding member states. Given the prime minister will face scrutiny from both the opposition and Euroskeptics within his own party, we can widely expect wrangling with Brussels to continue.

BA pioneers new debt issue

BRIEF: Write up this statement in about 150 words (source at bottom of page). Time: 40 minutes including research.

British Airways (BA) have issued a $927m publicly traded-bond issue which uses aircraft as collateral. Enhanced Equipment Trust Certificates (EETC’s) are common amongst US airlines, but the deal is the first of its kind carried out in the UK.

Two classes of certificates will be on offer, one with an annual coupon of 4.625% and the other a coupon of 5.625%. Both bonds pay out quarterly and have a maturity of a year.

Enrique Dupuy, CFO of IAG said: “This transaction marks a strategic milestone as we diversify our sources of funding. “

BA’s 2011 merger with Spanish airline Iberia has given the company access cheap debt according to an equities analyst from Goldman Sachs.

Citi was responsible for structuring the deal, which has been rated (A/BBB) by Standard and Poor’s.

ENDS

SOURCES:

British Airways inaugural $927 million EETC Bond Issue

International Consolidated Airlines Group, S.A. (“IAG”) today announces the successful launch by British Airways of an inaugural $927 million publicly-traded bond issue, using aircraft as collateral. These bonds are known as EETCs, or Enhanced Equipment Trust Certificates, and are a form of aircraft financing commonly used by US airlines.

The transaction includes Class A and Class B Certificates with an underlying collateral pool made up of six new B787-8 aircraft, two new B777-300 ER aircraft and six new A320-200 aircraft, due for delivery between June 2013 and June 2014.

The Class A Certificates ($721.6 million) have an annual coupon, payable quarterly, of 4.625%, and the Class B Certificates ($205.4 million) have an annual coupon, payable quarterly, of 5.625%.

Enrique Dupuy, CFO of IAG said: “This transaction marks a strategic milestone as we diversify our sources of funding. It is also the first time that British Airways has used EETCs and that this form of financing has been used in the UK”.

The transaction is rated by Standard and Poor’s (A/BBB), Moody’s (Baa1/Ba1) and Fitch (A/BBB-).
Citi acted as Lead Structuring Agent and Global Co-ordinator on the transaction.

Forex Report: Dollar rallies on Yellen news and pound slides on weak industrial data

BRIEF: Write a 500-word report on moves in the global forex market in recent days and the factors that may have influenced those moves. Also include a reference to factors likely to affect the forex market in the next few days. Focus on major currencies. Time: 2.5 hours including research

The dollar index strengthened on the back of increased risk appetite as news broke that the President has backed Janet Yellen to lead the Federal Reserve, yet the greenback is still at an eight month low due to the ongoing budget crisis.

Yellen, currently second in charge at the U.S. central bank, will take over from Ben Bernanke on January 31^st 2014. She is expected to maintain the accommodative monetary stance adopted by her predecessor. The former frontrunner Larry Summers, perceived to favour early tapering of quantitative easing, ruled himself out of contention last month.

In Wednesday’s trading, the dollar rose 0.4 per cent against the yen but remained flat against the euro at $1.3574.

The dollar’s safe-haven status has been in question as a result of the U.S.’s fiscal impasse. Investors looking to de-risk are currently backing the yen.

“It might be counterintuitive that the dollar rose on news that a dove is likely to be the next head of the Fed, but the news itself removed some of the uncertainty, and therefore contributed to risk-on sentiment,” said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank, to Reuters.

In spite of the aggressive monetary easing employed by Japan’s Abenomics programme, the U.S.’s uncertain outlook has seen the yen appreciate against the dollar in past months. Nonetheless, the minor 1.56 per cent appreciation over the previous three months compares with a 19.7 percent depreciation over the previous 12 months.

Meanwhile, sterling fell to a two week low after industrial production figures fell well below analyst estimates. Earlier in the week, the IMF (International Monetary Fund) doubled the UK’s 2013 growth forecasts. However, today’s ONS (Office for National Statistics) figures show a decline in manufacturers’ output of 1.2 per cent versus an anticipated 0.4 per cent increase. The pound is down against all major currencies including a -0.9 per cent decline against the dollar.

Looking ahead, markets will be awaiting the release of FOMC (Federal Open Market Committee) minutes from last month’s meeting. It was widely anticipated that the Fed would announce tapering of its bond purchasing operations, which currently stands at $85bn a month. When this failed to materialize, markets reacted frantically with the Dow rising 147 points on the day. Numerous factors could explain Bernanke’s decision- principal among these is the government shutdown- but traders will be anxious to find out exactly what influenced the committee’s decision. The minutes will be published today, 2pm Eastern time.

Overall, currency movements are set to remain constrained amidst protracted U.S. negotiations.

“We are definitely waiting for an end to the US shutdown. I think Thursday 17th is ‘d-day’ where they’ve got to come up with a solution before they default on the debt but markets are definitely in wait and see mode. Most clients are holding only very light positions at the moment,” said David Massey, an RBS forex analyst.

Euro strengthens in anticipation of ECB rate hike

BRIEF: EUR/USD is 1.3664, down 0.95 per cent on the day- was 1.3794 at the previous close. THEN, JUST NOW, a short statement has been issued by the ECB

In the light of the latest implementation of austerity measures by Greece and agreement by euro zone finance minister to write off a further portion of Greece’s debt, the ECB expects some slight increase in upside risk to inflation. Thus the next move in interest rates is expected to be upwards.

After the statement, the euro is trading at $1.3910 = a rise of 1.8 per cent since the announcement

150 words. Time: 20 minutes

 

The euro leapt 1.8 per cent against the dollar on news that the ECB (European Central Bank) is likely to raise interest rates.

Eurozone finance ministers have agreed to take a more lenient stance on Greek debt repayment after concerns surrounding the country’s latest round of austerity measures. The ECB is expected to raise rates to combat increased inflationary risk.

After a weak start to the day, the euro is currently trading at $1.3910, up from $1.3794 at the previous close.

Cypriot finance minister: “We have exited the danger zone.”

BRIEF: Write a news story of about 200 words for the FT based on this material (sources at bottom of page). Today is 31 July 2013.
Time: 45 minutes including research. 

Cyprus’ banking sector appears to be entering recovery, as latest figures show better than expected progress in light of the country’s recent financial crisis.

The troubled state is expected to struggle with austerity measures aimed at reaching a budget surplus of 4 per cent of GDP in 2018. Estimates suggest that Cypriot GDP will fall 13 per cent over the next two years but initial progress is positive according to the finance minister Harris Georgiades.

“The worst is behind us as far as the banking system is concerned, we have exited the danger zone and we are into a stabilization zone.”

In March, Cyprus received an emergency €10bn loan from the Troika (EU, ECB and IMF) to help recapitalize the banking sector.

As part of the deal, the nation’s second largest bank, Laiki, was shut down whilst the largest bank, Bank of Cyprus, forced a 47.5 per cent haircut on uninsured depositors. The bailout fund was also conditional on improvements to anti-money laundering measures and fiscal discipline.

The IMF is currently in the process of publishing its first review of the bailout programme. Delia Velculescu, mission chief for Cyprus said: “This review found the programme to be on track, with authorities having made good progress towards meeting their objectives.”

ENDS

SOURCES:

This is from the official Cyprus News Agency.

“The worst is behind us as far as the banking system is concerned, we have exited the danger zone and we are into a stabilization zone,” Cyprus Finance Minister Harris Georgiades said at a workshop on hydrocarbons and sustainable development in Nicosia today.

And …

“This review found the programme to be on track, with authorities having made good progress towards meeting their objectives,” IMF mission chief Delia Velculescu said today during a conference call at the end of a mission to Cyprus.

Greek coalition locked in austerity talks

BRIEF: Read the text below (see bottom of page) and write a news story as if the news has just broken. Bring in key background and improve the language. 100 words, 20 minutes. Date is Friday, 21 September 2012.

“Greek coalition locked in austerity talks”
-by Tom Davies

Greece’s Finance Minister Yannis Stournaras is still engaged with party leaders over final changes to the country’s proposed spending cuts.

The coalition government is required to reduce the budget deficit by an additional 2.0-2.5 billion euros before the proposals will be accepted by the Troika (European Commission, European Central Bank and the International Monetary Fund).

There are still lingering concerns that further cuts will have a considerable effect on welfare. The Finance Minister said that “negotiations were difficult” and he was looking to minimize the social costs inflicted on the “poorer strata”.

ENDS

SOURCES:

‘Negotiations continuing’, Finmin says after coalition leaders meet

Friday, 21 September 2012 – Emerging from a meeting between the three party leaders supporting the coalition government, Finance Minister Yannis Stournaras on Thursday confirmed that negotiations with Greece’s creditors are continuing.

Stournaras said that a large part of the austerity package demanded of Greece had been agreed but there were still reservations surrounding certain of the proposed measures, chiefly to do with modernising the state, that had not yet been resolved.

“The negotiation is difficult. We are doing everything possible to minimise the social cost, especially for the poorer strata,” the minister said, expressing hope that the package of measures will soon be finalised.

(Previously the same day)

FinMin briefs PM ahead of coalition leaders’ meeting

Finance Minister Yannis Stournaras opined on Thursday that discussions for the finalization of the government’s package of austerity measures would continue for a few more days before final agreement is reached on the package 11.9 billion euro cuts in state spending, and estimated the shortfall between the measures proposed and those demanded by the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) Troika at 2.0-2.5 billion euros.

Stournaras was speaking to reporters after he and the government’s economic staff briefed prime minister Antonis Samaras of the finance minister’s talks with the Troika on Wednesday, ahead of a scheduled meeting of the leaders of the three parties — PM and New Democracy (ND) leader Samaras, PASOK leader Evangelos Venizelos and Democratic Left (DIMAR) leader Fotis Kouvelis — for continued talks for the finalization of the measures.

The finance minister is due to meet later at the ministry with main opposition SYRIZA officials Yiannis Dragassakis and Efklides Tsakalotos to brief them on the ongoing negotiations with the Troika.