Movement in Greek Debt Negotiations, IMF Calls For ECB to Buy Bonds, and Merkel's Speech in Davos
January 26, 2012
Although investors appear to have shifted their focus from Europe to the Fed leaving its ZIRP in place for three years, there are several developments in Europe worth nothing this morning including a possible break in the Greek debt swap negotiations, a call from the IMF for the ECB to buy bonds, and Merkel’s speech in Davos.
On the subject of the debt swap negotiations, Reuters is reporting that according to Greek media, private bondholders are willing to up their final offer of a 4% interest rate on new bonds. In an effort to secure a debt swap deal, private holders of Greed debt are reportedly now willing to consider a yield of ~3.75% on new bonds that will be swapped for the existing debt. But there also appears to be a new demand.
A potentially new development is the idea of public bondholders participating in the debt swap. Recall that only private sector bondholders are currently being asked to exchange their existing debt for new bonds. The Greek publication Kerdos reported Thursday that the participation of public creditors, including the ECB, was a pre-condition of the new offer.
Charles Dallara, the head negotiator for private sector bondholders, will reportedly return to Athens on Thursday to resume talks with government officials.
The next development involves the IMF urging the ECB to expand balance sheet, which, in English means that the IMF wants the ECB to keep buying bonds on the open market.
According to Dow Jones, the IMF is calling on the ECB to expand its balance sheet as part of a multi-pronged effort to stem the sovereign debt crisis. The IMF said in a report to the G20 that "Expanded crisis management" is needed "by providing sufficient funding through expanded use of the ECB's balance sheet and adding real resources" for the bailout funds.
The Journal article pointed out that although the IMF has not said specified the degree to which the ECB should expand its bond buying efforts; an official said the ultimate amount will likely depend on the amount of firepower Eurozone leaders decide to add to the ESM/EFSF bailout funds.
Finally, German Chancellor Merkel's speech at the World Economic Forum is receiving a great deal of attention. In the speech, Merkel continued to downplay the hopes for an increase of the ESM/EFSF bailout funds and continued to pitch the German strategy of austerity and fiscal reforms.
In the speech, Merkel highlighted the potential “tail risks” involved with the possible expansion of the ESM/EFSF, noting that governments may not ultimately be able to provide the assets pledged to the bailout funds.
Merkel told the audience of who’s who in Davos, "What we don't want is that we promise something that we can't deliver." Merkel added that "In that case Europe would have a really vulnerable flank."
Although there is growing criticism that EU leaders that not enough attention is being paid to growth plans going forward, Merkel continued to emphasize an approach austerity and structural reforms as the best way to address/combat the sovereign debt crisis.
European stock markets are up more than 1% this morning.
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