Eurogroup: No numbers on Greece; IMF cuts global GDPs

Angela Merkel

The EcoFin Meeting gathering, as confirmed by the final statement, brought little to no surprises on any major front of the crisis, with no substantive solutions at all being taken. IMF's Lagarde, EU's Juncker, ESM's Regling and EC's Rehn came on stage to say less than meets the eye. 

The Eurogroup first projected their views on Portugal, saying the country's resolve to achieve fiscal targets helped for the Eurogroup to approve the next EUR4.3B aid tranche for the country.

On the Greece status, EU Juncker said he is personally impressed by Greek Govt performance, adding that Greece must implement measures by the Eurogroup, and only then the ground will be laid to reconvene on more aid. The review of Greek reforms by international lenders and the IMF is still ongoing though, it was remarked.

The initial troika target limit of 120% debt/GDP ratio by 2020 appears to be way too optimistic, according to DJ-WSJ sources, with Troika now contemplating adverse scenario at 150%/GDP by 2020.

About Spain, the Erogroup said they are encouraged by Spain's effort to implement fiscal consolidation, with confidence remaining high that Spain financial program is on track, as proven by State aid to Spain banks less than capital shortfall.

About Cyprus, following the news that the country had just been downgraded 3 notches by Moody's, the Eurogroup agreed on heightened urgency to speed up Cyprus aid talks.

Taking the stage last was IMF Lagarde, who amongst other headlines, she stressed that clear progress on the ground in Greece, however, since work is still ongoing, no numbers were put on the table.

IMF cuts global GDPs forecast, dowside risks worsen

The IMF has lowered the euro zone GDP outlook for 2012 by -0.1% to -0.4% from -0.3%, while setting a +0.2% in 2013 from +0.7%. Progress toward banking, fiscal union is required for rosier revisions. ECB could cut rates further, the institution says.

Japan 2012 growth forecast was also cut to 2.2% from 2.4%, 2013 stands now at 1.2% from 1.5%. The BOJ easing program may help its GDP target, although more is needed to reach 1% inflation goal. China 2012 growth forecast was downgraded to 7.8% from 8.0%, 2013 forecast at 8.2% from 8.5%.

On the US front, IMF said “imperative” to avoid year-end fiscal cliff, as it could reduce 4% of GDP in 2013 in the worst case scenario. U.S., Canadian economies GDPs are projected at around 2% in 2012 and 2013, but both face large downside risks.

Cuts 2012 global GDP growth forecast to 3.3% from 3.5% in July and 2013 forecast to 3.6% from 3.9%. “General feeling of uncertainty” holding back global growth.

Eurogroup launches ESM program; Schäuble believes Spain doesn't need bailout

The Eurogroup has launched the European Stability Mechanism (EU's permanent bailout fund replacing the temporary EFSF) on Monday and the head of the lending institution Klaus Regling, appointed for 5 years, has affirmed that it had become fully operational, starting today.

Its initial lending capacity will be approximately 200 billion euros. EU finance ministers are also supposed to release a statement regarding the situation in Greece, in the light of last week's negotiations with the Troika inspectors.

The mission of the ESM program is "to safeguard financial stability in Europe by providing financial assistance to euro area Member States." The program will intervene in primary and secondary bond markets and it will "act on the basis of a precautionary programme."

As the following image shows, the 17 euro area Member States will be the shareholders and Germany, France, Italy and Spain will provide the most. Bilouted Countries like Greece, Portugal and Ireland will fund money.

table fund

Klaus Regling said that ESM's instruments were the same as those of the EFSF and assured that the matter of the direct recapitalization of distressed EU banks would be reassessed as soon as a single Eurozone banking supervisor was established.

Meanwhile, Fitch ratings agency announced on Monday that ESM's bonds had been granted the top AAA rating, with a stable outlook. Possible downgrades of AAA-rated Eurozone countries should not affect the funds' rating, although “in the event that Greece were to exit from the eurozone, the ratings of all sovereign and sovereign-rated entities in the eurozone, including the ESM, would be placed on Rating Watch Negative.”

Later on Monday, German Finance Minister Wolfgang Schäuble told reporters on Monday, ahead of the Eurogroup meeting in Luxembourg, that Spain “does not need additional financial aid,” adding that the country's government is doing all that is necessary to fight the crisis.

But market expects that Spain will be the first EU member state to apply for ESM funds, but most probably it won't happen just yet, as Spanish bond yields have been declining recently, while harsh budget cuts spurred a strong opposition among Spanish citizens. But with the bailout fund already in place investors will exert more pressure on Rajoy's government to ask for financial aid.

Spanish 10-Year bonds trade at 5.74%, with 426 points as differential with Germany. Italian 10Y bonds are at 5.08%; France's 10Y bond at 2.17% and German at 1.48%.

Commenting on another important point on the meeting agenda – the decision on the bailout for Greece - Schäuble admitted that it cannot be expected today, as Troika's report has not been finalized yet, stating however that "hope never dies for an October decision on Greece".

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