The European Union has made a long way during the 2 years of debt crisis. Learn what's behind and what's ahead on the road by reading the articles and interviews that the FXstreet.com team wrote as part of the special content The European Debt Crisis Chronicles.
Troika inspectors, which conducted the seventh review of the Irish economic program at the beginning of July, decided that the implementation of the conditions attached to the bailout is satisfactory. In a document jointly released by the EU, ECB and the IMF on Thursday the country's progress is described as “strong in a challenging environment."
Troika's document states that Ireland managed to reach the required 2012 deficit target of 8.6% GDP. It praises the steadfast way in which Irish authorities reduce spending and raise taxes in order to bring down the deficit further.
Nevertheless, the country's deficit is still the highest in the Eurozone and unemployment is excessively elevated. Ireland should thus primarily concentrate on stimulating growth and employment.
The positive outcome of Troika's review will allow for the disbursement of the next tranche of the rescue money, amounting to 1.9 billion euros.
Spanish government announces new austerity plan
Spanish 10-year bond yields decreased by 16 basis points on Wednesday after Spanish President Mariano Rajoy appeared before the parliament to present a program of additional budget cuts, which will allow for savings of 65 billion euros in two years. Rajoy hopes to bring down this way the country's budget deficit below 3% of GDP by 2014. The reforms mainly affect civil servants' salaries, the VAT and unemployment compensations.
Standard VAT will be raised from 18% to 20%, while the reduced VAT will increase from 8% to 10%. Civil servant's salaries will be cut and their year-end bonuses will be eliminated. The number of local lawmakers will be reduced. The model of granting unemployment benefits will be revised.
Mariano Rajoy also said that it is a very difficult time for Spain as it finds itself in the second largest recession in history. He urged Brussels to speed up the implementation of summit agreements on direct recapitalization of Spanish banks, in order to reassure the markets. He also expressed his satisfaction with the bailout conditions.
The new austerity measures will be introduced as a response to EU officials calls' on Tuesday. During the Eurogroup meeting at the beginning of the week Spain's deficit target has been extended by one year and additional cuts will help the country to meet it.
Vittorio Grilli appointed Italy's new Finance Minister
Italian PM Mario Monti, who until today has also held the post of Finance Minister, appointed Vittorio Grilli to the position today. Until now the Italian economist served as Deputy Finance Minister in Monti's cabinet. Before that he was director general of the Italian Treasury.
Apart from naming the new Finance Minister, Mario Monti announced on Wednesday that a special committee will be created in order to supervise the Italian economic and financial policy. Monti, Grilli and Bank of Italy Governor Ignazio Visco as well as the Economic Development Minister Corrado Passera will take part in the committee.
Spain trapped under EZ guardianship
Up to 32 conditions that Spain will have to comply with and a few others still to be defined and applicable to fiscal policy. The toughened measures are part of the 20+ pages from the memorandum of understanding for the Spanish bailout to its banks.
The draft memorandum of understanding will be finalised on July 20. In plain terms, further cuts, increase on taxes and measures which may see a whole generation of hard-working ordinary Spaniards savings being evaporated.
20 pages full of demands that will change up and down the Spanish banking map and, incidentally, part of economic policy in the coming years, starting with a fresh batch of cuts that the government should start immediately and constant supervision by a troika, formed by the European Central Bank and International Monetary Fund, who will visit Madrid constantly every three months.
The most significant changes include: The EU takes power away from EcoMin Mr. Guindos to give it to the Bank of Spain.Banks should have a 9% capital minimum until the end of 2014. The rescue will classify entities into four groups according to their solvency. The bad bank should be up and running before year end. Thhey will force banks to sell assets and impose losses on preferred shares.
Picking up on the last line above, small savers in Spain therefore may be potentially facing billions of euros in losses, as the Euro zone as said toughens the demands to the Iberian country in exchange for the bank bailout, with 30 billion euros expected to be delivered before the end of the month.
Authorites in Brussels are asking Spain to wipe out certain types of bank debt as per attached bailout conditions. According to a draft memorandum of understanding the Financial Times reports, Spanish banks enjoying bailout funds should be forced to write off preferred shares and subordinated bonds.
"Banks and their shareholders will take losses before state aid measures are granted and ensure loss absorption of equity and hybrid capital instruments to the full extent possible,” the document says.
According to Bank of Spain, banks hold over €67bn of subordinated and hybrid debt outstanding, most sold to retail investors as savings products. “It was an error to sell the the preference shares, and we will have to look for solutions,” Mr. De Guindos, Spanish EcoMin said earlier last month.
EU asks Spain for more austerity to meet new deficit target
The Eurogroup's decision to provide 30 billion euros of recap funds for Spanish banks, agreed upon the first day of the meeting in Brussels, caused a slide in yields on Spanish 10-year bonds below the 7% level, which market experts consider as unsustainable.
Eurozone finance ministers continue their talks on Tuesday, but market expectations for any further important decisions are rather low. It was reported that European Economic and Monetary Affairs Commissioner Olli Rehn urged Spain to adopt additional measures to meet the new deficit target, extended by one year during the first day of talks.
According to Stephen Hughes, Director of Currencies.co.uk: “It is apparent that EU finance ministers fear Spain will not reduce its deficit within the current timeline, which will ultimately lead to a default. Crucially, the fall-out from a Spanish default would be felt by the whole of the EU and would dramatically impact the value of the already fragile Euro.”
Spanish Finance Minister Luis de Guindos told reporters that Spain, which will obtain bank recapitalization funds in the form of EFSF bonds, will be able to lend them back to the ECB. He also informed that Finland is the only EU country requiring collateral in exchange for the aid.
Meanwhile, Italian PM Mario Monti exhibits pessimism on Tuesday, saying that it cannot be ruled out that Italy will never need to ask for bailout money. He also assured that he would step down as Prime Minister at the end of the year.
EZ aims formal deal on Spain by late July
There has been a bunch of headlines coming from the EZ FinMin meeting briefing, which commenced at 2.15 am Brussels time.
Eurogroup head Juncker said they reached a "political understanding on Spain' memorandum of understanding on bailout" aiming for a formal deal on Spain by late July, when €30 billion ($36.88 billion) is thought that might be ready. Juncker confirmed there will be another meeting/conference call by July 20.
The loans to be used for Spain banks recap will have the maturity of up to 15 years. Maturity on Spain loans up to 50 years, Jucker said, also confirming 1-year extension for Spain to cut deficit. Juncker said: "We endorsed the extension of Spain deficit target by one year to 2014." The extension is thought to be formally adopted at Ecofin Tuesday.
On Greece, there was no conclusive review of its program. While in possession of the preliminary briefing of the troika, they agreed to discuss Greece again once the full report of Troika is available. Touching on Cyprus program, Jucker said it will be finalized by end of Sept. Finally, Juncker said it aims to step down as Eurogroup Chairman by year end.
Meanwhile, EU's Rehn said the comission will present draft on Spanish bank supervision by early Sept. Same time when work on direct ESM recap will start. Rehn "the ECB signed an agency agreement for the EFSF/ESM on interventions." Rehn added that they aim to finalize Spain memorandum of understanding on bailout on July 20. He set Spain's targets at 4.5% GDP deficit in 2013, 2.8% in 2014.
According to Rick Lloyd, Analyst covering the latest developments for IFR Markets: "No comment on ESM seniority & vague comments point to more delay, which will most likely prompt Spanish bond yields to edge higher on no breakthrough of ESM. Furthermore, likely German court action may force EU to rely on EFSF meanwhile."
