“The euro zone must deal with its main problems,” Stournaras noted. “A banking union… an economic policy which combines fiscal consolidation and growth, not all countries can impose austerity … and the most important: a common debt market, but this probably at the end.”

Stournaras added that Greece, which is in its sixth year of recession, needs a primary budget surplus and growth before it returns to the bond markets.

In an interview with Mega TV, Stournaras said: “we received the support we needed from the U.S.” He noted that the visit of Antonis Samaras in the United States was very important. “We agree with the U.S. in the overall attitude to the economic policy. By itself austerity does not bring results. The Eurozone must address its main problems with a banking union, an economic policy that combines development and a unified debt market,” the minister said.

President Obama would not have taken the risk of a positive statement if the Greek economy were not doing well, Stournaras added.

“I see no major conflicts between USA and Germany for the Greek debt, but a constructive dialogue. Greece must achieve a primary surplus at the end of 2013.”

When asked if the recession will end, the FinMin said: “data so far suggest that by the end of 2013 Greece will go into primary surplus. The recession in 2013 will be below 5%.” “My previous statement about growth in 2014 still stands,” he said.

The team will stay in Greece for about two weeks during which it will monitor the country’s finances. During the standard media briefing in Washington, Rice said that currently the IMF is focusing on the third evaluation of the Greek programme and the country’s commitment on its prerequisites, Reuters informs.

He reiterated the need to reduce the Greek debt by saying that a new reduction is required to keep the program from derailing. “Our estimates show that it will take a further easing of the Greek debt to achieve the objectives of the programme,” Rice said.

However, he added that he does not expect any further discussions on the participation of the official sector “at this stage” and denied that the IMF will accept a haircut on the loans it has given to Greece.

“The Greek economy is entering a new phase. The programme is on the right track. The recovery is expected to begin next year with positive indicators from quarter to quarter,” Finance Minister Yannis Stournaras said inter alia at the conference organized by the Bank of Greece entitled “The crisis in the Euro-Area,” presenting the 10 economic policy points implemented by Greece.

According to tovima.gr, Stournaras also said that so far the country has carried out two thirds of the required fiscal adjustment for the period 2010 – 2016, it has achieved the required adjustment on competitiveness, but the whole procedure will take patience and dedication.

“Doomsday prophets have been dashed. Greece remains in the Eurozone, while confidence in the country is rapidly restored. The main objective now is to achieve a primary surplus in order to invoke the clause agreed at the Eurogroup in November for a drastic reduction of the state debt. This will strengthen the positive climate and accelerate our exit from the crisis.”

He added that the completion of the recapitalization of banks is necessary to restore the flow of credit.

How did this happen?

During the past three or four years, over-indebtedness and the draconian programs applied to cut down government deficits, were quickly translated into less and less economic activity and consequently into quickly increasing unemployment in the weak Eurozone countries. Only in Spain unemployment was endemic even before the crisis years. Ireland is also an exception, but a positive one, steadily overcoming now all its problems. However in all those high unemployment countries over-indebtedness and the real economy woes which followed, came seven years after the advent of the euro.

Until the first signs of the still ongoing crisis in the weak Eurozone economies appeared in the spring of 2009, all of them could borrow at the same interest rates as Germany. During the first two months of that year Greece had borrowed the unbelievable amount of around €50 billion. The financial environment though changed drastically in the summer of 2009 and towards the end of that year Greece became insolvent followed by Portugal and Ireland. Spain and Italy haven’t really joined this club but live under the Damocles Sword of their debts.

In short the introduction of the common European currency and the imprudence of the major German and French banks, in evaluating the creditworthiness of all Eurozone members with the same rate, drove many of them to the unsustainable region of debt. But it was not only the governments that borrowed heavily. All the peripheral banks were also offered practically unlimited credit from the major Eurozone banks in Germany and France. As a matter of fact at that time “the road to hell was paved with good intentions” and everybody thought the party will never end.

The difficult questions

The existential questions for Eurozone then come freely. Was the advent of the euro the basic reason for the over-indebtedness of the weak countries? Can the weak Eurozone countries follow the example of Ireland and effectively confront their problems? Given that the first question has a rather historic character it seems that the second is the crucial one.

A free translation of the question is the following: Is it possible for Italy, Greece, Spain and Portugal and probably France to return to a sustainable growth path and start reducing unemployment? Of course all that, under the spell of a strong currency and the high cost or even unavailability of credit. Unfortunately the Eurozone has only made standard for everybody a disadvantage, the expensive euro. At the same time euro area financial markets are tragically fragmented. The cost and the availability of credit are drastically diverging between member states. Germany can borrow at almost zero interest rates, while at the same time Greece, Portugal, Cyprus and partially Ireland can’t borrow at all in the market, while Spain and Italy have to pay dearly for the refinancing of their debts.

This unsustainable arrangement has led to an also unsustainable situation in the labour market, with half of Eurozone being condemned to unseen before unemployment levels. And the next question comes naturally. Is the Eurozone itself sustainable, from an economic and political point of view given the situation in Greece, Italy, Spain, Portugal and now Cyprus? Can those economies start growing again in the foreseeable future, under the prevailing conditions?

This question is practically answered continuously but not yet conclusively in the streets of Athens, Rome, Madrid, Lisbon and Nicosia. The endurance of the political system in all those countries is tested every day. The stress on many occasions is so intense that an accident may happen. The reliance on the police forces is increasing all over the South. For how long can this continue? The option to leave the single currency zone is no more a taboo in the South. Hopefully the North has being informed about this.

As things stand now the disintegration of the Eurozone may come as an accident. Berlin has miscalculated many times in the last hundred years the reaction of the others. Is Germany once more being short-sighted? Unemployment is slowly but steadily feeding the political explosion and unfortunately the extinguishers are gradually been withdrawn. Bail-ins prevail.

From the europeansting.com. By permission.

As stressed in the report, the Eurogroup decision will have a series of exceptionally negative developments in the financial sector in Cyprus, leading to the practical isolation and shrinkage of the financial services sector and (ultimately) the island’s economy.

The report states that “the Eurogroup and IMF’s selective use of deposits above EUR 100,000 for the recapitalization of the banks, simply because they are uninsured, weakens (instead of strengthening) the Eurozone as a whole and subverts the European system of bank supervision and resolution of banking crises, which was decided in the midst of the Eurozone crisis. This is a dangerous practice that can even lead to the weakening of the European Union itself, that the enlightened European Leaders of other times spent their lives  creating and regulating”.

Meanwhile, Cypriots queued calmly at banks as they reopened yesterday under tight controls imposed on transactions toprevent a run on deposits after the government was forced to accept a stringent EU rescue package to avert bankruptcy.

According to Reuters, bank staff turned up for work early as cash was delivered by armored trucks, and queues were formed at branches in the capital, with uniformed security guards on duty. Doors opened at noon (6:00 a.m. EDT) but initially at least there was no sign of any major run on the banks, as had been feared.

Authorities say the emergency rules imposed to limit withdrawals and prevent a bank run will be temporary, initially for seven days, but economists say they will be difficult to lift as long as the economy is in crisis.

Speaking several hours after the deal was reached in Brussels, Simos Kedikoglou said: “The agreement reached on Cyprus thισ morning is painful but the only way to stop the chaos that would bring about bankruptcy and exit from the Eurozone .”

“The most important thing now is: How will help Cyprus to stand back on its feet. Now we look ahead. Cyprus has made the ‘miracle’ many times and will do it again. And I will not let anyone advantage of the temporary weakness, ” he added.

Cyprus’ conservative government has defended a painful bailout deal with international creditors insisting it had stopped a “disorderly” default and euro exit.

Popular Bank, the island’s second largest bank, also known as Laiki, will be closed and all deposits below 100,000 euros will be shifted to the Bank of Cyprus, the island’s top lender, to create a “good bank”, according to Reuters.

Deposits above 100,000 euros in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki’s debts and recapitalise the Bank of Cyprus, the news agency added.

The agreement came hours before a deadline to avert a meltdown of the banking system in tense negotiations between President Nicos Anastasiades and Troika.

Without a deal, Cyprus’s banking system would have collapsed and the country could have become the first to crash out of the European single currency.

Cyprus is set to begin receiving its bailout installments in May.

Meanwhile, the near-bankrupt member of the eurozone has closed its banks until Tuesday.

Talks between President Nicos Anastasiades and the troika of lenders in Nicosia proved inconclusive yesterday as Cyprus’s overtures to Russia for financing also failed to yield results.

According to Financial Times, Russian prime minister Dmitry Medvedev did not rule out possible support for Cyprus but said talks would continue with European Commission officials, including president José Manuel Barroso, in a pre-planned meeting today in Moscow.

In the most detailed comments yet from Moscow on the bailout plan voted down by the Cyprus parliament on Tuesday, Medvedev said the EU and Cyprus had acted “like an elephant in a China shop”.

The cabinet meeting of Cyprus under the President of the Republic, Nikos Anastasiadis will meet again today, as the process for the approval of several bills, were not completed yesterday.

Troika rejected the alternative plan of Cyprus, which provided for the finding of EUR 5.8 billion that would come from the haircut of deposits, from internal sources, media have suggested. The various solutions include the use of reserves from Cypriot insurance funds and the imposition of an emergency “assistance fee” to Cypriot taxpayers.

However, latest reports coming from the island earlier this morning suggest that an agreement is close, since the Cypriot government has agreed with the troika representatives on a viable Plan B.

More specifically, according to tovima.gr, Laiki Bank will close replaced by a new ‘good bank’ to save EUR 2 billion. Cash reserves of insurance funds of public sector employees will provide another EUR 2.8 billion, whilst the remaining EUR 1 billion could come from a small haircut of deposits, around 1-1.5%, that corresponds to interest gained in the last few years.

Samaras expressed the Greek government’s support to Cyprus, while his discussion with Anastasiades focused on possible solutions, after the rejection of Eurogroup’s plan.

Earlier Samaras met with coalition party leaders Evangelos Venizelos and Fotis Kouvelis to discuss developments in Cyprus and how they affect the Greek economy.

Exiting the Maximos Mansion, Finance Minister Yannis Stournaras told reporters that “Greece is shielded” and Cyprus “will not default”, Kathimerini writes.

“The eurozone made a historic mistake which needs to be fixed now”, PASOK leader Venizelos said after the meeting.

Democratic Left leader Kouvelis told reporters that European partners “must reconsider their decision”, stressing that Cyprus’s problems cannot be solved with measures of this kind.

The Cypriot parliament said “no” to Eurogroup plan of cutting the Cypriot deposit. 36 MPs voted against the bills and 19 abstained, while there was no vote in favor, according to protothema.gr.

The communist AKEL, the socialist EDEK, the Greens, the European Party and the centrist DIKO, which is in the co-governing coalition, voted against the measure. The ruling Democratic Rally abstained from voting, enet.gr informs.

“We live the criticality of developments and historical circumstances. The decisions we take today will not be forgotten quickly, but will write history. The country is under an unjust and unprovoked attack. We will not give anyone the right to turn us into a guinea pig,” Democratic Party chairman Marios Karoyian said.

“We are at a decisive turn in our history. Developments in Cyprus will seal the political developments in the EU. This time Cyprus becomes the guinea pig for the haircut in deposits. Behind the decision of the Eurogroup hide political expediencies. I propose to withdraw the request for assistance from troika,” AKEL secretary Andros Kyprianou said.

Protests were underway outside the parliament in Nicosia since the parliamentary debate started at 6pm. Crowds outside parliament broke into applause, chanting: “Cyprus belongs to its people.”

Meanwhile, Cypriot Finance Minister Michalis Sarris, arrived in Russia for talks with officials there. Cyprus will attempt to strike a deal with Moscow for the sale of troubled Popular Bank of Cyprus, known as Laiki, with Russians most likely seeking some form of compensation for such an investment, Kathimerini writes.

Anastasiades is also thought to be examining the option of making use of social security funds’ reserves, which amount to EUR 5 billion, and offering depositors with more than EUR 100,000 a voluntary haircut in return for natural gas-indexed bonds, the paper reports.

How to form a government

The centre left coalition under Pier Luigi Bersani has managed to acquire an absolute majority in the House of Representatives, but the 310 sits of the Senate are divided between the four parties in a way that nobody has an absolute majority. In the Italian political system a government has to have a majority in both Houses.

In any case the initiative is now in the hands of Bersani who needs a government partner with enough votes in the Senate, to be added to his own 121. This has to be either Silvio Berlusconi, whose centre right coalition got 117 Senate sits or Beppe Grillo’s “5 star movement” with its 54 senators. As for the outgoing Prime Minister, Mario Monti, his centre party got only 18 Senate sits, with a quite disappointing overall performance in this election. Probably it didn’t do any good to Professor’s political party the backing he got from Brussels. Berlin had the wisdom not to openly support him.

Low alarm in markets

It goes without saying that capital market fund managers have the most pressing and vested interests for a swift conclusion of negotiations over the formation of a government in Rome. It was encouraging however to see yesterday the bond market to regain confidence after some initial highs. Despite the large losses of 4.5% in the Milan stock exchange, the yield of 10 year benchmark Italian sovereign bond increased only by 31 basic units (0.31 percentage points), meaning that investors asked only for a small increase in the risk premium they demand, to continue holding such securities.

Understandably bond investors have all the reasons of the world to expect a swift solution in the Italian political stalemate, being it a grand coalition between Bersani and Berlusconi or a minor coalition between the centre left and Beppe Grillo. In either option the stakes will be very high. The first to know the news will have the prerogative in the market. Capital markets however kept their composure yesterday, but what if the new government comes out with a programme diverging widely from Monti’s austerity policies? In such a case the selloff of the Italian bonds could take large proportions. In reality markets are much more interested in the content of a possible government programme, rather than in the names undesigning it.

What if?

Returning to the introduction of this article the fact that the Italian debt has reached the region of the €2 trillion feels like a Damocles Sword above the entire Eurozone. If Italy starts looking incapable, of taking care of its own problems by itself, the Entire Eurozone will be again in peril. In such a case there will be no other solution than an intervention by the European Central Bank in the capital markets of Italy and Spain. The ECB can use its unlimited resources, in order to keep the lending interest rates for those two countries at sustainable levels. The central bank has already stated some months ago it could undertake such action. Why not now if developments reach a risky conjuncture? The volume of the Italian debt is so huge that in an emergency, there will be no other way available to refinance it, than with the freshly printed money of ECB’s.

In such an eventuality the Eurozone will face a long period of increased inflationary pressures. Such a prospect though apart from some negative effects on nominal idle wealth, will have positive repercussions on real growth, through the weakening of the euro parities. A cheaper euro however will help everybody to export more to third countries. Italy will be the first Eurozone economy to profit from such an eventuality.

If such a prospect materialises the entire atmosphere in the Eurozone will change and the euro will return to the low region of 1.25 with the dollar or maybe lower. This will be the best news for many including the Italian exporters and the tourism business. What else the Italian and all Eurozone exporters could pray for?

From the Europeansting.com [by permission]

The full announcement:

“The Eurogroup recalls that a full staff-level agreement has been reached between Greece and the Troika on updated programme conditionality and that, according to the Troika, Greece has implemented all agreed prior actions.

The Eurogroup in particular welcomes the updated assessment of the Troika that Greece has implemented in a satisfactory manner a wide ranging set of reforms, as well as the budget for 2013 and an ambitious medium term fiscal strategy 2013-16.

The Eurogroup noted with satisfaction that the updated programme conditionality includes the adoption by Greece of new instruments to enhance the implementation of the programme, notably by means of correction mechanisms to safeguard the achievement of both fiscal and privatisation targets, and by stronger budgeting and monitoring rules. Greece has also significantly strengthened the segregated account for debt servicing. Greece will transfer all privatizations revenues, the targeted primary surpluses as well as 30% of the excess primary surplus to this account, to meet debt service payment on a quarterly forward-looking basis. Greece will also increase transparency and provide full ex ante and ex post information to the EFSF/ESM on transactions on the segregated account.

The Eurogroup again commended the authorities for their demonstrated strong commitment to the adjustment programme and reiterated its appreciation for the efforts made by the Greek citizens.

The Eurogroup noted that the outlook for the sustainability of Greek government debt has worsened compared to March 2012 when the second programme was concluded, mainly on account of a deteriorated macro-economic situation and delays in programme implementation

The Eurogroup considered that the necessary revision in the fiscal targets and the implied postponement of a primary surplus target of 4.5% of GDP from 2014 to 2016 calls for a broader concept of debt sustainability encompassing lower debt levels in the medium term, smoothing of the current financing hump after 2020 and easing of its financing.

The Eurogroup was informed that Greece is considering certain debt reduction measures in the near future, which may involve public debt tender purchases of the various categories of sovereign obligations. If this is the route chosen, any tender or exchange prices are expected to be no higher than those at the close on Friday, 23 November 2012.

The Eurogroup considers that, in recapitalising Greek banks, liability management exercises should be conducted in respect of remaining subordinated debt holders so as to ensure a fair burden sharing.

Against this background and after having been reassured of the authorities’ resolve to carry the fiscal and structural reform momentum forward and with a positive outcome of the possible debt buy-back operation, the euro area Member States would be prepared to consider the following initiatives:

- A lowering by 100 bps of the interest rate charged to Greece on the loans provided in the context of the Greek Loan Facility. Member States under a full financial assistance programme are not required to participate in the lowering of the GLF interest rates for the period in which they receive themselves financial assistance.

- A lowering by 10 bps of the guarantee fee costs paid by Greece on the EFSF loans.

- An extension of the maturities of the bilateral and EFSF loans by 15 years and a deferral of interest payments of Greece on EFSF loans by 10 years. These measures will not affect the creditworthiness of EFSF, which is fully backed by the guarantees from Member States.

- A commitment by Member States to pass on to Greece’s segregated account, an amount equivalent to the income on the SMP portfolio accruing to their national central bank as from budget year 2013. Member States under a full financial assistance programme are not required to participate in this scheme for the period in which they receive themselves financial assistance.

The Eurogroup stresses, however, that the above-mentioned benefits of initiatives by euro area Member States would accrue to Greece in a phased manner and conditional upon a strong implementation by the country of the agreed reform measures in the programme period as well as in the post-programme surveillance period.

The Eurogroup is confident that, jointly, the above-mentioned initiatives by Greece and the other euro area Member States would bring Greece’s public debt back on a sustainable path throughout this and the next decade and will facilitate a gradual return to market financing. Euro area Member States will consider further measures and assistance, including inter alia lower co-financing in structural funds and/or further interest rate reduction of the Greek Loan Facility, if necessary, for achieving a further credible and sustainable reduction of Greek debt-to-GDP ratio, when Greece reaches an annual primary surplus, as envisaged in the current MoU, conditional on full implementation of all conditions contained in the programme, in order to ensure that by the end of the IMF programme in 2016, Greece can reach a debt-to-GDP ratio in that year of 175% and in 2020 of 124% of GDP, and in 2022 a debt-to-GDP ratio substantially lower than 110%.

As was stated by the Eurogroup on 21 February 2012, we are committed to providing adequate support to Greece during the life of the programme and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment programme.

The Eurogroup concludes that the necessary elements are now in place for Member States to launch the relevant national procedures required for the approval of the next EFSF disbursement, which amounts to EUR 43.7 bn. EUR 10.6 bn for budgetary financing and EUR 23.8 bn in EFSF bonds earmarked for bank recapitalisation will be paid out in December. The disbursement of the remaining amount will be made in three sub-tranches during the first quarter of 2013, linked to the implementation of the MoU milestones (including the implementation of the agreed tax reform by January) to be agreed by the Troika.

The Eurogroup expects to be in a position to formally decide on the disbursement by 13 December, subject to the completion of these national procedures and following a review of the outcome of a possible debt buy-back operation by Greece.”

“Greece will require additional financing, which may take the form either of official-sector involvement or of additional loans, hopefully on more favorable terms,” Catsambas said, according to WSJ.

According to the paper, Samaras has asked his Eurozone partners for a two-year extension to meet budget deficit reduction targets, something that would create an extra EUR 20 billion funding gap for the period. The government has explored funding this with increased issuance of shorter-term treasury bills, thus avoiding direct extra financing from its creditors, but Catsambas said it would be “totally unrealistic” to assume that Greece could fill the gap entirely on its own.

Catsambas insisted that it should be the euro zone and ECB that take the strain of filling the rest of the gap. “Extension of repayment of the IMF [part of] loans is impossible as all terms and conditions of IMF loans to all countries are based on rules that are not negotiable,” he said. The failure of Greece to implement its agreements, and the lack of a sustainable debt trajectory, make it impossible for the IMF, under its own charter, to lend any more.

Catsambas said that the previous coalition government under Lucas Papademos, who took over from George Papandreou in November last year, estimated that “only 22% of the commitments under the troika-supported program were implemented” in 2011. Catsambas noted that the public sector still needs to be shrunk as a

Finance Minister Yannis Stournaras yesterday denied the WSJ report. “The country ́s positions are formulated by the Prime Minister and the Finance Minister,” Stournaras told Reuters