* Money markets increasingly pricing in ECB depo rate cut
* Such a move may have adversely impact repo markets
* May also increase volatility in sovereign bond markets
By Marius Zaharia
LONDON, June 25 (Reuters) - Money markets are increasingly pricing in a near-term cut in the European Central Bank's deposit facility rate, but some players warn that such a move may do more harm than good by lowering banks' incentives to lend.
With the euro zone economy faring worse than expected, the three-year-old sovereign debt crisis intensifying day by day and waning hopes that politicians can get a definitive grip on events, markets are increasingly banking on support from the ECB.
Analysts say forward euro overnight Eonia rates are pricing in an over 50 percent chance that the ECB will cut its deposit facility rate from 25 basis points to zero later this year along with its 1 percent refinancing rate.
But while this would be intended to give a further push to banks to lend to each other and then to businesses to help the real economy grow, it may actually have the opposite effect. Analysts say the few banks that are willing to lend in unsecured lending markets may stop doing so as their return on such transactions may fall below the cost.
More importantly, it could create distortions in the most active sector of the money markets, repo transactions, in which investors raise cash backed by collateral, usually government debt.
The rate to borrow cash using top-rated general collateral (GC), such as a basket of German or French government debt, has recemtly traded 20 basis points below Eonia, the overnight rate for unsecured lending, because of the quality of the bonds on offer.
Eonia, in turn, has settled 10 bps above the deposit facility rate on average in recent months - on Friday it fixed at 0.325 percent. Once the deposit rate is cut to zero, Eonia is expected to fix at around 0.1 percent.
"That would mean that the GC rate will be negative, limiting the ability to get money using the bonds. It can create a distortion in the repo market," said Alessandro Giansanti, rate strategist at ING.
BOND MARKET IMPACT
Any repo market distortion could also lower volumes in sovereign bond markets, as investors who buy government debt to raise cash will no longer have a reason to purchase them.
"This could add to the negative momentum observed in sovereign bond markets, which is reinforced by increased volatility and already impaired liquidity," Commerzbank rate strategist Benjamin Schroeder said in a note.
"Within the context of the broader sovereign crisis, it would be worrying if the ECB risked endangering the still very fragile bond markets in return for questionable positive effects for interbank lending."
Not all analysts are worried that a cut in the deposit rate will have side effects on repo markets.
Max Leung, a rates strategist at Bank of America Merrill Lynch Global Research, said repo rates on a few German bonds - posted as collateral individually rather than as part of a basket - have already turned negative and volumes have not dropped.
"Negative rates is never a good thing because you penalise people for lending, but there are securities which are already trading at negative levels because of flight-to-quality flows," Leung said.
"As far as banks are concerned it still represents business. For the repo desks, they can still charge relatively wide bid/offers so we don't think volumes will necessarily fall because of that."
Greek finance minister Vassilis Rapanos resigns - BBC News
Greece's newly designated finance minister, Vassilis Rapanos, has resigned less than a week after being appointed to the job.
In a letter to new Greek Prime Minister Antonis Samaras, Mr Rapanos said he was stepping down due to ill health.
Mr Rapanos was admitted to hospital last week suffering from abdominal pain, nausea and dizziness.
Mr Samaras is himself recovering from eye surgery which has caused him to miss this week's EU summit.
Mr Rapanos, who is chairman of the National Bank of Greece, was named finance minister last week as part of Greece's new three-party coalition government.
However, he was rushed to hospital last Friday before he could be sworn in and has been in hospital ever since.
The Hygeia Hospital in Athens said on Monday that Mr Rapanos's condition was improving and he was expected to be discharged on Tuesday.
Greek media say Mr Rapanos has a history of poor health.
"The recent incident that led to my admission to a hospital shows that my health problem has not been fully overcome," Mr Rapanos said in his letter of resignation.
He said medical advice led him to determine that: "My health situation, for the time being, is not such that would allow me to fully and efficiently exercise my duties".
The BBC's Mark Lowen in Athens say there has been speculation that Mr Rapanos is unhappy with the make-up of the new cabinet, and other reasons may lie behind his decision to resign.
Several names have been touted as Mr Rapanos's replacement, including the former Prime Minister Lucas Papademos, he says.
The new coalition will be keen to fill the post swiftly, our correspondent adds.
Bailout pressureMr Samaras, meanwhile, underwent routine surgery on Saturday for a damaged retina and the operation was said to have been a success.
As well as missing the EU summit, Mr Samaras's health problems also led the "troika" of rescue lenders to postpone a visit to Athens.
Inspectors from the EU, European Central Bank and International Monetary Fund (IMF) had been due to review Greece's progress in meeting bailout conditions on Monday.
Debt-stricken Greece is under huge international pressure to fulfil the terms of its international bailout.
The new government in Athens is seeking to water down the tough requirements imposed on it by the EU and IMF.
Measures it wants to review include extending the deadline to reduce its budget deficit by at least two years, to 2016.
However, Germany is strongly opposing any major concessions.
Finance minister: France needs €10 billion to reduce deficit - Raw Story
France must find up to 10 billion euros to cut its public deficit to 4.5 percent of gross domestic product (GDP), Finance Minister Pierre Moscovici said on Monday.
Moscovici told iTele television that the new socialist government was looking for seven to 10 billion euros ($12.5 billion), and added: “We are somewhere in the middle I imagine, but I am waiting to see the official figures”.
The numbers given were lower than the government’s previous estimate of about 10 billion euros and came hours before a seminar attended by France’s 38 newly installed ministers to brainstorm the country’s budgetary challenges.
In 2011, France posted a public deficit, which includes state and social services spending such as the public health system, of 5.2 percent of GDP, and in March the former government cut its 2012 target to 4.4 percent.
Under EU rules, eurozone countries are supposed to keep deficits below 3.0 percent of GDP, and work towards a balance or even a surplus in times of economic growth.
Ministers were tight-lipped after the seminar with only a brief statement coming from Prime Minister Jean Marc Ayrault’s office reiterating the government’s commitment to balance France’s budget by the end of President Francois Hollande’s term in 2017.
Moscovici said that a European Union summit to take place on Thursday in Brussels had to see eurozone countries offer “structural solutions” to a crisis that is now in its third year.
He insisted that this meeting of EU leaders “is not a banal summit”.
Markets and other countries around the world “expect Europeans to finally come up with structural solutions, and that is what they are looking for”.
Moscovici said the summit should “finally provide the euro with a political spine, and banking regulation”.
As for France, the finance minister said his government was working for “a structural fiscal reform of income taxes and corporate taxes that would occur in the autumn.”
The country would also reduce spending meanwhile, “because we must absolutely show that our policies are balanced.
“There will be fair fiscal measures, and there will be savings, we will work on both sides,” Moscovici said.
He stressed that reduced government spending could not be assimilated to austerity.
“I reject any notion of austerity in this country,” the finance minister said.
FOREX-Euro slips as summit hope fades, yen jumps sharply - Reuters
* Investor pessimism rises ahead of EU summit
* Merkel worried EU focused on "easy" crisis solutions
* Spain remains in focus
NEW YORK, June 25 (Reuters) - The euro fell to its lowest in almost two weeks against the dollar on Monday and more losses were expected as investors bet a European summit will fail to find a solution to the region's debt crisis.
Investors parked money in perceived safe havens, driving up the dollar and pushing the yen almost 2 percent higher against the euro. Higher-yielding riskier currencies such as the Australian and New Zealand dollars tumbled.
Expectations for the two-day EU summit are quite low after a meeting of the euro zone's four biggest economies on Friday, at which Germany resisted pressure for common euro zone bonds or a more flexible use of Europe's rescue fund.
A German government spokesman said on Monday that Chancellor Angela Merkel was worried that just before the summit, people were expressing a wish for "supposedly easy solutions" such as shared liability.
"Again we are likely to get frustrated on the lack of a solution for the debt crisis," said Brad Bechtel, managing director at Faros Trading in Stamford, Connecticut.
"We are only likely to receive the telegraphed European 'blueprint' for the way forward, something that is long term in nature and several referendum and parliamentary wrangling sessions away from here."
The euro fell as low as $1.2469, the weakest since June 12, and was last down 0.6 percent at $1.2496. Support was seen near the June 12 low around $1.2441, using Reuters data, and strategists said a break below that level would open the door to a test of the June 1 two-year low of $1.2286.
Spain formally requested euro zone rescue loans for up to 100 billion euros ($125 billion) to recapitalize its debt-laden banks, saying the final amount of financial assistance would be set at a later stage.
Some market economists believe the rescue is merely a prelude to a full bailout for the Spanish state, which saw its annual borrowing costs soar to euro era record levels above 7 percent early last week before easing.
With Spain, the fourth largest euro zone economy in focus, investors are also looking to how Italy, the third largest euro zone economy, is faring. Italy will sell zero-coupon and inflation-linked bonds on Tuesday and medium- and longer-term bonds on Thursday..
The sharp rise in the financing costs of Spain and Italy has been accompanied by their shift towards shorter-dated issuance, potentially building up even bigger future refinancing hurdles. .
The last time Spain issued bonds maturing in more than 10 years was in July 2011, according to Reuters data. Italy has only done so twice in the same period.
GREECE
A German government spokesman said the EU probably will not take any decisions on Greece at this week's summit, dashing Athens' hopes it might ease the terms of its bailout.
Weak euro zone economic data and rising borrowing costs for peripheral countries will likely heap pressure on the European Central Bank to cut interest rates or expand liquidity operations, prospects likely to keep the euro subdued.
"You have economic growth in the States probably running at about a 2 percent annualized rate, and you've got growth in Europe a lot slower than that, so therefore in the relative growth scenario you would still favor the U.S. and that's probably attracting cross-border flows," said Ken Dickson, investment director of currencies at Standard Life Investment.
Against the yen, the dollar fell 1 percent at 79.58 yen . The euro lost 1.6 percent and last traded at 99.46 yen after earlier falling to a one week low.
Traders have piled back into the dollar since the Federal Reserve held off on aggressive quantitative easing last week and instead extended its "Operation Twist" program, under which it sells short-term bonds and buys longer-term securities to lower longer-term interest rates.
The Australian dollar fell 0.7 percent to $0.9992. The New Zealand dollar dipped 0.3 percent to $0.7865.
Finance Minister Schäuble: Euro Crisis Means EU Structures Must Change - Der Spiegel
SPIEGEL: Minister Schuble, the European Union is mired the worst crisis in its history with the euro threatening to break apart. What is at stake?
Schuble: Our prosperity. The world, with its globalized economy, is changing at a rapid pace. Those who want to keep up cannot go it alone. It only works in collaboration with other European countries and with a European currency. Otherwise we would fall far behind, and that would lead to a substantial loss of prosperity and societal security.
SPIEGEL: Would the EU survive the collapse of the monetary union?
Schuble: There is certainly the risk that, in the event of a collapse of the euro -- which, by the way, I don't believe is going to happen -- much of what we have achieved and become fond of would be called into question, from the common domestic market to freedom of travel in Europe. But a collapse of the EU would be absurd. The world is moving closer together, and we're talking about the possibility of each country in Europe going its own way? This cannot, must not and will not happen!
SPIEGEL: Was it a mistake to introduce the euro?
Schuble: No. The monetary union was the logical consequence of the advancing economic integration of Europe.
SPIEGEL: Nevertheless, the euro is a miscarriage. The necessary political union was absent.
Schuble: To call it a miscarriage is nonsense. But it's clear that we wanted a political union at the time, but it wasn't possible. Germany would have been prepared to relinquish powers to Brussels, because it was only through Europe that we received a new chance after World War II. But other countries had trouble with the concept, because of special traditions, for example, or because they had only recently regained their national autonomy after the fall of the Iron Curtain. As such, we faced a fundamental question: Do we introduce the euro without having the necessary political union, and do we assume that the euro will bring us closer together, or do we abandon the idea?
SPIEGEL: And in that situation you preferred to take the risk.
Schuble: If we had always said we would only take steps toward integration if they would immediately work 100 percent, we would never have advanced by so much as a meter. That's why we wanted to introduce the euro first and then quickly make the decisions needed for a political union. Luxembourg Prime Minister Jean-Claude Juncker was right when he said, at the time, that the euro would prove to be the father of future European developments.
SPIEGEL: In the meantime, however, the common currency has, above all, powers of destruction.
Schuble: Now you're exaggerating. Europe has always worked on the basis of two principles: What isn't possible at first will happen over time, and what doesn't work will be corrected over time. That's why perfect solutions take so long in Europe. And that's why we are now improving the architecture of the monetary union.
SPIEGEL: It almost sounds as if you had longed for the crisis so that you could finally correct the birth defects of the euro.
Schuble: Well, it isn't quite that bad, especially since I don't have a propensity for despair or even resignation. But the more people see what's at stake, the more they are willing to draw the right consequences.
SPIEGEL: What are the consequences that Europe now has to draw?
Schuble: We need more and not less Europe.
SPIEGEL: You are clearly an advocate of the bicycle theory: Those who don't move fall over.
Schuble: Yes, of course.
SPIEGEL: But you also seem to suggest that the design is unstable.
Schuble: Excuse me, but the desire for improvement is a basic condition of human existence. In "Faust," Goethe writes: "If the swift moment I entreat: Tarry a while! You are so fair! Then forge the shackles to my feet, Then I will gladly perish there!" That's how it is.
SPIEGEL: The call for more Europe has become almost as much a classic as "Faust."
Schuble: Perhaps, but that doesn't mean it's wrong. Unfortunately, Europe is complicated, and its structures are such that they inspire only limited confidence in citizens and the financial markets.
SPIEGEL: How do you intend to correct this deficit?
Schuble: So far, member states have almost always had the final say in Europe. This cannot continue. In key political areas, we have to transfer more powers to Brussels, so that each nation state cannot block decisions.
SPIEGEL: You want nothing less than a United States of Europe.
Schuble: Even though the term is used repeatedly, it doesn't make it any better. No, the Europe of the future will not be a federal state based on the model of the United States of America or the Federal Republic of Germany. It will have its own structure. It's an extremely exciting venture.
SPIEGEL: It sounds more like a new experiment, not unlike the introduction of the euro. And yet you want to transfer as much power as possible to Europe?
Greek finance minister quits over health - Financial Times
June 25, 2012 6:16 pm
MONEY MARKETS-Rate swaps show high central bank expectations - Reuters
NEW YORK, June 25 |
NEW YORK, June 25 (Reuters) - U.S. interest rate swaps have rallied sharply this month even as yields on risky European debt, including Spain's bonds, increased, a move that some fear may reflect overconfidence in the ability of central banks to stem contagion from Europe's debt woes.
Two-year interest swaps, which are seen as a proxy for bank credit risk, tightened to 22.50 basis points on Monday, and are down from 38 basis points at the beginning of the month.
The move since June 1 reflects a breakdown of the swaps' previously strong correlation to Spanish, Italian and other peripheral European debt spreads, which have been worsening.
The rally in the swaps may reflect high market confidence in central bank programs to ease pressures on the region's banks, said Ralph Axel, an interest rate strategist at Bank of America in New York.
"The market more and more believes that central banks will do whatever is necessary, and not just that they will act but that they can effectively prevent any kind of funding or liquidity problems," Axel said.
"As soon as that confidence leaves, it could be a major swap widening event, though I don't know if that will happen," he added.
Analysts at Barclays Capital noted that the correlation between Spain's sovereign debt and other assets, including world stock markets, has also broken down of late, calling the effect "puzzling."
"We very much doubt that it will persist if market pressures on Spain continue to mount in the weeks and months ahead," Michael Gavin, head of global macro and emerging market strategy said in a report on Monday.
Spain formally requested European aid for its indebted banks on Monday, but the lack of details rekindled investor doubts over the financial sector, hours before Moody's was expected to cut the ratings of all Spanish lenders.
CONFIDENCE COULD WORSEN
Bank of America's Axel recommends entering into trades that would benefit from two-year swap spreads widening from around 20 basis points, noting these levels are near their tight levels historically and on the expectation they could widen on a renewed crisis of confidence.
"There could be a combination of things like fears that bank losses will be uncontrollable, combined with political arguing or separation, a feeling that central banks have lost control of the situation," Axel said.
Central banks have eased funding concerns by offering cheap loan and swaps programs to banks, as well as various bond purchase programs, and as economic conditions worsen globally there are high expectations of further assistance.
But many see the measures as stop gap, and say that more definitive solutions are needed from political leaders in the region.
The Bank for International Settlements, a global forum for central banks, said on Sunday that leaders in the euro zone should create a banking union and warned that central banks are limited in their ability to contain the crisis.
"Central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed," the BIS said, adding that if the root causes of financial and economic weakness are not addressed, central banks will come under pressure to do more than they can actually deliver.
German Chancellor Angela Merkel said on Monday that shared debt liability within the euro zone was "economically wrong" and "counterproductive," ahead of a highly anticipated two-date summit in Brussels starting on Thursday.
Greek finance minister resigns in blow to govt - Reuters UK
ATHENS |
ATHENS (Reuters) - Greece's new finance minister resigned on Monday due to ill health, throwing the government's drive to soften the terms of an international bailout into confusion less than a week after it took office.
Vassilis Rapanos, 64, chairman of the National Bank of Greece, was rushed to hospital on Friday before he could be sworn in, complaining of abdominal pain, nausea and dizziness.
The mild-mannered banker, who was imprisoned by a military junta in the 1970s, has a history of ill-health.
The office of Prime Minister Antonis Samaras, who only took office last Wednesday following a June 17 election, said Rapanos's resignation on health grounds had been accepted.
Rapanos said in his resignation letter: "Following discussions with my physicians, I have concluded that my health would not at the moment allow me to carry out my duties fully".
Samaras has only just emerged from hospital himself after undergoing eye surgery to repair a damaged retina. Both he and Rapanos had already said they would not be able to attend the June 28-29 European summit.
It was a worryingly chaotic start for the new government, formed after the second election in a month and facing huge domestic opposition to a harsh international bailout and steadfast European opposition to any watering down of its terms.
Only hours before Rapanos's resignation, a hospital bulletin said he would be discharged on Tuesday. He had undergone a gastroscopy and colonoscopy, an official at the Hygeia Hospital told Reuters on condition of anonymity. The tests "showed everything is completely normal", it said.
According to a source from one of the three parties in the new coalition government, Rapanos had been under heavy pressure from his family to turn down a job in which he would have been charged with negotiating a softening of the bailout terms.
Earlier on Monday the three party leaders had announced a trans-Atlantic roadshow to try to persuade sceptical lenders to give them more time to repay the country's massive debt.
TROIKA VISIT POSTPONED
The medical problems of Samaras and Rapanos had also forced a postponement of the first meeting between the new government and Greece's "troika" of international lenders, originally slated for Monday. A new date has not been set.
Samaras's government, an unlikely alliance of right and left that emerged from the June 17 election, has promised angry Greeks it will soften the punishing terms of a bailout saving them from bankruptcy in exchange for deep economic pain. But euro zone paymaster Germany has rejected major concessions.
Berlin signalled on Monday that Europe would wait for the troika's report on Greece before taking any decisions on how to make adjustments to the bailout package to compensate for weeks of political paralysis and a deeper than expected recession.
Samaras, 61, emerged from hospital on Monday with a bandage over one eye. He was under orders not to fly or make the long road trip to Brussels, doctors said.
Speaking to Mega TV earlier, government spokesman Simos Kedikoglou said Rapanos told Samaras on Friday, after being offered the job, that he had a "chronic situation" that he had learned to live with and would be able to do the job.
Kedikoglou later said the government was not expected to name a replacement for Rapanos on Monday. A senior official from one of the coalition parties said a new finance minister was likely to be announced on Tuesday.
The government said Samaras and the leaders of his two coalition allies - the Socialist PASOK and smaller Democratic Left - would take their case for renegotiating the bailout conditions to Europe and the United States as soon as the prime minister was well enough.
GREEK TACTICS
At the two-day EU summit starting on Thursday, Greece will be represented by Foreign Minister Dimitris Avramopoulos and outgoing Finance Minister George Zanias in a delegation headed by President Karolos Papoulias.
Avramopoulos and Zanias met on Monday to discuss tactics, working from a government programme that calls for tax cuts, extra help for the poor and unemployed, a freeze on public sector lay-offs and two more years to bring Greece's deficit under control.
Much of this programme, announced by the coalition over the weekend, would unravel basic elements of a bailout agreement reached with lenders as recently as March.
"We have facts and data to show the medicine is not working," a government official, who declined to be named, said after the Avramopoulos-Zanias meeting. "The recession is very deep and unemployment (at almost 23 percent) is very high."
He warned of "long and tough" negotiations. "Our primary aim will be to reinvigorate the economy and provide relief to the sectors of society that are hurting the most."
The coalition of Samaras's conservative New Democracy, PASOK and the small Democratic Left party faces an emboldened opposition committed to tearing up the terms of the bailout if it ever gets into power.
Critics and much of the population argue that the terms are only driving Greece ever deeper into recession and fraying the edges of society. But Germany is unsympathetic, frustrated by the slow pace of reform in Greece.
(Additional reporting by Greg Roumeliotis, Lefteris Papadimas, George Georgiopoulos, Deepa Babington and Tatiana Fragou; writing by Barry Moody; editing by Philippa Fletcher)
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