German Lawmakers Approve Leverage; Greece Demands to 50% Debt Cut

Bikram Pandey
26 Oct, 2011
New York City

European markets closed fractionally higher ahead of the details of the bank rescue plans as leaders struggle to resolve Greek bond bailout conditions and leverage rescue fund. Germany lawmakers approved the leverage of the rescue fund and Italian prime minster to offer vague promises of reforms.

[R]5:00 PM Frankfurt – European markets closed fractionally higher ahead of the details of the bank rescue plans as leaders struggle to resolve Greek bond bailout conditions and leverage rescue fund. Germany lawmakers approved the leverage of the rescue fund and Italian prime minster to offer vague promises of reforms.[/R]

European indexes traded higher in anticipation of final details on the Greek bailout plan.

Greek finance minister has demanded higher cut in the debt that originally agreed in July. The latest discussion between Greek finance minister Evangelos Venizelos and banks and insurers suggest that lenders will ask to take 50% cut in the loans.

To make the plan palatable to the bankers, Greece will pay €15 in cash and exchange €35 of 30-year bond that will yield 6% for every €100 of debt held.

The plan details were first published in the Greek newspaper Kathimerini also noted that the total debt of Greece will be cut by 50% to €103 billion from €206 billion.

Greece will also offer €30 billion assistance to local banks that hold between €45 billion and €50 billion. Greek companies, banks and investors hold in all €80 billion of Greek bonds.

In Paris, the CAC-40 Index added 12.99 or 0.4% to 3,187.28 and in Frankfurt the DAX Index edged higher 23.59 or 0.4% to 6,070.34.

The indexes in Stockholm, Madrid and Milan edged higher but in Zurich declined a fraction.

German Bundestag lower house approved the motion to leverage the rescue fund EFSF. The approval gives the mandate to Chancellor Angela Merkel to negotiate ways to leverage the rescue fund at a meeting in Brussels later today.

Lawmakers approved the vote with 503 in favour, 89 against and 4 abstaining.

The approval vote also strengthened the position of Merkel in demanding stricter and specific plan of cutting debt and improving growth outlook from Italy.

France and Germany and other European leaders demanded a letter from Italian Prime Minister Sivio Berlusconi to guarantee certain reforms and action plan in writing before the European Central Bank can resume its bond buying program.

Berlusconi in a weak alliance with Northern League is not in a position to agree to pension reforms demanded by the European leaders and is expected to make vague promises in a 16-page “letter of intent” to be presented to the ministers later today.

According to the sources in Rome, northern League may leave the governing coalition as early as December.

Bond yields at the Italian auction rose but the treasury managed to sell €10.5 billion of bonds with the bid-to-cover ratio was 1.65.

Italy sold €8.5 billion bonds of six month maturity at 3.54%, highest in three years and sold €2 billion of zero coupon bonds that mature in 2 years.

The yield on six month bonds sold by Spain yielded 3.3% in yesterday’s auction.

Italy is scheduled to sell as much as €8.5 billion of 3- and 10-year bonds on Friday.

Gainers & Losers

Deutsche Bank AG declined 39 cents to €28.17, BNP Paribas SA fell 74 cents to €30.06 and Societe Generale SA edged lower 38 cents to €18.62.

Intesa Sao Paolo SpA closed unchanged at €1.27 and UniCredit SpA increased a fraction to 87 cents.