NEWS,11.10.2012

Spain comfortable with waiting game on aid

Spain is comfortable putting off an international aid request for weeks or even months as it waits out German political obstacles, analysts and sources say.In the meantime, Spanish Prime Minister Mariano Rajoy is focusing on measures such as intensifying labour market reforms, as well as pushing for a European banking union that would help rebuild confidence in Spain's tarnished banking sector.Spain's borrowing costs spiked in July, the yield on the benchmark 10-year bond jumped over an unsustainable 7%, but tumbled after ECB head Mario Draghi unveiled a bond-buying scheme to lower Spanish borrowing costs.Spain must first sign up for a European rescue plan to trigger the bond buying. Given its debt position, the Spanish government still sees that step as inevitable but pressure has eased as investors are less willing to bet against Spain with the ECB waiting in the wings.Germany has sent Spain strong signals that it should hold off because German Chancellor Angela Merkel is wary of presenting a fresh aid request to her parliament, euro zone sources say.Sources familiar with Rajoy's thinking say he also wants the ECB to indicate exactly what it will achieve with the bond-buying. "We will end up there, with ECB action, but the ECB is still designing the instrument in more accurate terms," said a source close to the government. "The markets understand that we have the fire extinguisher. We'll see how it evolves in the coming weeks."Turmoil over Greece, a fresh spike in Spanish yields or a credit rating downgrade to junk status for Spanish government bonds could accelerate the process, but for now Madrid is comfortable taking it slow, the source said.Spanish officials see more risks to moving ahead quickly without assured German backing, than in delaying a request.Meanwhile, they think things are moving in the right direction. For example, criticism of Draghi's plan has died down after strident objections from European Central Bank Governing Council Member Jens Weidmann, who heads the German Bundesbank."We think that the current period of vacillation might last for several months if events don't intervene," Alex White, an economist with JP Morgan in London, wrote in a research note.White said he saw little on the horizon to change Germany's desire to avoid a Bundestag vote on Spain in the near-term.Then there is Rajoy's personality to consider."Rajoy has infinite patience to put up with tension where others would break down," said a senior banker in Spain.Although Rajoy has said he is studying conditions for seeking European aid, there is no mystery over what the European Commission would demand of Spain in terms of structural reforms and spending cuts.Euro zone sources have said conditions are likely to be largely in line with measures the country has already taken, since Spain would not be applying for a full rescue programme that would cover all of its financing needs.The International Monetary Fund has sent a strong message to European policymakers to focus on growth even as they try to correct deficits, a line Spain applauds.With the economy in a deep recession and unemployment close to 25 percent, Spanish officials point out that ECB intervention might bring liquidity, but won't revive economic growth."With or without liquidity we have a growth problem globally, that we must start discussing," said the source close to the government.Banking reform Rajoy has concentrated on moving forward with banking union - under which the ECB would supervise European banks and the region would set up a deposit guarantee fund - which he sees as key to improving Spanish banks' access to liquidity.After meeting French President Francois Hollande on Wednesday the two leaders called for rapid progress toward banking union at a European leaders' summit next week. However, Germany and others do not expect agreement even on cross-border supervision for a year or more.Originally, Spain was pushing for the banking union because it would have allowed the ESM rescue fund to directly recapitalise Spanish banks, keeping the cost of a financial sector rescue off the country's public accounts.However, Spain is less concerned about that impact now, since it estimates it will use only 40 billion euros of the 100 billion euros of bank rescue funds lined up, equivalent to only 4 points of gross domestic product.Treasury Minister Cristobal Montoro calculated the deficit would swell to 7.4% of GDP this year when taking the bank rescue into account, but he said the European Commission would not consider that as non-compliance with targets, since it is a one-off.But banking union is still paramount for Spain since it would foster some confidence in its financial sector, which was crippled by a decade-long building boom that collapsed four years ago leaving the banks with 184 billion euros of bad debt.Rajoy has announced 65 billion euros in budget savings by the end of 2014 to try to bring Spain's deficit down drastically, in line with European Union targets.But rising unemployment, falling tax revenue and the recession are undermining his efforts.The Spanish government is acutely aware that next door, Portugal's severe spending cuts have failed to revive the economy.In Madrid, the source close to the government said under European rules if the government misses is deficit target because of recession, the European Commission would not apply sanctions for a missed deficit.

S&P downgrades Spain two notches

Standard & Poor's cut Spain's sovereign debt rating on Wednesday by two notches to just above junk level, citing the deepening recession and strains from the country's troubled banks.S&P cut the rating to BBB- from BBB+, just one level above "speculative" or "junk" grade debt, which could have sent Madrid's borrowing costs skyrocketing to untenable levels."The downgrade reflects our view of mounting risks to Spain's public finances, due to rising economic and political pressures," S&P said."The deepening economic recession is limiting the Spanish government's policy options," it said, adding that rising joblessness and tighter spending will likely intensify social conflict and tensions between the country's regions and Madrid.Moreover, S&P expressed doubts that all of the eurozone governments will give their backing to the bloc's effort to recapitalize Spain's banks, leaving more of the burden at least on the Spanish government and forcing its debt burden to balloon."Against the backdrop of a deepening economic recession, we believe that the government's resolve will be repeatedly tested by domestic constituencies that are being adversely affected by its policies," S&P said."Accordingly, we think the government's room to maneuver to contain the crisis has diminished."The ratings agency also attached a "negative outlook" to the rating, a warning of a possible further downgrade over the medium term.Such a downgrade would come, S&P said, if political support for the government's reform agenda weakens, if eurozone support fails to prevent Spain's borrowing costs from jumping above sustainable levels, or if debt tops100 percent of economic output or debt payments surpass 10% of general government revenues.

Greece's biggest company flees

Greece's biggest company, Coca Cola Hellenic, is leaving the country, the drinks bottler announced today. The immediate material impact on Greece is limited - its Greek plants stay open and CCH said the small portion of it activity that the world's second-ranked Coke bottler has in Greece will be unaffected. But analysts quickly saw it as bad news for a nation struggling to compete inside the euro zone.CCH, which has said it fears the Greek crisis could disrupt its multinational business, said in a bourse filing in Athens that shareholders, most of whom are abroad, will exchange their stock for shares in Coca Cola HBC AG, based in Switzerland and effectively shorn of the Greek tag "Hellenic".That stock will be primarily quoted on London's LSE."A primary listing on Europe's biggest and most liquid stock exchange reflects better the international character of Coca Cola Hellenic's business activities and shareholder base," the company said in its regulatory statement.The firm, in which The Coca-Cola of the United States has a 23% stake, bottles Coke and other produce in 28 countries from Russia to Nigeria. About 95% of its shareholders and business activity are outside Greece."This transaction makes clear business sense," chief executive Dimitris Lois told analysts in a conference call. An overwhelming majority of shareholders have already accepted moving a company which has long complained about Greek taxes.Analyst Manos Hatzidakis of Beta Securities in Athens said that the move made sense for the firm, which follows Greek dairy group FAGE this month in seeking a low-tax, low-volatility haven for its corporate base - in FAGE's case Luxembourg."The Greek bourse is losing a very good company and the London Stock Exchange is gaining a very important group," said Hatzidakis. "It's very bad news for the Greek economy and bourse."For brokers on the stock exchange, losing a stock that made up 8% of daily turnover this year will be unwelcome - especially since total volumes are down by half since last year.For the Greek treasury, the loss of tax revenue is unclear. Though CCH officials did not detail tax savings from moving the registered office to Switzerland, it has complained of high - and increasingly unpredictable - taxation in crisis-hit Athens.But the move may further discourage investment in Greece.Trade unionists saw the corporate exodus as immoral and one, Stathis Anestis, spokesman for the biggest labour group GSEE, suggested a boycott of Coke: "This is unacceptable," he said."CCH and FAGE are speculating at the most crucial moment for the Greek economy and the Greek people. Consumers should use their power to punish these companies."Country risk One analyst said CCH, which rose to the top of corporate rankings as the values of Greek banks collapsed, was out to rid its share price of such risks associated with Greece; the country is mired in recession and facing mass discontent as its leaders slash budgets to meet international creditors' terms for loans intended to keep Athens inside Europe's single currency."This is a healthy company that does not want to suffer from Greece's high country risk," said the analyst, who spoke on condition of anonymity.Foreign investors have been steadily reducing their investment in the Athens Stock Exchange since the country was engulfed by the sovereign debt crisis in 2009. Greece's future in the 17-nation euro zone still remains in doubt.Aided by the fact that it is doing most of its business outside Greece, CCH consistently outperformed the general Athens stock market index, which has slumped to 20-year lows.CCH has become the country's biggest firm by market value with a capitalisation of around 6 billion euros, representing about a fifth of the Athens bourse's total.The company, which last year made net profit of 330 million euros on sales of 6.85 billion, has complained of taxes imposed under Greek government austerity measures.A US filing shows it paid about 20 million euros in both 2009 and 2010 for one-off "social responsibility" levies in Greece.Profits at operating units in other countries are generally taxed locally. The Greek parent company reported 32 million euros in Greek taxes in 2010 and none last year. New withholding tax on dividends in Greece might have affected CCH in future.In its US filing for 2011, the company said: "Greece, which accounted for approximately 6% of our unit case sales volume and approximately 8% of our net sales revenue in 2011, is currently facing a severe economic crisis resulting from significant government fiscal deficits and high levels of government borrowing.""The ... Greek government debt crisis may have impacts on our liquidity that currently cannot be predicted."CCH said it would delist from the Athens Stock Exchange and then seek to re-enter that bourse with a secondary listing.Coca Cola Hellenic shares closed down 4.9% at 15.66 euros in Athens. Analysts explained the drop by the low cash price of 13.58 euros the company is offering to those shareholders who refuse the offer of new Swiss shares.