Eurointelligence – 27Julho2011, enviado por Domenico Mario Nuti

 Eurointelligence Daily Briefing 


 Criticisms of a communication disaster

  • EU diplomats blame poor post-summit communication by EU leaders for the negative market reaction;
  • Examples are Mark Rutte false statement that the private sector participation was part of the €109bn package, and the confusion about the reduction in the net debt of Greece;
  • Christine Lagarde blamed the negative market reaction on the complexity of the agreement, and that much had yet to be worked out;
  • Deutsche Bank reduces its Italian exposure by 88% through the purchase of CDS;
  • Italy’s latest six-month bond auction came up with a yield of 2.269%, the highest since 2008;
  • Deutsche Bank also reduced its net exposure to Spain;
  • the latest Markit purchasing managers index points towards a sharply slowdown in the eurozone economy;
  • Christian Noyer spooked the markets with a comment that the ECB exercise “very strong vigilance”, which the Bank of France later corrected to “very high alertness”;
  • Wolfgang Münchau has a go at German economists who are pretending being surprised that a monetary union will lead to a fiscal union – something they themselves have claimed for decades;
  • Alan Beattie, meanwhile, says the eurozone’s model of political governance is not suited for the handling of debt crises.

Eurointelligence Comment


The ECB Stress Tests: Not the Real Thing

By: Satyajit Das


The stress test’s objectives were laudable: (1) to strengthen the financial system by forcing banks to hold adequate equity, and (2) to convince markets about the solvency of European banks. Unfortunately, the deep flaws of the stress test mean that they failed both objectives.



There is always a point towards the end of July when the eurozone news flow drops of sharply due to the summer holidays. We may have reached that point today. Even though the situation remains hopeless, it is no longer deemed to be serious.



As bond yields rise back to the pre-summit levels, the congratulatory mood among officials has given way to more recriminations for who is to blame for the poor communication. FT Deutschland echos the criticism of a diplomat who said that EU leaders created confusion after the summit by citing wildly different figures about the scale of the implied debt reduction. He gave as an example the statement by Mark Rutte, the Dutch PM, who suggested in his final press conference that the private sector component was part of the €109bn package. (There was also confusion about the extent to which the agreement would reduce the net debt of Greece.) There was also a lack of clarity as to how the IMF will participate in the programme. Christine Lagarde said the negative market reaction was due to the complexity of the agreement, and the fact that a lot of work has yet to be done to implement the decision. The newspaper noted that there is not even a scheduled meeting for the eurogroup meeting, which is supposed to implement the agreement.


Deutsche Bank reduces Italian exposure

The most interesting aspect about Deutsche Bank’s results yesterday was the announcement that the bank has reduced its net exposure to Italy by 88%. FT Deutschland writes on its front page that the fall of the net exposures to under €1bn was mostly due to the purchase of CDS as a hedge against falls in their Italian portfolio. This showed, according to the paper, that international investors remained concerned about the spread of the crisis to southern Europe.


Italy’s auction of six-month bonds came up with a yield a return of 2.269%, the highest since 2008, and clearly a sign of deteriorating market conditions for the country.

El Pais adds that Deutsche Bank also reduce its net exposure to Spain by 53%.


Eurozone economy slows down markedly

Frankfurter Allgemeine writes that the outlook for the eurozone economy has deteriorated significantly in the last few months. Citing the latest Markit purchasing managers index, the mood among purchasing managers has dropped sharply, with the balance only just above the growth line of 50. The problem is that Germany and France, which sustained the above average eurozone rates, recently have both weakened considerably. The paper, however, disputes Markit’s assessment that the German recovery was fragile, noting that various German indicators, including the Ifo index, show that the economy is still expanding strongly.


When Very Strong is less than Strong

We always thought that the ECB’s obsession with code words is a little silly, especially those with a one-to-one correspondence. And yesterday, we have seen that code words may actually confuse the markets when central bankers fail to memorise, or when they get lost in translation. Christian Noyer yesterday spooked the markets briefly when he said in an interview that the ECB was watching inflation with “very strong vigilance”, something that reminded markets of the code word “strong vigilance”, which Jean-Claude Trichet uses to pre-announce a rate rise at the next governing council meeting. FTD Deutschland, which did the interview, wrote yesterday that it conducted the interview in French. Noyer spoke about “très grande vigilance”, which even the ECB would translate as “very strong vigilance”. The Bank of France yesterday made clear that Mr Noyer meant “very high alertness”.


Wolfgang Münchau on the faked outrage by German economists

In his FT Deutschland column, Wolfgang Münchau says the protestations by German economists that the monetary union would now inexorably lead to a fiscal union reminded him of the police chief’s exhortations in Casablanca, who claimed to be “shocked, shocked” about illegal gambling. Twenty years, German economists, including every Bundesbank president at the time, always maintained the position that monetary unions would fail unless they developed into fiscal union. What is happening now is precisely what German economists always predicted would happen. They may not want a fiscal union (and by extension a monetary union), but they should not fake surprise that there is a linkage between the two.



Alan Beattie on why the European model of governance is not suited to a debt crisis

This is an interesting column by Alan Beattie in the Financial Times, comparing the European and US twin crises. In his comment, he makes the observations that the EU’s model of governance had served it well over the years, but the iterative consensus-driven approach is unsuitable to the management of currencies or debt crises. He said the issue had become so complicated that the most senior US officials only managed to keep with developments through the press. While Washington is better at solving debt and banking crises, there are similar governance problems as we can now see in the standoff about the debt crisis, which must be settled by August 2.



Spreads, Forex, and ZC Swaps

No let-up. Yesterday’s bond auctions in Italy and Spain came out with much increased yields.



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