Eurointelligence Daily Briefing, 16 de Agosto de 2011. Obrigado ao Domenico Mario Nuti

 O Domenico Mario Nuti fez hoje 74 anos. Auguri di buon compleanno, Domenico.


Um grande abraço de todos os argonautas.





“When the time is right”


  • The debate on Eurobonds in Germany has reached fever pitch as the government discusses the issue internally;
  • Angela Merkel remains officially opposed: the official line is now that Eurobonds are not acceptable until the time is right;
  • one newspaper report says Merkel first wants to calm down the markets and prepare the political ground before taking the plunge to accept Eurobonds;
  • Merkel and Sarkozy are likely to have an informal discussion on the subject, but Sarkozy decided not to put any pressure on Merkel at this time;
  • one point of discussion will be regular eurozone summits, and the elevation of Herman van Rompuy as the eurozone’s official spokesman;
  • in Germany, a leading business organisation, the association for external trade, has come out in favour of Eurobonds, while the chambers of industry and commerce remain hostile;
  • a study by IWW suggests that the costs of Eurobonds to Germany may be smaller than widely estimated;
  • Thomas Mayer and Daniel Gros have put forward a scheme under which the EFSF would be granted the status of a bank, with access to the ECB;
  • the ECB spent €22bn last week to support the Italian and Spanish bond markets;
  • Frankfurter Allgemeine leads with a comment by Holger Stelzner on the decline of the ECB to an EBB, a European Bad Bank;
  • the French growth forecast is likely to be revised downwards;
  • Philippe LeCoeur writes that France was now in danger of missing its deficit target;
  • Christine Lagarde warns that consolidation should not occur at the expense of economic growth;
  • Raghuram Rajan, meanwhile, argues that not even unanticipated inflation will help the world out of its debt problem.


The debate on Eurobonds has reached fever pitch in Germany. Sueddeutsche Zeitung writes that the German government was now actively discussing Eurobonds internally. While Angela Merkel was still officially opposed, senior government officials and ministers have been debating the issue for some time, and believe that Eurobonds would indeed end the crisis.


In order to bridge the gap between what is happening internally and externally, the German government seems to have borrowed a line from Margaret Thatcher in the 1980s, which her government deployed ahead of the entry into the European exchange-rate mechanism. One would join “when the time is right” (or ripe). Peter Altmeier, a leading CDU deputy, yesterday said one could never rule anything out in the long term, but politics was concerned with the immediate future, and clearly Eurobonds were not appropriate “at this time”.


FT Deutschland writes in an article that Merkel has decided in favour of a strategy first to calm down the market and to prepare the political grounds, and then, in a second step, to soften her opposition against the Eurobonds. The article says Merkel will demand a much stricter fiscal regime as a quid pro quo.


The issue will almost certainly be discussed at today’s bilateral summit between Merkel and Sarkozy in Paris, but it will not be a top agenda item, according to Frankfurter Allgemeine. Sarkozy does not want to put pressure on Merkel at this given time, given the delicacy of the political debate in Germany. The article said Wolfgang Schäuble had also qualified his opposition to eurobonds, which he said would not be acceptable for „as long as member states run their independent economic policies”. The article says that the first business organisation, the association for external trade, was in favour of Eurobonds, while the chambers of industry and commerce reiterated their opposition.


Reuters writes that today’s summit might discuss the setup of regular eurozone summits, with Hermann van Rompuy emerging as the leading eurozone spokesman.


FT Deutschland writes the costs of launching Eurobonds might be smaller than widely believed. It quotes a study by the Institute for International Economics at Kiel, according to which Eurobonds would come at a relatively moderate price. One bank analyst is quoted as predicting that Germany’s refinancing cost might even fall in the long run (something we believe as well).


Thomas Mayer is quoted as saying that the interest rate could be below the average rate of the individual member states. Mayer and Daniel Gros have made an alternative proposal, according to which the EFSF should be give bank status, which would allow it to borrow from the ECB. The idea is to overcome the €440bn lending ceiling constraint in an emergency.


ECB spends €22bn to support Italian and Spanish bond market

The ECB yesterday revealed in its latest weekly financial statement that it bought €22bn in presumably Italian and Spanish bonds last week, bringing the total of the securities market programme to €96bn. The numbers show the sheer scale of the interventions involved. In less than a week, the ECB spent more than quarter of the entire programme just to support the two countries. Italian and Spanish spreads have come down to around 2.7%, which shows that the ECB’s operations have been very effective. The question, however, is whether they are sustainable.



Frankfurter Allgemeine’s website this morning leads with a comment by Holger Stelzner, its economics editor and probably the most influential conservative economic commentator in Germany, with the headline “The decline of the European Central Bank”. He writes the ECB has turned into a political agency, and it has turned into EBB – a European Bad Bank. He calculates that the ECB will amass about €300bn of government securities by the end of September. He writes the minute the financial market has forced Italy to come up with tough reforms, the ECB comes to the rescue and alleviates the pressure.


French growth forecast likely to be revised downwards

The growth figures for France are not good:  Zero growth in the second quarter 2012, with a fall in private consumption of -0.7%, the strongest decline in the last 15 years. France would need to grow by at least 0.7% in the next two quarters to achieve its 2% growth target for 2011,writes Les Echos, which seems unlikely given the growth forecasts of INSEE (0.5% in Q3 and Q4) or Banque de France (0.2% in Q3). This will almost certainly also affect the growth forecasts for 2012, currently tabled at 2.25%. It is likely that the growth figures have to be revised downwards, concedes Sarkozy’s advisers.


Deficit implications of growth revision

Less growth, less tax revenues (0.1pp less growth implies about €1bn less tax income), so in the end the French government risks missing its deficit reduction plan, writes Philippe LeCoeur in his blog for Le Monde. The warnings of international institutions started already in Mai, but the government only got active now, with an emergency package to be presented on August 24.


Lagarde woes for short term growth policies

Just in time, IMF managing director Christine Lagarde warns in an article for the FT that consolidation efforts should not be at the detriment of growth. “What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs” Lagarde writes.  While high debt countries have little leeway to act, in others (including France) “there is scope for a slower pace of consolidation combined with policies to support growth.


Why we can’t inflate our way out of debt

Raghuram Rajan argues in the FT that inflation will not be a solution to this debt crisis. It will be hard to generate it in any case. Anticipated inflation will not help reduce debt for countries with large amounts of variable rate debt because markets would demand offsetting higher interest rates to roll over existing debt. For the US, it would take a very high degree of unanticipated inflation. Much of its obligations, in terms of health care and pensions cannot be inflated away. But high surprise inflation would have very negative distributional consequences. He concludes that the solution to this crisis is not a macroeconomic bang, but microeconomic reforms.


Spreads, Forex, and ZC Swaps

Some stability has returned, thanks to ECB bond purchases. The euro is rising again. Who is the mystery buyer everybody talks about? Inflation expectations are now in danger of overshooting in the other direction.



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