Stress to the interbanking-market returns
We are talking mostly about a European sovereign debt crisis, but in recent weeks the old money markets crisis has returned to the eurozone, as the interbank-market has become subject to renewed stress. Investors are once again concerned about the stability of the banking system, and a pushing up liquidity margins back to crisis level. One of the many crisis indicators has been the Libor-OIS spread, a measure of bank vulnerability perceptions. It is the gap between the Libor money market rate and the overnight swap rate. Unlike the Libor, the latter is considered safe as the transacting counterparties only agree to swap the floating for the fixed rate of interest.
Here is the term structure for eurozone Libor – OIS this morning. It suggests that markets are deeply sceptical of the liquidity positions of banks as time progresses. 1w: +13.250 1m: +40.013 2m: +46.913 3m: +60.213 6m: +88.750 12m: +126.675 Source Reuters (Just as a comparison, the US Libor-Ois spread was +38.111 for 6m and +69.017 for 12m this morning.) Bloomberg writes the European Libor-Ois spread had reached a two and a half year high, and that the cost of credit protection has doubled, as investors once again mistrust the soundness of the banking system. The stress in the interbank-system has returned, and as a result the financial crisis has a hit a new dangerous phase. The eurozone now has a dual crisis: a sovereign bond crisis and an interbank crisis.
The domestic pressures on Merkel
The Bundesbank yesterday interfered in the Eurobond debate with its monthly report, which said that the tendency to take on new debts would accelerate under such a regime. This would weaken the institutional setting of the monetary union, and put the monetary policy under continuous pressure to remain laxer than it would otherwise be. The Bundesbank proposes an automatic investor bail-in, under which the maturity of sovereign bonds is renewed by a fixed 3 years if the issuing country applies for help under the European Stability Mechanism. The Bundesbank is sceptical about voluntary participation in the case of Greece, given that a large part of Greek debt had already been socialised, according to Frankfurter Allgemeine’s story.
Over the weekend FDP leader Philipp Rösler threatened to quit the coalition should Merkel ever accept eurobonds. While she and Wolfgang Schäuble seemed to rule out eurobonds, she left a backdoor open during her TV interview when she said that in the future it may be possible to change the arrangements, but not now.
Reuters reports that Merkel is due to discuss Eurobonds with CDU parliamentarians this evening, after returning from a trip to the Balkans. Wolfgang Bosbach, a well-known conservative CDU MP, announced that he would vote against the EFSF.
FT Deutschland has a comment criticising Rösler’s threat to end the coalition if Merkel were to accept Eurobonds. The paper says the FDP was clearing positioning itself as the saviour of low German interest rates, but in doing so the FDP deprived Merkel of all flexibility in future anti-crisis policy. He may find that the alternative of Eurobond vs. Coalition might be asked sooner than he imagines.
Moody’s warns eurozone on collateral deals
Moody’s warned yesterday that member states should not seek separate collateral agreements with Greece, or risk a serious delay of the programme. The agency also said it expected other euro area members to block the agreement with Finland, according to Reuters. Moody’s said: “The deep fissures among the ostensibly united euro area nations evidenced by such demands, even in the context of new German and French proposals intended to strengthen European institutions, create additional concerns over the conditional and evolving nature of the current financial support mechanism.”
The situation could come to a head next month, when Greece needs to roll over €4bn. Evangelos Venizelos, the Greek finance minister, yesterday cut his growth forecast for the current year, with a new range of -4.5% to -5.3%.
ECB bought €14.3bn in government bonds last week
The ECB’s latest financial statement shows bond purchases of € 14.3bn last week, after €22 billion previous, in support of European bond markets. Presumably, most of this was spent to support the Italian and Spanish markets. The total size of the securities market programme has now gone beyond €100bn for the first time. It now stands at €110.5bn.
OECD data confirms significant growth slowdown in Q2 Latest OECD data showed that economic growth for the OECD slowed down to 0.2% qoq in Q2 compared to 0.3% qoq in Q1. It is the fourth quarter of slowdown. Most pronounced is the slowdown in the eurozone, Les Echos reports, with 0.2% qoq growth in the second quarter after 0.8% qoq growth in Q1. More detailed figures see OECD tables.
Portugal’s budget challenges: Health and the regions
Portugal’s detailed budget figures show that health expenditures and the regions will give some headaches towards meeting the deficit goal, Jornal de Negocios reports. By end of July the health budget show a deficit with €153m, a 15% increase over the same period last year. The other problem is the fiscal performance of the autonomous regions. Instead of a balanced budget, the regions recorded a deficit of €40m in the first half of 2011. In aggregate terms, the joint deficit of the central government and social security was €5.4bn, about 25% less than the 2010 value.
Prosecutors seek dismissal against Dominique Strauss-Kahn case
It is now virtual certain that the criminal case against Dominique Strauss-Kahn will be thrown out, after the office of the New York prosecutor decided to recommend a dismissal of the case. The prosecutors said that the accuser has “not been truthful on matters great and small”. In particular, the prosecutor said the witness had been telling falsehoods about herself and about the incidents at all meetings they had with her. The civil case, however, is not affected by these latest events. But Mr Strauss-Kahn is will soon get his passport back, and be able to travel to France. See Le Monde for more details.
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