Finnish collateral deal off the table
The big news this morning, as reported by Frankfurter Allgemeine and others, is that the Finnish collateral deal is definitely off the table, which throws the whole package into doubt, and raises the possibility that Finland might withdraw from the agreement, unless an alternative solution is found. The paper cites sources in the German finance ministry, who said that while the deal was off the table, the problem was not. One of the problems, as stated by Handelsblatt, is that private sector might be able to sue the Greek government if it granted such preferential treatment to one of its creditors. The collateral deal might thus constitute a default. The FT writes this morning that a meeting of the Economic and Financial Committee will today consider some alternative proposal to solve the impasse over the Finnish collateral agreement with Greece. One option, favoured by some, is to extend the principle of a collateral to everybody, but to switch from a cash collateral to an asset-based collateral, including property, or shares in nationalised companies. The article quotes Alexander Stubb, the Finnish foreign minister, as saying that Finland was not wedded to the cash collateral deal, and would seek new compromises. Finland’s finance minister Jutta Urpilainen made a statement on Thursday demanding that all euro countries participate in negotiations to find an acceptable solution should they reject the Finnish-Greek guarantee deal, Newsroom Finland reports. According to Urpilainen, the EU countries have already twice given their approval in principle to Finland’s demands for guarantees and her party is not giving up over the guarantee demands.
Why Finland opens an opportunity for a restructuring of Greek debt
Reuters Breakingviews has a comment this morning offering a way out of the Finnish collateral dilemma. If Finland prevails, other countries undoubtedly follow suit, and the package may break down. One option would be to do this without Finland, but that would set a bad precedent. The other option would be to press ahead with a Finnish collateral in place, and a promise to collateralise all future loans, thus making official senior. Given that the market have downgrade 10-year debt to extremely low levels, this may actually be a good time for a big restructuring instead.
Four members of the ECB’s governing council voted against the bond purchases
El Pais has the news this morning that four members of the ECB’s governing council, including Jens Weidmann of the Bundesbank, and Jürgen Stark, a member of the ECB’s directorate, voted against the resumption of bond purchases. The article says the internal divisions are reducing the effectiveness of the central bank.
Together with the public criticism of the ECB action, including from German president Chrisitan Wulff, this risks inflaming public opinion in the wealthier countries, but it also raises doubts about the effectiveness of the programme. The article says it is doubted whether the ECB would help Italy and Spain if they came under renewed attack.
Merkel cancel Russia trips to speak to Bundestag on the crisis
This is a sign that the opposition in her party to the extension of the EFSF is substantial. She is now planning to speak Sep 7 to the Bundestag (which is also the same day when the Constitutional Court will give its verdict on the EFSF case brought by some right-wing professors). The paper writes that it is not clear whether her coalition has its own majority in the vote. But the package will not be in danger as the opposition will support it. FTD also said that its poll of economists suggest that the extra costs of a Eurobond will not be nearly as high as some earlier estimates had suggested. Frankfurter Allgemeine reports that Merkel defended herself against criticisms from Helmut Kohl by saying that “every time has its special challenges”. She also distanced herself from comments by federal president Christian Wulff, who on Wednesday criticised the ECB’s bond purchases.
Four eurozone countries extend short sale ban The FT reports that France, Spain, Italy and Belgium agreed to extend their short-selling bank – covering almost 60 companies until September. The decision was taken amid renewed stock market turmoil yesterday. The original decision, taken two weeks ago, followed a 15% slump in the share price of Société Générale. An analysis by the FT suggests that trading volumes have fallen to three-quarter of the pre-spike average. This means that investors will pay more to buy or sell the stocks. El Pais has further details on the story. In Spain and Italy, the ban will last until Sep 30, in France until Nov 11, and Belgium has put no time limit on the decision yet.
Portuguese government seeks more control over municipal companies The Portuguese government approved a draft law which is to reinforce central government control on municipal companies, Jornal de Negocios reports. Preliminary data suggest a debt of municipal companies over €2.5bn and around one billion euros in assets.
A German comment on Spain’s debt brake Frankfurter Allgemeine welcomes the Spanish agreement on a constitutional debt break, and says it only happened because markets put pressure on the government, and because every member state has to be responsible for their own debt. If there had been Eurobonds, the Spanish government would not have needed to take such drastic action.
Gillian Tett on money market funds Gillian Tett writes in the FT that the real danger of the US money market funds for the eurozone banks does not lie in the total of money they provide, but in the fact that the eurozone’s banks are heavily reliant on fund in the short term. She cites a study by Morgan Stanley that 58% of the €8,000bn funding currently in place for the largest 91 eurozone banks needs to be rolled over in the next two years. 47% of that amount has a duration of less than one year. She picked up on an idea from Hew van Steenis who proposed that eurozone governments should offer joint funding guarantees as a circuit breaker. But eurozone governments still to be in denial of the problem.
Paul Krugman on the fiscalisation of the crisis Paul Krugman has a go at Wolfgang Schäuble, who had claimed that the causes of this crisis, and in 2008, was the rise in public sector debt. Krugman says this is nonsense. The only country where this applied in Greece, but the financial crisis is mostly about private sector debt. He says the fiscalisation of the crisis is doing untold damage on both sides of the Atlantic.
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