IMF puts eurozone bank recapitalisation volume at €200bn
The IMF has leaked its calculations of required bank recapitaliation in the eurozone ahead of the publication of its financial stability report this month. This number is now €200bn, and is immediately disputed by European policymakers and central bankers. Elena Salgado was quoted in the Financial Times as saying that the estimates were biased, as they did not include the banks’ gains on German bunds. (That is true up to a point, but the gains in Bunds are comparatively small in relation to the losses on other sovereign bonds.) She also said that the European stress tests were a better indicator, and those suggest that virtually no more recapitalisation is needed. The IMF uses a mark-to-market approach, based on the price of credit default swaps. While mark-to-market calculations are snapshots in time, and are thus subject to change, this is not really a debate about decimal points. (The stress tests lack credibility, as they assume no losses on sovereign debt holdings in the bank book. It is very likely that investors in Greek and peripheral debt securities will ultimately face losses, especially given the European Council has already agreed to accept a degree of private-sector participation. Considering the decline in economic growth, now evident throughout the eurozone, those losses of banks will increase substantially, as a result of which even the IMF’s €200bn calculation might be too optimistic.) Reuters has a news analysis this morning, applauding Christine Lagarde’s decision to show her independence from European policy makers, with experts agreeing that she picked the right subject on which to pick a fight. But ultimately, those critics do not expect her re-capitalisation campaign to have any influence on the European debate. (We agree with this depressing analysis. A proper recapitalisation would jettison the present ownership structure of European banks, which the political system is protecting. The parallels to Japan in the early 1990s are obvious.)
Portugal presents new austerity measures Portugal announced new austerity measures to cut its budget deficit from 9.1% last year to close to zero by 2015. Portuguese should expect to pay more taxes next year including higher VAT, a solidarity charge on higher earners and companies with higher profits. The government will also cut public spending, including job cuts and wage freeze. Here are the major measures as reported by Jornal de Negocios:
The yield on Portuguese 2y and 5y bonds fell by more than 30bp after the announcement of the new austerity measures. Under a €78bn bailout, Portugal s expected to cut its deficit to 5.9% this year, 4.5% next year and 3% in 2013. Gaspar said that the government expects the economy to contract 2.3% this year and 1.7% next year. GDP growth of 1.2% is expected for 2013.
German millionaires encourage spezial tax for the wealthy As in the US or France, there are a few millionaires who encourage the government to tax wealthy Germans in order to overcome budgetary shortfalls, Frankfurter Allgemeine Zeitung writes. The proposals encourage the opposition social democrats to go ahead with their plans to create such a special tax. The SPD thinks about raising the tax rate for people earning more than €100.000 per year from currently 45% to 49%. Also the social democrats ponder the reintroduction of a wealth tax and to create an inheritance tax.
Bild predicts Steinbrück will be Merkel’s challenger in 2013 Mass circulation daily Bild thinks that Angela Merkel will be challenged in 2013 by Peer Steinbrück, the social democrat’s former finance minister. The paper points out that according to a recent poll by Forsa, Steinbrück is now Germany’s most popular politician ahead of Merkel. Also this straight talking politician reminds many Germans of Helmut Schmidt and Gerhard Schröder, two SPD chancellors who were business friendly pragmatists with a reputation of getting things done. The SPD however is no hurry to take in decisions. Party chairman Sigmar Gabriel always says the decision will be taken in 2013 only.
FDP boss Rösler proposes toughening the deficit limits As the German cabinet and Bundestag put their finishing touches to the legislative proposal to enhance the EFSF, economics minister and FDP leader Philipp Rösler proposed to toughen the deficit limits in the stability and growth pact, Süddeutsche Zeitung reports. “I could for example imagine that we lower the current deficit limit of 3%”, he said. “We must think about how we further tighten the budgetary thumbscrews”.
Economists warn of too much involvement of Bundestag in euro rescue decisions Financial Times Deutschland quotes several economists who warn that too many controlling rights of national parliaments like the Bundestag in the euro rescue decisions could be fatal in the case of an acute crisis.
Holger Schmieding of Berenberg Bank and Bruegel deputy director Guntram Wolff warn that decisions may have to be taken overnight or over a weekend, in which case there is no time for cumbersome legislative procedures. They propose that only decisions about help for a new country or the creation of new rescue instruments should have to be explicitly approved by parliament. Other implementing decisions should be within the authority of the EFSF.
Le Maire promises Sarkozy’s presidential projects will be cost neutral Nicolas Sarkozy charged his agriculture minister Bruno Le Maire to draw up a presidential project for next year’s elections and the minister now explained in an interview with L’Express magazine what he has cooked up together with UMP party boss Francois Copé (hat tip Le Monde). Le Maire promises that Sarkozy’s plans will not cost the tax payer a single euro because all now expenditure must be compensated by cuts elsewhere. The minister wants to reindustrialize France and strengthen SME’s. Schools and teacher’s pay must be improved. Le Maire says Sarkozy will push for greater economic coordination in the eurozone and fiscal harmonisation. On Eurobonds, however, the presidential project is very cautious. They should be introduced only once “the European countries which have not put their public finances in order have done so”.
Has Sarkozy accepted money from Liliane Bettencourt? In a book to be published today (“Sarko m’a tuer”, Editions Stock) the authors Gérard Davet and Fabrice Lhomme (both from Le Monde) quote a nurse to the aged billionaire Liliane Bettencourt who says she has seen Sarkozy in person accepting envelopes with cash from Bettencourt before the presidential elections in 2007. This allegation has been made for a while but the book claims for the first time to have a first hand witness. But according to Le Monde the nurse now claims never to have spoken of cash envelopes for Sarkozy or anyone else.
ESRI cut growth forecast for Ireland As unemployment figures are rising in Ireland as reported by the latest figures according to the Irish Times , the ESRI institute cut its forecast, expecting GNP to increase by 0.2% this year and by 0.7% in 2012, down from 2% forecast three months ago. ESRI supports the Government to seek a sharing of this burden from its EU partners argueing that rescuing bank investors has been of benefit to the wider euro area as it has contained contagion to other countries’ banks, but that the burden has fallen entirely on Irish taxpayers. To ease the burden of adjustment the report recommends to increase competitiveness through reducing the price level by eliminating price distortions.
European Commission is to send a warning to Belgium The European Commission is losing its patience with Belgium, and is getting ready to send an official warning to Belgium , calling for a functional government, writes Le Soir. Amid a detoriating growth in Europe the Commission is concerned that Belgium might become the next victim in the crisis. The country to will soon have to decide on important structural reforms that cannot be dealt with by the current care taker government. The warning comes in a crucial moment in the negotiation process led by Elio di Rupo.
Xavier Vidal-Folch on the Spanish debt ceiling Writing in El Pais this morning, Xavier Vidal-Folch criticises the Spanish debt ceiling on economic grounds. He noted that the debt break was an effect carbon copy of the German model, which stipulated a deficit ceiling of 0.35%. In the Spanish case the ceiling is 0.4%, with a share of 0.26% for the federal government, and 0.14% for the autonomous regions. He says the problem with this static approach is that regional spending, mostly on health and education, is less elastic than federal spending. It is easier to cancel the order of a tank, than to close down a hospital. He makes the point that the target relatives to the structural deficits, but doubts that in practice Spain will be able to avoid a pro-cyclical recessionary fiscal policy.
Spreads, Forex, and ZC Swaps Italian 10-year spread unchanged at 3.1%. Portugal’s spread improve on the budget news.
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