Eurointelligence Daily Briefing, 14 de Setembro de 2011. Enviado por Domenico Mario Nuti.











The banking crisis and its complacent response

  • French officials deny need for a recapitalisation of the French banking system;
  • Merkel rejects an attempt by Sarkozy to issue a joint statement in support of the French banks after their joint video conference scheduled for today;
  • the head of the Medef says the attack on the French banks highlighted concerned about the French state;
  • Italian 10-year spreads surpass 400bp for the first time, before settling down to 391bp this morning;
  •  the rise in spreads reflects fears of contagion from an increasingly probable Greek default;
  • Merkel, Sarkozy and Papandreou will hold talks today with Papandreou expected to outline plans for privatisation and further spending cuts;
  • Mario Blejer, former Argentinian central bank chief, says Greece should default big;
  • Nomura says a Greek default would cost German banks €9bn and French banks €16bn;
  • FDP defies Merkel’s request not to talk about a Greek bankruptcy in public;
  • the Dutch finance ministry and central bank are studying the detailed consequences of a Greek default on other eurozone countries;
  • China, India, Brazil, Russia and South Africa will hold a meeting to discuss the eurozone crisis;
  • Jens Weidmann says the eurozone either needs to revert to the original ideas of the Maastricht Treaty, or become a fiscal union;
  • IMF urges Portugal to cut employers’ social security contributions;
  • Martin Wolf, meanwhile, quotes a senior Italian policymaker, who says that default was preferable to a depression.

The latest dramatic development is the re-emergence of the banking crisis, which the authorities had hoped to quell through a sustained economic recovery and deliberately misleading stress tests. Both planks of that “strategy” have come unstuck. The rout on the French banking system highlights the need for an urgent recapitalisation – an issue recently raised by Christine Lagarde, and angrily denied by the eurozone’s complacent political leadership. The latest signs are that governments are about to allow the latest stage of the crisis to run out of control.



The FT has a story that France continues to resist pressure to recapitalise the banking system, quoting a French official as saying the French equivalent of “crisis, what crisis”? The French banking system, he said, was well capitalised. The problem was Greece, not the French banks.  Moody’s will decide on Thursday whether or not to downgrade French banks.


Merkel rejects Sarkozy’s idea of a common statement on banks in the crisis



The chancellor’s office yesterday rejected the idea of Nicolas Sarkozy’s advisor to react to the market attacks on  the French banks by issuing a common statement that both governments remained committed to their banks, Le Monde’s presidential correspondent Arnaud Leparmentier writes in his blog L’Elysée cotè jardin. Instead Angela Merkel and the French President will talk in a videoconference today and insist they stick to the summit decisions of July 21st to get the enhanced EFSF started as soon as possible. Sarkozy’s advisors denied that any state rescue of the battered French banks were on the agenda while saying that obviously if worst came to worst the government would rescue them. The three biggest banks Société Générlae, BNP Paribas and Crédit Agricole are under increasing criticism even within the government for their decision to write down Greek bonds by 21% only and not at a much higher figure, like the insurer Axa. Claire Guélaud in her Le Monde blog Contes Publics quotes Laurence Parisot, the president of the French business association Medef, who says: “If the banks are being attacked the reason is that there are doubts about our state.”


Italian bond spreads surpass 400bp for the first time in this crisis



There is nothing magical about apparent threshold numbers, but a spreads of 400bp is awe-inspiring because it clearly signals a lack of sustainability. Italy’s ten-year yesterday briefly breached 400bp, before settling down to 391bp this morning – which is itself still almost 10bp higher than yesterday morning. The bond spreads rose after investors concluded that China is, after all, not going to bail out Italy. The deeper reason for the latest increase in the spreads is the growing realisation of a Greek bankruptcy and its effect on the other crisis-ridden eurozone countries, with Italy now in the firing line. Il sole 24 ore has a full account of yesterday’s events in the bond market.


Talks between Papandreou , Merkel and Sarkozy after shift in support for Greece



After another day of frenzied speculation other whether Greece would default or not, a teleconference call was hastily arranged between George Papandreou, Angela Merkel and Nicolas Sarkozy, Kathimerini reports. It is expected that, during the call, Papandreou will outline his government’s timetable for an ambitious privatization scheme and detail its plans to slash public sector spending. He is also expected to urge the two EU leaders to press French and German banks into joining the private sector involvement. Before the conference call, scheduled for 7 pm Wednesday, Papandreou is to chair an emergency cabinet meeting.


Blejer recommends Greece to default instead of adhere to recession creating programmes



Mario Blejer, who ran Argentina’s central bank after his country’s default, said Greece should default big time, Bloomberg reports. “Greece should default, and default big. A small default is worse than a big default and also worse than no default.”  Rescue programs backed by the IMF and ECB are “recession-creating” efforts that will leave Greece saddled with more debt relative to the size of its economy in coming years and stifle growth, Blejer said. “It’s totally ridiculous what is going on…If you assume that these countries do everything that is in the program, they do all these adjustments and privatizations, at the end of 2012 debt-to-GDP will be bigger than this year.”


Nomura: 80% Greek default costs €9bn to German banks and €75bn to the ECB



An analysis by Nomura bank, cited by Frankfurter Allgemeine (hat tip Irish Times) suggested that an 80% loss on Greek investments would cost German banks €9bn and French banks €16bn. The total exposure to the ECB would be to the order of €75bn.


FDP defies Merkel and continues to ponder a Greek bankruptcy



Angela Merkel and Wolfgang Schäuble yesterday criticized the FDP’s party chairman for bringing up the idea of an “orderly default” of Greece and appealed to her junior coalition partner to stop the loose talk about an orderly bankruptcy of Greece, Frankfurter Allgemeine Zeitung reports, but they were defied immediately by the party. Talking to Financial Times Deutschland Christian Lindner, the FDP’s general secretary said, people in the eurozone and financial markets needed clarity. “That cannot be achieved by delivering oaths of silence”, he said. Lindner said Merkel wanted to “avoid a long overdue debate about a default in Greece, which is not desirable but possible.”


Dutch study consequences of Greek bankruptcy



Reuters has a story from Amsterdam, according to which finance minister Jan Kees de Jager said his ministry and the central bank were studying all “likely and unlikely” scenarios, which include, of course, a Greek default. He cautioned that a controlled bankruptcy was difficult to achieve. The article also quotes a senior Dutch banker as saying that the issue no longer whether Greece would go bankrupt, but when this will happen.


Emerging countries will discuss how to stabilize the euro



Brazil, Russia, India, China and South Africa will discuss how to stabilize the eurozone at the meeting in Washington next Thursday, the Brazilian finance minister Guido Mantega yesterday said, according to Les Echos. Also Barack Obama let it be known that he is increasingly worried about the European’s inability to come to grips with the crisis. Timothy Geithner will participate in the discussions of the EU finance ministers and central bank governors in Vroclav in Poland this weekend in attempt to persuade the Europeans to do more to stimulate their economies.


Weidmann launches a debate on the eurozone’s future evolution



In a remarkable speech Jens Weidmann yesterday launched a debate in Germany on the eurozone’s future evolution, Financial Times Deutschland reports. The Bundesbank president urged the government to quickly decide on whether it wanted to continue on the basis of the existing arrangements or whether it intended to go down the road of a “big leap” towards a fiscal union. “From my point of view a decision has to be taken within a short time”, he insisted. Half baked compromises as the euro summit decisions of July 21st threatened to undermine “a stability oriented currency union”, he warned. Weidmann’s preference clearly is to continue on the present basis by reinforcing the SGP and by increasing the pressure the markets exercise on countries to keep their finances in order. But he said a fiscal union where national parliaments no longer have the last word on the budgets and European authority intervenes is a possibility. The latter however would require a change of the German constitution and would be the result of a “long and difficult path”. But Weidmann insisted that both options can be “in principle economically sustainable”.


IMF calls for 2% of GDP cut in employers’ social security contributions and further cuts in Portugal



Jornal de Negocios covered the IMF verdict on Portugal extensively. Here are some  of the main points:  IMF advocates a cut of 2% of GDP in social security contributions  paid by employers;

Portugal is to “strengthen spending control and reduce wasteful expenditure”;

pension funds can be used to balance the budget this year only to get a temporary relief of some €500m;

otherwise, the adjustment program in Portugal is broadly on track despite fiscal slippages in 2011 (which created a gap of about 0.6% of GDP) and the resilience of the Portuguese banking sector is noteworthy;


Martin Wolf wonders: Is Italy ready to default?



Martin Wolf’s FT column this morning, on why Germany soon will have to make a decision on whether its wants the eurozone to survive, contains an interesting and disturbing comment from an unnamed senior Italian policy maker.



“We gave up the old safety valves of inflation and devaluation in return for lower interest rates, but now we do not even have the low interest rates … Some people seem to think we have joined a currency board, but Italy is not Latvia… It would be better to leave than endure 30 years of pain.”

Wolf concludes the comment signified a loss of trust in the project.


Spreads, Forex and ZC Bonds



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