 EFC warns of credit crunch
Eurointeligence Comment and AnalysisThe Italian budget drama during this summer serves as a reminder that a eurobond regime is doomed to fail.
Reuters has the story that the EFC had produced a (no longer) confidential report in preparation for this weekend’s informal meeting of finance ministers, in which it warned of a renewed credit crunch, as the sovereign debt crisis spills over to banks. The proposal warned of a “risk of a vicious circle between sovereign debt, bank funding and negative growth”. The EFC said contagion had spreads across countries and markets, and the crisis had now become systemic. It says a further reinforcement of bank resources had become advisable.
German government prepares for bank rescues in case of a Greek default
The German government is doing preparatory work to be ready to help banks should the troika come to a negative view of Greece’s consolidation and reform progress and stop disbursing the next tranche of rescue credits, Financial Times Deutschland writes. The government thinks it is crucial that any decision on Greece should be taken only once the enhanced EFSF is in place, which allows the EFSF to recapitalise banks directly. The Bundestag’s vote is scheduled for September 29. The EFSF’s new rules become operational once 90% of the guarantees are in place, so that a later vote of Slovakia would be not block the creation of the enhanced EFSF.
Merkel government under threat over euro dispute
Süddeutsche Zeitung and Frankfurter Allgemeine Zeitung both report that the German government could fall over the crisis. Angela Merkel has notably failed to quell the loose talk by her two coalition partners about a Greek default. Süddeutsche Zeitung reports on the ongoing debate within the FDP about an orderly default of Greece. It seems certain now that FDP MP Frank Schäffler will succeed to get an internal party referendum. That effectively makes it impossible for FDP deputies to vote in favour of the ESM later this year. Meanwhile transport minister Peter Ramsauer of the CSU said a Greek default would not be the “end of the world”. He said he was against the ESM as well because it violated “the foundations the parliament’s budgetary sovereignty”, as he laid out in an article in Frankfurter Allgemeine Zeitung.
Markets rally on a misunderstanding
It was hilarious to watch a rally in peripheral bonds yesterdays as a consequence of a statement by Jose Manuel Barroso who said the European Commission would soon make proposals for eurobonds. Barroso said yesterday that the Commission will present options, but that this will not bring an end to the eurozone crisis. This means the Commission is not going to propose an all-encompassing eurobond, but some partial bond, which may be nice to have, but will not bring down borrowing costs for sovereigns. (The misunderstanding lies in the word eurobond. People have used it from anything from a common infrastructure bond to Treasury securities that would encompass most of Europe’s sovereign debt).
Spain plans €4bn bond sale today
Bloomberg reports that Spain today plans to sell €4bn of bonds two days after Italy’s borrowing costs surged at a bill auction. Italy’s Treasury sold €3.9bn of five-year bonds, with yields rising to 5.6%. The Treasury fell short of its maximum target of €7bn as demand was 1.28 times the amount offered.
Spanish banks’ ECB borrowing rises in August
Spanish banks borrowed €81.6bn from the ECB in August, up from €57bn the previous month, Reuters quotes data from the Bank of Spain. The data reflected tougher funding conditions as market tensions rose.
Greece may face civil servant strike action over salary cut scheme
In Greece, the civil servants’ union ADEDY is gearing up for strike action over the government’s plans to extend a scheme to cut civil servants’ salary for 12 months, Kathimerini reports. Deputy Interior Minister Paris Koukoulopoulos suggested that once the scope for staff transfers has been exhausted, the remaining surplus staff – some 15,000 people – would face redundancy. Angry civil servants were further riled after Deputy Prime Minister Theodoros Pangalos sent a letter to 389 state bodies, including universities and hospitals, asking for a full list of their employees which is to be perused by a committee that is overseeing the merger and abolition of several state bodies as part of broader cutbacks to state spending. Unionists will take a decision on strike action on Friday.
Commission proposed cuts in Irish EFSM rates to zero
Interest payments on borrowings from the European Commission have been reduced to zero, the Irish Independent reports. The decision of the European Commission was announced yesterday and came as a surprise. It has to be approved by all EU member states. It would mean that Ireland (as well as Portugal) will now have twice as much time, 30 years, to pay back the €22.5bn part of the EFSM. The reduction will apply to money already drawn. From the €22.5bn, Ireland has drawn down €11.4bn from the fund so far.
For Bild the crisis has transformed the ECB into a ruin
Mass circulation daily Bild has a story showing a photomontage of the ECB’s Eurotower in Frankfurt with the headline reading: “This ruin once was our proud ECB: What happened to the guardians of the Euro?” The paper recounts the unconventional rescue measures the crisis forced the ECB into, the controversial bond buying program and the resignation of the two German representatives on the ECB governing council, Axel Weber and Jürgen Stark. The article ends with quotes by Helmut Kohl’s former finance minister Theo Waigel who appeals to politicians to quickly relieve the ECB of the responsibility to intervene on the markets to save the eurozone.
Wolfgang Münchau on Jürgen Stark
In contrast to the eulogies the German press had reserved for Jürgen Stark, Wolfgang Münchau argued that Stark’s position has been inconsistent throughout, and he had failed as he was trying to stick a position to rule out eurobonds and ECB bond purchases at the same time. His recipe for crisis resolution had been adjustment through depression, a process that would almost certainly have led to collapse of the euro and its reduction to a small number of states. Münchau compares him to Michael Kohlhaas, a figure from German literature who failed because he went to extremes in the pursuit of the fight for his legal rights. His departure is therefore welcome.
Britain to sue ECB over clearing houses
This promises to be a very interesting legal case. The FT reports that the British government has lodged a complaint at the ECJ against the ECB over a request that clearing house that handle more than 5% of the market in a euro-dominated product need to be based in the eurozone. The British say the rule contravened the principle of free movement of capital within the EU. (We suspect the ECB’s lawyers will point out that the euro is the official currency of the eurozone, and all the countries had the right to join the eurozone. We would be surprised if the UK prevailed despite the overt legal logic of their case.)
German energy commissioner Oettinger under pressure to resign over flag remark
Several media (mass circulation daily Bild, Coulisses de Bruxelles) report that the German energy commissioner Günther Oettinger is under pressure to apologize or to resign after his advice that the flags of countries running huge budget deficits should be put on half-mast in front of EU institutions. 150 parliamentarians now ask him to issue an apology or to step down.
George Soros on the end of the crisis
In a commentary in Reuters this morning, George Soros makes the following proposal to end the euro crisis. The first step that needs to be taken is to prepare for the possibility of default and exit from the eurozone of Greece, Portugal, and possibly Ireland. To prevent a financial meltdown, he proposes four sets of measures. First, a eurozone bank deposit insurance scheme; second, special protection of banks in defaulting countries; third, a broad recapitalisation of the European banking system and movement towards a European bank supervisor; fourth, protection from contagion of the government bonds of the other deficit countries inside the eurozone.
Poland fears a war in Europe should the eurozone fall implode
The Polish finance minister Jacek Rostowski, whose government is holding the rotating European council presidency, fears an implosion of the eurozone may lead to wars within European, Jean Quatremer reports on his Coulisses de Bruxelles blog. “Europe is in danger”, he quotes Rostowski from a speech in the European Parliament. The minister went on to tell the deputies of a friend back in Poland who fears there will be “a war within the next ten years in Europe” and who is now determined to ask for green cards for his children so they can to the US.
Spreads, Forex, and ZC Swaps
A rally in peripheral bonds, and a fall in bunds, prompted by Barroso’s remarks. Euro strengthens a little.
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