Eurointelligence Daily Briefing, 22 de Setembro de 2011. Enviado por Domenico Mario Nuti.

QE3 leaves eurozone isolated

  • The Fed launches Operation Twist, its third programme of quantitative easing;
  • programme consists of $400bn in long-date treasury bonds, and reinvestments of early repayments of mortgage bonds;
  • announcements triggered an immediate fall in treasury yields and a rise in the dollar;
  • the Greek cabinet approves Draconian measures to comply with the EU’s programme;
  • includes higher income taxes, cuts in pensions and temporary dismissals of public sector workers;
  • Greek trade unions have stepped up their protests against the agreed measures;
  • Germany’s Bild, for once, is impressed;
  • IMF sticks to its €200bn estimate for bank recapitalisation, and receives support from the ESRB;
  • Bundesbank rejects IMF’s recommendation to step up bond purchases;
  • Wolfgang Schäuble criticises the Constitutional Court and calls its views of the nation state old-fashioned;
  • Fabrizio Saccomanni is to succeed Mario Draghi at the Bank of Italy;
  • ECB loosen collateral requirements;
  • Germany and Switzerland reach agreement in their dispute over German tax evaders;
  • Roger Altman says the world is on the brink of a very deep recession;
  • two of Italian best known commentators, meanwhile, have called on Silvio Berlusconi to resign.

The Fed finally did. It is called Operation Twist, the code word for the third programme of quantitative easing. The Fed said it would purchase up to $400bn in long-dated treasury securities with the goal to bring down long term interest rates, and to make financial conditions more accommodative. The FT reports that the name of the report comes from a similar attempt in the early 1960s to twist the shape of the yield curve. The Fed also pledged to reinvest any early repayments from mortgage securities back into the mortgage market, which according to the FT has prompted some observers to call the programme a double-twist. The announcement triggered a fall in 30-year treasury yields from 3.22% to 3%. The Fed’s open market committee voted with a majority of 7 to 3.


(Just contrast the Fed’s early reaction to the agonisingly slow European response, where a majority of central bankers are still in denial that the economy is slowing down. The eurosystem is already reeling with bond purchases of €150bn. The transatlantic policy divide is getting wider.)


Greek cabinet approves draconian measures to secure next bailout payment



After a 7 hour marathon cabinet meeting the Greek government approved plans to slash pensions, tax low-income earner, place 30,000 public workers in labour reserve. According to a statement, quoted by Kathimerini, the following austerity measures have been approved by the cabinet:

  • the tax-free threshold on income should drop from €8000 to €5000;
  • a unified pay structure for the public sector, whose details were not announced;
  • state pensions below €1200 remain untouched but above that threshold the extra amount will be reduced by 20%;
  • All pensioners under 55 will have anything they earn above €1000 reduced by 40%;
  • Some 30,000 public sector workers will be placed in a labour reserve by the end of the year, with a 60% salary for a limited period after which they are being sacked or re-employed;
  • Structural reforms and privatisation plans, without further details.

The measures are yet subject to parliamentary approval in the coming days. Venizelos set the tone in parliament ahead of the cabinet session, telling lawmakers they must impose more reforms or risk a collapse in Greece’s economy. Talks with the troika are due to continue over the weekend in Washington, Dow Jones Wires reports. Negotiators hope to clinch a deal by Oct. 3, in time for it to be approved at a scheduled eurozone meeting in Luxembourg. 


Employees are stepping up their protests



Trade unions have already announced their opposition to the measures. On Thursday, public transit workers in Athens will stage a 24-hour strike over the fresh austerity plans, while teachers and taxi drivers are also planning a nationwide strike. Finance Ministry staff  have called a 48-hour strike for next Tuesday and Wednesday to protest fresh wage cuts. They are to be joined in their walkout by tax collectors and customs officials, according to Kathimerini. Earlier Greece’s two main umbrella unions–private sector GSEE and civil servants union ADEDY–called two 24-hour general strikes for October 5 and 19 to protest the government’s ongoing austerity drive.


„Bild“ is impressed with Greek reform efforts



Until now mass circulation daily Bild has distinguished itself by ridiculing or humiliating the Greeks in its reporting on the country’s crisis. But yesterday’s announcement of deep cuts in retirement benefits and the number of government officials seems to have impressed the editors of newspaper. “Fewer retirement benefits! Fewer officials! Now the Greeks really have to bleed” is Bild’s headline against the backdrop of the Acropolis under the sunset’s light.


IMF sticks to its €200bn estimates, and receives support from the ESRB



The FT reports that the IMF, in its global financial stability report, stuck to its estimate that the European banking sector needed a recapitalisation of €200bn as a direct result of the debt crisis. The estimate is based on movements in credit default swap spreads. The tally would rise to €300bn if the knock-on effects of banks’ holdings in each other were also taken into account. European governments have been reeling about this estimate.  Interestingly, the ESRB, chaired by Jean-Claude Trichet, yesterday came out in support of the IMF, saying that the best way to beat the crisis would be to increase capital buffers.


Bundesbank flatly rejects the IMF’s calls for the ECB to step up the SMP



It’s no surprise but still worth mentioning. The IMF’s recommendation for the ECB to keep buying the crisis countries’ bonds wasn’t even public for 24 hours before the Bundesbank hit back. The German central bank’s board member Andreas Dombret rejected the idea stressing the bank’s attachment to the “separation between fiscal and monetary policy”, Financial Times Deutschland reports.


Schäuble calls constitutional court’s insistence on the nation state an “absurdity”



In an interview about the German Constitutional Court Wolfgang Schäuble, who is a lawyer by training, calls on the court to exercise restraint and openness when it rules on European matters. “We cannot stick to the old regulation monopoly of the 19th century nation state”, Schäuble said talking to Frankfurter Allgemeine Zeitung. “This has proven to be an absurdity a long time ago. It is obviously right if the Constitutional Court rules that we will one day reach a limit with the European unity where we will have to think about a new constitution. But at the moment the issue is merely to make Europe more capable of acting and stronger by transferring competencies in a limited manner.” Schäuble is referring to sentences in past Karlsruhe rulings that defined core competencies for the Bundestag like budgetary matters where there can be no durable transfer of sovereignty to the European level within the present German constitution implying that it would have to be changed potentially by referendum.


Saccomanni to succeed Draghi at the BoI



Reuters reports that Fabrizio Saccomanni, deputy governor of the Bank of Italy, is likely to be named as successor to Mario Draghi at the Bank of Italy. The report is based on the comment of an unnamed political source from the ruling majority. Berlusconi is to propose Saccomanni formally at a meeting with president Giorgio Napolitano on Wednesday.  The article says that the chances of Vittorio Grilli, head of the treasury, and favourite of Giulio Tremonti, had diminished due to Tremonti’s own political troubles. The appointment raises a question of the future of Lorenzo Bini Smaghi, whose term at the ECB does not end until 2013.


ECB makes changes to collateral framework



The ECB has abolished the eligibility requirement that debt instruments issued by credit institutions are only eligible if they are traded on a regulated market, according to Reuters, quoting an ECB statement. The decision amounted to a net loosening of the central banks collateral rules, as the ECB now accepts instruments for which there is no liquid market. They quote one analyst saying that the decision would make it easier for banks to access liquidity. As a contrary measure, the ECB capped its acceptance of bank-issued unsecured debt instrument from 10% to 5% of the total collateral submitted.


Germany and Switzerland conclude a tax treaty about German tax evaders



Germany and Switzerland have concluded a treaty how to deal with deposits German tax evaders brought to Switzerland, Süddeutsche Zeitung reports. The agreement is twofold. On the one hand it outlines that capital revenues of Germans in Switzerland today will be uniformally taxed anonymously and at the source at 26%. The more tricky question is how to tax money that Germans have been hiding in Switzerland for many years will be taxed. The German authorities estimate that Germans have hidden between €130 and 200bn in Switzerland. The cumbersome procedure foresees a complicated calculation by the Swiss authorities of the capital revenues in the past and that will be taxed by between 19 and 34%.


Roger Altman on the coming recession


Roger Altman, President Clinton former deputy Treasury secretary, issues a stark warning in the FT that the US and Europe were on the brink of a damaging recession. He says the bond markets would normally signal a recession through an inverted yield curve (with long term yields falling below short term yields) but this was impossible given that short-term rates are already close to zero. The rapid fall in long-term rate is the best indication that markets are expecting a very deep recession. He is scathing about the policy response in the eurozone, calling for an “exponential” increase in the size of the EFSF, and an immediate cut in eurozone interest rates.


Italian newspapers call on Berlusconi to resign


Two of Italy’s best know commentators, Roberto Napoletano in Il sole 24 ore, and Sergio Romano in Corriere della Sera, have both called on Silvio Berlusconi to resign, in separate editorials published on the same day. Romano makes the point that Berlusconi had been a symbol for political stability and economic dynamism. That hope had given way to broken promised, indecent behaviour, and scandals. He says everybody in Italy knows that Berlusconi is at the end of his reign. The question was only how to get rid of him, without doing violence to the Italian constitution. Napoletano was appealing to Berlusconi’s sense of patriotism, to act in the interest of his country, which is now under acute threat.


Spreads, Forex and ZC Bonds



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Source: Reuters



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