Eurointelligence Daily Briefing, 26 de Setembro de 2011. Enviado pelo Domenico Mario Nuti.


Towards a leveraged EFSF

European policymakers have come under massive pressure from non-European ministers to act quickly and decisively;

US and Russian finance ministers tell their European counterparts that they have to do more;

there is now a big push towards a leveraged EFSF;

discussions are taking place to ensure that this can be done within the existing EFSF legal framework;

consensus appears to be moving away from the idea of a bank licence for the EFSF towards an insurance-based concept;

Patrick Honohan cautions against EFSF leveraging, especially if it involves the central bank (which it will);

Yves Smith says Europe is preparing another one of those “This Really Will Do The Trick” packages;

Wolfgang Münchau welcomes the idea of a leveraged EFSF, but warns that it may be too late, given the direction of domestic politics in several member states;

French senate shifts to the left for the first time since 1958, burying hopes to get balanced budget rule into constitution;

Merkel is fighting for the EFSF and her political survival ahead of a crucial vote in the German parliament this week;

a senior Christian Democratic member of the German budget committee wants to bring forward the ESM;

Christine Lagarde pushes for the IMF to increase its resources to cover short term measures and contagion;

Paul Krugman and Kash Mansori say the origin of the eurozone crisis is not fiscal deficits, but current account imbalances;

an opinion poll shows that the Greeks have a positive view about the euro zone but are critical about Papandreou’s crisis management;

the Indian central bank governor Dawuri Subbarao, meanwhile, thinks that Greece could use a restructuring.

We have never seen anything like this. This has been the most uncomfortable week ever for European policymakers at the semi-annual meetings of the IMF and the World Bank in Washington. They came under massive pressure from everybody to act over the eurozone crisis, as the global economy faces a sharp downturn, exacerbated in Europe by a credit crunch, and rising interest spreads in several countries. The New York Times has a good account of the kind of pressure applied by non-European participants at the IMF meetings. So does El Pais. Tim Geithner asked for ministers and the ECB to work more closely together. And the Russian finance ministers bluntly told his European colleagues over dinner: “Most of us think you need to do more, additional steps must be taken.”

It is our own understanding that technical discussions are under way to leverage the EFSF to solve a dual problem – bank recapitalisation and backstopping Italy and Spain. We are hearing that there are still several options under broad considerations, though the discussions seem to be moving away from the banking licence proposal of Thomas Mayer and Daniel Gros. There seems to be some support for the idea of an insurance company setup, through which the EFSF could leverage its exposure without increase the liability of its shareholders. The latter would go some way to assuage the Germans that their liability is not indirectly increased (which would be the case with other forms of leverage).

This is a complicated technical issue. It is also fraught politically because national parliaments have yet to ratify the comparatively modest changes agreed at the July 21 summit. An increase in the effective lending ceiling of the EFSF to €1-2 trillion, which is the scale now under discussion, might have a potentially negative impact on the ratification process. Another question is whether a scheme that might cap everybody’s liability would satisfy the financial markets. Essentially, the idea is the same as that of a CDO – and we all know what happened to them.


Patrick Honohan cautions about EFSF leveraging

The Irish central bank governor is quoted by Reuters as saying in Washington that the idea of leveraging the EFSF is problematic. “If the pot of money put by governments on the table is to be leveraged, that is definitely a separate decision especially if that leverage is to involve a central bank… We should not think of leveraging a public pot of funds as a free lunch.” The ECB is not going to accept this lying down. At the same meeting, a member of the Bundesbank’s board is reported to have said that the ECB will soon stop its bond purchasing operations. (He did not mention on which planet that would happen.)


Yves Smith on the latest development

Yves Smith, one of our favourite financial bloggers, has a perceptive comment in one of her latest posts in Naked Capitalism. Her headline says: “Europe Readying Yet Another “This Really Will Do the Trick” Bailout Package”. This already tells you that outside financial observers will not be easily persuade by a leveraged CDO. For the solution to work, it will have to substantive. She also writes that the Europeans are excruciatingly slow as they hope to present the plan to the G20 meeting in early November, by which time it may well be too late. (The timetable was new to us. We assumed that they would get this ready for the next eurogroup meeting, given the urgency.)


Wolfgang Münchau on what is at stake

In his latest Financial Times column, Wolfgang Münchau says EU officials have probably realised by now that they urgently need to get ahead of the crisis. He welcomes the options currently under discussion – an increase in the size of the EFSF through some form of leveraging, and a recapitalisation of the banks – but he fears that the political process in member states is not catching up fast enough. The northern European countries are politically unprepared what lies ahead. The blame rests squarely with the political leaders like Angela Merkel who have created expectations among her supporters that she is now certain to disappoint. Even if policy makers did all the right things from now onwards, the crisis will continue due to political uncertainty.


Paul Krugman on this crisis

The eurozone crisis is becoming increasingly prominent in Paul Krugman’s blog. Over the weekend, he had a very interesting comment on the origins of the eurozone crisis – disputing the assertion by Wolfgang Schäuble and other European policy makers, who keep on saying that this is a fiscal crisis at heart. He reproduced a table from Kash Mansori, which listed the eurozone countries in terms of current account deficits and budget deficits. The list shows a perfect correlation between a country’s current account deficits and its vulnerability in the crisis – Portugal, Greece, Spain and Ireland all had large current account deficits – while the relationship between fiscal deficits and the crisis is much less clear. Mansori’s article on the issue is well worth reading.

Merkel fights for the EFSF and her political survival in crucial Bundestag vote week

Angela Merkel is fighting for her political survival this week with the EFSF vote coming up and uncertainties remaining if she will be able to have her coalition provide her with the necessary majority. For that reason she appeared in the most regarded political talkshow to explain her support for Greece. “ We buy time for Greece and other countries so that the Euro remains stable, Europe is worth any investment”, she said according to mass circulation daily Bild. The coalition has 19 more votes than a majorirty requires  but everybondy agrees but in recent test votes 25 voted against. Domestic policy commentators agree that not getting her own mahority would very likely to Merkel’s dowfall.


Senior CDU MP proposes to bring forward ESM

Among the many ideas currently discussed in the context of the eurozone crisis management  is bringing forward the introduction of the ESM from mid-2013 to 2012. Reuters has the story that Nobert Barthle, a Christian Democrat MP and member of the Bundestag’s budget committee, wants the ESM sooner because of the collective action clauses, which he said “would be extremely helpful.” The implication is, of course, that this would allow a much earlier Greek default.


Historic defeat for Sarkozy in Senat elections

Nicolas Sarkozy suffered a historic defeat in Sunday’s election for the Senate, the French upper house, Le Monde online and Le Figaro report.  For the first time since 1958, the right wing dominated Senate is shifting to the left, with 175 left-wing Senators out of 348 according to  first provisional figures. Seven months before the first round of next year’s presidential elections this result does not bode well for Sarkozy’s attempt to get re-elected next year.  There is no major legislation outstanding that a left-wing Senate could delay, but losing his majority there would bury Sarkozy’s grand plan to get a budget-balancing debt rule written into the French constitution, Reuters reports.


IMF wants to increase its ressources

At its annual meeting the IMF launched a process that may well lead to an increase in its resources from currently €940bn to €1300bn, Frankfurter Allgemeine Zeitung reports. “Our credit capacity of €400bn may look comfortable today but it fades compared to the potential financing needs of endangered countries”, IMF MD Christine Lagarde is quoted. According to the paper Lagarde follows her predecessor DSK’s strategy for the fund to offer protection to as many countries as possible.  The IMFC asked Lagarde to provide a report on the issue within the next year and a decision will be taken afterwards. One of the reasons for Lagarde’s push is that she wants to enable the IMF to be useful for short term liquidity shortages and to be able to shield concerned countries from contagion.  Such a concept is part of a set of ideas that are being drawn up at the moment in the G20 context of the reform of the international monetary system.


Greeks positive about the eurozone, but lost faith in Papandreou’s crisis management

Greeks have a positive view of the eurozone, according to a recent opinion poll . Kathimerini (hat tip Wall Street Journal) reports that 63% of Greeks have a “positive” opinion of the euro and 66% say that re-adoption of the drachma would be a negative development for the country. Some 59% of respondents also said it is unlikely that Greece will leave the euro zone. Compared to the last poll the acceptance increased by 5pp over the last three months. At the same time, only 17% of the public had faith in incumbent George Papandreou to manage the country’s financial crisis. Only 26% of Greeks held a positive opinion of the position taken by the conservative opposition leader Antonis Samaras in response to the crisis.


Indian central bank governor thinks Greece is insolvent

Talking to Financial Times Deutschland the Indian central bank governor asks the euro countries to finally get their act together. “The most important message is that they have to fight the crisis of confidence”, Dawuri Subbarao told the paper and added that the fear of contagion was high in the emerging economies. The governor said the euro governments had to provide the markets with clarity. “Those countries in the eurozone that are insolvent or are thought to be insolvent, must get their debt restructured” he said adding that he had the impression “that Greece could use a restructuring.” In Portugal and Ireland, Subbarao added, there does not seem to be a solvency problem.


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