Eurointelligence Daily Briefing, 27 de Setembro de 2011. Enviado por Domenico Mario Nuti.



S&P warns that a leveraged EFSF would endanger Germany’s credit rating

  • The rating agency says we are close to the limit of what countries can guarantee without damaging their own position;
  • Jens Weidmann says maintained confidence in Germany was critical for the success of the current arrangements;
  • leaks about discussions on a leveraged EFSF have prompted furious reactions from Angela Merkel’s coalition partners – and raise renewed doubts about Thursday’s ratification vote;
  • the Daily Telegraph says EFSF to be leverage to €2 trillion with a CDO-like structure;
  • Barrack Obama stepped up his attack on the eurozone crisis management, saying that European governments had made the mistake of failing to recapitalise the banking system;
  • ECB council members are not unanimous on whether or not to cut rates at the next meeting;
  • an extension of current liquidity policies is likely;
  • the Greek parliament is due to vote on the property tax scheme today, amid huge opposition to the measure in the country;
  • after an important recent break-through in negotiations, Belgium is slowly edging towards an end of its political crisis;
  •  Axel Weber wants to join UBS sooner;
  • Beppe Severgnini explains why Italians have fallen out of love with Silvio Berlusconi;
  • Raghuram Rajan, meanwhile, says the IMF needs to establish new vehicles to play a more pro-active role in the eurozone’s crisis management.

Frankfurter Allgemeine reports that S&P warned that a leveraging of the EFSF would endanger Germany’s credit rating. The discussions about the future of the EFSF were the reason for the increase in German sovereign CDS rates to 111bp. The paper quotes David Bears, an S&P director, as saying that we are already close to the limit where guarantees are compatible with current ratings. Further leverage would cause significant strains. In Washington, European central banks and politicians confirmed that such talks were under way. The article also quotes Jens Weidmann as saying that confidence Germany’s own capacity is critical for the success of the rescue umbrella. The paper says in a separate comment that the German government was losing the control over the debate.

(We think that S&P’s objections are serious and valid, and will mean that the ultimate liability of individual member states cannot be substantially increased – not even indirectly via an intransparent CDO. This makes it more likely that the technical solution to the problem of extending the EFSF will rely on a much stronger involvement of the ECB.)


Huge backlash in Germany on EFSF rumours

The FDP and the CSU are furious over reports from Washington that the EU plans to leverage the EFSF, according to FT Deutschland. The political reaction does not surprise us, especially since the new EFSF treaty, to be ratified by the Bundestag on Thursday, was sold as a final measure. A debate of its extension before the vote is politically risky, since Merkel may not be able to secure her own majority, having to rely on opposition votes. CSU chief Horst Seehofer said the discussion of new ideas about the EFSF would cast doubt on Thursday’s vote.

Frankfurter Allgemeine Zeitung quotes Hermann Otto Solms of the FDP as saying that his party would not support a leveraging of the EFSF. The SPD, which supports the changes to the EFSF treaty, has warned Merkel not to play any dirty tricks.  

(Since the EFSF discussions are for real, and have been widely confirmed, the sceptics are now able to say that the EFSF is part of a slippery slope that increases Germany’s ultimate liability by a significant factor compared to what the official ceiling suggests. This may persuade some of the sceptics to vote No. We still do not think that Merkel would resign even if she did not get her own majority.)


What kind of leveraging?

Over the next few weeks (probably months) there will be detailed discussions on how to leverage the EFSF, some of which will invariably remind us of the financial instruments that play a central role in the financial crisis of 2007. Over the weekend the Daily Telegraph came out with an intriguing detail of how the discussion on leveraging had proceeded in detail.

“The complex deal would see the EFSF provide a loss-bearing “equity” tranche of any bail-out fund and the ECB the rest in protected “debt”. If the EFSF bore the first 20pc of any loss, the fund’s warchest would effectively be bolstered to Eu2 trillion. If the EFSF bore the first 40pc of any loss, the fund would be able to deploy Eu1 trillion. “

See also FT Alphaville on this subject.

(To us , that would look like a CDO, and we don’t think it will fly in the German Bundestag, and hold up to the recent ruling of the German constitutional court, whose objections cannot be circumvented through the clever-dick tricks of modern finance.)


Obama steps up attack on European rescue strategy

Sueddeutsche Zeitung reports on a comment Barrack Obama, who said the eurozone crisis scared the world, and, more substantively, that the Europeans had failed to draw the correct lessons from the 2007 financial crisis – to recapitalise their banking system.


ECB not unanimous on interest rates

The markets are expecting a big interest rate cut and a return for unlimited long term funding for banks. Ralph Atkins reports in the FT that it is not a forgone conclusion that the ECB’s governing council may do any of those things at its council meeting next week, the last under Jean-Claude Trichet’s presidency. The ECB will prolong its programme of unlimited three month liquidity, and the hawks may concede a cut in the overnight deposit rate, but there are concerns among central bankers that a cut in the main refinance rate could cause volatility (We are not sure what that means. Presumably, it means that the ECB does not like to admit to the outside world that it misjudged the strength of the economic recovery earlier this year).

Reuters quotes Erkki Liikanen as saying that he believes the risks to growth were “substantially to the downside”, which means that he will be supporting a cut in interest rates. Yves Mersh is quoting calling the rate cut expectations will and unrealistic.


Greek parliament to vote on property tax today

Greek lawmakers are expected to approve an unpopular property tax today, Reuters reports, opening the way for the return of inspectors from Greece’s bailout lenders and the release of the next aid tranche, despite growing anger among austerity-hit Greeks.  Greek newspapers reported that George Papandreou held private talks last week with five or six wavering MPs in a bid to ensure there is no slippage from his four-seat majority in parliament. Papandreou will be in Germany for a meeting with Angela Merkel during the vote on the tax bill, which is scheduled for around 7pm local time.

More than 74% of Greeks polled by Rass for To Paron newspaper opposed the property tax, according to Bloomberg. The poll also showed that 59% believed Papandreou’s government won’t be able to avert a default. The survey had a 3.1 percentage point margin of error.


Belgium edges towards a new government

Belgium is getting closer to have a new government under Elio di Rupo, Flanders Today cites an article in De Morgen. After an agreement on the split of the Brussel-Halle-Vilvoorde (BHV) constituency and internal reforms in Brussels, the eight deliberating parties reached a compromise on the financing act last Saturday.  A new federal government might not be ready for the start of the new parliamentary year on 11 October though. The Flemish Nationalist party, N-VA, which did not participate in the negotiations at federal level but is one of the coalition partners in the Flemish government, has criticized the finance act severely. It will become clear this week whether their stance will put the Flemish government coalition under pressure and its repercussions for the discussions on the federal level.


Axel Weber cannot wait

Reuters reports that Axel Weber had sounded out the Bundesbank about joining the board of UBS early – not having to wait until his grace period of one-year ends. We presume that the scandal-ridden bank needs him now. The story did not say anything about the Bundesbank’s answer. We presume that the Bundesbank has leaked the story to gauge public reactions before making a decision.


Time is up for Berlusconi

This is a well written comment by Beppe Severgnini in the Financial Times, who explains to the outside world why Silvio Berlusconi’s time as prime minister is now nearing the end – a mood that is now widely reflected in Italian political circles. He calls him an escape artist, a quality that resonated strongly with the electorate. While the voters were ready to forgive him any private scandals, they are less forgiving in his inability to manage this economic crisis.


Raghuram Rajan on what the IMF needs to do in this crisis

Raghuram Rajan agrees with the consensus view outside the eurozone on what now needs to be done – recapitalise the banks, enlarge the EFSF to cope with Italy and Spain, and not to let Greece default. But in his a comment in the FT he argues that the IMF also needs a changed a role in this crisis, and stop play second fiddle to the Europeans. Concretely, he proposes that the IMF should create a new instrument along the lines of its current New Arrangements to Borrow system set up in 1995 following the Mexican financial crisis. It would be capitalised by a first-loss layer from the EFSF, and then a second layer of the IMF’s own capital. This would allow it to offer large lines of credit to illiquid countries such as Italy.


Spreads, Forex, and ZC Bonds

Small but not substantial improvement in Italian spreads on hopes of a leveraged EFSF.

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Source: Reuters



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