Eurointelligence Daily Briefing, 3 de Outubro de 2011. Enviado por Domenico Mario Nuti.


Greek forecasts spook the world

  • The Greek government confirmed it will miss the 2011 deficit projections by a long shot;
  • the news spooked financial markets on Friday, and led to a big in the euro as investors were contemplating a Greek default;
  • Greece is also predicting a fall of GDP by 5.5% this year, and by 2-2.5% in 2012;
  • the Greek cabinet approved a scheme to put 30,000 state workers on short-time, dismissing them after a year;
  • but a majority of the workers in the scheme are due to retire in that period anyway;
  • Der Spiegel reports that Mario Draghi is in favour of granting a banking licence to the EFSF, breaking ranks with Jean-Claude Trichet;
  • El Pais reports that the ECB may not be cutting interest rates this week after all;
  • Wolfgang Schäuble argues in favour of a big transfer of fiscal and economic policies from the nation state to the European level;
  • Alain Juppé also came out in favour of a Federal Europe, and said a breakdown of the eurozone would be a catastrophe for France;
  • the French government resists plan by Brussels to recapitalise the banking system;
  • Merkel’s most senior aide has come under criticism for mobbing CDU parliamentarians who voted against the extension of the EFSF last week;
  • Germany’s net contribution to the EU budget has risen by over 10% last year;
  • Wolfgang Münchau says that turning the EFSF into a CDO is like putting explosives into a can, before kicking it down the road;
  • Caroline de Gruyter, meanwhile, argues that private sector involvement was a catastrophic mistake.

The Greek cabinet approved the draft budget for 2012, and confirmed it will miss a budget deficit reduction target of 7.6% of GDP set by the troika for this year. The new estimate is 8.5%. The news spooked global financial markets on Friday, as the prospect of a Greek default seemed to be coming closer. Stock markets plunged on Friday afternoon, and investors took refuge in US treasuries, as a result of which the euro fell to $1.3322.



The Greek Growth forecasts are much worse than those implied by the bailout agreement in July, which assumed only a mild recession. GDP is now predicted to fall by 5.5% this year and the government expects the economy to shrink 2-2.5% next year, Reuters reports.   The shortfall in the 2011 deficit target means Greece would need almost €2bn extra just to finance its expenses for this year.



The cabinet also adopted the controversial “labour reserve” scheme allowing 30,000 state workers to be placed on 60% pay and be dismissed after a year.  But the government softened the blow and saved less money than troika inspectors initially sought  with a decision to construct the scheme in such a way that two-thirds of the workers affected are near pension age and due to retire soon anyway. The rest would be from state firms that would merge or be closed down. There is no official declaration yet, but  Kathimerini cites sources saying that troika representatives had accepted the proposal.  The 2012 draft budget is to be presented in parliament on Monday.   Euro zone finance ministers are expected to discuss Greece at a meeting in Brussels on Monday, but will be waiting for the troika inspectors’ report before taking any new decisions. 


Draghi in favour of providing central bank liquidity to the EFSF


Today’s paper edition of Der Spiegel has an interesting story on the argument about leveraging the EFSF and the argument within the ECB as to whether granting the EFSF with a bank license and giving it access to central bank liquidity is the right way. According to the magazine, Jean-Claude Trichet, Jens Weidmann and Jörg Asmussen, currently Wolfgang  Schäuble’s state secretary and candidate to succeed to Jürgen Stark at the ECB board, are opposed. There are proponents however Der Spiegel reports. Among them are Ewald Nowotny, the Austrian central bank president, ECB vice president Vito Constancio and crucially Mario Draghi, who will succeed to Trichet in less than a month. The topic will be discussed at tonight’s eurogroup meeting in Luxemburg and the ECB’s governing council meeting in Berlin this Thursday.


El Pais says ECB may not cut interest rates after all



El Pais reports that there are increasing signs that the ECB may not cut interest rates after all this week. One reason is the recent uptick in inflation to 3%. The other reason is the tradition that the ECB does not change interest days on days when it holds its council meeting outside Frankfurt. This Thursday, they will meet in Berlin.


Schäuble pleads for “more Europe” after the EFSF vote


In an op-ed for Welt am Sonntag and a speech on the occasion of today’s national unity holiday in Germany, Wolfgang Schäuble pleaded for “more Europe”, Die Welt reports. This did not mean abandoning the nation state. But it implies significant transfers to the European level in fiscal and budgetary matters and a stronger democratic legitimization of European bodies, Schäuble argued. However the CDU politician was immediately met with criticism and contradiction coming from the CSU. “Whoever draws the conclusion from the debt crisis that we need to reinforce European centralism is on a totally wrong path”, interior minister Hans-Peter Friedrich told Der Spiegel.


However there are important voices in France also warming up to the idea of more European integration, as Libération correspondent Jean Quatremer points out in his Coulisses de Bruxelles blog. In an interview with the TV channel France 2 foreign minister Alain Juppé said he was in favour of “a real European federation” underlining that “France’s future is Europe” and that an implosion of the euro would be “a catastrophe for France”. Quatremer underlines that it is the first time to his knowledge that a prominent member of the current government is on the record publicy in support of a European federation.


France procrastinates on a European rescue plan for banks


Despite market pressure on the three big French banks BNP Paribas, Société Générale and Crédit Agricole, the French government is resisting attempts in Brussels to come up with a rescue schemes for European banks, Le Monde reports. The government favours a rapid implementation of the enhanced EFSF instead of mounting rescue schemes for European financial institutions. Paris fears that a European initiative would send “bad signals” to the market. The French procrastination is in contradiction with the appeals of IMF MD Christine Lagarde who called for rapidly recapitalizing European banks and with Nicolas Sarkozy’s behaviour as EU president in 2008 when he was strongly engaged in a European response to the Lehman bankruptcy, the paper points out.


Nerves laid bare before last Thursday’s crucial EFSF vote


Just before last week’s crucial EFSF vote there was considerable stress among Angela Merkel’s top brass, Spiegel Online reported over the weekend. The head of the chancellory and close Merkel aide Ronald Pofalla started to mob dissidents within the CDU by shouting at Wolfgang Bosbach, a highly regarded and long serving member of Bundestag who announced a no-vote on the EFSF. “I cannot stand seeing your face any longer”, Pofalla reportedly shouted at Bosbach. “I cannot listen to that shit any longer.” Pofalla later apologized and Bosbach said for him the incident was closed. Pofalla, however, came under increasing criticism for his insults with some deputies questioning whether he would be able to remain at his post.


Rapid increase in Germany’s net contribution to the EU budget


Germany’s net contribution to the EU budget rose to €9.22bn last year, €1.1bn than the year before, Frankfurter Allgemeine Zeitung wrote in its Saturday edition. By comparison the UK net contribution was €5.63bn and France paid €5.53bn. The biggest net beneficiary was Poland €8.43bn, followed by Spain with €4.10bn and Greece with €3.60bn. The rapid rise of the German net contribution, which is the highest since the turn of the century, is explained by the recovery from the financial crisis. The paper goes on to criticize the almost clandestine way in which the commission publishes those figures in an obscure report on a Friday afternoon without any pre-announcement or press conference by the budget commissioner.


Wolfgang Münchau on why a CDO is no solution to the eurozone debt crisis


Wolfgang Münchau writes in his FT column that the latest gimmick pursued by desperate European officials was to turn the EFSF into a CDO. He says this is like putting explosives into the can before kicking it down the road. With a CDO the eurozone government’s total guarantees of €440bn would become the equity tranche of the CDO, which in turn would guarantee senior tranches of debt from outside investors. Münchau makes the point that the markets will not trust this structure. In the case of subprime CDOs, governments stood ready as a backstop once the system collapsed. That is not the case here as government themselves are already the equity holders. The last man standing is, once again, the ECB. It would be much better, therefore, to construct a system in which the ECB is involved in a better and more transparent way, than through an extremely dangerous toxic debt structure.


Caroline de Gruyter on how and why PSI backfired


Caroline de Gruyter writes in NRC Handelsblad about the sorry tale of private sector involvement in Greece, and how it made the crisis much worse. PSI was motivated by political considerations in creditor countries, notably Germany and the Netherlands, but the programme had come unstuck because Europe’s political class once again misjudged the market dynamics. They ignored, or rather disbelieved the pledge that PSI would only apply to Greece, and only this time, inferring from the decision that more PSI was on the way, which is a reasonable inference after all, given the current state of debate. As the EU is now actively considering an increase in the level of PSI, the situation might once again deteriorate.


Spreads, Forex, and ZC Swaps



Euro falls to $1.3322 as investors seek refuge in US Treasuries. Note also the increase, once again, in Italian, but especially Spanish 10-year spreads.


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Source: Reuters



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