 Dexia on the brink, as eurozone crisis is about to spin out of control
Eurointeligence Comment and AnalysisWhat matters are the indirect costs due to uncertainty. The status quo approach of muddling through costs Europe €95bn a year, and is likely to do so for the foreseeable future.
We are back in a situation where a carefully laid out policy path is about to end in failure. The board of Dexia met at an emergency session at 6pm last night to consider a restructuring of the bank that would effectively submerge it into a French banking conglomerate, Le Soir reports. The FT reports, quoting unnamed sources that Dexia was considering hiving off its €20bn in bad assets into a bad bank. Belgium and France apparently stand ready to offer state guarantees to the bank. The board issued a statement overnight, saying that the shareholders continued to support the bank.
The events at Dexia accelerated the decline in global stock markets. The S&P closed down 2.9%, having now eradicated all gains of the last year. European markets are expected to open lower this morning. The euro has fallen to below $1.32, and sovereign spreads have been rising. Decision on next tranche for Greece delayed until next month
The FT also reports that the eurogroup will paper over the latest Greek deficit shortfalls, and pave the way for the payment of the next tranche, which is to be delayed until November. The article also contains some information how the wretched question of Finland’s collateral has been solved. The eurogroup also and predictably back Jörg Asmussen, Wolfgang Schäuble’s deputy, as the successor of Jürgen Stark at the ECB. EU heads of state and government are to discuss plans for the EFSF reforms at a summit in a fortnight’s time.
Slovak prime minister seeks support for EFSF fund extension
Slovakia’s divided coalition government is headed for a showdown when leaders of all four parties meet late Tuesday to try to reach agreement on the amended euro-zone bailout fund, Wall Street Journal reports. If the second-largest coalition party, Freedom and Solidarity, doesn’t support the EFSF’s expansion, prime minister Iveta Radicova will need support from her parliamentary opposition, which may seek costly political concessions. Slovakia’s largest left-of-center opposition party, Smer-Social Democracy, offered to back the EFSF in exchange for a cabinet reshuffle or early general elections. Juncker scares markets with announcements of technical revisions to PSI
The markets always suspected that the promise by the European Council to restrict the PSI was a single one-off measure, applicable only to Greece, was a straight-forward lie. This became apparent yesterday when Jean-Claude Juncker confirmed that the eurogroup was reviewing the size of the private sector’s involvement in a second international bailout package for Greece. Reuters writes that this move could undermine the aid programme and hasten the threat of a Greek default. Juncker is quoted as saying: “As far as the PSI is concerned, we have to take into account the fact that we have experienced changes since the decisions we took on the July 21, so we are considering technical revisions, so yes.” Regarding the talks on leveraging the EFSF, Juncker said the ECB was not the main avenue being explored. Reuters writes this statement is likely to undermine confidence that the bailout fund can be sufficiently scaled up to calm febrile financial markets. The meeting last for six hours, and produced few concrete results.
Troika representatives urged the Greek government to renegotiate the national collective labour contract or to take the necessary legislative steps to cut the minimum wages and allow employers to negotiate salaries with employees on an individual basis, Kathimerini reports. George Papandreou is reported to have reacted angrily. “Collective labour contracts apply,” he is reported to have told a group of PASOK MPs during a private meeting. “We are not, nor do we have any intention of becoming, India or Bangladesh.” Steinmeier proposes road map to political union
Writing in Handelsblatt, Frank Walter Steinmeier, the SPD parliamentary leader, said that the Bundestag’s approval of the EFSF will solve nothing. The politicians will not get ahead of the crisis, unless they adopted a clear long-term strategy of where they are headed. He is proposing a 10-year road map towards a political and fiscal union to accompany that current crisis management – similar to the Delors plan of the 1990s. Rösler pleads for orderly insolvency for crisis countries
The German economics minister and FDP party chairman Philipp Rösler pleads for an orderly insolvency procedure for euro crisis countries, according to Frankfurter Allgemeine Zeitung. In a letter to Jörg Asmussen, Rösler asks for such a procedure to be included in the treaty for the permanent crisis mechanism ESM, which implies a combination of a reform- and consolidation program, private sector involvement and a temporary loss of sovereignty of the concerned country. Rösler is playing towards his partly eurosceptic electorate of the FDP and wants to be seen as active on this issue. Most economists think the ECB will keep the status quo on interest rates this Thursday
In Financial Times Deutschland’s monthly poll among chief bank economists the majority of economists expects the ECB to keep its 1,5% policy rate unchanged in its last meeting under the leadership of Jean-Claude Trichet. A majority of the economists believe that rates will come down back to the crisis levels of 1,0% within the next 12 months. Economists expecting the ECB to ease liquidity supply for banks by introducing a 12 months tender. A majority also considers it likely that the ECB reactivates its purchase program for covered bonds this Thursday. German PMI drops to the lowest level in two years
The German PMI dropped by 0,6 points 50,3 which is barely above its growth threshold and at the same time its lowest level in two years, Süddeutsche Zeitung reports. The drop was the highest since 2009. The German export driven industry seems to feel the pain of the worldwide slowdown.
Spreads, Forex, and ZC Bonds The crisis is clearly back. The euro is now at below $1.32, and spreads are fast rising again. The financial markets seemed to have concluded that the present course of policy action will end in failure.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||