Eurointelligence Daily Briefing, 10 de Outubro de 2011

Merkel to press for Greek default

  • A German newspaper reports says the German chancellor had now made up her mind, and concluded that a Greek default would be inevitable;
  • she now wants to persuade others, including France, to work towards an orderly state insolvency;
  • Merkel and Nicolas Sarkozy met yesterday, and said that they would seek a recapitalisation of their banks, with joint criteria;
  • José Manuel Barosso says a Greek default would be hugely risky, as the eurozone has no experience of how to manage a state insolvency;
  • Francois Hollande is the winner in the first round of the Socialist primary with 39% against 31% for Martin Aubry;
  • but the lead is too close to comfort for next Sunday’s run-off;
  • pressure is rising in Greece to move towards a Grand Coalition, but this is denied by the government;
  • the board of Dexia agrees a rescue-deal, which includes a bad bank, and partial nationalisation;
  • pressure is growing in the CDU to change the voting rights in the ECB’s governing council;
  • the FDP’s leading Eurosceptic says the deterioration of the crisis makes an FDP rejection of the ESM increasingly likely;
  • David Cameron is calling for a big bazooka to end the euro crisis;
  • Gerhard Schröder says a fiscal union is the only solution to the crisis;
  • Wolfgang Münchau, meanwhile, says that minimal crisis resolution scenarios – including those that focus on banks alone – do not hold up to closer scrutiny.

Eurointeligence Comment and Analysis

It looks like there will be a Belgian government soon, 16 months after elections. The underlying agreement was welcomed by all regions, though fundamentally nothing was solved. Tensions are likely to continue.


FT Deutschland leads with the story this morning – sourced to several German government officials – that Angela Merkel is pushing for an involuntary Greek default. The paper writes that the German government has now concluded that Greece was insolvent and that it would have to default on its debt. Germany was now trying to persuade its European partners to accept the inevitable, but was still running into opposition from the European Commission, the ECB, and several member states, including France.


Merkel met with Nicolas Sarkozy in Berlin yesterday to discuss the strategy. Reuters quotes Sarkozy as saying that the eurozone would need to deliver a comprehensive plan by the end of the month, before the G20 in Cannes in November. They did not go into details, but said France and Germany would be ready to recapitalise their banks, and agree on joint criteria for this exercise.

 

Barroso says Greek default would lead to disaster


It is not hard to see that the EU might take a little longer than promised by Merkel and Sarkozy to agree a comprehensive package. As Merkel is now pressing for a Greek default, José Manual Barroso warns that of unforeseeable consequences, and a spread of the crisis, should this occur, according to an interview he gave to Bild. He makes the point that the eurozone has no experience of handling a state insolvency.

 

First vote in French Socialist primary goes to Hollande – but majority is too close for comfort


The results are coming in for the Socialist primaries, the first round of which was held yesterday. It is clear now that Francois Hollande has failed to win sufficient support to nail the nomination in the first round. Le Monde has the latest numbers. He got 39% of the vote, following Martine Aubry with 31%. There will a run-off between the two at a second-round referendum next Sunday. The majority is too close for comfort. Arnaud Montebourg came in as a surprise third with 17%, following by Segolene Royal who only received 7%. The two have not yet declared whom they will support in the run-off, and their endorsement is likely to have an important implication for the final outcome of the vote. Le Monde writes that a majority of Montebourg’s supporters would go with Aubry. If true, this would make the second a cliff-hanger. The result is much closer that what recently opinion polls suggested. The vote was open to everybody, not just Socialist party members. 2m people took part in the referendum.

 

New rumours of a grand coalition in Greece


Throughout the weekend there have been rumours about George Papandreou and a new attempt for a grand coalition that would imply him to resign as a prime minister; reports have been flatly denied by the government. But Kathimerini quotes sources saying that PASOK deputies are pressuring the prime minister to seek a coalition deal with the main conservative opposition party, New Democracy, amid concerns that the Socialists are committing political suicide by adopting unpopular austerity measures without the support of anyone else in Parliament. Former New Democracy MP Elsa Papadimitriou, who quit the conservatives to become an independent when she voted for the midterm fiscal plan, told Sunday’s Kathimerini that President Karolos Papoulias should use his powers to form a government of national unity. She suggested that Lucas Papademos should be made prime minister with Papandreou taking over the role of foreign minister. Any suggestions of snap elections have been rejected by the government.

 

Dexia approves break-up plan


After a 14 hours marathon meeting, the board of Dexia approved the break-up plan hammered out by France, Belgium and Luxembourg this morning, Reuters reports. According to the agreement, Belgium is to nationalise Dexia’s Belgian banking business for €4bn. A consortium of the French state bank Caisse des Depots and Banque Postale is to insure the French municipal financing arm. A ‘bad bank’ supported by state guarantees will hold €90bn in bonds, including €12bn of sovereign debt of euro zone periphery nations. Belgium will guarantee 60.5% of this bad bank, 36.5% is guaranteed by France and 3% by Luxembourg, Le Soir reports. The burden of bailing out Dexia led ratings agency Moody’s to warn Belgium late on Friday that its Aa1 government bond ratings may fall. The breakup will ending a 15-year cross-border banking experiment, notes Bloomberg. The shares are resuming trading after the news conference.

 

CDU wants changes to voting rights in the ECB


Der Spiegel has the story that the CDU is debating proposals to amend the voting rights in the ECB. This is not yet a party decision, but once it is, the pressure for a reform could become irresistible, especially since Germany may be in a position to demand a quid-pro-quo for its financial support. At present, each member of the ECB’s governing council has a single vote. The proposal is to weight the votes according to the capital share in the ECB, which would give Germany an effective veto right.  There is significant concern in Germany that the Bundesbank gets outvoted in the ECB’s governing council.

 

FDP eurosceptics say they will win ESM referendum


Frankfurter Allgemeine has talked to the FDP’s leading eurosceptic, Frank Schaeffler, who argued that the current deterioration of the crisis would help his campaign to achieve a No vote in the upcoming FDP referendum on the ESM. He said he expected a result in the referendum before Christmas. He said the government had used massive threats to secure a five-seat majority on the EFSF, predicting that this majority will not hold up in a deteriorating crisis. He predicts that the coalition will continue even if the ESM is rejected. It would be quite simple, there just would not be an ESM law, he said (and presumably everybody would be living happily ever after).

 

A voice from beyond the periphery


David Cameron seems to be panicking about the eurozone, whose misfortunately seem to unsettle his own economic experiment. In an interview with the Financial Times he proposes a five-point plan to deal with the crisis, “a big bazooka” as he calls it. He wants the eurozone to recapitalise the banking sector, enlarge the EFSF, end the uncertainty about Greece (he did not say how), increase the firing power of the IMF; and reform the eurozone’s governance, if necessary through treaty change. He says this was not a menu choice. The eurozone will have to do the whole lot, and do it within the next few weeks.

 

Gerhard Schröder on the future of the EU


Writing in FT Deutschland, Gerhard Schröder argues that a leap in European integration would be the only exit from the crisis. He said eurobonds would come at the end of a long process. Specifically he is demanding to nominate a member of the European Commission as a European treasury secretary, a streamlining of European offices, including the mergers of the presidents of the Commission and the Council, the nomination of candidates to this new enlarged office through political parties, and a specific European tax.

 

Wolfgang Münchau on why a banking solution is not sufficient


There is a lot of talk about minimum solutions for the eurozone – well short of a fiscal union. Many such proposals revolve around a Europeanisation of banking. Wolfgang Munchau says such a step be necessary but it is no longer sufficient to solve the actual crisis. If the EU had done this in 2008, it might just have worked, but the sums are now very large. And in any case it will not be possible to inoculate a banking system against contagious sovereign defaults. At the heart of the eurozone crisis are imbalances. Without a fiscal union these imbalance will continue to produce financial sector instability. If you maintain full fiscal sovereignty at the level of the member states, that includes the right by member states to go against the consensus, and even the European rules. That’s the nature of sovereignty. Furthermore, he concludes, a  common financial sector policy is politically just as controversial as a fiscal union. In political terms, this is not a minimal solution at all.

  

Spreads, Forex, and ZC Bonds


Spanish 10-year spreads fall under 3%, while Italy’s remain stuck at 3.5%. The euro stabilises at over $1.34.

10-year spreads

 

 

 

 

 

 

 

Previous day

Yesterday

This Morning

France

0.807

0.762

0.701

Italy

3.517

3.516

3.502

Spain

3.073

3.002

2.976

Portugal

10.843

10.871

10.675

Greece

22.270

22.321

22.72

Ireland

5.847

5.821

5.691

Belgium

2.132

1.988

1.905

Bund Yield

1.939

2.003

2.017

 

 

 

 

 

 

 

 

Euro Bilateral Exchange Rate

 

 

 

 

 

 

 

Previous

This morning

 

Dollar

1.343

1.3461

 

Yen

102.940

103.29

 

Pound

0.868

0.8622

 

Swiss Franc

1.235

1.2414

 

 

 

 

 

 

 

 

 

ZC Inflation Swaps

 

 

 

 

 

 

 

previous

last close

 

1 yr

1.71

1.71

 

2 yr

1.59

1.59

 

5 yr

1.78

1.76

 

10 yr

1.91

1.9

 

 

 

 

 

Source: Reuters

 

 

 

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