Another comprehensive strategy beckons
Our heart sinks every time we hear Herman van Rompuy promising a “comprehensive strategy”. To make time for further negotiations, he postponed the next summit by a week until October 23. The delay reflects deep divisions between France and Germany, which the Merkel/Sarkozy bilateral meeting on Sunday failed to bridge. Von Rompuy said the crisis response now required further elements to address Greece, bank recaps, and the use of the EFFF/ESM. Germany is putting pressure on the others for a much larger debt restructuring than agreed at the July 21 summit, and Jean-Claude Juncker yesterday publicly refused to rule out a larger debt cut, according to Reuters. Germany is pushing a significantly bigger contribution from the financial sector than the voluntary contribution of 21%, agreed in July. The hope of a truly comprehensive package raised expectations on the financial markets, as the euro shot up by 2 cents against the dollar. (This pattern is familiar. The markets rise in anticipation of a meeting, continue to rise as von Rompuy announces his latest comprehensive package, and then decline after they have read and digested the details. While we expect an agreement on bank recapitalisation, and a new compromise on private sector participation in Greece, the combined package will still leave many questions unanswered, and will thus disappoint those who believe that the crisis may soon end. See also Tim Duy further down with a similar prognosis.)
Divergence between Merkel and Sarkozy delays EU summit The delay of the EU summit is due to the failure of Angela Merkel and Nicolas Sarkozy to agree on the treatment of Greece and the recapitalization of banks, Le Monde’s presidential correspondent Arnaud Leparmentier reports in his blog Elysée Coté Jardin. Especially the argument how to recapitalize the banks is unresolved with Merkel insisting that they must either tap the markets or be helped by their respective governments first before turning to the EFSF. According to Leparmentier, the Germans are suspicious that the French want to use the EFSF’s money to recapitalize their banks in order not to endanger France’s AAA rating. The fear of losing the AAA is has made the relationship between Sarkozy and Merkel increasingly unbalanced. During the dinner vice chancellor and FDP chairman Philipp Rösler was invited to join Merkel and Sarkozy together with Wolfgang Schäuble. Rösler insisted that the EFSF could only be used on occasion when the euro as a whole was threatened.
Slovakian parliament to vote on EFSF today After the ratification of the new EFSF treaty by Malta, all countries have ratified except Slovakia. We have no doubt that Slovakia will ratify in the end, but it may not happen at today’s scheduled vote, which PM Iveta Radicova looks set to lose, according to Austria’s Der Standard. A minority party in her coalition, the ultra-liberal SaS under its leader Richard Sulik are demanding that Slovakia does not take part in the ESM as a pre-condition of its acceptance of the EFSF. Radicova said this demand was not acceptable. If she loses today, she will have to make a deal with her Robert Fico, the Social Democratic leader, and her predecessor. It would mark the end of her government, and probably trigger new elections. Under Slovak law, however, it is possible for the parliament to vote twice on international treaties. A No vote today is therefore not the final decision.
Asmussen differentiates himself from Stark In his hearing at the European Parliament, Jörg Asmussen was at pains to differentiate himself from ECB chief economist Jürgen Stark, Financial Times Deutschland reports. When asked if he considered himself dogmatic or a pragmatic in terms of monetary policy he replied: “You congratulated me on being pragmatic — that’s not always a positive in conjunction with monetary policy in Germany, but in the global and European context I think it is a positive term… That’s something that the Germans have to learn.” He also gave a qualified endorsement of the SMP. After the hearing Asmussen was endorsed and his nomination is a pure formality. (The appointment of Asmussen marks a clear power shift within Germany, leaving Jens Weidmann as the sole hardliner on the ECB’s governing council. The importance of this shift is hard to overestimate, given the role the ECB will have to play in the further management of the crisis.)
German bankers lobby Berlin not to recapitalise them German banks fear that they will be forced to recapitalise because of the bad shape French and Italian banks are in, according to Financial Times Deutschland. “We hope to convince the government that not all banks need fresh capital”, an unnamed German top banker told the paper. Another banker said that even if Italian bonds were marked to market, the German banks’ capital position were still solid. But the German finance state secretary Jörg Asmussen made it clear yesterday in his hearing at the European parliament that the recapitalisation would take place in all 27 EU states and that everything would be done in order to avoid any “stigmatisation” of individual banks. This means that probably all the major banks would be forced to participate. Reuters quotes a German banker as saying: “We expect the EU to come up with a minimum core tier I (capital) level under certain stress scenarios and a higher one without any stress. Then banks will be asked to reach this level in a short period of time,” said a senior German banker.
The “deglobalizer” Montebourg is the referee in the French Sociliast’s primaries With his third place with 17,16% of the votes Arnaud Montebourg came in only third in last Sunday’s Socialist primaries, Lemonde.fr writes. But he is now the referee in the decisive run-off between Francois Hollande (39,2%) and Martine Aubry (30,7%). Speaking last night on TV Montebourg announced he will wait until Wednesday’s TV debate between the two candidates and only endorse one of the two if they adopt some of his protectionist anti-globalization stances. Meanwhile Nicolas Sarkozy’s advisors are alarmed at the popular success of the Socialist’s primaries that had over two million French participate in the party vote and with millions of TV spectators following the debates, Le Monde’s Arnaud Leparmentier writes in his blog Elysée Coté Jardin. So they now ask that this massive media attention for the Socialist’s choice of candidate must now be “rebalanced” so that Sarkozy’s party also gets its fair share.
Tim Duy on the illusion of grand bargains This is, in our view, a very astute summary of the situation in the eurozone, by Tim Duy (hat tip Calculated Risk). “And although there is optimism the European situation can be resolved in three weeks, they seem to be walking a very fine line between attempting to recapitalize the banking system without undermining sovereign debt ratings while maintaining what effectively amounts to a pegged exchange rate system that is fundamentally inconsistent with the economic needs of more than one nation. In addition, they have an odd situation where every nation needs to issue Euro-denominated debt, but no nation can actually print Euros as a backstop. It’s as if each nation issues only foreign-denominated debt, with ultimately no lender of last resort on a national level. Of course, the European Central Bank could fill this role, but will they? My experience is that when a financial landscape is as ugly as we see here, there is no rescue plan. Things tend to get much worse before they get better. That seems to be what financial market are telling us.”
Jim O’Neill on the necessity of a big bang Writing on ft.com, Jim O’Neill says that eurozone politicians have been muddling through since the beginning, but this is no longer feasible to keep financial markets at bay. “If no credible ‘big bang’ is unveiled next month to convince the markets, consequences are likely to be severe.” First, they need to agree a decisive debt restructuring for Greece – one that ends the uncertainty. The second is a credible bank recapitalisation strategy. The third is that countries with liquidity problems, such as Italy and Spain, need to demonstrate that are willing to impose strict fiscal discipline on themselves; and finally, they all have to be on the same page, including the ECB, which should promises unlimited support.
Spreads, Forex, and ZC Bonds Strong rise in the euro back to over $1.36. Note also the fall in inflation expectations to well under the ECB’s target.
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