 The (in)significance of Slovakia
The Slovakian parliament rejected the EFSF – for now – with a vote of 55 out 150 deputies. It is not quite the big shock it appears to be. The government of Iveta Radicova has now collapsed as the vote triggered her resignation as PM. There will either be new elections, or a new coalition among existing parties. This was a purely domestic political game. The opposition Social Democrat opposition under Robert Fico got what they wanted, and after Radicova’s resignation they will now support the EFSF. In good old European tradition, the Slovakian parliament will keep on voting until they provide the right answer. This could happen within days. See Austria’s Der Standard for more details. Reuters makes the point in its news coverage that the wages in Slovakia are hardly higher than those in Greece – and lower than those in Italy – which makes it politically hard for Slovakian politicians to argue the case for large transfers. (If a small country were to veto an emergency plan like the EFSF, it could not realistically remain in the eurozone. For that reason, this whole ratification circus, while a legal necessity, is also a political farce – not one that inspires voters’ confidence. The real problem with last night’s No Vote is its impact on other governments, and on financial markets. The euro crisis has already caused the fall of governments in Portugal, Ireland, and now Slovakia. When EU leaders meet on October 23, one of them will either be missing – or attending for a last time. Her political fate will certainly not increase the willingness by other leaders to take big political risks.)
Troika concluded their review in Greece, cautiously optimistic EU, IMF and ECB inspectors concluded on Tuesday their review of Greece’s progress on a bailout programme, concluding that Greece would miss the targets for 2011, but that current measures would suffice to meet targets in 2012.There was no clear endorsement for releasing an €8bn aid tranche in November, but the positive assessment for 2012 could be the basis for a green light. According to Reuters, the report concludes that:
As to structural reforms, overall progress has been uneven, though the decision to suspend the mandatory extension of sector-level collective agreements to the firm level is a major step forward. The decision about the disbursement is now is up to eurozone leaders and the IMF. Evangelos Venizelos wants the Greek parliament to approve the latest measures before the eurozone summit on October 23, Kathimerini reports. The next two days, Greece faces a new wave of protests against austerity measures.
EU plans a 9% core-tier one requirement We would be very surprised if they get this through the European Council, but this would be indeed a big change. The FT reports that the European Banking Authority – the purveyors of the stress tests – want to set a core-tier one requirement of 9%, which would force banks to raise €275bn in new capital. The FT writes that the German contingent on the EBA opposed this, something might give us a hint about the political obstacles ahead. Now that this ambitious target is out, there will be plenty of room for disappointment (though this prospect itself might scare political leader to accept the new target. The FT also reports that the ECB’s emergency lending facility has been running at €3bn a day for the past week, which suggests that there must be acute trouble in parts of the banking system. (We think that a 9% core-tier one level would probably go a long way to revive confidence in the European banking system, but it is very naïve to think that it will not end the crisis.)
ECB warns of renewed debate about even higher PSI The ECB is worried about the consequences of the renewed debate around private sector involvement in Greece, Financial Times Deutschland reports. Especially Germany is adamant that private investors share the pain beyond the 21% haircut agreed at the July 21st EU summit. Berlin argues that the situation in Greece has considerably worsened and that investors need to take that into account. Already back then, the ECB thought PSI was a disaster because it undermined worldwide trust in European sovereign exposures, provoked contagion and escalated the crisis. Events since the end of July seem to show that these concerns were justified. In order to warn governments not to do same mistake again, the ECB’s governing council urged the euro members last Thursday “to fully implement all aspects of the decisions they took on 21 July 2011”, in other words: to stick to the agreed 21%. Speaking at the EU parliament Trichet yesterday reiterated this point. Warning that the crisis hat reached a “systemic dimension” he urged that the summit decisions must now be implemented “fully and rapidly”.
CDU will ask for “more Europe” at its party convention Talking to Frankfurter Allgemeine Zeitung, CDU secretary general Hermann Gröhe says the party will ask for “more Europe” at its party convention in November. There should be an enforceable debt break in all constitutions of euro member states. The EU treaties should be modified in order to allow for much more forceful responses if countries violated the deficit and debt criteria. Should countries continually breach the rules there must be a proceeding before the European Court of Justice with the aim to limit its sovereignty and to put a consolidation commissioner in charge to help the country get its finances back on track. In order to get there, Gröhe asks for a European convention and treaty changes. However the CDU’s two most prominent MdEP’s, Elmar Brok and Werner Langen, want to go further. In a separate article they are quoted with proposals of a European Monetary Fund under the management of an EU commissioner who would also chair the Eurogroup and be as independent in the commission as the competition commissioner. The EU should be transformed into a confederation with a directly elected president, hopefully from Germany, as Brok and Langen add.
Montebourg poses conditions for backing either Hollande or Aubry In a letter published by Libération the Arnaud Montebourg, who came third in the Socialist presidential contest, has put a list of demands to Francois Hollande and Martine Aubry, before he will make up his mind on whom to endorse. Montebourg wants a financial transaction tax to pay for the public debt that many euro states had to accumulate in order to safeguard the banks. Also he wants to reform the ECB’s rulebook so that it can buy government bonds on the primary market. Also, he wants to reinforce protectionist measures to avoid foreign control of strategically important companies and outsourcing of staff. Lastly he wants to increase democratic control of French politics by augmenting the parliament’s powers, limiting the president’s impunity and making the judiciary system more independent. Montebourg came in third with 17%.
According to Eurostat, Germans paid the highest amount to save their banks Süddeutsche Zeitung cites figures compiled by Eurostat according to which Germany paid the highest amounts to protect its banking sector from collapse during 2008 and 2009. German taxpayers paid €38.9bn, the Irish paid €35.7bn, the British €15.1bn. France, Spain, Italy and Greece actually all made a profits from the bank rescue measures ranging from €2.4bn in the case of France to €0.1bn in Italy. The story concludes that in the case of Germany a likely second round of bank rescues is likely to be much less expensive because German banks are not as exposed as their French counterparts which threaten to cost huge sums to the French budget. (But not if they go to 9% core tier one). In this context Le Monde has a half page story on the consequences of a French bank bailout that runs under the title: Will the French AAA survive?
BNP Paribas CEO Prot refuses to authorize interview on the financial crisis Handelsblatt exposes the perverse interview authorization procedures that are common practise in Germany. The paper did an interview with BNP Paribas CEO Baudouin Prot on September 7, 2011 talking about the financial crisis. Subsequently the paper sent BNP the interview so that Prot could authorize it, which he has not done on the grounds that the financial crisis made matters too delicate. Now the paper ran out of patience and published the questions of the interview with the photos of Prot and the reporters talking and left blanks for the answers that Prot gave, but did not authorize.
Martin Wolf on why a bazooka is not going to work Martin Wolf is sceptical in his FT column about attempts to solve the eurozone crisis through a couple of large technical decisions – such as increasing the EFSF or recapitalising the banking sector. His main argument is summarised in the following paragraph. “As I have long argued, at bottom this is far more a balance of payments crisis rooted in financial sector misbehaviour and cumulative divergence in competitiveness, than a fiscal crisis. The architects of the eurozone thought that balance of payments crises were impossible in a currency union. They were wrong. In the absence of automatic cross-border financing, an unfinanceable external deficit will emerge as a domestic credit crisis. Then, even currency risk will return if the union is among largely sovereign states.”
Spreads, Forex, and ZC Bonds Clearly, the situation in Slovakia and the troika’s report on Greece had negative effect on overnight spreads.
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