 Discussion focus on Greek haircut of 30-50%
George Papandreou said the Greek government was in negotiations with the eurozone and the IMF about how to ease the debt burden ahead the EU summit, considering also changes in the private sector involvement (PSI), a haircut of 21% for Greek bond holders as agreed on July 21. Reuters quotes four euro zone officials confirming that a haircut of 30 to 50% for private investors was now under consideration. Papandreou will meet EU Council President Herman Van Rompuy in Brussels today. There were suggestions within his party that some MPs might not vote for some of the reforms the premier is hoping to present at the talks, Kathimerini reports.
Banks say they rather stop lending than raise new capital It looks like the attempt to force recapitalisation of the European banking is about to hit a major snag, as banks are threatening that they would meet any new capital requirement by cutting lending – rather than raising capital, the FT reports. The paper reported earlier that the EBA would plan to impose a 9% core-tier 1 level, but bankers are furious that they are forced to raise capital at a time when the stock markets are down. So it seems that the politicians and the banks are headed for a major confrontation, in addition to a confrontation between member states, as Germany seems to be among those not to support the 9%. José Manual Barroso confirmed yesterday that banks would need a “temporarily higher capital ratio”, plus restrictions on dividends, and bonus payments. The FT article also has further information on the 9%. It will be calculated taking the stress on the sovereign debt into account, but not the macroeconomic stress scenarios of the last stress test. (So this is another lie. Would it not be more honest to include a more realistic assessment of stress, and a more realistic core-tier 1 ratio of 7 or 8%, rather than seek a headline grapping number that is not for real? The EBA has already lost credibility, and this strategy is extremely risky.)
Swedish finance minister wants to use the EIB to recapitalize banks In an interview with Financial Times Deutschland, the Swedish finance minister Anders Borg proposed to use the European Investment Bank (EIB) to recapitalize the European banks. “We don’t have much time and that’s why I prefer existing institutions which would be able to use leverage effects”, he said. He pleaded for strengthening the European Banking Authority (EBA) and he said within the next five to ten years Europe’s banking sector would undergo a complete overhaul with “more capital, more regulation and more oversight”.
The return of the cocos The FT has an interesting story about the return of the Cocos (contingent convertible bonds), which might see a prominent role in the upcoming stress tests. Cocos convert to equity once a bank falls through a specific capital ratio, and thus provides a useful buffer (it is also cheaper for banks to issue Cocos as opposed to raise actual capital). The Basel committee ruled that Cocos would not qualify as capital, but Cocos still make sense in a stress test scenario.
Mario Draghi warns that Italy is heading into severe crisis without reforms Not mincing his words, Mario Draghi used his penultimate public appearances as governor of the Bank of Italy to warn his country that without reform the recently agreed consolidation of public finances would fail. He said Italy must act now, having already wasted too many years, according to La Republica. He said reforms were necessary for two reasons. The first was the growth and fiscal consolidation are not externally given, and would have to be achieved through policy. And Italy also a duty to its younger generation.
The time is (almost) up for Berlusconi, but perhaps not this week La Repubblica leads with a story in the run-up to tomorrow’s confidence vote in the chamber of deputies. Berlusconi will probably survive, again, but the air is getting thinner. (He lost a vote on an important piece of legislation on Tuesday, which prompted outspoken criticism by President Giorgio Napolitano, and triggered tomorrow’s vote.) The Repubblica story is about a dissenter in his own ranks, former minister Claudio Scajola, a shady figure in Italian politics, who has told Berlusconi yesterday morning that the time was up. Together with 15 co-conspirators, he met in a Roman restaurant last night to plot his strategy. The article speaks of a wide-ranging cabinet reshuffle, which could give Scajola a new more prominent role. Scajola was most recently minister for economic development, but had to resign over the alleged use of a slush fund to a buy an apartment.
German growth drops significantly but avoids recession According to the leading German economic research institutes, the German economy will grow only half as much as the federal governement expected previously, Financial Times Deutschland reports. A recession, however, can apparently be avoided. For 2012 the institutes’ forecast is a GDP growth of 0.8% as opposed to 1.8% the government expected earlier. In the fourth quarter of 2011 the economy will even contract for the first time since 2009. However growth in 2011 will still be at 2.9%. All those figures are from the so called autumn report the institute will present today. There are far reaching consequences to this growth forecast. It shows that Germany cannot be counted on to be the growth motor of the eurozone. On a domestic level it will be next to impossible for the government to deliver on its promises for tax cuts without widening the deficit.
Weidmann expects debt cut in Greece Talking to Bild, Jens Weidmann said a debt cut “cannot be ruled out” in Greece. He said Greece’s problems cannot be solved this way. A debt cut must not be an attractive way out of self-inflicted problems. Otherwise trust in government bonds of endangered countries cannot return.” Weidmann pointed to the high risks that the German taxpayers shoulder as a consequence of the euro bailouts. “Now monetary union must be put on a sound footing”, he added. “The solution cannot be to just permanently expand and leverage the liability risks.” The German central banker also reiterated his opposition to the ECB’s SMP. “Buying government bonds fills me with worries”, he said. “Doing that we only buy time, increase our risks and we don’t solve the real problems.”
Court of auditors criticizes Schäuble for lack of consolidation The German Court of auditors will criticize Wolfgang Schäuble for his lack in ambition to consolidate public finances during good times, according to Bild. In a report to be published mid-November, the court will say: “The credit charges in the federal budget will remain high despite the good assumption for the economy.” The court also accuses Schäuble to have manipulated the budgetary statistics in order to fulfil the constitutional requirements of the debt break. There is currently no room of manoeuvre for additional expenditure of the tax cuts the government promised according to the court.
Asmussen says there is no agreement in principle to reform drawing rights Talking to Financial Times Deutschland, finance state secretary Jörg Asmussen, who is co-heading the G20 working group on the international currency system that will present its results to the G20 finance ministers and central bank governors this Friday in Paris, announced an agreement in principle to reform the IMF’s special drawing rights. The majority of participants wants to enlarge the present currency pool on the basis of the criteria of freely useable currencies, he said. That means that the Chinese renminbi , and later the Brazilian Real, will join the synthetic currency unit which currently consists of the dollar, the euro, the yen and the pound. Asmussen also said the working group agreed that capital controls should only be used as “the very last means and only temporarily and under multilateral surveillance”.
The debate between Hollande and Aubry underlines more common ground than differences Last night’s final TV debate between Francois Hollande and Martine Aubry seems to have underlined more common ground than differences in substance, Lemonde.fr reports. Meanwhile the Socialist’s former candidate Segolène Royal, who came in only fourth (5%) announced she would support Francois Hollande in next Sunday’s final round of the primaries. In a separate piece, Lemonde.fr also reports that Aubry has responded favourably to the letter of Arnaud Montebourg (third place in the first round with more than 17%) who had asked the two candidates to commit to his protectionist and anti-globalization stances. So the final decision seems to be relatively open .
Wolfgang Münchau on the Big Bazooka Writing in the Financial Times, Wolfgang Münchau argues that David Cameron’s proposal for a big bazooka is not helpful, and the idea might even prove destabilising. He says if the EU were committed to a fiscal union with a eurobond, a big increase in the size of the EFSF could be justifiable. But without such a commitment, an enlarged EFSF becomes a crisis propagator. Italy, which has a share of 18% in the EFSF, will never be able to make good on its guarantees. But in this France would not in a position to guarantee Italy, and Germany would never be able to guarantee France. For an increase in the size of the EFSF to be credible, EU leaders would have to accept the principle of joint and several liability. Münchau concludes that we have reached the end of the rope, politically, financially, and legally, in terms of what we can do with the present setup.
Spreads, Forex, and ZC Bonds Spreads sideways, but masked by an overall increases in yields. Bund yield now back above 2.2%.
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