Eurointelligence Daily Briefing, 17 de Outubro de 2011


A €3 trillion EFSF? Are they now raising expectations a tad too high?

  • As G20 calls for urgent action, eurozone officials edge towards a deal ready for next Sunday’s European Council;
  • British Sunday newspaper reports that the EFSF will be leveraged to a size of €2-3 trillion;
  • the negotiations on the EFSF are definitely moving in the direction of an insurance-type solution;
  • one report suggests that the EFSF could insure 20-30% of a primary market issue;
  • the embedded leverage would be a maximum of five;
  • leveraging through the ECB is now definitely off the table;
  • one report suggests that the negotiators are close to a deal on bank recapitalisation;
  • the IMF is preparing new flexible instruments to help with a potential liquidity shortfall in Italy and Spain;
  • Joseph Ackermann is negotiating, on behalf of the IIF, an increase in the Greek PSI from 21% to around 50%;
  • European politicians and central bankers show solidarity with the anti-Wall Street protestors;
  • SPD chief Sigmar Gabriel wants to introduce a Glass Steagall Act in Europe;
  • Francois Hollande won the run-off against Marine Aubry, and is now the Socialist challenger to Nicolas Sarkozy at next year’s presidential election;
  • Aubry faces calls internal calls to quit the party chairmanship;
  • Stephen Fidler says the EU need not worry about CDS;
  • Wolfgang Münchau, meanwhile, says the deep reason behind the crisis is the small open economy mindset.

The headlines of the G20 meeting on Saturday seem quite dramatic: Eurozone has seven days to prevent disaster. But the meeting did essentially little more than rubberstamp existing procedures, by agreeing that the eurozone must sort out of its banking system, leverage the EFSF, and get a decision on Greece. This is precisely what eurozone officials have been doing in the last few weeks. They know fully well that they have to come with a convincing deal.


British Sunday newspapers have been raising expectation of a €2-3 trillion EFSF. Our own sources are telling us something different. The eurogroup is definitely moving in the direction of leverage through insurance – a percentage of primary market issues – but the sums involved are in the lower hundreds of millions, and this for a relatively simple arithmetic reason: If you add the size of existing commitments (including the new Greek progamme), which have to come out of the unleveraged portion of the EFSF’s lending capacity, plus any funds for bank recapitalisation, plus a small headroom, you are left with perhaps €100bn, perhaps a little more. You can leverage this four or five times, but not twenty times. Even if they find a way to outsource bank recapitalisation, it is still not clear how they can to get to €2-3 trillion in a way that is credible. Such a large effective size would require a very different capital structure altogether. (Our guess is that the British papers received their information from British sources, who are still dreaming of the Big Bazooka).



Frankfurter Allgemeine Zeitung has some more details on this. In the case of new emissions of government bonds on the primary market the rescue fund could guarantee 20% to 30% of new debt issues so that investors would be covered for that amount in case of a default. That would increase the attraction of otherwise uncertain debt issues and also increase the EFSF’s firepower up to five times. Any solution that would have used the ECB to leverage the EFSF are reportedly off the table due to fierce resistance from Germany and the ECB.



On bank recapitalisation, Bloomberg is reporting that the negotiators are close to an agreement (we hear the same). We also think that member states are edging closer towards an agreement to raise the official 21% Greek PSI.


The IMF is preparing new flexible instruments for Italy and Spain



Probably the most important element of the G20 meeting is the involvement of the IMF. The IMF is preparing new instruments to help the eurozone cope with turbulences in Italy or Spain, Les Echos writes. IMF sources say that the Fund has several instruments it could use such as the flexible credit line from which Mexico, Columbia and Poland have so far benefitted. Another instrument could be the precautionary credit line that can go up to 1000% of a country’s IMF quota. According to the paper that would make up to €92bn for Italy and €46bn for Spain. But that solution would sure rekindle the debate as to whether the IMF is adequately funded. Brazil expressed readiness to provide more money but they tie that to an increase of influence at the fund. At the G20 meeting, the US and Germany rejected any increase in funding for the IMF.


IIF president Ackermann negotiates a 50% debt cut for Greece



According to Bild, Deutsche Bank CEO Josef Ackermann is negotiating a debt cut for Greece in the magnitude of 50%. Ackermann is also head of the powerful worldwide bank lobby Institute for International Finance (IIF). The EU summit of July 21st only foresaw a cut of 21% but due to worsened economic conditions in Greece, almost everybody agrees that this is totally insufficient. Given the complexity of a new deal, there are doubts that 50% cut can be agreed until the EU summit this Sunday. Contacted by Spiegel Online, neither Deutsche Bank nor the finance ministry wanted to confirm or deny the Bild story. (We think the story is credible. If they were not negotiating by now, there would be no chance they could get a deal by October 23.)


Politicians and central bankers support worldwide anti-bank-movement



Financial Times Deutschland’s front page story says there are an increasing number of top politicians who show support of the worldwide movement against banks. The paper quotes commission president José Manuel Barroso, who came out in support of the demonstrators. Mario Draghi was clearly sympathetic. “Even we are upset about the crisis and we should imagine how it is if one is 20 or 30 years old and one has no perspective in life”, he said at the margins of the G20 meeting in Paris. There were roughly 5000 demonstrators outside the ECB headquarter in Frankfurt on Saturday. Timothy Geithner said that the Occupy-Wall-Street-Protesters in the US showed that people wanted Washington to do something to improve their situation. Also Wolfgang Schäuble voiced support warning that a failure of the current efforts to reform the rules for international finance would undermine “the credibility” of the system. An unnamed top central banker said: “The worldwide extension of the protests shows that the legitimacy of our economic system is at stake.”



In the German domestic debate there is a cross party consensus emerging from the liberal FDP to SPD that regulation of banks needs to be much tougher than thought until now. Talking to Der Spiegel SPD party chairman Sigmar Gabriel asked to split off the investment banking activities from retail activities. FDP parliamentary group chief Rainer Brüderle warned the banks in an interview with Bild: “If they don’t do their homework we will take them on their hands and guide them.”


Francois Hollande will challenge Nicolas Sarkozy in 2012



With 56.37% of the votes Francois Hollande clearly beat his rival Martine Aubry in the Sociast’s primaries last night, the French press reports (for detailed reports see and After his victory, Hollande had a common appearance with Aubry at which he asked the Socialists to overcome their division and unite behind his candidacy in order to maximize chances to unseat Sarkozy in May 2012. Aubry announced she wanted to return to be party chairwoman as soon as today. But there are voices such as that of the Socialist deputy Julian Dray who said there needed to be a “redirection” of the party leadership. “The lesson of 2007 is that there needs to be an osmosis between the candidate and the party leadership”, Dray said according to “There must not be two competing teams.” The 2007 presidential election campaign of the Socialist’s candidate Segolène Royal was burdened by infighting between Royal’s team and other big whigs at the party headquarters.


Do not worry about the CDS trigger



Stephen Fidler makes a number of interesting observations in the Wall Street Journal’s Real Time Brussels blog. He says European officials are obsessed with avoiding an official Greek default in order not to trigger a CDS event. Fidler does the math and finds that the net exposures are all relatively small.  The  latest data from Depository Trust and Clearing Corporation show total net exposure on Greek government bonds to be a mere $3.7bn. If the haircut is 50%, that number would be halved.


Wolfgang Münchau on the small open economy mindset 



In his FT column, Wolfgang Münchau asks the question why EU policymakers keep on getting it wrong –especially when it comes to assessing the impact of their austerity policy on economic growth, and indirectly on their own crisis resolution strategy. His answer is the “small open economy” mindset. Eurozone countries are used to thinking that their actions have no influence on the rest of the world – which is why they can solve crises through austerity with a degree of impunity. But once you coordinate such policies, they suddenly start to influence the rest of the world. The trouble with the eurogroup or the European Council that the sum of 17 small open economy mindsets is not a large closed economy mindset (which it should be), but an amplified small open economy mindset. That is the principle reason why classical policy coordination is not working in Europe, and the true reasons why you need a much more centralised system.


Spreads, Forex, and ZC Bonds



Euro strengthens. Note the French spread heading towards 100bp (where Belgium was not long ago).

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Source: Reuters




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