 Don’t expect too much on Sunday, say Merkel and Schäuble
Angela Merkel and Wolfgang Schäuble yesterday tried to calm down expectations for next Sunday’s crisis summit, Handelsblatt and Financial Times Deutschland write. The meeting would not produce a “final solution” to the euro crisis, Schäuble cautioned. Merkel’s spokesman warned against illusion that all the eurozone’s problems would be solved by the meeting. The summit would provide for first steps of a journey that promised to be long, he added. After the G20 meeting of finance ministers and central bankers, expectations had risen to a level where markets seemed to hope for a miracle that would end all the eurozone’s woes. (Remember, they always quell expectations before a summit so that they can claim to have succeeded. But in this case, the warning is probably justified, as there is no way that they can meet market expectations of a €2 or 3 trillion EFSF. And the other stuff may also disappoint.)
ECB staff think Trichet overstepped his mandate during the crisis
With Jean-Claude Trichet’s departure now imminent, the ECB’s trade union IPSO organized a survey among the staff assessing the president’s performance during his 8 year mandate, Financial Times Deutschland reports. 55.1% of the 507 respondents thought that Trichet had overstepped the ECB’s mandate in managing the crisis. Although not explicitly stated, they seem to refer to the SMP and to the heavy ECB’s interference in euro countries economic policies, such as the famous joint letter by Trichet and Mario Draghi to Silvio Berlusconi in this summer. However the huge majority of those who said that Trichet had overstepped his mandate also said the ECB president did not have a viable alternative that given the crisis.
Germany warms up to the idea of Glass-Steagall
Following the lead of SPD party chairman Sigmar Gabriel, Angela Merkel’s coalition seems to warm up the idea of introducing a Glass-Steagall-Act in Germany or Europe, according to Frankfurter Allgemeine Zeitung. The Bavarian prime minister and CSU party chairman Horst Seehofer said that separating the investment banking from the retail business of banks was an “interesting idea”. The spokesman of Wolfgang Schäuble said the proposals contained “interesting ideas for a discussion on the international level”. In view of the worldwide protests, there is now a renewed drive among politicians in Germany and Europe to rethink bank regulation on a larger scale. Merkel’s spokesman yesterday said the chancellor had “sympathy for the protests”, as the demonstrators expressed “a profound concern of the people, and there is a justified desire for justice”, Handelsblatt writes.
International star economists attack Wall Street
The Occupy-Wall Street Movement and the outrage against Banks also energised some international economists. Financial Times Deutschland has a story quoting Simon Johnson, Paul Volcker, Jagdish Bagwati, Dani Rodrick and Hans-Werner Sinn attacking useless financial innovations and pleading for a crackdown on banks with much tighter controls, regulation and capital requirements.
Domestic pressure rises ahead of vote in Greek parliament
George Papandreou is due to meet New Democracy leader Antonis Samaras on Tuesday, Kathimerini reports. The meeting is not expected to produce any significant changes. The opposition insisted that the two parties were so far apart that snap elections were the only way to settle their political differences. Papandreou came under further pressure on Monday when Thessaloniki MP Thomas Robopoulos resigned. Though Robopoulos was replaced by another Socialist candidate, ex-Labour Minister Louka Katseli continues to insist that she will vote against Article 37. The austerity bill is due to be voted in Parliament on Thursday.
Unions are to scale up their protests and walkouts on Tuesday ahead of a two-day general strike on Wednesday and Thursday, expected to be marked by vehement protests in the run-up to the vote.
Rising foreign currency credits
The EBRD is warning of a renewed trend in foreign currency credits in Eastern Europe. A majority of mortgages in Romania, Bulgaria, Georgia and Albania is denominated in foreign currencies, most of them in euros. In Romania, 90% of its mortgages are in euros. Der Standard reports that this could become a potential problem also for Austrian banks, as their subsidiaries are active in these markets. Local credit markets are small and expensive, so foreign currency credits look attractive. But the risks are often underestimated, as experienced in 2008, when many of those local currencies depreciated and led to a significant rise in bad debts.
Sarkozy prepares for duel with Hollande
After Francois Hollande’s clear victory in the Socialist primaries, Nicolas Sarkozy now wants to take on his challenger pointing to his lack of experience and his reputation of indecision, Le Monde writes. The president wants to use the EU summit on Sunday and the G20 summit in the beginning of November to demonstrate his qualities of an international dealmaker and crisis manager. However, there is a danger that the strategy may not work, especially given the likelihood that the eurozone is once again not going to get its act together. Advisers to Sarkozy worry that the US and China will have to come in and save the currency union.
Bild critizes Herman Van Rompuy for building a EU palace in the middle of the crisis
Bild has a very critical story on the new European Council building to be used as Herman Van Rompuy’s presidential offices and as the venue of EU summits from 2014 onwards. “Europe is in the middle of a debt crisis but the president is building a palace”, the mass circulation daily writes. It acknowledges that the decision to build it was taken prior to Van Rompuy’s arrival. Nevertheless, the paper and many experts it quotes find it outrageous to build new headquarters for €290m in a time of recession, downgrades and looming government defaults.
Patrick Jenkins on why recapitalisation is not enough
Patrich Jenkins writes in the FT that recapitalising banks is necessary, but not sufficient. Dexia is reminder that capital is not always the problem. In Dexia’s case, it was the funding model. He endorses policies to fix the funding mechanism, such as net stable funding ratios, which would provide strong disincentives for banks to fund themselves through the wholesale market. (Jenkins is right in our view, but there is not a chance that they will implement all the Basel III changes, such as the net stable funding ratio, prematurely.)
James Saft on why bank recapitalisation is potentially dangerous
This is an interesting piece by Reuters columnist James Saft this morning. He argues that the planned bank recapitalisation could land the eurozone in an extended credit crunch. Europe, like the US, was going through a balance sheet recession, as everyone is trying to repay debts at the same time. Austerity makes this worse. Any attempt to shore up banks must come to terms with all overindebted borrowers, and not just sovereigns. If a higher capitalisation leads to lower bank lending, this could be much more painful in the eurozone than it was in the US, given the Europeans’ dependence on banks. Furthermore, the eurozone has no institutions like Fannie Mae or Freddie Mac to absorb the shock of various regional housing market downturns.
Paul Krugman says Wolfgang Munchau has been far too kind to European policymakers
We thought of including this blog comment by Paul Krugman , a comment on Wolfgang Munchau’s FT column yesterday, because it makes an interesting point about small open economies. Munchau argued that the deep problem of the eurozone related to the inability by policymakers to escape from the small-open economy mindset, and adopt the mindset of a large closed economy. Krugman says he has sympathy with this argument, but it was ultimately far too kind to European policymakers. Their policies would have been inappropriate even for small open economies.
“European leaders and institutions by and large didn’t even get to the point of devising policies that might have worked in a small open economy. Instead, they went in for fantasy economics, believing that the confidence fairy would make fiscal contraction expansionary. The ECB, which Münchau credits as the institution most aware of the linkages, was also the institution most dedicated to the doctrine of expansionary austerity.”
Spreads, Forex, and ZC Swaps
Getting worse again, across the board.
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