Eurointelligence Daily Briefing, 19 de Outubro de 2011. Obrigado ao Domenico Mario Nuti


On the brink

  • French 10-year spreads shoot above 1%, after Moody’s announces a review of France’s credit rating;
  • a French downgrade would require further changes to the EFSF treaty, beyond the agreements reached on Sunday;
  • the Guardian reports that France and German had agreed to lever the EFSF to €2 trillion;
  • Wolfgang Schäuble says it was possible to lever it to a maximum €1 trillion;
  • German parliamentarians were deeply upsets when he told them that leveraging was under consideration;
  • Germany is now pushing for a Greek PSI of 60-70%;
  • Moody’s cut the credit rating of Spain;
  • S&P cut the credit rating of Italian banks;
  • Karel de Gucht says Europe’s leader have been complacent, and that the euro was now in danger of collapsing;
  • Nicolas Sarkozy said Europe’s destiny would be decided in the next ten days, as a failure to agree would bring a “a resurgence of conflict”;
  • pre-election austerity is becoming increasingly likely in France;
  • Guillaume Tabard argues that whoever wins the presidential elections will start with austerity;
  • Jean-Claude Trichet says European Treaty change is needed to make the eurozone sustainable;
  • Greece awaits the “mother of all strikes” in protest against austerity;
  • tax deal between Greece and Switzerland could recuperate funds from tax evasion;
  • Bild accuses the Greek government of not doing enough to stop the outflow of funds;
  • Martin Wolf, meanwhile, argues that even a fiscal union won’t work: the key to the eurozone’s survival is adjustment, and Germany’s structural mercantilism is making this impossible.

The situation has been deteriorating dramatically, after Moody’s put the French credit rating on a review. European officials are now warning that the eurozone may be in danger of unravelling unless the Sunday’s summit was able to take a big decision. German politicians continued yesterday to lower expectations, while the British papers seem to be convinced that the Big Bazooka may indeed come out on Sunday.



The Guardian reported that the eurozone had reached agreement to lever the EFSF to €2 trillion EFSF. (We think they took the EFSF’s total size and applied leverage ratio of 5, but this does not make sense as some funds have already been disbursed or committed. How can you lever what you already paid?) On our calculations, the most the EFSF could devote to primary market operations is about €200bn –and even that would not leave much funds for further loan programmes, which will be needed next year. If you take a first-loss tranche of 20%, with €200bn committed funds, that would insure a maximum of €1 trillion. Unless they structure their Big Bazooka differently,  the total size cannot get much bigger.


Wolfgang Schäuble yesterday confirmed that the EFSF could be levered to €1 trillion, according to Financial Times Deutschland. He insisted the German guarantee of €211bn would not be increased by the manoeuvre but some of the deputies were nevertheless upset. At the recent parliamentary debate Schäuble had refused to provide any details or even confirm plans for leveraging the EFSF so some of the parliamentarians now feel duped by their finance minister.


The other still undecided issue is PSI, which Germany wants to be as high 60% to 70%, but this is unacceptable to France.



After Moody’s comments on France, the 10-year yields have risen to 1.125% overnight. France is now close to a spread where Italy was not too long ago. A downgrading of France (which we think is very likely to happen) would automatically lead to a downgrade of the EFSF as well, and require fundamental changes to the way the rescue mechanism works.



There has been more bad news, after Moody’s  downgraded Spain to A1, and Standard & Poor’s downgraded 24 Italian banks and financial groups, citing weak growth and tight credit.


A sense of panic among politicians



Europe’s trade commission Karel De Gucht was unusually outspoken for a European official warning that there was now a real threat that the euro might unravel, blaming political dithering for the problems, according to Reuters.  “If Europe’s political class is unable to take unpopular decisions on deficits, haircuts, the size of the European Financial Stability Facility and bank recapitalisation, the monetary union may well unravel with truly incalculable economic and political costs,” he was quoted as saying.


Sarkozy: „Our destiny will be decided in the next 10 days“



Nicolas Sarkozy did not react directly to Moody’s announcement to put France’s AAA on watch. But the French president did tell parliamentarians from his party over breakfast that “our destiny will be decided within the next ten days” – apparently hinting at Sunday’s EU summit, Le Monde’s Arnaud Leparmentier reports in his blog Elysée Coté Jardin. Later in the day Sarkozy warned that it was in the 20th century only that Europa had known the “two most barbarian” wars in the world. “To allow the euro to be destroyed is to take the risk to destroy Europe”, he said. “Those who destroy the euro will take over the responsibility of the resurgence of conflicts on our continent.” The president said the origin of the crisis was too much debt in Europe and consolidation was the only way to avoid the fate of Greece, Ireland, Portugal and Spain (he did not mention Italy). “We cannot hand over to our children the price of the cowardice of our generation”, he said.


New budgetary cuts are increasingly likely in France



After the shock of a potential downgrade new austerity measures are becoming increasingly likely in France. Le Figaro reports, that even within government the growth estimate of 1.75% for 2012 is considered to be unrealistic and that further consolidation is therefore under study in order to meet France’s deficit target of 4.5% of GDP in 2012. Currently the consensus among economists is that France will see 0.9% growth in 2012. Some deputies already mention additional budgetary savings in the magnitude of €10bn which would come on top of the €12bn already decided in August. But as the paper points out, austerity in times of an election campaign is as much a political as an ecnomomic issue.


For Les Echos, austerity will be the election campaign slogan



Commenting Moody’s decision in Les Echos Guillaume Tabard  points out that Nicolas Sarkozy as his Socialist challenger Francois Hollande know that will have to manage the consequences of a potential downgrade in six months. That is why the right prepares new austerity measures and the left insists its election platform can be adapted according to economic circumstances. Former finance minister Michel Sapin, one of the Socialists responsible for drawing up the party’s economic proposals, said that he assumes budgetary rigor. “The right and the left will each claim credibility and point to the irresponsibility of the opposite side”, Tabard writes.


Trichet asks for treaty changes to impose budgetary decisions on euro governments



Jean-Claude Trichet is asking for treaty changes to impose budgetary decisions on euro governments that persistently violate the budgetary rules. “In the future it should be possible to impose decisions on countries that continually violate the stability and growth pact and that endanger the currency union by doing so”, the ECB president told Frankfurter Allgemeine Zeitung (interview in English). “According to my opinion the treaty needs to be changed for that”.


Greece awaits the “mother of all strikes”



Thousands of riot police are being rushed to Athens ahead of what one Greek daily has dubbed ‘the mother of all strikes’ – a 48-hour stoppage with a pledge by unions to flood the capital with protesters, the Guardian reports (No reports from Greek newspapers these days, as journalists joined the protests). Rubbish is piling up in streets and ministers locked out of their offices for two weeks now. Workers from rubbish collectors to judges, seamen to schoolteachers, transport employees to journalists have stepped up their resistance to the government’s reforms.  Evangelos Venizelos, the embattled finance minister – who has been unable to enter his office for the past two weeks – spoke of the country being gripped by “complete lawlessness”.


Tax agreement between Greece and Switzerland could bring home billions of tax evader’s money



Talking to Financial Times Deutschland Horst Reichenbach, head of the EU task force in Greece, said that a tax agreement between Greece and Switzerland could repatriate billions of Greek tax evader’s money.


Reichenbach referred to the recent tax agreement between Germany and Switzerland as a model. According to estimates Greeks hold around  € 200bn in Switzerland of which a sizeable amount is money from tax evasion. Additionally the crisis and fears about Greece leaving the euro led many Greek to bring their money out of their country. According to the Greek central bank € 46bn have left Greece since the beginning of 2010. The Swiss government confirmed that it was in talks with the Greek government that would start next week.


Bild attacks the Greek government for allowing money to flee the country



Commenting in Bild Paul Ronzheimer attacks the Greek government for its inaction against Greeks bringing their money out of the country. “While the euro-countries send one package of billions (of euros) after the other the rich Greek have since a long time brought their money out of the country”, he writes. “There is still no trace of the announced transfer tax, tax evaders are still not being punished, the Greek elite are still protecting one another. Grandiose announcements by the Greek finance ministers to publish a list of all tax evaders have been taken back”, Ronzheimer says.


Martin Wolf says there is no hope



Martin Wolf writes in his FT column that a deal on Sunday will not be enough. Not even a fiscal union on its own could save eurozone. It could hold together then, but it would not work.



“The fundamental challenge is not financing, but adjustment. Eurozone policymakers have long insisted that the balance of payments cannot matter inside a currency union. Indeed, it is a quasi-religious belief that only fiscal deficits matter: all other balances within the economy will equilibrate automatically. This is nonsense.”

He concludes that with structural mercantilists at the core, adjustment is not possible.


Spreads, Forex, and ZC Swaps



France is now in the position where Italy was not too long ago, with 10-year spreads now well over 1%. Italy is heading back towards 4%. The crisis is once again in acute phase.

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Source: Reuters




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