Eurointelligence Daily Briefing, 20 de Outubro de 2011. Enviado pelo Domenico Mario Nuti.


France insists on banking licence for the EFSF

  • Nicolas Sarkozy and Angela Merkel have fundamental disagreement on the reforms of the EFSF;
  • France fears that the present outlines of a levered EFSF would not be sufficient to have an impact on financial markets;
  • Merkel, Sarkozy, van Rompuy, and Barroso hold a two-hour long meeting, but reach no agreement;
  • Silvio Berlusconi has decided to nominate Lorenzo Bini-Smaghi as the new governor of the Bank of Italy after Sarkozy threatened to denounce the Italians at the summit;
  • Portuguese trade unions are organising a general strike in protest against the 2012 austerity budget;
  • the Greek parliament is due to publish the austerity bill today;
  • a disagreement between the IMF and the European Commission is holding up the publication of the troika report on Greece;
  • the Bundestag insisted on a full summit resolution draft in German – to be delivered by 12am last night – or threatened to withdraw Merkel’s mandate for Sunday’s summit;
  • Helmut Schmidt severely criticised the incompetence and indecisiveness of Europe’s political leadership during the debt crisis;
  • Holger Stelzner urges Mario Draghi to correct the mistakes of his predecessor, in particular to end the SMP;
  • EU Commission wants to outlaw inconvenient country ratings;
  • Le Monde says that France has lost its equal status to Germany;
  • S&P downgrades Slovenia;
  • Paul de Grauwe says bank recapitalisation is not going to work: only the ECB can help;
  • Gavyn Davies says no financial engineering can get around the fact that the EFSF is too small.

There is always this nail-baiting moment before a European summit when it appears that a deal may not be possible. Of course, they always reach a deal later (insufficient deals as it turned out). Yesterday we hit this diplomatic crisis moment, when Nicolas Sarkozy gatecrashed Jean-Claude Trichet’s farewell party in Frankfurt and put France’s demand back on the table to give the EFSF a banking licence so that it could refinance itself via the ECB, Financial Times Deutschland writes. After the official celebration, there was an improvised mini summit with Angela Merkel, Jean-Claude Trichet, Mario Draghi, Herman Van Rompuy and José Manuel Barroso attending. Before Sarkozy’s surprise visit, Francois Baroin said that France remained convinced that the “banking licence for the EFSF would certainly be the best solution”. After two and half hours, all the participants left without statements. German government sources expressed surprise at Sarkozy’s decision to go back on a subject they thought they had buried, as it was unacceptable to both Germany and the ECB.


Lorenzo Bini-Smaghi to become governor of the Bank of Italy

The Italian crisis ultimately helped him. The FT reports that Silvio Berlusconi will this week nominate Lorenzo Bini-Smaghi as the next governor of the Bank of Italy to succeed Mario Draghi. Bini-Smaghi has refused to resign from his post at the ECB unless offered the top job at the BoI, while the Italian government had two different candidates for this job in mind – Fabrizzio Saccomanni, the deputy governor and until recently thought the most likely candidate, and Vittorio Grilli, the head of the Italian treasury, the favourite candidate of Giulio Tremonti. Berlusconi decided to nominate Bini-Smaghi at least in part to avoid a showdown with Nicolas Sarkozy, who is keen to nominate a French candidate to the ECB, which he could not do if two Italians were on the executive board. (It will be interesting to see what changes at the top of the BoI this appointment will trigger.)


There was more background on this story from Les Echos. If the situation had not been resolved  by Sunday’s EU summit, Sarkozy would be prepared “to denounce” the presence of two Italians (Draghi and Bini Smaghi) at the ECB board.


An insurrection against Portugal’s 2012 austerity budget

Portugal’s biggest labour unions, CGTP and UGT, scheduled a general strike for Nov. 24 to protest against austerity measures, 5 days before the final parliamentary vote is due on the 2012 austerity budget. The 2012 budget includes plans to eliminate summer and Christmas salary payments for state employees with a salary above €1,000 a month. Tax deductions will be reduced and value-added tax increase on some goods.  An initial vote on the 2012 budget proposal is scheduled for Nov. 4, the final vote scheduled for November 29. The new Socialist leader Jose Antonio Seguro is highly critical of the budget and refuses to clarify how Socialists will vote, Jornal de Negocios reports.


Greek Parliament set to approve austerity bill while strikes intensify

The Greek Parliament is expected to give a final green light to the latest austerity plan later today, after backing it in principle in a first reading on Wednesday despite the country’s biggest labour action in years, Reuters reports. Most PASOK deputies are expected to approve the changes, albeit reluctantly. Only one MP, former Labour Minister Louka Katseli, insists that she will vote against the article on collective bargaining, writes Kathimerini. Angry protesters, meanwhile, vowed to bring Greece to a standstill on the second day of a general strike. Tens of thousands of people took to the streets of Athens on Wednesday for one of the largest anti-austerity demonstrations in recent years with some outbreaks of violence and looting.


Troika report hold up over disagreement

Disagreement between the European Commission and the IMF is holding up the release of the report on Greece, crucial for the release of the next aid tranche, Kathimerini reports. The IMF is maintaining a tougher stance, and considers the Commission’s estimates to be too optimistic. The report may not be published before the Eurogroup meeting on Friday.


Bundestag insists on full implication on all Euro rescue decisions

The Bundestag made it clear to Angela Merkel that it insists on seeing the draft proposals for the EFSF guidelines in German this Thursday if it is to give the chancellor a mandate for negotiations at the summit on Sunday, Frankfurter Allgemeine Zeitung reports. The parliament intends to discuss the guidelines at a special session of its budget committee today but there have been no drafts so far. According to the new law about the co-decision of the Bundestag on European matters (a result of the Constitutional Court’s ruling ordering a systematic implication of Bundestag on all EU matters with budgetary relevance), the government has to seek a mandate from parliaments in order to have the legitimate right to decide on behalf of Germany during summits. FDP parliamentary leader Rainer Brüderle said the EU drafts had to be presented to the Bundestag at midnight today. Otherwise Merkel would have to go to Brussels without a mandate and thus unable to conclude any deal. Some parliamentarians said Brussels would have to get used to producing its draft early enough so that Bundestag could debate them and decide whether to give the government a negotiating mandate or not.

(This absurd story tells us that the German political and legal system is no longer for membership in the EU.)


Helmut Schmidt lambasts the incapacity of Europe’s politicians to tackle the crisis

At Jean-Claude Trichet’s farewell event in Frankfurt former chancellor Helmut Schmidt severely criticized “the incapacity” of European politicians to effectively address the crisis, Financial Times Deutschland and Spiegel Online report. “It was the ECB board under the guidance of Trichet that has proved to be effective during the financial and debt crisis”, the 92 year old politician said looking down severely on the front row where Angela Merkel, José Manuel Barroso and Herman Van Rompuy sat listening. In her congratulatory speech to Trichet, Merkel insisted that treaty changes must not be a taboo and that the summit should decide to set up a convention to do so, Frankfurter Allgemeine Zeitung reports.


Holger Steltzner urges Draghi to correct Trichet’s errors

Frankfurter Allgemeine Zeitung’s economic editor Holger Steltzner urged the incoming ECB president Mario Draghi to correct what he called Jean-Claude Trichet’s fundamental errors. In a front page editorial under the title “At the service of politics” he insists Trichet was wrong to buy government bonds from Italy and other crisis countries. He denigrated the ECB to being “a handyman of politicians who do not want to burden themselves or their citizens with a solid budgetary policy”. It is naïve to think that politicians will be less addicted to deficit and debt once the disciplinary effects of the capital markets are no longer there, argues. “The new ECB president, the Italian Draghi, needs the strength to correct the errors of his predecessor”, Steltzner writes.


EU commission wants to outlaw ratings for euro crisis countries

According to a confidential draft law, EU competition commissioner Michel Barnier wants to outlaw ratings in specific cases for euro crisis countries, Financial Times Deutschland reports. The draft says that the European Securities and Market Authority ESMA should be allowed to “temporarily outlaw” rating agencies’ country ratings for euro countries which are in negotiations with the EFSF or the IMF for rescue credits. Such an interdiction intends to avoid that ratings come at an “inappropriate moment” and that they have “negative consequences for the financial stability of the state or possibly destabilizing effects on the world economy”, the paper quotes from the draft.

(This is a sign how desperate the European authorities have become. Instead of solving the crisis, they are pointing fingers. The rating agencies played a role in the US mortgage crisis because they awarded AAA-rating to financial products whose risk was inaccurately assessed. The rating agencies are not to blame for the eurozone debt crisis. To us, the only rational reason to come up with such a nonsense proposal is to scare the rating agencies against lowering the French AAA rating. This might backfire badly.)


France has lost its equal status with Germany, Le Monde writes

In an unsigned front page editorial on the Moody’s decision to put France on watch Le Monde says the country has lost its status as a power equal to Germany. “France and Germany are no longer a couple of equal”, the paper writes. In order to give France back its competitive edge France will have to undergo the social and economic reforms the social democratic chancellor Gerhard Schröder launched in Germany almost ten years ago and which have left the country with an unemployment rate of around 6% and a growth rate of almost 2.9% this year, Le Monde explains.


Standard & Poor’s downgrades Slovenia

Reuters reports that Standard & Poor’s lowered its sovereign credit rating for Slovenia from AA to AA-, citing a deterioration in the fiscal position, and the lack of a convincing fiscal strategy. The country’s debt, which been declining between 2002 and 2008, had rapidly increased during the crisis, and is expect to have doubled in three years. S&P said the Slovenian government had been complacent about structural reforms.


Paul de Grauwe says no solution without the ECB

Writing in the Financial Times, Paul de Grauwe argues that only the ECB can solve the banking crisis. Governments could have recapitalised the banking sector in 2008, but not now. The only way to prevent a meltdown of the financial sector is for the ECB to step up the SMP massively in support of the financial sector. To avoid moral hazard, firmer rules for budgetary policies have to be put in place. The EFSF is no alternative for the ECB, as it has limited funds and cannot act quickly.


Gavyn Davies says financial tricks are not going to work

This is a very good column by somebody who understands financial instruments, what you can do with them, and what not. Gavyn Davies writes in the FT that the idea of leveraging the EFSF is not going to work because the guarantees behind the EFSF are far too small relatively to the amount to levered. He does the math, and concludes that the maximum amount that can be credibly levered would be between €500bn and €1000bn. In the end, there is no way around it: you need to increase the size of the EFSF. (Since this cannot be done without endangering the French AAA rating, and thus the EFSF itself, this requires the introduction of a joint and several guarantee – a Eurobond in other words.)


Spreads, Forex, and ZC Swaps

Still getting worse. Anybody have any idea why inflation swaps are rising again?


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Source: Reuters




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