Eurointelligence Daily Briefing, 21 de Outubro de 2011. Enviado pelo Domenico Mario Nuti.

The postponement of a decision, and its consequences

  • Angela Merkel and Nicolas Sarkozy issue joint statement that they will not be able to reach a conclusion on the EFSF by Sunday;
  • a follow-up summit to seal the agreement is now planned to take place on Wednesday;
  • the postponement is due to the Bundestag’s new powers: Merkel had no mandate to negotiate beyond the current remit;
  • Merkel and Sarkozy will hold another bilateral on Saturday night;
  • the reaction by the financial markets was negative: Italian spreads now back to 4%, and French spreads continue to creep up;
  • bank recapitalisation is likely to be below €100bn;
  • bond markets experts warn about a two-tier bond market if the EFSF insurance scheme is adopted;
  • Frankfurter Allgemeine and Financial Times Deutschland warn about a break-up of the euro in front-page editorials;
  • Greek parliament adopts austerity bill in final vote;
  •  Louka Katseli excluded from PASOK after voting against article on wage bargaining;
  • EU and IMF continue to disagree on Greek report;
  • Michel Barnier wants rating agencies to be certified by ESMA;
  • German government is odd, and totally uncoordinated, over FDP proposals for a tax cut;
  • Irish government meets bailout targets according to troika report but new risks may require additional measures;
  • Silvio Berlusconi, meanwhile, sprung a surprise yesterday by appointing Iganzio Visco as the new governor ofthe Bank of Italy.


Eurointeligence Comment and Analysis

The case for a fiscal union beyond a eurobond

by Massimo Morelli, Jaime Luque and José Tavares



Macroeconomic shocks have been the standard argument in favour of a fully-fledged fiscal union. But this is neither the only, nor the most important reason. 


The postponement of the single most important decision expected at Sunday’s summit falls in the “hopeless but not serious category” of events. France and Germany decided yesterday that they will not able to bridge their difference over the role of the EFSF by Sunday, and need more time to work out a deal. It is not serious in the sense that there will be an agreement a few days later – in any case before the G20 summit. But it is hopeless in terms of what it reveals a lot about the policy process in the eurozone. The postponement  is due to a combination of two factors: Nicolas Sarkozy’s diplomacy, and the German Bundestag’s insistence that it needs to give a mandate to the chancellor ahead of the summit. Merkel would not have had a mandate to negotiate anything beyond the minimalist insurance solution that was recently under discussion. She now has to crawl back to the Bundestag each time where she gets on a plane.



Merkel and Sarkozy will hold another bilateral summit on Saturday night, and will discuss the issue on Sunday, but will take no decision. They issued a joint communiqué yesterday that pretends that everything is fine. But it did not persuade financial markets, which reacted with an increase in bond spreads. Italy’s spread is now back at 4%, a level as we keep on point out is not consistent Italy’s sustained membership of the eurozone. 

From a market point of view, there is too much disappointment and disunity coming out of the EU right now. A further example has been the dispute between the IMF and the EU about Greece, as the IMF challenges the EU’s optimistic projections for Greek growth.



It also emerged that the bank recapitalisation programme will fall in the too little, too late category of responses – now likely to be below €100bn. If you think that undercapitalised are the core of the problem, then this will not help. If you think that recapitalisation will damage growth (as we do), a weak recapitalisation is better than a strong one, but it will still be negative for growth.



Regarding the EFSF, the debate is about the method of leveraging. The Germans want to continue down the route the discussions had been going until Wednesday, by using a primary market insurance scheme that would allow the EFSF to insure up to €1 trillion in new debt issuance. The French say this is not sufficient, favouring a banking licence for the EFSF. Reuters reports that bond market experts are severely critical of the insurance schemes because it creates a two tier bond market. If an Italian government bond was issued under this scheme, investors would no longer classify it as a sovereign bond, but as a structured product.


Another Summit on Wednesday



A follow-up summit is now scheduled for next Wednesday, Frankfurter Allgemeine Zeitung reports. Since there was no political agreement, chancellor Merkel was unable to deliver her speech in front of Bundestag today and to seek a negotiating mandate by the deputies as is now required after the constitutional court rulings and the legislation about the parliament’s involvement in EU decisions with budgetary implication. So Merkel intends now to go to parliament in the beginning of next week to deliver what she could not bring to the deputies today. Meanwhile, Wolfgang Schäuble explicitly ruled out that the EFSF will be refinanced via the ECB as Sarkozy wants. Frankfurter Allgemeine Zeitung’s political correspondent Günter Bannas has an excellent analysis how the Bundestag’s enhanced powers will force the Brussels machinery and the complex EU political summit mechanism to profoundly change to accommodate the German parliament’s new powers.


FAZ and FTD warn of the disintegration of the euro



Frankfurter Allgemeine Zeitung and Financial Times Deutschland both warn in front page editorials that the breakup of the eurozone is a threat that must be avoided. FAZ’s political commentator Klaus-Dieter Frankenberger warns that for the first time a breakup of the eurozone has become a realistic scenario. “This crisis, which was a debt crisis in its origins and which started from Greece, is increasingly becoming a political crisis of the European Union and the currency union”, Frankenberger argues. “The worry that the whole enterprise will collapse, seems no longer exaggerated. What a disaster that would be.” In a nonsigned full front page editorial FTD writes: “There is no question: What will be decided or not (at the summits) will decide over our well-being. No, it is not too pathetic to say so. Maybe we have not all internalized that the euro can still fail.” In order to drive home its point about the merits of the single currency the paper converted the euros back into D-Marks, Francs, in all the articles in today’s edition. 


Greece adopts austerity bill amid protests



Greek parliament approved the austerity bill Thursday with 154 against 144 votes.  153 deputies were voting  for the entire package, former labour minister Louka Katseli voted in favour of all except for Article 37 about collective wage bargaining.  After the vote George Papandreou expelled MP Louka Katseli from the party, as a consequence the  PASOK’s majority is now reduced to just three seats, Kathimerini reports. Katseli said that even as an independent, she aimed to stay loyal to PASOK.



Protests turned violent on Thursday when hundreds of self-styled anarchists clashed with demonstrators from Communist-led Pame union in front of the parliament, leading to running street battles around Athen’s main Syntagma Square. Thursday’s rally drew 50,000 people, though organizers put the number closer to 80,000, significantly smaller than Wednesday’s turnout, according to Kathimerini. A man died of a heart attack after the violent rally.


Disagreement between Commission and IMF continues



The European Commission is calling for the immediate disbursement of the sixth loan tranche to Greece, while the IMF has decided to issue a separate report, according to Kathimerini, with the IMF concerned that the Commission is too optimistic and that a deeper debt reduction is needed. The Commission’s draft report, prepared in cooperation with the ECB and leaked to Reuters on Thursday, forecasts a significant increase in public debt to 181.4% of gross domestic product for 2012, against the draft budget’s estimate for 172% of GDP. Revenues from privatizations for 2011 amount no more than €1.7bn, against a target for €5bn, and expects the deficit to surge to 8.9% of GDP, or €19.4bn, rather than €18.7bn euros as envisaged in the 2012 draft budget.


Commission wants to enforce rating ban for crisis countries on a global scale



Financial Times Deutschland has a follow-up to its story about competition commissioner Michel Barnier’s attempts to outlaw for rating agencies to publish ratings for countries under EFSF or ÍMF programs. According to the paper, the commission wants rating agencies to be certified by ESMA and thus have to respect the EU agency’s rulings. Frankfurter Allgemeine Zeitung’s economic editor Holder Steltzner derides Barnier’s efforts. “Fortunately, Barnier is not responsible for education, otherwise he would come up with the idea to outlaw bad grades in school”, Steltzner writes.


German coalition fails to agree on tax cuts



Wolfgang Schäuble and Philipp Rösler, economics minister and FDP party boss, wanted to dress up yesterday’s bad growth figures for next year in Germany (just 1% instead of 1.8% as forecasted earlier in the year) by announcing a coalition agreement on a small tax cut in the magnitude of €6bn to €7bn, Süddeutsche Zeitung reports. But Schäuble and Rösler failed to inform CSU party boss and Bavarian prime minister Horst Seehofer who immediately shot down the proposal. In a scathing editorial called “Coalition out of control”, Süddeutsche Zeitung’s Nico Fried concludes: “This dispute shows that even small projects are too big for this government.”


Irish is meeting bailout targets but risks remain



The Irish government is meeting the targets set under the €85 bailout plan but there are domestic and international risks and more sacrifices are to be made, the troika has warned according to the Irish Times. In its latest quarterly review of the plan, the troika said a balance must be struck between correcting the public finances and growing domestic demand in the economy. The Irish government has faced calls to seek savings of greater than €4 billion in this year’s budget.  Finance minister Noonan said the troika had not objected to finding budget alternatives to income tax rises and social welfare rate cuts.


Ignazio Visco, not Lorenzo Bini-Smaghi, to the head the Bank of Italy



This is a most interesting turn of events. The FT reported yesterday that Silvio Berlusconi would appoint Lorenzo Bini-Smaghi to head the Bank of Italy, but the story appears to have generated so much momentum that he decided to change course, and appoint Ignazio Visco, a highly respected Italian economist – now at the Treasury, and formerly chief economist of the Bank of Italy. Until yesterday, this was a race between three candidates, Bini-Smaghi, Fabbrizio Saccomani, number two at the bank, and Vittorio Grilli, head of the Italian treasury. Visco will be the most serious and senior economist in the ECB’s governing council. See Il Sole 24 ore for the internal political manoeuvring behind the decision – too complicated to convey in a short briefing.



This leaves Lorenzo Bini-Smaghi at the ECB, for now, and the French without a candidate to succeed Jean-Claude Trichet as a member of its executive board. Expect a furious reaction from Sarkozy.



Spreads, Forex, and ZC Swaps



Italian spread back to 4% this morning, Spanish moving towards 4%, Belgium towards 2.5%, French spread creeping up towards 1.16%. What we are looking at below is not a sustainable monetary union.

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Source: Reuters




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