Eurointelligence Daily Briefing, 24 de Outubro de 2011. Enviado por Domenico Mario Nuti.


Towards another agreement that won’t solve the crisis

  • Eurozone leader are locked in a marathon in a summit expected to end Wednesday night;
  • they reached a deal on bank recapitalisation of €108bn, to be financed by member states;
  • the two options on the table for the EFSFextension is the monoline insurance idea by Paul Achleitner, and a CDO to attract foreign capital;
  • Angela Merkel prevails against Nicolas Sarkozy’s demand to turn the EFSF into a bank with full access to ECB money;
  • a eurozone official says the banks’ offer of a 40% haircut was a joke;
  • Holger Stelzner says the euro’s endgame will play out in Rome, not Athens;
  • Hugo-Müller Vogg urges Merkel to stay tough;
  • Germany’s Bafin fears contagion of the crisis to the insurance sector;
  • Jens Weidmann argues that leveraging the EFSF increases the risks for the countries backing the rescue fund;
  • Wolfgang Münchau that the concept of a monoline insurance is so dangerous that it could accelerate a break-up;
  • Georges Ugeux wonders whether Sarkozy was confusing the interests of the country with those of the banks;
  • Financial Times Deutschland has an article about the prominent role of Italian officials, now that the ECB’s governing board will have three Italians;
  • Helmut Schmidt endorses Peer Steinbrück as the SPD’s candidate to challenge Merkel in 2013;
  • Paul Krugman says banks are not the causes of the crisis, but a symptom;
  • Rob Parenteau says the troika leaked reports amounts to an admission that expansionary fiscal contraction has failed;
  • Mark Schieritz is surprised by the relatively low estimates for credit support needed by to achieve long-term debt sustainability;
  • Finland has changed the constitution to ban the president from traveling to European summits;
  • Greece, meanwhile, is running out of ink to print tax receipts, because the government did not pay the ink supplier.

This is the half-term report of this marathon summit, which will run until Wednesday. Of the three main issues under discussion, agreement has been reached over the recapitalisation of banks, which is going to be around €108bn. Germany has refused demands by southern European countries that this should be funded by the EFSF, insisting that it should only come in as a last resort (that means we are back to the contagion between sovereign and the banking sectors in countries where this matters the most. The continued lack of a European solution, and the continuation of the policy that member states backstop their domestic banking sector means that one of the largest crisis propagators has been strengthened.)



There has been little progress on the Greek haircut. See more on this story below. On the EFSF, the number of options have boiled down to two – the much discussed Achleitner first-loss insurance option, and an SPV that could draw in foreign money (a monoline insurance plus a CDO – the two most toxic instruments of the credit bubble). The summit definitely rejected the French proposal to turn the EFSF into a bank, and Nicolas Sarkozy announced a tactical retreat from his demand (which means that he will make again at some point). Technical discussions are now going on today and tomorrow to sort out the remaining issues, especially the Greek haircut and the precise structures of those EFSF/IMF vehicles. Complex financial instrument are complex for good reason. The devil is in the small print. A final agreement is expected when the summit resumes Wednesday.


Euro governments and banks are bogged down in fight about haircut in Greece

The euro governments and the banks were in a fight at last night’s summit about the increased haircut for Greece, according to Financial Times Deutschland. The banks proposed a haircut of 40% while the governments insisted it be 60%. But the real difference between the two proposals is much wider because the banks want to extend the losses over a long time period while the governments are asking for an immediate writedown. In addition the banks ask for AAA collateral in the volume of €55bn. A high-ranking eurogroup representative last night called the banks request “a joke”, according to FTD.

(The high-ranking eurozone official apparently does not understand that beyond a certain threshold of a haircut, banks have no longer an interest in a voluntary agreement because of most of them have CDS insurance contracts. A 60% forced haircut is more attractive to them than a 40% voluntary haircut.)


Holger Steltzner warns the endgame of the euro will be played in Rome, not in Athens

Frankfurter Allgemeine Zeitung’s economics editor Holger Steltzner warns of short sighted optimism that once a solution for Greece is found all will be will in the eurozone. “Why should the Berlusconi government burden itself and the Italians with painful consolidation laws if Greece will have half of its debt forgiven and it can nevertheless remain in the eurozone”, Steltzner asks. “Rome is not Athens. The Italian industry is strong, but the politics are weak. Italy could quickly regain international competitiveness and growth if only it wanted to. The decision about the eurozone’s future will not be taken in Athens. The euro’s endgame will be played in Rome.”


Hugo Müller-Vogg urges Merkel to stay tough

Bild’s influential columnist Hugo Müller-Vogg urges the chancellor to stay tough in the marathon summit until Wednesday. “Without Angela Merkel there will be nothing”, he argues. “France’s president Nicolas Sarkozy must learn that the EFSF is not money printing machine. Silvio Berlusoni is being taught a lesson: Italy must finally get serious about consolidating its public finances. All euro countries have to wait for the agreement of the Bundestag”, he continues. “The chancellor must remain tough – in Germany’s and Europe’s interest.”


German watchdog Bafin fears contagion to insurance sector

The German financial watchdog Bafin fears the banking crisis will lead to contagion to the European insurance sector, Financial Times Deutschland writes. Bafin asked the German insurance companies to provide a list of all investments in banks and differentiate whether they hold secured or unsecured bonds. A similar poll by Bafin in the spring showed that the ten biggest insurers had up to 55% of their investment in banks, according to Rolf Wenzel, a director at the finance ministry. “There is a risk of contagion”, the paper quotes Wenzel.


Weidmann warns that leveraging increases the risks

Bundesbank president Jens Weidmann said that leveraging the EFSF was not possible without increasing the risks for the countries backing the rescue fund. “The size of the leverage obviously increases the risk”, Weidmann said in an interview with Bild am Sonntag.


Wolfgang Münchau on why leveraging the ESFS is a bad idea

The credit bubble is not that long ago, but in Europe one seems intent to replicate the worst of its institutional setup. In his FT column, Wolfgang Münchau compares the EFSF to a monoline insurance, which benefitted from an AAA-rating, which they able to pass on to the toxic credit products they insured. That scam eventually burst. In the case of the EFSF, it would lose its AAA-rating when France does. Also, leverage through insurance means a large loss for the guarantors in the case of a haircut. This form of leverage is not a solution, but a vehicle that will greatly accelerate a catastrophic outcome for the eurozone.


Sarkozy, the saviour of the French banks

In his Le Monde blog, Georges Ugeux asks if the French president is in reality the president of the French banks. Ugeux thinks the request to increase the European banks’s participation in rescuing Greece is perfectly justified. But the French banks’ position and the French budgetary position are so weak that Sarkozy has become a major stumbling block for an agreement with his insistence to have the EFSF involved. “[France] is looking to recapitalize the French banks with the European mechanism”, Ugeux asserts.


Italy – the eurozone’s secret superpower

While Italy is on the brink of becoming a rescue case, it has managed to occupy more strategic seats in the eurozone than any other country, Financial Times Deutschland writes. After Ignazio Visco’s nomination to the BoI, Italy will be the only euro country with three nationals present at the ECB governing council: the new president Mario Draghi, board member Lorenzo Bini Smaghi and Visco. Italians are heading three strategic general directorates in the ECB. One of them is Francesco Papadia, who is heading markets operation and in charge of the SMP. Then there is Vittorio Grilli, the head of the Economic and Financial committee, Marco Buti, director general of DG Ecfin and Andrea Enria, chairman of EBA in London. While the integrity and competence of these officials are beyond dispute, the accumulation of Italian influence in euro top jobs is raising eyebrows in the other member states and may soon lead to some rebalancing.


Helmut Schmidt endorses Peer Steinbrück as the SPD candidate for chancellorship

Talking to Der Spiegel, 92 year old former SPD chancellor Helmut Schmidt endorsed Peer Steinbrück to be the Social Democrat’s challenger to Angela Merkel for the general elections in 2013. Schmidt and Steinbrück also had a common appearance last night in a popular Sunday evening talk show.


Paul Krugman says banks are a symptom not the cause of the crisis

In his blog, Paul Krugman says bank recapitalisation is not going to stop the crisis. It is like putting band aid on a dying patient. The eurozone needs a backstop that is fully guarantee by the ECB, combined with a commitment to reflation.


About that leaked Greek debt sustainability report

The Troika’s well leaked debt sustainability report  has given rise some comments. The American economist Rob Parenteau was intrigued by the implied admission that the notion of expansionary fiscal contraction did not work in the case of Greece. This is what he wrote in an email to various journalists and bloggers.

“I may be reading too much into this, and so would appreciate other pairs of eyes on the prize, but if I am not mistaken, point 1. A. on the first page is not only  a pretty open and blatant admission that expansionary fiscal consolidation (EFC) has proven to be a contradiction in terms, at least in Greece, and there is a serious policy incompatibility problem, at least over the intermediate term horizon, with efforts at internal devaluation (ID) – that is, attempting nominal domestic private income deflation in order to improve trade prospects when one has a fixed exchange rate constraint.”


In his blog Herdentrieb, Mark Schieritz focuses on what he thinks is a surprisingly tame estimate of Greek debt sustainability. He points to an estimate of €359bn in new credits until 2030, necessary to reach what the troika believes to be a sustainable debt to GDP ratio of 130%. In a worst-case scenario this would rise to €551bn, which is about 5% of the eurozone’s GDP. And with PSI, that number goes substantially. So he wonders whether this is not really a price worth paying. (We are not so sure about those numbers. The troika has been dead wrong on the impact of the austerity programme, and what it considers a worst-case scenario is more likely to end up as an optimistic scenario. The fundamental problem with Greece, apart from its large stock of debt, is the persistence of high fiscal deficits, which are not coming down. The country needs a strong real devaluation, in order to get back to a scenario of self-sustainability. Also, we do not believe that 130% is a sustainable debt ratio for Greece. We feel that 80% is a more realistic number, one that is clearly out of reach without a default, and possibly exit.)


The Finnish president to stay home during EU summits

Finland’s parliament has passed a constitutional amendment restricting the president’s powers.  One of the changes is that only the prime minister will travel to EU summits, Newsroom Finland reports. The amended constitution makes the first mention of Finland’s EU membership, an addition that the Finns party was strongly opposed to.


Running out of ink for printing tax bills

The Greek government department responsible for sending out tax bills to citizens has virtually run out of ink amid a sudden increase in the number of documents it is printing, according to Sunday’s Kathimerini.  The shortage seems to be the result of cutbacks in the public sector, as the company to supply the ink has not been paid and has stopped its deliveries. Taxpayers are now asked to print their own tax documents via the online system. The finance ministry is in the process of finalizing a tender for a new company to supply ink for the next three years. It hopes to have signed the deal by the end of the year.


Spreads, Forex, and ZC Bonds

Euro up, spreads sideways.


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Source: Reuters



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