Eurointelligence Daily Briefing, 1 de Novembro de 2011. Enviado por Domenico Mario Nuti.

 

So much for the latest comprehensive plan…

  • George Papandreou calls a referendum on the Greek bailout, triggering a market rout that yesterday led to another dramatic rise in spreads;
  • referendum is due in December or January;
  • outcome is highly uncertain with polls suggesting that 60% of Greeks oppose the agreement;
  • opposition leader Antonis Samaras is pressing for early elections;
  • Italian 10-year  spreads have crept back up to 4.1% – with 10 year yields now at an unsustainable level of 6.1%;
  • euro down 2 cents on the dollar;
  • there is now a growing scepticism among investors about last week’s “comprehensive” measured agreed by the European Council, especially regarding the Greek package, and the leveraging on the EFSF;
  • Spain’s economy stagnates during Q3;
  • Yu Yongding argues why China won’t come to the rescue of the eurozone;
  • Willem Buiter, meanwhile, says either the EFSF’s guarantees need to rise to €2.5-3 trillion, the ECB steps in, or the eurozone breaks up.

Dramatic moments in Greece, as George Papandreou surprisingly announced on Monday that his Socialist government would hold a confidence vote and a nationwide referendum on a new EU aid package for the country, Kathimerini reports. Papandreou said that  the referendum would be a straight ‘yes’ or ‘no’ to adopting the €130bn aid package;

 

 

It is a dangerous strategy as a  ‘no’ vote would  unravel the deal hammered out by EU leaders last weekend and force Papandreou to resign. The confidence vote is expected to succeed and will take place on Friday night following three days of parliamentary debate. The referendum  will be hold either in December or January.

 

 

Parliamentarians questioned the legality under the constitution, which does not allow referendums on economic issues, only on matters of great national importance, Reuters reports. For a referendum result to be binding, there must be a minimum 40% turnout on issues of “crucial national importance” and 50% on a law that has already been voted on in parliament. If Papandreou loses the vote, he has to resign. Nearly 60% of Greeks view Thursday’s EU summit agreement on the new bailout package as negative or probably negative, a survey showed on Saturday.

 

 

New Democracy leader Antonis Samaras will visit President Karolos Papoulias on Tuesday to discuss developments and push for snap elections, party officials said.  New Democracy is rising fast in opinion polls, but no party would win outright if polls were held now, leading to coalition governments or repeated elections.

  

Market euphoria reverses dramatically

 

 

Markets are beginning to wake to the catastrophic shortcomings of last week’s eurozone deal, as Italian spreads are now back at the peak of eurozone membership, with ten-year yields now trading at 6.1%. Investors are beginning to realise that the leveraging of the EFSF is not going to work, that foreign governments are not going to provide financial guarantees the eurozone itself is unwilling to give, that the recapitalisation of the European banking system is insufficient, and that even the Greek PSI plan is likely to derail after George Papandreou yesterday called for a referendum. The probability of a disorderly default in the eurozone periphery is now very high, and the crisis is now spreads further through the periphery. Unfortunately, we are back in a situation where the crisis is moving at a faster speed that the political response.

 

Why China will not come to the rescue

 

 

Yu Yongding, a former member of the People’s Bank of China’s monetary policy committee, provides an eloquent explanation why China is not going to play a prominent role in the eurozone rescue. The reasons are political. Apart from the usual arguments – hard to explain why to help the much richer Europeans – he makes the point that the eurozone has a current account surplus, and is thus logically in a position to help itself. Why should China help the eurozone, if Germany does not? The best way for Beijing to help would be indirectly – through an appreciation of the exchange rate. But it would be a mistake for China to take decisions on other than financial grounds.

 

Spain’s economy stagnates in Q3

 

 

The Bank of Spain yesterday forecast that the country’s economy had stagnated in the third quarter, according a new report in El Pais. The country was also in some danger of missing its deficit target of 6%, as it is trapped in a vicious circle of deficit cutting and lower tax revenues, which had fallen below target. The article cites an Spanish economist who fears that the country is unlikely to escape from this vicious spiral.

 

Willem Buiter on why the levered EFSF will not work

 

 

Writing in the Financial Times, Willem Buiter says that the levered EFSF is not going to work the way the Europeans intend. The increase in the firework only makes sense if the money provided came in at lower than market rates. That is simply not going to happen. The EFSF needs a loss-absorbing capacity of €2.5-3 trillion, or the ECB needs to step in. Buiters estimates that the ECB’s non-inflatoin loss absorption capacity is €3 trillion (the closest you can come to a free lunch). Buiters also said that the agreed bank recapitalisation volume is a third to a quarter of what is needed. He concludes with the following stark warning:

 

 

“The choice, sometime in 2012 or, at the latest, 2013, will be between a collapse of the euro area and large-scale quasi-fiscal abuse of the ECB.”

 

Spreads, Forex, and ZC Bonds

 

 

All quite bad. Italian spreads are close to their eurozone-era record. French spreads are back above 1%, and the euro fell by 2 cents. Market sentiment has clearly deteriorated.

 

10-year spreads

 

 

 

 

 

 

 

Previous day

Yesterday

This Morning

France

0.983

1.086

1.084

Italy

3.841

4.008

4.088

Spain

3.336

3.528

3.595

Portugal

11.351

11.376

11.328

Greece

21.909

22.660

22.67

Ireland

6.094

6.183

6.389

Belgium

2.145

2.363

2.365

Bund Yield

2.183

2.027

1.947

 

 

 

 

 

 

 

 

Euro Bilateral Exchange Rate

 

 

 

 

 

 

 

Previous

This morning

 

Dollar

1.401

1.3814

 

Yen

110.600

107.95

 

Pound

0.876

0.8607

 

Swiss Franc

1.222

1.2144

 

 

 

 

 

 

 

 

 

ZC Inflation Swaps

 

 

 

 

 

 

 

previous

last close

 

1 yr

1.94

1.71

 

2 yr

1.92

1.61

 

5 yr

1.95

1.7

 

10 yr

2.1

1.85

 

 

 

 

 

Source: Reuters

 

 

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