 German Constitutional Court slaps preliminary veto on EFSF secondary market bond purchases
Eurointeligence Comment and AnalysisExpansionary fiscal constractions are possible, but they are not automatic. In the case of Greece, the Troika’s policy approach has been an abject failure – indeed, they appear to have finally concluded as much themselves.
This story may not be on your radar screen this morning, but a little known preliminary ruling by the German constitutional court on Friday could have important implications for the management of the EFSF, and the eurozone’s so-called comprehensive rescue strategy. On Friday, the court issued an injunction against the Bundestag’s implementation law of the EFSF procedures. Under the now vetoed arrangement, a special secret committee of nine members would have accompanied the executive decisions of the EFSF on a regular basis. The idea was to reduce delays that would result from parliamentary approvals, and keep information about secret EFSF market operations out of the public domain. In its original EFSF ruling, the court stipulated that any decision by the EFSF with an impact on national budgetary appropriations would have to be sanctioned by the Bundestag’s budget committee. Until the court announces its final ruling, expected end-November, EFSF bond purchases would have to pre-announced, discussed, and voted on by the full budgetary committee before they can be implemented, which, of course, renders the exercise ad absurdum. The Bundestag will wait until the final ruling before deciding on a new procedure. (The court’s ruling tells us that secondary market operations should really be carried out by the central bank, not the fiscal authorities for the simple reason that fiscal decisions have to take by democratic vote.)
Spreads are creeping up again,
After the predictable rally on Thursday, the mood on financial markets became more sobering on Friday when the Italian treasury sold €2.98bn in 10-year treasuries at a yield of 6.06%, Reuters reported. The yield was the highest since the start of the euro. It is unsustainable, and incompatible with the country’s continued membership of the eurozone. As of this morning, Italian 10-year spreads were back up to 3.843%, close to the all-time peaks in the days before the summit. The market relief about the summit lasted less than two days.
Online platform to reinforce home bias for Italian bonds
The Italian Treasury plans to introduce an online platform for Italian households to trade government bonds, according to the Dow Jones Wires. The Treasury said Friday it is developing the new scheme, which may ease access for Italy’s wealthy households to support the country’s sovereign debt. Domestic demand from both individuals and institutions for Italian government bond auctions had provided “satisfying” support for new issuance even during the turbulent markets of recent times. Roughly half of Italy’s public debt is held domestically by banks, insurers and households.
Schäuble wants eurozone to go it alone in financial regulation
This is an interesting story – not so much for its direct, but indirect implications. Wolfgang Schäuble told the FT that he wants to push the Tobin tax, but what is really intriguing is his determination to bypass the EU in the process, and to do this among the eurozone members. He says he will first try this through the G20, then the EU, but since both efforts are likely to fail, the best course to take would then be to introduce eurozone-based legislation. (We believe that the Germans and the French are very determined about introducing a financial transactions tax, something they will almost certainly have to do among each other, as the UK will block any EU-levels. As Ireland is not in a position to block anything right now, this means that the eurozone will need to introduce a financial regulation policy layer that is separate from that of the EU itself.
In an interview with Der Spiegel Schäuble went even further when he said the big task now was to create a new institutional architecture for the eurozone, saying it would take a long time to create it.
Wolfgang Münchau on the diverging interests of the eurozone and the EU
In his FT column, Wolfgang Münchau writes that the necessary solutions to the eurozone crisis will, if enacted, destroy the EU as we know it. His point is not so much that the interests of the eurozone and the non-eurozone EU are diverging, but that the macroeconomic needs of the eurozone will conflict with the microeconomic approach of the EU itself. He quotes two examples. The internal market programme is derived from a need to achieve greater trade integration, but the eurozone needs a far greater degree of market integration to ensure the functioning of a monetary union. On financial services, the eurozone has an intrinsic interest to move towards joint regulation for reasons of macro-prudential stability. Non-eurozone members do not have the same needs. He says he doubts that it would come to a giant conflict between the non-eurozone and the eurozone EU, simply because the non-eurozone is not sufficiently coherent a group. The most likely outcome of this process is an alienation – and possible exit – by some member states, who decide not to join the euro for good.
France considers rise in reduced VAT rates for extra savings
France has less than two weeks to come up with a plan on how to raise €6bn-€8bn to make up for the economic slowdown ahead of the G20 summit Le Monde reports. There are no plans to raise the VAT rate, currently at 19.5%. But the finance ministry is considering the choice between either a rise in the preferential VAT rate or the introduction of an intermediate rate. Currently a reduced rate of 5.5% applies to food, certain agricultural products, and many cultural products such as theater shows and books. A one-percentage point increase in the VAT rate would help the government raise €12 billion, Mr. Baroin said in an interview on news television channel i-tele (hat tip Wall Street Journal).
Greek protesters caused cancelation of military parade
Greek protesters caused the cancellation of the annual military parade in Thessaloniki on Friday, Kathimerini reports. President Karolos Papoulias was forced to leave the dignitaries’ podium in Thessaloniki, as protesters chanted “traitor.” After leaving the parade, Papoulias called on Greeks to “pause for a moment and collect our thoughts.” Opposition leader Antonis Samaras was quick to blame the government for the social unrest, and for the nationalist party Popular Orthodox Rally (LAOS) this was like manna from heaven.
Nick Malkoutzis comments in Kathimerini that the next months require not only an economic but also a political and social overhaul of the system, otherwise the country is doomed to paralysis between voters’ anger and political inertia.
Trichet says that Draghi was misinterpreted
Reuters extracted a nice sound byte from Jean-Claude Trichet, who said that Mario Draghi was misinterpreted last week, when he said the ECB was determined to continue the bond purchase programme. Draghi’s comments was seen in markets as a policy shift by the ECB, as part of which it would increase the size of the SMP, but Trichet warned that this was an over-interpretation. He said the changeover to Draghi was not a change of government. The ECB is very much a team, of which Draghi had been a member for a long time.
Aubry attacks Sarkozy’s China visit
It is interesting to see how the attempt to illicit money from China is turning into a debate of domestic politics. In France, Socialist leader Martine Aubry said over the weekend that by turning to China, the European scuppered any hope that they could secure better terms of trade with the Chinese. “How will Europe now be able to ask China to stop undervaluing its currency and accept reciprocal trading terms?” Reuters quotes her as saying. She said the Europeans should have sought their own solution, by turning the EFSF into a bank, and move towards eurobonds.
How Regling’s CDO is going to work
FT Alphaville dug up a very useful FAQ about how the euro-CDO is going to work. Here is the full document. The following is our summary of FT Alphaville’s summary:
E12 – How will the event of default be defined?
The event of default could be defined differently from the one set by the International Swaps and Derivatives Association (ISDA). A credit event (default) could be defined as the Member State failing to pay either a scheduled interest or principal payment. E16 – What will be the cost of the certificate? The investor will be receiving a lower coupon from the Member State than current market yields reflecting the intrinsic value of the certificate on day 1. E18 – Why should an investor participate in this scheme rather than buying a newly issued bond and simultaneously buying protection in the CDS market? This is for investors to judge. The main difference is that the partial protection certificate will be backed by EFSF collateral and therefore the investor will have counterparty risk to the EFSF (AAA) rather than the provider of a CDS.
Gene Frieda on the outdated European banking model, and why the levered EFSF will not work
Gene Frieda makes two related points in this Project Syndicate column. The first is that the European banking model – consisting of excessive leverage backed by implicit government guarantees – is ending. Europe’s capital ratios may look respectable on the basis of risk-weighted assets, but since government bonds are no longer risk-free, attention must shift to total assets. In France, the capital-to-total-asset ratio is only 2%. The second point relates to the EFSF. As investors are now abandoning the banks, they are now being asked to fund the EFSF – which is not going to work. Here is his conclusion:
“Once a leveraged EFSF fails, it should be clear that the eurozone will not last in its current form. The cause is excessive public and private indebtedness, coupled with the absence of an effective bailout mechanism;the effect is collapsing confidence in banks and sovereign debt.
“The solution is either a broad and deep debt restructuring that imposes losses on the private sector, or an ever more expensive bailout by taxpayers. The latter would be credible only if carried out by the ECB, at the expense of its mandate. Until this choice is made, no amount of additional capital will assuage the private sectors’ fears.”
Spreads, Forex, and ZC Bonds
The crisis is back.
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