 The end of Papandreou (and quite possibly of Berlusconi as well)
Greece should have a coalition government and a new prime minister by tonight, Kathimerini reports. George Papandreou and New Democracy leader Antonis Samaras struck a deal in principle last night to form an interim administration that will ensure Athens adopts the latest eurozone bailout before calling elections, most likely late February. The meeting was possible after Papandreou told his cabinet that he had no intentions to lead the interim government. Both are due to meet again on Monday to decide who will lead the coalition government, as well as who will serve in its Cabinet. Former European Central Bank Vice President Lucas Papademos is the front runner, although he was reportedly not in Greece last night.
New elections could be by the end of next February
A statement after the meeting also indicated that the two sides had agreed to adopt the October 26 eurozone deal. “There will be an immediate meeting between representatives of the two sides to determine the obligations that stem from the implementation of the October 26 agreement,” Papoulias said in his brief statement. The president said that the interim government would call elections as soon as the eurozone debt deal has been implemented. This could be by the end of February. The next prime minister’s main tasks will be to regain the trust of Greece’s eurozone partners so Athens can secure the sixth loan tranche from its first bailout. If Greece does not receive the €8bn by mid-December, it could face a disorderly default.
An opinion poll conducted for Sunday’s Kathimerini suggested that despite the current problems, a majority of Greeks (68%) want to remain in the eurozone.
Berlusconi on the brink
We are hesitant to make any predictions about Italian politics, but it looks as if Silvio Berlusconi is in more than the usual political trouble. The trigger could be tomorrow’s budget vote in the Italian chamber of deputies. La Repubblica is leading with the story that interior minister Roberto Maroni, a member of the Lega Nord, predicted that the government had lost its majority after a number of defections. The latest has been Gabriella Carlucci, a former TV show at Berlusconi’s Mediaset company, who later became a Forza Italia politician. Maroni is quoted as saying that the way forward now would be new elections. Berlusconi himself is quoted as saying that he still had a majority in parliament. This morning the 10-year spreads are at 4.566%, a level that at which Italy cannot maintain its membership of the eurozone.
Row about pooling SDR’s sows distrust between Bundesbank and ECB
A row about pooling the euro countries’ special drawing rights (SDR) at the IMF into a dedicated fund in order to enhance the EFSF has led to distrust between the Bundesbank and the ECB, Financial Times Deutschland reports. At the G20, Nicolas Sarkozy and others proposed that the euro countries pool their SDR in a special fund that would have contained up to €60bn of which €15bn would have come from Germany. The aim would have been to supplement the €440bn of the EFSF given that the Sarkozy failed to convince reserve-rich emerging countries like China or Brazil to offer bilateral help to beef up the euro rescue fund. Angela Merkel and Mario Draghi hesitated, and both called Bundesbank president Jens Weidmann, who flatly vetoed the plan. The Bundesbank is in a particularly strong position because according to German law it is administrating Germany’s SDR and it is the Bundesbank president, not the finance minister, who represents Germany at the IMF. The Bundesbank is convinced that some inside the ECB apparatus are behind this idea with the aim to “undermine” the German central banks position. The reason for this suspicion is the existence of a legal document from ECB lawyers, outlining the possibilities of the euro countries’ SDR to be pooled. The ECB denies those allegations and the German government said over the weekend that the plan was off the table. But given that the G20 conclusions call for ways to explore putting the SDRs at the service of the euro rescue, the Bundesbank is convinced the topic will come back maybe as soon as at the euro finance minister’s meeting tonight.
The FT writes this morning that the proposals also included an increase in the IMF’s general funds, and an increase in SDRs. The controversial bit, however, related to the use of eurozone SDRs.
(Ask yourself: what difference would such a concoction have made to this crisis? It would have provided another €60bn in additional eurozone finance to the EFSF. Even then, the EFSF remains underfunded given that Italy is now effectively no longer in a position to fund itself. The Italian crisis is insoluble without an involvement of the ECB, which Germany continues to reject.)
Holger Steltzner warns that the euro rescuers are after the German gold
Frankfurter Allgemeine Zeitung’s economics editor Holger Steltzner warns that the real aim of those promoting the idea of putting the SDR at the service of the euro rescue is to get their hands on the German gold reserves. “Behind this apparently technical procedure is nothing less than the attempt to get to the German reserves”, he writes in a front page editorial. “Since the Bundesbank has invested the largest part of those reserves in gold, which we citizens have earned over the decades, the real aim is our gold. There have been already several governments who wanted to grab this gold – and they have each time paid their attempt with a bloody nose”, he warns referring among others to an unsuccessful attempts of Theo Waigel to get a hold of the Bundesbank’s gold reserves in the 1990s.
Wolfgang Münchau on the G20
In his FT column, Wolfgang Münchau draws parallels between the G20 and the European Council – and the IMF and the EFSF. The latter two have been set up to deal with small countries, yet they are now drawn in to rescue large industrial countries, who size dwarfs their lending capacity. And the G20 is just as ineffective in getting on top of this crisis as the European Council. Münchau disagrees with the prevalent notion that this is a crisis of political leadership. He says the crisis cannot be solved by means of inter-government co-ordination, however well intended. Monetary union in Europe, and the spreads of global finance require new sets of political institutions, not a continuation of the various cosy G7/8/20 processes and the old Bretton Woods institutions.
German government reaches agreement on tax cuts
After seven hours of negotiations, Angela Merkel and the heads of the FDP and the CSU reached an agreement for cuts in the magnitude of €6bn for 2013 and 2014, Süddeutsche Zeitung reports. On top of that the coalition settled a row about additional financial help for child care and a special insurance for age-related care. The government now hopes that the agreement will pass Bundesrat, the second chamber. There is also the announcement by SPD party chairman Sigmar Gabriel that the SPD will introduce a complaint with the constitutional court on the grounds that the tax cuts violate the constitutional debt brake.
French government will present its consolidation package and advance lifting the retirement age
In its effort to maintain its AAA rating, the French government will today announce its consolidation measures. According to Les Echos the surprise announcement will be an increase in the retirement age to 62 years in 2016 or 2017, instead of 2018 as foreseen initially. “These measures will be very difficult to implement but they provide a strong signal the rating agencies”, writes the French economic daily. Other measures include a dis-indexation of social handouts, cuts in the budgets to certain ministries and higher taxes, including VAT on certain building activities, hotels and restaurants. (There is no small amount of irony in this latter point given that one of the tax measures announced after Nicolas Sarkozy’s election victory in 2007 was to lower VAT for these professions) According to Le Figaro those measures should enable France to save between €6 and €10bn, mainly in order to make up for a loss of tax revenues due to lower growth next year. In an interview with RTL-LCI-Le Figaro, finance minister Francois Baroin announced the government aimed at a balanced budget in 2016.
Majority of the French turn hostile to further aid to Greece
As opposed to the Germans, the French so far seemed more inclined to help the Greeks overcome their crisis. But according to a poll for the Sunday edition of the regional newspaper Ouest France, the French are turning hostile to pouring more money on the crisis-ridden country. For the first time a majority of the French are against giving more help and 89% consider “money lent to Greece is lost money”. Somewhat paradoxically, an identical 89% of the French polled for this survey consider that the euro debt problem will continue to escalate if the Greek debt problem is not solved.
Eurozone finance minister to agree EFSF details end November
Reuters has the story that eurozone finance ministers will try to finalise the levered EFSF before the end of the month, a month ahead of schedule. Reuters is quoting a eurozone official as saying that the market pressure on Italy was forcing them to act more quickly. (It really astonishes us that, after everything that had happened in the last couple of months, they still need reasons to act quickly. The pressure on Italy has been building up since August. The urgency to act has been relentless since the July summit.)
Spreads, Forex, and ZC Bonds
Getting closer to the brink. Italian spreads are now way beyond any sustainability thresholds. And French and Belgian spreads are also rising. Notice that Belgian spreads are now where Spanish spreads were before the July summit. The contagion of this crisis is visible in these numbers.
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