 French spreads reach 1.7%, Spanish spreads at 4.2% – the eurozone crisis is on verge of getting out of control
This is no longer just an Italian problem. Spanish spreads have reached 4.2% – and this despite any absence of adverse of political developments. French spreads are now at 1.7%. In the summer we recall that the Italians reacted with sheer panic when at one point Italian spreads reached 2%. France is now exactly 6 month behind Italy. The eurozone crisis is now on the verge of getting out of control. The French downgrade was triggered by a strange error on the part of S&P, the rating agency, which had mistaken published a note to its clients that it had downgraded the French sovereign rating. It was only a mistake, Standard & Poor’s later apologized, but it was enough to spook the markets and the French political class, Le Figaro reports. “Even if there is no downgrade for France at the moment this mistake confirms that the rating agencies are working on an eventual downgrade of the country’s debt”, Le Figaro writes. “This would put France in a critical situation to reduce its deficit and to borrow on the markets.”
Oops, Regling seems to have lost interest in leveraging the EFSF Klaus Regling yesterday blamed market volatility for difficulties he has in leveraging the EFSF, the FT reports this morning. He said the number of €1 trillion was always ambitious. He said that guarantees would have to be bigger to get investors engaged in this structure. The paper cites the EFSF’s financial officer as saying that the strategy now was to issue short-term bills right away. (The truth is that leveraging the EFSF is a downright silly idea, and part of the reason why the financial markets are losing confidence. It is on level a sign that the eurozone is not ready to solve its own problem, have to rely on outside helping. More importantly, the leveraging is far too high to achieve any meaningful reduction in spreads. There is no way you can cap the spreads at 2% for the entire eurozone through this structure.)
Wishful thinking and dire realities in France The French government tries to give the impression that there is no real risk of contagion and a downgrade for France, according to Les Echos. “Things will go back to normal once the new government (in Italy) will have rapidly adopted the urgency measures it has announced it would take”, an anonymous French government source told the paper. In its top front page story however Le Monde asks: “After Greece and Italy now France?” In another story under the title “For the markets, the French debt is less and less a save investment” Le Monde quotes several very pessimistic analysts. “With the measures (announced Monday) France will this time keep its rating”, Marc Touati of Global Assya told the paper. “But the question is not if France will lose its AAA but when”. Le Monde then quotes Jacques Attali, one of the country’s most prominent public commentators, who says: “France has de facto lost her AAA. It is pointless to insist on that rating.” The EU commission meanwhile destroyed the government’s optimistic growth assumptions for next year, Le Monde reports in yet another piece. Olli Rehn yesterday said he believed the French GDP growth in 2012 would only be 0.6% and not 1.0% as the government thinks. If Rehn is right French government will have to introduce additional savings in the magnitude of at least €4bn for 2012 on top of the cuts of €18bn announced in August and past Monday, if it wants to reach its deficit gaol of 4.6% next year.
The ECB rejects SOS calls by governments and commentators In what seemed to concerted public comments a series of ECB members rejected the calls by governments and commentators that it must now step in and stop the panic as the lender of last resort, Financial Times Deutschland reports. “We have already gone pretty far in what we can do and one cannot expect of us to much more”, the Dutch central bank president Klaas Knot yesterday warned. He was echoed by Peter Praet, the Belgian ECB board member, who said the central bank risked “absolutely and clearly going beyond its mandate”. ECB chief economist Jürgen Stark warned against expectations the ECB would step in as the lender of last resort by saying that “this is something we will not do”. Those comments echoed remarks made earlier by Mario Draghi and Jens Weidmann. Yet, at the same time there are rumours about battles within the ECB about the course to follow and crisis meetings. A Bundesbank spokesman, however, yesterday denied there had been a crisis meeting at the ECB. But Handelsblatt quotes an unnamed prominent CDU politician that the central bank being the lender of last resort may be “the only solution” to save the eurozone.
Gavyn Davies explains why the ECB can’t monetise This is a very good analysis by Gavyn Davies, who breaks away from the FT’s commentators’ consensus that the ECB will now have monetise the debt. He starts off quoted two research papers, by Willem Buyter and Huw Pill, according to which the ECB has a non-inflationary capital of about €2-3 trillion. Very roughly: central banks earn income from seignorage, the fact that cash in circulation does not carry any interest, while the central banks earns money by lending to banks or buying assets. If you discount the entire future income stream of seignorage, this is approximately the number you arrive at. The ECB could monetise debt up to this amount without creating inflation. Davies argues that this is fine for a central bank in a nation state, it is extraordinarily problematic for a central bank of a monetary union because debt monetisation of one country would involve a one-off transfer of resources from the monetary union to that country.
Italy to vote on stability law today and tomorrow The Italian will vote on the stability law today (Senate) and tomorrow (chamber), after which Silvio Berlusconi is going to present his resignation. The frontrunner to succeed him now is Mario Monti, but there are still political talks going on in Berlusconi’s PdL about what to do. Corriere della sera has an account of the confusing debate that we are not even attempting to summarise. A decision is due tomorrow.
Sovereign debt crisis threatens German banks, Bundesbank warns Presenting this year’s Financial stability report, the Bundesbank warned that the escalation of the sovereign debt crisis put the stability of the German banking system at risk, Financial Times Deutschland and Frankfurter Allgemeine Zeitung report. “The risks for the German financial system have markedly increased”, Bundesbank board member Andreas Dombret said. The extension of sovereign debt crisis to Italy and Span had provoked “massive contagion effects” that had reached internationally active banks including in Germany. While a bankruptcy in Greece “can be handled”, the Bundesbank pointedly refrained from saying the same about a bankruptcy in Italy and Spain. The escalation of the sovereign debt crisis therefore neutralises the better financial health of the German banking sector which has increased its capital buffers and decreased its leverage ratios compared to the pre-crisis levels in 2008.
Papademos named prime minister for interim government Lucas Papademos was named Greece’s new prime minister after leaders of the three parties participating in a new coalition government finally managed to overcome their differences, Kathimerini reports. Papademos has yet to announce his cabinet. Sources in both parties said Evangelos Venizelos was likely to remain as finance minister. It is also believed that the ministers of education, transport, health, agriculture and the environment will also keep their posts. It is expected that New Democracy will contribute around four party officials — not MPs — to the new cabinet and that two LAOS deputies will take ministry posts. The cabinet is scheduled to be sworn in at 1200 GMT on Friday. Analysts are cautious on whether Papademos can impose tough austerity amid rising public resistance. As a man with no political experience, he may struggle to exert his authority over strong party figures in his cabinet like Venizelos. Venizelos is expected to run for the prime minister’s job in the elections next year.
Greek unemployment rises to 18.4% There is also some bad economic news coming in from the statistical office ELSTAT reporting that unemployment jumped almost 2 percentage points in one month to a record 18.4% in August, a time when the rate traditionally falls as tourists flock to Greek beaches.
Portugal set to approve 2012 budget, heading for deep recession In Portugal, the parliamentary debate about the 2012 budget bill started and is expected to pass in parliament on its first reading today, Friday, even though its sweeping austerity measures are set to send Portugal into its deepest recession in decades, Reuters reports. The European Commission predicted now that the Portuguese economy will contract by 3% in 2012 — the worst performance in the eurozone, with a jobless rate to reach a record 13.4%. Next year’s budget includes a deeply unpopular measure to cut civil servants’ year-end and holiday bonuses, effectively cutting two months’ pay off their annual salaries, as well as sweeping spending cuts and tax hikes. The Portuguese will next year pay more sales tax, income tax, corporate tax and property tax. Welfare entitlements are being curtailed. Private sector employees will have to work an extra 30 minutes a day while state employees earning more than €1,000 a month won’t get their Christmas or vacation bonus. The Troika is currently in Portugal for a second progress review.
Bini Smaghi bows to Sarkozy pressure and leaves the ECB board for Harvard Lorenzo Bini Smaghi last night bowed to Nicolas Sarkozy’s public mobbing and announced that he was leaving the ECB board by the end of the year to go to Harvard, Financial Times Deutschland and Lemonde.fr report. Since this summer Sarkozy had repeatedly called on the Italian board member to resign once Mario Draghi took over the ECB presidency from Jean-Claude Trichet. “Today there are two Italians (in the ECB board), I am delighted for Italy, but that cannot last because there is no French”, he said at the last EU summit at the end of October. For the ECB’s cherised independence and Bini Smaghi’s personal ambitions, this is a disaster. The bank’s legal service even issued an internal opinion in which it insisted a board member could leave only if he or she was offered a position of “equal rank”. Mario Draghi, however, put on a brave face last night and showed a good sense of irony when he said in a written statement: “Throughout his mandate, including in taking this decision, Mr Bini Smaghi has upheld the independence of the ECB.”
Nouriel Roubini on the debt dynamic that is pushing Italy into insolvency This is a very good analysis, not so much for its prediction, which will horrify any Europeans, for its analysis of the dangerous debt dynamic that we are currently seeing. Nouriel Roubini writes in the FT that Italy is very likely to default ton its €1900bn debts, and leave the eurozone. This is his outline of the dynamic that produces this catastrophic outcome: “Until recently the argument was being made that Italy and Spain, unlike the clearly insolvent Greece, were illiquid but solvent given austerity and reforms. But once a country that is illiquid loses its market credibility, it takes time – usually a year or so – to restore such credibility with appropriate policy actions. Therefore unless there is a lender of last resort that can buy the sovereign debt while credibility is not yet restored, an illiquid but solvent sovereign may turn out insolvent. In this scenario sceptical investors will push the sovereign spreads to a level where it either loses access to the markets or where the debt dynamic becomes unsustainable.”
Spreads, Forex, and ZC Bonds No comment.
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