 End of the Monti rally
We have observed that market rallies on hopes of a full or partial crisis resolution have been getting shorter and shorter. They are now almost intra-day movements. Yesterday began with a continuation with what we would call the Monti rally, but it reversed after the Italian bond auction, at which Italy sold €3bn worth of 5 year bonds at a yield of 6.29% (compared to 5.32% a month ago). The auction triggered another rise in Italian yields across the board, with 10-year spreads over German bunds heading back towards 5%. Spanish spreads are now back over 4.3%, and perhaps, most seriously, French spreads are now at 1.65% – a level that is no longer consistent with the country’s AAA-rating. The number for Italy are inconsistent with Italy’s membership of the eurozone, no matter what Mario Monti can achieve. There exists no attainable growth rate at which could remain a member of the eurozone under those interest rates.
All these adverse market movements have happened despite ECB bond purchases. It is clear by now that the ECB’s security markets programme does not achieve a stabilisation of bond prices. After Jens Weidmann’s public statement that the ECB must not act as a lender of last resort, Yves Mersch yesterday reiterated that position. He said the SMP was limited in volume and in time, and the ECB had no duty to act as a lender of last resort to states. (We believe that a lender of last resort states is probably necessary, but we find it hard to believe that the ECB would be in a position to do so without a stronger political commitment to a fiscal union.)
Greek conservatives vowed to reject further austerity measures
Greece’s conservatives vowed on Monday to reject any new austerity measures in return for the bailout, Reuters reports. Eurozone leaders and the European Commission are waiting for the conservative New Democracy and its two coalition partners — the Socialists and the right-wing LAOS party – to sign pledges that they will do what is necessary to make a new €130bn rescue loan package work. New Democracy leader Antonis Samaras said he would not sign any pledge for new belt-tightening. His support for the three-day old government has been lukewarm. The LAOS party has also objected to any new wage or pension cuts. Opening a parliamentary debate that will culminate in a confidence vote on Wednesday, incoming premier Lucas Papademos urged the parties to commit to implementing the bailout’s terms as agreed last month. Papademos said Greece had no choice but to remain inside the eurozone, telling lawmakers reforms were the only way to mitigate painful austerity measures.
IIF to propose two PSI alternatives
Talks about the haircut start on Wednesday. Kathimerini reports that the Institute of International Finance (IIF) is to propose two PSI alternatives. The first, which the IIF sees as likely to be favoured by investors, concerns foreign bondholders, whose paper adds up to €141bn and provides for a 50% haircut and the swap of the rest for new bonds maturing after 22 years. They will be guaranteed by EFSF bonds worth €29.75bn and will bear an interest rate of 7%, or a coupon from 5.5 to 7.5%. The other alternative, which the IIF expects the Greek banks and social security funds to favour, proposes a 37% haircut on the bonds that have a total nominal value of €65bn, with the remaining 63% covered by new 15-year bonds with an 8% coupon and an additional rate based on the GDP growth rate. Both alternatives cut the debt by 45.9%, or €94.5bn.
Merkel asks for “more Europe” as the reaction to the crisis
At the CDU party convention in Leipzig Angela Merkel asked her party for “more Europe” as a result of the euro crisis, Frankfurter Allgemeine Zeitung reports. “It is time for a breakthrough in Europe now”, she said. The chancellor and party chairwoman refrained from spelling out what exactly that meant but she insisted on tougher sanctions against countries that violate the euro budgetary rules and the right to bring countries in regular breach with those rules to the European Court of Justice. Strangely enough neither FAZ nor any other major German newspaper picked up Merkel’s dramatic statement that Europe was in the worst crisis since 1945. In his feature piece on the convention FAZ’s chief political correspondent Günter Bannas says that the meagre applaus Merkel got on her euro passages illustrated how tired the party was of the never ending euro rescue operations.
For Bild’s Ralf Schuler Merkel now has as much authority as Kohl
Commenting on her Leipzig speech, Ralf Schuler claims that after six years of chancellorship Angela Merkel has reached a level of undisputed authority in her party that only Helmut Kohl enjoyed in recent times. “Minimum wage, more money for Europe, six minutes of applause after a rather boring speech – Angela Merkel can ask of her party whatever she wants”, Schuler writes. “Next to her there is nobody any more in the CDU who could compete with her. No Länder prime ministers, no party wings, no ambitious would be successors”. And the columnist concludes: “Since Helmut Kohl the party has never been as dependent as now on its Number One.”
Ackermann will no longer seek chairmanship of Deutsche’s supervisory board
In a surprise move Deutsche Bank last night announced that Josef Ackermann would no longer seek chairmanship of the bank’s supervisory board, Financial Times Deutschland reports. Officially Ackermann said his duties as the CEO to steer Germany’s only internationally relevant bank through the crisis required all his attention and left no time to convince investors of his switch to the supervisory board. Apparently, important shareholders were unwilling to back that move which raises questions of compliance with corporate governance rules. Additionally, it yesterday emerged that Ackermann’s office had been searched last week in the context of possibly fraudulent statements he may have made in court proceedings dealing with Deutsche Bank’s role in the bankruptcy of the former media magnate Leo Kirch. Allianz CEO Paul Achleitner will now become Deutsche’s new head of the supervisory board. In his role as CEO, Ackermann will be succeeded by Anshu Jain and Jürgen Fitchen in May 2012 as was decided earlier this year. The importance of Ackermann’s definite exit cannot be overstated given the prominent role he had in the management of the euro financial crisis.
EP parliamentarian joins German law professor in ECC case against the ECB
The conservative Belgian MEP Derk-Jan Eppink is the first deputy from the European Parliament to join the German law professor Marcus Kerber in his attempt to sue the ECB for its Securities Market Program (SMP) at the European Court of Justice, Bild reports. Meanwhile the ECB yesterday revealed in its weekly SMP figures that it had only purchased €4.5bn of bonds from crisis countries such as Italy, Greece or Spain bringing the total amount of bonds purchased since May 2010 to €187bn, Financial Times Deutschland writes. The figure is significantly lower than expected by market experts who had thought it would be around €10bn. However the figures only include purchases up until Tuesday last week and settled by Friday last week so the much more turbulent second half of last week is not included.
Roland Berger thinks that Germany is the loser of the euro
Roland Berger, founder of the economic consultancy and one of Germany most trusted economic experts, see Germany as a looser of the euro. “The truth is that Germany was among the losers fo the euro in the first decade”, he told Süddeutsche Zeitung. “Since its introduction and until after the world financial crisis we were among the last in terms of economic growth in Europe – together with Italy. In terms of GDP per capita Germany has dropped from the 4th to the 10th place in the EU. The real income has shrunk by 7.4% in Germany since 2000 – so Germans are able to afford less for their work. The export quota into the euro area has gone back from 46% to 41%.” Also Berger thinks the euro is not the reason for the strong position of German companies. The reason for their competitiveness is that their product mix is tailor-made to the needs of emerging countries and that in real terms the German euro has devalued by 21% towards non euro countries and by 18% in relationship with the euro area. “German products and services have become better and nevertheless cheaper”, Berger argues.
Dutch finance minister says he is not aware of a plan to break up eurozone
This is a story we would normally not have carried, but it struck us because of its wording. Not too long ago, senior European policymakers would either not have commented, or totally dismissed, any reports that the eurozone would break up. According to Reuters, Jan Kees de Jager, the Dutch finance minister, gave a written answer to the Dutch parliament saying that he noted media reports about a core Europe, adding he “was not aware” of such plans. (In other words, he is uncertain about whether this is actually not happening, or whether he is simply left out of the loop – which is of course the way Germany and France have been running this.)
Spreads, Forex, and ZC Swaps
Italian spreads are head back 5%. Carnage all over.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||