 France and Germany are now in open disagreement on crisis resolution
There was a time when this crisis could have been completely avoided simply by Europeanising bank supervision, deposit insurance, and resolution regimes. The policy of kicking the can down the road has now led us to a situation where resolution requires both eurobonds and an ECB backstop facility, both rejected by Germany. With each stage, the financial costs and the political hurdles towards resolution have become higher.
The spread of the crisis to France has not only made it more severe, but also introduced a qualitative change in the politics, as we are now seeing a breakdown of the Franco-German consensus that has held up since the start of the global financial crisis in 2007. France now demands an ECB backstop with increasing ferocity (see our story below).
Yesterday, the ECB intervened on financial markets to stabilise the rapidly falling bond prices in the eurozone outside Germany, but the intervention had little effect. French 10-year spreads remained at over 1.9% this morning, and Italian spreads were close to 5.3%-with yields of over 7%. Reuters reports that Fitch warned of a possible downgrade of US banks, due to the fears of contagion from the eurozone. Our local little difficulty thus has repercussions on the global economy, which in turn will have negative impact on our growth, and thus on our ability to resolve the crisis.
French and Germans continue to fight about the ECB’s role in the crisis
France and Germany continue to fight about the ECB’s role in the current crisis. “The role of the ECB is to ensure the stability of the Euro but also financial stability in Europe”, the French government spokeswoman and budget minister Valérie Pecresse yesterday said after a cabinet meeting in Paris according to Les Echos. “We trust that it is taking the necessary measures as it did in 2008.” Pecresse echoed remarks by finance minister Francois Baroin who had even claimed that the ECB had made a promise at the last euro crisis summit in October to intervene to alleviate the crisis. The French demands was rebuked by Angela Merkel who said, according to Financial Times Deutschland: “Our reading of the treaties is such that the ECB has no means to resolve the crisis.” Handelsblatt even went as far as to characterize the argument as a threat to the German stability in its main front page story. In an interview with Frankfurter Allgemeine Zeitung Wolfgang Franz, chairman of the wise men’s group of economic counsellors to the government, warned that further ECB purchases of government bonds from the crisis countries would be “a deadly sin.
Monti and his cabinet of technocrats
Mario Monti will be his own finance minister, which sort of makes sense, since the job of Italian premier will be almost entirely devote to economic reform, and to EU policies. Yesterday, he presented his new cabinet to President Giorgio Napolitano. It will be made up entirely of technocrats, after the two main support parties, the PD and the PdL (The left, and Berlusconi’s party, respectively) both refused to participate in the government directly. A vote of confidence is scheduled in the chamber of deputies for today, and in the Senate for tomorrow.
Important positions in the Monti cabinet will be held by Corrado Passera, previously MD of Intesa Sanpaolo Group, who will be in charge of economic development and transportation, and by Giulio Terzi di Sant’Agata, previously the Italian ambassador to Washington, as foreign minister. Corriere della Sera has the latest news from yesterday’s officially ceremony, in which Silvio Berlusconi handed over power to Monti. It was worth seeing just for the pictures, showing a beaming Berlusconi shaking hands with a wary Monti.
In a comment in La Repubblica, Massimo Giannini reflects on the “democracy of the spread”. The comment makes clear the cheer relief by Italy’s establishment at the demise of Berlusconi. Giannini marvels at the miracle of how much Italy has been transformed in the last few days, but his joy is also tempered by concern whether a cabinet made up entirely of experts is likely to be able to maintain the support of the Italian parliament, and the trust of the Italian people. He noted the elitist make-up of the parliament – professors, lawyers, prefects, and bankers.
Papademos wins first hurdle in parliament
Lucas Papademos’s crisis coalition cleared its first hurdle on Wednesday by overwhelmingly winning a vote of confidence. Of the 300 MPs in Parliament, 255 voted in favour of the short-term administration and 38 voted against (including three MPs from the coalition), according to Kathimerini. The next challenge for Papademos is to get the fractious coalition parties behind unpopular reforms and this amid renewed protest rallies starting off today. On Friday, the government is to submits to parliament a budget of tax hikes and spending cuts the troika has insisted upon before unblocking an €8bn tranche of financial aid. The new government will also face a protest rally today, a test of public resistance, according to Reuters.
This letter of commitment
EU officials are also still expecting a letter from Papademos bearing also the signature of the leaders from the two main parties that would commit them to the terms of the second bailout agreed on October 26. But Antonis Samaras insisted last week that Greek politicians should not be forced to sign written commitments. Samaras received public backing on the issue yesterday from Giorgos Karatzaferis, the head of Popular Orthodox Rally (LAOS), third party in the government coalition.
State deficit slightly better than expected
The state budget deficit was slightly better than expected in the first ten months of the year, Kathimerini cites provisional figures released on Wednesday by the Finance Ministry. The deficit was €20.104bn, slightly below the revised target of €20.362bn included in the 2012 budget draft.
Troika clears way for next instalment to Portugal
The EU and IMF announced on Wednesday that Portugal was on track to meet the conditions of its €78bn financial rescue programme, clearing the way for the payment of the next €8bn instalment, the FT reports. Vitor Gaspar acknowledged that the government’s deficit reduction efforts had been “off track” after disclosure of unreported deficits in Madeira this year but said one-off measures, such as a cut in Christmas and holiday bonuses and transferring banks’ pension funds to the Treasury, will ensure Portugal achieves its 2011 budget deficit goal of 5.9%, down from 9.8% in 2010. Jornal de Negocios meanwhile reports that the troika made an appeal to private companies to cut wages to their workers in order to sell more and cheaper.
Belgium still has no budget deal after Marathon talks
In Belgium there is still no agreement over the budget, Le Soir reports. The parties ended talks at 6.30am this morning after 13hours of negotiation without a deal. There are fractions between liberals and socialists over school leavers and unemployment benefit payments, but there is also a sense of urgency. The negotiations will continue today at 4pm.
British fears about German dominance
Ahead of David Cameron’s visit to Germany on Friday, Spiegel Online has a story about British fears of German dominance in Europe. CDU parliamentary leader Volker Kauder said at this week’s party conference: “All of Europe is speaking German now”, referring to the fact that Angela Merkel to a large extend dictated the terms of the euro rescue and consolidation programs in the crisis countries. Unsurprisingly this did not go down well in Britain (as in all other EU countries) so that Cameron is under pressure now from eurosceptic politicians in Britain to be seen as tough when meeting Merkel. The chancellor will go out of her way not to confront Cameron, according to the online site, because she needs British cooperation for her plans to amend the EU treaties.
Juncker criticizes German arrogance
In an interview with the Bonn regional paper General-Anzeiger, picked up by Spiegel Online, Jean-Claude Juncker called Germans to show more restraint when talking about their neighbour’s economic problems. “I think to level of German debt is worrisome”, the euro finance minister’s chairman said hinting at the fact that Germany has a debt to GDP level of 80% while Spain only has about 60%. Juncker criticized that nobody in Germany looked at the economic facts of European countries. “ It seems to be easier to say that people in the South are lazy and the Germans work hard. The thing is that this is wrong”, he went on criticizing Merkel’s remarks in spring, when she said that Southern Europeans went on holiday for too long.
Izabella Kaminska of FT Alphaville was flabberghasted by Juncker’s comments. “Just when you thought it couldn’t get any worse… Jean-Claude Juncker, Luxembourg Prime Minister and president of the EuroGroup speaks”, is how she started her article, in which she quoted Juncker’s criticism of the German debt level length (here is another politician with a very limited understanding of what this debt crisis is all about.)
Banks fear EBA ad hoc stress test will lead to additional capital requirement
According to Frankfurter Allgemeine Zeitung, European banks are worried that the current ad hoc stress tests will lead to higher additional capital requirements than the initially announced €106bn. The main reason for this worry is that the EBA will no longer allow to offset potential losses banks may have realized with their holding of Italian government bonds with gains on German bunds. Bundesbank vice president Sabine Lautenschläger last week hinted that the €5.2bn of additional capital for four German banks (Commerzbank, Deutsche Bank, LBBW, Nord LB) may have to revised upward slightly. The concerned banks now fear the upward revision may be much more significant than imagined so far. The EBA intends to announce the additional capital requirements this Friday.
Implementation of Basel III splits the EU
A row has erupted among EU governments about the implementation of the Basel III capital requirement rules, Financial Times Deutschland reports. At the heart of the dispute is the question whether governments can go beyond the Basel III requirements of a core tier 1 capital of 7% or if this should be consider a maximum. FTD quotes from an internal memo of the Polish EU presidency where it is stated that especially the UK would like to be able to go beyond the Basel III requirement. The London argument for national decision making on this issue is that “the ultimate responsibility for financial stability” is with the national governments. The Commission argues that European-wide rules are crucial in order to avoid regulatory cherry-picking by the banks. The Commission claims it is up to Brussels to decide for the entire EU on the capital ratios in the Basel III context. Other countries like the UK, however, want to give this competence to the new European Systemic Risk Board (ESRB), a newly created systemic risk watch dog in Frankfurt that is dominated by central bankers.
Spreads, Forex, and ZC Swaps No reprieve.
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