 French spreads breach 200bp for the first time
Eurointeligence Comment and AnalysisBig political changes are now sweeping through the eurozone, putting, at least for now, the many skeptical political observers to shame.
The crisis yesterday crept further into Spain and France, as both countries came under pressure in separate bond auctions. Spanish spreads yesterday touched 5%, and French spreads for the first time briefly exceeded 2%, prompting heavy ECB intervention to push yields a little lower. (Our table below reflects the effects of these purchases). The Spanish Treasury issued €3.6bn of 10-year bonds at an average yield of 6.975%. In its coverage of the story, the Financial Times quotes a credit analyst at Citibank, who said it appeared that the eurozone government bond market was broken, and beyond repair. Another analyst was saying that the markets were now beginning to price in the breakup of the eurozone. In a separate report, the FT reports that British banks have cut their exposure to the eurozone periphery by 24% in the three months to end-September. (We assume that this retrenchment must have continued since).
Conflict between Germany and the eurozone on the ECB intensifies
The conflict between Germany and everybody else in the eurozone turns sour, as Financial Times Deutschland reports. José Luis Zapatero literally pleaded to Germany to let the ECB end the crisis. “We now need a European Central Bank that really merits its name and that defends the euro”, Spain’s outgoing prime minister said. Francois Baroin reiterated France’s position that giving the EFSF a bank license and letting the ECB refinance the EFSF would be the best solution. The paper quotes French government sources who said only “a massive intervention” by the ECB would be able to stop the crisis now. Le Figaro quotes another source who points out: “The rise of spreads that we have seen in the last days, including in the Netherlands, shows that the problem is not whether countries have a sound budgetary policy or not. There is a global attack on the eurozone that needs a global response.” The paper says that Nicolas Sarkozy spoke with Angela Merkel on the phone Wednesday and Thursday. Those conversations however did not change the chancellor’s mind.
According to FTD, she once again rejected any direct ECB involvement. Merkel said none of the proposed plans “would bring about a solution to the crisis”. The CDU/CSU deputy parliamentary group leader Michael Meister said all those ideas amounted to the futile attempt to solve the crisis via the “money printing press”. According to Süddeutsche Zeitung, she also reiterated her opposition to all forms of Eurobonds.
Germany’s plans for a political union
The Daily Telegraph quotes from a six-page German foreign ministry document setting out a pathway to political union. This includes plans for a European Monetary Fund, with the right to usurp sovereignty from member states. “The fund will have the power to take ailing countries into receivership and run their economies. Even more controversially, the document, entitled The future of the EU: required integration policy improvements for the creation of a Stability Union,” the newspaper writes. This was part of a process in which the EU develops into a political union, a debate on which needs to start right now.
The newspaper is obviously interested in the consequences for the UK, especially on the day of David Cameron’s visit to Berlin. Merkel proposes a deal where the changes only apply to the eurozone, in the hope to avoid a referendum in the UK. The Financial Times has a report this morning that Cameron will back Merkel’s plans for a political union, but on condition that the Tobin tax does not apply to the UK (which would almost certainly scupper the whole idea).
Sarkozy is prepared to render sovereignty in order to find a compromise with Merkel
Nicolas Sarkozy is looking for a way out of the current crisis decoupled France from Germany in the investors’ perception and that has driven up the country’s borrowing costs to record levels since the euro introduction. But Le Monde reports the president is looking for common ground with Angela Merkel to prepare the eurozone institutionally on a medium term. In a reaction to the chancellors willingness to render parts of German sovereignty to defend the euro Sarkozy thinks about responding in kind.“ In exchange there will have to major political sacrifice from the French side”, the paper quotes a presidential advisor. Sarkozy is looking at accepting real budgetary control powers at a eurozone level that go beyond the reenforced Stability and Growth Pact rules that were recently decided. But according to Le Monde there will also have to be institutional changes to give the reinforced eurozone more political legitimacy. The paper writes that Sarkozy may outline his ideas in a big speech on Europe that might take place on December 11, the 20th anniversary of the Maastricht summit.
ECB has introduced an upper limit of €20bn per week for SMP interventions
According to Frankfurter Allgemeine Zeitung, the ECB governing council has introduced an upper limit of €20bn the central bank can spend per week to help ailing euro countries to stabilize the spreads on their government bonds. This move is interesting in the sense that the market expectations are that with the arrival of Mario Draghi and the intensification of the crisis the ECB would go the other way and loosen its limits of the program. The paper, however, argues that there is a growing scepticism among the governing council’s members about the program which has resulted in lowering the weekly ceiling from a previously higher figure to €20bn. According to FAZ discusses at each of its bimonthly meetings the SMP and sets a ceiling for the coming two weeks. Whether the €20bn ceiling was maintained at yesterday’s governing council meeting is unclear. According to the ECB’s official SMP figures it spend only €4.5bn last week, much less than the markets had expected.
Papademos presents final 2012 budget, troika arrives for inspection
Lucas Papademos is to unveil the final budget 2012 today. The budget is up to approval by the cabinet before it is submitted to parliament. A parliamentary vote is expected for next week. Inspectors of the Troika will start arriving in Athens for talks on releasing the €8bn instalment. Antonis Samaras’ refusal to sign a written commitment remains an obstacle. IMF spokesman David Hawley said the fund was waiting to see “broad political support” before the IMF approves further loans.
Samaras’ show-down
Samaras appeared to harden his stance further, questioning the reforms that the coalition administration has pledged to see through. Samaras called for “a change to the failed economic policy, a shift toward restarting and overhauling the economy.” Samaras said he needed to win a parliamentary majority in early elections next year to reverse the austerity measures he disagrees with, Reuters reports. Samaras’ insistence on not signing is widely regarded as posturing, chiefly to appease ND MPs who disapproved of his decision to enter a coalition with the outgoing Socialists, writes Kathimerini.
Nothing is secret anymore
The Irish government has complained to the European Commission about Germany releasing a document disclosing confidential details about new taxes to be introduced in Ireland over the next two years, the Irish Times reports. The document – identifying austerity measures of €3.8 billion in next month’s budget and €3.5 billion in budget 2013 – was made public after being shown to the finance committee of the German Bundestag yesterday. It contained government plans to raise VAT by 2 %to 23% and a €100 household charge. Germany’s federal finance ministry confirmed yesterday that it had forwarded troika documents to the 41 member Bundestag budgetary committee in line with its legal obligation under EFSF guidelines.
Belgian King urges parties to agree on budget
No budget agreement in Belgium yet. The six parties quit after another six hours of negotiation, to be continued today at 11am, Le Soir reports. With Belgian yields rising significantly in recent days, King Albert II urged politicians to find a compromise following a meeting with Elio Di Rupo, the French-speaking socialist leader and chief negotiator.
Antonio Borges quits
He was only there for a year. The IMF said that Antonio Borges, head of its European Department, has left the IMF with immediate effect for personal reasons. He is succeeded by Reza Moghadam, currently director of the strategy, policy, and the review department. Moghadam’s successor will be Siddharth Tiwari, currently secretary of the fund.
Nikolaus Blome says the rising spreads are no reason for hysteria
Bild’s deputy editor in chief Nikolaus Blome argues in a column that the rising spreads even for core euro countries are no reason to panic. “The big investors on the financial markets are nervous, no question”, he tells his 10m daily readers. “But that is no reason for politicians to become hysteric.” Most importantly, he says, the ECB has to stop intervening on the government bond markets.“ This creates inflation against which especially vulnerable people cannot defend themselves”, he writes. “Taking up debt must no longer be so easy and cheap. A number of governments have understood that, most recently also in Italy. As soon as the politicians show that they have internalized the issue about debt the financial markets will understand as well and calm down.”
Westerwelle on Germany’s crisis resolution strategy
Guido Westerwelle’s Op-Ed in the Financial Times is very useful – not for its abysmal content but because it demonstrates the German establishment’s warped interpretation of the causes of this crisis, and its likely solution (or non-solution as is increasingly more probable). Westerwelle firmly rules out any ECB role in this crisis, which he wants to solve purely through structural reforms in member states, and tougher central budgetary supervision. He wants to calm the markets by sending a clear signal that the eurozone will no longer take on any debts. (We don’t want to discuss the economic illiteracy behind his comments. What worries us even more is the extent to which the German narrative of the crisis is consistent and persistent.)
Spreads, Forex, and ZC Bonds,
Spanish and French yields fall on heavy ECB purchases, after reaching new intra-day records.
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