 European Commission to propose three variants of a Eurobond
The FT has the leaked European Commission report on Eurobonds, which includes, among three proposals, a total Eurobond that would replace all national debt issuance. The Commission is due to present its long-awaited report on “stability bonds” on Wednesday. (We understand the need to put on a positive spin on Eurobonds, which have a negative connation for many people. But renaming them “stability bonds” is perhaps taking this too far.) The report says that substantive treaty change is needed, which would delay its introduction for many years. In order to make this politically acceptable in Germany, the quid-pro-quo for a Eurobond would be the introduction of strict budgetary supervision, including the possibility to put countries in trouble “under some form of ‘administration”. The least onerous scheme would be that countries issue limited national guarantees for new bonds, without any risk pooling. An intermediate approach would consist of some variant of a blue bond/red bond proposal.
Commission will propose single IMF seat for the eurozone
Europe’s upcoming proposals to fight its debt crisis will include a shared representation for the eurozone at the IMF, Commission vice president Viviane Reding told The Wall Street Journal. She declined to go into details but Frankfurter Allgemeine Zeitung picked up the story and quoted the spokesman of Wolfgang Schäuble who immediately shot down the proposal. “At the IMF only states can be members, only states have a voice and that is the way things will remain”, he said. “I don’t see a tendency to change that in any state of the EU”. An integration of voting rights would entail a pooling of the capital shares of the euro members at the IMF, FAZ warns. The paper recalls that such a pooling of the eurozone countries’ reserves had just been prevented at the G20 after a veto of the Bundesbank which according to German law is the guardian of the country’s capital shares at the IMF.
Rajoy’s triumph
It was no surprise that Mariano Rajoy would win last night’s Spanish general elections. What was surprising was the sheer scale of his victory. The Popular Party won an absolute majority, the triumph in the history of the party, with 186 out of 360 votes. El Pais write that the PP, apart from its absolute majority in the national parliament, also runs 11 out of the 17 autonomous regions, with another victory likely in Andalusia;
it controls all the provincial capitals, as well as the Constitutional Court. The new government will not be sworn in until Dec 20, prolonging the immediate uncertainty. The immediate bond market reaction was muted (see our table below), as the result was widely anticipated. El Pais says in an editorial that after a muted election campaign Rajoy must now come out with a clear programme of what he wants to do.
Papademos travels to Brussels, Samaras still refuses to sign pledge
Lucas Papademos headed to Brussels on Sunday for talks with Herman van Rompuy and Jose Barroso, as Antonio Samaras continues to refuse to give a written pledge about the implementation of reforms as agreed in October. Laos party leader George Karatzaferis said after a meeting with troika officials that there was no wiggle room and that he would sign the pledge. But Samaras continues his opposition and told the troika officials on Sunday that a verbal vow not to oppose existing reforms should suffice, Reuters reports. Some newspaper commmentators still believe that Samaras could secure a compromise and that he may not have to back down.
But Wolfgang Schäuble made it clear in an interview on Deutsche Welle radio (quoted by Kathimerini) that if there are no written guarantees, there will be no release of next instalment to Greece.
According to a source close to the troika, the team was to depart Athens on Sunday. It is expected to return later to discuss whether it will release an €8bn tranche of aid, without which Athens would default in mid-December.
Looming strike action over privatisation
There is also the threat of intensified strike actions if the government goes ahead with the reform plans. On Sunday, the union at Greece’s biggest power producer PPC threatened to call a wave of strikes in opposition to plans to loosen the firm’s grip over Greece’s coal reserves. Under its bailout scheme, Athens needs to lift state-controlled PPC’s de-facto monopoly on the production of lignite coal, the backbone of the country’s power production, and to try to sell the state’s stake in the generator. PPC labour Union GENOP said it would launch rolling strikes if the cabinet tries.
Merkel’s coalition partner CSU warns Draghi could become „the most expensive ECB president of all times“
Angela Merkel’s Bavarian coalition partner CSU severely attacked Mario Draghi over the ECB’s bond purchase program. “I think it is questionable that the European Central Bank buys ever more government debt from indebted countries”, the party’s general secretary Alexander Dobrindt told Die Welt. “Whoever covers himself too much with rotten paper will end up getting a toxic shock. The Italian Draghi has had a highly problematic start by drastically increasing the speed of purchase of the crisis countries’ government bonds. He could become the most expensive ECB president of all times.” Dobrindt then concludes: “We would have never agreed to a European Central Bank had we known that one day it would be run the Italian way.” (Dobrindt fails to substantiate his attacks on Draghi any further and there so is no factual basis for his remarks. Since Draghi took over at the beginning of this month the ECB has purchased euro crisis countries’ bonds for €9.5bn in the first week and for €4.5bn in the second week which is significantly less than in many weeks under his predecessor Jean-Claude Trichet. The third week’s figures will be released this afternoon. In this light Dobrindt’s attacks appear to be an expression of racism.)
Merkel government refuses to take the ECB to court over bond purchases
Angela Merkel’s government refuses to take the ECB to court over the controversial bond purchases program, mass circulation Daily Bild reports. In a response to a written request to do so by Jörg-Uwe Hahn, the liberal Europe minister of the state of Hessen, Merkel’s chancellery minister Ronald Pofalla replied: “Please understand that the federal government has no value judgement on the actions of the European Central Bank because of its independence guaranteed by the treaties.”
EBRD president asks ECB to avoid a panic in the eurozone
Talking to Financial Times Deutschland EBRD president Thomas Mirow asks the ECB to continue to stabilize the euro crisis countries’s debt markets. “As a functioning institution the ECB plays a very important role”, he said. “It must help to avoid the sort of panic that we observe at the moment”. The ECB should not give the crisis countries the feeling that it would solve the problems on their behalf, he argued. But the central bank should avoid that the crisis gets incrusted into markets “where there is objectively no reason for it such as with the government bonds of countries with an AAA top rating”, Mirow said. The former German deputy finance minister went on to criticize that his compatriots discussed the ECB’s interventions only in the context of Germany’s traumatic experiences with hyperinflation. “Even if you have had a bad experience with floods in the past you need to use water if your house is on fire.”
In a separate piece, FTD reported that Mirow announced his candidacy for a second term at the EBRD’s helm. Should he be renominated in July 2012 Germany would hold the top jobs at most of Europe’s economic and financial agencies: Klaus Regling at the EFSF, Werner Hoyer, who is bound to succeed to Philippe Maystadt at the EIB and Mirow at the EBRD.
Doubts about Germany’s AAA
Jean-Claude Juncker last week attacked Germany’s debt level of 81.2% and his attacks are now followed by a number of critical articles and comments about the solidity of the country’s public finances. Le Monde runs a story asking “And what if Germany was so exemplary after all?” in which economists criticize shadow funds to hide parts of the debt and warn of health expenditure that is likely to spin out of control. Der Spiegel comes out with similar article today in which Thorsten Polleit of Barclays Capital urges the government to implement a consolidation package if it does not want to become the next target of the rating agencies. “Their top rating (for Germany) is anything but a certainty”, he says.
The ECB cannot bail out government, but it can do QE
In his FT column, Wolfgang Münchau expresses some sympathies with the conservative legal views that constrain the ECB. The existing legal framework allows the ECB to operate on secondary markets, but not for the purpose of securing lower interest rates to governments, or to help them roll over existing debt. But the ECB can do quantitative easing, which is a monetary policy operation after all. The recession has already started, and likely to get much worse, due to a global slowdown, procyclical fiscal policies, and bank deleveraging. QE would be a particularly suitable instrument as it would affect the economic downturn, and the funding crisis, at the same time.
Spreads, Forex, and ZC Swaps
A little relief, presumably to heavy ECB intervention on Friday. Italy and Spain remain in unsustainable territory.
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