 Euro-breakup is coming closer
The end game comes closer. Angela Merkel has now categorically ruled out eurobonds, so that there is no prospect of any meaningful agreement on December 9 unless she changes her mind. Italy’s 3-year interest rates approach 8%, and the EFSF leveraging has failed. International companies have now started preparations for the break-up of the eurozone, according to an investigation by the FT (which of course endangers of becoming a self-fulfilling prophecy as they withdraw cash funds). Italy yesterday managed to raise €8bn on the markets, but for a whopping 7.56%. The yield for a three year bond was even higher, at 7.89%. These inverted yields are really bad news. It tells us that the markets are pricing in a default. With these rates, we are fast approaching breaking point in the eurozone.
Merkel excludes Eurobonds any time soon
Ahead of next week’s crucial EU summit Angela Merkel significantly hardened her position on Eurobonds and the role of the ECB in the crisis, Financial Times Deutschland reports. Speaking at a closed door meeting to Bundestag deputies of her own parliamentarian group the chancellor said that even if the other EU or Euro member states agreed to her demands on treaty changes to create a “stability union” with automatic sanctions against countries with excessive deficits and ECJ jurisdiction for persistent deficit sinners, she could not agree to Eurobonds and an enhanced role of the ECB in fighting the crisis. Her refusal was echoed last night at the eurogroup meeting by Wolfgang Schäuble who said that both Eurobonds and a role for the ECB as the crisis fighter of last resort “are excluded by the treaties”.
Merkel’s and Schäuble’s statements dash expectations that Germany will agree to a grand bargain involving treaty changes for more fiscal discipline in exchange for more solidarity. Les Echos points out that Nicolas Sarkozy insists “on a political reading of the sanctions mechanism and even if he is ready to accept more automatic sanctions he does not want that in case of a budgetary problem, a debate between the country concerned and its partners is excluded”.
As a result the French President will give his big speech on Europe tomorrow without being able to announce any Franco-German initiatives for next week’s summit, Le Monde’s Arnaud Leparmentier writes in his blog Elysee coté jardin. “The divergences between the two capitals remain deep”, he writes. Sarkozy is particularly opposed to give the ECJ the right to intervene in national budgets because, according to his view, a European Court does not have any competences in national politics. In his speech however the President will plead for a much stronger political integration of the 17 euro zone members.
Eurozone approves €8bn aid tranche for Greece
Less than 24 hours after Greece secured a further €8bn, Lucas Papademos is expected to issue a stern warning to his cabinet amid concern that bickering between ministers is holding up the implementation of reforms, Kathimerini reports. Sources said that Papademos has expressed concern about the disagreements between PASOK ministers in the run-up for the leadership contest in the Socialist party.
PSI+ talks paused
Negotiations in Brussels on the new private sector involvement plan (PSI+) paused for a week following profound disagreements on key issues, according to Kathimerini. Greece is proposing that the 50% haircut followed by the issue of new bonds corresponding to 35% of the value of the old ones, with the remaining 15% paid in cash. The coupon of the new bonds will range between 4.5 and 5%. In net present value (NPV) terms, that would entail 70% losses for banks. Private sector bondholders agree to a 50% cut but wish to reduce their NPV losses to 52-54%. Discussions are expected to take a long time.
Greek banks suffer surge in withdrawals
Greek central bank governor George Provopoulos told a parliamentary committee that deposits of Greek banks had shrunk significantly in the past two months, by €5bn in September and €6.5bn in October, in reaction to mounting political tension, the FT reports. Depositors withdrew another €1bn in the first week of November, during the political crisis, but the drain stopped once the new government took over. So far, funds have not returned.
ESRI slashed its growth forecast for Ireland
Irelands leading research institute ESRI has slashed its forecasts for next year, the Irish Times reports. ESRI expects that Irish GDP will grow by only 0.9% in 2012, down from 2.3% it forecast previously, as demands for Irish exports from the euro zone and the UK slows rapidly. ESRI is also warning that the euro area will plunge into a recession next year if the ECB fails to act to resolve the deepening crisis.
Irish to raise tax on higher end civil servant pensions
Former public and civil servants with pensions of €100,000 or more will be taxed in Ireland at a new 20% rate, the Irish Independent reports. The move comes ahead of Budget 2012 next week. While it is not expected that the new tax will raise huge amounts of money, the announcement comes on the foot of growing public anger and the unease of backbenchers over recent huge pension pay-offs.
Germany and France fight about the ECB chief economist
The euro finance ministers last night backed the nomination of the French deputy treasury director Benoit Coeuré as the successor to Lorenzo Bini Smaghi in the ECB board, Die Welt reports. Before the meeting started Wolfgang Schäuble publicly endorsed his deputy Jörg Asmussen to succeed Jürgen Stark in the position of ECB chief economist. “We think that he is the best candidate for the position that Jürgen Stark currently holds”, the German finance minister said. His statement is supposed to pre-empt French attempts to dispute this post for Asmussen and to put Coeuré there instead, who is a top bureaucrat and a highly regarded academic economist. Schäuble later backtracked and together with his French colleague Francois Baroin he underlined it was up to the ECB board to decide the attribution of the portfolios.
German commentators argue that the ECB chief economist should stay German
Heike Göbel of Frankfurter Allgemeine Zeitung argues that Germany must keep the position of the ECB chief economist. “Certainly both candidates (Asmussen and Coeuré) both have the necessary knowledge and the position is not an entailed estate”, Göbel writes in a commentary. “But the future of the Euro also depends on the question whether the strongest economy continues to trust the ECB. In this situation one should not dispute Germany the chief economist it trusts”. In a comment for Handelsblatt, Dirk Heilmann comes to a similar conclusion. “The importance financial markets attach to the chief economist was illustrated by the stock markets drop when Stark resigned”, Heilmann argues. “It is worth fighting for Asmussen as the chief economist in order to consolidate the confidence in the ECB.”
(This is pure madness in our view. If Germany’s trust in the euro depends on a German occupying a certain position in the ECB, then the logical consequence is that Germany distrust the euro. We feel that Mario Draghi should not give in to this blackmail, and appoint whomever he thinks is most appropriate for the job. Or even better, he should follow Mario Monti’s example and become his own chief economist.)
Commission will be generous in applying state aid rules on crisis related capital injections for banks
Competition commissioner Joaquín Almunia will be generous in applying state aid rules if banks need a capital injection as a direct result of the crisis escalation, Financial Times Deutschland writes, referring to new state aid rules for banks Almunia will present tomorrow that the paper has seen. Those plans still foresee that banks requiring capital injections must present a restructuring plan to the Commission. But in his examination, Almunia’s official will pay special attention to the question whether the need for fresh capital mainly stems from a loss of value of euro government bonds and whether the bank in question has engaged in excessive risks by holding these papers. According to a Brussels competition lawyer quoted by FTD, banks fulfilling these criteria “can hope on a certain amount of clemency” on the Commission’s behalf.
A new daily index
We have added a new important index to our daily statistical section – the Euribor-OIS spread for the eurozone. It is a measure of a stress in the financial system. The Euribor is the rate at which banks lend to each other over various periods. OIS stands for overnight indexed swap. It is a rate at which an investor swaps an overnight interest rate with that of a specific period. Before the financial crisis started in 2007, the Euribor-OIS spread (or Libor-OIS in the UK/US) was typically 0.1%. During the crisis, it shot up. As you can see from the table, the 1-year Euribor-OIS spreads is now close to 1.6%. By comparison, the 1-year Libor-OIS spread in the US was 0.91% this morning. While the US banks are healthier than European banks, the biggest risk to the US would now a contagious banking collapse in the eurozone – which is why even the US level remains elevated. The high Euribor-OIS spread also tells us that monetary policy has no traction at the moment. The low central bank interest rates do not filter through into the real economy.
Spreads, Forex, ZC Swaps and OIS-Libor Spread
Italian, Spanish and Belgian spreads remain at unsustainable levels. The French spread has fallen. Please also that the decrease in spreads reflect increase in German yields, not decreases elsewhere.
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