 An ECB/IMFbailout foretold
This was a good day on financial markets. Concerted action by various central banks produce a strong rally on markets, but was also a reminder of the enormous expectations market participants are attaching to the ongoing process of crisis resolution. The ECB, Fed, BoE, BoJ, SNB and Bank of Canada, yesterday announced that they agreed to lower the cost of existing dollar swap lines by 50bp. Collateral requirement will be reduced. There will also be bilateral swap arrangements between central banks to provide liquidity in each other’s currency. Reuters has the details of that story.
Furthermore, several central banks loosened monetary policy, including in China and Brazil. The measures taken are a precursor to further expected liquidity boosts, including an LTRO of possibly up to three years in the eurozone.
The European strategy of crisis resolution, as outlined by Poland’s finance minister Jacek Rostowski, would rely on two planks: a political agreement of yet uncertain scope (Treaty change, possibly eurobonds) plus what he called “action taken in an extremely forceful way to ensure stabilisation of the markets in the period that will follow after the council meeting”, meaning a time-limited ECB commitment, according to Reuters.
The success of this strategy will depend critical on the strength of the political decision reached. Will it be merely a relatively loose commitment for more fiscal discipline – without a eurobond? Or will they start a process of fiscal union that will eventually culminate in a joint and several debt security of minimally sufficient size?
Olli Rehn said yesterday that the EU has ten days to avert disaster. It faces the choice between big steps towards policy integration or a slow process of disintegration (this is, of course, an optimistic assessment. There is no way we can put a timeframe on disintegration. This could happen very quickly.) And Christian Noyer yesterday warned that “we are now looking at a true financial crisis — that is a broad-based disruption in financial markets,” according to Reuters.
The IMF could become an important part of the package
Reuters has the story this morning that a deal is currently being worked out, involving the IMF as part of a package. Under this “grand bargain” the eurozone would commit to credible deficit-reduction plans and an easier monetary policy, while countries with current account surpluses would pump more money into the IMF. Funding from the IMF, accompanied by ECB bond purchases, would give countries time to put political mechanisms in place for strong fiscal discipline. The article said it was a major development that eurozone governments confirmed that they are looking at providing bilateral loans to the IMF from national central banks. (The idea is that the IMF is more credible at cracking down on recipient member states than the eurozone itself. Such a deal, of course, also means that Mario Draghi and his colleagues will take instructions from Washington. This will be interesting. Doing this via the IMF might have some short-term technical attractions, but does this underline the message that the eurozone can sort itself out?)
Otmar Issing on the limits of the ECB
This is an important article for the simple reason that it explains the limits of what the ECB can do – or is prepared to do – better than anything we have read so far. Otmar Issing writes in the Financial Times that the ECB already complies with Bagehot’s definition of a lender of last resort. In fact it goes beyond what Bagehot is advocating, since the ECB does not impose penalty interest rates, and accept questionable securities as collateral. Issing makes the point that the ECB cannot go much further than this, and that the consequences of such actions would be incalculable. The financial markets, who demand such action now, may then impose higher long-term interest rates. Governments may not have an incentive to comply with rules. The public could lose faith in the system. He argues that an ECB purchase of national debt constitute a breach of the law, and there is no way to build trust in a system that is based on a breach of the law.
Portugal’s parliament approves 2012 budget
Portugal’s parliament passed the 2012 budget bill on Wednesday in its final reading, with the main opposition party abstaining, Reuters reports. Approval of the budget was never in question as the centre-right coalition government has a comfortable majority in parliament but the Socialists stance is important as it shows a broad, though tacit support for the measures. The government insists the budget will create a basis for sustainable growth and debt reduction and expects the economy to start recovering in late 2012. But Prime minister Passos Coelho said in an interview with SIC, that more austerity measures might be necessary if the economy slips further than expected.
This year’s deficit target of 5.9% of GDP is met only after the government secured a deal with the major banks of the country for an extra-ordinary transfer from their pension funds to the state in the order of €6bn, according to Jornal de Negocios, and a 50% tax on the end-of-the year bonus payments agreed earlier. Troika representatives warned last month that Portugal cannot rely on such one-off measures in the future.
Merkel and Sarkozy want Poland and Sweden to join the new governance arrangements
Bild reports that Germany and France want to avoid the impression that the eurozone reforms will split the EU27. Merkel and Sarkozy are trying to get Poland and Sweden to join voluntarily the enhanced economic governance arrangements the 17 eurozone members are about to find. Both are eager however to keep the UK and the Commission out of the game. In a photomontage Bild merged Angela Merkel and Nicolas Sarkozy and thus gave „Merkozy“ a (rather unappealing) face. „Is this the new face of Europe?“, the tabloid asks. Unsurprisingly thus the lack of enthusiasm in Brussels: „Merkozy is without any doubt a strong motor in order to come to terms with the crisis“, Commission vice president Viviane Reding told Bild. „But a strong engine is no guarantee that the plane is flying in the right direction.“
While Merkel and Sarkozy negotiate the Commission and the Council prepare for all options
In a further sign that the Commission and the Council have been relegated to the role of a mere service agency of Berlin and Paris José Manuel Barroso and Herman Van Rompuy prepare for all possible options of the negotiations between Angela Merkel and Nicolas Sarkozy, Financial Times Deutschland reports. In order to change the treaties two possibilities seem to be under study. One is changing protocol 14 of the Lisbon Treaty that defines the way the eurogroup works. The second, possibly more appealing possibility is to change protocol 12 which outlines the implementation of the stability criteria from the Maastricht Treaty. The advantage of going down this avenue is that the protocol can be changed by an unanimous decision of the heads of state and government without convention, CIG, parliamentary ratification or referendum.
Sarkozy to give his speech on crisis and Europe
Nicolas Sarkozy will give a big speech today in Toulon on the crisis and Europe, according to Les Echos. As there is no agreement with Angela Merkel so far on what to do at next week’s EU summit, he is likely to stay rather general and argue for an EU that allows France to be „stronger in the globalization“. Also he will insist that the summit must lead „to more discipline and more solidarity“, hinting that he will submit himself to Merkel’s ideas of a fiscal union only if she gives in on eurobonds and an enhanced role for the ECB. Keeping in mind that the presidential elections are 120 days away and that a majority of the French rejected the European Constitution in 2005 he will stress that with the enhanced rules for the eurozone „we will bind our hands but we will do so voluntarily“, the paper quotes an anonymous member of government. Angela Merkel will talk on the same topics tomorrow in Bundestag.
Principle agreement for a new federal government in Belgium
Belgium is set to have a government on Thursday according to Le Soir, with the coalition document of 185 pages finally on the table, ready for a last re-lecture among the negotiators of the six parties which will form the coalition government. Elio di Rupo will the new prime minister, a French-Speaker for the first time since 1974.
Wolfgang Proissl argues that the German central bank nationalism is a disgrace
Writing a comment in Financial Times Deutschland Wolfgang Proissl argues that the central bank nationalism displayed in Germany is a disgrace. Proissl reacts to comments by policy makers and editioralists saying the German candidate for the ECB board Jörg Asmussen must become the new chief economist because he is German. Proissl argues that while this sort of logic may be acceptable in reporting on European football championship it was totally inappropriate in the context of central bank top jobs. Also he points to the inconsistency of Germany always underlining the ECB’s independence while at the same time interfering in portfolio attribution which are Maro Draghi’s and the board’s business. Germans should be happy that both Asmussen and the French candidate Benoit Coeurré are both well qualified,. So everybody should just shut up and let Draghi and his colleagues decide.
For Helmut Kohl resolving the crisis is a question of war and peace
In one of his rare public appearances the ailing former chancellor Helmut Kohl warned at a seminar that resolving the euro crisis was a question of war and peace. „The risks stemming from measures undertaken in order to get ahead with a united Europe are less than the risks that Europe potentially falls apart with the possibility of a war“, he said, according to Bild.
Spreads, Forex, ZC Swaps and Ois-Libor Spread
That’s what a good day looks like. Spreads are down sharply, below 5% for Italy, below 3% for Belgium, and the Euro is up. However, no change in the Euribor-OIS spreads yet. Spain and France auction €8.25bn of bonds today according to Bloomberg.
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