Elements of a deal may be falling into place
Eurointeligence Comment and AnalysisThe way to make this work is to limit the potential scope of interventions to new sovereign long-term bonds of solvent eurozone members. Focusing only on the new debt issues thus turns the EFSF’s job into a more manageable size – one linked to the flow of new and rollover debt rather than the stock of debt.
Mario Draghi yesterday told European government that the ECB would help, but only after governments agreed what he called a “fiscal compact”. Speaking in front of the European Parliament, he said a deal on controlling public debt was the” most important element to start restoring credibility”, according to the FT. “Other elements may follow, but the sequencing matters.” In other words: you go first. Draghi did not say what minimal conditions such a compact should fulfil, nor what the ECB might do once these are fulfilled. But his statement about sequencing means that the ECB may not take those decisions at its regular council meeting on December 7/8, which ends before the summit starts. This was his annual speech to the plenary of the European Parliament, not the regular appearance in front of the monetary committee. One would have expected a packed house, especially considering the importance of what he had to say. But as FT Deutschland reported, hardly any of the deputies bothered to come. When he started his speech, roughly 30 of the 736 deputies were present and the number increased to perhaps 50 by the end of the 90 minutes speech and debate. The eurosceptic British deputy Godfrey Bloom mockingly told Draghi: „Thank you for coming even though nobody else showed up“.
Markets are now firmly pricing in a deal Borrowing costs in the eurozone fell after Spanish and French bond auctions drew better-than-expected investor demand. French 10-year yields fell 27bp, the most in 20 years, to 3.12% after the auction, while Spanish 10-year bond yields declined 21bp to 6.015%. Italian borrowing costs fell below 7% for the first time in a week.
Merkel is ready to accept more debt purchases by the ECB Angela Merkel is ready to accept temporary debt purchases by the ECB as a bridging measure, Süddeutsche Zeitung writes. The chancellor is sceptical of the central bank’s debt buying program. However she would be ready to accept an increase in the purchases and not criticize it publicly in order to bridge the time needed to implement the reforms on budget control in the eurozone that will most likely be decided at next week’s summit. This would allow the ECB to intervene in order to limit the spreads between German bunds and the government bonds of Italy, Spain and other euro members under strong market pressure. However, the chancellor is not prepared to accept for the ECB to become an unlimited guarantor of eurozone public debt since this would be a breach of the EU treaties and economically counterproductive as it does not address the root problem, Berlin argues. Merkel will meet Nicolas Sarkozy on Monday in Paris in order to talk about common proposals for the euro summit.
Sarkozy insists on inter-governmentalism – in other words: another meaningless stability pact While there is now a lot of optimism about a deal, Nicolas Sarkozy yesterday reminded us just how different the French idea of a fiscal union is from everybody else’s. Speaking in Toulon, Nicolas Sarkozy, ruled out any supra-national decision. If this prevailed, there would be no treaty, just a beefed-up stability pact. “The integration of Europe will go the inter-governmental way because Europe needs to make strategic political choices,” he was quoted by Reuters. Merkel will give her keynote speech in the Bundestag today. (From his speech it is obvious that they still have some way to go. Germany has reverted to its classic role of proposing deeper integration through the classical route of building on the current system – rather than circumventing it – which has been one of the problems in crisis management so far).
Philip Stephens on why there will be a deal In his FT column, Philip Stephens says he senses that European leaders may this time do it after previous summits only produced vacuous pseudo-solutions. He gives three reasons for his optimism: first the central bankers have told everybody that the financial system is broken. The second is the replacement of Silvio Berlusconi by Mario Monti. And the third is Mario Draghi’s compact – over whatever you like to call it. The ECB is now putting pressure on the political system, and even giving directions about the sequencing of reforms. (We noticed a dry comment from a reader who merely said: this time is different.)
Juan Crespo on the deadly embrace between banks and governments Writing in El Pais, Juan Ignacio Crespo says governments and banks have a deadly embrace. The banks hold government debt, and the governments are too weak to recapitalise the banking system. This has now been going on for four years. Fiscal union and a European Treasury are all very nice, but this is a problem that can only be solved by the ECB. It must step in stabilise government bonds and the banks at the same time.
Some on the French Left turn anti-German in their euro rhetoric While the French Socialist presidential candidate Francois Hollande was measured in his comments on Angela Merkel’s euro policy stances, some on the Left turned to Germanphobia, Le Monde reports. Arnaud Montebourg, a former candidate for Socialist’s primaries said that „the German nationalism is about to come back in the form of the Bismarck-style policy employed by Mrs. Merkel“. He compared Nicolas Sarkozy’s meetings with the German chancellor to „Napoleon III in Seda“. Later on he explained: „I don’t accuse Germany, it is anexation of the French right by the Prussian right that I condemn.“ A former Socialist government minister urged caution underlining that „if we win in 2012, we will have Mrs. Merkel as our interlocutor in five months time“. Meanwhile Les Echos underlines that it is a myth to talk about a German diktat in the context of the eurozone crisis. Many elements of the Greek rescue package or the decision to create the EFSF and the ESM are clearly French inspired.
Smaller northern euro members seek a seat in the ECB board A group of smaller northern euro countries led by the Netherlands want to use the replacement of the Spanish ECB board member José-Manuel Conzalez-Paramo to put one of their representatives in the ECB board, Financial Times Deutschland reports. Gonzalez-Paramo’s term ends in May 2012 but he may even leave earlier as he is being considered for a post in Mariano Rajoy’s new Spanish government. Spain considers it is one of the big euro members and it has a right to a permanent board membership as Germany, France and Italy. But the Netherlands, Finland and possibly a few other smaller northern countries don’t accept this and push for an alternative candidate. Also there is a feeling in Northern Europe that the eurozone’s south is currently too dominant in the board with Italian Mario Draghi as president and the Portuguese Vitor Constancio as vice president. Rajoy who is very worried about losing the Spanish seat said a few hours after his election victory that he would work hard so that „Spain’s voice in Brussels and Frankfurt“ will continue to be heard.
Riot-free austerity protests in Greece, with lower turnout Thousands of Greek workers joined the seventh general strike of the year on Thursday to protest the government’s plans to continue its austerity drive, Kathimerini reports. But the turnout by protesters was small, with police putting the total crowd numbers in Athens at around 17,000, compared to more than 50,000 in October’s walkout. It was also relatively peaceful. Still the action showed that the two main labour unions are set for fighting reforms, and therefore a key barrier for the government.
Papademos called for unity amid rifts within the cabinet As rifts emerged between several ministers, Lucas Papademos had to remind his cabinet of the need for all members of the fractious three-party coalition to fully support the government’s reform efforts despite the rifts, according to Kathimerini.
Austrian government urges support for constitutional debt break In an interview with Der Standard the Austrian Vice chancellor Spindelegger urges the opposition to agree on a constitutional debt break. He warned that this is not a time to set conditions and that Austria’s triple A might be put into question. If there is no agreement on the constitutional debt break, the opposition will have to carry the co-responsibility for the consequences. A two-third majority in parliament is needed to pass constitutional laws. This means that the coalition – which shows more and more disagreement about various issues according to the Austrian Independent – needs the support of at least one opposition party.
Spreads, Forex, ZC Swaps and Ois-Libor Spread The markets are really expecting a deal.
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