 That „comprehensive agreement“ in full
Angela Merkel and Nicolas Sarkozy essentially agreed on the German position. These should be embedded in a New Treaty, and they have asked Herman van Rompuy to put those proposals formally on the agenda for the Dec 8 and 9. Here is a summary of the six most important decisions taken. As so often, the newspapers cover only a short subset.
The negotiations about the treaty should concluded end March.
(These proposals indeed require substantial treaty change, but we are surprised that this could be concluded so quickly, given the necessary procedures, and their own implantation record. A change in the EU treaties would require a convention, unless the European Parliament were to decide to wave its rights in this respect. Given that these proposals entail a transfer of sovereignty, national referendums in Ireland and possibly other countries may be required. While there are possibilities for the eurozone to adopt its own set of policies, points 1 and 2 (which are the main element of the fiscal agreement) require a full treaty change, to be ratified by all 27 members (even if the provisions are only implemented in respect of the eurozone). We suspect therefore that Sarkozy agreed to these measure in the full knowledge that this will never be implemented. If you substract the treaty change proposals, one is left with a shallow agenda. Also, newspapers reported that Merkel gave up PSI. That is not true. The position is now that the IMF rules will be applied, which are not all that different. CACs will also remain in the ESM treaty.)
The mood in financial markets has been jubilant since the speech by Mario Draghi last week, and the rally continued yesterday. Italian bond spreads are now back below 4%, and Spanish spreads are at 3% (just a reminder that these are still unsustainable levels for both countries).
S&P places all six AAA-rated eurozone members on a negative outlook For what it is worth: S&P yesterday attached a negative outlook to the credit ratings of the six triple-A rated eurozone member states, the FT reports. The reason is the inability to get control of the crisis. “It is our opinion that the lack of progress the European policymakers have so far made in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union.”
(While we agree with the criticism of the quality of crisis management, we wonder whether S&P, or any other rating agency, would know what a comprehensive solution would entail. In the meantime, a downgrade reduces the effectiveness of the EFSF. )
The debate about French Germanophobia continues and becomes contagious Nicolas Sarkozy has attacked the French left over the Germanophobic remarks (comparing Angela Merkel with Bismarck and the euro crisis negotiations with the Munich agreement of 1938) some of their leaders have made, Le Figaro reports. “Until now the Franco-German friendship was a consensus in the French political class”, the president said in common press conference with Merkel. “I hope that whatever the electoral calendar is everybody will be responsible and nobody plays with the history of our two countries that was too dramatic to just let go at this point.” The chancellor tried to take the debate with humour. “Those who speak are in the opposition so we should be glad that we are in government and that it is us who decide and not them.”
In a separate story Le Figaro points out the Germanophobia is also on the rise in other EU countries. The paper says that in the UK politicians regularly criticize that the economic crisis has created a situation in which the EU or at last the eurozone is de facto run by Berlin. The Daily Mail run a story under the title “The Fourth Reich: how Germany uses the financial crisis in order conquer Europe” claiming that “never since 1941 Germany has been as powerful as today”. In Greece, the current situation is often characterized as the “second occupation”, the paper reports. Horst Reichenbach, the head of the EU task force to help unfreeze EU money and implement reforms, is nicknamed the “Third Reichenbach” in the Greek press.
Hollande argues in Berlin for a “balanced” Franco-German relationship Speaking in Berlin to the SPD party congress Francois Hollande argued for a “balanced” relationship between France and Germany, Le Monde writes. Nicolas Sarkozy’s Socialist challenger for the presidential elections said that “recognition of our mutual strengths” should be the bases for that relationship and not “imitation”. Hollande is under huge pressure from Arnaud Montebourg, who scored 17% in the Socialist primaries with his agenda against globalization and the EU, to stand up against the perceived German dominance. The debate about the French Germanophobia is starting to leave traces in the German press. Frankfurter Allgemeine Zeitung, for instance, put the report of Hollande’s appearance in Berlin under the ironic title: “Hollande comes to see the spiked helmets”.
Nicolaus Blome says: Germany must lead Bild’s Berlin bureau chief Nicolaus Blome is unimpressed with the European unease about German dominance. “Germany must lead”, is the title of his comment in today’s paper. “Whenever the chancellor keeps still, people say: lack of leadership! Whenever she tries to take things in her hands (together with France) people say: dominance!” Blome argues it is Germany’s economic size that makes it central to any solution in the current crisis. “If Germany tried to artificially belittle itself, it would hinder the fight for the euro and increase the distrust against Germany.”
Germany’s bank rescue fund is being reactivated The German bank rescue fund Soffin is about to be reactivated, Frankfurter Allgemeine Zeitung reports. The fund will be able to provide guarantees up to €400bn and the finance minister can go to the market to get credit up to €70bn, roughly the financial firepower the Soffin had when it was created in the first phase of the financial crisis. The background of the resuscitation is that EBA will this week present figures on the need for EU banks for additional capital injections. Reportedly there will be five German banks on the list. Commerzbank, Germany’s ailing semi-public second largest bank may need a capital injection of up to €5bn. Commerzbank is determined not to ask for additional public health and to raise the capital necessary to fulfil stricter capital requirements on its own. But to be able to do so it may have to its loss-making subsidiary Eurohypo to Soffin.
Bank economists are convinced the ECB will lower rates to 1.0% The majority of international bank economists is convinced the ECB will lower its key interest rate from 1.25% to 1.0% this Thursday, Financial Times Deutschland’s monthly interest rate survey found. Of the 33 respondents 22 thought the ECB will go 1.0%, 2 economists even bet on 0.75% and the remaining 9 economists think it will keep rates at 1.25%. About half of the polled economists think the ECB will keep its loose bias and lower rates further throughout 2012 up to 0.75% or even 0.5%. An important reason for this assessment is huge pessimism on the 2012 growth perspectives. The average assumption is that GDP growth will drop to 0.1% with a significant minority believing there will be negative growth of up to -0.7% in the coming year. The ECB will publish its quarterly staff projections for 2011 and 2012 this Thursday.
IMF approved sixth tranche for Greece The IMF approved a €2.2bn tranche of its emergency loan programme for Greece on Monday. The IMF board overlooked the failure of Greece to meet several major loan condition terms urging Greece to quickly implement new economic reforms including privatization plans, according to the Dow Jones Wires. Next challenge for Greece is the visit of troika officials, to determine how much recapitalisation is needed by the banks as the consequence of the PSI+ haircuts on Greek bonds. Finance Minister Evangelos Venizelos suggested that Greek lenders will need no less than €40bn for their recapitalization, Kathimerini reports.
Nowotny: ECB can do more Ewald Nowotny said the ECB is observing liquidity shortages in the banking sector and can do more to supply funds, Bloomberg reports. “We can do a lot with regard to liquidity and in future we may take additional measures,” Nowotny said during a speech in Vienna yesterday.
Portugal’s spending in arrears increased by one billion in three months Portugal’s outstanding debts to suppliers in arrears for more than 90 days hit record levels of €5.4bn (3.1% of GDP) at the end of September. This is an increase of more than one billion compared to June. Half of the variation results from inability to control these expenses. The other half is explained by registry errors identified and corrected in November, Jornal de Negocios reports.
Belgium has a new elected government, 540 days after elections In Belgium, a new coalition government headed by socialist Elio Di Rupo will be sworn into office by King Albert II on Tuesday, ending a political crisis which had left the country without an elected national administration for a record-breaking 540 days. New finance minister is Steven Vanackere, former Vice Prime Minister, Didier Reynders will be Foreign minister. Le Soir has the full list.
Spreads, Forex, ZC Swaps and Ois-Libor Spread Quite a dramatic improvement in spreads, as bunds rally ends. Euro weaker again.
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