 EFSF and ESM may run concurrently
Peter Spiegel of the FT has the story this morning that the euro working group is discussing proposals to allow the EFSF to run alongside the ESM, effectively doubling the available resources for rescue funding from next year. The EFSF’s leveraging operation has failed to achieve the desired goal. Its maximum levered size is now believed to be an effective €600bn. Together with the €500bn ESM, this would achieve a €1 trillion umbrella, which would be a credible size (for now), considering that Italy alone is due to roll over €440bn of debt in 2012. (Of course, this is not yet a political deal, and even if agreed would be subject to severe implementation risk in Germany, for example, as it effectively doubles everybody’s guarantees. We would also suspect new legal challenges in the German constitutional court, as the EFSF would become permanent.)
Van Rompuy proposes fast-track treaty change
We were wondering how Angela Merkel und Nicolas Sarkozy were going to manage to go for a full treaty change, including the Court of Justice as an adjudicator, and mandated national balanced budget constitutional agreements. There are reports this morning that Herman van Rompuy is planning a fast track treaty amendment by focusing only on an amendment of Protocol 12. By that he hopes to avoid the full and lengthy procedure of a treaty revision.
There is more from Reuters on the same story. Reuters quoted from a report by Herman van Rompuy in which he wrote tighter deficit rules could be achieved with only minor tweaks to the treaty (presumably the protocol 12 procedure). In other words, he is only talking about the stability pact and the sanctions threshold. It is not clear what would happen to the Merkel/Sarkozy Court of Justice proposals and the Balanced Budget nAmendments proposals, and whether they can also be squeezed into the protocol. Van Rompuy also wrote in his report that a eurozone bond should be a long-term objective, in contrast to Merkel’s and Sarkozy’s position that they are to be rejected.
(We are hearing that attempts for a fast-track constitutional change might run into legal problems. A treaty change, even a protocol change would normally trigger an IGC and a convention).
Britain will ask for a veto on financial regulation as a price for agreeing to Merkel’s and Sarkozy’s treaty changes
David Cameron will ask for the reintroduction of unanimity in financial services legislation as a price for the UK’s agreement to the treaty changes that Angela Merkel and Nicolas Sarkozy propose to improve the eurozone governance, Financial Times Deutschland reports. “The British are looking for an exit clause from financial services legislation”, a EU negotiator told the paper. The German government thinks the British demands are unacceptable. In that case London could block the treaty changes that need agreement of all 27 member states. Sarkozy however may not be unhappy about Cameron’s refusal to treaty changes, Le Monde reports. In that case Sarkozy and Merkel would push for an intergovernmental agreement among the 17 euro states that should be ratified by mid-March.
S&P takes revenge on eurozone
S&P is on a rampage. After attaching a negative outlook to the eurozone’s six AAA-rated countries, S&P yesterday went a step further and threatened a downgrade of the EFSF, on the grounds of “continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis”. Reuters reports that S&P put the ratings of 15 countries on review for a downgrade by 1-2 notches. The downgrade warning of the EFSF is not surprising given that it derives its credit rates from its AAA-rated members.
The threat to the German AAA will make Berlin more cooperative
S&P’s decision to threaten Germany’s AAA rating will make Angela Merkel’s government more cooperative in finding a common solution to the eurozone crisis, Norbert Gaillard, author of “A century of souvereign ratings” tells Le Monde. “With this warning of Standard & Poor’s Germany will finally understand that it is in the same boat as its European partners, that she cannot advance its better macroeconomic fundamentals despite a higher debt and a more fragile banking sector than in France”, he says. “Germany’s main trading partners are France, Italy and Spain. In case of stress Germany will suffer without any doubt.”
Saccomanni hints at ECB action
We suspect that Fabrizio Saccomanni, deputy governor of the Bank of England, was not speaking off the cuff when he told US investors that “the ECB will do what is required in the present situation”, especially considering the deterioration in the economic outlook. He also dismissed fears of a credit crunch in Italy, but he said that some companies are expecting a deterioration of credit conditions.
Greek parliament approves fiscal plan
Greek lawmakers early Wednesday approved a 2012 budget pledging tough fiscal goals in return for fresh loans. A broad majority of parties backing Lucas Papademos’ caretaker administration secured the economic blueprint’s passage by 258 to 41 in a vote shortly after midnight, AFP reports. Tuesday was also marked by clashes between hundreds of masked youths hurling petrol bombs and clashing with the police outside parliament, an annual protest in memory of the police shooting of a student in 2008.
Francois Fillon excludes a third austerity package – for the moment
Francois Fillon yesterday excluded a third austerity package as a direct reaction to S&P’s threat to downgrade France and the eurozone’s other AAA-countries, Le Figaro reports. But the prime minister almost pre-announced further cuts to come. “If we need to go further, if other measures need to be taken, the French government will take them, that is not excluded”, he said. “But we will not take any measures just on the basis of projections. If there need to be new measures they will be taken on the basis of the growth of 2012 when we know the growth rates of the first and the second quarter.”
Jens Weidmann will be the key person in all the decisions on the euro rescue in the next few days
In a full page story on Jens Weidmann Financial Times Deutschland argues that the new Bundesbank president is the single key person for any decision to rescue the euro in the next few days. ECB president Mario Draghi knows that he cannot be credible in front of the markets with any decision to expand the ECB’s role if Weidmann opposes it. The same goes for decisions the EU leaders will take on the eurozone governance reforms. Should Angela Merkel return home with decisions that do not get the Bundesbank president’s approval she may not be able to convince the public opinion and her own majority in the Bundestag to implement them.
SPD decides on pragmatic economic policies
In a significant victory for the SPD leadership trio of party chairman Sigmar Gabriel, parliamentary group leader Frank-Walter Steinmeier and former finance minister Peer Steinbrück, the party congress decided not to increase the top tax rate beyond 50%, Süddeutsche Zeitung reports. According to the plans adopted now the top tax rate will go up from 42% today to 49% but will be applicable only to incomes of more the €100.000 a year. The party’s left wing had demanded higher rates. SPD chairman Gabriel said the pragmatic decision showed that the party was “willing to govern”. The party congress, however, brought a setback for Steinbrück’s ambitions to become the SPD’s candidate for chancellorship in 2013. Steinbrück only drew little applause for his pragmatic speech whereas Gabriel received a standing ovations for his passionate speech.
Bild gives an exhaustive list of Germanophobia across Europe
It took a while before the German media noticed the wave of Germanophobia rolling across Europe as a result of the political tensions around the eurozone crisis and Germany’s perceived dominance in formulating the answers to the crisis. Today, Bild gives an exhaustive list of countries insulting Germany and Angela Merkel with cartoons showing her as a domina with black leather boots and a whip, as a Prussian general with a spiked helmet or simply as female Hitler with the trade mark mustache. The tabloid’s 10m readers will learn that a French satire show depicts her as the country’s new president yelling “Arbeit!”, that the Daily Mail writes “Welcome in the Fourth Reich”, that the Polish foreign minister Radoslaw Sikorski is taken to court in Warsaw because he said he feared German inaction more than German dominance, that Greek newspapers compare Merkel’s insistence on economic reform with Nazi terror and that the Italian newspaper Libero wrote: “Heil Merkel”.
Martin Wolf on Merkozy
In his FT column, Martin Wolf has been developing an important theme – that the eurozone crisis is not at its heart about fiscal policy, but a current account crisis. He cites figures to suggest that most countries affected by the crisis had large current account deficits. He regards the Merkel-Sarkozy deal as a victory for Sarkozy as it eliminates the threat of automatic sanctions. But he says this purely fiscal approach is not going to solve the problem.
Spreads, Forex, ZC Swaps and Ois-Libor Spread
Spreads are still tightening as markets are jubilant about this weekend’s expected “comprehensive package”. But money market stress remains at extreme levels, as evidence by the steep curve in the OIS-Libor spread.
Source: Reuters
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