 EU agrees comprehensive solution: No Treaty, no ECB Big Bazooka, no ESM bank licence, no increase in ESM size
We now have two crises. After last night’s summit fiasco, the eurozone crisis has returned with a vengeance, and an agreement to pursue a 17+6 treaty outside the legal framework is now threatening the future of the European Union itself.
The EU is now entering into a phase of extreme legal uncertainty after David Cameron blocked an agreement on a new treaty. He insisted on a protocol to protect the interests of the City of London, something deemed unacceptable by the others. The summit ended after 10 hours of talks.
After the decision by the others to pursue a separate treaty, Mr Cameron warned that he would not accept the new treaty organisation to make recourse to any of the EU’s official institutions, according to Spiegel Online. Jose Manual Barroso said the EU was now looking into legal tricks of how to circumvent the problem. (But this is obviously not going to be a stable solution.)
Earlier in the day, the ECB announced a rate cut to 1% in addition to a number of liquidity measures – a 36-month LTRO, a cut in the minimum rating requirement for ABS, and a surprise cut in the minimum reserve requirement. But the ECB gave no indication that it would step up its bond purchasing programme, let alone set a target.
Asian markets dropped after last night’s summit fiasco, and these losses are very likely to be reflected in open market prices in Europe this morning. They already have been reflected by sharp drops in eurozone bond prices. Italian spreads shot up to 4.67% by this morning, French spreads were up at 1.41%, and the euro fell below $1.33. The gains since Mario Draghi’s fiscal compact speech have now been mostly reversed.
Sueddeutsche Zeitung writes this morning that last night’s failure now officially sealed the principle of a two-speed Europe. (We expect that the summit is the beginning of the end of the EU itself, as EU and eurozone are now moving into politically different directions.)
Mario Draghi last night welcomed the 17+6 agreement as the “basis for a good fiscal compact and more discipline in economic policy in the euro area members,” but said the proposals would need to be flashed out in more detail. He also suggested that his remarks on a fiscal compact and its implication for ECB policy had been overinterpreted by the markets.
Sweden and Czech Republic might also join the pact, after consulting with their parliaments. The UK and Hungary will be outside. The idea is to ratify the new treaty by March.
Reuters reports that the summit also decided to cap the ESM’s capacity at €500bn, and rejected any notion of a doubling of its effective firepower through allowing the EFSF and the ESM to run concurrently. Herman Van Rompuy also confirmed that the ESM would have no banking licence. It was also agreed that EU countries would provide up to €200bn in bilateral loans to the IMF, to secure its continued participation in the eurozone programmes.
Reuters said that the danger of a treaty outside the EU’s legal framework is that it would open up a fast track procedure for countries to deepen integration in areas reserved for the EU, including finance and the single market.
Just as a reminder of the seriousness of the crisis, the EBA yesterday published the stress test results, which show that the eurozone banks needed to increase their capital by a total €114.7bn. Six German banks flunked the test.
Fight in the ECB’s governing council on interest rates and liquidity measures
There was a serious argument among the 23 members in the ECB’s governing council on the opportunity of lowering rates to 1% and on providing unprecedented liquidity measures to banks, Frankfurter Allgemeine Zeitung reports. In the post-meeting press conference, Mario Draghi admitted that there had been „a lively discussion“ among the council members. „The German members and other representatives of northern European countries wanted to avoid another cut in December“, the paper writes. Financial Times Deutschland reports that Bundesbank president Jens Weidmann and some of his colleagues found that the measures were too generous and too risky for ECB’s and the national central bank’s balance sheets. Therefore they would have preferred a more restrictive approach.
Draghi balances his dovish policies by portraying himself as the guardian the Bundesbank tradition
In an article called „Bundesbank president Mario Draghi“ Financial Times Deutschland’s Wolfgang Proissl explains that Draghi balances his very dovish policies with tough rhetoric and repeated references to the Bundesbank. When asked why the ECB did not act like the Fed or the Bank of England, Draghi replied that he was old enough to remember how the Maastricht Treaty was negotiated and how many of today’s euro members relied on monetary financing by their central banks with catastrophic results. This, according to Draghi, was the reason why the treaty was drafted with an explicit interdiction of doing this. „This treaty embodies the best tradition of the Bundesbank where there was always an interdiction of monetary financing“, he explained.
Stephan Balling condemns Draghi acting like Santa Claus calling him „Santa Mario“
Boersenzeitung’s Stephan Balling clearly thinks that Mario Draghi was far too dovish and to generous yesterday when the ECB lowered its main policy rate by 25bp to 1.0% and when it provided liquidity in an unprecedented way to banks. „The eyes of some bankers will have shined more brightly Thursday afternoon than that of their children in two weeks when the candles are burning on the christmas tree“, Balling writes. While the author applauds Draghi’s No to an increase of the SMP and while he thinks that more liquidity is the lesser evil, he considers lowering the rates as totally inappropriate. „Once again Draghi has signalled: Under his leadership there will be a relaxed approach to inflation“, Balling writes. „Pensioners and working people will have to suffer from inflation.“
The ECB’s message according to Nicolas Barre
For Nicolas Barre of Les Echos Mario Draghi’s message to the EU leaders and the crisis summit is clear: „The European Central Bank has sent a clear message to the European leaders on their way to Brussels for yet another summit: “It’s your turn now’“, Barre writes. „In a nutshell Mario Draghi reaffirms that the ECB will remain German as long as the governments have not done their work and restored their public finances.“ But the logic of austerity is reaching its limits in times of recession, Barre warns. „In this adventure the ECB will have to show it is really independent by being less German.“
Greek poll shows strong support for coalition government
New Democracy has widened its lead over PASOK but still does not have enough support to form a government on its own as there has been a substantial shift to the leftist parties, according to a new Public Issue poll for Kathimerini. According to the poll ND would get 30% of the vote, 1.5pp up on last month. The rise indicates that the conservatives have not suffered from their participation in the interim government, as some members have feared. Significantly, just over half of respondents want elections to be held soon, and 38 per cent like the idea of a coalition government. The approval rating for the current interim prime minister, Lucas Papademos, is at 60%.
9% deficit target unattainable
Latest figures released by the General Accounting office show that the Greek deficit reached €23.1bn or 10.6% of GDP in the year to October. This means that the target for a budget deficit of 9% deficit-to-GDP rate for the whole of the year is unattainable, writes Kathimerini. The situation did not improve in November, the article quotes sources.
Spreads, Forex, ZC Swaps and Ois-Libor Spread Back to Armageddon.
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