 Waiting for the markets to give their verdict
There is nothing more familiar to seasoned EU observers than a classic Britain-versus-the-rest bust-up. The Financial Times and other British newspapers have an intensive coverage of what happened, why it happened, and what will happen now. We will bypass this undoubtedly important story, as this is not really related to the eurozone apart from the obvious fact that a eurozone debate triggered this crisis.
The main development since our last briefing is that the 17+ pact became a 26-pact, which the governments now want to negotiate in a fast-track until March. Italian and Spanish bond sales will mark the first big test of post-summit market sentiment this week. A first indication will come from short-term debt auctions on Monday and Tuesday by Italy, France and Spain ahead of the more challenging bond sales.
The treaty to be agreed will contain some “golden rule” provision – which is a confusing terminology as the expression has different interpretations. The idea in this case is that governments introduce balanced budget rules in their constitutions with the goal to run deficits of close to zero over the economic cycle, presumably also including a mechanism to ensure that the mechanism is working.
(The Germans introduced the notion of an account with an overdraft facility to make it transparent to which extent you are deviating from the target. We have seen how such rules-based policies have failed in the UK, which is why we are sceptical about any assertion that you can manage a deficit over an economic cycle in real time. What made the German rule credible is not the rule itself, but the broad-based political support for such a role. If you impose it from the outside, or through a treaty, there would be less credibility.)
Since you cannot amend the existing treaty with a separate treaty, we struggle to think what else one can do with such a construct.
What about the ECB?
Ralph Atkins of the FT produced a very good Q&A, in which he discussed why the ECB is not going to bring out the Big Bazooka any time soon. The ECB is not going to venture into territory which is legally disputed. (There is no dispute about the legality of the forceful liquidity measures it announced on Thursday. We believe that this will have a positive effect, but it will not solve the crisis.)
Weidmann rules out further ECB action and eurobonds
Reacting to the euro crisis summit, Jens Weidmann categorically ruled out further ECB action to stabilize the eurozone. „Solving the crisis is the governments’ task – with reforms and with help from other countries if need be“, the Bundesbank president told Frankfurter Allgemeine Sonntagszeitung. „Monetary policy clearly has no mandate to redistribute among the tax payers of the member countries. And financing the member states with money printing is and remains forbidden by the treaty“.
Weidmann also said the summit results provided no basis for introducing eurobonds. „The heads of state and government have agreed on a fiscal pact not a fiscal union“, he stressed. „The national sovereignty in budgetary matters remains intact. The summit did not foresee any direct interferences in national budgets. In this framework eurobonds would not solve the underlying problems of the debt crisis but rather escalate them. They would decisively undermine incentives for sound fiscal policy.“ Weidmann had said before the summit that he could be in favour of eurobonds if the euro member states created a fiscal union be pooling their sovereignty in fiscal and budgetary matters and by allowing direct interference in their national budgets.
Stark calls stronger IMF intervention in Europe „an act of desperation“
Talking to Süddeutsche Zeitung, Jürgen Stark harshly criticised the euro summit’s decision to increase the IMF’s involvement in the euro crisis. „That would be an act of desperation after leveraging the rescue fund didn’t work as some had imagined“, the ECB board member said. „But where should the money come from? If it came from the central bank it would be indirect monetary financing. In the end it is the European tax payer who is liable.“
Meanwhile Financial Times Deutschland reports that problems for a stronger IMF involvement in the Eurozone may arise because the US is not prepared to commit any additional bilateral loans to the IMF. An additional problem arises because the Bundesbank will only grant a bilateral loan of some €45bn to the IMF if the Bundestag agrees with it, Bundesbank board member Andreas Dombret said yesterday. The German central bank does not want to be seen as secretely circumventing the parliament’s decision to put a ceiling of €211bn for potential German guarantees in the different euro rescue operations.
Finns opposed QMV for ESM
Finland was the only country to oppose the switch to qualified majority voting over the eurozone bailout fund, Newsroom Finland reports. The Finnish Parliament’s grand committee had ruled on Thursday that the Franco-German proposal to do away with unanimity in decisions regarding the fund clashed with the Finnish constitution. The committee said that the implementation of qualified majority voting cannot be justified on the basis of any emergency, because doing so would establish the new procedure as the rule, according to Helsingin Sanomat.
Agreement might break political consensus in Portugal
The summit agreement has also the potential to split Socialists and ruling conservative Party in Portugal, Jornal de Negocios reports. The leader of the Socialist Party, Jose Antonio Seguro said: “What I demand is that the government of my country has not the vision of the interests of Germany, but the sight of the interests of the Portuguese, and business in Portugal.” Seguro said austerity is important, but priority should be given to growth and employment. He also said that he sees no reason to change the constitution to include a balanced budget rule and that the summit.
Troika officials return to Athens Troika officials will start talks in Greece on Monday for a new progress report and to finalise the terms of the agreed €130bn bailout for Greece and the bond swap programme, Kathimerini reports. The troika inspectors are expected to focus this week on a new tax code drawn up by the government and due to be submitted in Parliament soon. Inspectors are expected to focus on labour relations. According to sources, the chief goals of the troika are to reduce operating costs in the private sector and to annul the salary increases included in a three-year collective labour contract signed in the summer of 2010.
BIS: Italy can withstand elevated years- for a while
The BIS writes in its quarterly review: “Yet simple simulations … suggest that Italy should be able to withstand elevated yields for some time, provided it retains access to the market. Given the relatively high average residual maturity of the Italian public debt (seven years), it would take a long time for elevated yields to translate into significant additional debt service costs.” The BIS said that even if the yield curve observed on Nov. 9, when Italian 1-year debt yields topped 7%, persisted throughout next year, the additional yearly cost would amount to 0.95% of 2010 GDP.
El Pais writes about another aspect of BIS quarterly review. There was a negative gap between between bank debt issues and the rollover volume of some €27bn during the third quarter – which is why banks had to resort to the ECB for liquidity. This is a sign of an acute liquidity crisis in the banking sector.
Euroscepticism on the rise in Germany
Germans have turned more eurosceptic during the crisis, a poll for Bild am Sonntag reveals. 46% of the population believe Germany would be better off without the EU, 45% believe the opposite. Among the voters of the main opposition party SPD even 51% think Germany would do better without the EU. 60% don’t believe the euro will break up and somewhat paradoxically even 68% think the EU has a good future. Concerning their identity 75% feel German first and then European, 25% feel the other way around.
Pimco’s El Erian thinks the summit results are „insufficient“
Talking to Les Echos Pimco’s CEO Mohamed El Erian considers the summit results will not be enough to stop the crisis. „This is certainly an important step but it certainly neither a miracle solution nor a global remedy“, the fund manager said. „The additional finances will prove to be insufficent unless much and quick progress is made on several fronts.“ El Erian said he was not sure that the ECB would step up its efforts to contain the crisis. The ECB knew that it endangers its balance sheets with the help it provides to the euro states and that the results are disappointing because some of them are not doing what they need to do. „So out of fear that the costly efforts will once again be useless, it is understandable and even logical that the ECB insists that the other actors first do what they need to do.“
Wolfgang Munchau on the summit
Wolfgang Munchau concluded in his FT column that the European Council produced yet another fudge – a treaty outside the treaty. Such a construction can only have a very limited impact. In particular it cannot draw from resources inside the EU, and will give rise to legal uncertainty. Such a construction cannot issue eurobonds. Any member states could leave this treaty without endangering its position as a member of the eurozone. Munchau discusses the extent to which such a treaty could be legitimised on the based the existing treaties – using Art. 136 or enhanced cooperation – but concludes that the neither of those can produce a credible portal to an extra-legal space of an outside treaty. He says investors have by and large not yet fully understood the full implications of the decision, but this was now only a matter of time.
Kevin O’Rourke on an Orwellian fiscal union
This is from Kevin O’Rourke (hat tip Paul Krugman).
“With this in mind, the most obvious point about the recent summit is that the “fiscal stability union” that it proposed is nothing of the sort. Rather than creating an inter-regional insurance mechanism involving counter-cyclical transfers, the version on offer would constitutionalize pro-cyclical adjustment in recession-hit countries, with no countervailing measures to boost demand elsewhere in the eurozone. Describing this as a ‘fiscal union’, as some have done, constitutes a near-Orwellian abuse of language.”
Spreads, Forex, ZC Swaps and Ois-Libor Spread
Spreads were up on Thursday night, down on Friday, up again overnight. The market cannot make up its mind about what to think.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||