 The crumbling of Comprehensive Solution No. 4
It is surprising how long it took the markets to see through last week’s agreement to set up a separate treaty to reinforce the current one. As Frankfurter Allgemeine reports, the European Commission believes the whole thing is legally doubtful, and mostly irrelevant. The rating agencies, too, are underwhelmed; the euro comes under press and spreads are once again rising. Welcome back to the crisis!
The European Central Bank effectively ended its bond purchases ahead of the summit, in a clear signal that the SMP is now the vehicle through it will support the eurozone. As a result, Italian 10-year yields are once again back at the level of over 7 per cent, a situation that is not consistent with Italian continued membership of the eurozone. The euro slumped to a new recent low.
Moody’s also announced yesterday that it will review the credit rating of the eurozone member states, citing a lack of new measures agreed at the summit. Fitch was even more explicit, saying the summit once again failed to provide a comprehensive solution. A eurozone downgrade seems increasingly probable, at which point the EFSF would also lose its rating, and with it its whole raison d’etre.
For the Commission the euro agreement adds very limited value In the Commission’s view there is hardly anything really new in the euro agreement and what is new is legally very doubtful, Frankfurter Allgemeine Zeitung reports. The main problem according to the Commission is that the agreement for quasi-automatic sanctions would be part of an intergovernmental treaty and in international law that is of lesser legal value than a European treaty. As a consequence any country’s request to proceed according to the weaker deficit rules of the European treaty would mean that the stricter rules according to the intergovernmental treaty cannot be applied. Also the Commission points out that is doubtful that it and the European Court of Justice can legally be asked to perform surveillance duties on behalf of a subgroup of the EU.
Sarkozy prepares the French for the loss of the AAA In a long interview with Le Monde about the euro crisis summit, Nicolas Sarkozy prepares the French public for the loss of the country’s AAA rating. „For the moment they (the rating agencies) have maintained the triple A“, the French president said. „If they were to take it away we would deal with this situation with cold blood and calm. It would be one more difficulty but it would not be insurmountable. What counts is the credibility of our economic policy and our determined strategy to reduce spending. We will absolutely respect the engagements that we have taken.“ The loss of the French AAA rating could be part of general downgrade of many of the eurozone countries or of the five other AAA countries in the eurozone including Germany.
Francois Hollande wants to renegotiate the euro agreement if he is elected French president Francois Hollande announced yesterday that he would renegotiate the euro agreement struck should he be elected French president next May, Le Figaro reports. „If I am elected President of the Republic I would renegotiate that agreement and add what is lacking“, he said. He underlined that list would comprise more interventions by the ECB, eurobonds, a financial rescue fund, in other words how do we react to market pressure, and finally I would seek to have more growth.“
Reintroducing the Franc would cost France 1m jobs The Institut Montaigne, a thinktank close to the French employers, estimated in a study that leaving the Euro and reintroducing the Franc would cost France roughly 1m job, Les Echos reports. Marine Le Pen, the presidential candidate of the Front National, is proposing that France should reintroduce the Franc. Anti euro sentiment is growing stronger in France and some observers believe that Le Pen might stand a chance to get into the second round of the presidential elections.
New cutbacks doom in Greece The government on Monday sought to play down fears of new austerity measures, Kathimerini reports. Finance Minister Evangelos Venizelos said at a press conference that even if the targets are missed, there would be no new tax increases. Revenue would be raised by cutting spending. “There is no question of whether we can increase taxes further; we can’t,” he said. “There is no question of whether we must cut spending more; we must,” he added.
Greece’s economy now looks likely to contract by at least 6% this year and 3% next —worse than official forecasts, Wall Street Journal reports. A further fall in tax revenues and rising social transfers makes deficit targets look shaky. Those targets were for a budget deficit of around 8.5% of GDP, or about €17.1bn in 2011, but which the government now sees settling closer to 9% of GDP and €19.68bn. Many economists say a 10% deficit is more likely, which could force the government to announce new cutbacks in the months ahead. There is pressure for Greece to advance part of the €7bn worth of austerity measures for 2013 and 2014, and to implement it in 2012 to make up for this year’s budget shortfalls.
Belgium’s 2011 deficit slippage Belgium will end the year with a deficit of 4.2% of GDP, or €15.5bn rather than 3.6% (€13.3bn) agreed with the European Commission. One of the factors behind this slippage is the slowdown of economic growth, Le Soir reports.
FDP party chairman Rösler under growing pressure FDP party chairman Philipp Rösler is under growing pressure and there are even rumours about a coup within the party against him, Spiegel Online reports. The reason for this is his announcement this weekend that the party referendum on the ESM and failed because not enough party members had participated. The initiators of this referendum accuse him of foul play because the referendum officially ends only today. Also many FDP members feel that he lacks the general leadership qualities to engineer a comeback of the party after serial losses in all the Länder elections. The FDP which is one of the two junior partners in the ruling coalition currently scores as low as 2% in some polls.
Commerzbank in talks with the German government about renewed public aid Commerzbank is in talks with the German government about renewed public aid, Reuters reports, referring to five sources independent of each other. According to the report a decision should be reached by Christmas. One possible outcome could be that Commerzbank hand over its loss making real estate arm, or parts of it, into a state-owned bad bank. Germany’s second largest bank has already received more than €18bn of public money, of which it has repaid about €14bn. The EBA stress test revealed last week that Commerzbank faced a new gap in capital of €5,3bn.
Japan says No to IMF bailout The world is getting impatient with the eurozone and its pathetic attempts to solve its crisis through the IMF. Reuters has the story that Japan’s finance minister Jun Asumi said Japan would only be able to cooperate with an IMF programme if the Europeans first came up with a convincing firewall. He expressed sympathy for the negative position the US taken on this issue.
Philip Stevens on David Cameron We are largely bypassing the British debate in Eurointelligence, but there is one aspect that has an indirect bearing on the eurozone. While the fiscal compact agreed by the eurozone is hardly worth the paper it is written on, it is possible that David Cameron may after all not block the use of community institutions to supervise the new treaty, as Philip Stephens asserts in his column, which is otherwise about the political implications of his decision. (However, the Commission will be able to implement any excessive deficit procedure under the already existing six-pack legislation. But here we are talking about provisions that are inside the treaty. Art. 136 allows the eurozone to pass any secondary legislation on deficit policy and macro policy coordination without interference of the likes of Mr Cameron.)
Spreads, Forex, ZC Swaps and Ois-Libor Spread Spreads are returning to levels that are not consistent with the existence of the eurozone. The euro is now at $1.31.
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