 Germany’s message: That’s it.
Eurointeligence Comment and AnalysisScenario of an Italian defaultby Diego Valiante What happens if Italy fails to implement structural reforms and interventions are not enough to avoid a default? The last summit?by Guntram Wolff European leaders convened for yet another summit deciding on the fate of the euro area. So are all central parts of a solution now defined? Angela Merkel told the Bundestag she wanted a fiscal union, but on her definition this means a fiscal pact for a deflationary adjustment, and without eurobonds. Jens Weidmann said the ECB’s governing council was becoming more sceptical about the SMP. Reuters reports from a meeting with journalists that Weidmann said Italy could live with yields of 7% for a while, and it was now up to Mario Monti to deliver the budgetary cuts to persuade markets that the Italy can sustainably reduce its debt. Meanwhile Süddeutsche Zeitung reports that Weidmann and Angela Merkel agree that the Bundesbank loan should only be granted if a sizeable number of non EU countries participate in beefing up the IMF’s available funds. The reason is that they want to avoid a situation in which the Bundesbank participates in an exercise that can be seen as monetary financing of bankrupt euro states via the IMF. So far the US has ruled out any further bilateral IMF credits, Japan has voiced doubts and even the UK is not sure it will participate.
(Germany is digging in now. The most we would expect now are some marginal indirect increases in the size of the rescue funds, if at all, but no bazookas or further guarantee schemes. The penultimate act of this drama has started.)
Budget committee refuses to hear Bundesbank on IMF loans The coalition deputies in the Bundestag’s budget committee refused Jens Weidmann’s offer to explain to the committee in a closed door session under which condition s e was ready to implement the €45bn bilateral loan to the IMF, Financial Times Deutschland reports. The Bundesbank president is eager to get the parliament on board because he considers the loan is risky since the concentration of loans to ailing euro zone countries can put into question the IMF’s preferred creditor status should there be several state bankruptcies in the Eurozone. But according to coalition sources top coalition politicians refused that Weidmann speaks to the committee. In the end they merely took note of the Bundesbank’s position. The paper quotes budgetary policy spokesman Carsten Schneider of the opposition SPD who says that this is not good enough and under these circumstances the Bundesbank is not in a position to grant the IMF loan. The background is the EU summit decision that the EU should send an additional €200bn to the IMF in order to prepare for major rescue operations such as in Italy or Spain.
IMF calls for dismissals as Greece economy is set to shrink by 6% Greece needs to start dismissing civil servants, the IMF’s mission chief to Greece, Poul Thomsen, warned in Athens on Wednesday, adding that the budget deficit is likely to reach 10% while the economy could shrink by at least 6% this year (worse than the 5.5% forecast released just days ago). In his remarks, Thomsen said tax rises and across-the-board wage and pension cuts have reached their limit. Instead, Greece must do more to crack down on tax evasion and to shrink its public sector by closing unnecessary public organizations and dismissing surplus government workers, Dow Jones wires report.
Papademos said his government would do whatever it takes Papademos said on Wednesday that if Greece fails to meet its fiscal targets this year — as seems almost certain — then his government would negotiate further measures with the troika. The suggestion appears to run counter to the assertion on Tuesday by Finance Minister Evangelos Venizelos that any corrective steps would be agreed by the next government, notes Kathimerini.
Noonan: If Ireland were to hold a referendum, it would be about euro membership The Irish government was accused of scaremongering after Finance Minister Michael Noonan warned that a referendum on tougher rules for euro zone countries would inevitably turn into a vote on whether Ireland should remain in the euro, the Irish Times reports. “So my personal wish is that it can be done without constitutional change. But if constitutional change is required, [then] we will have a referendum and we will put the case to the people and it will come down to whether one wants to continue in the euro, or not.” Noonan said it was too early to say, without seeing the draft treaty, whether it would have to be put to the people. Asked if his comments could be seen as a threat, he said he had not raised it, but had responded to a question during a Bloomberg newswire interview. Fianna Fáil finance spokesman Michael McGrath accused him of irresponsible scaremongering.
Finnish government wins confidence vote over euro crisis handling Finland’s coalition government on Wednesday won a vote of confidence, 116 to 73, based on the government’s reaction to the eurozone’s sovereign debt crisis. The populist Finns party launched the interpellation, asking the government whether it had undertaken precautions for a possible breakup of the single currency and whether it approved of a transfer of fiscal power to the European Commission, according to Newsroom Finland.
Merkel’s liberal coalition partner FDP implodes as the party’s general secretary resigns In a surprise move, and without giving any convincing explanations, the FDP’s general secretary Christian Lindner resigned yesterday. The German media sees the resignation as yet another sign of the ongoing implosion of Angela Merkel’s coalition partner, which has been thrown out of most Länder parliaments and which scores as low as 2% in some polls. It is also a blow for party chairman Philipp Rösler who was caught by surprise and who is seen as largely incompetent and overwhelmed by the job. Tomorrow the results of the internal party referendum on the ESM will be announced. Despite the fact that the eurosceptics’ motion to vote against the ESM in the Bundestag is likely to be defeated, many commentators think that Rösler will also have to resign. Rösler last night proposed party treasurer Patrick Döring as Lindner’s successor. For a complete coverage see Frankfurter Allgemeine Zeitung, Spiegel Online and Süddeutsche Zeitung.
Germany resuscitates and toughens bank rescue fund Soffin The German government resuscitated and toughened the bank rescue fund Soffin in order to prepare for potential problems with the country’s second largest bank Commerzbank, Handelsblatt reports. The new Soffin includes the provision to recapitalize banks against their will. Also the government can nominate a „special envoy“ who will be able to fire the bank’s board and to impose the government’s will on the bank. The move is seen as a response to Commerzbank’s problems. After the recent EBA stress test, the bank will have to raise €5.3bn. Most observers don’t think it will be able to do so on the market, but Commerzbank’s CEO Martin Blessing is reluctant to ask yet for more help after having had to accept already €18bn in 2009.
Alain Juppé prepares public opinion for the loss of France’s AAA After Nicolas Sarkozy’s remarks about a potential loss of the French AAA, Alain Juppé repeated the same message. „It would obviously not be good news but it would not be a cataclysm either“, the foreign minister told Les Echos. „The United States have lost their AAA and they continue to borrow on the markets at good conditions.“
Le Monde explains the consequences of what it calls „the probable loss of the French tripe A“: exclusion of the French debt by the big international institutional investors, higher CDS rates, higher borrowing costs for all the subsouverains like municipalities or state owned enterprises, loss of the AAA rating for the EFSF, but perhaps even for the EIB and the EBRD which are also guaranteed by governments.
Paul Johnson proposes a new scheme The market for new schemes to revive the eurozone has reopened again – which reflects the outside world’s mistrust in the “solution” offered by last week’s summit. Writing in the FT, investor Paul Johnson proposed a scheme, based on the Temporary Liquidity Guarantee Programme by the Federal Deposit Insurance Corporation. This is how it would work in the eurozone: “…in return for a 1 per cent annual guarantee fee, and compliance with the ECB and/or IMF on implementation of structural reform programmes, Italy and Spain would be able to refinance all maturing debt with an ECB guarantee. This would probably cause their “all-in-financing costs” to fall to the 4 per cent range. The programme would be open for two years for maturities of up to 10 years, giving Italy and Spain time to implement their structural reforms.” He said such a guarantee would immediately stabilise the sovereign credit market, and would be non-inflationary, since the ECB is not taking on any liabilities in its balance sheet. (We think the scheme would contravene European law, as it constitutes a contingent debt monetisation that would be triggered by a default. The ECB carries the ultimate risk in this scheme. Johnson’s scheme presupposes that every beneficiary is solvent. We think this is a non-starter.)
10-Y Spreads, Forex, ZC Swaps and Ois-Libor Euro below $1.30, Italian spreads rising and rising..
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