 Some really bad news from the banks: they do not seem to be keen on the ECB liquidity shower to buy sovereign bonds
The big question in crisis resolution is to which extent the banks will use the ECB’s 3-yr LTRO to buy up sovereign bonds. It appears they are not very keen, according to the FT. The liquidity-for-bond swap has been compared to a carry trade, as bank use cheap ECB credit to buy higher yielding securities. Some market observers are quoted as saying that previous LTROs had helped exacerbate the link between eurozone sovereigns and their banking systems. The FT story says some bankers believe that the carry trade was not as attractive in the current climate, as banks already had too much sovereign debt on their balance sheets. The report cites data according to which the total bank exposure to eurozone peripherals had fallen from €497bn to €455bn between the start of the year to the end of September. The article quotes the chief executive of UniCredit who said that “it wouldn’t be logical” to use ECB funding to buy more government debt, and he would prefer lending to the real economy. The French banks are also not likely to jump on board. The article also says the cost and availability of collateral was another limiting factor.
The liquidity crunch continues
Meanwhile, there is pressure on the banks to act. In another story, the FT quotes Mario Draghi calling on banks to take the money. He estimated that the reduction in the reserve ratio from 2 to 1 per cent would free up liquidity in the banking sector by about €100bn. But according to FT Alphaville, Draghi also expressed concern about a collateral crunch, despite the widening of the ECB’s eligibility criteria. FT Alphaville writes: “Things are so tight, in fact, that the premium which used to be associated with German sub 10-year paper being used for repo has now evaporated, since market participants have had no other choice but to be forced into trading longer maturities due to the former’s lack of availability.”
Financing of municipalities dries up in France
As a result of the downfall of Dexia, the Franco-Belgian bank that specialized in financing municipalities, there will be significant shortage in municipal finance in 2012, Dexia warned in a confidential note to the government, according to Le Monde. According to this estimate, there will be a shortage of €12bn to €18bn, and only 45% and 64% of the financing needs would be covered.
The new treaty will be watered down to a non binding self commitment
Instead of a full-blown new treaty, the 26 Euro and EU members are aiming for a much less binding set of self commitments, Financial Times Deutschland reports. The reason is a fear that the UK would launch a complaint to the European Court of Justice that community mechanisms would be used by a subgroup. The result of this development is that the stricter fiscal rules with automatic sanctions will not have the strong legal basis that Angela Merkel sold as the most significant outcome of the summit. Generally, this proves the chancellor’s claim wrong that the fiscal rules will be enhanced because they will be enshrined in primary legislation. The decision by the 26 countries to introduce debt breaks remains unaffected by this development as they will be introduced via national legislation.
Czech Republic and Hungary won’t give up tax sovereignty for treaty
The prime ministers of Hungary and the Czech Republic have said they will not give up their countries’ independent tax policies to join a new EU treaty, writes the Irish Independent. Peter Necas said his country wanted to take part “actively” in the negotiating process but wanted more details on how it might affect non-eurozone countries.
Troika wants firm proposals on new measures
Troika inspectors expect to see concrete proposals on new measures when they return in mid-January as well as progress in talks on a debt swap, sources have told Kathimerini. Progress has been achieved in talks between the troika and New Democracy — the most popular party in the opinion polls — with the latter committing to the basic elements of a program of structural reform and spending cuts. Also, administrative Reform Minister Dimitris Reppas indicated for the first time that the government was willing to consider layoffs in the bloated public sector. Speculation is running high over a possible government reshuffle to push through crucial reforms quickly.
PSI+ progress – or not?
There were signs on Thursday that the government and banks could reach an agreement on the private sector involvement plan (PSI+) by next month. Kathimerini understands that the eurozone has accepted that the new bonds to replace the old ones after the haircut will have the same legal status as the €30bn loan to Greece for the completion of the plan. Also a source from the banking steering committee has told Bloomberg that the banks are seeking to reach an agreement on the details of the debt swap in early January. Reuters, meanwhile, has the story that Josef Ackermann had a much more downbeat assessment of the success chances of a Greek debt deal. He said the talks had stalled over demands that banks accept a haircut of significantly more than the 50% as originally agreed. There is also disagreement about the credit status and interest coupons on the new bonds to collateral arrangements and legal guarantees to be offered by the official sector, as well as disagreements over the net present value.
France enters into recession
France has entered into a recession according to figures published by the statistical office Insee yesterday, Les Echos reports. There will be negative growth in Q4 of 0.2% and in Q1 of 2012 of 0.1% according to figures published yesterday. „Never has a presidential compaign started in such a economic downturn as it has this time“, the paper notes. Insee also foresees unemployment to rise above 10% next year. Those pessimistic figures will have direct consequences on the country’s public finances. France has undertaken to cut its deficit from a current 5.7% to 3.0% by 2013, an ambition the paper judges to be „impossible“ in the current circumstances. To get to the present position, the government already had been forced to adopt two austerity packages. It is now likely that there will be a third right after the elections in May 2012 – one that is likely to be much more severe than the current ones. As a result of the poor growth and the likely further strains on the French public finances, Les Echos thinks the loss of the AAA rating is now almost unavoidable.
Noyer lashes out at the Brits
El Pais reports that there was a rumour yesterday that S&P would downgrade French sovereign debt immediately, prompting Christian Noyer to say that the UK, more than France, deserves a downgrade. He called the reasoning of the agency incomprehensive and irrational, ignoring the many efforts undertaken by European governments to resolve the crisis. (This is really funny, we think.) El Pais writes that his comment is part of an orchestrated campaign by French officials to prepare the public for the bad news to come.
Portuguese Socialists are angry about austerity dictate from Northern Europe
The vice president of the Socialist Party, Pedro Nuno Santos lamented in Parliament that Portugal does not have a leader who put the interests of Portugal in the first place, Jornal de Negocios reports. “We have an atomic bomb that we can use in the face of the Germans and the French: this atomic bomb is simply that we won’t pay,” Pedro Nuno Santos is quoted by the Telegraph. “Debt is our only weapon and we must use it to impose better conditions, because recession itself is what is stopping us complying with the (EU-IMF Troika) accord. We should make the legs of the German bankers tremble,” he said.
Bundesbank warns of increased risks for national lenders and the EFSF should the IMF lend much more to the eurozone
The Bundesbank warns that a significant increase in IMF lending to other eurozone countries would pose risks to Germany, Financial Times Deutschland reports. „The risk structure of the German guarantee limit (to the EFSF) of €211bn would change if the IMF were to have programs in big volumes in additional euro countries“, a Bundesbank source told the paper. This echoes a letter Jens Weidmann wrote to Wolfgang Schäuble, in which he warned that additional programs would result in a rollover of credit risks to the other lenders such as Germany and the other euro countries and the EFSF due to the IMF’s preferred creditor status. Also, the mere perspective of additional IMF programs could have unintended consequences. It might trigger fears among investors that their government bonds will not be honoured, which in turn could lead to „pressure to increase the aid measures“, Weidmann warns. The bill for those risks would have to be footed by the German taxpayer.
10-Y Spreads, Forex, ZC Swaps and Ois-Libor Bond spreads ease after a successful Spanish bond auction. Euro back above $1.30.
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