 Fitch has given up on the eurozone
Fitch has concluded that a comprehensive solution to the debt crisis is beyond the eurozone’s reach, according to Reuters. It put six countries on a negative watch – Italy, Spain, Belgium, Ireland, Slovenia and Cyprus. In addition, it also warned of a French downgrade within two years. In a statement published on Friday, Fitch said that it had concluded that “a ‘comprehensive solution’ to the eurozone crisis is technically and politically beyond reach”. It noted the absence of a credible financial backstop as a particular concern.
The folly of a downgrade for Belgium Writing in his blog Coulisse de Bruxelles, Jean Quatremer criticises the rating agencies pessimism on Belgium. The country has just got a new government, and in the past, it has also shown a remarkable ability to reduce its debt, from 130% in 1993 to 84% in 2007. Due to the banking crisis, the debt has now gone up close to 100%, and the country has once again had a primary deficit, but the latest budget plan foresees a significant tightening. He also makes the point that Belgium is a very rich countries, with domestic savings several times the size of annual GDP.
Grilli says EU has to do more to solve the problem In an interview with Il Sole 24 ore Vittorio Grilli, Italy’s deputy finance minister, said the eurozone had not been able to persuade financial markets that the measure it had taken are sufficient. In respect of crisis resolution, he said, “we are not there yet.” It is now important to strengthen the EFSF and the ESM. The priority, however, has to be a recovery in liquidity, which he said was the main problem in Europe now. The banks had ceased to lend to each other.
Draghi warns about the costs of an EU breakup The FT had a long interview with Mario Draghi, in which he openly discussed the costs of a eurozone breakup –something previously considered a taboo subject. He warned that leaving the eurozone would create inflation. This would not obviate the need for structural reforms, but governments would have to do this from a weaker position. He also warned about the legal uncertainty that would ensue from a departure.
Greece needs to find €2bn on top of the 2012 budget Following a visit in Athens last week, the troika told Greece that over the next few weeks it will need to find a way to save or raise another €2bn in 2012 on top of the measures already included in the 2012 budget, Kathimerini reports. The troika has not stipulated where the extra €2bn should come from but wants greater emphasis to be placed on speedier structural reforms. The Troika wants these measures to be implemented in the coming three months, so that a preliminary bailout agreement can be reached by March.
Portuguese opposition favours debt brake in secondary law In Portugal, the constitutional debt brake divides not only economists but also pitches the Socialist opposition against the conservative government. The Socialists call on the government to present valid reasons for a debt brake in the constitution rather than secondary law. The Socialist leader Jose Antonio Seguro might be ready to adopt the “golden rule” but only in secondary law, Jornal de Negocios reports.
Germany’s president may have to resign over private credit scandal Germany’s president Christian Wulff may have to resign because he may not have been entirely truthful about a private credit of €500,000 he got to buy a house, Spiegel Online reports. When Wulff was still prime minister of Niedersachsen he denied business links to a business man from the region. Now it turns out that he got this private credit on unusually favourable terms via the business man’s wife and according to Der Spiegel there are many indications that it was actually the business man himself who provided him with the credit. Since the president’s sole role in the German political system is to be a moral authority and to provide moral guidance, commentators across the board agree that Wulff is no longer the person to fulfill that role and that he may have to resign. Der Spiegel this Monday has Wulff’s photograph on its cover under the title „The wrong president“. For Angela Merkel this would yet be another blow that would further undermine her political authority as well. Wulff was handpicked by the chancellor, she could only impose him with great difficulties in 2010 after three rounds in the body that elects the president. Since her majority has further eroded since then, she may not even be able to force through another candidate of her own choice, but she may have to accept a candidate championed by the opposition.
Germany’s triple A and Weidmann’s triple No Talking to Les Echos, Jens Weidmann responded with a clear No to the three most important questions the paper’s journalists asked. When asked whether he feared Germany might lose its triple A rating, the Bundesbank president replied: „For me that is very improbable. But after the downgrade of the United States you could ask if that would have a dramatic effect. One shouldn’t stare at those verdicts like a rabbit stares at the lights of the car.“ He also responded negatively on the question whether the ECB would increase its bond purchasing program if the crisis escalated. „The treaties forbid us to use the printing press to finance the states“, arguing that doing so would mean redistributing risks among European taxpayers and breaking the law. „We certainly cannot overcome the confidence crisis by violating the law.“ Weidmann’s last No concerned the question if the ECB could backstop the ESFS or the ESM if one day it obtained a bank licence. “The Eurosystem has clearly stated that it will not finance the ESM even it had a bank licence because we must not monetise the states’ debt.“
Jürgen Stark hints at real reasons for his resignation So far Jürgen Stark always said that his resignation from the ECB board by the end of this year was due to „personcal reasons“. In an interview with Wirtschaftswoche Stark added: „There is a big topic that is the reason for it (the resignation): I am dissatisfied how the currency union has evolved.“ Just as Weidmann he insisted that ECB’s bond purchasing program was limited and that it was impossible to extend the central bank’s balance sheet indefinitely. Stark also accused Greece – even under the leadership of his former ECB colleague Lucas Papademos – not to do what is necessary to get the country out of the mess. „Greece has currently chosen an option that is too easy by saying the country suffers under a systemic crisis in Europe. It is not acceptable to hand over the responsibility to other people if one has not done one’s homework.“
Wolfgang Münchau on France versus German In his FT column, Wolfgang Münchau is picking up on the various statements by senior French officials last week, who said the UK, not France, deserved a credit downgrade. He writes that France is in a worse position than the UK, precisely because it has no central bank of its own, and no currency, as a result of which is policy options are more limited. “The real difference between France and the UK is simply that the UK is not trapped. Britain is a sovereign country. France is economically a sub-sovereign zone.” The lack of a comprehensive solution to the eurozone crisis and the refusal to commit to a eurozone bond are the real reasons why seemingly healthy economies are now in trouble.
Ronald McKinnon on the relevance of James Hamilton for the eurozone One of the notable features of the eurozone’s crisis management is an absence of any attempt to learn from history, including non-European debt crises. Ronald McKinnon has a useful story about the relevance of the Jefferson-Madison-Hamilton dinner party to the eurozone’s debt crisis, when Jefferson and Madison agreed that the new federal state would assume the states’ debt, while Hamilton agreed that the capital be moved from Philadelphia to what later became Washington DC. McKinnon said the two lessons from the founding years of the US where the creation of a fiscal union, with join tax raising powers, and the establishment of a “secure bank”.
10-Y Spreads, Forex, ZC Swaps and Ois-Libor Getting worse for Italy. Euro at $1.30. Banking stress remains unchanged.
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