 Ecofin approves €150bn for IMF, but UK refuses to join in
Last night Ecofin approved €150bn additional resources for the IMF rescue fund, but fell short to of its set target of €200bn after the UK refused to provide an anticipated €30bn. During a three-hour conference call on Monday, the British finance minister George Osborne told his EU counterparts the UK would not offer any additional IMF funds unless it was part of a broader international effort, the FT reports. Eurozone member states will provide €150bn, while the Czech Republic, Denmark, Poland and Sweden are also ready to grant loans, though these lenders must first win parliamentary approval, according to Reuters. That leaves the euro zone more reliant than ever on major economies such China and Russia. The United States is reluctant, concerned about the lender’s exposure to the euro zone.
ECB’s stability report says eurozone faces massive risks
Financial stability reports are among the most heavily edited documents currently in circulation because central banks do not want to create panic among investors by highlighting the fragility of their own financial systems (thus rendering those reports ad absurdum). But occasionally, when the censors are not paying attention, these reports are worth reading, as was yesterday’s ECB’s report, which gave an usually stark warning of the risks ahead. Insiders are probably not surprised by the warnings, but it had a big effect in the media. The story has been the top item in Spiegel Online from yesterday until this morning. The ECB’s report identifies four big interacting risks:
(Where the report is less credible is in the assertion that current policy is addressing these risks.)
Draghi warns about massive volumes of new issuance In a testimony to the European Parliament, Mario Draghi pointed to the massive bond expiries in Q1 2012, with €250bn-€300bn in government bonds expiring, €230bn in bank bonds. In addition, €200bn in collateralised obligation will fall due during the course of 2012, Reuters reports. Draghi said the pressure was “unprecedented”. Asked about eurobonds, he said: “(But) if you have separate countries that go on and spend on their own, separately and tax on their own, you cannot think about common issuance.”
Greek government stopped paying tax returns
The Greek government has decided to stop tax returns and other obligatory payments to enterprises, salary workers and pensioners with immediate effects, Kathimerini reports. The desperate measure comes as the budget deficit is soaring over 10% of GDP for 2011, due to additional grants to social security funds (0.5-0.9% of GDP) and lower revenues in the first 11 months. Evangelos Venezelos and his colleagues also decided to issue a new regulation early 2012 allowing for old debts to be paid in 60 instalments, at a minimum sum of €300 each, in an effort to bring more revenues into the state coffers.
Cabinet reshuffle looming
There is also speculation of a cabinet reshuffle. A government spokesman indicated that a shake-up might be ahead and that Greece should expect significant developments after the holidays. One question here is whether candidates for the leadership contest of PASOK need to give up their cabinet posts. In such a scenario, challengers to Papandreou — Development Minister Michalis Chrysochoidis and possibly Finance Minister Evangelos Venizelos, as well as Health Minister Andreas Loverdos — would resign from their posts ahead of the contest, leaving key posts in the Cabinet open, according to this article.
IMF: Portugal on track, focus now on reforms
Portugal is on track to meet the budget deficit for 2012 says the IMF, warning that the focus should now be on the implementation of structural reforms. The IMF hereby approved a loan disbursement of €2.9bn for Portugal under the €78bn IMF-EU rescue loan. David Lipton, deputy MD, also said that state support for bank recapitalization may be needed despite banks’ strong efforts to raise capital from private sources, Reuters reports. “In light of the fiscal contraction and much weaker external demand, it is even more critical to ensure that bank deleveraging does not come at the cost of excessive contraction in credit to dynamic enterprises,” he added.
Not everybody loves Mario Monti
The opposition to Mario Monti is forming. It looks as if he will pass his austerity budget with a comfortable margin this Friday – in a vote scheduled in the Senate after last week’s approval in the Chamber – but the trade unions have been uniting in opposition to his proposals with mass demonstration in front of the parliament yesterday, with further demonstrations all over Italy, according il sole 24 ore. Unions are holding a multitude of strikes, include postal workers, with further strikes likely among health workers, and further strikes in the near future. (The real big test for the Monti administration is not this budget, but the labour market reforms planned for the first half of next year. This is where we expect the protests to be massive.)
German objections to an ECB-only bazooka
This is how Joachim Nagel, a director of the Bundesbank, argued the case against an ECB-only bazooka. He is quoted by Reuters as saying: “Markets like to see the cheque on the table. But if the ECB was misled to do so, the markets would celebrate briefly and then straightaway ask much more uncomfortable questions… They would worry this solution would overwhelm Germany. They would doubt the credibility of the ECB. And they would point towards the big risks of such a policy.” (We actually agree with him. An ECB solution without the compliment of a political solution is unsustainable for exactly the reasons he mentions. And the political solution can only include an enlarged rescue fund – which is of course the same as a eurobond.)
Bundesbank is upbeat on German economic prospects Contrary to the prevailing gloom in Europe, the Bundesbank gave a rather upbeat assessment of the German economy in its monthly report, Frankfurter Allgemeine Zeitung reports. The German central bank predicts that national growth will drop to 0.6% next YEAR after 3.0% in 2011. But according to its base scenario, growth will rebound to 1.8% in 2013. All other indicators show that the German economy has become robust once again, the Bundesbank stresses. The pre tax benefits of the 70 publicly quoted real economy companies have grown to 7% of total revenue. Also the central bank thinks a credit crunch in the eurozone would not significantly hurt most German companies because most companies have retained earnings are thus less dependent on bank lending than most of their international competitors.
Low German unemployment leads to job cuts in job centers
Historic lows in German unemployment figures prompted the president of the Federal Work Agency to cut jobs in the so called job centers. Talking to Financial Times Deutschland, the agency’s president announced that 17.000 jobs in the agency will be shed by 2015. With just 2.7m unemployed, Germany’s currently has the lowest jobless figures in more than 20 years.
For Sarozy’s top advisor a loss of the French AAA would be „totally unjustified“
For Henry Guaino, Nicolas Sarkozy influential advisor and speech writer, a loss the French AAA would be „totally unjustified“. Talking to Les Echos, the presidential advisor stresses there is „no doubt at all about the French debt. Contrary to countries like Greece or Italy the state is strong, taxes are paid and the government shows its determination to improve the public finances“. Guaino warns that all must be done to avoid for France to fall victim of speculation. „Doubt nourishes doubt and that makes interest rates go up“, he explains. „This is how a country which is perfectly capable of paying its debt can find itself strangled financially.“
Montebourg accuses Merkozy of promoting former Goldman Sachs bankers into Euro top jobs
Arnaud Montebourg, number 3 in the Socialist’s primaries, accuses Angela Merkel and Nicolas Sarkozy of systematically promoting former Goldman Sachs bankers into Euro top jobs. „It is the ‚Merkozy’ couple that has put at the head of the ECB, Italy and Greece three former Goldman Sachs bankers, a bank which is at the origin of a fraud that has gone unpunished so far ranging from the American subprime crisis to the falsification of the Greek public accounts“, Montebourg told Le Monde.
The euro crisis will be the end of the European social model
In a long analysis, Le Monde thinks that the euro crisis will lead to end of the European social model as we currently know it. According to Jean-Marc Daniel, an economics professor from ESCP quoted by the paper, „without doubt we are living in the last hours of a European Social model“. The paper explains that Sweden proved in the 90s that consolidating and reforming does not neccessarily mean killing the social model. There are countries such as Greece where, according to jokes, 20% of the taxi drivers declare to be blind in order to get special benefits. In other countries such as Spain or Portugal, consolidating and reforming without destroying the social model is more difficult according to the paper.
Martin Feldstein on why a decline of the euro’s exchange rate might be a temporary quick fix
Martin Feldstein, who has been a Eurosceptic, has a proposal how to get out of the current mess. He says internal adjustment in the eurozone would require one or a combination of the following three components: austerity; internal devaluation, or more demand by Germany; the goal to reduce the current account deficits of the southern European countries could be achieved easier through a devaluation of the euro. On his estimate, a devaluation to $1.18 would suffice, which was of course the nominal bilateral rate against the dollar at the start of the euro. (We doubt this rate would be sufficient, and, more importantly, we doubt that the eurozone’s as a whole can run a large current account surplus, given the policies of the rest of the world, including the US and China. So it is not clear whether this exchange rate is attainable for any length of time.)
10-Y Spreads, Forex, ZC Swaps and Ois-Libor Marginal improvements, but no overall change.
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