 Some good news from the eurozone at last: the ECB’s liquidity policies are showing some effect
The FT reports that the ECB is today expected to announce a much larger than expected take-up of its 3-year long term finance operations, with estimates cantering on a figure of €250bn – €350bn. Mario Draghi dismissed the notion that any stigma was attached to taking up this money. This facility was there to be used, he said. Banks face a record €720bn in maturing loans next year, and many will take the money simply to be assured that they will be in a position to roll over. The article also reports that central banks have actively been pushing the banks to take the money.
One of the immediate consequences of the ECB’s liquidity policies has been the fast drop in Spanish short-term rates at yesterday’s 3-month auction where interest rates dropped from a recent 5.11% to 1.74%.
(While this drop is large, these rates remain clearly above the ECB’s refinance rate. The previous rate suggests that the funding market had completely dried up. Yesterday’s suggests that the market is working again, but at the cost of a still elevated interest rates. What we are seeing now is a gradual normalisation at the short-end of the interest rate spectrum, with some ‘trickle-up’ effect on the long end. But we caution against extrapolating this. Liquidity measures can tide you over for a while. They cannot solve a debt crisis.)
Surprising rebound of Germany’s Ifo index…
Against all expectations, the Ifo index rose from 106.6 points to 107.2 points, Frankfurter Allgemeine Zeitung reports. The Munich-based Ifo Institute interprets this rebound after four consecutive falls as a sign that the downturn in the German economy will not be as severe as some had feared. „The German economy seems to successfully withstand the downturn in Western Europe“, the Ifo Institute’s president Hans-Werner Sinn said.
… and a reality check from Brussels
Peter Spiegel has an excellent news analysis, in which he makes the point that no crisis in Europe can ever be large enough from distracting Europeans from their favourite sport of navelgazing. He quoted a senior official saying that the December summit not only failed to deal with the problem, but made it worse by focusing on the wrong subject.
“Instead of restoring confidence, these officials worry, summit leaders created even more political uncertainty by giving birth to an unwieldy new European treaty that will lead to months of protracted negotiations over a pact that will be presented to national parliaments at a time when anti-Brussels sentiment is at its highest in a generation. It is a recipe for political upheaval, reinvigorated populism and colossal distraction.“
New Democracy set to challenge legislation on auxiliary pensions
Lucas Papademos’s government faces its first real test on Wednesday. New Democracy is expected to challenge a crucial piece of legislation aimed at making significant savings by cutting auxiliary pensions and merging the funds that pay these pensions, Kathimerini reports. According to sources, ND ministers are expected to fight these proposals and are ready to suggest that Greece should request a larger loan from its creditors. ND ministers are also likely to argue that cuts to auxiliary pensions have not been agreed with creditors. Government sources countered on Tuesday that Greece’s original pact with creditors does foresee changes to auxiliary pensions.
Where are we with the PSI+ talks?
The news over PSI+ couldn’t be more contradictory. Reuters‘ headline reads: “Greek debt talks hit trouble as hedge fund walks out”. Kathimerini writes that “PSI agreement draws ever closer”. Facts are more or less the same: Vega Asset Management resigned from the steering committee representing private creditors. And there is progress in the sense Greece gave in on the legal status of the new bonds to be under British law. The two articles differ in the sense that Kathimerini reports that banks have accepted a 4% interest rate in new bonds while Reuters did not confirm agreement. Kathimerini writes that in case the private sector participation rate is limited there are already some alternative solutions on the table. One of these options is the extension of the PSI to other legal entities such as industries and trade companies that hold Greek debt. Another is the forced participation of the minority that wanted to abstain from the PSI through a collective action clause (CAC).
Jouyet says maintaining France’s AAA would be a „miracle“
For Jean-Pierre Jouyet, the president of the French financial market watchdog AMF, it would be „a miracle “if France kept its AAA rating, Le Figaro reports. France will need to refinance €178bn of medium-to-long term debt in 2012, a third of that sum already in the first three months. So a downgrade and the likely rise in risk premiums would hurt France’s fragile public finances. The head of the French debt agency AFT, Philippe Mills, yesterday pointed out that it will be crucial for France is „the number of countries keeping the AAA“, the paper reports. France hopes that Germany will be downgraded at the same time because then the rise in spreads may be less severe than if the two countries will be in two different rating leagues. However, that scenario would have consequences for the EFSF because Fitch had already warned that even a French downgrade alone would automatically also lead to a downgrade of the EFSF.
Majority of the French would see a downgrade as Sarkozy’s failure
68% of the French would interpret a loss of the French AAA as a failure of Nicolas Sarkozy, a poll for Les Echos reveals. According to the paper, this is the consequence of the fact that the president stated publicly that keeping the top rating would be one of this principal aims in the remainder of his presidency.
Sarkozy wants to learn from Gerhard Schröder
Nicolas Sarkozy met with former German Chancellor Gerhard Schröder yesterday in order to talk about the latter’s reform agenda in the early 2000s, Le Figaro reports. The French president sees Schröder as a source of inspiration because of his labour market reforms in the so called „Agenda 2010“ which, according to some analysts, laid the foundations for Germany’s recovery of international competitiveness. The paper goes as far as to say that from hindsight Schröder was right with his reforms and his opposition to the war in Iraq, „a real statesman“, Le Figaro writes.
Dominique Strauss-Kahn attacks eurozone crisis policies
We picked this up from Sueddeutsche Zeitung, which reported on Dominique Strauss-Kahn’s appearance in China, where he severely criticised the eurozone crisis policies. The rather incomplete report says that DSK attacked the one-sided emphasis on savings by Merkel and Sarkozy, which had led to a less of confidence among investors. He also criticised that the ESM would be installed far too late. What Europe needs is a movement towards a genuine political union. He compared the eurozone in its present state to a sinking ship.
Nouriel Roubini warns policymakers against another year of kicking the can down the road
Writing in the FT, Nouriel Roubini warns about a perfect storm of a double-dip US recession, an implosion in China, and a violent break-up of the eurozone, which could ensue because policymakers have failed to address the various crises. For the eurozone he recommends a swift debt restructuring with an exit of the weakest members.
10-Y Spreads, Forex, ZC Swaps and Ois-Libor Some good news at last.
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