 The end of yet another suckers’ rally
There is a depressing regularity about any apparent good news that comes from Europe these days. The markets cheer for a short period, and then revert to normality once they realise that the underlying problems have once again not been addressed. The good news this time was the higher than forecast take-up of the ECB’s three-year long-term financing operation, which came in at €489bn. The markets rallied strongly on those numbers, hoping that the banks would not come to the rescue of sovereigns and start buying up bonds. In reality, what we are seeing is that banks are dumping their most toxic asset-backed securities, including their own bonds, as ECB collateral. The FT has the story, quoting one analyst as calling the LTRO a “sugar rush” – which about sums up the overall effect of the ECB’s liquidity policies. Also note that the Libor-Ois spread (see below), which measures the stress in inter-banking markets, has not eased up since last week.
Mark Schieritz’ assessment The best comment this morning on the impact of this operation came from Mark Schieritz, who gives a downbeat-realistic assessment. He says the liquidity shower will have a marginally positive impact on the banking sector, in the sense that it reduces the probability of a liquidity squeeze. It probably prevents a massive liquidity crunch, but it is unlikely to lead to more private sector credit. He also dismissed the backdoor theory – that banks would now use the money to buy government bonds. One reason for their caution is that future stress tests might require a corresponding increase of core-tier one capital to back such purchases. Schrieritz concludes that most of the money will end up with the ECB.
Italian economy shrank 0.2% in Q3 The Italian economy shrank 0.2% in the third quarter compared to the previous quarter, up just 0.2% year-on-year, according to latest data from the national statistics bureau ISTAT. The data is weaker than expected and points to an economy deeply troubled even before tough austerity measures were adopted, according to Reuters. It is lagging behind the eurozone, which grew by 0.2%, with Germany and France growing 0.5% and 0.4% respectively. Mario Monti’s technocratic government forecasts a fall in GDP of 0.4%-0.5% in 2012, but Confidustria forecasts a 1.6% decline, four times as large.
Monti faces confidence vote today in the senate Mario Monti faces a confidence vote in the Senate on Thursday that he called to speed up final approval of a €33bn austerity package, Reuters reports. The confidence votes also allows the parties supporting Monti’s government to say that they are backing the law out of a sense of responsibility, even if they don’t agree with many of the measures. Both Berlusconi’s People of Liberty Party (PDL) and the centre-left Democratic Party have misgivings about the tax increases and the pension changes respectively, but know they cannot sabotage its passage without unleashing an economic catastrophe.
Papademos starts bilateral talks after ND opposed reforms Lucas Papademos is to seek common ground with the leaders of the three parties in his fragile coalition, starting on Friday, after conservative New Democracy strongly opposed reform plans to cut auxiliary pensions. Papademos stressed that auxiliary pension funds could not remain untouched as they are not viable and offer significant scope for savings. A possible compromise, which could placate ND without completely alienating the troika, is the merging of the auxiliary pension funds in a first phase followed by pension cuts later, according to Kathimerini. The first meeting is with ND leader Antonis Samaras. If the talks fail, the prospect of snap elections will loom even larger.
Poll shows disarray of Merkel’s liberal coalition partner A poll shows the desolate state of the FDP, Angela Merkel’s liberal coalition partner, Bild reports. According to that poll done by Forsa for Stern-RTL, the liberals have fallen back to 2%, well below the 5% threshold required to enter parliament in Bundestag elections. Also 48% of the FDP voters think that the current party leader Philipp Rösler should make room for Rainer Brüderle, the current parliamentary group leader. Furthermore, the poll also showed there there is currently no clear majority for either political camp. The Christian Democrats would have 35%. The SPD, at 28%, would have a majority only if it formed a coalition with both the Greens (14%) and the ex-communist Left (7%).
Germany increases its export surplus with most EU partners According to figures calculated by the Ifo Institute for Financial Times Deutschland, Germany significantly increased its export surplus with almost all its EU partners. According to the figures, Germany had a surplus with 20 of its 26 partners. The paper points out that even Sweden, which has an overall surplus, has a deficit in its bilateral trade relation with Germany. The German surplus has grown significantly in relation with 10 EU countries, most notably with France, Germany’s biggest trading partner. The trade balance is part of an EU wide monitoring process but after several German interventions, surpluses are not being sanctioned by the EU.
Sarkozy announces there will be a „break“ between president and candidate Sarkozy Speaking to about 100 deputies from his own UMP, Nicolas Sarkozy announced there will be „break“ between what he stands for as the current President and what the candidate Sarkozy will stand for, according to Les Echos. Without going into detail he raised expectations for the job summit he intends to hold on January 18, which may be inspired by his talks with Chancellor Gerhard Schröder past Tuesday when the former German explained how he introduced the far reaching social and labour law reforms with his „Agenda 2010“ in the early 2000s. Sarkozy was upbeat regarding his chances to win the presidential elections in May 2010. The president compared his Socialist challenger Francois Hollande to former presidential hopefuls such as Edouard Balladur or Lionel Jospin who were leading the polls in December but who lost in the elections in spring.
Scepticism about France’s deficit goal Due to the recession in France, most economists think that reaching a 3.0% deficit in 2013 is out of reach for the country by now, Frankfurter Allgemeine Zeitung reports. The paper quotes Jean-Pierre Jouyet, the president of the financial market watchdog AMF who said: „To reach the aim of 3.0% under current circumstances seems very difficult to me.“ FAZ also quotes Matthieu Plane of the economic research institute OFCE, who says: „The 3.0% can only be reached at the price of two years of recession.“ The paper also quotes Gilles Moec of Deutsche Bank who says that the country could get to the 3.0% if it cut €25 in the yearly government spending of €1000bn but he doubted that the government had the political force to do so. The government had promised to Brussels to bring its current deficit of 5.7% down to 3.0% by 2013.
Ken Rogoff is pessimistic Writing in the Financial Times, Kenneth Rogoff argues that eurozone is very likely to cast a long shadow over the global economy in 2012. A solution to the crisis is not in sight.
“There is no easy solution. The eurozone needs a new constitution that creates powerful, centralised fiscal and regulatory authorities, with corresponding political integration. Substantially greater integration probably means ousting some of the less developed states until they are sufficiently economically advanced. Unfortunately, such a course is politically unacceptable, not least to France, a core member.”
The only realistic medium-term solution, he writes, is an expansive interpretation of the European Central Bank’s charter.
(We think he is quite on wrong in his political judgement. If he thinks that a political union is politically unrealistic, then so is an expansive interpretation of the ECB’s mandate. One requires the other. We agree with him, however, that a political union is the only realistic solution to the crisis.)
Olivier Blanchard is even more pessimistic We have this via Paul Krugman. Olivier Blanchard, the chief economist of the IMF, severely criticises the decision by the last European summit to respond to this crisis with a policy of eternal deficit reduction. But he makes an important new point – that these policies are likely to fail even in terms their narrow goals:
“Some preliminary estimates that the IMF is working on suggest that it does not take large multipliers for the joint effects of fiscal consolidation and the implied lower growth to lead in the end to an increase, not a decrease, in risk spreads on government bonds. To the extent that governments feel they have to respond to markets, they may be induced to consolidate too fast, even from the narrow point of view of debt sustainability.”
10-Y Spreads, Forex, ZC Swaps and Ois-Libor The markets revert to the status quo ante. We are wondering the the Libor-Ois spread is not registering any chances despite the success of the ECB liquidity policies.
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