Eurointeligence Comment and Analysis

Receiving Nicolas Sarkozy in Berlin, Angela Merkel yesterday endorsed the French president’s plan to implement a Tobin tax on a eurozone level, Süddeutsche Zeitung reports. Up until now the chancellor had said she supported the idea provided it was introduced by the EU27. Merkel’s change of course immediately drew an angry response by Philipp Rösler, economics minister and FDP party chairman who insisted that such a tax was acceptable only if it was introduced throughout the EU. Sarkozy now wants to push the Danish EU presidency to put the topic on its agenda and to transform into reality a Commission proposal from September 2011.

According to Le Monde, the Tobin tax version Sarkozy has in mind is a simple stock market tax which would put a 0.1% tax on all purchases of stocks and bonds. But the French government thinks it may not be wise to discourage investors to buy European government bonds by taxing them. The Commission proposal also foresees a 0.01% tax on all transactions of derivatives but according to the paper this is technically difficult because information about many derivative transactions are not available. So in the end Sarkozy’s plan may be nothing more than a 0.1% tax on stock transactions. The president plans to introduce this unilaterally in France and to present a draft law by March. According to a separate piece in Le Monde, Sarkozy’s Socialist challenger Francois Hollande is for the Tobin tax but wants to see details first. All commentators in France agree that Sarkozy’s rush to introduce the tax as rapidly as possible is part of a strategy to take away a topic from Hollande which was so far considered to be an idea by the left.

Merkel upbeat on new EU treaty

The FT writes that Merkel expressed “optimism” that the new EU treaty might be concluded before the end of January. (We think this is possible but this will not a material treaty, confined mainly to national balanced budget ceilings. One should always remember that the euro crisis would happened even if such a treaty had been in force ten years ago.)

Investors pay Germany for its debt

For the first time investors yesterday paid to lend money to Germany, Financia Times Deutschland and Frankfurter Allgemeine Zeitung report. In €3.9bn auction for papers over six months investors accepted – 0.0122 percent compared with a positive return of 0.001 percent at a similar auction in December. „This is unprecedented“, a spokesperson of the German debt agency said. The investors readiness to accept negative yields reflects a flight into security in the midst of the eurozone crisis and increasing doubts about some euro government’s ability to honour their debt.  Investors also accepted negative interest rates from the Netherlands and non euro countries like Denmark and Switzerland recently.

PSI could be 60% or even higher, but doubts remain

Private investors holding Greek debt could be asked to accept a haircut of around 60% because a previously agreed 50% write-down is no longer seen as sufficient because of the deteriorating Greek economy, people with direct knowledge of the matter said Monday according to Wall Street Journal. “The cut in terms of net present value will likely edge higher towards 60%, or even higher. We still expect an agreement in January. There are reactions from bondholders but we basically have little choice,” a banker involved in the talks said.  

 

The discount rate used to calculate NPV losses is now calculated to be around 11% to 12%.

Reuters quotes Olli Rehn as saying that talks with private investors on a restructuring of Greek sovereign debt are in their final stages and could conclude shortly, according to Reuters. The article says the discount would be close to the 50% agreed in October.

In another story, Reuters quotes an unnamed executive from a large insurance company as saying that the talks were going slowly and are unlikely to be agreed.  Angela Merkel warned yesterday that the whole second Greek loan package would depend on the conclusion of this agreement.

Holger Steltzner predicts Greek bankruptcy

Commenting the new debate within the troika about debt sustainability in Greece, Frankfurter Allgemeine Zeitung’s economics editor Holger Steltzner predicts the country’s bankruptcy in the near future. „In the judgement of most global investors a Greek bankruptcy is unavoidable“, Steltzner writes in a front page editorial. „After the private debt restructuring there will be most likely a write-down by state creditors, since the debt is transferred on a large scale to the public sector via credit packages and the central banks.“

Portugal needs to resort to extra-ordinary income measures in 2012

Jornal de Negocios reports of a slippage of the Portuguese deficit rising to 5.4% due to higher spending on hospitals and pensions. The Troika has already  given its”ok”, but the government has to resort to extraordinary new revenue measures in 2012.

Companies are lending to banks

Reuters has an interesting story about reverse-flow repos from companies to banks, as the traditional role of clients and lenders are interchanged. Among those companies are Johnson & Johnson, Pfizer and Peugeot. Those cash-rich companies have stepped into the repo market, which is otherwise the exclusive realm of central banks and banks. The article quotes one market participant as saying that in one key area of lending, companies now accounted for 25% of the deals.

Is the IMF getting more optimistic about growth?

The IMF has been leading the camp of pessimists in respect of economic growth this year. A South African newspaper (hat tip Reuters) now quotes Christine Lagarde as saying there are reasons to be more upbeat. “The euro-zone scene has changed massively over the last 18 months or so … there are reasons to be a little bit more upbeat about the prospects,” she told Business Day. She said even if some countries entered into a recession, the whole of the Eurozone might not.

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