 The leaked watered-down draft of the treaty: nothing that is not already there
The FT has seen the third draft of the fiscal treaty currently under negotiation, which now contains that makes it indistinguishable in substance from the already existing stability pact. (Remember the stability pact tightened the Maastricht Treaty 3% deficit ruling by calling for budget to be in balance or in surplus). The new Treaty, just like the stability pact, allows for temporary deviations from a budget rule temporarily for as long as sustainability is unaffected. The article says this constituted a significant watering down from previous provisions. The draft also excludes any reference to the eurozone going it alone on single market issues. And Karl Whelan at the Irish Economy Blog points out that there is one other important change in the draft treaty. The notion that the balanced budget rule has to be “constitutional or equivalent” has been replaced with “preferably constitutional”. (So what remains in substance is little more than the original pact. We are actually quite glad that this is so. A deflationary fiscal rule is the fastest way to blow up the eurozone. The really negative aspect about this treaty is that, once again, is that it distracts from the need to solve the crisis. So we cannot really get excite by the debate whether 26 or 27 countries sign up to it? The new treaty is totally and utterly irrelevant to this crisis.)
First bond auction for Italy and Spain
Italy and Spain will seek to sell as much as €17bn in debt today, Bloomberg reports. In their first auctions of 2012, Spain will sell as much as €5bn of bonds, including a new three-year benchmark security. Italy, which needs to repay more than €50bn in bonds in the first quarter, will sell as much as €12bn of bills today and €4.75bn of bonds tomorrow. The yield on Italy’s 10-year benchmark bond remains near 7%. The Spanish 10-year yield is at 5.32%.
El Pais exasperated by slow-moving ECB
The article in El Pais reflects the exasperation of Spain’s leading daily about today’s likely refusal by the ECB’s governing council to cut interest rates yet again. The article makes several reference to Draghi taking risks when he was photographed in Rome not wearing a seat belt. Yet as ECB president he acts very cautiously. The article says the eurozone was now faced with a sharp economic slowdown, further uncertainty through the instability in Hungary, while the banks are sitting on the money they have received from the ECB.
Germany may fall from boom into recession
Yesterday’s growth figures showed that Germany may well fall from a boom directly into a recession, Financial Times Deutschland reports. While preliminary figures estimate the GDP growth for 2011 at 3.0% they also showed that the Germany economy contracted by 0.25% in Q4. Economists are divided as to whether this was the sign of a looming recession or just a temporary drop. The deficit was at 1.0% of GDP and debt at 81.7%.
Bild warns that Germany cannot escape the euro crisis
Bild’s Jan W. Schäfer warns the latest growth figures show that Germany cannot prosper in splendid isolation. „Everybody in Europe feels the pain of crisis – not only the bankrupt states“, he argues. „For us Germans there is no reason to relax, on the contrary: The negative figures are an alarming wake-up call for politics and business! The government must finally get serious about the announced reforms – and consolidate, consolidate, consolidate. Otherwise the budget will explode soon. But also the company CEO’s and unionists are challenged. They must agree at once how to keep as many workers as possible despite the decline in orders – in the best of all cases without asking for public money.“
Lagarde asks Europe to contribute more to Greece’s rescue
According to Handelsblatt, Christine Lagarde urged Angela Merkel at their meeting in Berlin on Monday that the Greek problem must be solved urgently. On the one hand she says it is critical that the PSI negotiations between the Greek government and the private banks must be concluded by next week at the latest. But in her talks with Merkel, Wolfgang Schäuble and FDP party chairman Philipp Rösler she also urged that catastrophic evolution of the Greek economy rendered the rescue package of past October obsolete and that a „significant double digit billion figure“ of European public money will be needed in order to restore debt sustainability in Greece.
Monti warns of Italian resentment against Germany and the ECB
After his talks with Angela Merkel, Mario Monti was consensual and assured the German chancellor that Italy no longer presented a danger of contagion to the eurozone thanks to his reforms. But talking to Die Welt, Monti warned: „If the Italians don’t see any tangible results of their readiness to consolidate and reform in a foreseeable future protests against Europe will emerge in Italy, also against Germany, which is seen as the leader of EU intolerance and against the European Central Bank.“ Monti did not elaborate what exactly he was asking for but his comments could be seen as a thinly veiled threat to Germany and the ECB to intervene more heavily in the markets in order to drive Italian spreads further down.“ Monti was immediately rebuffed by Merkel’s ally Peter Altmaier. „I wish Monti advances Italian reforms before formulating demands to his European partners“, Altmaier said.
Merkel’s party prepares the exit of Germany’s controversial president
Support for the embattled federal president Christian Wulff is in freefall even within Angela Merkel’s CDU, the party to which the head of state belongs, Frankfurter Allgemeine Zeitung reports. The paper writes about a „dramatic shift“ in attitudes within the party due to Wulff’s failure to stop the scandal around his doubtful real estate credit by fully disclosing all the relevant information. There is speculation that defence minister Thomas de Maizière may be asked to be a presidential candidate should Wulff resign. But the coalition’s majority in the Bundesversammlung, the body charged with election Germany’s head of state, is so thin that some people in the CDU are considering not to present their own candidate and to look for a common candidate with the opposition. Bild speculates Frank-Walter Steinmeier, the SPD’s candidate for chancellorship in 2009 and currently the Social Democrats parliamentary leader, could be such a candidate.
Credit Suisse finds a way to circumvent the short-selling ban
The biggest argument against regulatory instruments such as short-selling bans is that they can be easily circumvented. The FT has a fascinating article this morning about Credit Suisse offering an off-the-shelf product through which hedge funds can bet against an index of stocks that are included in the short-selling ban list. The article mentioned that some investments banks have been reluctant to do the same for political reasons. The article quotes a Credit Suisse executive as saying that the product was used by investors to hedge existing long positions, but not as an outright speculative instrument. Thus the bank complied with both the letter and the spirit of the law.
Wolfgang Munchau on the futility of a transaction action
In his column in Spiegel Online, Wolfgang Munchau argues that the transaction tax proposed by Nicolas Sarkozy and Angela Merkel is very likely to turn out a flop. He says the main reason is not that transactions move off-shore but that banks will offer products to circumvent the tax. Furthermore, the tax is very likely to prove discriminatory, hitting small shareholders and pension funds while hedge funds will be able to circumvent the tax much easier. As an instrument to reign in finance it is completely useless. This goal would be much better achieved through new bank resolution regimes, and special taxes on excessively high incomes.
Michael Pettis on Europe’s misdiagnosis of the crisis
This from from Michael Pettis’ blog, in which he gives an eloquent analysis of the problems facing the eurozone, and the persistent failure by European governments to recognise the underlying causes of the crisis. “Europe’s underlying problem is not budget deficits or even unsustainable debt. These are mainly symptoms. The real problem with Europe is the huge divergence in costs between the core and the periphery – in the past decade costs between Germany and some of the peripheral countries have diverged by anywhere from 20% to 40%. This divergence has made the latter uncompetitive and has resulted in the massive trade imbalances within Europe.
Trade imbalances, of course, are the obverse of capital imbalances, and the surge in debt in peripheral Europe in the past decade ….was the inevitable consequence of those capital flow imbalances. While European policymakers alternatively sweat and shiver over fiscal deficits, surging government debt, and collapsing banks, there is almost no prospect of their resolving the European crisis until they address the divergence in costs. Of course if they don’t resolve this problem, the problem will be resolved for them in the form of a break-up of the euro. “
10-Y Spreads, Forex, ZC Swaps and Ois-Libor
Euro weakens, spreads move sideways.
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