 ECB’s liquidity policies are beginning to work
Mario Draghi gave a nuanced assessment of the ECB’s liquidity policies at his first press conference in the year, saying that the three year liquidity operation had eased tensions, and prevented a credit crunch.
However, he spoke about further downside risks stemming from the European debt crisis, and warned about a possible spillover to the real economy. He also said during the Q&A session that there was insufficient evidence that the banks would be using the liquidity to buy government bonds. He also said that the amount of money parked at the ECB is not the same as the money that was made available in the 3-year LTRO, implying that the money would flow through the economy. On the economy he said that inflation would soon fall below the 2% target, and that the risks to growth remained on the downside. He ruled out QE for now, saying the ECB was now focusing on improving liquidity. Here is his statement.
Yesterday’s Italian and Spanish auctions went very well. Italy sold €8.5bn of 12-month bills and €3.5bn of bills maturing end May. The Italian bid-to-cover ratio for the 12 month sale was 1.5. Thursday’s sale brings a net inflow of €4.3bn, according to Reuters. The total target for refinancing between February and April is more than €90bn. El Pais reports that the Spanish Treasury sold bonds for maturities for three and four years, with marginal rates of 3.58% for bonds maturing in July 2015, 3.88% for 2016 and 3.95% for October 2016. The bid to cover ratio was close to two. With yesterday’s auction, the Spanish Treasury covered 11.8% of gross medium and long term issues planned for the year. The paper concluded that the impact of the policies of the ECB on the success of these auction was undeniable. We found the following comment from a service called Moneycontrol, which quoted a hedge fund manager as saying the following: “[The banks] are going to the sovereigns and doing that job for them and then depositing that money as collateral back to borrow more money… It`s doing the trick to start with, but I think the game might be seen for exactly what it is… This is de facto QE or money printing in a different way.”
ECB critizises watered down version of fiscal pact
In a letter from ECB board member Jörg Asmussen to the members of the Eurogroup Working Group the ECB severely criticises the latest version of the fiscal pact, Financial Times Deutschland writes. The ECB is particularly unhappy with a provision that would allow governments to have deficits of more than 0.5% if they can invoke exceptional circumstances. Asmussen warned of a „substantial watering down“ of the pact and requested that the exceptional circumstances can be invoked only in cases of natural catastrophes and other events clearly out of the government’s control. Also in his press conference Mario Draghi yesterday said the pact’s wording must be „unambigious and effective“.
Two CDU parliamentarians consider Greek exit from Eurozone manageable Lawmakers from Chancellor Angela Merkel’s party are stepping up pressure on Greece, saying that a Greek exit from the euro region would be manageable. Michael Meister and Michael Fuchs, both deputy parliamentary caucus leaders of the CDU, called into question Greece’s future in the euro zone in separate interviews with Bloomberg, saying that crisis-fighting bulwarks introduced since 2010 have made contagion “significantly” less likely. Greece will have no other option than to exit the euro area as it struggles under a mountain of debt, unable to regain its competitiveness without having its own currency to devalue, said Fuchs.
Time is running short for deal on PSI+ The time for a deal on the private sector involvement plan (PSI+) is running out while key areas remain unresolved, the Institute of International Finance (IIF) said on Thursday. Kathimerini reports that Charles Dallara is said to have asked for a coupon of more than 5%. Observers have not ruled out the possibility of forced participation that would trigger the payout of credit default swaps. Deputy Finance Minister Filippos Sachinidis stated yesterday that if there is not full participation by private creditors, Greece would need additional funding. In a telephone interview with the Wall Street Journal, Charles Dallara expressed concern about “the lack of a clear process to finalize these negotiations.” The question he implicitly raised in this interview was whether, even if Greece wants a deal, it has the power to seal one.
Berlin accumulates budgetary reserves for bad times Because of the so called debt break, the German government is able to accumulate budgetary reserves that it may use bad economic times, Financial Times Deutschland writes. Since the economy went exceptionally well in 2011 the government’s net borrowing needs were significantly lower than the debt break would allow for. According to the new rule, the government can now transfer about €25bn to a so called control account and use the money once there is an economic downturn. Wolfgang Schäuble made it clear yesterday that there are no plans to use that money any time soon.
French deficit 2011 could be lower than expected According to Le Figaro, the French deficit could be 5.5% in 2011 instead of 5.7% initially foreseen. After meeting with Wolfgang Schäuble in Berlin, Francois Baroin announced that the deficit would be at €91.5bn, which is about €4bn less than initially foreseen for past year. The lower deficit makes it more likely for France to reach its target of a 3.0% deficit in 2013.
German government will lower its growth forecast for 2012 In his yearly economic report economy minister Philipp Rösler will next week lower his forecast for Germany’s growth from 1.0% to roughly 0.75%, Handelsblatt reports. With his forecast, Rösler is in the middle of the forecasts of the independent economic institutes that think that German GDP growth will be between 0.3% and 1.2% next year.
The Germans work six weeks more per year than the French According to a study by COE-Rexecode, based on Eurostat data, Germans work about six week more each year than the French, Frankfurter Allgemeine Zeitung reports. According to the study, Germans work 1904 hours a year compared to 1679 hours for the French. The French working time has dropped by 271 hours a year between 1999 and 2010 as a result of the introduction of the 35 hours week by the government of the Socialist prime minister Lionel Jospin. Three and a half months before the presidential elections the study has provoked a furious debate, in which the Socialists claim that the study’s methods are flawed. According to the study only the Finns work less than the French while Greeks, Poles, Hungarians and Rumanians work even more hours than the Germans.
Strong increase in support of the ideas of the extreme right Front National in France Support for the ideas of the extreme right Front National in France increased strongly, Le Monde writes. 31% of the French polled by TNS Sofres for Canal+, Le Monde and France Info said they agreed with the ideas of the party that is now led by Marine Le Pen, the daughter of its founder Jean-Marie Le Pen. The figure compares with the last poll in January 2011 when only 22% expressed sympathy with those ideas. The results illustrate that Marine Le Pen’s strategy of a normalisation of the Front National seems to pay off. Marine Le Pen abstained from the open anti-semitism and racism that was characteristic of her father’s party leadership. Instead she emphasizes topics like criticism of the euro, which she wants to abolish in France in favour of a return to the French Franc.
Henrik Enderlein on the last chance to save the eurozone Writing in Franfurter Allgemeine, Henrik Enderlein says the last chance to save the eurozone would be a revival of the idea to let the EFSF and the ESM coexist. It would double the rescue volume initially, but has the advantage that it is time-limited. From July 2013, the EFSF can no longer accept new programmes. Its bonds would expire 2023 at the latest, after which the total guarantee volume would be reduced back to €500bn. This construction would not necessitate any Bundestag votes to increase lending volumes, and it would address the concerns of the German constitutional court.
Jens Nordvig on the need for transparency about break-up scenarios This is a touchy subject. Jens Nordvig of Nomura argues that one of the reasons for the fund outflows from the eurozone has been uncertainty over what will happen after a hypothetical euro breakup, something which many investors consider possible. He says “a contingency plan for orderly asset redenomination in a break-up scenario could help alleviate investor worries about eurozone assets and improve the capital flow situation and funding costs.” He says the publication of such a plan would actually reduce the risk of the break-up, as investors are assured that there is a future beyond the euro. He makes the proposal to create a new ecu, to which national currencies would be linked.
Some relief yesterday. Italian ten-year spreads down about 30bp, Spanish, French spreads also soften. Euro up. The Euroibor-OIS curve has flattened marginally since the ECB’s 3-yr tender, but has not fundamentally improved.
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