 The downgraded EFSF
If the rating downgrade of France was no surprise, the subsequent downgrade of the EFSF was even less so, since it derives its ratings directly from its members. S&P thus yesterday lowered the EFSF’s rating from AAA to AA+, in line with that of France, triggering a debate about whether the rescue fund can remain effective under these circumstances. Spiegel Online quotes Thomas Mayer of Deutsche Bank as saying that he estimates the decision will add 0.25bp to the EFSF’s borrowing costs. But Spiegel points the more serious impact would be on its ability to leverage, which is now further reduced. The article quoted a string of European officials, including Klaus Regling, pretending that the EFSF had enough firepower left. (Which is true in respect of Greece, Portugal and Ireland. But the EFSF has no capacity to take on a large country. See the story below for a situation in which this may become necessary.)
The FT writes that the only hope left would be an earlier start of the ESM, but it points to the difficulties in getting this up and running in time, considering the previous ratification record. Also, there is still no agreement on the ESM’s final size, as the €500bn ceiling is almost certainly not enough. The ESM negotiations will therefore get mixed up with the fiscal treaty. If that can be agreed, Germany may be willing to accept a larger ESM.
Monti’s quid pro quo
Mario Monti said in an interview with the FT that Germany should lend its fiscal weight to lowering borrowing costs of the eurozone periphery. (That essentially means a call for a eurobond, because this is the only realistic way the borrowing costs could be sustainably reduced.) Monti’s made an appeal to Germany’s “enlightened self-interest”, as Germany has been benefitting from the euro more than others. Mr Monti said in return for fiscal discipline “there has to be a visible improvement somewhere else…“In a country like Italy now, the ‘somewhere else’ can only be interest rates.” He said Italy had no choice but to embrace fiscal discipline. But if “this strong movement towards discipline and stability is not recognised as taking place, and a certain approach to financial aspects does not gradually evolve, then there will be a powerful backlash in the countries which are being submitted to a huge effort of discipline.”
Italy wants to stabilize its debt at 100% of GDP by 2020
Talking to Frankfurter Allgemeine Zeitung Vittorio Grilli, Italy’s deputy finance minister announced that the country wants to stabilize its debt level at 100% of GDP by 2020. „Looking further ahead that means that the Italian state finances no longer represent any threat“, Grilli insisted. Grilli pointed to the low Italian deficit level. „If the budget is balanced and the economy grows, the reduction of the debt quota comes automatically“, he explained.
Draghi warns about severity of the crisis
In his appearance in front of the monetary affairs committee of the European Parliament, Mario Draghi said his predecessor had warned last autumn that the crisis had taken on systemic components. Draghi said it has worsened since,” il Sole 24 ore reports, through a combination of deteriorated credit conditions and weak economic growth. He acknowledged that the austerity programmes would lead to a further, albeit brief, contraction, but he stuck to the line that there was no alternative. He also said the EU should to live without ratings agencies, or at least with a much reduced role.
The ECB council disagreed about how to deal with Greek bonds on the NCB’s balance sheets
On Thursday’s there was an inconclusive argument in the ECB’s governing council about how to deal with Greek government bonds that ECB and national central banks (NCB) have on their balance sheets, Financial Times Deutschland reports. The argument was sparked by the possibility of a Greek default and of the Greek intention to include retroactively collective action clauses (CACs) in the bonds. This raises the question if the bonds on the central banks’ balance sheets also should take a hit. The Eurosystem has bought an estimated €50bn of Greek bonds through the SMP. Some NCBs also have large holdings of Greek bonds. Some argued that the Eurosystem should not suffer a hit since the Greek bond purchase was an emergency aid similar to the IMF’s intervention, and the ECB should thus enjoy a privileged creditor status. Others argued this would be inconsistent with the ECB’s claim that the SMP was a monetary policy exercise. A hit on the Greek bonds must be accepted, and losses must be distributed according to the NCB’s capital shares in the ECB.
Portugal plans 11m bond auction
Portugal will test the markets’ appetite for its debt tomorrow when the country auctions the longest maturity bills since it sought a rescue last year, Bloomberg reports. Investors will be asked to bid for 11-month Portuguese bills. Standard & Poor’s cut Portugal’s credit rating to junk status, meaning the nation’s debt can no longer be held by some index- tracking funds.
French bond auction successful
Bloomberg also reports that French borrowing costs fell at an auction of 51-week treasury bills in the first sale since the nation’s credit downgrade. France sold €1.895bn of one-year notes at a yield of 0.406%, down from 0.454% on Jan. 9. The French Treasury sold a total of €8.59bn in bills, including three and six-month paper.
Bundesbank attacks bond purchases as unlawful
Bundesbank board member Carl-Ludwig Thiele last night attacked the SMP as unlawful, Börsenzeitung reports. The purchases represent a violation of the ban of monetary financing, Thiele argued. The statement is remarkable because the Bundesbank had routinely criticized the SMP but never questioned its legality.
Annual economic report will underline Germany’s robust economy
The annual economic report leaked to Handelsblatt will underline that Germany continues to outperform its eurozone partners. The report predicts that German unemployment will continue to fall by 0.3pp to 6.8% while it will continue to rise from 9.9% to 10.6% in France, from 8.3% to 9.0% in Italy and from 21.9% to 23.0% in Spain. The report underlines that the German growth estimated at 0.75% for 2012 is self-sustained and not the result of a state sponsored stimulus. The report stresses that the slowdown of growth will be temporary only. Net borrowing will be at 1.0% of GDP as it was in 2011, the report says.
Hugo Dixon on Greece
In his Reuters Breakingsviews column, Hugo Dixon writes that the main problem for the eurozone right now is not the S&P downgrade, but Greece. There are now two big hurdles ahead. The first is the bondholders negotiations. It is not clear that the negotiators will agree a deal, and even if they do, whether this will be accepted by bondholders. It is then not clear whether European governments are willing to hand over a single tranche of €90bn – much of it to cover the losses of the Greek banks – just before the country is to hold elections with uncertain outcome. By then, the eurozone has €300bn in public money at stake in Greece, which will weigh down on them like the stone of Sisyphus.
10-Y Spreads, Forex, ZC Swaps and Ois-Libor
After the rating shock, markets calm down a little. The ECB’s liquidity operations are slowly beginning to affect the OIS-Euroibor spread. The curve is still extremely steep, but one year spreads have come off some 10bp from there peak.
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