 Contagion spreads to Portugal
Eurointeligence Comment and AnalysisGermany’s economic policy strategy is incompatible with the logic of a monetary union. That is the real reason why Europe fails to solve the crisis.
It was a relatively good day on the market for most of the eurozone – except Portugal, the FT reports. S&P’s downgrade of Portuguese sovereign bonds to junk status has forced many funds to offload bonds. Portuguese bonds were also removed from Citigroup’s European Bond Index. With S&P’s decision, all rating agencies now rank Portugal as below investment grade. CDS prices put the default probability over five years at 65%. In our table below, Portuguese 10-year spreads have risen to over 13% – about 3pp up from last week. Portugal has an auction of short-term bills due today, but this is expected to go smoothly, as Portuguese banks will be able to dump the bills as collateral at the ECB.
Elsewhere, the eurozone saw a number of successful debt auctions. El Pais writes that Spain placed €3bn for a one-year note at 2.15%, and €1.9bn for an 18-month note with a yield of 2.49%. The EFSF also managed to place €1.5bn, according to El Pais. Reuters quotes Klaus Regling as saying the S&P downgrade would have no impact for as long as the others are not following.
(The main market impact of S&P’s decision was not France, but Portugal. The reason is that a downgrade to junk status has a legal meaning, while the other ratings are mostly judgemental, and lag market developments in any case.)
Westerwelle wants a European rating agency to be organised as a foundation
Here is a proposal bordering on the certifiably insane. Germany‘s foreign minister Guido Westerwelle wants a European rating agency to be organized as a foundation, he argues in an internal paper seen by Frankfurter Allgemeine Zeitung. „The rating agency could be organized as a non-profit in order to provide a real alternative to the rating of commercial agencies“, he writes. Roland Berger, founder of the consultancy of the same name, who is currently working on a European alternative to the three big agencies S&P, Moody’s and Fitch, finds it difficult to raise the neccessary amount of money.
Sarkozy’s party is visibly embarasses by the loss of the AAA
Several signs clearly indicate that Nicolas Sarkozy and his conservative UMP party are visibly embarrassed by S&P’s downgrade of France 100 days before the presidential elections, Le Monde reports. On a trip to Spain, Sarkozy refused to answer a question on S&P’s decission to downgrade France because the journalist had not mentioned that Moody’s decided not to change France’s rating for the moment. In a parliamentary debate prime minister Francois Fillon and UMP party chief Jean-Francois Copé denounced the extensive reporting on the downgrade in the French media as a „small and indecent media tsunami“.
Stefan Kaiser on German conspiracy theories about rating agencies
In a commentary in Spiegel Online, Stefan Kaiser commented on some of the more excentric German reaction to the ratings downgrade, including Elmar Brok’s paranoid suggestion that this was part of an Anglo-Saxon conspiracy theory. His conclusion is that these theories have no basis in fact, and only serve the purpose to gain attention, and to sell books.
Wolfgang Munchau on the rating agencies
Writing in Financial Times Deutschland, Wolfgang Munchau says the debate about rating agencies following the downgrade of France has been predictably hysterical. Rather than regulating them, he thinks they should be taken out of the equation, by forcing public institutions no longer to use them, and in a second step to remove rating requirements for insurance companies and pensions funds. That would degrade rating agencies to financial journalists.
Spain offers liquidity credit line to regions
Spain plans to offer a crisis credit line for liquidity to help Spain’s regions settle their outstanding bills and payments to suppliers and the central administration, Bloomberg quotes Budget Minister Cristobal Montoro. The size of the credit line from the state-backed Official Credit Institute is still to be determined. Regions shall get an extra five years to pay off €31bn they owe the central government while the administration in Madrid wants to bring forward an €8bn transfer scheduled for July. None of the measures will affect Spain’s national deficit, Montoro said. Many regions are shut out of public-debt markets. Valencia, the most indebted, was forced to delay loan repayment due to Deutsche Bank in December by a week.
World Bank expects eurozone to enter into recession this year
The World Bank cut its growth forecast for the eurozone, expecting it to enter into a recession this year (-0.3%), according to Spiegel Online. This is one of the reasons why the world economy is expected to grow only by 2.5% down from 3.6% of the previous forecast. The second reason is that growth in newly industrialised countries like China, Brazil, India slowed down, and growth is now expected to be 5.4% rather than 6.2% in the previous forecast. The World Bank warns that both trends, eurozone’s recession and a growth slowdown in the newly industrialised countries, could reinforce each other.
Bank of Italy says says persistently highly yields would leave economic in recession
The latest bulletin of the Bank of Italy has calculated, that if yields remained at January levels for two years, GDP will shring by 1.5% this year, and a stagnation in 2013. If spreads return to the level of last summer, the decline would be 1.2%, while the economy would grow by 0.8% in 2013. The latter scenario would also facilitate the planned return to a balanced budget, La Repubblica writes.
Greek debt talks resume
The Greek debt talks resume this afternoon, amid a threat by Lucas Papademos that he will consider legislation to force creditors to take losses in the absence of an agreement and a 100% participation rate by investors. The article said that the key to success or failure will be the position taken by hedge funds, many of which hold bonds maturing in March. The deal on offer by the Greek government is a swap in longer and lower yielding debt, and a small cash payment. The argument has been about the coupon of the new longer term bonds.
Austria under pressure over loans to central Europe
The FT reports that pressure has been growing on Austria in respect of its unilateral move to ask its banks to reduce their exposure to central European countries. Erik Berglof, chief economist at the European Bank for Reconstruction and Development, has told the FT that Vienna had agreed to interpret the rules “flexibly” and to allow more time than previously to meet deadlines. Policymakers have revived the coordination initiative – now Vienna 2.0. But it is proving harder this time, given the pressure on the banks. Berglof said he was “very concerned about a lot of signs of deleveraging in eastern Europe”.
The new EP president Schulz vows to take on Merkozy
Yesterday the European Parliament elected the German social democrat as ist president. Talking to Bild, Schulz promised to take on the governments more than his predecessor had done. „We have not been able to sufficiently make our influence visible“, he said. „I believe the people want someone who fights for their interests. For that reason I will be more confrontational in the future and I will pick a fight with the European Commission or the head of government with individual member states, if neccessary. I will not hide away.“ The context of Schulz‘ remarks is widespread frustration in the EP that the crisis has transferred power in the EU and the eurozone away from the European institutions to the heads of state and government, especially to Angela Merkel and Nicolas Sarkozy.
ECB ponders alternatives to government bond purchases
The ECB currently discusses alternatives to its controversial government bond purchases, Financial Times Deutschland reports. One of the possibilities debated in the ECB’s governing council is to buy other papers than government bonds from banks. Another option debated is for the ECB to engage in quantitative easing. But according to FTD the debate is still in a preliminary stage and the ECB council is unlikely to take decisions on this any time soon. But the information puts some flesh to a remark of Ewald Nowotny, ECB council member and Austrian central bank governor. „We are at the moment discussing potential alternatives, these discussions have not gone far enough so that we can abondon the SMP“, Nowotny yesterday told Wallstreetjournal.de. „That is a discussion that involves the entire spectrum of monetary policy.“
Goldman Sachs on the effects of QE in the eurozone
We picked this up via FT Alphaville. Goldman Sachs wrote in a recent research note that the impact of quantitative easing in the eurozone would be limited because of the effect of the liquidity operations. The argument is that the main impact of QE is through the portfolio balance channels operating via the banks, according to which banks would change the composition of their portfolios as a result of the policies. Because of the full allotment policies, that goal is already achieved. The main impact of a QE in addition to existing measures would be additional liquidity creation.
Nicolas Sarkozy will today hold a „social summit“
Nicolas Sarkozy will today receive the social partners at the Elysée palace for a social summit, Les Echos reports. At the center of the president’s plans is a rise of the VAT by potentially 2pp whith a simultanious decrease of social charges on salaries. At the same time Sarkozy wants to strengthen schemes that help people keep their jobs in cases of temporary downturns as Germany had done successfully with its Kurzarbeit scheme.
10-Y Spreads, Forex, ZC Swaps and Ois-Libor
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Les notícies d’agència solen ser l’eco de les veus oficials. Espanya, ens diuen, ha obert una línia de crèdit per proporcionar a les comunitats autònomes la liquiditat que els permeti atendre els pagaments i satisfer les factures dels proveïdors. I un allargament de 5 anys del termini perquè paguin el que deuen a l’Estat central. En la realitat, però, l’Estat no paga el que deu a les comunitats autònomes, ni tan sols els assentaments que ja estaven concertats i signats. D’aquesta manera, oculta el seu dèficit i dóna relleu internacional al dèficit de les comunitats autònomes, i arrodoneix així la jugada política: equiparar autonomia amb malversament de fons públics i disbauxa pressupostària, i alhora enfortir la dependència de les comunitats respecte de l’Estat central i prestigiar les polítiques recentralitzadores.