 The IMF wants $500bn in new funds, but non eurozone shareholders resist
The big story this morning is the request by the IMF for an additional $500bn in official funding, The FT writes that this would generate demand for bailout loans of $1 trillion. Reuters speaks of a total of $600bn in new funds, which include a $500bn for loans, and a further $100bn as a protection buffer. Christine Lagarde presented the estimate to the IMF’s executive board last week. Of those $500bn earmarked for new loans, the eurozone would contribute $200bn. The reaction from non-eurozone countries is sceptical. The US Treasury said in a statement that “the IMF cannot substitute for a robust euro area firewall”. The UK has also expressed reservations. The FT quotes sources as saying that Brazil and India were more supportive but also emphasises the need for the eurozone to pay for its own rescue. Reuters says Japan and South Korea also insisted that the eurozone must do more, while China rejects the proposal unless a number of tough conditions are met. Those include more voting power for China and other emerging nations, and a change in the stance of IMF policy with a stronger focus on stabilising capital flows and exchange rates. The Reuters article quotes Bank of Canada Governor Mark Carney as saying it was not clear that European governments had done everything necessary to make sure they could fund themselves at sustainable interest rates over the next few years.
PSI+ talks continue Greece is due to continue on Thursday talks with banking representatives to find agreement on the haircut for private investors holding Greek debt, Kathimerini reports. No statements were made after Wednesday’s meeting. The FT writes that the Greek negotiators are about to reach a final agreement.
In an interview with the New York Times published on Wednesday, Papademos confirmed that Greece is considering retrofitting its bonds with Collective Action Clauses (CACs) if the participation in the voluntary debt restructuring is not high enough. The creditor steering committee under Jean Lemierre and Charles Dallara represents bondholdings worth an estimated €155bn of Greece’s outstanding €260bn debt. That leaves a further €50bn or so of such uncanvassed
Merkel and Sarkozy push ahead with financial transaction tax Angela Merkel and Nicolas Sarkozy push ahead with their plans for a financial transaction tax. According to Süddeutsche Zeitung, both leaders insist on a common six-points-plan in preparation of the European Council on January 30 that the tax must be introduced. Should the UK resist, a eurozone-only approach would be the second best solution. But Merkel still faces resistance from her liberal coalition partner FDP. The party’s parliamentary group leader Rainer Brüderle yesterday reiterated his opposition to the plans and proposed instead to follow the IMF’s proposal to tax the bank manager’s salaries and bonuses.
Handelsblatt reports that Merkel and Sarkozy also propose the creation of a European growth and competitiveness fund that should be filled with EU subsidies that have not been released last year.
Schäuble and Baroin will present common plans on company taxation According to Les Echos, Francois Baroin and Wolfgang Schäuble will present common plans on company taxation when they meet on Monday. According to the finance ministry in Berlin, the differences between the two countries can be overcome. One of the differences is the possibility to use losses in one year to offset benefits in the preceding years. Germany’s rules are stricter, but France is likely to adopt them in order to increase tax revenues. Baroin’s and Schäuble’s plans are part of an initiative announced by Nicolas Sarkozy and Angela Merkel last August that aims to create common tax rates and a common basis for company taxes. According to the leaders’ common paper to the EU partners, this could later be extended to the EU level.
Merkel rebukes Montis request for additional German help Angela Merkel ironically rebuked Mario Monti’s appeal that Germany should do more to help Italy, Frankfurter Allgemeine Zeitung reports. „I am still searching for what exactly it is that we should do more“, the chancellor yesterday said at a common press conference with her Bulgarian counterpart Boiko Borissow. The Bulgarian Prime Minister, who is heading one of the poorest countries in the EU, drove home Merkel’s point more clearly by adding: „I would like to dispense the advice to my colleagues that they should preoccupy themselves less with Germany and instead worry more about their own budget deficits and their external debt.“
Downgrade threatens EFSF’s capacity to act S&P’s downgrade of the EFSF from AAA to AA+ could threaten the rescue fund’s capacity to act, Frankfurter Allgemeine Zeitung reports. In EU circles, people say everything should be ok as long as the fund is not required to do more than the ongoing rescue programs in Greece, Ireland and Portugal. Problems would arise once the fund is confronted with additional requests. Many specialists don’t share Angela Merkel’s view that a rating of AA+ was sufficient because the US does not have any difficulties attracting investors with such a rating. Experts point out the fundamental difference that the EFSF is a young institution whose soundness is more difficult to judge. Experts also point out that the downgrade may adversely affect the EFSF’s plans to leverage its remaining credit volume of roughly €250bn.
Spain nominates ECB’s chief lawyer as a candidate for the board Spain yesterday nominated the ECB’s chief lawyer Antonio Sainz de Vicuna as the country’s candidate to succeed to the current Spanish board member José Manuel Gonzalez-Paramo on the ECB board, Financial Times Deutschland reports. The nomination clearly shows that Spain is determined to fight for its informal right to a permanent representation in the board in line with the three biggest Euro economies Germany, France and Italy. The curious aspect of the candidacy is that Sainz de Vicuna is considered to be a top expert on central bank law but he is neither an economist nor does he have any experience in monetary policy. Euro circles believe that smaller and Northern European countries will challenge the Spanish claim because they don’t accept the informal arrangement of permanent seats and because the Northerners think that the board is currently dominated by Europe’s south. So far, according to FTD, the Slovenian economic development minister Mitja Gaspari is the only other candidate.
The sheer unimaginable scale of the eurozone’s banking crisis Dieter Wermuth has a good analysis in the blog Herdentrieb, in which he undertakes some number crunching on the eurozone’s banks. He points to the difference between the sectors’ book value and market capitalisation, the former only accounting 41% of the latter, while a normal range would be between 100 and 200%. This implies that investors are seeing write-offs of €350bn, about 3.7% of the eurozone GDP. He makes some further calculations that the capital shortfall for the eurozone’s banking system is some €1000bn, about 10% of GDP, a gigantic sum. Germany may be able to muster its share, but for the rest of the eurozone it is essential the ECB fills that gap.
The vulnerability of Europe’s current account imbalances to the oil price FT Alphaville quotes from an interesting paper by Bank of America Merrill Lynch, on the effects of oil price changes on the eurozone’ s current account imbalances. “Over the last 10 years, Germany cumulative c/a surplus was $1900bn, while the cumulated deficits of Italy, France, Spain, Greece and Portugal were $1500bn. During that period, the share of oil increased from 67% of the combined deficit to 80%. In other words, Germany’s export surplus are finance the rest of the eurozone’s oil deficit. The combined deficit for 2011 is $258bn. A 10% increase in oil prices would increase the deficit by around $21bn, or 8%.”
Zingales: ECB should loosen its monetary policy In his comment for Bloomberg Luigi Zingales concludes that now is the time for the ECB to loosen its monetary policy. Central banks should intervene when the fear of a sovereign default risks becoming self-fulfilling, as is the case now in Europe. ‘With a liquidity facility providing €639bn to banks and an interest rate at 1%, one could argue that the ECB’s monetary policy could hardly be looser. The reality is different. Most of that liquidity has never left the central bank’s Frankfurt headquarters: European banks redeposited €502bn at the ECB. And the real measure of monetary policy isn’t the rate at which banks borrow from the ECB, but the rate at which businesses can borrow from banks. Credit is drying up in Europe. The little credit available is very expensive. As a result, Europe is quickly drifting into a recession.
10-Y Spreads, Forex, ZC Swaps and Ois-Libor The news from the IMF has a positive impact on the euro. Also, the Euribor-OIS spreads is slowly coming down.
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