 Morgan Stanley says worst of euro crisis over
Eurointeligence Comment and AnalysisThe international monetary system needs the euroby Agnès Bénassy-Quéré It may seem strange to call for an increased international role of the euro. But the flaws of an international monetary system centered on the US dollar are substantial.
We were rubbing our eyes this morning when we read in the Financial Times a report on European banks that Morgan Stanley now estimates that the worst of the eurozone crisis is over. We suspect, however, that this statement relates only to one specific, though important, aspect: the funding crisis of European banks, for which such a statement may well be true. (But as banks still need to raise massive amounts in capital, as we reported yesterday, the overall banking crisis is not solved. And as the eurozone economy is turning down, the wider eurozone debt crisis continues.)
Italian banks have taken up more than €50bn in the LTRO.
The above-mentioned article focuses on a research report by Morgan Stanley, which has the numbers of the take-up of specific banks of the 3-yr LTRO. Unicredit tops the list with €12.5bn, followed by Intesa Sanpaolo with €12bn and Monte dei Paschi di Siena, with €10bn. So that’s gold, silver and bronze to Italy. Italian banks altogether accounted for more than €50bn of the LTRO, and this money accounts for more than 90% of their 2012 funding needs. Huw van Steenis of Morgan Stanley is quoted as saying: “The market has underestimated how meaningful the scheme could be to avert a credit crunch.” The FT article also has a prediction from Mario Draghi according to which the take-up of the second auction, on Feb 28, will be lower, but still very high.
IMF predicts eurozone recession in 2012, and Italian recession in 2012 and 2013
Il sole 24 ore, following up a report of the Italian news agency ANSA, reports on the leaked update of the IMF’s WEO, according to which world growth will fall to just 3.3% this year and 4% in 2013, compared to a previous forecast of 4% and 4.5% respectively. Eurozone GDP is expected to fall by 0.5%. Italy will have a full two years of recession, with GDP down 2.5% this year. The IMF says the eurozone crisis was the main factor behind the global slowdown. El Pais, quoting from the same sources, says the downturn for Spain is 1.7% in 2012.
Rehn asks Germany to choose between more money for the ESM and eurobonds
Olli Rehn tells Süddeutsche Zeitung that Germany has the choice between accepting a bigger ESM or eurobonds. „The Commission is in favour of a reenforcement of the ESM“, the economy commissioner told the paper. „I firmly believe that we need such a big solution. The alternative would be eurobonds but there are serious constitutional obstacles against that in several countries – for example Germany.“ Currently the ESM is limited to €500bn, but this sum could be raised when the ESM and the EFSF merge. At the December summit the EU countries agreed to review the ESM’s volume in March.
Spain questions its deficit target for 2012
Talking to Financial Times Deutschland, the Spanish budget minister Cristobal Montoro put into doubt that his country would be able to reach its 2012 deficit target of 4.4% of GDP. „It would be something I wish for and it would be good to get there“, he told the paper, but he declined to promise that Spain would reach that goal. „We first have to look at the growth projection“. The 4.4% deficit target was based on an „outdated“ growth projection of 2.3% GDP growth in 2012, Montoro insisted. But the reality was now that the country is entering a recession. „This year will be a difficult year, an exceptional year.“
Fiscal pact will not contain the requirement of a constitutional debt break
According to the most recent draft of the fiscal pact, the requirement for a constitutional debt break has been scrapped, Handelsblatt reports. The debt rule has to be „binding and permanent“. But the draft no longer contains an obligation for the signatory states to enshrine the principle in their constitution. One of the reasons for this change is a worry by the Irish government that it would have to hold a referendum which would then not be about the debt break but about the whole crisis policy response and the austerity programme. On the other hand Germany and the ECB scored a victory in the new draft since member states can bring countries that breach the debt break to the ECJ. Initially the idea was to give the Commission that right but constitutional lawyers ruled that would not be in line with EU law.
(We still like to understand the legal basis for that. In particular, should we not assume that a country that is fined and objects to the fine, would challenge the legality of the ECJ’s competence, and argue that this is not enshrined in European Treaty law.)
The Left is putting pressure on Francois Hollande
Nicolas Sarkozy’s Socialist challenger Francois Hollande and his pragmatic low key campaign is coming under pressure from the left wing of the Socialist party, Le Monde writes. The reason is a dispute about the Socialist’s electoral promise to create 60,000 new jobs in the educational system. Hollande and his pragmatic allies fear this may be unrealistic given France’s strained public finances, so there has been some backtracking on this. Pascal Cherki, a Parisian left wing Socialist, ironically remarked: „Normally Socialists get accused of not respecting their programme after the presidential election. This time, they even do it before the elections.“ Hollande and his advisors warned that unity was needed for victory and internal disputes only risked that the Socialists would once again lose the election.
Karl Whelan proposes a delay on the repayment of ELA
This is from the Irish economy blog. Karl Wheelan writes in Business and Finance that the repayment of the Emergency Liquidity Assistance programme by the Central Bank of Ireland will be the biggest burden of the Irish taxpayer for the next 20 years. He urges the government to say that it has no intention of repaying €3.1bn in March, and that payment will only be made once Ireland has fully recovered from the crisis. He says the Irish central bank governor would only need support of seven members of the ECB’s governing council to proceed with this plan. With Mario Draghi’s support, that threshold could be easily achieved.
10-Y Spreads, Forex, ZC Swaps and Ois-Libor
Euro reaches two week high against dollar and yen, after successful debt auctions in France and Spain, underlying a current mood of optimism in the financial markets.
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