 Still no deal on PSI
Private bondholders have made their “maximum” offer for the losses they are willing to accept, according to Charles Dallara, implying that any further demands could kill off a “voluntary” deal and trigger a default. Dallara said in interview with the FT that the IIF’s position tabled with Greek authorities on Friday night – believed to include a loss of 65-70% on current Greek bonds’ long-term value – was as far as his side was likely to go. Earlier on Friday, official creditors, led by the IMF, called for a further interest rate cut of 50 basis points. The FT quotes one banker saying that the extra interest cut would push net present value losses for bondholders from 68% to more than 70%, “a level that institutions may be unwilling to accept voluntarily”. Kathimerini reports that Dallara suggested in an interview to the Greek TV channel Antenna on Sunday night that an average interest rate of between 3.8% and 4% was the biggest concession that could be made. The troika returned to Athens. According to Kathimerini troika demands the closure of 100 state entities, resulting in some 10,000 layoffs; the trimming of the 13th and 14th salaries paid to workers in the private sector; cuts to auxiliary pensions and the full liberalization of all closed professions. Monti wants to double volume of the euro rescue fund It was only a time until Mario Monti would extract a quid-pro-quo for his reforms, and to put some flesh to the warnings he expressed in several media interviews recently, when he warned of a popular backlash in Italy, unless Germany used its fiscal space more proactively. Der Spiegel reports that he is now proposing to double the size of the euro rescue fund. Such a measure would create trust and result in lower interests, a respite that the Italian prime minister sorely needs. Monti is supported by Spain, Portugal and France. According to the magazine, Mario Draghi also is in favour of a larger rescue fund. However the ECB president takes a more modest approach by proposing that the EFSF’s remaining €250bn should be added to the €500bn that will be in the ESM. However, according to Financial Times Deutschland, Angela Merkel made it clear over the weekend that she is opposed to enlargening the rescue fund to more than €500bn. The heads of state and governments had agreed in December that they would review in March as to whether or not €500bn currently foreseen for the ESM are enough. Germany and France want more relaxed Basel III rules An undercapitalised banking sector was always an integral part of the German economic model. We are therefore not surprised to hear that France and Germany are now joining forcing trying to roll back the Basel III rules. The FT reports on a joint paper by Wolfgang Schäuble and François Baroin that proposes a watering down of the rule to help economic growth. It calls for special treatment of banks that own insurance companies and for a three-year delay to the mandatory deadline to disclose leverage ratios. The paper says that a rush to implement the rules could hit lending capacity and economic growth. Luxembourg proposes Mersch to challenge Spanish candidate for ECB board Luxembourg nominated Yves Mersch to the ECB’s executive board as a challenger to Antonio Sainz de Vicuna who was nominated by Madrid last week, Financial Times Deutschland reports. By nominating a long serving central banker, Luxembourg hopes to gain the support of other small Northern countries like the Netherlands, Finland or Austria who are unhappy that the four biggest euro economies Germany, France, Italy and Spain claim to have an unwritten right to a permanent board seat. Also Luxembourg hopes to capitalize on the feeling in those countries and Germany that the board is currently dominated by Southern European countries. According to Handelsblatt, Germany is opposed to the candidacy of Sainz de Vicuna and supportive of Mersch. Hollande wants to propose a new Franco-German treaty In his first big electoral meeting, Francois Hollande gave a speech in front of 20,000 Socialist supporters on Sunday at the Le Bourget airport close to Paris, all French newspapers report. While the French media focussed on his attacks on Nicolas Sarkozy and the world of finance, German newspapers like Die Welt noted that Hollande wants to renegotiate with Angela Merkel the current eurozone rescue policy and that he proposes a new Franco-German treaty. Hollande, who is currently clearly ahead of Sarkozy in the polls, will unveil a more detailed economic program this Thursday. Two Pro-Europeans end up in race for Finland’s president Two Pro-Europeans will face each other in a second round of the Finland’s presidential election in two weeks, as Sauli Niinistö, the leading candidate failed to secure a majority of votes in the first round last Sunday. The FT reports that Niinistö, a pro-European former finance minister from the ruling National Coalition party, won 37%, Pekka Haavisto, a pro-European candidate from the Green League, grabbed second place winning 19%. The eurosceptic Paavo Väyrynen from the Centre party, received 17.5%. The euro-crisis figured high in the campaign, even if the president has no executive rights in economic policies. Niinistö said on Sunday night that ‘a pro-Europe policy and support for the euro has received strong backing from the people, according to YLE news. People now have a longing for stability.’ Paul Krugman on the eurozone failure to adjust In a comment on the McKinsey Global Institute report on debt and deleveraging, Paul Krugman has something interesting to say about the eurozone. While in the US, the private sector delivered, and the public sector built up debt instead (thus fulfilling its proper function of helping in the transition), this did not happen in the eurozone. He cites Spain as an example. While in both the US and the eurozone, private debt is the main issue, policymakers focus on public debt and austerity – without any success. It seems a paradox, but it is not if one understands the mechanism of balance sheet recessions, and the importance of expansionary monetary policy in such periods. Wolfgang Proissl supports enhancing the European effort to combat the crisis Commenting in Financial Times Deutschland Wolfgang Proissl supports the IMF’s and the emerging countries’ request that Europea should enhance its contribution to combating the eurozone crisis. The crucial point is that Italy still is highly fragile, despite the promised reforms. A stronger European contribution to the IMF and more resources for the Euro rescue funds are neccessary to avoid or to counter a crisis of confidence against the eurozone, Proissl argues. Angela Merkel should overcome domestic opposition to more Wolfgang Munchau on why the IMF should not bail out the eurozone In his FT column, Wolfgang Munchau argues that the IMF should not get involved in Europe beyond current programmes. Europe already constitutes 91% of all commitments (minus extended credit lines and the like), and to raise this number even higher is morally reprehensible and economically unjustified. The eurozone in particular has a current account surplus and its own central bank and is thus in a position to help itself. Munchau picks up an argument from Mario Blejer, saying that an IMF loan to Italy would subordinary every Italian bondholder, which would have severe repercussions on the European bond markets. Also, if the IMF’s senior were to fail, the repercussions on the IMF’s ability to lend at low interest rates would be massive. Munchau says non-eurozone member state should reject the request to increase the IMF’s resources. If they do, they should at the very least enact a quid-pro-quo in the form of a changed policy. But ideally, the IMF should not get into this. 10-Y Spreads, Forex, ZC Swaps and Ois-Libor |