 Merkel ready to merge ESM and EFSF
For the first time Angela Merkel yesterday hinted at her readiness to increase the euro rescue fund’s financial firepower, Süddeutsche Zeitung reports. Speaking at a joint press conference with the new Belgian prime minister Elio di Rupo, the German chancellor said the question of a higher lending capacity for the rescue funds war not a priority at this moment. But she insisted that in the past Germany „had always done everything to protect the euro“ when help was necessary. The remarks were meant to respond to Christine Lagarde. In a speech in Berlin the IMF’s MD had yesterday warned of the dangers of a solvency crisis in Italy and Spain as a result of abnormally high financing costs. „Adding substantial real resources to what is currently available by folding the EFSF into the ESM, increasing the size of the ESM, and identifying a clear and credible timetable for making it operational would help greatly“, she said. Lagarde insisted she did not ask for doubling the ESM as Mario Monti had done. She implied she might be in line with Mario Draghi’s proposal to add the remaining €250bn of the EFSF to the ESM which should be able to hand out emergency credits in the magnitude of €500bn.
(Is 250 plus 500 really 750? The economic reality is very different. The EFSF runs out in 2013. The proposal does not make the EFSF permanent. This means that the nominal joint ceiling of €750bn between mid 2012 and mid 2013 will revert back to €500bn from mid-2013 onwards. Furthermore, it is not clear that the ESM will have its paid-in capital right from the start, and that means that it won’t be able to go anyway near its ceiling in year one. So basically, the decision turns nominal €500bn at most into effective €500bn. At no time will the effective firepower of the two funds reach €750bn. Once market participants see through the scam and grasp this basic arithmetic, we will be back to square one, and discuss the need to increase the ESM.)
Eurozone finance ministers rebuffed private bondholder offer on PSI+
At their meeting in Brussels, eurozone finance ministers rebuffed what private bondholders presented as their “maximum” offer for a voluntary haircut on Greek debt, the FT reports. Jean-Claude Junker said that talks “would have to be resumed” to reach a settlement that is “clearly below” the bondholders’ existing offer. Specifically, Junker demanded that the average interest rate on new long-term bonds to be swapped for existing Greek debt be below an average 3.5% in the period up to 2020. One person familiar with the discussions said the ministers had not issued a final rejection, expecting negotiations to continue at least until a meeting of European heads of government next week.
Haircut in Greece will increase the cost of German bank rescues
The likely haircut in Greece will significantly increase the cost of the bank rescue in Germany, Handelsblatt reports. Even if the haircut was just at 50% (it is likely to be significantly higher) the German bank rescue fund Soffin would have to write off Greek bonds in the volume of roughly €6bn, Christopher Pleister, spokesman of the steering committee of the Federal Agency for Financial Market Stability (FMSA) yesterday told the Bundestag’s budget committee. Those write offs would mainly concern the bad bank that was created to absorb the losses of Hypo Real Estate (HRE). On top of that Pleister thinks additional write offs will become neccessary for the Greek bond holdings of the partially state owned Commerzbank and WestLB.
Mark Schieritz on the ECB’s dilemma
Mark Schieritz writes in Herdentrieb that the ECB faces a dilemma in Greece. If it participates in the Greek debt restructuring, it posts a loss that will have to covered by national taxpayers. At that point, it will no longer be able to claim that this SMP is just about re-establishing monetary transmission mechanisms. However, if the ECB does not participate, it is effectively a senior bondholder that subordinates everybody else, with negative implications for bonds markets elsewhere. So the ECB faces a choice between losing credibility, or effectiveness.
Bank of Spain gloomy about Spain’s economic outlook
Le Monde reports this morning on the Bank of Spain’s latest forecast for the Spanish economy, which make some gloomy reading. The recession will last the entire year, with GDP not expected to rise again until early 2013. The forecast is for a 1.5% fall in GDP this year, followed by de facto stagnation in 2013 (the forecast is for 0.2% growth). This is less abrupt than the recession in 2009, which lasted seven quarters, as opposed to a forecast of five quarters this time. The dynamics, however, are similar, through a combination of weak private demand and a credit crunch. Unemployment is thus expected to increase again.
Le Monde says Berlin is now the only centre-stage
After France’s loss of its AAA rating the times of „Merkozy’s“ joint euro rescue efforts have ended and Berlin is now the only centre-stage in the drama of the single currency, Le Monde writes. The paper describes in great detail the leaders who Angela Merkel has met and will meet in the days leading to the next crisis summit on January 30: Christine Lagarde, Herman Van Rompuy, José Manuel Barroso, Elio de Rupo, Swedish prime minister Fredrik Reinfeldt, the Austrian Chancellor Werner Faymann, the Portuguese prime minister Pedro Passos Coelho, the opening speech at Davos, a phone conversation with David Cameron and a meeting with the new Spanish prime minister Mariano Rajoy have been and will be on Merkel’s agenda, Le Monde stresses. The only important meeting in which Nicolas Sarkozy would have participated was a meeting with Merkel and Mario Monti in Rome but the French president cancelled it. „Germany has won the debate about economic policy in Europe“, the paper quotes Monti.
Helmut Kohl’s foreign policy advisor criticizes German euro scepticism
Writing in Handelsblatt, Host Teltschik, Helmut Kohl’s foreign policy advisor, severely criticizes Germany’s reluctance to take over the leadership and to contribute more constructively to the euro crisis management. „Solidarity in and for Europe seems to have become an unknown word“, Teltschik complains. Teltschik avoids attacking Angela Merkel directly but he stresses that even Margaret Thatcher acknowledged that economically stronger European states had a duty to help the weaker ones. „Our partners expect, especially now, conceptual contributions to the solution of our current problems from German politicians“.
Cohn-Bendit on why the fiscal treaty is completely unnecessary
Jean Quatremer has a good summary of an argument by Daniel Cohn-Bendit who says the new European Treaty is completely unnecessary. For the European Parliament, there is no need for such a treaty, he says. It’s all in the existing legislation, like the six pack. Most of the rest can be done through secondary legislation. As for the golden rule and the constitutional debt brake, this is likely to fail politically, at least in some countries. Finland requires a four-fifth threshold for a constitutional change, while in France there is no political majority.
Larry Summers makes the case for a fiscal stimulus right now
This comment only tangentially refers to the eurozone, but it is an important discussion that we should have here as well. Larry Summers makes a convincing case in the FT for another stimulus. He starts off with the observation that real (market) interest rates are close to zero, that stock valuation and house prices are relatively cheap, and that companies are hoarding cash. This is a scenario, from which a strong recovery could emerge, but economic history tells us that this will only happen if governments follow the advice given by Keynes to President Roosevelt in the 1930s, which is expand demand – in another words through another fiscal stimulus. (In the eurozone, of course, we are not close to even such a debate, as the general drift of fiscal policy is one of contraction as we are heading into a recession.)
10-Y Spreads, Forex, ZC Swaps and Ois-Libor The rally continues, and the euro is back above $1.30.
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