 IMF calls on Spain to ignore eurozone deficit targets
As policy makers gather high up in Switzerland, the global signal-to-noise ratio is about drop sharply for a few days. The biggest news yesterday came from the IMF, which yesterday published its grim updated forecasts, some of which was leaked last week. El Pais has the story that the IMF predicts that Spain will miss its deficit targets, and should not even try to meet them, as this would create additional economic instability. The articles quotes an IMF official as saying that further adjustment to the deficit may undesirable from the perspective of growth. It would exacerbate rather than alleviate market tensions. The main forecast for Spain is a two year recession, with the deficit likely to have hit 8% in 2011, and forecast to fall to 6.8% in 2012 and 6.3% in 2013 – the year when it was supposed to be 3%.
IMF puts pressure on ECB to take losses on Greece
The FT reports that the IMF has put pressure on the ECB to take a hit on its €40bn in Greek bondholdings, citing unnamed eurozone officials, who also said that the ECB was resisting this pressure. The report says the ECB’s governing council had discussed various scenarios, including the possibility of foregoing the yield payments, or to shift losses to the portfolios of national central banks. The IMF has concluded that the agreed €130bn bail-out plan was no longer sufficient to get to the 120% debt-to-GDP target by 2020.
(While we disagree with the position of the ECB, we find it hard to support the position of the IMF either. A 120% debt-to-GDP ratio is still unsustainable – especially after a negotiated default. The Greek debt-to-GDP needs to be cut to 60-80% relatively soon, for Greece to survive inside the eurozone – given the fragility of the economy. )
Sarkozy muses about his life after his defeat
Speaking to friends Nicolas Sarkozy for the first time talked about his potential defeat at next May’s presidential elections and about his plans for the time after, Le Monde reports in its leading front page story. „In case of a failure I will get out of politics“, the paper quotes the president. Sarkozy has observed what other former political leaders have done after leaving office and he has told friends several times that after his political career, he wants to make money. According to Le Monde, Martin Bouygues, the owner of a huge construction and media empire in France, has repeatedly offered Sarkozy jobs for the time after politics. „I could start my working weeks on Tuesdays and stop on Thursday nights“, the paper quotes the president. „I imagine life after politics more pleasant: less interesting, but more pleasant“, Sarkozy reportedly said.
This story is obviously linked to the fact that Sarkozy consistently trails his Socialist challenger Francois Hollande in opinion polls. In a second story Le Monde reports on the desperate efforts of Sarkozy’s UMP party to counter Hollande’s progress in the polls. Many of the president’s supporters say that France’s loss of the AAA top rating on January 13 was a watershed moment and that Hollande had done an excellent job when he delivered his first big electoral speech last Sunday. „Hollande has created for himself a leadership that silenced all the snipers on his own side“, the paper quotes Pierre Charon, a former presidential advisor.
Merkel’s coalition wants to avoid all discussions about an extension of the euro rescue funds
Angela Merkel’s coalition is resigned to the fact that the euro rescue funds may eventually need to be extended in volume but all three parties are determined to prevent a discussion about the controversial issue at this point in time, Frankfurter Allgemeine Zeitung reports. The paper quotes several top coalition representatives who all stress that „at the moment“ there is no need for any decisions about augmenting the means of the EFSF and the future ESM. But they all also point to the fact that there is an agreement among Euro leaders to revisit the issue by March. In a speech Christine Lagarde pleaded for more financial firepower for the rescue funds. Mario Draghi and Mario Monti are also in favour of more money for the funds.
ECB chief economist Peter Praet cautions on expectations for lower policy rates
Talking to Frankfurter Allgemeine Zeitung, the ECB’s new chief economist Peter Praet cautioned widespread market expectations that the ECB will soon lower its policy rates of currently 1.0% further. The speed of the downturn has slowed compared to what was still expected in December, the executive board member argued. On top of that, the flight into quality, for example, into German Bunds had made rates in some parts of monetary union already „very, very low“, Praet said. (One factor weighing on the ECB’s mind was yesterday’s unexpected pick-up in the PMI for January, after several months of decline. The index bounced back to just over 50 – a level consistent with a small economic expansion.)
When asked whether the ECB would be prepared to accept a haircut on its Greek bonds, Praet reacted evasively. „The ECB will abide to the agreements with the governments. According to this, the readiness of private investors to accept a haircut will be singular event.“
Legal challenges by hedge funds are unlikely to succeed
The FT has the story that legal challenges by hedge funds who are considering to take action in respect of retroactive CACs in Greece are unlikely to succeed. The article says the absence of vulture funds in Greece was the best metric that the prevailing legal opinion is that any action by the Greek government cannot be successfully challenged in Greek and other international courts. The articles quotes a couple of lawyers who said that the Greek government can pretty much do what it likes, and that any challenge would be cumbersome, lengthy and expensive.
Interest rates on Irish promissory notes under discussion
An interesting debate is going on right now in Ireland, about how to ease the burden of the expensive Irish promissory notes the government uses to recapitalize the former Anglo Irish banks. A reduction in the rate of interest on the Anglo Irish promissory notes is considered by many in Ireland as crucial for Ireland’s recovery. The Irish Times reports that finance minister Michael Noonan held talks yesterday with the ECB and the European Commission about whether the expensive promissory notes could be replaced with EFSF bonds. But Karl Whelan explains in his blog why the focus on the interest rate on the promissory note is not a key issue here, as the interest is going from one part of the state to another. John McManor from the Irish Times goes through the logic of this argument in more details, concluding that “It is thus – as the ECB claims – within the Government’s own power to significantly reduce the interest rate on the promissory notes, but there would be no gain to the State. There might even be a cost.” Whelan says the key issue here is not the interest rate on the promissory note but the amount of liabilities that need to be paid out to bondholders and central banks, and the timing of these repayments.
Zoellick calls on Germany to propose a labour union
Writing in the FT, Robert Zoellick has called on Germany to launch a broader eurozone revival plan to complement the fiscal pact. This plan would have to focus on labour mobility. Labour policies in the past were geared to towards protection. He said the EU should focused the European Commission on this new mission, which would ease unemployment, and build a real economic union.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
The recent bond rally has stopped, but note the improvement in the Euribor-Ois spread. The inter-banking system is still not functioning, but there are signs of life.
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