 ECB involvement in Greece is on the table
Talks between Athens and its private creditors on the private sector involvement plan (PSI+) resume today, Kathimerini reports. Eurozone governments press to see a deal by the end of the week, while the involvement of the ECB will now be part of the negotiation after the IMF openly came out in favour. Christine Lagarde said yesterday in Paris that “The balance between the participation of the private and the public sector is a concerning question,…If the level of Greek debt held by the private sector is not sufficiently renegotiated, then public sector holders of Greek debt should also participate in the efforts.” The European Commission responded saying the EU’s position on the participation of the official sector has not changed. ECB officials told Kathimerini that there has been no shift in its policy on the issue, while a Bloomberg report suggested that any ECB involvement in the haircut would likely harm the lender’s credibility.
ECB has rejected voluntary participation, but ponders its position when a loss is forced Reuters has some more details from the ECB’s debate on Greek bond losses. The ECB’s governing council was in agreement that it won’t take voluntary losses but was debating how it would handle any forced losses, or whether it should explore legal options to avoid such a hit, Reuters reports, quoting central bank sources. (Please that this position may already have changed, see the story above). France, Italy, and the ECB’s executive board were against accepting losses, while some central banks, which have opposes bond purchases, say that losses may be unavoidable. The article points out that if the ECB finds a way to avoid losses in a forced debt restructuring, it could reduce demand for Italian, Spanish, Portuguese and Irish debt, as markets would view the ECB as having preferred status.
Greek MPs revolt against liberalisation of pharmacy opening hours A revolt by socialist lawmakers highlighted a populist backlash in Greece the FT reports. More than 60 backbenchers, among them a former European commissioner, voted against the lifting of restrictions on Greek pharmacy opening hours, as part of measures liberalising more than 130 “closed-shop” professions. A group of conservatives were among another 90 deputies who abstained, forcing the coalition government to withdraw the article. Andreas Loverdos, health minister, appeared poised to make concessions to the rebels, saying it would be presented again “with improvements” as a separate piece of legislation. The overall package had already been approved by parliament at a first reading last week.
Merkel warns of overburdening Germany in the crisis resolution
Angela Merkel warned the other Europeans of the dangers of putting an excessive burden on Germany in solving the crisis. „With all the billions of aid and the rescue umbrellas we Germans must be careful not to eventually loose our strength, because our possibilities are not infinite, and all of Europe would not be helped if this happened“, the chancellor said in a joint interview with Süddeutsche Zeitung and five other European newspapers. „We exercice solidarity, but we must not forget the responsability for ourselves“, she added. Merkel reiterated her refusal to extend the size of the rescue funds for the moment and insisted on reforms in the indebted European countries. „It makes no sense to promise ever more money and not to fight the root causes of the crisis“, the chancellor affirmed. Also Merkel insisted on tough budgetary rules in the fiscal pact. „If one has promised 100 times to reduce debt and to manage bugets solidly then one has to be able to reenforce this in the future and to ask for the court to implement it“, she warned.
Financial markets are getting concerned about a Portuguese default As Greek is heading towards a catastrophe, markets are now becoming worried about the situation in Portugal. Portuguese 5-year CDS were up 26 bps on the day to reach a record of 1,305 bps, Reuters reports, quoting data frm CDS data provider Markit. Spanish 5-year CDS were at 365bp, and Italian CDS at 429bp.
Bild applauds Angela Merkel, the German „Powerfrau“ In a comment that borders on a Soviet-style personality cult, Bild’s columnist Ernst Elitz applauds the role the „German Powerfrau“ Angela Merkel plays in the current crisis. „She wants that Europe becomes strong again. She knows that this continent needs a strong Germany. She advises those who are endebted: Work as hard as we do. Germany cannot be eternally the paymaster. She is a German hausfrau. She wants to see the effort before she pays“, he says before he concludes: „What a chance that this German Powerfrau gives the Europeans once again courage and self confidence!“
French unemployment rises dangerously close to 3m The French unemployment rate has reached a level of 9.3% with 2.874.500 French out of work, Les Echos reports. This is the highest unemployment level since 1999 and it represents a rise of 35% since Nicolas Sarkozy was elected in 2007. The president wants to boost jobs by lowering the employers’ social contributions and instead wants to increase VAT as Germany had done when former chancellor Gerhard Schröder introduced his labour market reforms.
Hollande drops Keynes in favour of Schumpeter Nicolas Sarkozy’s Socialst challenger Francois Hollande will today unveil his economic proposals. According to Le Monde there are several circles of economists who have elaborated Hollande’s economic policy proposals. Among the dominating figures are Harvard economist Philippe Aghion, Bruegel director Jean Pisani-Ferry, industrial policy specialist Elie Cohen and social policy expert Gilbert Cette, the paper reports. „The Socialists are today engaged in the transformation the Social Democrats in Scandinavia have already gone through several years ago“, Les Echos quotes Aghion. „The Keynesian model of of relaunching consumption would today aggravate our external deficit. Our thinking is now much closer to Schumpeter who emphasizes the role of innovation for growth in the medium to long term.“
Meanwhile a poll done by CSA confirms Hollande’s lead, Le Figaro reports. The Socialist candidate leads with 31%, followed by Sarkozy with 25%, the extreme right Front National candidate Marine Le Pen with 17% and the Centrist challenger Francois Bayrou with 15%.
Trichet enters the supervisory board of EADS After Lorenzo Bini Smaghi’s transformation from a monetary policy maker to a gas salesman for Eni’s subsidiary Snam, similar moves by former central bankers should not come as a surprise. Still we were stunned when we read in Les Echos this morning that Jean-Claude Trichet will enter the supervisory board of the European aeronautic giant EADS to take over the seat Arnaud Lagardère.
Fed extends low interest rate policy, and sets inflation target The US Federal Reserve has said it extended its promise of exceptionally low interest rate from mid-2013 until late 2014, and has formally set an inflation target of 2%, the FT reports. (This is higher than Europe’s asysmmetric „below but close to 2%“). The Fed also downgraded US growth expectations from moderate to modest, and left open the possibility of another round of QE. (We are reporting on this shift in US monetary policy because it will keep pressure on the ECB to maintain loose policies for much longer – and not to repeat the mistakes of 2008 and 2011, when it prematurely raised interest rates.)
First Irish bond sale on the market Irland sold government bonds on the market yesterday for the first time since September 2010. The National Treasury Management Agency sold over €3.5bn worth of three-year debt in a bond swap, the Irish Times reports. The new bonds were offered to investors holding €11.8bn of outstanding bonds maturing in two years. The NTMA argues that the fact that about one-third of those investors agreed to the “switch” to longer-dated bonds “demonstrated investor appetite for Irish Government paper and will support our plans for a phased re-entry to long-term debt markets”. The rate of interest offered was just under 5.2%, only marginally higher than the bonds it repaid.
Colm McCarthy says this is not even the beginning of a return to the market In a comment on the Irish ecnomy blog, Colm McCarthy says that the bond sale is not the beginning of a return to the market. He compares the situation with Belgium, where ten-year bonds yields 4%. Debt-to-GDP is 100%, the primary deficit 1%. The interest rates is consistent with debt sustainability, given 2% inflation. Ireland’s exit debt ratio will be higher, there are contingent liabilities, and a deficit projected to fall to 4% in 2014. Can Ireland really expect to sell 10-year bondsin 2014, at 4% yields? Present market conditions for Irish paper are not nearly consistent with this scenario.
New Irish fiscal watchdog insists on much greater policy transparency and automaticity The Irish Fiscal Advisory Council wants that any new government be required by law to publish detailed fiscal measures for its five-year term and set out targets for maintaining sustainable public debts. Such medium-term planning has only started in the crisis, and so far only on an annual basis. This recommendations came in the context of discussions for a fiscal responsibility bill, which eurozone countries are required to implement as part of the ongoing discussion of a fiscal pact.
George Soros proposes a T-bill solution to the debt crisis Writing in the FT, George Soros says the LTRO has helped the financial sector, but won’t solve the sovereign debt crisis. To reduce Italian and Spanish interest rates, he proposes a complex scheme, based on a proposal by the late Tommaso Padoa-Schioppa for short-dated treasury bills. This would work like this: The EFSF/ESM would insure the ECB against solvency risk for T-bills they would buy from cmmercial banks. The EBA would then be able to treat the T-bills as riskless, which would induce banks to hold their surplus liquidity in the form of T-bills for as long as the yield is higher than the interest rate of the ECB’s deposit facility. As a result average borrwing costs would fall from over 4% to under 1%.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois Spreads are rising again, as last week’s suckers’ rally ends. However, the euro continues to stabilise.
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