 Work on a rescue umbrella of €1500bn is under way
Work on tripling the the current euro rescue umbrella of €500bn to almost €1500 is under way and could be completed until the IMF spring meeting in April, Financial Times Deutschland writes. According to the paper this is the result of confidential talks between Timothy Geithner, Christine Lagarde, Mario Draghi, Wolfgang Schäuble and Francois Baroin. According to the FTD, the mega umbrella would be composed of the €500bn foreseen for the ESM, the roughly €250bn left at the EFSF which then would be folded into the ESM and the €200bn that the eurozone has already committed to Greece, Ireland and Portugal. On top of that would be another €500bn from the IMF that would be the result of voluntary bilateral credits from member states. The eurozone has already committed €150bn for this but other countries with reserves like Brazil have announced that they would participate.
(But that would require a number of legislative changes that have not yet been enacted. For a start, the EFSF would have to be made permanent. As of now, it expires in mid-2013. That in turn would require changes to the EFSF treaty. For this arrangement to be credible, all of the EFSF funds also need to be available at reasonable interest rates. We doubt therefore that the European part of the rescue fund will be a true €1 trillion.)
Banks are preparing to double their LTRO-uptake on Feb 29
Portuguese bond yields reach record high Portugal’s bond yields reached new euro-era highs as many investors priced in a default amid fears its debt holders could suffer heavy losses once a restructuring deal with Greece is agreed. The FT reports that the yield on benchmark 10-year Portuguese debt rose as much as 204 basis points to 17.26%. Portuguese credit default swaps, meanwhile, rose to record levels as the market priced in about a 70 per cent chance the country would default over the next five years.
Samaras suggests to freeze wages rather than cut Lucas Papademos said he hopes to conclude negotiations with troika officials by the end of this week, although there were still some “difficult issues” to resolve. This is especially true for the wage cuts demanded by Greece’s foreign creditors. Kathimerini reports that Antonis Samaras, the leader of conservative New Democracy, strongly opposes cuts to auxiliary pensions and to wages in the private sector which, Samaras argues, would deepen the current recession. Instead the ND leader proposes a salary freeze. The leader of the rightwing Popular Orthodox Rally (LAOS), Giorgos Karatzaferis, suggested an alternative to the abolition of the 13th and 14th annual salaries — an additional hour be added to each working day.
General strike against austerity grips Belgium as EU leaders meet Belgium’s first general strike in almost two decades brought parts of the country to a halt on Monday in an anti-austerity protest aimed at the new government and at EU leaders meeting in Brussels, Reuters reports. Unions have called the general strike over government plans to raise the effective retirement age along with other measures designed to save €11.3bn. Belgium has pledged to bring its public sector deficit below the EU limit of 3% of GDP this year assuming a 0.8% growth rate. Belgian union chiefs, gathered outside the meeting, urged the EU to issue joint eurobonds to ease the interest pain for weaker nations and said the rich should shoulder more of the austerity burden. But the Belgians seem to have accepted the need for austerity. According to an opinion poll in Het Laatste Nieuws last week, only 21% of Belgians supported the strike.
Czechs join Brits in opting out of the EU’s treaty – and possibly a new deficit target for Spain Beside the general strike, the other news from Brussels yesterday was yesterday’s EU summit, where 25 member states agree to the now largely symbolic fiscal treaty, with the Czech Republic joining Britain in opting out. The FT called it a symbolic victory for Angela Merkel, which was overshadowed by the outrage caused by Germany’s proposal to deprive Greece of its national sovereignty whilst it recieves funds. Merkel did not put up a fight, and tried to bury the issue as quickly as possible, as everybody, including Nicolas Sarkozy, came out in total opposition to these plans. Also, as Reuters reports, EU Commission president Jose Manual Barroso held out the possibility of a new deficit target for Spain to take account of the reduced growth expectations.
(We agree with the FT’s balanced editorial on Germany, which concludes: „There is truth in the German view of fiscal discipline. But it is not the whole truth, nor nothing but the truth. Most of Europe has opted to learn from Berlin; it could now usefully consider whether others have something to offer in return.“ The article said the reason Greece is missing its target is due to the programme’s procyclical nature. We would add to this comment that Merkel and her advisors remain in denial of this fact.)
FDP and SPD applaud Sarkozy’s plans for a transaction tax Angela Merkel’s liberal coalition partner FDP and the opposition SPD both applauded Nicolas Sarkozy’s announcement to unilaterally introduce a financial transaction tax, Frankfurter Allgemeine Zeitung reports. The FDP’s support may appear surprising because the liberals initially opposed the plans but they now consider that Sarkozy’s plan is very close to the British stamp tax which they champion as well. The SPD together with the Greens is traditionally supportive of a transaction tax. The social democrats now appealed to follow the French president’s lead and to introduce the tax along with France. Merkel’s CDU says it would like introduce such a tax on a eurozone level. But his position is opposed by Volker Bouffier, the minister-president of the state of Hessen, who fears that such a tax would be against Frankfurt’s interests as a financial center.
Fillon halfs French growth expectations for 2012 Francois Fillon yesterday announced that he expects French growth to be 0.5% instead of 1.0% , the figure the government hoped to attain earlier, Les Echos reports. However the prime minister explained that further budget cuts would be limited €2bn neccessary for moment because in order to reach the 3.0% goal that France said it would reach by 2013. The reason for this is, according to Fillon, that the 2011 deficit is lower than initially expected (5.3% of GDP instead of 5.7%). On top of that the government will elimate €1.6bn of spending it originally foresaw.
Inflation in Germany falls to 2% The inflation rate in Germany is at 2.0% year on year the Federal Statistical Office yesterday announced according to Handelsblatt. With this inflation is at the lowest level since one year and the rate in the eurozone’s largest economy is converging with the ECB’s benchmark of below but close to 2,0% for the eurozone. Economists see the low rate as the result of falling costs for package holiday trips and vacation homes typical for the season. Some economists, however, think this is a trend and inflation will continue to drop in the coming months.
Commerzbank chief says Greece should leave eurozone Reuters quotes the supervisory board chairman of Commerzbank , Klaus-Peter Muller, as saying that Greece should quit the eurozone in order to survive. He said more money won’t help. Greece needs a currency it can devalue. The only adjustment mechanism it has now are internal. Structural reforms will take 20-40 years to become effective. Muller expressed confidence that a Greek exit would not be chaotic. (We picked up on this story because it may indicate a shift in sentiment in the banking sector. Whether true or not – once the banks feel that a Greek exit is no longer catastrophic, the politicians are much more likely to accept the gamble. We agree with Muller that Greece cannot survive inside the eurozone, but we also believe that a Greek exit would also drive Portugal out, and that this may set off a domino effect.)
Paul Krugman on the futility of austerity In his blog, Paul Krugman has some useful charts of the futility of austerity in the eurozone, presenting statistical evidence on imbalances, and the missing link between austerity and improved fiscal positions. He also makes the case against austerity in an op-ed in El Pais this morning. The articles focuses on the UK, with references to the eurozone, but argues that austerity in a recession is self-defeating.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois Spreads are rising again as markets are concerned about Greece and a spillover to Portugal. With the euro stable at $1.31, and falling bund yields, this indicates that funds are moving money back from the periphery to the core.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
