 Now for the next acronym of the eurozone crisis: OSI
OSI stands for offical sector involvement (meaning ECB) in the haircut on Greek bonds is now the center of attention. Finance Minister Evangelos Venizelos, the frontrunner for Socialists leadership, called on the ECB to accept some losses Kathimerini reports. A target debt of 120% of GDP by 2020 does not only require PSI, said Venizelos, but also the completion of a parallel OSI. “This means that the ECB must be mobilized, we need to resolve issues that concern the national central banks, and we need to resolve issues regarding the level of the interest rate of the original Greek loan,” he told the PASOK parliamentary party on Thursday.
Kathimerini understands that on a technical level the ECB has already examined all possible scenarios including those two options: The first concerns a haircut on Greek bonds bought before the support effort through the Securities Markets Program (SMP), totalling up to €60bn. This would sum up to a 50% haircut but a rather small benefit for Athens, of some €5bn. The second scenario is a haircut on also those acquired on the secondary market, which according to sources have in many cases cost the ECB no more than 75% of their original price. That scenario would save Greece €14bn.
Euro states hope that the ECB will contribute to the next Greek package
Euro member states hope that the financing gap in the second Greek rescue package can be bridged with the help of the ECB and national central banks, Financial Times Deutschland writes. However there still is disagreement within the Eurosystem how the central banks should contribute. Most central banks agree that national central banks that have bought Greek bonds as in investment and not as a part of the SMP (which according to the ECB is a monetary policy operation) should take a haircut on those bonds. The ECB however is staunchly opposed against a participation of the Greek bonds that were purchased as a part of the SMP and that are valued at about €40bn. There will be an attempt to strike the final political deal on the second Greek package on Monday on a special eurogroup meeting.
China considers stronger engagement in euro rescue
China is ready to examine a stronger implication in the efforts to salvage the eurozone, Frankfurter Allgemeine Zeitung reports, citing Wen Jiabao after his meeting with Angela Merkel in Beijing. At the same time the Chinese prime minister said that his country was ready to help solve the crisis in the context of the IMF implying that China may be ready to contribute to reenforcing the IMF with an additional $500bn in bilateral credits. Both leaders agreed that the main responsibility for solving the crisis is with the Europeans. Wen Jiabao asked the indebted countries in the eurozone for additional efforts. „The endebted countries should make painful decisions and conduct an approprate budgetary policy“, the prime minister said.
Spain imposes a third programme to clean up banking debt
After the creation of the Frob and the forced increased in bank capital, Spain now prepares for a third wave of measures to clean up the incredible mess left by the collapse of its real estate bubble. The Spanish government is now forcing banks to reduce their real estate portfolios and put appartments up for sale to recoup some €50bn according to El Pais. As of June 30, 2011, the real estate and development sector loans of the Spanish banking system amounted to €323bn, of which €175bn are potentially problematic. The article quotes a real estate expert as saying that this will make it attractive for buyers, another way of saying that this measure will accelerate the decline in Spanish house prices.
(A short comment from us: The fall in Spanish house prices has a lot further to go. While US house prices have now mostly adjusted, much of the adjustment in Spain still lies ahead. According to the latest Tinsa house price report, Spanish peak-to-trough prices are down by 24.7% in November 2011. We expect a total peak-to-trough decline by around 50%. This won’t be the last restructuring measure in the banking system, and the economy is currently heading into a slump. )
Monti to force labour reforms against the trade unions
La Repubblica quotes Italian labour minister Elsa Fornero as saying that the Italian government will go ahead with labour market reforms even without the consent of the social parts. The issue is Art. 18 of the Italian labour code, which forces an employer with more than 15 staff to rehire workers subsequently deemed to have been unfairly dismissed. The employers are saying that they want to restrict Art. 18 only of cases of discrimination. Fornero says the government would present legislation in two to three weeks. Reuters reports that Mario Monti recently mocked the idea of a permanent job, provoking a row with Pier Luigi Bersani, the leader of the Democratic Party, who said a permanent job was desirable for someone outside the labour market.
The active population in France would favour a second round in the presidential election opposing Hollande to Le Pen
A poll done by Ifop for the communist newspaper L’Humanité shows that if only people with a job voted in France this would lead to the elemination of Nicolas Sarkozy in the first round of the presidential elections in April and a second round in May which opposes Francois Hollande to Marine Le Pen, the extreme right and anti Euro candidate, Lemonde.fr reports. According to the poll among the working population Hollande would get 27%, Le Pen 24%, Sarkozy 18, the centrist Francois Bayrou 13% and the extreme left candidate Jean-Lux Melanchon 8%. Among the entire population Sarkozy would make into the second round 22% barely beating Le Pen (20.5%) but clearly behind Hollande (28%).
Have rating agencies caused the eurozone’s sovereign debt crisis?
Policymakers and central bankers obsessed with the role of the rating agencies. Reuters points us to an ECB working paper showing that n push up borrowing costs by as much as 1pp, according to sovereign credit downgrades and a rise in bond spreads feed off each other, an that every rating cut ca an ECB working paper. The paper shows that rating agencies both follow, and drive the market, and raises the question whether it was self-perpetuating. It also showed that there was evidence that ratings downgrades of one country affected the ratings of others.
AAA-rated finance ministers meet in Berlin (without France and Austria)
So much for the protestations that the French and Austrian ratings downgrade would have no effect. Reuters reports of a conspirative meeting among the finance ministers of the four remaining AAA-rated countries to take place in Berlin today – Germany, Luxembourg, the Netherlands and Finland, and yes without France and Austria. The article suggests that it won’t be the first time, which means that the French and Austrian ministers must have participated in such meetings before, but not no longer.
The link between the fiscal compact and the ESM treaty
Karl Whelan, in the Irish economy blog, took a closer look at the ESM treaty and found the following clause:
„It is acknowledged and agreed that the granting of financial assistance in the framework of new programmes under the ESM will be conditional, as of 1 March 2013, on the ratification of the TSCG by the ESM Member concerned.“
TSCG, of course, stands for the Treaty on stability, coordination and governance, another acronomy to learn. In other words, you have to sign up to the pact in order to get ESM money.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois Still improving. The French spreads are approaching 100bp, the euro stable at $1.31.
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