 Germany is now opposed to merger of EFSF and ESM
Eurointeligence Comment and Analysis Greece may live to default another day. Other embattled European nations will be scrutinising the Athenian sub-plot extremely closely as to clues as to their future as they await the battles that lie ahead. A declaration of victory in the European debt wars would be premature.
The FT writes from Berlin that the German government is now digging in over demands to merge the EFSF and ESM. The article quotes Steffen Seibert, Angela Merkel’s spokesman, as saying that the German position had not changed on this issue, that it was not necessary to merge the two. The article says that Merkel fears a backlash in her own coalition, and in the country at large, over the €130bn Greek programme, as a result of which she has to be seen being tough on the question of raising Germany’s overall exposure. But the article also said that Germany may eventually change position on this, quoting an official as saying that Germany will commit to discussing the issue, as promise, at some point in March, but not necessary during the March 1/2 summit. The official also said that Germany wanted to avoid any subjects right now that would complicate the vote on the Greek programme. The Dutch have changed their position, and are now supporting the increase in the funds of the ESM.
G20 chairman Carstens asks Europeans for more efforts on euro rescue
G20 current chairman Agustín Carstens, Mexico’s central bank governor, increased pressure on the eurozone to enhance its rescue funds. Talking to Financial Times Deutschland Carstens said he clearly linked more European money to the other G20 countries’ readiness to enhance the IMF with addional resources of €600bn, as the eurozone requests. „The Europeans must undertake bigger efforts. That will lead other G20 countries to support the IMF more strongly.“ Ahead of this weekend’s G20 meeting of the finance ministers and the central bank governors countries like China, Japan and the US have also asked the Europeans to increase their efforts. One possibility supported by the ECB would be to put he remaining €250bn in the EFSF on top of the €500bn of lending capacity the ESM will dispose of bringing the total to €750bn. Carstens cautioned that while €750bn of euro rescue money would be a welcome signal he was not sure that the other G20 members would consider it enough.
Greek parliament in a hurry to pass bailout legislation
A parliamentary committee approved the collective action clauses (CACs), Kathimerini reports. The CAC could be activated if Greece is unable to convince enough of its bondholders to take part in a voluntary swap. The bill, which was approved by coalition MPs but rejected by opposition deputies, is to be voted on by Parliament’s plenary session on Thursday. Several other pieces of legislation must be approved by the House in the next coming days, before eurozone finance ministers meet again next Wednesday or Thursday. Other legislation tabled in Parliament Wednesday sets out the €3.2bn in spending cuts that Greece will have to make this year.
Samaras invites ousted MPs back into party if they support bailout bill
New Democracy leader Antonis Samaras, likely to win the elections in April, invited those 21 MPs, who had been ousted from the party for voting against the terms of Greece’s new loan agreement earlier this month, to rejoin the conservatives if they back the bailout bills that will go before Parliament over the next few days, Kathimerinireports. Commentators see this as an attempt by the conservative leader to heal any open wounds before general elections and to obtain the widest support possible for the legislation that will be voted in Parliament in the days to come.
The Dutch finance minister has doubts about the Greek program
The Dutch finance minister undiplomatically expressed doubts about Greece’s willingness or capacity to fulfill her obligations under the second rescue package. Talking to Le Monde, Jan Kees de Jager said that the tight control mecanisms for the Athens government made him a little more confident. „To be honest I have doubts but it was the best we could do“, he told the paper. He went on to say that Greece had so far even been unable to fulfill ist easiest obligations like the privatization. De Jager ruled out further rescue packages for the country. „Both plans combined represent €240bn. We cannot put up more money“, he said.
Clive Crook: Greece deal will not stop confidence crisis
Clive Crook on Bloomberg writes that the second bailout deal is at best a holding action but that it does not stop the confidence crisis in the euro area. There are several realistic scenarios how the programme can derail and even politicians do not believe it will solve the problem. One is if too many private lenders opt out. They have never done enough to solve this crisis, as if they want to maximise panic to pressure the governments of the debt-laden countrie for reforms long overdue. But Greek debt should be written off and until it has primary surpluses, Europe should assist it financially without suffocating the economy. In any event banks have to be recapitalized and the EFSF greatly enlarged for the panic to subside. “The cost to euro-area taxpayers is not small, but it’s nothing compared with the crash they will suffer if this game of chicken with financial markets goes wrong.”
German tax revenues slow considerably
German tax revenues increased by 3.9% yoy in December, Handelsblatt reports. But the increase was due to special effects. Had they not existed the revenues would have dropped by 0.4%. „The trend of monthly growth in tax revenues has been broken“, paper quotes a source from the finance ministry. The finance ministry thinks that the weaker growth will be reflected by tax revenues for the federal as well as for the Länder governments. Wolfgang Schäuble however will be able to point to the lower figures when he negotiates the 2013 budget and cuts with his ministerial colleagues.
France will be the litmus test for the EU’s new deficit rules, Werner Mussler argues
Commenting on the EU Commission’s decision to withhold money for Hungary from the structural funds Frankfurter Allgemeine Zeitung’s Werner Mussler argues the decision tells us nothing how serious Brussels can get with these rules. „The country is too small and not part of the monetary union“, Mussler writes. „Therefore, the Brussels action is neither politically nor systemically risky.“ But the litmus test fort he Commission’s readiness to take on euro member states over the tougher budget rules will come. „Soon the Commission has to decide how to deal with France.“
Proissl calls on Weidmann and Draghi to avoid a remake of the Weber-Trichet-confrontation
Commenting in Financial Times Deutschland Wolfgang Proissl calls upon Jens Weidmann and Mario Draghi to work on avoiding another damaging confrontation as their predecessors Axel Weber and Jean-Claude Trichet had had. Proissl argues that the initially good relations between the presidents of the Bundesbank and the ECB risk turning sour because of a series of policy decisions the ECB has recently taken against the Weidmann’s will. Among them are the second surprise interest rate cut in December, the extremely generous conditions of the 3yLTRO’s, the imposition of a senior creditor status of the eurosystem for its Greek bonds and the attempts to earmark future profits from Greek bonds for governments so they can pass the money on to Greece. Weidmann has started to come out publicly against those decisions thus risking to put the Bundesbank back into the dissident role unable to form coalitions as was the case under Weber. Proissl calls on both central bankers to work out a mature relationship because working against each other damages the euro and the prospect for both to be successful on their respective jobs.
A useful diagram on the ECB’s broken monetary transmission channel
This is from Nomura, via FT Alphaville, which has a useful elementary discussion about the two most important channels of monetary policy – the interest rate channel and the bank lending channel. The first operates more direct, via money market interest rates, as ECB interest rate cuts (or increases) are passed on through the system to the end-borrower. The bank lending channel operates through the banks‘ balance sheets, and impacts the quantity of money banks are willing to lend.
A Reinhart-Rogoff debt rule for the private sector?
Here is an interesting snippet hidden in a Reuters analysis on private debt. The empirical Reinhart-Rogoff rule suggest that once public sector debt gets to 90% of GDP, GDP growth slows down. The article points to a recent BIS study, which came to a similar conclusion with a 95% threshold for the public sector. But it also found a 90% threshold for the corporate sector, and an 85% threshold for the household sector. This is roughly compatible with the European Commission’s combined private sector safety threshold of 160% of GDP. The Netherlands is among the countries well above that limit, mainly due to extremely high mortgage debt.
Wolfgang Munchau on private sector imbalances
In his Spiegel Online column,Wolfgang Munchau writes about the German obsession with running very large trade surpluses, and argues that they are neither morally defensible, economically optimal, nor compatible with life inside a monetary union. He says Germans fail to see the identity of trade and savings surpluses, as a result of which Germany’s relies on solvent banks outside its own jurisdiction. The Target 2 debate is a variant of the same phenomenon, as Germany has built up claims against the ECB of over €500bn. Germany’s surpluses come with a big collateral risk attached.
Why Germany does not care
In an ECFR paper, Sebastian Dullien and Ulrike Guerot take a closer look at the German position, in which they say that Berlin is determined to force a German solution to the crisis. They argue that Germany’s rigidity is not just about simple national interest and the psychological scars of Weimar-era hyperinflation. It is about a broadly-held belief in the foundations for economic success, as shown by German historical success. Austerity is not just about teaching others a lesson: it is about building the foundations for sustainable economic growth. And attacking excessive austerity and demanding a renegotiation of the new fiscal treaty will simply fall on deaf ears. Instead, a more promising strategy might be to demand pan-European growth and investment programmes with more spending and taxation power shifted towards the EU level.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Sideways, mostly.
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