Merkel loses her “chancellor majority”
The German Bundestag passed the second Greek programme by a wide margin – as expected since opposition parties supported the move. But it has been the first time among the Bundestag’s seven crisis-related plenary votes that Merkel had lost what the Germans refer to a “chancellor majority”, an absolute majority among all MPs (not just those who are voting). This is a large symbolic majority threshold, relevant only for the election of a chancellor, but not for legislation. Merkel’s coalition still had a simple coalition majority (a majority among all those who were voting). But the German media, including Spiegel Online, made a big deal out of her failure to reach the higher threshold, saying it symbolised the growing opposition within her own coalition to the packages. 20 coalition deputies voted No or abstained, and a further six MPs were absent. During the debate, Merkel said that nobody could estimate the effects of a Greek default, and it was her oath of office that would rule out any adventures. Peer Steinbrück, the former finance minister who spoke for the SPD, predicted that the Bundestag will soon debate a third Greek programme.
(We do not think that the loss of the “chancellor majority” is particularly relevant. The strike chaos at Frankfurt Airport quickly supplanted this is the main story. Merkel may eventually lose even the simple coalition majority, but even this would not be sufficient to end the coalition, for as long as the opposition supports the packages. These are largely symbolic moments, reflecting something we know already: that support for this exercise in the German population is waning. The implosion of the Greek programme, if and when it happen, will not be due to a decision taken in Berlin.)
Frankurter Allgemeine’s chief political commentator Berthold Kohler said Merkel’s Greek policy resembled a war on two fronts with unknown length and a dual danger of a breakdown. The latter consists of uncertainty over how long the recipient country will withstand the reform policies, which in some cases they have not even began, and how long the tax payers of the creditor countries will sustain the programme. He said the Bundestag still support her course – reluctantly – but even she is not immune to the growing scepticism among the population, economists, and her own MPs.
Frankfurter Allgemeine’s Eurosceptic economics editor Holger Steltzner recalls that two years ago Angela Merkel and Wolfgang Schäuble both told the Bundestag that countries unwilling or unable to reform should be excluded from the monetary union. When this weekend the interior minister said the same, the coalition attempted to isolate him. He says we are now on a course for a socialisation of all Europeans debt. Governments and the ECB are pulling in the same direction. He criticised specficially a comment by Peter Praet of the ECB, who explained the rationale of the LTRO as one of banks obtaining cheap central bank money, which they lend on to governments and thus taxpayers, with a much increased margin.
Writing in Sueddeutsche Zeitung, Thorsten Denkler says the loss of the “chancellor majority” would not unleash a crisis, only because the government has been in a permanent crisis since it started in 2009. The only thing that binds the two coalition parties is a lack of alternatives. He says the coalition is politically finished, and the loss of her majority is merely a symbol.
Eurozone summit this Friday cancelled?
The eurozone summit scheduled for Friday (to follow the regular European Council meeting) has been cancelled due to “lack of perspective” of an agreement on raising the firepower of the bailout funds, the Portuguese newspaper Público reports. We have no confirmation for this news yet, except that Jose Barroso said on Monday that euro-zone leaders will decide whether to boost the lending capacity of the regional bailout funds in March, but not at this week’s heads of government meeting. The eurozone summit was scheduled to follow the two-day summit of the 27 EU leaders. Eurozone issues are now expected to be dealt with during the EU summit.
Spanish deficit rises to 8.5%
The Spanish deficit figures are worse than we expected, and make the adjustment effort even harder. The 2011 deficit was 8.5% – as opposed to a 6% target – and there is no way that Spain can now meet the 2012 target of 4.4% this year, even if they wanted to. Most of the overshoot came from the autonomous regions, which had a deficit of 2.94% against a target of 1.3%. The central government’s deficit of 5.1%. El Pais writes that the planned adjustment for this year is not only historically unprecedented; it may well be physically infeasible, especially given the overshoot in the autonomous regions.
IMF approved next loan tranche for Ireland
The IMF on Monday approved a €3.23bn loan to Ireland, bringing the total disbursements under the Extended Fund Facility to €16.05bn, Reuters reports. It is the latest instalment in the three-year programme for €85bn, which was initiated in December 2010. The IMF said Ireland attained a deficit reduction to 10% of GDP despite weaker domestic demand, reflecting the authorities’ strong revenue administration and firm expenditure control. Ireland expanded almost 1% in 2011 after three years of contraction. “At the same time, the challenges Ireland faces have intensified since the outset of the program,” David Lipton said in a statement.
The parliaments of the Netherlands and Finland are to vote on the debt deal on Wednesday.
The falling costs of Italian debt
The LTRO has been successful in bring down interest rates on debt, particular in the short end. There is also some modest (albeit insufficient) relief at the long end. Reuters reports that market participants expect Italy’s 10-year debt to fall to around 5.7% at today’s debt auction, in which the country aims to raise €6.25bn in 5 or 10-year bonds. With the second LTRO due tomorrow, Italy was yesterday able to raise six-month money at 1.2% – a 17 month low. Reuters reports that the new 10-year bond yielded around 5.7% on the grey market on the eve of the auction, after 6.08% a month ago.
S&P downgrades Greece to selective default
This is really not a surprising story at all, even though it tops all the news headlines this morning. Standard & Poor’s has downgraded Greece to selective default, for as long as the debt swap offer is in place, after which the rating will return to CCC. S&P said the bond swap “constitutes the launch of what we consider to be a distressed debt restructuring … we believe the retroactive insertion of CACs will diminish bondholders’ bargaining power in an upcoming debt exchange”. The action by S&P was long foreseen, and the EU’s rescue strategy had already full taken account of this event – including the temporary provision of EFSF collateral at the ECB. (The more important question is whether the bond swap will trigger credit default swaps. We think so.)
Quentin Peel on the ESM extension debate
Quentin Peel has an insightful article in the FT on the politics behind German intransigence in the debate to raise the ESM beyond €500bn. For once, such a decision would raise the risk that Merkel’s majority may be eroded further. But there are also tactical considerations. Wolfgang Schäuble says the EFSF and ESM were never intended to be big enough to rescue Italy or Spain. But there is also another important consideration. Merkel wants to wait until the outcome of the Greek bond swap, and the LTRO, to see whether Italian and Spanish interest rates are coming down fast enough. (We are not sure what such an analysis will do. If they conclude that the rates are coming down fast enough, does this mean that one should increase the ESM on the grounds that the risk is reduced, or that one should not increase the ESM on the grounds that the extension is now not necessary? It won’t end the argument.)
Jean Pisani Ferry says do not enforce deficit targets
Writing in the FT, Jean Pisani Ferry pleads with the Commission and the Ecofin not to enforce deficit targets this year, or otherwise risk a significant deterioration in the economy. He says economic history teaches us that financial crises have a long-lasting effects. Asking countries to meet deficit targets would not only aggravate the recession, but would also prompt them to adopt bad policies in order to meet the targets (such as Italy’s crazy VAT increase). (He tries very hard to explain that such action would be consistent with the EU’s framework. We do not think so. The EU’s fiscal framework is completely consistent with the kind of pro-cyclical fiscal policies we are seeing at the moment. The problem is not the enforcement of the rules, but the one-side nature and inflexibility of the rules themselves.)