Massive increase in ESM from €500bn to €500bn
The eurogroup agrees the parameters for the ESM;
capital to be provided in four trances – two in 2012, one in 2013 and 2014 respectively;
Unused EFSF funds to serve as a reserve for one year only to ensure that €500bn total is available from the start;
finance ministers claim that this operation would raise the ESM ceiling to €700bn, or even €800bn;
the agreement was followed by a call to the G20 to authorise the IMF to
increase its support for the eurozone;
Wolfgang Münchau says the G20 should say No;
Ignazio Visco says the firewall may soon allow the EBA toreduce capital buffers;
Spain announces an austerity budget for a total of €27bn in savings;
measures include a controversial tax amnesty;
France delays the appointment of Yves Mersch, and wants a package deal for
several international jobs, expected later this month;
public sector wage rise of 6.3% puts a strain on Germany’s public finances;
Schäuble expect 0.9% deficit in 2012;cracks surface in the Dutch three-party minority government over the budget;
Greece is still heading for a Grand Coalition, according to the latest opinion polls, which show a rise in the support for Pasok;
Economists warn ECB of early exit from non-standard measures;
anti-capitalist protesters injure 15 police officers in Frankfurt;
Francois Hollande, meanwhile, is worried about the extreme left
candidate’s progress in the polls.
Since our last newsbriefing, EU finance ministers concluded the final
agreement, which was broadly as outlined in the draft treaty, with some
interesting technical twists. Most of the news coverage is about
implausible claims of headline totals, rather than the substance. The best
source, as so often, is the official statement.
The most important is that the ESM will have a €500bn lending capacity
that will be available from July 2012. It will remain the main instrument
to finance new programmes from July, but the EFSF’s unused capacity is
held in a reserve to make up any shortfalls, as the ESM’s capital is
only provided gradually.
The agreement also brought forward the provision of capital. There will be
four tranches of capital – in July 2012, October 2012, one in 2013, and
one in the first half of 2014. The statement also reiterated the important
principle that the paid-in capital to issuance ratio must never fall below
15%.
This means that the ESM will have a fresh lending capacity of €500bn.
Depending on how you count it, one could make all sorts of claims for the
total lending capacity. Two figures were given in the statement itself –
€700bn as the combination of EFSF existing programmes plus ESM capacity
– and €800bn if one includes the EFSM and bilateral programmes.
Curiously, the statement also translated that number into dollars (over
$1tr), presumably to impress a gullible outside world with a nice round
headline total.
The eurogroup meeting was followed by frantic attempts by finance ministers
and central bankers to congratulate themselves on the new firewall, and to
call on the G20 to sanction an increase in IMF funds for the eurozone. We
spare you the quotes.
Wolfgang Münchau says G20 should say No
In his FT column, Wolfgang Münchau (Link:
http://www.ft.com/cms/s/0/8a784232-7a53-11e1-839f-00144feab49a.html )
argues that the deal was a disappointment, as it left the ESM’s lending
capacity at €500bn. He dismissed the claims about the total headline
size as false accounting, saying the €500bn is the metric that matters.
On the assumption of a proportional increase in IMF support, that would
raise the total umbrella to some €750bn, which will still make the ESM a
small-country mechanism that will, at most, be able to accommodate a
limited programme to recapitalise the Spanish banking sector, in addition
to second and third programmes for Greece, Portugal and Ireland. If the
recession in the periphery gets worse, as he expects, the funds may not be
sufficient. He says the G20 should not fall for the headline numbers, and
examine the substance of the agreement, and send the eurozone finance
ministers back to the negotiating table. The eurozone will only ever act
if under pressure from outside.
Ignazio Visco says firewall may allow a relaxation of capital buffers
Iganzio Visco, the governor of the Bank of Italy, said the European Banking
Authority could eventually relax the compulsory capital buffers as a
result of the agreement once the pressure on government bond yields has
eased, according to a report from Reuters. The high capital requirements
are particularly problematic for Italian banks, which faced a capital
shortfall of €15bn. Visco also said the Italian economy had suffered an
incipient credit crunch in November and December, but there had been
“tentative signs” of easing since them.
Spain’s austerity budget
The FT (Link:
http://www.ft.com/cms/s/0/285b2682-7a58-11e1-839f-00144feab49a.html#ixzz1qrMvHjip
) has the best summary we have seen on the Spanish austerity budget. The
total budgetary adjustment is about 3% – 1.6% from the central state, and
1.4% from the autonomous regions – comprising a total of €27bn of
savings. Of those €12.3bn would be raised in new taxes, and €2.5
coming from a temporary amnesty on unpaid taxes in the black market. El
Pais (Link:
http://politica.elpais.com/politica/2012/04/01/actualidad/1333306771_486698.html
) this morning focused on the tax amnesty, which it said came as a result
of a need to avoid raising the rate of VAT. The amnesty allows tax
fraudsters to pay only 10% of what they failed to declare. (We remember
countless tax amnesties in Italy, which is the beginning of a slippery
slope as such policies encourage tax evasion on a grand scale.)
France delays appointment of Yves Mersch
El Pais (Link:
http://economia.elpais.com/economia/2012/04/01/actualidad/1333313367_856629.html
) reports that François Baroin managed to delay a decision on the last
vacant slot in the European Central Bank until April. The French position
was that the post should not be decided on in isolation but as part of a
wider agreement that should include the EBRD (which the eurozone tends to
treat as an internal appointement). The article says that Yves Mersch is
mostly likely to get the ECB job, while Spain may be fielding Belén
Romana, a former director of the Spanish treasury, to run the ESM.
Public sector wage rise of 6.3% puts a strain on Germany’s public
finances
The public sector agreement to raise wages by 6.3% over the next two years
will put a financial strain on the public finances especially of
municipalities, Frankfurter Allgemeine Zeitung reports. The finance
ministry in Berlin estimates the cost of the agreement at the federal
level at €1.7bn per year. The municipalities however think this
weekend’s deal will cost them €2.2bn this year and €4.3bn next year.
FAZ has an interview (Link:
http://www.faz.net/aktuell/oberhausens-kaemmerer-tsalastras-ohne-hilfe-von-aussen-sind-wir-nicht-zu-retten-11703965.html
) with one local finance official, who says that his city cannot afford
the deal and will now have to diminish municipal services and lay off
people. Frank Bsirske, the head of the Verdi public sector union hailed
the deal as the guarantor for purchasing power in 2012 and 2013.
Bundesbank president Jens Weidmann however warned that it should not be
seen as a model for private sector wage negotiations.
Schäuble expect 0.9% deficit in 2012
According to Focus (Link:
http://www.focus.de/finanzen/news/staatsverschuldung/maastricht-kriterien-starke-wirtschaft-hilft-im-schuldenkampf-am-besten_aid_731074.html
) weekly magazine, Wolfgang Schäuble reported on April 1 to Brussels that
Germany’s deficit in 2012 will be 0.9%. The debt level will rise by 1pp
to 82.1% due to exceptional payments Germany will make to the ESM. The
finance ministry confirmed the report and pointed out that the German debt
level would have fallen without the exceptional ESM payments. According to
Der Spiegel (Link:
http://www.eurointelligence.comfile:///C:UsersWolfgangAppDataLocalMicrosoftWindows
Temporary%20Internet%20FilesContent.OutlookXOSLXZJ4,%20http:www.spiegel.de
spiegelvorab,1518,824940,00.html), Schäuble wants to propose setting up
independent expert bodies for all
euro member states to make sure that the national budgets are in line with
their obligations from the fiscal pact and the renovated Stability and
Growth Pact.
Cracks surface in the Dutch three-party minority government
The political crisis in the Netherlands surfaced over the weekend as
disagreement within the minority coalition party over plans to cut the
country’s development aid budget by €1bn. The Irish Times
(Link:
http://www.irishtimes.com/newspaper/world/2012/0402/1224314231256.html )
picked up on an open letter to the Dutch government, in which six senior
Christian Democrat members warned that the Netherlands’ international
standing would be damaged if the cut went ahead. Last week Geert Wilders
had threatened to walk out of the negotiations, talks resumed on Thursday
and the reduction in development aid was privately agreed by negotiators
of all three parties – in what was widely regarded as yet another
significant political coup engineered by Mr Wilders. The letter is the
most public indication that cracks are beginning to emerge in that
three-party consensus. The letter was immediately supported by two
“dissident” Christian Democrat MPs, Kathleen Ferrier and Ad Koppejan,
both of whom have expressed their dislike in the past for doing political
deals to secure the support of Mr Wilders. The three parties have until
April 30th to agree a €9bn programme of savings to bring the budget
deficit to 3% of GDP by 2013.
A grand coalition for Greece?
Kathimerini (Link:
http://ekathimerini.com/4dcgi/_w_articles_wsite1_4226_01/04/2012_435867 )
cites the latest opinion poll showing that support for the Socialist PASOK
increased, rising 4.5 pp to 15.5% while the conservative ND slipped 2.5pp
to 22.5%. Together, the two main parties would gain around 38% of the
vote, which may give them just enough seats in Parliament to form a grand
coalition. The polls also show that a significant part of the votes goes
to smaller parties. According to the poll, the Coalition of the Radical
Left (SYRIZA) would get 12.5% of the vote, the Communist Party (KKE) and
the Democratic Left 12% each, and the Independent Greeks, founded by
ousted ND deputy Panos Kammenos, 8.5%, according to the poll which sees
the neo-fascist Chrysi Avgi attracting 5% of the vote.
Economists warn ECB of early exit from non-standard measures
In its monthly pre ECB council rate survey Financial Times Deutschland
found that 23 of 36 polled economists warned that exiting from the
crisis-related non-standard-measures now would be wrong. Also a majority
of economists disagreed with Mario Draghi’s recent assessment that the
worst of the crisis was over. Additionally most economists warned that the
ECB’s single monetary policy was increasingly in a dilemma between
catering to the weak and over-indebted peripheral euro members and
countries with sound fundamental and reasonable growth perspectives like
Germany. The economists said that this should not lead the ECB to raise
rates. The situation in Germany could be much better addressed with
national macro-prudential measures, the warned.
Anti-capitalist protesters injure 15 police officers in Frankfurt
At least 15 German police officers were injured, one seriously, during
rioting that lasted into Sunday morning, following an anti-capitalist
protest in Frankfurt, police said according to Reuters. Demonstrators
threw paint bombs at the European Central Bank and attacked emergency
vehicles on Saturday in violence which escalated after police tried to
arrest several protesters. Battles stretched through the night and one
officer was taken to intensive care after being singled out by a handful
of demonstrators. Officers who went to his aid were met with massive
violence, police said. Saturday’s clashes mark one of the first
significant outbreaks of violence in Germany connected to recent
anti-capitalist demonstrations inspired by the ‘Occupy Wall Street’
movement. Police said they arrested 465 people during the
„anti-capitalist day“ march.
Hollande worried about extreme left candidate’s progress in polls
Francois Hollande is increasingly worried about the continued rise of the
extreme left presidential candidate Jean-Luc Mélenchon, Le Figaro
(Link:
http://elections.lefigaro.fr/presidentielle-2012/2012/04/01/01039-20120401ARTFIG00051-
un-sondage-place-melenchon-en-troisieme-position.php
) reports. The paper quotes a Sunday LH2-Yahoo poll according to which
Mélenchon for the first time comes in third with 15% in the election’s
first round on April 22 with the extreme right candidate Marine Le Pen
getting only 13.5%. Hollande himself would come in first with 28.5% ahead
of Nicolas Sarkozy with 27%. Mélenchon is proposing a significant rise of
the French minimum salary and he warns of further austerity measures in
France. Arnaud Montebourg, who came in third in the Socialist’s
presidential primaries with anti-globalization and anti-German comments,
told Journal de Dimanche (Link:
http://www.lejdd.fr/Election-presidentielle-2012/Actualite/Montebourg-pour-une-negociation-avec-Melenchon-
interview-499016/?from=headlines
) that there was plenty of margin of manoeuvre for negotiations between
the Socialists and Mélenchon. Another poll done by Journal de Dimanche
(Link: http://www.lejdd.fr/Election-presidentielle-2012/ ) has
the following results for the first round: Sarkozy 28.5%, Hollande 27%, Le
Pen 16% and Mélenchon 13.5%.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Agreement makes little difference to market rates.
10-year spreads
Previous day Yesterday This Morning
France 1.154 1.099 1.124
Italy 3.414 3.497 3.446
Spain 3.672 3.569 3.659
Portugal 9.740 9.956 10.127
Greece 18.912 19.295 #VALUE!
Ireland 5.091 5.137 5.260
Belgium 1.803
1.751 1.744
Bund Yield 1.806 1.793 1.844
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.336 1.334
Yen 109.550 110.77
Pound 0.835 0.8342
Swiss Franc 1.205 1.2039
ZC Inflation Swaps
previous last close
1 yr 2.01 2.01
2 yr 1.97 1.98
5 yr 1.98 1.98
10 yr 2.08 2.2
Euribor-OIS Spread
previous lastclose
1 Week -8.729 -8.929
1 Month -1.286 -0.686
3 Months
1 Year
Source: Reuters