 Cautious bond rally after Italy’s bond auction
Italy’s €4.88bn euro sale produced mixed results, but some had anticipated an even weaker auction. Italy was forced to pay about 1.1pp more than a month ago to sell three-year debt. Italy sold €2.88bn of three-year notes, less than its maximum target of €3bn and €2bn of bonds due in 2015, 2020 and 2023. The total of €4.88bn fell short of its target of €5bn. The slightly better than expected showing prompted buyers to cautiously re-enter the market, driving yields lower across the curve, Reuters reports.
Asmussen says Ireland should honour promissory notes
The Irish media had a go at Joerg Asmussen’s speech in which he played down the prospect for Ireland to restructure the repayment schedule on the promissory notes that would lengthen their maturity and cut their interest rate. Asmussen said that Ireland should honour the commitment of defunct banks and that the full cost of the promissory notes had been factored into the bailout programme right from the start. The least damaging option from the ECB’s point of view is in ensuring that “no negative effects spilled over to other Irish banks or banks in other European countries”. In an interview Asmussen was also saying that the ECB has not yet received any concrete proposal on lengthening the term of the promissory notes according to Reuters. Responding to Asmussen, the Irish government said that they await a Troika paper on the debt issue, the Irish Times reports. On the Irish Economy blog, John McHale takes issue with the arguments saying that it ignores the difference between reneging and renegotiating a commitment, and that the initial repayment schedule was ambitiously short because at that time it did not foresee the European crisis to escalate. Moreover it is hard to see any spillovers as the improved maturity profile have a significantly beneficial effect on creditworthiness.
One in five unemployed in Greece, budget deficit widened 53% in Q1
Greece’s unemployment rate rose to a record of 21.8% in January, twice as high as the euro zone average, statistics service ELSTAT said on Thursday. A record 1.08m people were without work in January, 47% more than in the same month last year, according to Reuters. The number in work dropped 8.6% to a record low of 3.88m. Youth unemployment is now at 50.8%, twice as high as three years ago. As the number of people claiming unemployment benefits is increasing, the government is finding it difficult to meet its budget targets. The finance ministry announced on Wednesday that the deficit of its central government budget had widened by 53% in the first quarter, compared with a target to narrow it by 38% in the full year.
ECB warns of “shadow debt”
Frankfurter Allgemeine leads with the story on the ECB’s monthly report, which warns against the “shadow debt” of the eurozone member states. It calculated that the guarantees for banks and states would increase Germany’s public sector indebtedness by 11 percentage points to 90 per cent of GDP. Bank guarantees are the biggest threat in Ireland, with the potential to raise debt-to-GDP by 43pp, Greece (26pp), and Zyprus (16pp). The ECB advocates a much broader basis for the assessment of a country’s debt sustainability that should include contingent claims, such as those arising from ageing populations. The ECB is calling for a return of debt-to-GDP to less than 60%, which would require “additional consolidation over a long period”. (We would call this eternal austerity – likely to be self-defeating. The ECB does not explain what is so magical about 60%. Presumably because it was written in the treaty, but there is no economic justification these days for this particular number. If you ask for a broader definition of debt sustainable, which is reasonable, then you undermine your credibility by sticking to an arbitrary number.)
Now we know: it was the speculators who drove up Spanish yields in the last few days
We are not relaying the story because it adds anything new to the debate. But it is a good example of the narratives German journalists are creating, which in turn influence the political debate.Suddeutsche Zeitung, a paper that is liberal politically but hardline orthodox on economics, blames speculators for the most recent increase in peripheral yields. The article, which convolutes the usual “he-said, she-said” type news reporting with commentary, says the best way to react to the increase in yields is to stay calm. It quotes an economist as saying that interest rates are nowhere near their historical peaks. Our personal favourite is the discussion whether the rise in yields was the result of a speculative attack. The article concludes that it is probably a “power battle”, and some irrational exaggeration.
(With this type of news reporting one should not be surprised that policy makers act the way they do. Asking Angela Merkel to stay calm, however, is probably a first.)
Spain passes law to reign in regional deficits
Reuters reports that the Spanish parliament passed a new stability law that would give the central government the right to intervene in the finances of the autonomous regions if they do not comply with the new national financial stability laws. The law passed with 192 against 116, and four abstentions. The Socialists voted against the bill in protest against the decision to lower to required structural deficit from 0.4% to zero. The law now goes to the Senate, where some revisions might be included, but the main hurdle is now passed. The law establishes a calendar of sanctions for regions that do not meet budgetary targets. To reach the target this year, the regions must cut more than €15bn in areas of their fiscal competence, which include health and education.
EU sends mission to Spain to assess imbalances
Having been in denial over the importance of internal imbalances, the EU now officially cares about them – as long as they are deficits. El Pais reports that Spain may risk a fine if it fails to comply with the delegation’s requests, which it will today discuss with various government agencies. The visit was triggered because Spain was identified as a country with excessive imbalances, on issues such private debt, public debt, unemployment, external deficit, international investment position and evolution of the share of exports. The issue will come to a head at an Ecofin on June 22, which is to decide whether the European Commission should start an excessive imbalance procedure against Spain.
Lagarde says progress, but no deal expected on euro firewall at spring meeting
Reuters has the story from Washington that Christine Lagarde expects progress at the spring meeting over the question of an extension of the IMF funds for the eurozone firewall, but no final agreement. This would take “a little bit of time”, Lagarde is quoted as sayingly. Strangely, the IMF is also scaling back the estimates of the total amounts.
(Our explanation is that is a consequence of the lower than expected eurozone contribution to the firewall. There is no way they can get a total firewall of $2 trillion up and running, so they are now scaling down their estimates of what is needed. Economically, this makes no sense, of course, especially given the most recent developments in Spain, which, if anything, call for an increase in the firewall.)
Hollande regains in the polls
Ten days ahead of the first round election in France, Francois Hollande succeeded to stop his decline in the polls during the last months. Hollande gained slightly in three of the latest polls, and is now close to Nicolas Sarkozy around 30% in the first round and clearly leading in the second round (54%-57%), according to Les Echos. The polls also suggest a close race between Marine Le Pen and Jean-Luc Mélenchon, with one poll suggesting the Left Front candidate to rising to 17% of the votes while others put him at 13%. The Front National candidate is credited 13%-16% in the polls.
Is Germany overheating? The big debate in Germany is an overheating economy. Mark Schieritz summarises the debate, and makes the point there are three alternative how to manage the adjustment process in the eurozone. The periphery maintains its large current account deficit, but this requires permanent transfers. Second, the north adjusts downwards, but this would imply a long-lasting depression. Thirdly, we adjust by running large external surpluses. At the moment, things are working fine. Germany expands, and yet the ECB does not raise interest rates. German inflation is likely to rise as a result. Schieritz is cautious about demands for further fiscal stimulus in Germany, as this may trigger a massive overheating. Schieritz concludes that there is no easy way out.
George Soros on the eurozone’s stable, but deadly crisis
Writing in Project Syndicate, George Soros makes the point that the fundamental problems of the eurozone have not been resolved. The gap between creditor and debtor countries continues to widen. “The crisis has entered what may be a less volatile but potentially more lethal phase.” He proposes a plan, based on socialised the ECB’s seignorage. He says the EU should create an SPV that could use the ECB’s seignorate to finance the costs of a large bond purchasing programme. That construction would circumvent the restriction of Art. 123.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
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