 A bad start to the week
This is a bad start to the week, with indicators getting worse again across the board. Asian stocks were down overnight amid fears over the increased funding costs for Spain. Spreads are up significantly in Spain and Italy, but also in France. And the euro has weakened. See our table below. The modest improvements at the end of last week are now reversed.
Sarkozy says ECB should contribute more to growth in Europe
Speaking over the weekend at one of his last big meetings ahead of next Sunday’s first round presidential elections, Nicolas Sarkozy appealed to the ECB to use its monetary policy to contribute more to growth, Le Figaro reports. „If the central bank does not support growth we will not have enough growth“, the president said. According to his advisors, his aim is not to change the ECB’s statutes because Sarkozy thinks this would be a request that would never be accepted by all euro partners. Rather he wants to engage into an intensive dialog and to convince the ECB to help the eurozone by aiming for a more favourable exchange rate. According to Le Journal de DimancheSarkozy is only enjoying a narrow lead in the first round with 28% closely followed by Francois Hollande with 27%. According to that Ifop poll the extreme right candidate Marine Le Pen would come in third with 16% while the extreme left candidate Jean-Luc Mélenchon would get 13%. Pundits in France agree that Sarkozy only stands a realistic chance of getting re-elected if he wins the first round by a considerable margin.
(We also think the ECB should focus on growth, but to do this through the exchange rate is unlikely to happen, and very likely to produce a global backlash. It is depressing to see that a relapse to Mercantalism seems to be the only alternative to German-inspired austerity policies European politicians are able to come up with. The fact is that if you want the ECB to focus on growth, you need to change the Treaty. It’s all written in there.)
IMF is seeking only $400bn increase for its firewall
According to Frankfurter Allgemeine Zeitung, the IMF is now seeking to increase its war chest by only $400bn. In January Christine Lagarde had publicly requested an increase by $500bn to $600bn. „Some of the dramas that we had imagined at the end of 2011 have not materialized“, the IMF MD explained the reduced request for additional means. Roughly $200bn will come from the euro members, an additional $40bn to $50bn could come from other EU countries such as the UK. According Nikkei Japan is ready to contribute $60bn. With an additional $400bn the IMF would effectively double its lending capacity. On top of that come the €800bn by which the Europeans have increased their firewalls recently. However sceptics fear that with the renewed crisis in Spain and the danger of contagion to Italy or even France lingering this may not be enough. The real reason for reduced sum is likely to be resistance from the BRICS, which want to link any more significant increase with a reform of the quota system which would give them more of a say within the IMF and reduce the European influence at the organization, Der Spiegel reports.
A generation of investors will shun the eurozone
This is quite scary, but consistent with what we hear as well. The FT reports this morning that the eurozone sovereign bond markets have lost vast numbers of international investors, “possibly for a generation”. These include some of the largest international investors, including Pimco and BlackRock. The countries affected include Spain, Italy and France, with estimates of about €100bn withdrawn by international investors in the past two years. The article quotes data from the Bank of Spain showing that the percentage of international investors holding domestic debt had dropped to 33% per cent at the end of January. The trend was similar in France and Italy. The article quotes an investment manager as saying: “We have avoided the eurozone peripheral debt markets because many clients have lost confidence in the region.”
Monti’s poll ratings are tumbling
We have been chronicling the decline and fall of Mario Monti, and the return of politics as usual in Italy, for some time. Il sole 24 ore has the latest news on the confidence surveys, with Euromedia Research and SWG at 47%, and Ipsos at 55%, though the latter marked a 10 point fall. The paper says the problem is not the numbers, but the steady downward trend that all three institutions have confirmed – albeit for different reasons. One analyst quoted said the public was disillusioned with Monti’s progress, and are increasingly seeing him as a traditional political actor. They are becoming more doubtful about the claim that austerity is going to fix the crisis. Another analyst said Italy had expected strong measures to break open protected parts of the economy, but there was insufficient action. The articles said Italy’s political parties no longer talk about the greater good of the country, or the general interest, but have reverted to politics as usual, as the 2013 elections draws closer.
Despite Spain, Asmussen says worst of the crisis is over
The worst of the euro zone crisis appears to be over and it is now up to governments to tackle debt problems remaining in their countries, Jörg Asmussen told the Wall Street Journal. „The ball is with governments, they have to act“, the German ECB board member said. On the possible reactiviation of the SMP to counter the resurging crisis in Spain, Asmussen said. „I just want to repeat what my fellow Executive Board member Benoit Coeure said: It exists. No more, no less.“ Asmussen went on to justify the SMP that is highly controversial in Germany. „The ECB was at some moments of the crisis the only institution that could act. But should it stay like this? Clearly not. That’s why the design of the ESM is so important“, he said. Aside from recent tension on Spain’s debt markets, which has seen a rise in its bond yields, Asmussen said he saw a stabilisation on financial markets. „The worst of the crisis seems to be over, but the crisis of public and private debt in some euro area countries is clearly not over“.
Bundestag deputies rebel against curbs to dissenting views
Bundestag deputies from all parties are mounting a rebellion against plans from the parliamentary groups leaderships to curb the rights of parliamentarians to express dissenting views from their group leadership, Süddeutsche Zeitung reports. The paper had reported on Saturday that the big groups wanted to introduce internal rules that would make it more difficult for dissenters from the groups views to get the floor. The move was apparently fuelled by the anger of the coalition’s groups leadership with the fact that on several occasions dissenters from important euro rescue decisions such as FDP parliamentarian Frank Schäffler and others had been granted the right to speak despite the fact that they were representing views in opposition to the official party line. The new rule would make it more difficult for dissenters to get speaking time and give the group’s leaderships a de facto control over who gets to speak. Prominent parliamentarians from all parties criticised the move, with some even threatening to challenge it at the constitutional court.
Plans for a European rating agency about to fail
Plans to challenge the oligopoly of S&P, Moody’s and Fitch with a European rating agency are about to fail, Financial Times Deutschland reports. According to the paper the German consulting company Roland Berger charged with raising €300m for the project no longer believes it will be able to get the money. German and French banks as well as large industrial companies showed no particular interest in contributing to financing an alternative to the three incumbent rating agencies that currently control about 95% of the market, FTD reports. Europeans governments accuse the three agencies to share responsibility in the crisis because they did not warn of the US subprime crisis and because they believe that the repeated downgrade of Greece and other euro crisis countries contributed to escalating the situation in the eurozone.
A majority of Greeks opposes EU/IMF package
Kathimerini reports that a majority of Greeks reject the austerity programme imposed by the EU and the IMF, but would still prefer a coalition government to emerge from upcoming elections. The latest opinion polls showed that 26.2% will vote for a party opposed to the agreement, with support for Pasok and New Democracy eroding further. 66% of Greeks want to stay in the eurozone, but with another plan, while 13.2% want to leave the eurozone.
Wolfgang Münchau on Spain In his FT column, Wolfgang Münchau argues that there is a fundamental misunderstanding, in Brussels and Madrid, about the nature of the market panic about Spain. The markets are not panicking because Spain may miss the deficit target, but because Spain is trying to hit it. To hit these targets with a declining economy is not only bad economics, but physically impossible. He says a more credible strategy would be for Spain to focus on the banks first, forcing them to take losses, and consolidating them. That can only be done through the ESM, a task for which the Spanish government and the private sector are too weak. Eventually, such a programme could give rise to a bank resolution/supervision scheme. While the private sector deleveraging occurs, it would be unwise to engage in a simultaneous exercise of public sector retrenchment, which can wait a few years.
Paul Krugman gets really pessimistic about the eurozone
Writing in his blog, Paul Krugmann makes the simple point that the Spanish crisis is not a fiscal crisis.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Not good, anywhere.
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