 IMF warns of financial crisis in eurozone
This is probably the most important story in the eurozone crisis right now – and mostly off the policymakers’ radar screen. The IMF warned in its Global Financial Stability Report that the eurozone is about to witness a massive credit crunch – of a scale that warrants a complete reboot in economic crisis resolution policies. We have going on about this problem in Spain, where the full scale of private sector deleveraging has become apparent.
The best summary, as ever, is from the report itself, emphasis ours:
Olivier Blanchard said at the news conference that there was an urgent need for recapitalisation and resolution, and that the EFSF/ESM should be used for the recapitalisation of banks, to break what he called the “pernicious link between sovereigns and banks”.
Spanish house prices are now starting to decline
There was an unrelated story yesterday that goes a long to explain the extent of the credit crunch in Europe, at least in respect of Spain. The FT cites a report by Fitch according to which repossessed properties in Spain are selling for about half their original value, and are likely to continue to fall. (That squares or own estimate of a Spanish house price decline of over 50%, of which less than half is so far officially recorded.) Fitch said that valuations on properties that were bundled up in securitisation deals and later repossessed are also significantly lower than data from the official housing price index suggest. The FT also reported that the latest Bank of Spain data for non-performing loans have registered a jump to over 8%, the worst level since 1994. Official data show that Spanish house prices fell 3% in the first three months of the year. Fitch noted that reposed homes were valued at 25% below their original prices, but their average selling price is 48% lower. An expert is cited as saying as saying that the official house price statistics are therefore highly misleading. Fitch estimates that the overhang of unsold homes in Spain is still over 1m.
EBA to set up proper stress test infrastructure
The European Banking Authority plans to set up a data hub within two years to give outsider full transparent information on the riskiness of European banks, according to Reuters. The article quotes Andrea Enria of the EBA as saying the authority was to prove up-to-date information on banks’ capital positions, sovereign debt holdings, and other stress test-style data. He said the lack of such information had been a source of market uncertainty. He said once there a common reporting framework is established, “we can go much further in terms of disclosure.”
Europe’s little wall
This looks like a charity fund raiser. The IMF said yesterday that it had already secured $320bn, $200bn of which from within the EU, to increase the firewall, in other words only $120bn from outside. So much for the idea of a large foreign participation. The latest commitments were $8bn from Poland, and some money from Switzerland. The target is to get to $400bn. (The target has been adjusted so that it can be met). The biggest external commitment came from Japan with $60bn. Reuters quotes Mark Carney, of the Bank of Canada, as saying that the success of the crisis response will not depend on the firewall, but on the policies. Neither the US nor Canada have put any money.
Weidmann says it’s not the ECB’s job to solve Spain’s problems
Spain should take a rise in its bond yields as a spur to tackle the root causes of its debt woes, not look to the European Central Bank to help by buying its bonds, Jens Weidmann told Reuters. The head of the Bundesbank, who has led a push by some policymakers from core eurozone countries for the bank to begin planning an exit from its crisis mode, said no ECB policymakers favoured using the bank’s bond-buying plan to target specific interest rates on sovereign bonds, and ECB board member Benoit Coeure was simply stating a fact by saying last week that the programme still existed. Weidmann also said he saw no reason to discuss a third LTRO. „We shouldn’t always proclaim the end of the world if a country’s long-term interest rates temporarily goes above 6 percent,“ he said referring to rates at which Spain currently has to borrow. „That is also a spur for policymakers in the countries concerned to do their homework and to win back (market) confidence through the pursuit of the reform path.“
Italy’s budget way off track, according to JP Morgan
This is a very interesting analysis from JP Morgan, as reported by FT Alphaville, showing the delusion of European governments in their deficit planning. Italy’s cabinet yesterday considered the new forecasts, which project an increases in the projected deficits for 2012 from 1.6% to 1.7%, and in 2013 from 0.1% to 0.5%. But JP Morgan looked at the raw Jan-Mar budget data, and concludes that the budget is current on a trajectory for a deficit more than twice as large for this year – €60bn, instead of the projected €26bn. (To us, this shows that the deficit planning in the eurozone periphery is completely delusional, as is the 3% deficit target for 2013.)
German economic institutes fear for ECB’s independence
The eight leading German economic institutes fear that the ECB will lose its independence as a result of all the non-standard rescue operation for the eurozone, according to Frankfurter Allgemeine Zeitung. „Independence and credibility are at stake“, the paper quotes from their yet unpublished report on the economic situation in Germany that the institutes will today present to the government. „There is the danger that the monetary policy will no longer be able to liberate itself from this situation of constraints that has arisen“, the report warns. The institutes also criticize the government that despite the good economic situation in Germany the government will not be able to have a surplus. Additionally the institutes take a sceptical view on the euro crisis countries’ ability to fulfil their consolidation and reform obligations. According to the institutes, especially Italy and Spain are vulnerable. Should there be a prolonged recession, both countries may no longer be able to service their debt, the report warns.
Metall industry employers offer 3.0% pay rise
The German metal industry employers start negotiations on salaries in the industry by offering 3.0% pay rise over 14 months starting retroactively as of April 1 for the 3.6m workers in this sector in Germany, Frankfurter Allgemeine Zeitung reports. The powerful union IG Metall is asking for 6.5% over 12 months. Additionally the union demands that all trainees shall get definitive work contracts and that the unions will get co-decision powers over the question whether a company hires temporary workers. The public workers union Verdi had recently raised hopes for significant wage increases by obtaining a 5.6% pay rise over two years. In the past years Germany had been among the euro members with lowest real and nominal wage rises.
If elected Francois Hollande wants to raise the minimum wage
According to Les Echos, Francois Hollande wants to raise the French minimum wage SMIC if he gets elected. The Socialist candidate said that he would examine if that was a possibility „given that the SMIC had not been raised for at least three years“. Unions reacted cautiously to the announcement. The Communist CGT and the extreme Left candidate Jean-Luc Mélenchon union want to raise the SMIC to 1700€ which would be 20% more than it currently is.
Election campaign kicks off in Greece
Antonis Samaras will unveil his party’s economic programme today ahead of the May 6 elections. Samaras has called yesterday for a «clear mandate» that will allow his party to govern without having its «hands tied,» adding that if elected ND would seek changes to Greece’s austerity programme. Evangelos Venizelos also tries to draw a line behind the past distancing himself from his predecessor Papademos saying that he had been against the decision to appeal for IMF emergency loan and that he had preferred Greece to drawn up its own measures. He pledged in his TV appearance for measures to improve liquidity for small businesses, Kathimerini reports.
According to the latest polls, the two major parties would win a narrow parliamentary majority if elections were held today, Reuters reports. Support for the conservative New Democracy party was at 22.3%, down 2.5pp from a previous poll last month. The Socialist PASOK party was down 0.6pp to 17.8%. Based on those poll numbers, the election would allow the two parties to renew their coalition government.
Undecided will be decisive in Irish Referendum
The outcome of the Irish referendum on the European stability treaty on May 31st is wide open, according to the latest Irish Times/Ipsos MRBI poll which shows the result is in the hands of undecided voters. Asked whether they were likely to vote Yes or No to the treaty, 30% of voters said Yes, 23% said No, 39% were undecided and 8% said they would not vote. When undecided voters, and those who won’t vote, are excluded the Yes side is ahead by 58% to 42% but the outcome hinges on the attitude of the currently undecided voters. The Lisbon Treaty has a lead of the Yes vote at a similar stage but the referendum turned it down. Good news is that the number of ‘No’ voters has halved since October.
Portuguese banks given money to invest in government bonds
Jornal de Negocios reports that the money that the Portuguese state will inject into the two banks, the BCP and BPI, to help these two institutions to comply with capital requirements of the European Banking Authority (EBA) will be mainly invested in government debt. The two banks cannot use those resources to increase the credit to the economy.
George Soros says he would bet against the eurozone
In an interview with Le Monde, George Soros makes a number of gloomy predictions. He said the policies of the eurozone were leading to disaster, and that the euro was now threatening the survival of the European Union. And even if the euro survived, the eurozone would face the prospect of a lost decade similar to what happened in Argentina in 1982 or in Japan ten years later. In the interview he also said that his Quantum fund had no positions in the euro, but if he were to invest, given the present political leadership, he would bet against the euro.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Italy worsening, France worsening, Spain a little better.
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