Eurointelligence Daily Briefing, 14 de Maio de 2012. Enviado por Domenico Mario Nuti

High Noon in Athens

  • Talks with President Karolos Popoulias ended in an impasse, as Syriza refused point-blank to join a government;
  • talks continue as New Democracy and Pasok are pondering alternatives;
  • one option is for a coalition to include the small Democratic Left, which wants to remain in the eurozone, but cancel the EU/IMF memorandum after two years;
  • but DL so far refuses to enter a coalition with the participation of Syriza;
  • another option under discussion is for the Independent Greeks, a rightwing splinter group, to join the coalition;
  • a poll shows 78.1% of Greeks want to stay in the euro;
  • the two big parties are expected to use the upcoming election campaign as a referendum on euro membership;
  • European central bankers have been threatening for the first time that Greece might be leaving the euro;
  • Paul Krugman says the euro might end within a few months from now;
  • Wolfgang Munchau writes that the Greeks face four choices, of which the best would be to stick with the programme until primary balance is reached, and then default inside the eurozone;
  •  CDU suffers a catastrophic defeat in Northrhine-Westphalia;
  • German commentators see the result as having serious implications for Merkel and her coalition;
  • the markets’ reaction to the restructuring of Spanish banks has been underwhelming, as investors remain convinced that Spain needs an EFSF/ESM programme;
  • French Socialists attack Angela Merkel ahead of tomorrow’s meeting with Francois Hollande;
  • a poll shows that the united front of the French left has a clear lead but the Socialists trail the UMP;
  • Vincent Reinhart and Ken Rogoff, meanwhile, show that debt overhangs have massively negative implications on growth.

It looks like Greece is heading towards new elections, as SYRIZA rejected the coalition talks. After a dramatic meeting with Karolos Papoulias and the conservative and socialist leaders, SYRIZA leader Alexis Tsipras said of their coalition offer: “They are not asking for agreement, they are asking us to be their partners in crime and we will not be their accomplices”.  Kathimerini quotes sources saying that Evangelos Venizelos and Antonis Samaras asked Tsipras to either join a unity government or to at least give it a vote of confidence.



There are still some options on the table though none is straightforward. One is for New Democracy and PASOK to form a government with the small Democratic Left party led by Fotis Kouvelis, which would give them 168 seats in the 300-seat parliament. Kouvelis’s proposal is for parties to combine their forces in a unity government that would aim to keep Greece in the euro, draw up a plan for its gradual decoupling from EU-IMF loan agreement and which would remain in place until 2014. But Kouvelis said it will not join the government unless the coalition also includes SYRIZA and there is a clear fear that SYRIZA would seek to capitalize on the anti-memorandum sentiment in Greece. Polls show he would now place first if the vote is repeated, benefiting from 50 extra seats in the 300-seat parliament. 



Another option cited by the FT is that some lawmakers from Independent Greeks, a rightwing splinter group, could return to New Democracy and give the two pro-euro parties a slim overall majority. But Evangelos Venizelos  is expected to refuse to serve in a government that did not include either Syriza or the Democratic Left.



The constitution sets no deadline for Papoulias to complete his search for a deal and he has given no indication how long he will spend trying before he calls a new election. 



Polls show an overwhelming majority of Greeks reject the bailout but want to keep the euro – a position widely regarded as untenable. As many as 78.1% want the new government to do whatever it takes to keep their country in the currency, Reuters quotes a poll by Kappa Research for To Vima daily.  If we are heading for new elections, the two main parties are likely to campaign as guarantors of Eurozone membership.



The European reaction is predictable. The EU has now reverted to threats. Various central bankers yesterday raised the prospect for the first time that Greece might have to exit the euro. Patrick Honohan, the Irish central bank governor, said in a speech that the eurozone would withstand a Greek exit, calling it “not necessarily fatal”. The FT has an interview with Luc Coene, the Belgian central bank governor, who spoke of an “amicable divorce”. Jens Weidmann of the Bundesbank said the consequences would be worse for Greece than for the eurozone.



The idea is to scare the Greeks into following the agreed line. Politically, this is not working well.


Greece will continue to get money from the EFSF after a euro exit



According to Der Spiegel, Greece will get money from the EFSF even if it leaves the eurozone. Plans of the German finance ministry foresee that only the part of the EFSF transfers to Greece will be scrapped in the case of an exit that go directly to the Greek budget. The part of the EFSF billions that are used to service the Greek government bonds that are being held by the ECB will continue to paid. This will help to prevent losses of the ECB that would have to be supported by the national budgets, the magazine explains. According to the German plans Greece would remain part of the EU after a euro exit and thus be eligible to EU assistance that would have to be paid by all 27 EU members and not only the Euro 17 as currently the case. According to a poll done for Welt am Sonntag, 78% of all Germans favour suspending all aid payments until Greece has formed a government that clearly commits itself to the EU/IMF program and its reforms.


Paul Krugmann on Eurodämmerung



Paul Krugman sees a scenario in which the euro may collapse within a few months. Here is how it will play out. We quote in full:

“1. Greek euro exit, very possibly next month.

2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.

3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.

3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.

4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible;


4b. End of the euro.”


Wolfgang Munchau says the Greek choice is between a default right now, or a default postponed



In his FT column, Wolfgang Munchau says the Greeks face four options. Follow the programme;

follow the programme until primary balance is reached, and then default; default now, and hope to remain in the euro; default and leave the euro. Munchau says the worst of all options is number as it will end in a political and economic catastrophe. Leaving the euro would not make much sense either. That leaves the two default-inside-the-eurozone options. Munchau says it would be better for Greece to reach a primary balance first, and then default. The plan by Syriza to default now, and hope the EU is bluffing, is too risky. It would trigger a cessation of the loan payments, and an immediate collapse of the Greek state. The dynamic of that situation may well push Greece out of the eurozone, though Tsipras is right when he says that this outcome is not in the eurozone’s own best interest. Munchau says he agrees with that point, but argues that eurozone leaders have made numerous misjudgements before.


CDU suffers heavy defeat in Northrhine-Westphalia



Angela Merkel’s CDU suffered a heavy defeat yesterday in Northrhine-Westphalia, Germany’s most populous state. The CDU got 26.3%, way behind the SPD’s 39.1%. Together with the Greens (11.4%) the SPD will form a red-green government with a clear majority of 128 out of 237 seats in the state parliament. The FDP got 8.6% – due to the performance of its state party leader Christian Lindner, who now becomes a serious rival for FDP chief Philipp Rösler. The Pirates got 7.8% and thereby managed to get elected into a state parliament the fourth consecutive time. The left did not pass the 5% threshold. For graphics with the exact results go to The SPD’s clear victory is the result of the popularity of the state prime minister Hannelore Kraft and the poor campaign of Norbert Röttgen, the CDU’s front man in NRW, and also a minister in Merkel’s government. Röttgen immediately resigned as state party leader, trying to shield Merkel from the consequences of this defeat.


Heavy consequences for the federal government



German commentators agree that the results will have serious consequences for the federal government. “On a federal level the crash of the CDU has more significance than the victory of Hannelore Kraft and her SPD”, Süddeutsche Zeitung’s Heribert Prantl writes. “Once again a potential successor to Angela Merkel has destroyed himself. Once again a potential party chairman and chief whip in parliament has gotten himself out of the way.” The mass circulation daily Bild’s deputy editor Nikolaus Blome writes. “The ambitious Norbert Röttgen will never be chancellor. He can be happy if Merkel keeps him as a minister.” In its unsigned editorial Financial Times Deutschland writes: “The reinforced SPD will not only make the remaining time of this legislature more difficult for Angela Merkel – already the upcoming vote on the fiscal pact will be a real test of courage.”


Spanish banking crisis not over yet



The EU and the IMF were reassuring about the recent steps taken by the Spanish government to clean up the banking sector, but no one else seems to believe it for the simple reason that the ultimate write-offs will be too large for the Spanish banks and the Spanish government to handle.  On Friday the Spanish government forced banks to take losses against doubtful assets, to put property assets into a separately managed property company, and to provide high interest loans to banks in trouble, but this package failed to convince the financial markets, which had been looking for more direct help by the Spanish government, according to Reuters. The announcement triggered further falls of Spanish bank stocks. The problem is the Spanish government’s reluctance to ask for money from the EFSF and the IMF. Reuters talked to several bankers, one whom call the programme “a series of erratic, rushed decisions rather than a real plan”.


French Socialists attack Merkel ahead of meeting with Hollande



Ahead of tomorrow’s meeting of Angela Merkel with the newly sworn in French president Francois Hollande, France’s socialists attacked the chancellor, Le Figaro reports. She needs “to understand that she cannot decide on her own about Europe’s future”, Benoit Hamon said, the socialist party’s spokesman. “We have not voted for a president of the EU whose name is Ms Merkel who takes a sovereign decision about the future of all the others” he said.


United left clearly leads polls for French parliamentary elections



According to a poll for Le Journal de Dimanche the united left clearly leads with around 45.5% for the upcoming French parliamentary elections on June 10 and 17. But this comprises all the left leaning parties. Francois Hollande’s socialist party on its own would only get 30% and thus slightly trail the conservative UMP with 32.5%. According to this BVA poll for Orange, the Front National would around 16%.


Vincent Reinhart and Kenneth Rogoff say debt overhangs produces massively negative growth performance



Vincent Reinhart and Kenneth Rogoff (hat tip Philip Lane of the Irish Economy Blog) have a paper in which they built on recent work by Carmen Reinhart and Rogoff – looking at episodes where debt-to-GDP exceeded 90%. This results show that the economic growth effects are massively negative. We quote from the abstract:


“Among the 26 episodes we identify, 20 lasted more than a decade. Five of the six shorter episodes were immediately after World Wars I and II.  Across all 26 cases, the average duration in years is about 23 years.  The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions.  The long duration also implies that cumulative shortfall in output from debt overhang is potentially massive.”


10-Y Spreads, Forex, ZC Swaps and Euribor-Ois



The euro is now under $1.29, and no reprieve for Spain.









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Source: Reuters




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