Worse than Lehman The financial crisis has returned in full force, with Spanish spreads now at a new record; markets were yesterday fretting simultaneously about a Greek exit, and a Spanish banking meltdown; German bunds hit lowest yield in history; euro fells below $1.29; El Pais writes that eurogroup did not rule out an EFSF programme for Spain; in Greece, President Karolos Papoulias is now proposing a technical government; but Syriza has already rejected the proposal; another meeting of party leaders and the president is due to take place at 2pm today; Jean-Claude Juncker said the most one could expect is a promise to extend some of the austerity deadlines, but there can be no change to programmes itself; the Dutch finance minister admits his government has conducted an impact study of a Greek exit; BVVA writes in a submission to the SEC that the situation for eurozone banks is much worse now than after Lehman; Jim Flaherty, Canada’s finance minister, says the eurozone should either show solidarity or dissolve; after the election defeat Angela Merkel is under pressure to adopt a more conservative stance (not a good time, given where the crisis is going); party is nervous, as public support is falling to a level of below one-third; Bild doubts that Merkel still has the authority to lead; Le Monde says the SPD’s victory in North-Rhine Westphalia would strength Francois Hollande’s negotiating position; a majority of Germans oppose measures to support economic growth in the eurozone; a poll in France shows that two thirds are in favour of fiscal consolidation; the SPD sets conditions for its approval of the fiscal pact; Stefan Collignon argues for a genuine growth pact that ends the inherent pro-cyclicality in the eurozone’s fiscal policies; Philippe Aghion, meanwhile, says Hollande’s 75% tax will be reversed and that Merkel has nothing to worry about. Eurointeligence Comment and Analysis President Hollande Should Propose an Ambitious Growth and Integration Agenda for the Eurozone by Bernard Delbecque   Eurozone governments should agree to stop taking new austerity measures in 2011 and define next year’s budgetary consolidation in terms of structural measures and not in terms of specific reduction in deficit and debt ratio.   And they thought they had two years to solve the crisis after the LTRO…   The crisis is back at the acute point last November, when spreads spiralled out of control. Spanish spreads are at a record 4.8% this morning. Italian spreads are 4.5%. And the yield on the bund reached another all-time low of 1.459%. The euro broke below $1.29.   The markets yesterday panicked about Spain and Greece simultaneously. Spain has come under pressure to join the EFSF during a eurogroup meeting, while the political standoff  in Greece remains unresolved.   On Spain, El Pais has details from yesterday’s eurogroup meeting where Spain came under pressure over the banks, as Jean-Claude Juncker asked the question whether Spain had sufficient resources to help its banks. El Pais said the meeting did not rule out a future of EFSF/ESM programme for the country. In the meantime, the Spanish economy minister Luis de Guindos was asked to step up the efforts to clean up the banking sector. (Last Friday’s measures were clearly seen as insufficient).   In Greece president Karolos Papoulias will ask politicians on Tuesday to stand aside and let a government of technocrats steer the nation away from bankruptcy, but leftists have already rejected the proposal and look set to force a new election they reckon they can win, Reutersreports. Party leaders, deadlocked since a parliamentary vote nine days ago, will convene at the presidential palace at 2pm but said they had little hope President Karolos Papoulias’s offer would resolve a political crisis.  SYRIZA spokesman said “We will attend the meeting. But we are sticking to our position. We don’t want to consent to any kind of bailout policies, even if they are implemented by non-political personalities”. If supporters and opponents of the bailout cannot agree a government, the head of state must call a new election in June.   At the eurogroup meeting, Jean-Claude Juncker said a new Greek government could potentially raise the question of extending deadlines to meet some of its austerity targets, as long as it was still firmly committed to them.  He called speculation of a Greek exit as “propaganda and nonsense”. The Dutch finance minister confirmed yesterday that his government had specifically looked at a Greek exit scenario, according to Reuters. “But it is not the policy of Europe”, he hastened to add.   BBVA said financial crisis in Europe now worse than after Lehman Brothers     El Pais has the story that BBVS, in its annual submission to the SEC, has written that the eurozone debt crisis is now worse than the banking crisis that followed the collapse of Lehman Brothers in 2008. He said the banking crisis plus austerity would result in downward revisions for economic growth. The submission said that concerns about the health of financial institutions was now more intense than after Lehman, as governments and banks have lost access to funding.   Canada’s finance ministers says: eurozone should bail-out to split up   Seen from the outside, some things seem clearer. Canada’s finance minister Jim Flaherty put it well when he outlined the stark choice the eurozone is facing. This is according to CBC television, as quoted by Reuters:   “This is a time of crisis in the euro zone. The whole future of the euro zone is up for grabs, and this is very important for many of the euro zone member countries, given the history of Europe in the last 100 years or so… So they have to show courage. They have to do the right thing, use some of their taxpayers’ money to bail out some of the weaker members of the euro zone – or start moving away from the euro zone and just say this was an experiment that has not worked.”    Merkel under pressure to change course after electoral defeat  After the CDU’s severe defeat in the Northrhine-Westphalia state elections Angela Merkel is coming under increasing pressure to sharpen the conservative profile of her party. The chancellor’s coalition partner Horst Seehofer, Barvaria’s prime minister and chairman of the CSU said that he was not ready “to just go back to business as usual” after the defeat, the Süddeutsche Zeitung reports. He cited an argument about a state handout for young parents and the decision to get out of nuclear energy as topics that alienated more conservative voters. The result was “a political catastrophe”. There was also severe criticism of the CDU’s top candidate Norbert Röttgen, who is also Merkel’s environment minister and a protégé of the chancellor. In an internal meeting leading CDU politicians argued that the party needed to be worried because it had managed “to organize a two-thirds-majority” against itself.   Bild doubts Merkel still has the authority to lead   The mass market daily Bild asks whether Merkel is “lacking the power” to impose her views as the chancellor of Germany. The paper that is traditionally very close to Merkel cites five major setbacks she has suffered recently and that undermined her authority, among them the fact that Joachim Gauck was imposed on her by a blackmail of the FDP, her junior coalition partner and the fact that Röttgen refused to clearly state whether or not he was willing to relinquish his ministerial post in Berlin to go to Northrhine-Westphalia as an opposition leader in case of a defeat as Merkel had requested him to do.   Le Monde argues the SPD’s victory strengthens Hollande in his arm twisting with Merkel   I a front page editorial Le Monde the SPD’s clear victory reinforces Francois Hollande when he today meets Angela Merkel for difficult negotiations on the fiscal pact and growth measures for Europe. “Hollande has taken over the role of the spokesman of a strategy to rekindle growth in order to get out of the euro crisis while Merkel gives priority to cleaning up the budgets which according her is the precondition for ‘sustainable growth’. Hollande’s victory and the ideas he defends have given rise to considerable expectations in other EU countries confronted with the debt crisis including to parts of the SPD on the other side of the Rhine. Merkel knows that Sunday’s electoral setback is an additional incentive for her to loosen her position on the question of a growth pact.” However Le Monde cautions not to over-interpret the elections in North-Rhine-Westphalia. According to the paper Merkel’s insistence on sound public finances continue to be very popular in Germany. “According to a poll published by the Stern magazine 59% of the Germans are hostile to growth support measures that would lead to additional debt.”   SPD details conditions for its support of the fiscal pact   The three hopefuls for the role as the SPD’s challenger to Angela Merkel in the next federal election have published a common paper to outline their condition for support of the fiscal pact in the parliamentary ratification procedure, Süddeutsche Zeitung reports. Sigmar Gabriel, Frank-Walter Steinmeier and Peer Steinbrück insist that banks be held more strictly accountable when speculative deals turn sour and that the bank’s retail and investment activities be separated. Also the three ask that a European banking authority sees to it that the banks support more strongly the real economy and that a European rating agency be established. The three also ask to dedicate existing EU funds to the fight against unemployment and youth unemployment. Lastly they suggest to create a common liability for all debt of euro member states exceeding 60% of GDP if the state in question agrees to submit to a binding debt reduction program in exchange. The SPD insists the plan was drawn up in close coordination with Francois Hollande whom Angela Merkel meets today.   Two thirds of the French support cutting government spending in France   According to a poll done by OpinionWay 60% of the French would support cutting government in France in order to enhance growth, Les Echos reports. Cutting government spending is thus the means the French think is by far the most efficient way to get the economy back on track with only 29% favouring decreasing the tax burden on companies, the paper explains. France has one of the highest rates in government spending in relation to GDP in Europe. Nevertheless Francois Hollande has not promised to cut that level down during his election campaign. Instead he has pledget to raise a number of taxes with a 75% tax on the wealthiest French being the landmark measure.    Collignon: Time for a real political change   The verdict of the elections in France, Greece and North Rhine Westphalia is clear: citizens rejected the idea that austerity alone will reduce public debt, writes Stefan Collignon in Die Zeit.  Francois Hollande wants a growth pact alongside the fiscal pact, a ‘no’ in the Irish referendum could help him. But what is needed is a real political change. A growth strategy that does not shy away of stimulus programmes in a recession. A study by Centro Europa Ricerche showed that a 1% stimulus package in Greece could increase GDP growth by 2pp and reduce public debt by 4pp, and EU investment programmes could stabilize the European economy. A second element of this growth strategy is a fiscal pact that prevents pro-cyclical budget policy. In the end we need a European economic policy, with a European government with a European finance minister accountable to the European citizens rather than blocked by vetoes of member states. Europe is not private property of the states, it belongs to its citizens.   Aghion: No time for a real political change   This is a deeply depressing column for anybody who hopes that President Hollande is going to make any difference at all. It is from Philippe Aghion, his economic adviser. Aghion says that Merkel has nothing to worry about, as Hollande fully agrees with everything on virtually everything. The 75% tax is a suck to the left is likely to be temporary. And Hollande is the first Socialist to have dumped Keynesianism. He is a convinced supply-sider.   10-Y Spreads, Forex, ZC Swaps and Euribor-Ois   Carnage all over.                     10-year spreads               Previous day Yesterday This Morning France 1.288 1.375 1.387 Italy 4.163 4.530 4.527 Spain 4.511 4.796 4.833 Portugal 9.520 9.660 9.879 Greece 23.435 26.569 #VALUE! Ireland 5.428 5.545 5.735 Belgium 1.780 1.889 1.916 Bund Yield 1.518 1.456 1.459                 Euro Bilateral Exchange Rate               Previous This morning   Dollar 1.288 1.2827   Yen 103.100 102.46   Pound 0.802 0.7971   Swiss Franc 1.201 1.2007                   ZC Inflation Swaps               previous last close   1 yr 1.84 1.8   2 yr 1.78 1.75   5 yr 1.85 1.84   10 yr 2.15 2.01                   Euribor-OIS Spread               previous last close   1 Week 28.307 28.407   1 Month       3 Months       1 Year                               Source: Reuters