It is a bank holiday in large parts of the eurozone, and this means few newspapers this morning. It is perhaps a sign of the seriousness of the crisis that it no longer respects bank holidays.  

 

The main story yesterday is that the ECB has temporarily pulled the plug on lending to some Greek banks to limit its own risk. The affected banks can no longer offer assets to the ECB as collateral for loans, and would have to seek costlier emergency financing from the Bank of Greece.   It was not immediately clear which banks, or how many of them, were affected. Reuters quoted one person familiar with the matter said the capital of four Greek banks was so low they were operating with negative equity.   

 

Bloomberg quotes an ECB official saying that the ECB can only lend to sound banks and therefore won’t allow undercapitalized institutions to access its refinancing operations.  “Pending the recapitalization of Greek banks that are severely undercapitalized as a result of the” debt restructuring, some “have been moved to Emergency Liquidity Assistance,” said ECB said. The so-called ELA is emergency support national central banks can provide to lenders with ECB approval.

The move comes after Draghi acknowledged for the first time that Greece could leave the monetary union. While the ECB’s “strong preference” is that Greece stays in the 17-nation euro area, the ECB will continue to preserve “the integrity of our balance sheet,” Draghi said in a speech in Frankfurt yesterday.

 

 Zoellick and Lagarde warn about Greece exit

 “The core question will be not Greece, but Spain and Italy,” World Bank President Robert Zoellick said on Wednesday. If Greece left the euro zone, the ripple effects could be very damaging and reminiscent of when Lehman Brothers investment bank collapsed in 2008, spreading panic on global financial markets.  IMF chief Christine Lagarde also warned of “extremely expensive” consequences were Greece to leave the euro zone, a once taboo possibility that European leaders have now begun to discuss openly.   Lagarde told Dutch television any Greek departure from the euro “would be extremely expensive and hard, and not just for Greece”.

 

Lorenzo Bini-Smaghi on a Greek exit

In an article in the FT, Lorenzo Bini-Smaghi says the EU is right to play hardball with Greece, for two reasons. The first is the principle of pacta sunt servanda, without which the EU is doomed. The second is to avoid moral hazard. Once you give in to Greece, anti-austerity parties will demand the same rights elsewhere. But if Greece were to leave, the eurozone will need to act – something it is not in a position to do right now. It would have strengthen its institution, adopt QMV, and introduce something like a TARP programme virtually overnight.

 

Wolfgang Münchau on a Greek exit

In his column in Spiegel Online, Wolfgang Munchau says those are calling for a Greek exit have either not thought through the consequences, or their real motivation is to accept a break-up of the eurozone. He essentially makes the same argument as Bini-Smaghi, but goes further, arguing that a Greek exit would require a full-blow fiscal and banking union to be decided, ratified, and implemented overnight – which is something he does not think is realistic.

 

Political tussle behind nominating caretaker prime minister

A little known judge was nominated caretaker prime minister, after party leaders clashed over whether to keep Lucas Papademos. New Democracy leader Antonis Samaras and PASOK chief Evangelos Venizelos had been in favor of Papademos continuing but met with opposition from the head of SYRIZA Alexis Tsipras, Kathimerini reports. Instead Tsipras proposed  PASOK veteran and former Economy Minister Gerasimos Arsenis, to appeal to traditional but disgruntled PASOK voters, and to form an alliance with the small party Social Pact. The clash over Arsenis was settled when Tsipras said he would accept Papademos as premier. But then, Communist Party (KKE) leader Aleka Papariga and Independent Greeks chief Panos Kammenos objected, so they followed the Greek constitution and gave the eldest of Greece’s senior judges, Panayiotis Pikrammenos, the position. The administration will have no power to take political decisions, only steer the country to the election on June 17. 

 

Fiscal treaty referendum depends on 35% yet undecided

A fortnight before the referendum on the Fiscal Treaty in Ireland, there are more than a third still undecided on how to vote. An Irish Independent poll, conducted earlier this week, shows 37% saying they will vote Yes, with 24% in the No camp. But 35% of voters say they still don’t know how they will vote, while just 4% say they won’t vote. When the don’t knows are excluded, it is 60% Yes compared with 40% No. The poll results also reveal that the Yes vote is being driven by Fine Gael and Fianna Fail voters. Labour voters lag behind Fine Gael and Fianna Fail voters in their backing of the treaty. A substantial majority, or three out of every four voters, want Ireland to remain in the single currency.

 

Merkel fires Röttgen, the looser of the Northrhine-Westphalia election

For the first time ever Angela Merkel fired a government minister, Spiegel Online and all other newspaper websites in Germany report. In a hastily announced 90 seconds press statement, the chancellor yesterday afternoon said her environment minister Norbert Röttgen, who had last Sunday suffered a sounding defeat in the crucial state elections in Northrhine-Westphalia, would be replaced by the current number two parliamentary leader Peter Altmaier. No questions were allowed. By doing so Merkel publicly humiliated Röttgen because in all prior cabinet changes the chancellor had at least allowed the concerned minister to announce the news himself. The exchange is far reaching because the environment minister will have to put into place Merkel’s nuclear exit policies, and its replacement based on renewable and conventional energy. Altmaier is one of the chancellor’s closest allies (as was Röttgen until recently) and instrumental in lining the coalition deputies in Bundestag up behind Merkel’s eurozone policies. Röttgen had come under immense criticism within the party after his election defeat for having run a bad campaign, and for blaming Merkel’s eurozone policies for his defeat.

  

Nikolaus Blome says Merkel has demonstrated her willingness to lead and fight

Commenting in the mass market daily Bild Nikolaus Blome argues that Angela Merkel’s ejection of Norbert Röttgen is a clear power demonstration. “Merkel has shown what many people say she is incapable of: the ability to lead, to act quickly and if need be on her own.” Public power demonstrations are normally not her style, the paper continues but adds: “The message is clear: It  is about power, her power. And she has shown that she will fight for it.”

 

Roland Nelles says Merkel’s behaviour illustrates the decline of the coalition

Roland Nelles argues in a comment for Spiegel Online that Angela Merkel’s decision to fire Röttgen shows the erosion of her coalition and government. “The Christian Democrats suffer the same fate as all parties in government: they disintegrate in power. On the way, the entire team gets used up until hardly anyone is left. This party will take a long time to recover from Angela Merkel’s time in government”.

 

Hollande presents a government with 34 ministers, 17 of them women

Francois Hollande and his new prime minister Jean-Marc Ayrault worked until late afternoon yesterday to put the finishing touches to the new government. The team comprises 34 ministers and – as Hollande had pledged during the campaign – 17 of them women. For a complete table of all ministers and portfolios go to lemonade.fr. The most noteworthy nominations are Pierre Moscovici as minister of finance. Moscovici was Europe minister in Lionel Jospin’s government from 1997 to 2002. He was very close to Dominique Strauss-Kahn until his downfall a year ago. He is seen as a pragmatic social democrat and part of the economically more liberal wing. Another noteworthy nomination is Laurent Fabius as foreign minister. Fabius was France’s youngest ever prime minister under Francois Mitterrand in the 80s. More recently he lead the camp of the no voters when the socialist’s organized an internal referendum which lead to a deep-seated and lasting split within the party on issues of European integration.

 

First clash between Hollande and Aubry

It is interesting to see that that the left leaning party leader Martine Aubry who was a candidate for the presidential office in the party’s primaries and who was tipped as a potential prime minister is not part of government.  According to Le Figaro, this is the result of a clash between Aubry and Hollande. Aubry had told her supporters that for her it was “Matignon or nothing”. Hollande opted for the more pragmatic social democrat Jean-Marc Ayrault as prime minister and wanted to offer Aubry a big ministry comprising education, research and culture. For the time being she says she wants to win the battle of the parliamentary elections and then return to her political base in Lille where she is mayor.

 

All ministers who lose at the parliamentary elections have to leave

Jean-Marc Ayrault announced on France 2 television that all government ministers who would fail to win a seat in parliament at the elections on June 10 and June 17 would have to leave, lemonde.frreports. Nicolas Sarkozy had already applied the same rule in 2007 which forced UMP heavyweight Alain Juppé to resign after his defeat in the parliamentary elections a few weeks after the presidential elections.

 

Cameron and King says eurozone may be unravelling

Eurozone leaders will no doubt be very pleased to hear these constructive remarks from the UK, where David Cameron spoke of the dangers of a collapse of a eurozone. The FT quotes quotes him as saying (in a speech due out to today, so he has not said it yet, but he might): “Either Europe has a committed, stable, successful eurozone with an effective firewall, well-capitalised and regulated banks, a system of fiscal burden sharing and supportive monetary policy across the eurozone or we are in uncharted territory which carries huge risks for everyone.” Sir Mervyn King went even further and said the eurozone was “tearing itself apart without any obvious solution”. (They are both right, of course.)

 

10-Y Spreads, Forex, and ZC Swaps

 

Italian and Spanish 10 year yields at over 6%.
10-year spreads
	Previous day	Yesterday	This Morning
France	1.436	1.420	1.426
Italy	4.561	4.650	4.632
Spain	4.902	4.843	4.879
Portugal	9.979	10.301	10.527
Greece	28.465	27.430	27.41
Ireland	5.897	5.978	6.161
Belgium	1.921	1.925	1.950
Bund Yield	1.468	1.468	1.486
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.269	1.2738
Yen	102.000	102.23
Pound	0.796	0.8005
Swiss Franc	1.201	1.201
ZC Inflation Swaps
	previous	last close
1 yr	1.81	1.68
2 yr	1.75	1.64
5 yr	1.83	1.72
10 yr	2	2
Source: Reuters