Eurointelligence Daily Briefing, 22 de Maio de 2012

Oh no, is this what they mean by a eurobond?


  • Here it comes, the eurobond, a €230m project bond instrument (yes that is millions, not billions);
  • European ambassadors have agreed on a pilot project, but Germany wants to make sure that this sets no precedent;
  • the idea is to use those funds for cross-border infrastructure projects;
  • Herman van Rompuy has written a letter to EU leaders urging them to approach tomorrow’s informal discussions with an open mind;
  • France and Italy are also pushing for a timetable on eurobonds;
  • Wolfgang Schäuble and Pierre Moscovici, France’s new finance minister, openly disagree on eurobonds at the first meeting;
  • IIF says Spanish bank losses are higher than official estimates suggest;
  • Mariano Rajoy says he could solve the eurozone crisis in 24 hours by focusing on financial regulation;
  • says eurobonds won’t help much;
  • New Democracy and the liberal Democratic Alliance form an electoral pact to ensure in the hope to become the largest party at the forthcoming Greek elections;
  • Alexis Tsipras styles himself as the frontman against capitalism;
  • Irish television yesterday staged a heated debate between proponents and opponents of the fiscal pact;
  • the biggest issue in the debate focused on further access to ESM funding in case of a No vote;
  • Angela Merkel has invited leaders of other German political parties to discuss the fiscal pact;
  • Spiegel and Süddeutsche Zeitung carry large articles on Merkel’s political isolation in Europe and Germany;
  • Nikolaus Blome says Francois Hollande is a troublemaker;
  • Jörg Asmussen proposes a wide-ranging banking union with a single supervisory system for large, cross-border bank;
  • Mario Blejer says Greece should not follow the example of Argentina;
  • Paul Krugman challenges Wolfgang Münchau’s assertion that the extent of the eurozone imbalances are exaggerated;
  • Thomas Mayer, meanwhile, is proposing a “geuro” to save us from “grexit”.

Eurointeligence Comment and Analysis

Building a political Euro area

by Diego Valiante

The gap between democratic representation and political decision making is widening in Europe. Not only the economy, but also the institutional setup in Europe needs to change.



Peter Spiegel of the FT has the details of where the discussions about eurobonds – at ambassadorial level – are currently headed. It turns out that they don’t mean a eurobond when they talk about a eurobond. They mean a project bond. It will start with a “trial” of €230m, and yes that is million, a sum of no macroeconomic significance. (Even in Belgium it would be a number of no macroeconomic significance). The idea is to allocate those funds to finance cross-border transport, communications and energy infrastructure. And with this miniature scheme, Germany, the Netherlands, and Finland are still not happy. Spiegel quotes a senior diplomat as saying that the real division was about whether this pilot scheme could be made permanent. The Germans request guarantees that this would be a one-off measure only. (So much for the eurobond. And so much for that dinner tomorrow night. It looks like one of those useless and overhyped meetings where everybody will hype the new growth agenda. But when you look behind the headlines, you will quickly discover that we are back to where we were before, that there is no strategy to solve the crisis.)


Reuters quotes an unnamed EU official as saying that the eurobonds will not happen overnight, “but there is a desire for a plan of action toward euro bonds”. The official said Hollande would have support from other leaders. Reuters reports that Robert Fico of Slovakia already indicated his support for the French position. Herman van Rompuy has written a letter to EU leaders urging them to approach the discussion with an open mind.


Schäuble and Moscovici state their difference of opinion



In their first meeting Wolfgang Schäuble and France’s new finance minister Pierre Moscovici stated their difference of opinion on the topic of Eurobonds, Les Echos reports. “We have spoken about it”, Moscovici said yesterday after his first meeting with Schäuble in Berlin. “Each one of us confirmed his position that is already known.” However Moscovici reconfirmed France’s commitment to bring the deficit down to 3.0% by 2013. The EU Commission and the IMF however do not think this is possible and estimate that without drastic further consolidation measures the deficit will be 4.2% (Commission) or 3.9% (IMF). According to a different story in Les Echos Francois Hollande is thinking about proposing a change in the way the deficit is calculated and to take into account only the structural deficit.


IIF says Spanish bank losses are much higher than official figures suggest



This is from the Wall Street Journal Real Time Economics blog. Spanish bank losses could range from €218bn to €260bn, according to the Institute of International Finance, as a result of which the Spanish government would need to step in at lots of cajas beyond Bankia. IIF estimates that to cover these losses would require new capital of around €50bn to €60bn. The IIF based its calculations on projecting loan loss rates for Ireland onto Spain. It also said a number of factors suggest that the losses could come in at the upper end of the range because of the deteriorating economy. Also, house prices have further to fall.



El Pais has the details on the Spanish government decision to hire two external consultants and three auditors to look at the hidden losses of the Spanish banking system.


Rajoy thinks he can solve the crisis in 24 hours



Either he has found the magic ingredient or he does not know what he is talking about (no prizing for guessing which of the two we think is more probable.) Mariano Rajoy yesterday made one of those hair-risingly confident statements, where you wonder what he had in mind. Reuters quotes him as saying that eurobonds are not going to solve the crisis as they are too long-term (he is right on that, especially the eurobond scheme that is currently under discussion).  But then comes this: “(Financial stability) can be achieved quickly, doesn’t need debates or long discussions or studies or regulation, which is going to take two or three years to take effect. This is a decision which can take effect within 24 hours,” he said. 


New Democracy strengthened through new alliances



The leader of conservative New Democracy, Antonis Samaras, and the head of the liberal Democratic Alliance, Dora Bakoyannis, a former conservative minister and political rival, announced on Monday that they were joining forces in “a patriotic, pro-European front” aimed at “battling the forces of populism” and ensuring that the country remains in the Eurozone, Kathimerini reports. A key axis of the agreement was that members of Democratic Alliance run on ND’s ticket to secure the 50-seat bonus in Parliament given to the party that comes first in the polls. Two ex-MPs, Thanos Plevris and Giorgos Anatolakis, moved to ND’s camp. Three more ex-LAOS deputies were expected to jump ship today.


Tsirpas stylizes himself as ‘European’ frontman against capitalism



Here is what Alexis Tsirpas said during his press conference in Paris after meeting with the leader of France’s Left Front, Jean-Luc Melenchon: “In Greece, we are fighting on behalf of Germans, French and all European people….Financial capital, bankers and capitalists have joined forces in a European union against Greeks. They want to destroy Greece so they can attack Europe.” About the EU-IMF bailout programme he said: ““The memorandum cannot be negotiated because hell cannot be negotiated” (as quoted by Kathimerini, more quotes on Guardian).


Heated debate between supporters and opponents ahead of Irish referendum



In Ireland, supporters and opponents of the fiscal treaty clashed sharply in the course of the televised debate on RTÉ last night, according to the Irish Times. There were several heated exchanges between the speakers from each side on whether or not Ireland could access the ESM in the event of a No vote. The Yes camp argued that the ESM would be the only source of funding available to Ireland in the event of a second bailout, and that was only available if the referendum was passed. The No camp argued the ESM would still be available to Ireland and that there was room to negotiate. Also the prospect of a growth chapter was interpreted differently.   The supporters argued that the treaty would not be changed but that the French might succeed in achieving a protocol while the opponents expect that the final shape of the treaty might not be known until the summit of EU leaders in June.


Merkel invites political parties for talks about the fiscal pact



Angela Merkel invited the coalition and opposition parties for talks about the fiscal pact for Thursday, the day after the special summits in Brussels where Merkel and her colleagues will discuss the growth enhancing measures and eurobonds, Frankfurter Allgemeine Zeitung reports. The pact is up for a vote by the end of May. Since it requires a two-thirds-majority the opposition’s votes are crucial. But so far social democrats and the greens have only asked for more growth enhancing measures without clearly stating how they intend to vote.


Der Spiegel and Süddeutsche Zeitung say that Merkel is isolated



Der Spiegel and Süddeutsche Zeitung both run long stories how isolated Angela Merkel has become in Europe after Francois Hollande’s election and how much the chancellor is under pressure after the defeat of her party in North-Rhine-Westphalia. In an article with the headline “Merkel loses her triple A” Der Spiegel writes. “In the long run she will not be able to keep up her tough stance towards her European partners with regard to consolidation. The pressure that Hollande and others are mounting against her is just too big.” On top of that the news magazine writes that Merkel is getting under increasing pressure domestically because of the CDU’s historically bad results at the state elections in North-Rhine-Westphalia, Germany’s most populous states. Süddeutsche Zeitung has a similar view. “Merkel is provoking ever more opposition to her consolidation policy and her recipes for debt reduction”, the paper writes. “Ahead of the summit there is no doubt that the whole world expects Germany to do more.”


Nikolaus Blome thinks Hollande is Europe’s troublemaker



In a comment for the mass market daily Bild the paper’s deputy editor Nikolaus Blome regrets Nicolas Sarkozy’s departure from the European scene. “Sarkozy recognized that with the German-French tandem Merkel was sitting in the front – holding the steering wheel”, he tells the paper’s daily 10m readers. “The new French state president does not want to recognize this. He is pumping himself up, he is blocking the road.” Blome refers to Hollande’s announcement to withdraw troops quickly from Afghanistan and stimulate growth with debt in the middle of the euro crisis. “Merkozy is the past. Merkollande does not exist”, he states. Blome says that Merkel and Hollande will have to find a common ground on the most pressing questions for Europe. Otherwise there will be only empty compromises which will not hold for long.


Asmussen pleads for eurozone fiscal and financial market union with its own budget



In a speech Jörg Asmussen yesterday pleaded for deepening the integration of the 17 euro members by creating a fiscal and financial market union that would be underpinned with its own budget and stronger democratic control, Financial Times Deutschland reports. The German ECB board member wants to break the link between banks and their sovereigns through the ESM and by creating a “special fund in the EU budget for the eurozone”, which could be financed by the financial transaction tax that most euro members want to introduce. Also there should be a real financial market union for the eurozone with a banking supervisory and bank resolution authority with real competencies. In order to enhance democratic legitimacy, Asmussen proposes to give the EU parliament the right of initiative, which it does not have, and to set up a subcommittee, which would convene regularly with members of the eurozone only.


Mario Blejer warns Greece not to follow Argentina



The man who was at the helm of Argentina’s central bank at the time of its crisis is advising Greece not to follow in the footsteps of Argentina. Mario Blejer writes in the FT that instead it would be smarter for Greece to seek three concessions. First, a relaxation of austerity; second, transfers to boost growth and competitiveness; and third, further debt relief. Can transfers increase competitiveness? He says this would be possible if the transfers were geared towards the reduction of production costs. This plus public investments funded by the EIB, should improve competitiveness.


Paul Krugman on the eurozone’s internal imbalances



In his blog, Paul Krugman disputes Wolfgang Munchau’s assertion in his FT column on Monday which states that imbalances are an issues, but the extent may be exaggerated. Here is what Krugman has to say:


“One is that the divergence between Spain and the euro area average isn’t nearly as big as the divergence between Spain and Germany. Fair enough — but the euro average includes Spain and other GIPSIs, which in total are about 1/3 of the eurozone’s GDP, so the Spain-EA difference understates the actual adjustment required.


Second, Munchau’s argument that Germany was badly overvalued in 1999. But it had a roughly balanced current account;

I think it’s hard to make the case that it was a really big overvaluation.


Third, Munchau’s correct point that current account imbalances have narrowed since their peak on the eve of the crisis. As I read it, however, this largely reflects the depressed state of the peripheral economies rather than any large improvement in competitiveness.


Finally, all these measures of competitiveness are highly imperfect — which they are. If other data were telling a different story, I’d be prepared to discount the figure above;

but they aren’t.”


Can the “geuro” save us from “grexit”?



Here is another ugly phrase, invented by Thomas Mayer of Deutsche Bank, the “geuro”, a parallel currency. See, for example, Spiegel Online for more. The idea of a parallel currency for Greece is hardly new. A large number of economists have been thinking about how it could be accomplished. The basic idea is that Greece introduces a new financial markets instrument – an IOU – that is used in domestic transactions and that will soon float against the euro, against which it will devalue. Domestic prices and wages will be dominated in that new currency. At the end of the process the IOU will be abolished at then prevailing market rates. (The parallel currency is essentially a way to reduce wages and prices. But why would Greek trade unions accept a geuro over a direct wage cut, when the two mean exactly the same? Do we assume perfect money illusion? If this is an involuntary arrangement, then we wonder what could be the legal basis of this inside the EU? Legally, all contracts are denominated in euros.)


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



No change from previous days. There is one positive item to note. The Euribor-Ois spreads has continued to decline to under 100bp for the one-year. While that’s not good, and higher than the spreads elsewhere, the trend is positive.










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Source: Reuters







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