 The abominable consequences of a Grexit
The decline in the euro continued as more and more investors are pulling out of the eurozone, fearful of a generalised financial meltdown as a result of a possible Greek exit. The FT has been talking to fund managers, some of whom have totally divested of all their eurozone assets. As a result, the euro has fallen further, and is now at $1.2529, close to the lowest level for the last couple of years. The story says the funds included Threadneedle Investments, who said they had sold their last euro mid-May. The fund managers interviewed were all scared by Greece – much more so than governments, who are pretended that they are prepared. The failure to produce a banking resolution and deposit insurance system at the summit was cited as another reason why funds are getting out.
(In general, a rise in spreads when coupled with a fall in the euro means a net outflow of funds plus a relocation of funds inside the eurozone, which is what has been happening since the Greek election, and the frantic talk about Grexit.)
Reuters has a story about a talk show appearance of Mario Monti in Italy, in which Monti criticised the EU’s policy towards Greece as unrealistic. The need for institutional reform in Greece is so massive that it will take decades to complete. He tried to put a brave face on the situation with a prediction that he believes that Greece will most likely stay in the eurozone.
Poll suggests 4 point lead for SYRIZA
Greece’s leftist SYRIZA party maintained its four-point lead over the conservative New Democracy party, according to the latest poll conducted by the Public Issue. SYRIZA would garner 30% of the vote if elections were held today, versus 26% for the conservative ND, PASOK would get 15.5%, the Independent Greeks 8%, the Communists 5%, the Democratic Left 6.5% and the fascist Golden Dawn 4% Reuters reports. But another survey published on Thursday by Data RC, a little-known pollster, showed a different picture, with New Democracy slightly ahead with 29.4% to SYRIZA’s 28.8%.
Leaders were divided about the stance towards Greece
Diplomats told Kathimerini that EU leaders fell into two clear camps in Brussels when it came to Greece. German, Dutch and other Northern European leaders maintained a tough stance, insisting that Greece honour the terms of its debt deal to foreign creditors to the letter. The other, more lenient camp was led by Hollande, the French president, and was said to include Van Rompuy, Barroso and the leaders of countries that would find themselves in the biggest trouble in the event of a Greek euro exit.
Brain drain started in Greece
Business week picks up on the brain drain from Greece. The article cites that more than half of university-age Greeks say they may move abroad. Yannis Varoufakis, the director of the Ph.D. program in economics at the University of Athens, left. Varoufakis had been arguing for two years that Greece was insolvent and the country should default while staying in the euro region. Lately he was mobbed in the streets and received abusive phone calls at home. Tassos Patokos, an adjunct professor in the department, learned he probably wasn’t going to get paid for a year’s worth of lectures he had already delivered for the Ph.D. programme. Last summer, Greece dismissed almost every adjunct professor in the country, Patokos left too.
Some comments on Grexit
There have a been a number of comments this morning warning in stark terms about the consequences of a Greek exit from the eurozone.
Writing in L’expansion, Jacques Delpla says an exit is very likely to produce a civil war in Greece, and a complete breakdown of the society and the economy. He says a Greek drachma would not devalue by 50%, but more likely by 90%. It would massively destabilise the Balkans, and create another Somalia in the middle of Europe. He advocates that the EU sends a very strong message of support to Greece, couple with a warning that if the country were to follow Syriza, the Europeans would leave them to the Turks. In the Financial Times, Gillian Tett looked at the hidden costs of a Grexit for banks. She writes that the banks have already stopped treating the eurozone as a single economy in their risk management. She said it is hard to overstate this fact, as the eurozone until 2007 had been benefitting from the scale effect of a single large economy. Since then, that benefit has unravelled. She recounts the story of a bank with an assets/deposit mismatch in Italy, something that was never considered a problem before, but which now is leading the bank to cut its loans in the country. The deleveraging we are seeing –which the IMF puts at €2.6tn over the next 18 months – assumes that the eurozone stays together. If not, it will be much worse.
Uncertainty about Greece and the euro weigh on German economy
Uncertainty about Greece and the eurozone’s future start to weight on the German economy, Financial Times Deutschland reports. The Ifo-index fell by 3 points to 106.9 yesterday and the PMI sank to its lowest level in 3 years. Also investment into industrial equipment fell by 0.8% in Q1 of 2012. The paper quotes economists who say this is the proof that the German economy cannot insulate itself from the eurozone crisis given that about 40% of its exports go into the currency union. Simultaniously to the bad German data there were also bad data in France and the eurozone. Analysts quoted by FTD said that the bad data made it more likely that the ECB will cut its policy rates below the current rate of 1.0% which it had never done before. However they cautioned that the ECB was unlikely to do so before the Greek elections on June 17 and would probably wait for further confirmation of a the economic deterioration in the eurozone.
Bankia’s black hole: another €15bn needed
El Pais has the story this morning that Bankia probably needs another €15bn in state aid, on top of the €5bn already pledged. The article contains all the details how this number comes about, but it is significantly higher than what the government has been saying all along. Finance minister Luis de Guindos said the total recapitalisation requirement of Bankia’s holding company would be €9bn. (There is a clear pattern we have observed elsewhere. Governments always underestimate the costs of bank resolution, and then feign surprise that the final bill comes up so much higher.)
After Moody’s, it is Standard & Poor’s to announce further rating cut of Spanish banks, either today or tomorrow, according to Spanish newspaper “Expansion”.
SPD rejects eurobonds
We read this story in Spiegel Online, but can no longer find any reference to it. SPD chief Siegmar Gabriel and Jurgen Trittin, the head of the German Greens, were reported as having both ruled out proper eurobonds – and instead have lined by behind the concept of debt redemption bonds, a temporary measure designed to implement the 1/20 debt reduction rule. The SPD obviously hides behind the confusion behind the term “eurobonds” but the statement effectively means that the party is lining up behind Merkel, and will support her fiscal pact, for which she requires opposition approval.
Coalition and opposition advance in talks on fiscal pact
The negotiations between the government and the opposition on the fiscal pact ended last night without tangible results but both sides afterwards lauded the “constructive talks”, Süddeutsche Zeitung reports. But it remained uncertain whether there would be a vote before the summer pause that would be coupled with the ratification of the ESM. The social democrats continued to request the government’s commitment to do more for growth which Angela Merkel did not reject. However the negotiations are complicated by the fact that within the SPD there is growing opposition against what many party members see a lack of will of the party leadership to confront Merkel in her European policy. Also there are internal discussions about the EU policy within the Green party which may hold a special party convention to discuss the topic.
Hoyer: We need investment stimulus backed by private money
Werner Hoyer, president of the European Investment Bank, told Der Standard in an interview that the deleveraging in the banks had disastrous consequences for the small and medium enterprises. The money from the ECB did not reach the SMEs, banks used the money to improve their balance sheets instead. With respect to the growth agenda, countries are not that far apart. There is a common understanding – also in Germany- that innovation and employment need to be supported. This goes beyond the couple of billions from the EU budget and EIB capital increase. It needs among others to tap private money, i.e. from pension funds, and for this you need a bank to collect systematically the money.
Moody’s keeps France’s AAA
Moody’s yesterday decided to keep France’s AAA rating for the time being, Les Echos reports. But the rating agency also kept its negative outlook for the moment and will decide in the second half of 2013 whether or not keep the top rating when “the picture of the (new government’s) program is becoming more clear”. Moody’s lauded Francois Hollande’s stated intention to return to a 3.0% budget deficit but warned that his principle means of achieving this goal seem to be higher taxes. Simultaneously, the interest rate on French ten year bonds fell to 2.52% yesterday from 2.73% Wednesday night. Analysts pointed out however that this decrease was mainly due to market expectations for a Greek exit and the search for higher quality debt.
Hollande’s poaches France Brussels diplomats for key European policy advisor posts
Francois Hollande poached senior diplomats at France’s permanent representation in Brussels for the key European policy advisor posts at the Elysée palace and important ministries, Le Monde reports. Hollande’s European policy advisor is Philippe Leglise-Costa, until now France’s deputy EU ambassador in Brussels and deeply involved in all economic EU and Euro issues. Leglise-Costa is the will be the counterpart to Angela Merkel’s top European policy advisor Nikolaus Meyer-Landrut which the paper interprets as the sign that the EU policy will remain firmly in the president’s hand. At the foreign ministry, another former Brussels diplomat, Fabrice Dubreuil, will be in charge of European affairs. But since both foreign minister Laurent Fabius and European minister Bernard Cazeneuve have led the Socialist no-vote against the EU constitution the expectation is that the foreign ministry will mostly deal with classic diplomacy and not with European affairs. Lastly prime minister Jean-Marc Ayrault poached Odile Renaud-Bassot as his economic advisor and deputy cabinet director. Up to now, the French diplomat was economic advisor to EU Council president Herman Van Rompuy in Brussels.
German chemical workers get a 4.5% pay rise
The 550.000 German chemical workers will get a 4.5%, Frankfurter Allgemeine Zeitung reports. The union and the employers representatives agreed that the rise will take effect as of July or August and run over 19 months. The chemical industry is the third sector after the metal workers and public services to agree to a pay rise that is significantly higher than in the past years.
The silliness of a parallel currency
Peter Bofinger nailed the issue in the debate on the parallel currency, the “geuro” as proposed by Thomas Mayer. Bofinger says a geuro is worse even than a grexit because it translates prices and wages into geuros, while keeping debts in euros. The country would be immediately bankrupt, and the citizen would revolt. Bofinger concludes there are no soft options here. Greece either stays in, or gets out.
Gavyn Davies comes to a similar conclusion in the FT.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois That sinking feeling.
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