Mr Van Rompuy’s not quite so secret plan
Eurointeligence Comment and Analysis
On the European Commission’s handling the crisis: a response to Paul de Grauwe
by Macro Buti
This article disputes the view that the Commission is forcing countries to accelerate austerity in the midst of a recession, and that it forces adjustment in deficit countries without imposing a symmetric and opposite adjustment in surplus countries.
On Friday, the eurozone crisis intensified with the euro briefly below $1.22 (stabilising at $1.24 by this morning). There is now a growing pressure on leaders to act. A working group is meeting to flesh out concrete ideas for a banking union, and for a path towards fiscal union, German newspapers reported over the weekend. Welt am Sonntag spoke about a “secret masterplan” to introduce a banking union, a fiscal union and a political union, masterminded by Herman van Rompuy. Having broken the story, the newspaper immediately, and predictably, denounced the idea in an editorial, as a superstate through the backdoor. The FDP talks about the re-introduction of centralised planning.
German financial establishment opposes Draghi’s banking union
No surprises here. The idea of a banking union will be fiercely resisted by Germany’s financial establishment. The Bundesbank and the German banking lobby already signalled their opposition to Mario Draghi’s plan to set up a banking union to prevent and counter future crisis in the eurozone’s financial sector. In an interview with Frankfurter Allgemeine Zeitung Bundesbank vice president Sabine Lautenschläger warned the „instauration of a EU deposit guarantee and a EU rescue fund could entail the mutualisation of risk”. This would be acceptable only if it come in parallel with “central (European) control and implementation rights like in fiscal union”. Since this would require changes in the EU treaties and the national constitutions a banking union could not be cure to the current problems, Lautenschläger cautioned. Also Georg Fahrenschon, president of the German saving bank’s lobby group opposes Draghi’s plans. It would be wrong “to hold other credit institutes responsible for the debt banks which work in an unsolid manner”, he wrote in a guest comment for Financial Times Deutschland. “German (bank) clients would have to supply money to support foreign banks.”
Merkel and Schäuble want Spain to apply for EFSF rescue
Angela Merkel and Wolfgang Schäuble agreed last week to push Spain into asking for rescue loans from the EFSF, Der Spiegel reports. The chancellor and the finance minister have reached the conclusion that the country is unable to help its ailing banking sector on its own since it had to pay interest rates of 6.7% for government bonds, a level at which Portugal and Ireland last year requested rescue loans at the EFSF. When Schäuble met his Spanish counterpart Luis de Guindos last week he urged him that Spain should apply for EFSF money. De Guindos, however, refused and said he wanted to wait first for the results of the ongoing independent assessment of the need for the country’s banking sector.
Mark Schieritz on Spanish and the EFSF
Mark Schieritz writes in his blog Herdentrieb that an ESM-led rescue of Spanish banks had two disadvantages. It would drive up Spain’s debt-to-GDP ratio above a level that is deemed acceptable. And it subordinates existing bondholders. In the short-term those negative effects are likely to outweigh the benefits. As a result, a partial programme may not be realistic, and Spain may thus be forced into a full programme.
Spanish government tones down language on EFSF
El Pais reports on a subtle shift of tone by a senior Spanish policy maker on an eventual EFSF programme. It quoted José María Beneyto, a PP parliamenary foreign affairs spokesman, as saying that such a scenario “cannot be excluded”, and while it would be a set for the country image abroad, it would not constitute a catastrophe. In other words, the Spanish government is softly preparing for such a programme. Beneyto said Portugal had been living with such a programme in piece. But he also said it would be ultimately negative, as one would succumb to the markets.
One of the concessions Spain is ready to offer to its European partners is a complete centralisation of budget control – thus ending the autonomous in “autonomous regions”, as the FT reports. If that were to happen, they will become department, subject to a hard budget constraint.
The nature of the fall in bank deposits in Spain
FT Alphaville had a very useful discussion on the latest data from Spain, which seem to support the view that the country is subject to a slow-motion bank run. The article quotes JP Morgan as arguing that the main driver was capital rather than deposit flight, driven by foreigners rather than Spanish residents. One of the immediate consequences is that this has pushed Spain’s Target 2 liablity to €285bn in April.
After a yes in referendum , Ireland now wants a deal on Irish banks
Ireland has approved Europe’s new fiscal treaty with 60.3% voting YES in the referendum on the European Fiscal Stability Treaty. 39.7%voted No, and the turnout was 50.6%. Just five of the 43 constituencies voted against. The treaty was supported by voters in rural constituencies and middle-class areas in urban centres, the No vote was stronger in working-class areas.
In a telephone conversation after the referendum Prime minister Enda Kenny has told German chancellor Angela Merkel he wants a deal on the Irish bank debt now his electorate had delivered a decisive Yes to the treaty, the Irish Times reports. There is no sign, however, that Germany was willing to lift its opposition to any restructuring of the debts of the former Anglo Irish Bank. Diplomatic sources told the Irish Times that any push to allow the ESM bailout fund to directly recapitalise Ireland’s banks was likely to face strong resistance.
Tsipras presents his economic programme
SYRIZA leader Alexis Tsipras vowed Friday to reverse some the measures taken by the government in return for its €130bn bailout. Presenting the party’s economic policies ahead of elections on June 17, Tsipras vowed to reverse privatizations and revoke recent wage cuts imposed by the country’s European and international creditors in exchange for the bailout. “The amount of debt payments should be connected to the growth rate of the Greek economy,” he said according to Dow Jones Wires. Other promises include dropping taxes imposed on middle income earners and blocking further pension cuts. If elected, Syriza intends to nationalise Greek banks that have tapped state aid after the country’s debt restructuring and reversing the sale of state assets, such as Public Power Corp. and Hellenic Telecommunications Organization. “We will gradually bring back to state control strategic investments that are being privatized or have already been privatized, depending on the ability of the economy,” Tsipras said.
SPD opposes Schäuble as Eurogroup chairman
Talking to Bild am Sonntag Frank-Walter Steinmeier opposed Angela Merkel’s push to impose Wolfgang Schäuble as the successor at the eurogroup. “I don’t think it is a good idea”, the SPD’s chief whip in Bundestag said. “Germany’s dominance in European financial policy is already overpowering because of its economic strength. It would have been wise to leave the leadership of the eurogroup to a smaller partner.”
Economists are split about the ECB’s rate strategy
Ahead of Wednesday’s ECB meeting economists are split on the projecting the central banks interest rate strategy Financial Times Deutschland’s monthly rate survey shows. Out of the 30 polled economists, 23 think the ECB will hold rates at the current 1.0% level. The remaining seven think there will be a decrease to 0.75% given the weak recent data, the eased inflation outlook and the renewed tensions in the eurozone. They argue the central bank may use its new macroeconomic staff projections due on Wednesday to justify such a move. On a three months horizon, 10 economists expect an interest rate easing, on a twelve months horizon there are 12 to believe so. 7 of the 12 even think the ECB will have lowered rates to 0.5% by June 2013.
Nikolaus Blome announces “the endgame for Greece”
“Let’s not fool ourselves: in the coming weeks there will be the endgame for Greece – and the euro”, Nikolaus Blome writes for Bild. The deputy editor of the mass circulation daily warns that whatever the election result on June 17 the international rescue money will not be able to solve Greece’s problems. “The Greek state will have to be rebuilt from scratch, like a developing country”, Blome says. “And someone among the bosses in the eurozone will finally have to tell the Greeks the truth: a new start requires a radical first step. That means: Get out of the euro.”
French government will have to cut spending by €5bn per year to reach a balanced budget by 2016
According to a report prepared by the French finance ministry for the previous conservative government the government needs to save €5bn per year if it wants to reach a balanced budget by 2016, Les Echos reports. The report proposes to further reduce the government personnel, the freeze public sector wages and to reduce handouts and subsidies. It is unclear what the new socialist government will do with the report. Over the weekend the prime minister’s office announced the preparations for the 2013 budget which should respect the 3.0% deficit target as Francois Hollande had announced during the election campaign.
Gavyn Davies on the banking union
Writing in the FT, Gavyn Davies has done the math on the banking union. He said an ESM-financed recapitalisation of Spanish banks would cost some €150bn, which would have to come out of the ESM. Citing figures from JP Morgan, he writes that Spain needs a total refinancing volume of €121bn to finance the deficit, €74bn for treasury bills, and €154bn for the banks. The figures for Italy are €97, €173bn and €402bn respectively – in other words together way beyond the capacity of the ESM.
Wolfgang Munchau says a banking union could work…
… but only if it is done properly. In his FT column, Munchau argues that a banking union must be large enough to cover all systemically important banks, not just those that operate cross-border. For the restructuring fund, it would be fine to set it up in the ESM initially, but responsibility should ultimately be transferred to a banking resolution trust company. As long as the bank restructuring fund is credible, it would be possible to set up the deposit insurance inside the ECB. Such a system would necessity a central regulator and supervisory, with the executive power to close down banks, fire management, and force mergers. He said the banking union is probably the last chance to save the euro, but only if it is done properly, and not fudged.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Euro fell below $1.24, before stabilising a little higher. Spanish and Italian spreads continue at unsustainable levels.