Eurointelligence Daily Briefing, 7 de Junho de 2012. Enviado por Domenico Mario Nuti

External consultants likely to recommend a significant increase in Spanish bank capital

  • El Pais reports that Oliver Wyman and Roland Berger will be basing their recommendations on the assumption of an economic decline of 5% by 2013;
  • assumption means large computed losses, as real economy effects will outweigh losses on real estate portfolio;
  • the consultants will also be using higher capital ratios;
  • Spanish bankers have expressed concern about the approach;
  • FT says Spain should bail in investors, and rescue funds should take an equity stake;
  • Angela Merkel says don’t expect any concrete decision at June summit: this is about a broad-based discussion on the future of the eurozone;
  • ECB leaves interest rate and economic outlook unchanged;
  • Mario Draghi says investors have a point when they worry about the eurozone, but they underestimate the political commitment;
  • also criticises European Council for a lack of policy action;
  • Draghi also said there would be no quid-pro-quo for the Irish yes vote to the fiscal treaty;
  • Enda Kenny came under pressure in his parliament to reveal what assurances he had received from Merkel;
  • Reuters Breakingviews says the ECB is waiting and waiting, and is becoming as inactive as the politicians;
  • Paul Krugman says the ECB is not cutting rates to hide its own past policy mistakes;
  • Barrack Obama and David Cameron have joined forces to call on Merkel to accept eurobonds;
  • Nikolaus Blome says Germany will end up paying for the eurozone crisis;
  • Francois Hollande has made good on his promise to cut the retirement age to 60;
  • Pierre Moscovici is planning an additional austerity programme after all to meet the 3% deficit target in 2013;
  • a majority of French businesses distrusts Hollande, according to a poll;
  • Samaras wants focus on corruption, extending the programme period by two years;
  • Wolfgang Munchau, meanwhile, argues that the Germans currently have no clue what is about to hit them in the next few months. 

Eurointeligence Comment and Analysis


No matter how this crisis ends, it will be ruinously expensive for the Germans.


This story from El Pais is encouraging, because the external consultants hired to assess the state of the Spanish banking system are using far more realistic projections to determine the needed capital, rather than the insanely optimistic forecasts by the Spanish government (or indeed by any other official sector organisation). El Pais reports that Oliver Wyman and Roland Berger are assuming that the Spanish economy will contract by 5% until 2013, which the paper says would be a worst-case scenario (are they kidding? This surely is a base case scenario given what it is happening in the country and the global economy right now.) Once you stress test on that basis, you get a lot of payment defaults and payments delays in the Spanish, and with this further bank losses. (The effect of the recession may even be bigger than the housing related losses, where the main variable is extent of further real estate price declines.) They will also apply a “very high” capital ratio. The paper also quotes concerned bankers who complain that the analysis currently being prepared does not discriminate between different types of real estate portfolio, for example loans to middle-class borrowers, where there is a chance of recovery, as opposed to the basket-case scenario at Bankia. The auditors are due to present their report within less than two weeks.  


FT on how to solve the Spanish crisis



We very much agree with this morning’s FT editorial on the steps necessary to solve the Spanish crisis. As a first step, the paper argues, Spain needs to introduce bank resolutions laws similar to what has happened in Germany and the UK, allowing bondholders to be bailed in before public money is committed. As a second step, it is necessary that the rescue funds take a direct equity stake in the banks, rather than lend money to the Frob, the option that is now being pursued. And that, in turn, should be part of a wider resolution mechanism.


Merkel says no decision will be taken at June summit



If this is true, it will be severely bad news for the euro. Angela Merkel indicated yesterday that she intends to continue her piecemeal approach to the eurozone crisis, and that the world should not expect “the big throw”, as Reuters reports, quoting an interview with ARD. “But what we have been doing for some time, and on which a working plan will certainly be presented in June, is to say we need more Europe.” She acknowledged that member states would have to hand over competencies to the eurozone, but only step-by-step.

(The purpose of this statement is clear. She wants to lower expectations in the markets that the eurozone is about to do anything big in the short-term, while keeping up the idea of a political union in the long-term, meaning beyond the German election in September 2013. It confirms our suspicion that she either does not want a banking union, or at least not right now. This may be part of an all overall expectations management, but we fear that this is how the summit may well turn out.)


Draghi says investors have a point being worried about the future of the eurozone



The ECB left interest rates unchanged yesterday, and also broadly maintained its economic outlook. During the news conference he made a number of unusually frank statements. He said investors “were not wrong” to be concerned about the future of the euro, but added that they underestimate the political commitment behind the single currency. And in a broad swipe against the European Council, he said: “Some of the problems in the euro area have nothing to do with monetary policy… I don’t think it is right for monetary policy to fill other institutions’ lack of action.” The decision to leave rates unchanged support the euro, which stood at $1.2562 this morning.



With respect to Ireland’s wish to get a better deal on bank debts (John McHale in the Irish Economy blog explains what this means) , Mario Draghi said the vote for the fiscal treaty was not a “quid pro quo” for bank debt relief, just two days after Germany said any new banking deal would send the wrong signal about the Irish EU-IMF bailout, the Irish Times reports.  Enda Kenny, meanwhile, came under pressure in the Parliament to reveal what assurances, if any, he had received from Angela Merkel about the Irish banking debt during the telephone conversation they had in the aftermath of the referendum.


Breakingviews says the ECB is waiting, and waiting, and waiting



Reuters Breakingviews has a devastating comment on the ECB interest rate decision. The central bankers have become as indecisive as the politicians  they have been criticising:

“The European Central Bank is waiting. It is waiting for further deterioration in the stagnant euro zone economy – with its 10 percent unemployment rate – before it lowers its key interest rate. It is waiting for euro zone governments to do something substantial about Greece and Spain. And it is waiting for a long-term plan for monetary and banking union before it offers the short-term measures needed to keep contagious fear from devastating the region. The ECB has long taken the euro zone governments to task – and rightly so – for their incapacity. Now it looks stuck in the same morass.”

Krugman says the ECB is insane



If you think the previous comment was critical, you should read this. Paul Krugman says the ECB is driven by a desire not to admit past policy mistakes, and an irrational “work of depressions” mentality. We quote in full:


“First, the ECB is unwilling to admit that its past policy, especially its past rate hikes, were a mistake. Second — and this goes deeper — I suspect that we’re seeing the old Schumpeter “work of depressions” mentality, the notion that all the suffering going on somehow serves a necessary purpose and that it would be wrong to mitigate that suffering even slightly.



This doctrine has an undeniable emotional appeal to people who are themselves comfortable. It’s also completely crazy given everything we’ve learned about economics these past 80 years. But these are times of madness, dressed in good suits.”

Obama and Cameron pressure Merkel to accept eurobonds



In a telephone conversation Barack Obama and David Cameron agreed to put pressure on Angela Merkel with the aim of convincing her that the escalation of the eurozone crisis must be stopped once and for all and that to do so Germany must accept Eurobonds, Spiegel Online reports. A solution must be found at the latest at the G20 leaders summit in Los Cabos, both agreed. Cameron will travel to Berlin this Thursday to convince Merkel that she must accept Eurobonds now to stop the crisis.


Germans will once again have to pay, Nikolaus Blome warns



Bild’s Nikolaus Blome agrees that the euro governments need to address the issue of Spanish banks and put them under stronger oversight. But in his commend under the headline “Germans will once again have to pay” the deputy editor of the mass circulation daily strongly warns against all attempts to introduce a mutualisation of banking risks in the eurozone as proposed by the ECB and its plans for a banking union. “As things are it would be above all the German banks and with them the German savers” who would have to pay, Blome warns his 10m or so readers. “The euro rescuer should waste less thought how they can get Germany through the back door to agree to be fully liable” for everyone else in the eurozone, he argues. “It’s enough now. Period.”


Hollande lowers the retirement age back to 60 years for 110.000 people per year


Honouring one of Francois Hollande’s landmark election promises the French government decided to lower the retirement age back to 60 years for roughly 110.000 people per year, Le Figaro reports. People who have started to work at 18 or 19 years and who have paid their retirement contributions for around 40 years will be able to retire at the age of 60 years as was the case for everybody before Nicolas Sarkozy pushed the French retirement age back to 62 years. According to government estimates the measure will cost €1.1bn per year in 2013 and €3bn per year as of 2017. The paper points out that France is now among the countries were people retire younger than almost anywhere elso in Europe since most countries have a retirement age between 65 and 67 years.


Moscovici prepares for additional efforts to respect the 3% goal in 2013


The French finance ministry thinks that an additional effort of about €10bn will be necessary to reduce the deficit to 4.5% this year and to reach the target of 3.0% next year, Les Echos reports. Among the measures under study are scrapping the reduction of the wealth tax introduced under Nicolas Sarkozy and scrapping the tax breakes on heritages, the paper reports. Pierre Moscovici hit out at the previous government and claimed that without additional efforts France’s deficit would be at 5.0%. “We have to do now what (prime minister Francois) Fillon did not do”, Moscovici said.


Business community does not trust Francois Hollande


According to a poll done by Viavoice for Les Echos France’s business community does not trust Francois Hollande. Only 30% of the company representatives think the new socialist president will be able to support growth. 76% don’t believe in his election promise that he will reduce the tax burden on SME’s and 85% don’t believe that he will be able to make good on his election promise to present a balanced budget by 2017. Only 24% are confident for the French economy in the months to come, the poll shows.


Samaras wants focus on corruption, extending the programme period by two years



On the campaign trail, New Democracy leader Antonis Samaras proposed not making any more cuts but to make the savings by tackling waste and corruption in the public sector to reach the targets set by the bailout programme. Samaras said that €11.7bn in savings that Greece’s lenders are demanding for 2013 and 2014 could come from tackling waste. But Greece would need the fiscal adjustment programme, which is due to run until the end of 2014, to be extended by one or two years, Kathimerini reports.


Wolfgang Munchau on Eurodammerung


Writing in Spiegel OnlineWolfgang Munchau says most Germans do not have a clue about what is going to hit them in the next month. He says he does not know the outcome of the euro crisis either, but either of the most likely scenarios is going to be ruinously expensive for Germany. A full-scale banking union is now needed to avert a blow up of the eurozone, leading further on to a fiscal union. Given that Angela Merkel has allowed the debt crisis to fester for so long, the implied debt mutualisation will be more significant than would otherwise be necessary. Alternatively, if the euro breaks up, Germany losses could approach €1 trillion, as the Target 2 payment surplus turn into doubtful assets. He concludes with an anecdote to show how German politicians have lost the euro narrative, and may find it very hard to do things to save the euro.


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

News of a Spanish bailout has led to a marginal improvement in yields, but nothing substantial.












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Source: Reuters




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