Eurointelligence Daily Briefing, 11 de Junho de 2012. Enviado por Domenico Mario Nuti.

A conditional deal after all

  • Eurozone finance ministers agree a €100bn rescue programme for Spain;
  • no decision yet on whether this loan will come from the ESM or the EFSF;
  • Mariano Rajoy declared victory for Spain, while Alfredo Rubalcaba said the government behaves as though they won the lottery;
  • El Pais says the claim that no fiscal conditions are attached to the deal is false: if Spain deviates from the agreed stability pact programme,  the money will stop;
  • conditions will include caps on bank salaries and dividends, staff cuts, branch closures and mergers;
  • in the discussion, Finland and the Netherlands demanded tougher conditions;
  • Finland said it would require collateral if the loan was made by the EFSF;
  • the IMF’s Financial Stability Assessment of Spain says the country’s was  facing a banking crisis of unprecedented proportions;
  • stress tests reveal a capital shortage of €40bn, but this figure was likely to rise;
  • report says the main threat to the Spanish banks now is now real estate but the deteriorating economy;
  • commentators have been focusing on the continued interdependence of the Spanish banks and the Spanish state;
  • FT Alphaville is asking the question what happens to Spain’s EFSF commitment if it receives a loan from the EFSF;
  • Heike Göbel says the EU has given up on the principle of conditionality, as a result others will ask for similar concession;
  • Hugo Müller-Vogg laments that Spain will ultimately need a lot more than €100bn, leaving the German taxpayer exposed;
  • Nicolas Barre writes that Spain has been in denial for too long;
  • Jens Weidmann welcomes the deal and urges Spain to carry out more reforms;
  • French Socialists are on course for an absolute majority at the run-off;
  • in the first round, the tie with UMP;
  • Mario Draghi, Hermann van Rompuy, Jose Manual Barroso and Jean-Claude Juncker are preparing a plan for a large fiscal union, with joint and several liability for newly issued debt;
  • the SPD threatens to block the fiscal pact, suspecting that the government is cheating on its commitment to introduce a stock exchange turnover tax;
  • Wolfgang Munchau says EU leaders need to sequence the roadmap to a political union carefully, starting with concrete proposals for a banking union;
  • Niall Ferguson and Nouriel Roubini, meanwhile, say that Germany has failed to learned the lessons from the economic depression.

Spain is now under the umbrella – not clear as yet which one –  but the parameters have been agreed: a €100bn programme earmarked for bank recapitalisation, with formal conditions attached only to bank restructuring but not to fiscal policy. The deal led Mariano Rajoy to declare a Spanish victory, while opposition leader Alfredo Rubalcaba remarked dryly that the Spanish government wants us to believe that they have won the lottery.



El Pais led this morning’s edition with the story that contrary to the way the government is portraying the deal, there is de facto fiscal conditionality after all. If Spain does not stick to its agreed deficit reduction programme – which seeks to reduce the deficit from 8.9% last year to 3% in 2014 (which is virtually impossible given the likely trajectory of the depression), the European money flow would stop. It also quoted Olli Rehn as demanding “political conditionality”. In other words, the programme is conditioned on an event that (in our view) is unlikely to be fulfilled.



The conditions to be imposed on the banks include cuts in dividends and cuts in salaries, according to another article in El Pais, plus branch closures, and mergers.



El Pais also said that Germany was constructive in the discussions, while the Netherlands and Finland wanted tough conditions. Finland said that if the loan came out of the EFSF (something that would have a number of technical advantages), it would require collateral.



The decision comes right after the publication on Friday by the IMF’s Financial Stability Assessment, which concludes that the Spanish banking sector is highly vulnerable. The report starts with the assertion the crisis in the Spanish banking had been unprecedented in modern history. The overall assessment for recapitalisation is put at a (rather modest) €40bn, but it said more is likely to be needed to deal with various contingencies that are likely to occur. The important message is that the main risk to the Spanish banking sector from now onwards is no longer the real estate sector but the deterioration in the Spanish economy.



Much of the serious comment, such this analysis by Peter Spiegel and the editorial in the FT, is focusing on the question whether the sums are sufficient, given the trajectory of economic growth, and is critical of the obvious failure to sever the link between the Spanish banks and the Spanish state.



FT Alphaville is asking the question who is actually guaranteeing the Spanish loan? Spain is itself a substantial shareholder in the EFSF.  By requesting a loan, Spain is stepping out of the guarantees. leaving the others (including Italy) with a higher burden.



And here is what the German and French commentators are saying:


Heike Göbel warns that Spain ends the German principle of aid against strict conditionality



Frankfurter Allgemeine Zeitung’s Heike Göbel warns that the agreement for the banking sector rescue in Spain ends the German principle that aid can only be supplied against strict conditionality. “Also Italy will certainly be happy to take money without tough conditions”, Göbel writes. “And Ireland may demand that its condition will retroactively be softened. Thus the Spanish case shows: There is not much left of the ‘German’ principle to allow for aid within the euro area only against the toughest possible reform requirements. But it was with these reforms that chancellor Angela Merkel tried to justify the bail-outs that are forbidden by the EU treaties. Now the bail-outs are available without political cost, it is the debtors who dictate the rules.”


Hugo Müller-Vogg fears there will be more rescue payments to come for Spain



Bild columnist Hugo Müller-Vogg thinks there will have to be follow-ups to last weekend’s decision to grant rescue loans of up to €100bn to the Spanish government to bail out the country’s banking sector. “Already with the first rescue package for Greece Schäuble predicted that it would be a unique aid effort”, Müller-Vogg writes. “Also Spain will probably need more than just one capital injection. One thing is certain: The largest part of the bill will be paid by the German tax payer.”


The Spanish case shows that even large countries can fall into the need of being rescued, Nicolas Barre writes



For Les Echos’ Nicolas Barre the Spanish case proves that even large euro zone members can fall victim to a crisis that requires them to be bailed out by the rest. “The president of the Spanish government can pretend that the contrary is the case but is a rescue from which Spain is benefitting”, Barre writes. “After Ireland, Portugal and Greece, a fourth country is thus being saved at the eleventh hour. If this pleases Madrid or not: Without Europe’s help and more specifically without help from Germany and France, the Spanish state that has been in a state of denial for too long, would have rapidly been bankrupt.”


Weidmann presses Spain to continue reforms



Jens Weidmann welcomed the agreement to lend Spain up to €100bn to shore up its teetering banks but said the Spanish government must pursue economic reforms further, Reuters reported last night.  “It is important that Spain uses the instruments that were made available,” Weidmann told German ARD TV. “I have faith in the Spanish government, which has already implemented far reaching structural reforms in the labour market, but it has to pursue this path,” he said.  The agreement to help Spain occurred about a week ahead of an election in Greece that could push the country out of the euro zone if radical leftists get into power who do not support the terms of Greece’s EU/IMF bailout programme. “The new Greek government, once it is formed, has to send a clear signal whether it is ready to implement the agreed reform measures. It is in Greece’s hands to decide”. said Weidmann.  He reiterated that commonly issued euro zone debt could be introduced only at the end of a closer fiscal and political integration in the euro zone. “The idea to launch joint liability (in the euro zone) without having credible rights to intervene is wrong,” he said.


French socialists could win absolute majority in next Sunday’s second round of parliamentary elections 


The first round of the parliamentary elections ended with Francois Hollande’s socialists and the conservative UMP at almost equal strength, Le Figaro and report. The socialists got 34.9% and together with the extreme left Left Front (6.5%) and the Greens (4.9%) they are sure to have a majority. The UMP came in a close second with 33.0%, the extreme right Front National scored 14% but given the French electoral system the party of Marine Le Pen will have very few if any deputies in the French national assembly. But according to both papers it is possible that the socialists win an absolute majority in parliament at next Sunday’s run-off elections on their own which would considerably strengthen the room of manoeuvre for Francois Hollande and the government of Jean-Marc Ayrault. According to a simuation by Le Figaro, the Socialists could win between 292 and 323 of the 577 seats, so they would not have to rely on the votes of the extreme left and the Greens. According to this simulation the UMP is likely to have between 218 and 248 seats.


Euro committee plans real fiscal union



According to Der Spiegel Mario Draghi, José Manuel Barroso, Herman Van Rompuy and Jean-Claude Juncker are working on a fully-fledged euro area fiscal union that would deny its members the right to take on new debt independently. According to the plan, a government can only dispose independently of the revenues it generates by itself. A government that would need more would have to put in an application with the euro finance ministers. If they agree they would issue Eurobonds in order to finance the additional debt. There would be joint and several liability but only for newly issued debt, not the debt that existed prior the introduction of the fiscal union. According to the plans the euro finance ministers would be chaired by a full time chairman who could eventually become the euro area finance minister. The ministers would be controlled by a new body in which national parliaments would be represented.


Opposition accused Merkel government of foul play on financial transaction tax



A report by Der Spiegel according to which Angela Merkel is not serious about implementing a European financial transaction tax threatens to undermine an initial deal struck last week with the opposition to help win support for the EU’s planned fiscal pact. The magazine reported that Merkel’s Chief of Staff Ronald Pofalla had said such a tax would not get passed in the current legislative period and that was why her centre-right coalition could look as if it was accommodating the opposition. Saturday’s agreement between euro zone finance ministers to lend Spain up to €100bn to shore up its banks will, if anything, raise the pressure on Merkel to quickly get opposition support to ratify an EU deal on budget discipline. She wants to push the pact through parliament in the next few weeks together with a bill on the new ESM, which Spain may use, but needs the opposition to get the required two thirds majority. However, the SPD and Greens are insisting on a plan for a transaction tax and measures to boost growth. “Ronald Pofalla’s comments are a blow to the fiscal pact talks,” said senior SPD member Thomas Oppermann, adding they sowed doubts as to whether the coalition really wanted a deal.  “Whoever plays tricks risks the failure of the fiscal pact,” said senior Greens politician Volker Beck. 


Wolfgang Munchau on how to sequence the anti-crisis policies



In his FT column, Wolfgang Munchau says EU leaders will not be able to do everything in a single summit, so it is vital importance that they sequence the measures leading up to a political union. The banking union needs to be done immediately – not announced, but decided on. That must comprise of deposit insurance, a recapitalisation facility and common supervision. The summit should provide a general commitment to a fiscal and political union, but it would be sufficient for these steps to be decided at the December council. A mere timetable to a political union, with all the critical decisions to be taken in the future would lack credibility. A banking union would solve the entire eurozone crisis, but it is a necessary precursor, as it would address the most important crisis propagation channel in the short term. He says that his (relative) optimism about the eurozone was premised on the idea of a substantial agreement in June. The eurozone would not survive another fudge.


Ferguson and Roubini on what it takes to end this crisis



Niaill Ferguson and Nouriel Roubini have teamed up to argue in the Financial Times that Germany is about to repeat the mistakes it made in the early thirties though an obsession with the crisis of 1923, while ignoring the crisis of 1931 when the policy of austerity brought a depresssion and the end of democracy.

“We have warned for more than three years that continental Europe needs to clean up its banks’ woeful balance sheets. Next to nothing has been done. In the meantime, a silent run on the banks of the eurozone periphery has been under way for two years now: cross-border, interbank and wholesale funding has rolled off and been substituted with European Central Bank financing;and “smart money” – large uninsured deposits of wealthy individuals – has quietly departed Greek and other “Club Med” banks.”

They advocate a series of policies – including a debt redemption bond, a bank recapitalisation facility, deposit insurance, and a programme to jumpstart economic growth.


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


The market reaction overnight was mildly positive. Spanish spreads are still way to high at 4.7%, and the euro is back over $1.26, up two cents.











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Source: Reuters




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