Eurointelligence Daily Briefing, 14 de Junho de 2012. Enviado por Domenico Mario Nuti

Germany says no to banking union– existing tools are apparently adequate

  • German officials in Berlin are briefing that Angela Merkel will not support a banking union, or a fiscal union at the June 28/29 summit;
  • Germany is committed to a political union as a long-term goal (meaning after the elections);
  • German officials says they don’t understand the fuss, since existing crisis resolution tools are perfectly adequate;
  • the Dutch finance ministry agrees: no banking union, no fiscal union;
  • Francois Hollande dropped the idea of a fiscal union, now throwing his weight behind the notion of a debt redemption funds;
  • this idea is premised on the assumption that a stagnant Italy can repay half its debt in 20 years;
  • but Hollande reiterated his supported for a banking union anchored at the ECB and a banking licence for the ESM;
  • the volatile Mariano Rajoy now wants a full eurozone federation with tax raising powers;
  • Moody’s downgrade Spain to a notch above junk;
  • Spanish government refuses to consider the closure of banks as part of the restructuring process;
  • Finland insists that Spanish banks should be supervised by the troika as a pre-condition for the loan;
  • Greek deposit withdrawals have accelerated in the run-up to the elections;
  • Syriza is preparing an emergency plan if the negotiations with international lenders fail;
  • Alexis Tsipras says he will do everything to keep Greece in the eurozone;
  • Germany is on course to ratify the ESM and fiscal pact before the end of the month;
  • Germany is close to a balanced budget thanks to the low bond yields;
  • Wolfgang Münchau, meanwhile, argues that an Italian exit from the eurozone becomes increasingly probable. 

We always feared that Angela Merkel’s recent endorsement of a political union was a deflection, and this fear is now confirmed. The FT reports from Berlin that German officials are now playing down any expectations that Germany is ready to support a banking union and eurobonds, insisting that the existing tools of crisis resolution are adequate.


Instead German officials are pretending that they support a long-term process of political union. We are now back to where we were before: there is a need to act fast, but the German chancellor is chronically incapable of making the political case for burden sharing. Expectations in the German media, and among coalition politicians have also been “managed” in such a way that an agreement for a banking union would come as a total shock.


The Dutch finance ministry also said yesterday, according to Reuters, that a banking union should be seen as a long-term project that cannot be implemented immediately.


Francois Hollande, meanwhile, is backtracking on his demands for euro bonds. He used his meeting with the three SPD leaders Sigmar Gabriel, Frank-Walter Steinmeier and Peer Steinbrück at the presidential palace in Paris to convey the message that he wants to ease tensions with Germany over the right course in Europe, Handelsblatt reports. According to the three social-democrats, Hollande has put his insistence on Eurobonds on the backburner because he agrees that at the moment neither the legal nor the political conditions are right for a rapid introduction. Apparently the French president wants to push instead for building up quickly a debt redemption fund as it has been proposed by the German wise men. The idea is that every country redeems their excess debt within a period of 20 years. (Who on earth believes that a stagnant Italy can simply repay half its existing debt in that period?)


But Hollande is at least proposing an immediate banking union with the following characteristics: He wants the ECB to be in charge of supervision and bank resolution, but only for the “systemically important banks”. The ESM should be allowed to recapitalise banks directly, and have a banking licence. This will be the French submission to the co-ordinating group headed by Herman van Rompuy, and is supported, apparently by Spain and Italy.


(If the French proposal was adopted in full, widened to encompass banks that actually need recapitalisation, and a credible process towards a fiscal and political union started, then this may be just enough to avert a disaster. The most likely outcome, as ever, will be a fudge.)


Meanwhile, as El Pais reports, the volatile Mariano Rajoy, who seems to have returned from his football game, now supports a fully federal Europe, with banking and fiscal union, tax-raising powers, and the transfer of sovereignty to the centre. It is fair to assume that he did not coordinate this position with Hollande or anybody else.


Moody’s downgrades Spain to a notch above junk



Back in the real world, Moody’s has downgraded Spain from A3 to Baa3 – a notch above junk – and this with a negative outlook. The agency said the recapitalisation of the banking sector increased the country’s total indebtedness, and Spain is also in the process of losing access to the capital markets. El Pais has the full report.


So much for the promised banking clean-up in Spain



It is extremely naive to believe that eurozone member states will ever clean up their own banking system. This El Pais article gives a flair of the discussion going on in Spain, where the government wants to avoid any orderly liquidations of the banks, and keep every Caja going. The article quotes Joaquin Almunia as saying that if liquidation costs were lower than restructuring costs, it needs to be considered, but the Spanish government disagrees. (Considering that these cajas funded a housing boom, which is now turning into a decade long housing depression, the business model of most of these entities is no longer viable.)  


Finland’s conditions to Spanish bank bailout



Finland doesn’t want any of Spain’s bailout to prop up unhealthy lenders and expects some troubled banks to be split up, prime minister Jyrki Katainen said in an interview in Norway three days ago, Bloomberg reports.  Katainen also said he considers the supervision of Spain’s banks through the IMF, the European Commission and the ECB to be a precondition of the nation’s bailout. He said his government is unlikely to need collateral in exchange for its backing as the funds will probably come from the permanent ESM, which gives official creditors seniority over existing bondholders. For the EFSF, Finland demands collateral in exchange for its loan guarantees. But opposition parties are concerned over the Spanish banks bailout, YLE reports. Finns Party leader Timo Soini said he is against Finland helping to recapitalise Spanish banks. The legislature’s Finance Committee, meanwhile, recommended Parliament to approve the ESM. Committee members from Soini’s True Finns and Centre parties voted against the decision and submitted their own dissenting opinion, YLE reports.


Deposit withdrawal in Greece accelerated


Worried Greeks have accelerated bank withdrawals, Reuters reports. Bankers said the pace was picking up ahead of the vote, with combined daily deposit outflows from the major banks at €500m-€800m over the past few days, and €10m-€30m at smaller banks. It includes cash withdrawals, wire transfers and investments into money market funds, German Bunds, U.S. Treasuries and EIB bonds. Retailers said some of the money was being used to buy pasta and canned goods in case of shortages, as fears of returning to the drachma were fanned by rumors that the radical leftist leader Alexis Tsipras may win the election. On Tuesday, the rumor was that SYRIZA was leading by a wide margin. The rumor was rejected by a pollster. No polls can be published anymore, but the pollster told Reuters that nothing much has changed since the last public poll. The pollster also said that the number of undecided voters remained unusually large so close to the election and the result was impossible to predict.


SYRIZA is preparing emergency plan if bailout renegotiations fail


Alexis Tsipras told a press conference that his party had an “emergency plan” if negotiations with international creditors on Greek bailout deal collapsed though he repeated that European leaders cannot afford to risk a Greek Eurozone exit. “The fire will be uncontrollable and will not be limited to Greece and the southern European countries, it will break up the eurozone and this is in no-one’s interests,” he added. With respect to Spain, Tsipras said Madrid had secured the aid without tough terms. “Spain received funding without a debt deal,” he is quoted by Kathimerini.


Tsipras in the FT: let’s replace the memorandum with growth plan

In his FT comment Tsipras insisted his party is committed to keep Greece in the Eurozone but that they want replace the failed old memorandum of understanding with a national plan for reconstruction and growth. More concretely he wrote: ”The structure of this programme consists of: stabilising public expenditure at approximately 44% of GDP and re-orientating this expenditure to ensure it is well spent;

increasing revenues from direct taxation to the average European levels (by more than 4% of GDP) over a four-year period;

and reforming the tax regime so as to identify the wealth and income of all citizens, and to distribute equitably the burden of taxation.”


Germany likely to ratify fiscal pact and ESM by the end of June



According to Frankfurter Allgemeine Zeitung talks between the Angela Merkel’s coalition and the opposition SPD and Greens have progressed, which makes a ratification of the fiscal pact and the ESM by the end of June the most likely scenario. There were no agreements on details but Volker Kauder and Frank-Walter Steinmeier, respectively chief whip of the Christian democrats and the social democrats, lauded the progress in the talks. One important element is that the government supports a financial transaction tax that could be introduced within the EU framework of enhanced cooperation with nine or more EU countries participating. A scenario is now that Bundestag will ratify the fiscal pact and the ESM on June 28 just ahead of the EU summit which will start later that day. Süddeutsche Zeitung however reports that there is still resistance among some SPD governed federal states that have to ratify the fiscal pact and the ESM in Bundesrat, Germany’s second chamber. The states want to extract financial concessions from the federal government in exchange for their agreement with the pact, the paper reports.


Thanks to the crisis Germany is likely to present a balanced budget next year


Thanks to the euro zone’s sovereign debt crisis and the exceptionally low financing costs for Germany the government is likely to present a balanced budget in 2013, Financial Times Deutschland writes. According to the paper the country has saved more than €15bn in 2011 and 2012 because of the low financing costs. “Especially because of the reduction of the interest rate burden in the current and the next year we think there will be a balanced budget in 2013”, the paper quotes Jens Boysen-Hogrefe of the Kiel Institute for World Economics. If the current interest rate level of 1.52% for a 10-year German government bond remained at that level Germany could save up to €100bn over the next five years, according to Kiel Economics. The calculations deliver ammunition to those in Europe who claim that Germany must do more to help to end the crisis, FTD writes.


Wolfgang Munchau on how the eurozone will blow apart

In his column in Spiegel OnlineWolfgang Münchau writes about the mechanism through the eurozone might unravel, perhaps sometime in the second half of this year. Assuming no Greek exit, the next step will be a full ESM programme for Spain, for which the resources in the ESM are just sufficient, but leaving no further headroom for any further substantial programmes, except perhaps for Cyprus. As the Italian economy sinks further into a full-scale depression, and as Monti administration is losing political support, Italy’s refinancing costs will continue to rise until access to capital markets dries up completely. In this case, Italy will have a vital interest in leaving the eurozone as quickly as possible, and possibly default on its foreign debt. There is no mechanism in place that can solve this problem, unless, of course, the ECB agreed to monetise Italian debt directly, and indefinitely.


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


Italian spreads are gradually getting worse;

10-year yield at 6.3%.










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Source: Reuters




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