Eurointeligence Comment and Analysis

 

With ten-year yields now over 7%, a Spanish EFSF/ESM programme is now only weeks away, and once that happens, the financial room for manoeuvre will have been exhausted. This is a mess of epic proportions. In its main story on this unfolding crisis, El Pais reminds its readers of Mariano Rajoy’s comment over the week that since he had solved the banking crisis, he could fly off to watch the football. It was actually this economically illiterate agreement that has driven the increase in Spanish spreads this week, as the markets realised the impact of a €100bn credit to the Spanish economy.

                                                                                                                                                                                

Italian 10-year yields are also now consistently well above 6% – a level that is also unsustainable, especially as short rate have also been rising. These high yields are self-perpetuating. The markets view both Italy and Spain as no longer viable inside the eurozone at those interest rates.

 

Angela Merkel yesterday told the Bundestag that Germany is not ready to accept eurobonds or a common deposit insurance. She warned against over-burdening Germany.  In its coverage of Merkel’s speech in the Bundestag, El Pais focuses on the passage where she criticises Spain’s economic mismanagement of the crisis. In particular, she referred to “ten years during which Spain allowed its housing bubble to swell”. It is interesting that not a single German politician mentioned any of this during the last decade – when it was already obvious to outside observers, such as ourselves. And it is also revealing that Ms Merkel’s ignores the contribution of Germany’s structural current account surplus in any of this.

 

And the paper also has an interview with Jens Weidmann,  whose big idea for Spain is more austerity and higher taxes.

 

Luis Garicano on what Spain should do now

 

This is one of Spain’s best economists, outlining the options now. Luis Garicano writes in El Pais there are three. First, the EU saves Spain, either through a eurobond, which he thinks is not going to happen,  or through an ECB debt monetisation. He says the latter is only likely in the middle of utter chaos, for example triggered by a Greek exit. The second option is to leave the eurozone, which he calls insane. He said it would be hard to get the people to accept a new currency after the massive failure of the existing institutions;

and there is the third option, which he prefers: Instead of a small banking programme, with no conditionally, Spain should opt for a large programme with lots of conditionality. Get the EU to put equity into Spanish banks, and hand over the supervision to them. He said it would show a Spanish commitment to the euro, and get the Germans off the hook. (The Germans have hitherto rejected equity investments. So what he proposes is actually a big deal.)

 

Hollande propose a euro master plan to fellow governments

 

According to Le Monde, Francois Hollande is about to propose a euro masterplan in a letter to the fellow governments of the eurozone. Concerning the ECB the French president wants to go further than Angela Merkel. Hollande would like the ECB to become the euro area banking supervisor, but it would also be in charge of the deposit guarantee fund. Additionally the ESM should get unlimited financial firepower via a banking licence that would allow it to refinance itself at the ECB. Also the ESM should be able to recapitalize banks directly without going through governments. Hollande also wants to draw up a roadmap that would lead to the introduction of Eurobonds within ten years. In order to solve Europe’s short term debt problems the president is in favour of setting up a debt redemption fund as proposed by the German “wise men”. Hollande is open to Merkel’s idea of transferring sovereignty to the European level but he is eager to do so only if necessary and without any federal grandstanding. Therefore his advisors avoid talking about new euro institutions and merely say that France is ready to build the “appropriate institutions”.

 

Merkel warms up to the idea that the ECB should supervise euro area banks

 

Angela Merkel yesterday publicly endorsed the idea that the ECB should become the supervisor of euro area banks, Financial Times Deutschland and Handelsblatt report. “I would not have anything against the European Central Bank taking over a stronger role and getting supervisory competences”, the chancellor said in her speech in the  Bundestag. There appears to be the beginning of convergence between Germany and France on the issue because Francois Hollande also supports a supervisory role for the ECB and wants to make proposals in this sense at the EU summit. Vitor Constancio on Tuesday said the ECB was ready to become the supervisor of the 25 largest cross-border systemic banks.

 

Weidmann outlines his roadmap for a “stability oriented fiscal union”

 

 

It is quite hard to say the following with a straight face, but here it goes. Jens Weidmann yesterday outlined the conditions for what he calls a “stability oriented fiscal union”, Frankfurter Allgemeine Zeitung reports. The countries need to agree to strict budgetary and fiscal rules that must be supervised and enforced by a European authority, the Bundesbank president said. “In case a country does not comply with the budgetary rules the national sovereignty would automatically be transferred to a European level so that meeting the targets can be guaranteed”, Weidmann told his audience. The European authority would then be able to impose either higher taxes or spending cuts that it would be able to enforce against the parliamentary majority of the concerned country. If this condition is fulfilled a fiscal union with common liability in the context of a banking union or commonly backed Eurobonds is a viable option for Weidmann. He insisted that such a development would need to be democratically legitimized by an “expression of the will” of all the populations of the countries concerned. Also EU treaties and national constitutions needed to be amended accordingly so that the new rules are firmly anchored and cannot be changed with simply majority votes, Weidmann said.

 

Tsipras:  If Spain can get a deal, why not Greece?

 

Three days ahead of the elections, Alexis Tsipras went after his opponents in a boisterous speech suggesting that SYRIZA is the only party to give Greece its dignity back while remaining in the euro. “On Sunday Greece will change. It will leave behind it fear and insecurity and those who tried to poison the Greek people with fear and insecurity, Mr Samaras and Mr Venizelos,” he is quoted by Kathimerini. Tsipras accused the two established parties of “looting Greece” and “lowering the Greek flag and giving it as a trophy to Angela Merkel.” Tsipras insisted that a Greek euro exit was not on the cards but that SYRIZA will drive a hard bargain in renegotiating Greece’s debt deal. “Merkel is scared because she will not be faced with people saying yes to everything,” he said. Tsipras added that a €100bn bank bailout to Spain should pave the way for more lenient treatment for Greece. “If Spain can have financing without conditions, why can’t Greece stay in the eurozone without a disastrous memorandum?” he said.

 

Samaras: Do you want the euro or the drachma?

 

New Democracy stepped up its attempts to portray election rival SYRIZA and its leader, Alexis Tsipras, as not being responsible enough to govern Greece at this crucial point. New Democracy has campaigned heavily on the issue of trustworthiness since the May 6 election, attempting to convince voters that an untested Tsipras and his party, which gained just 4.6 percent of the vote in 2009, lack the experience and policies to govern. The conservatives claim this could lead Greece back to the drachma.  “Do you want the euro and stability or the drachma and isolation? Do you want security and checks on illegal immigration or fear? Do you want a stable government or a lack of governance?” ND leader Antonis Samaras asked an audience in Thessaloniki. Samaras is due to hold his final campaign rally in Syntagma Square, central Athens, this evening.

 

French government prepares measures to get the deficit under control

 

 

According to Les Echos, the French government is preparing a set of measures to be presented in July with the aim to contain the deficit, Les Echos reports. As was promised during the election campaign the wealth tax and the inheritance tax will be increased. Also the tax breakes on overtime work and other tax breaks are likely to be scrapped. Later in the year the government wants to propose legislation with the aim of taxing equally work revenues and capital gains. Jean-Marc Ayrault has repeatedly hinted that France’s dire budgetary situation required additional efforts but he has refused to spell out what he planned to do ahead of the crucial run-off parliamentary elections this Sunday.

 

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

 

 

Spanish yields at 7% – as situation deteroriates overnight.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	1.240	1.196	1.211
Italy	4.725	4.818	4.795
Spain	5.280	5.469	5.559
Portugal	9.271	9.295	9.294
Greece	27.701	27.352	#VALUE!
Ireland	5.921	5.936	5.964
Belgium	1.852	1.821	1.881
Bund Yield	1.495	1.489	1.512
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.257	1.264
Yen	99.750	99.67
Pound	0.811	0.8129
Swiss Franc	1.202	1.2007
ZC Inflation Swaps
	previous	last close
1 yr	1.42	1.53
2 yr	1.34	1.45
5 yr	1.56	1.61
10 yr	1.94	1.97
Euribor-OIS Spread
	previous	last close
1 Week	-7.000	-6.1
1 Month	-0.221	0.579
3 Months	29.700	28.5
1 Year	95.286	95.386
Source: Reuters