Eurointelligence Daily Briefing, 18 de Junho de 2012. Enviado por Domenico Mario Nuti.

It was the night of elections, with no real surprises. In Greece, New Democracy won narrowly. But even with the 50-seat prize to the largest party, the pro-memorandum parties only have the tiniest of majorities in the parliament, and will not be in a position to produce an accelerated programme of economic reforms. The first reaction from economic commentators – including from Citibank and Unicredit – was cautious. Nothing has really changed over the weekend. Whatever was a challenge before, is a challenge today. And second Greek programme has already fallen way behind its targets. For a good summary of the open questions read this morning’s post by FT Alphaville.

 

 

In France, the second round of the parliamentary elections gave the Socialists a large absolute majority. Francois Hollande can now govern unimpeded.

 

In Greece…

 

 

With 99.83% of ballots counted, New Democracy had won 29.66% of the vote, ahead of SYRIZA on 26.89 % and PASOK on 12.28%, followed by Independent Greeks on 7.71%, Golden Dawn on 6.92%, Democratic Left on 6.25% and the Communist Party on 4.5%, according to Kathimerini.

 

 

To form a government Antonio Samaras will need PASOK Socialists. Together the two parties would have a 162 majority in the 300-seat parliament. PASOK officials told Reuters that a meeting on Monday would decide how they would support Samaras – by participating fully in government, or by voting with the coalition in parliament. PASOK said it wanted a broad coalition that would include SYRIZA. Venizelos went as far as suggesting that no party leader should attempt to form a government and that they should all proceed directly to talks chaired by President Karolos Papoulias with the aim of forming as broad a coalition as possible.

 

 

Samaras could also approach Independent Greeks or Democratic Left. Given that the former has a staunch anti-bailout stance, agreement is unlikely. Democratic Left leader Fotis Kouvelis, on the other hand, said he was open for a coalition government. While his party opposes some elements of the bailout, it is fiercely pro-euro and there is potential for it to be part of a coalition with ND and PASOK, a coalition with a 178 majority.

 

 

In his victory speech Antonio Samaras called for a “national salvation government” to “bring economic growth and reassure Greeks the worst is over,” describing the outcome as “a stable foundation for national unity with a European direction.”   SYRIZA leader Alexis Tsipras conceded defeat, rejected to be part of a grand coalition and vowed to spearhead opposition to Greece’s austerity drive. SYRIZA also said that if Samaras fails to form a government, the leftists would not take up the mandate to try to form one on their own, according to Kathimerini.

 

 

Analysts are very pessimistic, saying a pro-bailout coalition may not last, having commanded only slightly more than 40% of the vote and being pressed to make more savings from lenders.

 

 

The reactions from the EU is one of relief, with politicians insisting that the terms of the second bailout programme must be adhered to. Germany’s foreign minister Guido Westerwelle was suggesting Athens might get more time to implement the cuts demanded of it. Both New Democracy and PASOK have said they want to renegotiate the terms of the bailout to spread the burden over a longer period and take measures to boost growth. As soon as a new government is confirmed, the Troika is likely to return to Athens to renegotiate.

 

In France…

 

 

In the second round of the parliamentary elections the Socialists won an absolute majority with 314 out of 577 seats, Le Figaro reports. The conservative UMP only got 229 seats, the National Front got 2 seats, the Greens 17 and the extreme left 10 seats. The most spectacular individual defeats were Marine Le Pen in Hénin-Beaumont in Northern France and the former presidential candidate and Francois Hollande’s ex-partner Ségolène Royal. Jean-Marc Ayrault and all his cabinet ministers were elected which spares the prime minister a reshuffle since he had said that any minister not making it into the National Assembly would have to resign. The election result considerably strengthens Hollande because he will not have to compromise with the Greens and the extreme left, and he now enjoys a strong personal and parliamentary mandate.

 

Hollande’s crucial election is not for the French parliament, but for the German Bundestag in 2013, Guillaume Tebard says

 

 

“Francois Hollande already thinks about the next elections”, Les Echos Guillaume Tebard writes in a comment. “Those that will take place in Germany in September 2013 and which, he hopes, will bring about a change on the other side of the Rhine as well. The decisive rendez-vous for the president were not yesterday’s elections that were predictable but his face to face with Angela Merkel where the outcome is uncertain but on which Europe’s capacity to overcome the crisis will depend”, Tebard explains.

 

Hollande wants to generate €120bn to stimulate growth in Europe

 

 

According to Le Journal de Dimanche Francois Hollande submitted his plans for the EU summit end of June and his proposals contain €120bn of EU money to stimulate growth. The French president would like to unblock the money until the end of this year in order to finance intelligent networks and into direct credit schemes to make up for falling bank lending, the paper writes. A closer look, however, shows that this is by no means all new money. Hollande proposes to take €55bn from the EU structural funds that are currently “sleeping” there, as JDD puts it. The rest will be raised the EIB and €4.5bn will come out of project bonds that Hollande wants to create.

 

EU works on euro bills, a minimalist version of eurobonds

 

 

The EU institutions are working on a light version of Eurobonds, the eurobills, Der Spiegel reports. The bills would have a very short duration and the issued amount would also be limited. According to the plans each state would be able to issue a certain percentage quota of its GDP. A state which would not abide by the rules would be excluded from issuing the bills the following year. Mario Draghi, Herman Van Rompuy, Jean-Claude Juncker and José Manuel Barroso want to submit their plan at next week’s summit. They hope that the limited scope of the bills would allow them to convince Angela Merkel, who so far rejects Eurobonds. Also they hope that the limitation make the proposal compatible with the Karlsruhe court’s interpretation of the German constitution in which they say unlimited liability in the context of Eurobonds would be unconstitutional. The idea of comes from Olivier Blanchard, the IMF’s chief economist.

 

 

Wolfgang Proissl says supervisory role of the ECB should be premised on political union

 

 

Writing in Financial Times Deutschland Wolfgang Proissl endorses plans to give the ECB a supervisory role for the eurozone banks. However Proissl points out that numerous crucial questions remain unresolved, among them the relationship with the EBA, the number and the size of banks the ECB would supervise, the ECB’s authority over a euro resolution authority and a deposit guarantee fund and potential conflicts with the central bank’s primary mandate of assuring price stability. For Proissl the biggest problem with the plans are that they would create an unparalleled concentration of power in the hand of unelected officials. “As long as the reinforcement of the ECB is not accompanied by a political transfer of power on the euro area level there is the danger that we will creepingly create an economic autocracy that would be incompatible with democratic principles”, he warns.

 

Money inflows cause a problem for Denmark

 

 

The FT has the story that the Danish central bank is considering negative interest rates to fight off the massive influx of funds that has resulted from the latest acceleration of the eurozone crisis. The paper quoted governor Niels Bernstein as saying that the upward pressure on the krone has been the most severe he has seen in his seven years in the job, adding that the central bank was ready to consider deploying tools to stem the inflow and protect the krone’s peg, including negative interest rates.

 

Deutsche Bank on austerity elasticities

 

 

This is from Deutsche Bank, via Menzie Chinn, looking at the impact of structural adjustment on growth. Especially in Italy and Spain the impact is hugely negative, and become more so, with negative elasticities of 1.5 for Italy, and 1.2 for Spain (though only -0.3 for Germany). These multipliers have become more negative as the economy entered into recession. Chinn concludes that an end of austerity and a stimulus programme right now would be quite effective to mitigate the recession.

  

What if there is no significant agreement June 28/29

 

 

In his FT column, Wolfgang Munchau argues that the EU clearly has a sequencing problem – whose failure to resolve may have unintended consequences. Bundesbank says no banking union without fiscal union. Merkel says no fiscal union without political union. Hollande says no political union without banking union. Merkel seems determined to hold her course – and focus on the long-term development of the eurozone, but to resolve the long-term without the short-term would mean that both Italy and Spain will not be able to remain in the eurozone. At current yields, and heading into a full depression, the two countries are not a position to maintain their position in the eurozone and pay interest on their debts. And they are too large for the umbrella.

 

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

 

 

The Greek election outcome had a positive effect only on the euro, while Spanish 10-year yields remain at over 7%, and Italian yields at over 6%.

10-year spreads
	Previous day	Yesterday	This Morning
France	1.196	1.140	1.149
Italy	4.669	4.673	4.610
Spain	5.469	5.473	5.536
Portugal	9.295	9.140	9.162
Greece	27.352	25.963	#VALUE!
Ireland	5.936	5.995	6.088
Belgium	1.821	1.763	1.841
Bund Yield	1.489	1.447	1.51
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.264	1.2709
Yen	99.630	100.66
Pound	0.813	0.809
Swiss Franc	1.201	1.201
ZC Inflation Swaps
	previous	last close
1 yr	1.53	1.57
2 yr	1.45	1.48
5 yr	1.61	1.63
10 yr	1.97	1.99
Euribor-OIS Spread
	previous	last close
1 Week	-6.300	-5.6
1 Month	-0.100	1.6
3 Months	29.400	31.6
1 Year	98.614	96.914
Source: Reuters