Eurointelligence Daily Briefing, 19 de Junho de 2012. Enviado por Domenico Mario Nuti.


The end of another suckers’ rally

  • Spanish 10-year yields are close to 7.3% this morning following the end of another short-live market rally;
  • financial markets have now concluded that Spain will have to fall under the EFSF/ESM;
  • Spain to issue €2-3bn in new loans today in a further test of market conditions;
  • yields have also risen dramatically at the short end;
  • a banking survey by the Bank of Spain shows further increase in interest rates paid by the private sector;
  • the rise is having a negative effect on Spanish exporters;
  • G20 summit in Mexico is unlikely to produce anything, except for another bland communique;
  • New Democracy, Pasok and Democratic Left are en route to forming a coalition;
  • an agreement is expected later today;
  • Alexis Tsipras formally ruled out to be a member of any government;
  • Democratic Left demands that the bailout terms be eased, and that Greece disengages from  the memorandum by 2017;
  • The economic and monetary affairs committee of the European Parliament proposes Eurobills;
  • the German coalition disagrees on whether to extend the austerity timetable for Greece, with Guido Westerwelle seeking a longer pay-back period;
  • the troika looks at doubling the pay back term for Ireland, the French government is to impose a new tax on dividends;
  • a Moody’s report says the private sector in the periphery is facing serious liquidity constraints;
  • Hugo Dixon says a banking union is not realistic in the short term;
  • Erik Izraelewicz says Francois Hollande must now save Europe;
  • Günter Nonnenmacher says we will now see the true Hollande;
  • Larry Summers says a eurozone breakup would be the defining moment of our time;
  • Jakob Augstein, meanwhile, draws the parallels between Europe today and the end of the Weimar Republic.

We have always been wondering which fools take part in these post-event rallies, but this time the rally last only for a few hours before turning negative. This morning, our snapshot of Spanish 10-year yields gave as 7.27%, a level at which Spain is not solvent inside the eurozone.  The financial markets have concluded that Spain will have to come under the EFSF/ESM.  


Today, the Spanish government is due to issue between €2bn and €3bn of 12-month and 18-month debt according to Reuters, to be followed by another issue on Thursday.  The article says the prognosis for the yields at those auctions is not good. Yields have also risen at the short end with the 12-month treasury bill at 4.9%, up 2 full percentage point in a month.


This latest financial squeeze is certain to reverberate on the economy, and deepen and prolong the recession. El Pais has an interesting article on a Bank of Spain survey of lending conditions, which have deteriorated dramatically. The interest rates to be paid by the private sector continue to increase. And Spanish exporters are losing out due to a lack of trade credit. The interest rate on new loans of less than €1m was 5.32%, against 4.70% in Italy and 3.34% in Germany.  (It is not the ECB’s official rate that matter but the dysfunctional transmission mechanisms. There are really is a case for a QE targeted at lowering interest rates in the private sector.)


The G20 summit in Mexico offers another opportunity for global leaders to prance around, while hiding behind a meaningless communique. The potentially more important meeting takes place in Rome later this week, when Mario Monti meets with Angela Merkel and Francois Hollande to work out elements of an agreement at next week’s summit.


Three party coalition emerges in Greece

New Democracy, PASOK and Democratic Left are poised to agree on the formation of coalition government Tuesday after holding “constructive” talks yesterday.  A New Democracy source toldReuters that PASOK would join the government, rather than just vote with it in parliament. PASOK will seek an active role in the administration and could put forward several of its officials for ministerial roles. According to Kathimerini, Antonio Samaras, likely to be the next prime minister, has suggested that 30% of the Cabinet should comprise non-political figures.


Democratic Left leader Fotis Kouvelis said he was ready to support Samaras, depending “on the content of what is agreed”. Kouvelis has called for the bailout terms to be eased and a disengagement from the EU-IMF memorandum by 2017.


Venizelos insisted that SYRIZA should be brought into the coalition talks. He proposed a discussion between ND, PASOK, SYRIZA and Democratic Left to be hosted Tuesday by Papoulias.  But Tsipras ruled out the possibility of his party entering a coalition after talks with Samaras and called on the conservative leader to honour his pledge to renegotiate Greece’s debt deal with foreign creditors.

A senior New Democracy official told Reuters he expected agreement on a new cabinet today. It would aim to accelerate and broaden a privatisation programme to top up state coffers, but also ask its creditors to spread €11.7bn austerity cuts over four years instead of two.


European Parliament proposes Eurobills

The debate on fiscal union is currently focusing on two ideas – European treasury bills, and the redemption fund. The former would cover new lending – up to an agreed amount – while the letter deals with existing debt.  The Economic and Monetary Affairs Committee of the European Parliament has yesterday presented a non-legislative text that provides a roadmap. Sylvie Goulard, who drafted the proposals, said eurobonds were neither a panacea nor an idea to be excluded, but potentially useful in dealing with certain aspects of the crisis. 


Eurobills would be a first step to eliminate the liquidity risk by pooling short-term debt with a maturity of less than one year. The total volume of outstanding debt of this category is €900bn. Longer term debt would remain the responsibility of each member state. The debt would be issued by a common debt agency. Members would have to qualify to take in this programme, but given the short-term nature of this debt, the moral hazard problem is greatly reduced.


German coalition disagrees on concessions for Greece


There are disagreements within the German coalition about whether or not concessions should be granted to Greece by easing the implementation of the adjustment program, Financial Times Deutschland writes. Foreign minister Guido Westerwelle of the FDP said Germany was ready to talk about the timetable of reforms. However Angela Merkel contradicted at the G20 in Los Cabos. “The Greek government naturally has to abide by its obligations that it has engaged into”, Merkel said. The chancellor also ruled out that there will be a third rescue package for Greece. Herman Gröhe, the secretary general of Merkel’s CDU, said that fulfilling the obligations “are the clear condition for further aid and the precondition for a successful recovery of Greece.”


Troika looks at extending repayment period for Ireland


Irish broadcaster RTE News reports that the Troika is been looking into the possibility to extend the repayment period for  Ireland, allowing the country to pay back EU loans over 30 years rather than 15 years in an attempt to help the country return to the markets.  Ireland’s official creditors would have to take a hit and it would require political agreement among them. Sources say the step is being considered in an effort to convince the markets that private sector bondholders would not be burned in future by Ireland and a reaction to the realisation that the Greek haircut for private sector bondholders has not worked.


France introduces additional tax on dividends as of July


The French government will introduce a new tax on dividends of 3% as of July, Les Echos reports. The government stresses this measure is less about additional revenues but rather intended to offer an incentive to reinvest the capital instead of handing it out to shareholders.


Liquidity problems in the cooperate sector


European corporations are at risk of running out of savings as they use up reserves to cope with the seemingly endless euro crisis, the Irish Independent cites a report of the rating agency Moody’s, especially in periphery countries like Ireland. Some €437bn of corporate debt is due to be paid off between now and the end of March. Moody’s estimates that as many as 9% of all borrowers may not have sufficient liquidity to make their share of repayments. Moody’s says that in many cases, access to lending is restricted to banks rolling over short-term facilities from year to year. Tighter banking rules will also have a negative effect, according to the report, as banks are forced to hold on to more of their cash to comply with capital rules. Access to the debt markets is narrowing at the same time as income for most companies is under pressure, with cash flow hit by slower growth in the global economy and recession in parts of Europe.


Hugo Dixon says don’t expect a banking union too soon


Reuters Breakingviews columnist Hugo Dixon writes that the hopes for an immediate banking union are misplaced. Parts of the zone’s banking industry are so rotten that taxpayers elsewhere can’t reasonably be asked to bear the burden of bailing them out. A massive cleanup is required first. Maybe the eurozone crisis will provide an impetus. The problem is that banks and their governments are tied in an incestuous relationship. Bank boards are mostly competent. The eurozone’s stress tests completely failed to spot the problems – in Ireland in 2010 and Spain 2011. Part of what he calls a “doom loop” involves banks‘  holdings of sovereign debt – worsened by the LTRO. For a banking union to work, there needs to be supervision and systems to bail in bondholders.


Erik Izraelewicz says Francois Hollande must now save Europe


In a front page editorial Le Monde’s editor Erik Izraelewicz argues that after his success at the parliamentary elections Francois Hollande is now responsible for leading Europe out of the crisis. Francois Hollande has won everything: the PS primary, the presidential elections and now the legislative elections. In some respects he is doing better than Mitterrand. He says Europe is in such a crisis that it threatens to take away the framework in which France prospers. “Of all the heads of state and government Francois Hollande now has in his country the freshest and the least contested legitimacy.” According to Izraelewicz Hollande’s task is now to rebuild Europe by giving the Eurozone a new dynamism. For a socialist in a club of conservatives, this is going to be easy.


Günter Nonnenmacher says we will now get to know the true Francois Hollande


Frankfurter Allgemeine Zeitung’s Günter Nonnenmacher argues that after all the electoral posturing we will now get to know the real Francois Hollande. “The unfriendly acts of the new president towards the chancellor that sometimes seemed to be personal and his counterproposals to save the euro – the mutualisation of debt and generous growth programs – could be explained by the electoral situation until Sunday”, Nonnenmacher writes. “Now we will see whether this was tactics or an ideological fixation and whether the new president really intends to form coalitions against Germany.”


Larry Summers gets really nervous


This is from Larry Summers in the FT:


“But a eurozone collapse would be a disaster that might define our era. Its prospect must focus the minds of all at the G20 summit on action. Non-Europeans must persuade Europeans that the rules change when the stakes rise. The ECB’s credibility will mean little if there is no longer a common currency.

“Setting the right precedent seemed far more important 24 hours before Lehman’s collapse than 24 hours after it. Now is the time for radical cuts in the rates charged by official creditors to European sovereigns; for a willingness to subordinate official debts; and for expansionary monetary policies in Europe that prevent deflation and encourage the growth that can create jobs and reduce debts. Only if the system is preserved can its future be debated.”

Jakob Augstein sees parallels with Weimar


In his column in Spiegel OnlineJakob Augstein compares Germany’s position towards Europe today with its position towards democracy in 1933. He invokes Sebastian Haffner’s description that  in 1933 the population was relieved that the experiment of democracy was finally coming to an end. He said it does not help Angela Merkel is the first modern German leader for whom Europe has no emotional meaning. Europe’s only hope consists of surviving until the autumn of 2013, and for Germany to change its leader.


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


Spanish 10-year spreads are approaching 6%, and Italy’s 5%. The exchange rate has stabilised at $1.26.









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Source: Reuters




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