German president suspends ESM on orders from Constitutional Court
Joachim Gauck has bowed to pressure from the German Constitutional Court, and announced he will not sign off on the ESM and the fiscal pact for the time being;
Court earlier announced that it expects the president to holds off his signature, as it requires more than a few hours to examine the case;
Gauck acts under warning that an early signature might have produced a constitutional crisis;
Wolfgang Schäuble criticised court for its intention to examine the ESM;
ESM and fiscal pact are both now likely to be delayed beyond July 1;
the Bundesbank said Monti’s plan amounted to monetary financing;
there is still confusion about the details about the Monti plan, but one official said it involved the ECB either directly, or indirectly;
Monti said he will not request aid under any circumstance because Italy had “done its homework”;
independent consultants put the worst case scenario recapitalisation requirement at €51bn to €62bn;
there are huge differences of assumptions between the reports, despite the relatively narrow range of the likely recapitalisation requirement;
the Spanish government says it has no intention to close down any bank;
a more detailed report by a group of auditors is expected for September;
yesterday’s Spanish bond auction produce the highest yields since 1997;
Claudi Perez says eurozone has 10 days to save the euro;
ECB governing council decides to further loosen the collateral framework but
there were dissenting votes;
Cyprus considers to negotiate a bail-out, either from the EU, or Russia;
Samaras presents his conservative government with Vassilis Rapanos as finance minister;
Finland opposes extension of timeline for Greece;
Rutte increasingly irritated by Merkel’s call for ‘political union’;
Euro crisis countries are catching up much faster than thought until now, an unpublished study shows;
Willem Buiter, meanwhile, says the probability of a collapse of the eurozone has risen dramatically.
After an intervention of the Constitutional Court, the German president Joachim Gauck will not sign the new law Bundestag passed to implement the ESM and the fiscal pact for the time being, Frankfurter Allgemeine Zeitung (Link: http://www.faz.net/aktuell/politik/inland/gesetz-zum-euro-rettungsschirm-esm-gauck-unterzeichnet-fiskalpakt-vorerst-nicht-11793957.html) reports. As a consequence it is now impossible that the ESM starts to exist as of July 1st. According to the paper the Karlsruhe judges were outraged at attempts by Angela Merkel to pressure Gauck into signing the laws quickly. Had the president done so and thereby deprived the constitutional court of any chances to an in depth examination of the constitutionality of the laws this would have amounted to “constitutional crisis”, FAZ quotes the constitutional court. Merkel’s spokesman denied that the chancellor had attempted to exercice pressure on the president. Meanwhile Wolfgang Schäuble criticized the court for its intention to do an examination of the laws.
Bundesbank opposes Monti plan to let the ECB buy troubled Eurozone government bonds as an agent of the EFSF/ESM
According to Financial Times Deutschland (Link: http://www.ftd.de/politik/europa/:schuldenkrise-machtkampf-um-die-ezb/70053130.html) the Bundesbank opposes plans by Mario Monti to cap spreads by tasking the ECB to buy government bonds as an agent of the EFSF/ESM. In return, according to the Italian prime minister’s plans, the funds would partially guarantee against potential losses from the bond purchases. “This would be monetary financing and thus a break with the EU treaties”, the paper quotes the Bundesbank. The German central bank argues that the motive for the bond purchases would not be monetary policy but rather fiscal policy because it would be about easing the burden of rising spreads for countries like Italy. At the G20 in Los Cabos, Monti had been understood to say that he wanted the EFSF/ESM to buy bonds of troubled Eurozone countries. But two high ranking Eurozone sources told FTD that the Italian prime minister pleaded for the ECB to do the job so that Italy or other beneficiaries of the operation would be burdened with the conditionality the EFSF/ESM would apply in such a case. “This will not fly”, the paper quotes one source. “This is the attempt to get the money without accepting a program and the conditions attached to it.” The proposal will be on the agenda today when Monti meets Angela Merkel, Francois Hollande and Mariano Rajoy today in Rome.
Monti excludes any kind of rescue request by Italy
In an interview with Süddeutsche Zeitung (Link: http://www.sueddeutsche.de/politik/mario-monti-im-interview-italien-wird-keine-hilfen-beanspruchen-1.1390088-3) ahead of today’s meeting with Angela Merkel, Francois Hollande and Mariano Rajoy, Mario Monti categorically rejects the option of Italy asking for any rescue requests. “We will not request any aid because Italy will this year have a deficit of 2% of GDP according to the Commission’s forecast”, Monti said. “In the EU the deficit is 3.6%, in the Eurozone 3.2%, in the Netherlands it is 4.4%, in France 4.5%, in Germany only 0.9%. 2013 Italy will have a structural surplus of 0.6% and it will be the first country with a revenue surplus. If there is a country in the Eurozone that has done its homework and yet still has to pay such high interest rates then there is a problem. And that is a system from which we want that it consists or rewards and punishments”, Monti said referring to the rising market spreads on Italian government bonds.
Independent consultants put Spanish recapitalisation needs at €51bn to €62bn
El Pais (Link: http://economia.elpais.com/economia/2012/06/21/actualidad/1340279394_859405.html) has the details on the report by the independent consultants Oliver Wyman and Roland Berger, who have put the “worst-scenario” recapitalisation requirement at €51bn to €62bn. A more detailed assessment, involvement a look at each bank’s loan portfolio, will be conducted by a group of auditors and will not be ready by September.
Yesterday’s external consultants’ report assume a 50-60% peak-to-trough fall in house prices, and a three-year recession – described by the new deputy governor of the Bank of Spain as “”an economic scenario that no analyst, no matter how gloomy it is, could sign off on” (Well we would sign off on it. It is a pessimistic scenario, but still within the range of expectations. We believe that the Spanish recession could last even longer, given the scale of the adjustment that has yet to be undertaken. We wonder what it would to get for the Spanish establishment to lose the sense of complacency that has got them in this mess.) And of course, no Spanish caja will have to close down. The Spanish government prefers a soft restructuring instead.
The base scenario would include a recapitalisation requirement of only €16bn to €25bn. Bankia has already got €19bn – but this does not only relate to the loan portfolio which the Wyman/Berger exercise was focusing on. In another article El Pais (Link: http://economia.elpais.com/economia/2012/06/22/actualidad/1340321544_841911.html) takes a closer look at the two reports, and concludes that the differences between them are enormous even though they arrived at a similar range. Wyman was much more pessimistic on the real estate portfolio, parts of which Wyman attached a 100% loss. Wyman, however, was much more optimistic than Berger on the deliquency rate. (So we wonder: would a true credible scenario not have to be the sum of the negative scenarios of both, i.e. High deliquencies and high property losses?)
Spain pays record interest rates at bond auction
The best news is that the auction did not flop, but the rates paid are the highest since 1997. As Reuters reports, the Spanish Treasury sold the bond due in July 2015 at a yield of 5.457%, compared with 4.876% in May, while the longer dated July 2017 bond sold for 6.072%, up from 4.960% last month.
Claudi Perez says EU has 10 days to save the euro
The headline of this article is: Ten days to save the euro – or where have I seen this before. (Strangely, we have also seen this before). Claudi Perez (Link: http://economia.elpais.com/economia/2012/06/21/actualidad/1340275139_022411.html) of El Pais writes these are really knife-edge times, as Germany is not even close to agreeing the minimum set of conditions that are necessary for Spain and Italy to continue to breath inside the eurozone. He describes Germany’s reaction as a mixture of disdain and contempt. He says Spain was the last frontier of fear in the EU. If Spain falls, so will Italy. The two countries constitute more than a quarter of EU GDP, with banking assets of €8 trillion. To stop the rot, what is now needed are programmes of asset purchases by the ECB, central bank restructuring funds, a fiscal and a political union. Perez also makes the point that an ESM asset purchase policy, under current legal constraints, would not be different from a normal ESM programme, and would bring few benefits. (He is absolutely right on this. An ESM asset purchase scheme would only make a difference if two conditions are met: an ESM banking licence, and no conditionality. One would have to change the ESM treaty to get there. Considering the news from Berlin on the ESM, we do not hope this is likely, let alone fast.)
ECB governing council decides to further loosen the collateral framework but there were dissenting votes
At its meeting Wednesday and Thursday the ECB’s governing council decided to further loosen the collateral framework for banks but the decision was not taken unanimously, Financial Times Deutschland (Link: http://www.ftd.de/politik/europa/:schuldenkrise-ezb-rat-zofft-sich-wegen-bankenhilfen-fuer-spanien/70053132.html) reports. According to the paper the ECB decided to lower the minimum quality requirements for certain securitized products such as MBS from A-down to as a low as BBB-, the lowest possible investment grade above junk status. However the products will have to examined by the eurosystem’s
central banks individually before being accepted as collateral and haircuts will be applied. Nevertheless, the decision which will be officially announced today is likely to boost the amount of collateral troubled Spanish banks are able to post with the eurosystem in exchange for central bank liquidity since banks in Spain own high quantities of real estate based products. According to FTD the decision was on a list the former Spanish central bank governor Miguel Fernandez Ordonez gave his ECB colleagues with measures that would ease the Spanish banking sector’s funding strains. The ECB’s collateral framework had already been considerably loosened in February against heavy resistance of the Bundesbank.
Cyprus in negotiations of a bail-out
Cyprus is in negotiations with the EU for a possible rescue package, while also looking into the prospect of loans from Russia, according to Reuters (Link: http://uk.reuters.com/article/2012/06/21/uk-cyprus-russia-loan-idUKBRE85K15N20120621). Cash-strapped Cyprus needs the equivalent of 10% of its GDP to recapitalise its second-largest bank Popular by June 30, with its financing options including an EU bailout, a Russian loan or a combination of the two. Cyprus has approached Russia on a political level to secure funding. So far Cyprus has appeared reluctant to borrow from the EU bailout fund, the EFSF, for fear of potentially unpopular fiscal austerity eight months before a general election. But it has not ruled that option out. Popular Bank took a heavy €2.3bn loss on the write-down in the value of Greek bonds in its portfolio, depleting its regulatory capital. Unless it finds the funds privately, the state must step in.
Samaras presents his conservative government with Vassilis Rapanos as finance minister
Prime Minister Antonis Samaras on Thursday unveiled a 39-member cabinet, centered around MPs from his New Democracy party, Kathimerini (Link: http://ekathimerini.com/4dcgi/_w_articles_wsite1_3366_21/06/2012_448387) reports. The Cabinet is dominated by conservatives, who hold 30 of the 39 positions. Of these, 24 are ND deputies and the others are figures associated with the party. The new finance minister is Vassilis Rapanos, who is not linked to ND at all, but has worked with PASOK governments as a civil servant. The new government promised on Thursday to renegotiate the terms of the country’s bailout without endangering its future in the euro. At the first cabinet meeting, Samaras said his ministers would take a 30% pay cut and told them to use government cars as little as possible in an effort to lead the debt-laden nation by example. The government will also seek to extend the payment of unemployment benefits to two years from one, to offer benefits to the self-employed without work and to limit public sector lay-offs, the official told Reuters (Link: http://uk.reuters.com/article/2012/06/21/uk-greece-idUKBRE85K0P920120621).
Finland opposes extension of timeline for Greece
Finance Minister Jutta Urpilainen has told YLE (Link: http://yle.fi/uutiset/urpilainen_no_extra_time_for_greece/6191998) that Finland does not accept a Greek request for extra time to implement its austerity programme. According to Urpilainen, Finland is not prepared to accept a Greek request for an extra two years to implement its savings programme. “We believe that extra time means extra cash. This is an impossible demand for us,” Urpilainen stated.
Rutte increasingly irritated by Merkel’s call for ‘political union’
The press summary from Radio Netherlands (Link: http://www.rnw.nl/english/article/dutch-press-review-thursday-21-june-2012) picks up on the Dutch-German relationship after prime minister Mark Rutte’s visit to Berlin for crisis talks with Angela Merkel. Rutte stressed the two leaders were “moving together” to find a solution to the problems. However, nrc. next says a gap has slowly been emerging over the past few weeks between the two, with Rutte increasingly irritated by Merkel’s proposal for ‘political union’ in Europe. “Rutte has two European faces” writes de Volkskrant. In Europe, he works enthusiastically on saving the euro, appearing like he’s a real Europhile, says the paper. Meanwhile, at home in The Hague, he looks annoyed when phrases such as ‘European integration’ or ‘the transfer of power’ are mentioned. “I’m no Europhile,” he quickly says. Some MPs are convinced that the prime minister uses his domestic eurosceptic face to woo the voters in the forthcoming election in September. De Volkskrant, however, believes that Mr Rutte is in a real state of confusion about what he wants from Europe. While he is for more European control over member state’s budget deficits, he’s against the loss of national sovereignty such control entails.
Euro crisis countries are catching up much faster than thought until now, an unpublished study shows
The euro crisis countries’ competitiveness particularly in Spain and Ireland is catching up much faster while Germany’s economy is losing its edge un unpublished study by the research firm the Conference Board shows, Financial Times Deutschland (Link: http://www.ftd.de/politik/europa/:konkurrenzfaehige-euro-krisenstaaten-deutsche-industrie-buesst-massiv-an-wettbewerbsfaehigkeit-ein/70053136.html) reports. “Unit labour costs in the peripheral countries is going down rapidly which is a big sign of hope for the whole continent”, Bart vanArk, chief economist of The Conference Board and a co-author of the study is quoted. According to the study costs have dropped in certain sectors up to 41.5% in Ireland since 2008 for example while they have risen by 14% in Germany in the same time span. Van Bart argues that the adjustment of macroeconomic imbalances within EMU is working and that there is no need even for a country such as Greece to leave the euro in order to regain competitiveness.
Willem Buiter sees the end of the euro
Willem Buiter (Link: http://www.ft.com/cms/s/0/b584547c-bb01-11e1-b445-00144feabdc0.html#ixzz1yUeMOemH) was one of the few economists who had not too long discounted the possibility of a Greek exit and a eurozone breakdown. He has now come round to the view that a Greek exit is virtually certain, and the risk of a eurozone breakdown is high. The troika may be lenient in its September report, but not again in December. There is no way that Greece is going to implement the prescribed reforms until then. As for the eurozone itself, this is what he had to say:
“There is now a material risk, if procrastination and policy paralysis prevail, that the endgame for the euro could be an onion-like unpeeling and unravelling. Survival to fight another crisis will require at least the following: an enhanced sovereign liquidity facility, banking union and sovereign debt and bank debt restructuring, with only limited sovereign debt mutualisation. The endgame for the euro area, if the political will to keep it alive is strong enough, is likely to be a 16-member area, with banking union and the minimal fiscal Europe necessary to operate a monetary union when there is no full fiscal union.”
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Euro falls 1 cent against the dollar, Spanish spreads go sideways, Italian spreads rise.
10-year spreads
Previous day Yesterday This Morning
France 1.072 1.118 1.140
Italy 4.164 4.371 4.357
Spain 5.158 5.099 5.174
Portugal 8.902 8.710 8.740
Greece 25.105 25.311 #VALUE!
Ireland 5.630 5.658 5.728
Belgium 1.711 1.781 1.852
Bund Yield 1.609 1.526 1.54
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.265 1.2555
Yen 100.720 101.03
Pound 0.807 0.8038
Swiss Franc 1.201 1.2006
ZC Inflation Swaps
previous last close
1 yr 1.46 1.44
2 yr 1.38 1.36
5 yr 1.55 1.55
10 yr 1.89 1.88
Euribor-OIS Spread
previous last close
1 Week
1 Month
3 Months
1 Year
Source: Reuters