The first leaks: the Group of Four sets out options but no immediate solutions
Reuters has details of the first draft of a paper to be discussed by the European Council on Thursday and Friday;
no formal decisions are likely to be taken;
paper targets four areas: banking union, fiscal union, economic union and political union;
banking union is prioritised, and could be implemented within a year;
paper says no treaty change would be necessary for any of the proposals;
the article says it is unlikely that this set of proposals would calm tensions in the markets;
a leaked paper from the German finance ministry said a euro breakdown would have catastrophic implications for Germany – exceeding the cost of even the most expensive rescue package;
Wolfgang Schäuble says there may be a referendum in Germany on political union within five years;
Jens Weidmann rejects Mario Monti’s ESM bond purchase proposal as a hidden monetary financing;
Greece’s new coalition will ask for an extra two years to implement austerity, no more firing of civil servants and an extension of unemployment benefit to two years;
health problems prevent Antonis Samaras and Greek finance minister Vassilis Rapanos to attend the summit;
a poll says that 39% of Germans now want to leave the euro;
78% want Greece out;
Angela Merkel has bribed the federal states into accepting the fiscal pact with the promise of a jointly issued federal-state debt instrument to cut the financing costs for the Länder;
federal government also agreed to pay any fines for the Länder until 2019;
Spain’s new toll road schemes face catastrophic losses as the economy goes from boom to bust;
the poll ratings of Francois Holland and his prime minister Jean-Marc Ayrault is already falling;
Simon Johnson says JP Morgan may not survive the collapse of the euro;
George Soros says Germany is endangering financial stability in Europe, and has drawn up an action plan to set up and link a banking union and a fiscal union;
Wolfgang Münchau, meanwhile, argues that Mario Monti should stand up to Angela Merkel and say that Italy cannot remain in the euro without joint debt instruments.
Reuters has talked to officials who have seen a paper drafted by the group of Four (van Rompuy, Juncker, Barroso and Draghi) outlining their proposal for this week’s European Council. It includes four pillars – banking union, fiscal union, economic union and political union – in varying degrees of concreteness, with a banking union earmarked as a priority. The paper, which Reuters says is 10-15 pages long, is mostly focused on the banking union, with a proposal to set up a single European banking supervisor, a common EU deposit insurance scheme and a single bank resolution regime. On supervision, the paper gives two options: a single banking supervisor to oversee all EU banks, or two tier structure where the central supervisor looks after only the systemic banks, while a separate body deals with day-to-day oversight. The expectation is that the role of supervisor will rest with the ECB, and the EBA attains a broader oversight role.
On a common deposit insurance scheme, the paper suggests that this should be done through the combination of national schemes (something guaranteed to be rejected by Germany). For the resolution fund, the paper says it requires “a large envelope” to be financed from bank levies. Reuters says the documents draws heavily on proposals from the European Commission on June 6. The paper also argues that all of these proposals can be implemented quickly, and require on Treaty change. But Reuters makes the point that even if this only took a year, it may not be quick enough to ease market pressure on Spain and Italy now. It also made the point that no decisions are expected at the summit. This is going to be only the beginning of a process.
German finance ministry fears catastrophic consequences for growth should the euro falter
According to the German finance ministry the break-up of the eurozone would have catastrophic consequences for the German economy, Der Spiegel (Link: http://www.spiegel.de/spiegel/vorab/zusammenbruch-des-euro-katastrophale-folgen-fuer-deutsche-wirtschaft-a-840554.html) reports. The potential drop in growth could be up to 10% in the first year after the reintroduction of the German mark, a study done by the ministry shows. Also unemployment could rice back to record levels above 5m. The ministry has kept the results of its study secret so far because of fears that they will contribute to a rise of the costs of the Euro rescue. “Compared with those scenarios (in the study) even the most expensive rescue appears to be the lesser evil”, the magazine quotes a
ministry official.
Schäuble thinks there will soon by a referendum about further EU integration in Germany
Wolfgang Schäuble told Der Spiegel (Link: http://www.spiegel.de/spiegel/vorab/schaeuble-prophezeit-baldiges-europa-referendum-a-840552.html) that the Germans will have to hold a referendum about their constitution within a few years in order to clear the hurdles for further European integration. Asked when he thought this would be the case the finance minister replied: “Nobody knows when this will happen. But I believe this will be the case more quickly than I thought only a few months ago.” Schäuble added: “A few months ago I would have said: In 5 years? Never in my life. Now I am not so sure any longer.”
Weidmann rejects Monti’s ESM proposal
Jens Weidmann said in an interview with Sueddeutsche Zeitung that Mario Monti’s proposal to allow the ESM to start buying bonds amounts to monetary financing as it involves the ECB. The proposal is for the ECB to do the buying, and for the ESM to guarantee the purchases. Weidman said: “Monetary policy should be restrained from limiting the financing costs of member states and from going a long way to shutting down market mechanisms…That way an extensive socialisation would be introduced and the regulation framework of the currency union hollowed out.”
(One gets the sense that the Bundesbank considers the high spreads as welcome on the grounds that they put countries under pressure, and there is no willing to contemplate any policies that might lead to a narrowing in spreads.)
Greece to ask for two more years for deficit reduction, more unemployment benefits and no more firing
Greece’s coalition government outlined the main points that the coalition would like to renegotiate. The three parties agreed to ask Greece’s lenders for two more years, up to 2016, to bring the public deficit under 3% of GDP. The coalition intends to ask for permission to extend unemployment benefit from one year to two and to limit any outstanding tax payments to 25% of each taxpayer’s income, with the remainder to be paid in two annual payments over the next two years. The government also wants to reduce value added tax for food catering to 13% from 23% and to replace all property taxes with a single, progressive charge. Most controversial is the proposal that no civil servants should be fired. The process to privatize state assets, however, will not be shelved. The coalition wants it to be linked to a growth strategy, not just for revenue purposes.
In terms of political reform, the parties suggest checks on the assets of all those who served as ministers and senior civil servants since 1974. They also propose that ministers’ immunity should be lifted if they are accused of committing financial crimes. Similarly, MPs should lose their immunity if they commit offenses not related to their political activity.
Deputies will also lose extra payment for taking part in parliamentary committees and new MPs will not receive a pension after serving two terms in Parliament. Parties will have their public financing reduced.
Samaras and Rapanos won’t be at EU summit
Neither Prime Minister Antonis Samaras, nor incoming Finance Minister Vassilis Rapanos, will be able to travel to this week’s European Union leaders’ summit due to health problems. Antonis Samaras underwent eye surgery on Saturday and Vassilis Rapanos is in hospital after suffering from nausea, intense abdominal pains and dizziness, Reuters (Link: http://uk.reuters.com/article/2012/06/24/uk-greece-idUKBRE85M0AG20120624)
reports. Instead, the foreign minister Dimitris Avramopoulos and outgoing finance minister George Zanias will attend the June 28-29 meeting to ask for the terms of the €130bn to be renegotiated. The unexpected turn of events forced the postponement of a visit to Athens on Monday by officials from Greece’s “troika” of lenders.
39% of Germans favour leaving the euro, says poll
Germany showed the lowest support for the Eurozone according to a poll of 4,000 people in the four largest Eurozone member countries Germany, France, Spain and Italy, Bloomberg (Link:
http://www.bloomberg.com/news/2012-06-24/germans-show-lowest-support-for-keeping-euro-in-four-nation-poll.html) reports. The poll shows 39% of Germans favour leaving the euro, compared with 28% of Italians, 26% of French and 24% of Spaniards. A majority of those polled in France (65%) and Germany (78%) said Greece should leave the euro if it can’t pay back its loans, about half shared that view in Italy (49%) and Spain (51%). The poll was conducted by the Ifop Fiducial Institute for the German newspaper Bild am Sonntag, Le Journal du Dimanche in France, Madrid-based ABC and Italy’s Corriere della Sera. In all four countries, majorities said that loans to Greece will never be paid back and that Greece will not make it, 65 % in Italy, 72 % in Spain, 84 % in Germany and 85 % in France (figures thanks to Jean Quatremer
(Link: http://bruxelles.blogs.liberation.fr/coulisses/2012/06/malgr%C3%A9-la-crise-les-europ%C3%A9ens-restent-massivement-attach%C3%A9s-%C3%A0-leuro.html)). Most said that not saving Greece would increase the euro region’s difficulties “dangerously” (76% in Germany, 84 % in France, 88 % in Italy, 90 % in Spain).
Germany decides introduction of „Germany bonds“
In order to overcome the resistance of the federal states against the fiscal pact in Bundesrat, the second chamber, the coalition of Angela Merkel agreed to introduce bonds issued jointly by the federal and the state governments, Frankfurter Allgemeine Zeitung (Link: http://www.faz.net/aktuell/politik/europaeische-union/einigung-ueber-fiskalpakt-bund-bereit-zur-einfuehrung-von-deutschland-bonds-11798042.html) reports. The common issuance’s goal is to reduce interest rates and thus the refinancing costs of the states. In a further concession the federal government agreed to shoulder until 2919 the total cost of potential sanctions that Germany could have to pay as a result of the application of the fiscal pact. The latter point was important to the states because a certain number of budgetary requirements will enter into force more quickly with the European fiscal pact than is the case with the existing national rules. Also the states will be held responsible for the financial situations of the municipalities which is not the case in the national rules. Economists think that the interest rates even the most solid states will have to pay will be lower with the new agreement than they were until now. In reference to the debate about the Eurobonds the opposition SPD and the Greens referred to the joint issuance as “Germany bonds”.
What a depression looks like – the toll on the toll roads in Spain
El Pais (Link:http://elpais.com/politica/2012/06/24/actualidad/1340558702_660459.html ) has a story on the catastrophic situation of the recently completed toll roads, a project drafted in better times. It is a good example of the collapse of demand in a depression, and how this reverberates on government spending. It quotes the head of one toll roads around Madrid: “There have been cost overruns in the works and expropriations. We had to invest €640m but ended up with €1.5bn. In addition, traffic has reached only 35% of what was expected… It does not work. Only the government can fix it.”
Hollande and Ayrault start to loose support in the polls
In a clear sign that there will be no honeymoon for the new French executive polls show that Francois Hollande and Jean-Mark Ayrault still command large support but the number of unhappy voters is rising, Le Journal de Dimanche (Link: http://www.lejdd.fr/Politique/Actualite/Popularite-premiere-alerte-pour-l-executif-barometre-Ifop-pour-le-JDD-juin-2012-521703/?from=headlines) reports. According to the poll done by Ifop the president still 59% of positive opinions but he lost 2pp compared with the previous poll in May and more importantly the rate of voters unhappy with his actions rose from 33% to 40%. The same tendency alos appears for the prime minister. While his popularity rating is as it was in May (65%) the rate of those unhappy rose from 22% to 29%. His government will this week announce first austerity measures with the aim of getting the budget under control. According to Les Echos the government will have to save or get additional revenues in the magnitude of €7.5bn which would be a bit less than the previously announced €10bn.
Simon Johnson explains how a euro breakup would lead to the collapse of JP Morgan
This is a very detailed and interesting column by Simon Johnson (Link: http://www.bloomberg.com/news/2012-06-24/u-s-banks-aren-t-nearly-ready-for-coming-european-crisis.html) in Bloomberg (hat tip Naked Capitalism), which explains how a euro bust up would affect the global banking system. Johnson starts off with a how a break up would affect cross-country euro exposures, and then gives the example of JP Morgan, which as his own research suggest, could not conceivable wheather such a storm. This is his conclusion:
“If the world’s largest bank can lose $2 billion to $3 billion in a relatively calm quarter through incompetence and neglect on the fringes of its operations, how much does it stand to lose when markets really turn nasty across a much broader range of its activities? And how might that harm the U.S. economic recovery?”
George Soros says Germany threatens European stability
Writing in the Financial Times, George Soros (Link: http://www.ft.com/intl/cms/s/0/e0a2799c-be51-11e1-83ad-00144feabdc0.html#axzz1ykWwtTnZ) says a lot is at stake in this week’s European summit. He says that even if a catastrophic accident can be avoided, there is a danger that the eurozone creates its permanent mezzogiorno as debtor countries cannot recover their competitiveness. He makes a concrete proposal to establish a fiscal authority that managers the banking and the fiscal union. This is how it would work:
“There is a missing element in the current plans for the June summit: a European Fiscal Authority (EFA) which, in partnership with the ECB, can do what the ECB cannot do on its own. It could establish a debt reduction fund – a modified form of the European Debt Redemption Pact that was proposed by Chancellor Merkel’s Council of Economic Advisors and is endorsed by the Social Democrats and Greens. In return for Italy and Spain undertaking specified structural reforms, the fund would acquire and hold a significant portion of their outstanding stock of debt.”
Monti must speak truth to power
Wolfgang Münchau (Link:http://www.ft.com/cms/s/0/6b58d55c-bbbb-11e1-9436-00144feabdc0.html) says that it falls to the Italian prime minister to speak truth to power and stand up to Angela Merkel and tell her that the eurozone cannot continue with debt mutualisation. Munchau says the problem is that Germany’s internal debate has gone off in a wrong direction some time ago, and that it will be very difficult for Angela Merkel to do what needs to be done. But she is afraid of an Italian exit. Monti must stand up at the summit and say he cannot remain prime minister if this summit fails to agree a crisis resolution, and that Italy cannot remain a member of the eurozone.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Spanish and Italian 10-year yields are down from peak levels.
10-year spreads
PreviousdayYesterdayThis Morning
France1.118 1.028 1.038
Italy4.231 4.312 4.303
Spain5.099 4.772 4.849
Portugal8.710 7.996 8.061
Greece25.311 25.361 #VALUE!
Ireland5.658 5.575 5.628
Belgium1.781 1.706 1.770
Bund Yield1.5261.5781.587
Euro Bilateral Exchange Rate
PreviousThis morning
Dollar1.2551.2527
Yen100.930100.52
Pound0.8040.8034
Swiss Franc1.2011.2008
ZC Inflation Swaps
previouslast close
1 yr1.261.1
2 yr1.321.29
5 yr1.471.55
10 yr1.831.92
Euribor-OIS Spread
previouslast close
1 Week-6.829-5.929
1 Month1.0574.957
3 Months33.40733.107
1 Year97.99397.893
Source: Reuters