Eurointelligence Daily Briefing, 28 de Junho de 2012. Enviado por Domenico Mario Nuti

Before sitting down for dinner last night at the Elysée palace Angela Merkel and Francois Hollande made short statements on today’s crucial EU summit with no further questions allowed, Spiegel Online reports. Both stressed there was agreement now to boost growth and the summit will announce €130bn of money mostly already available but newly repackaged will be used for that. But no agreement seems at the horizon on the crucial questions on the French president’s request for further solidarity and the German chancellor’s insistence for further integration into a political union and transfer of competencies on the control of national budgets to the European level. Hollande said there would be “as much integration as necessary and as much solidarity as possible”, while Merkel insisted on “more Europe” and that “we will talk about the political future of Economic and monetary union”. Speaking in Bundestag earlier in the day the chancellor reiterated that she remained opposed to any form of mutualisation of debt saying and she severely criticized the report of the group of four (Van Rompuy, Barroso, Draghi, Juncker), Frankfurter Allgemeine Zeitung reports. “Instruments like Eurobonds, Eurobills, redemption funds and many more things are impossible because of constitutional law but I also think that they are wrong and counterproductive.”

 

What today’s summit needs to achieve

 

 

In his Spiegel Online column, Wolfgang Munchau writes about action the summits needs to take concretely. The minimum that is necessary is not an agreement on eurobonds or eurobills  – which would take a long time to implement anyway – but an agreement to let the ESM recapitalise banks directly, for the ESM to have a banking licence so it can leverage itself, and for the ESM to purchase bonds in a more flexible way. This is essentially what Francois Hollande has proposed. This is not the minimum needed to save the euro, but the minimum needed to get through this year. Unless these measures are decided, the long-term plans for a fiscal or a political union will lack credibility. But a fiscal union and a banking union are necessary ingredients. Munchau says the importance now is not only to take the right measures, but to take in the right order.

  

Bild shows a stone bust of Merkel and asks: “No Eurobonds – Why is the chancellor as hard as stone?”

 

This is how your rhetoric can catch up you. The mass ciculation daily Bild refers to Angela Merkel’s categorical refusal of Eurobonds and other forms of mutualisation of debt “as long as I live” and explains the chancellor’s tough attitude. “She knows: The constitutional court would never accept Eurobonds because the German liability for those euro states would bring about incalculable risks”, the paper explains its 10m daily readers. “Merkel also knows: Only with a no to Eurobonds can she control the euro critics in her own coalition”. But the paper cautions that the chancellor will be challenged by almost every other summit participant. “They want Eurobonds because otherwise they are hardly able to raise money any longer.”

 

Monti links agreement on spreads to his acceptance of a financial transactions tax

 

Corriere della Sera has the story that Mario Monti says his acceptance of the transaction tax – which requires a procedures of enhanced co-operation – will be dependent on the summit agreeing a programme to reduce Italian spreads. He said a simple agreement on a transaction tax was too narrow. He said it was Italy’s “expectation and condition that there shall be closer cooperation in financial policies to remedy the failures of the sovereign debt markets.” The article said it would technically not constitute a veto, as the proposals requires a minimum threshold of nations wanting to go ahead.

 

Oh, and for the record, the Monti administration got its almost pointless labour market reforms through the parliament yesterday – linked to a confidence vote. For more on this, see this article in Corriere.

 

Germans feel more protected from the crisis than the French, Italians and Spaniards

 

Germans feel more protected and less exposed to the crisis than the French, the Italians and the Spaniards a Ifop-Fudicial poll for Le Figaro shows. While there are only 41% of the Germans who say they strongly feel the effects of the crisis they are 75% in France, 87% in Spain and 90% in Italy. Asked whether they favoured further European integration the Germans and the French were equally sceptical with 50% and 51% in favour while there were clear majorities in favour in Spain (67%) and in Italy (70%). In an online poll Le Figaro also asked its readers in an online poll if they were in favour of a European treasury minister. Out of the somewhat 15.200 respondents this morning roughly 76.5% were in favour and 23.5% were opposed.

 

Praet hints at rate cut…

 

In an interview with Financial Times Deutschland Peter Praet hints there could be a rate cut at the ECB’s next rate setting meeting on July 5. “There is no doctrine that the main policy rate cannot be below 1.0%”, the central bank’s chief economist told the paper. But Praet also stressed the risks of sustained low interest rate periods. They reduced the incentive for banks to engage into balance sheet repair while they increased the banks’ incentives to engage in more risky activities in their search for yields.

 

…and insists on tough conditions for Spain

 

The ECB executive board member said Spain should expect to undergo tough monitoring in exchange for the EU rescue loan in order to save the country’s banking sector. The country will get “a cooperation framework that will be monitored”, Praet insisted. Each bank would have to detail the bad loans it is sitting on. Also there would be an examination if private equity holders could be more substantially involved in the bank’s rescue. “The Spaniards will get their money in tranches”, he said. “The pay-out will only happen if Spain fulfils its conditions”. Praet said that not only the banking sector would be supervised but also the country’s fiscal policy. “Because of the link between the banking sector and public finances we also have to keep an eye on the Spanish state budget.”

  

Bankia’s value is a negative €14bn

 

When reading this story, one is reminded of the origins of the word “bankrupt”. El Pais reports that the board of Bankia has put a negative value of €13.6bn on the bank, as a result of which its parent company BFA will now have to be 100% nationalised. BFA is the holding company of Bankia, which was created through the merger of seven Cajas, including Caja de Madrid and Bancaja. The valuation is before the inject of public capital of €23.5bn. The story is worth reading alone for the picture of Rodrigo Rato and the other Caja bosses. At a tense board meeting of BFA, Bankia chairman Jose Ignacio Goirigolzarri, as a representative of the state, asked the board to resigned, or to face dismisssal, according to another article. The BFA board wanted to know details of the valuation, by Goirigolzarri refused that request. The board then resigned en bloc.

  

Eurogroup says the Spanish state is responsible for the repayment of the loan

 

This may be just a procedural statement, but if this position remains unaltered, the crisis is very likely to deteriorate fast. The eurogroup has warned that the Spanish government is responsible for the repayment of the aid to the banks, not the banks themselves. El Pais says this comments marked a disappointment to the Spanish government that the loan could eventually be turned into equity. In the document setting out the terms of the loan, it says the assistance will come through the EFSF but will be transferred to the ESM after ratification. This means the loan will rank pari passu through its lifespan, even when transferred to the ESM, which under current rules is a senior creditor. (We expect that to be changed at the summit.) The text mentions the independent consultants’ estimate of €51bn to €62bn, but the final figure will be determined with an audit of each entity this autumn.

 

Is Slovenia next to ask for bailout?

 

Slovenia’s government announced a recapitalization of the nation’s largest bank, Nova Ljubljanska Banka, or NLB, this week as part of efforts to boost the firm’s capital to meet European Banking Authority capital requirements, Dow Jones reports. NLB is burdened by non-performing loans and needs a €320m capital increase by the end of June. Asked if Slovenia could seek financial assistance to shore up its banks, the prime minister Janez Jansa said Wednesday that  it is too early to say whether Slovenia could need assistance or not.  Slovenia is pushing through austerity measures in a bid to push down its budget deficit from 6.4% of gross domestic product in 2011. On local radio Jansa said that Slovenia could face Greek scenario if the opposition does not support the legislative changes in July to stabilize public finances, Bloomberg reports.

 

Finland wants collateral for EFSF loans to Cyprus

 

Finland would demand collateral from Cyprus for its part of the loan if the bailout was taken from the EFSF, Finnish Prime Minister Jyrki Katainen said a parliamentary hearing. “As with previous rescue packages, Finland will request collateral from Cyprus if the funds are drawn from the European Financial Stability Facility”, spokesman Kare Halonen told AFP. Earlier this month, Finnish Finance Minister Jutta Urpilainen said that if a planned bailout of Spanish banks was drawn from the EFSF, Finland would seek guarantees and shares in Spanish banks in exchange for aid.

 

Samaras appoints personal friend as chief of largest lender bank

 

The chairman and chief executive of National Bank of Greece, the country’s largest commercial lender, were both sacked on Wednesday and Alexandros Tourkolias, NBG deputy chief executive and a personal friend of premier Antonis Samaras, was due to take over both posts, the FT reports. The two top jobs at NBG are traditionally nominated by the incoming prime minister, though the bank operates free of state control for a decade now. (Crony capitalism is back in Greece – and this from the party responsible for the Greek fiscal crisis in the first place. It is a very ominous sign.)

 

Bank bailouts often prolong crisis

 

 

Ireland has the costliest banking crisis in an advanced economy since the Great Depression in the 1930s, the Irish Independent cites from a new IMF working paper. The researchers study banking problems under three headings — fiscal cost, increased debt and loss of economic output. Ireland was in the top 10 in all three categories and the crisis is still ongoing. The working paper takes a detailed look at 147 banking crises from 1970 to 2011. The researchers conclude that bailouts often prolong a crisis because they stop banks recognising their problems. It says “If macroeconomic tools are used to avoid a sharp contraction in economic activity, this may discourage more active bank restructuring that would allow banks to recover more quickly and renew lending to the real economy, with the risk of prolonging the crisis and depressing growth for a prolonged period of time.”

 

Mark Schieritz advise eurozone to kick Germany out of the euro

 

Writing in his blog Herdentrieb, Mark Schieritz says there are two interpretations of the German position. The first is that Germany genuinely wants a political union as a condition for debt mutualisation. The second is that Germany insists on conditions it knows can never be fulfilled – like the Bundesbank’s coronation theory many years ago. He says Merkel’s comment that there shall be no eurozone “for as long as I live” suggests that the second interpretation can no longer be excluded. And in that case, it would be rational for the eurozone member states to kick Germany out of the club. (We think this is an interesting dialectic argument, but it will next to impossible to get Germany out of the euro.)

  

Alberto Alesina says: Give the Germans a break

 

 

Writing in Corriere della Sera, Alberto Alesina defends Germans against accusations from southern European countries. He refutes the argument, respectively, that Germany is not too generous in its bailout policies, that Germany runs chronic export surpluses, that Germany took advantage of the euro to strengthen its competitiveness, and that Germany has insufficient demand. He supports Merkel in her stance against the eurobonds, but urges her to be more open in respect of policies to help the banks. He said vulgar attacks against Germany by newspapers and economists are counterproductive. It would be a real disaster if Germany lost interest in the European project.

 

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

 

Mostly, unchanged from yesterday.

 

 

10-year spreads
	Previous day	Yesterday	This Morning
France	1.137	1.096	1.102
Italy	4.691	4.721	4.729
Spain	5.382	5.434	5.440
Portugal	8.236	8.920	8.926
Greece	25.428	25.154	#VALUE!
Ireland	5.667	5.904	5.910
Belgium	1.749	1.660	1.745
Bund Yield	1.497	1.572	1.564
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.249	1.2514
Yen	99.390	99.42
Pound	0.799	0.8026
Swiss Franc	1.201	1.201
ZC Inflation Swaps
	previous	last close
1 yr	1.17	1.22
2 yr	1.12	1.17
5 yr	1.5	1.5
10 yr	1.87	1.87
Euribor-OIS Spread
	previous	last close
1 Week	-7.586	-5.586
1 Month	4.786	4.286
3 Months	32.529	32.329
1 Year	94.779	96.379
Source: Reuters