 The rally fades as investors are digesting the agreement
The numbers on our table are telling the story – and it is the same story again and again. The surest way to make a lot of money in the markets is to bet on a short-lived post-summit rally, to be followed by a sustained decline. This seems to be happening again.
Spanish 10-year spreads are back up close to 5%, having fallen to 4.7% on Friday. Irish spreads, too, have been rising strongly, while Italian spreads have risen moderately. The euro held up, but it now below $1.26.
We can identify two reasons for this re-assessment, the most important being a closer look at the agreement reached in the European Council – which evoparates the second you even look at it. For some of more incisive commentary, see below.
The other reason is the sceptical position taken by some governments.The Finnish government said yesterday it has Dutch backing to prevent the eurozone’s new permanent bailout fund – the ESM – from buying bonds in secondary markets. Reuters quotes from a report the Finnish government submitted to parliament’s influential Grand Committee “Due to intervention of Finland and, among others, the Netherlands, the possibility of ESM operations in the secondary markets was blocked.” The Finnish statement, quoted by the AFP news agency, said that “in the future unanimity is needed in order to decide on [bond] purchases, and it seems that unanimity is not possible due to Finnish and Dutch opposition”.
But the Wall Street Journal writes that if the money comes from the ESM, there might be no need for unanimity. The new ESM bailout fund allows for “emergency” approval from countries holding at least 85% of the ESM’s capital, if the move is supported by both the ECB and the European Commission. The Netherlands and Finland are relatively small contributors to the ESM, contributing around 7.5% of the ESM’s capital. FT Alphaville has the relevant quotes from the ESM treaty, but also notes that “ultimately it depends on which ESM measures it would be judged politic to push through under an emergency procedure — under which the required agreement is 85% rather than unanimous.”
With respect to the second plank of last week’s agreement, the direct support for banks, Prime Minister Jyrki Katainen told the Parliament’s Grand Committee that direct bank support will be possible only once a European banking supervisory organization is established. Until then, support will support will be channelled via states. Katainen does not expect that a supervisory organization will be set up for at least a year, the Finnish news agency YLE reports. “In that case, it will be possible, if there is unanimous agreement, to capitalize banks directly. And in exchange, owners would lose their money and the EFSF would gain holdings in the banks,” Katainen explained.
New world bank chief open to assist Greece
The new head of the World Bank said on Monday he was willing to let the global development lender advise troubled developed nations like Greece, a major shift for an institution that has focused on the world’s poorest, Reuters reports. Jim Yong Kim emphasized that his top priority would be to protect developing nations at a “pivotal moment” for a world economy that is losing steam rapidly. He said the bank could deploy its technical know-how to help richer nations with structural problems.
Greek government to focus on deadline extension
The coalition government is to make asking for one or two more years to meet its fiscal and reforms targets the main goal in its upcoming negotiations with European and International Monetary Fund officials, the leaders of the three parties in the new administration decided on Monday. In return for asking for more time for the fiscal adjustment program, the government is to offer the faster merger of public sector organizations and the sale of state assets. Sources told Kathimerini it was decided that Greece would not push at this stage for its 50-billion-euro bank recapitalization to be funded directly by the European Stability Mechanism, rather than by public debt. The government believes the eurozone would not be willing to accept such a move, as proposed for Spanish and Irish banks, at this stage but that the issue may come back into play at a later stage.
The eurozone crisis and US growth
There was an eerie sense about yesterday’s ISM purchasing managers’ numbers from the US. The manufacturing part sank from 53.5 to 49.7, indicating a contraction of output, which surprised a lot of economic. It was clearly the most shocking economic news of the year so far. Could this be an indirect effect of the eurozone crisis? Conversely, a double dip US recession is almost certain to impact the eurozone’s own recovery, and would have seriously negative effects on the south in particular, where it might prolong the recession to a point where the current strategies are no longer working.
Court of Auditors says France needs €33bn to get to 3.0% in 2013
In its report presented to the prime minister Jean-Marc Ayrault yesterday, the court of auditors says France needs to find €33bn until 2013 if the country is to respect its promise to the EU partners to get its deficit down to 3.0% by 2013, Le Monde writes. “France has not yet left the danger zone which it entered several years ago”, the court’s president Didier Migaud told the paper. “The rebuilding process is on its way but the biggest part of the work is ahead of us. We have to do this in an environment in which the Eurozone is weakened by the sovereign debt crisis.” Migaud also warned that the French public debt level which reached almost 90% this year will surpass the threshold of 100% by 2017. Ayrault will today hold his first big speech at the national assembly and explain how he wants to get the country’s public finances under control. Le Monde’s leading front page story has the headline: “France: the turn towards austerity”. In an online poll among around 15.000 readers of Le Figaro almost 85% responded they were convinced that the Ayrault government would now engage into an austerity policy.
ECB staff union warns Draghi of “serious potential operational risk” due to overwork
The ECB staff union Ipso has written a letter to Mario Draghi and the other members of the the Executive Board warning them of “serious potential operational risk for the ECB” due to permanent stress and overwork since the outbreak of the crisis, Financial Times Deutschland reports. The union claims that were an increasing number of longterm absences due to missions in the euro countries, but also due to stress related illnesses. Ipso refers to a poll it has done among the 1500 ECB staff which concluded that 80% complained about feeling overwhelmed by their work and 16% even talk about serious consequences over their workload for their health and their private lifes. The union concludes that the ECB is not adequately staffed for the task it is being asked to perform and even more so it takes on new tasks such as banking supervision. In a meeting with staff Draghi promised to seek an increase of the central bank’s head count.
Oral hearings at the Karlsruhe court about the ESM
There will be oral hearings at the German constitutional court on July 10 in Karlsruhe about the ESM in a procedural move that highly uncommon for urgent procedures, Frankfurter Allgemeine Zeitung reports. For the paper this is a sign of the importance the constitutional judges attach to the hearing about the German ESM law that was voted with a two-thirds-majority Friday evening immediately after Angela Merkel’s return from the EU summit. In an equally uncommon move the court had asked the German president Joachim Gauck not to immediately sign the law so that the court would have time to consider its constitutionality before its ratification procedure was formally over. Several groups have gone to the constitutional court because they think that the ESM surrenders the Bundestag’s budgetary powers in a way that is not in line with the constitution. Originally the ESM was supposed to enter into force as of July 1st. Experts think that the court will rule in July on the urgency procedures.
Gideon Rachman on the UK’s duplicity towards the EU
In his FT column, Gideon Rachman argues that it would be crazy for the UK to hold a referendum on the EU now because the starkly different outcomes of the eurozone crisis. If the eurozone crisis leads to a federation, Britain should consider leaving, he argues.
“Even under current government policy, it is increasingly possible to envisage circumstances in which Britain does leave the EU. George Osborne, the chancellor, has urged Europe to follow the ‘remorseless logic’ of monetary union and to press on towards a fiscal union. He thinks this is the only way to prevent an economic disaster that would also engulf Britain.
However, what Mr Osborne does not acknowledge is that this process also entails a remorseless logic for Britain. The more that the eurozone of 17 countries turns into a genuine fiscal, and then political, union, the harder it will be for Britain to stay inside the larger EU of 27 nations. Hitherto, Britain has always argued that the single market is the heart of the union. But, if the eurozone turns into a successful political union then, whatever the legal niceties, it would determine the future of the EU, and the cherished single market with it.”
Why optimism about Ireland is significantly exaggerated
The FT says that Irish joy may be exaggerated about the decision to inject equity into Spanish banks. The Irish had hoped that once the new rule is in place, it could be retroactively employed in Ireland as well, but the FT writes more than two-thirds of the equity invested into the two-pillar banks – AIB and Bank of Ireland. Most of the €30bn invested came through the national pension fund, which now values them at €9.4bn. It quotes John McHale as saying: “I don’t see anything that would lead me to revise a view that the chances of other European countries absorbing already crystallised losses in the Irish banks are approaching zero.”
Paul de Grauwe says ESM bond purchases will destabilise the bond market
A very good column by Paul de Grauwe in Vox, where he argues that ESM bond purchases will have the opposite effect of what is intended because the ESM is too small. This is what is likely to happen.
“As soon as the ESM starts intervening, it will quickly destabilise the government bond markets in these two countries. The reason is the following.
Suppose a new movement of fear and panic, triggered for example by the deepening recession in Spain, pushes up the Spanish government bond rate again. To stem the tide the ESM starts buying Spanish bonds. Suppose it buys €200 billion worth of Spanish bonds. At the end of the operation it will be clear for everybody that the ESM has seen its resources decline from €500 billion to €300 billion. Less will be left over to face new crises. Investors will start forecasting the moment when the ESM will run out of cash. They will then do what one expects from clever people. They will sell bonds now rather than later.”
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
The bond rally is petering out. Spanish spreads close to 5% again, with yields at 6.5%.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||