 Lagarde says ECB should resume asset purchases, not cut rates
Tomorrow is decision day at the ECB. The markets are now firmly expecting at least a 0.25bp cut in the Repo rate, but Christine Lagarde says it was more appropriate for the ECB to resume its asset purchase programme than cut rates. “We are not sure this is the best channel at the moment,” she told CNBC, according to Reuters. “Germany does not need a lowering of interest rates set by the ECB but Italy and Spain do, so you can’t dissociate when you use that kind of monetary policy instrument. On the other hand, the (ECB) asset purchase program is much more selective and can be used in a more judicious way.”
(We are not sure why there should be a trade-off. The eurozone is in recession, price pressure have abated, so why not cut rates, even if it does not produce a large stimulus? The SMP has so far failed to bring down yields, and it would have to become an unlimited instrument to be effective.)
The latest economic data support the now widely expected rate cut with producer prices falling by 0.5% during May, the result of a fall in energy prices, bringing down annual producer price inflation to 2.3%.
ECB capped use of government guaranteed bonds as collateral
In a surprise decision the ECB capped on Tuesday the use of government-backed bonds that banks can use as collateral in ECB lending operations, Reuters reports. “Counterparties that issue eligible bank bonds guaranteed by a (European) public sector entity with the right to impose taxes may not submit such bonds or similar bonds issued by closely linked entities as collateral for Eurosystem credit operations in excess of the nominal value of these bonds already submitted,” the ECB said in a legal document. The document also says the new rules come into force immediately while in exceptional circumstances and with pre-approval from the ECB’s decision making Governing Council, banks may be able to increase their use of the contested collateral. To gain approval banks will have to submit a plan on how they will wean themselves off ECB funding.
Monti to impose more austerity in Italy
There are some English expressions the Italians have never bothered to translate. Spending Review is one of them. Corriere della Sera has details of Mario Monti’s spending review, which is now in draft form, with 19 articles, organised along 5 themes. The paper says the plan is at its most drastic in the health sector, with a strong increase in prescription taxes and cuts to hospital spending, with the introduction of private suppliers. Local health authorities must now go through the Italian government’s central purchasing office. Another cut is the transfer from central to regional and local governments. Further measures include efficiency gains from government purchases, operational cost cuts in ministries, and across the board cuts in public employment, estimated at between 100,000 and 300,000.
Linkiesta gives a very positive spin on this, saying that this was a big step after years of inaction. It established an important principle: that the government can reverse public expenditure trends. It said the Italian public spending has been out of control, and there was no merit system in public administration. The Italian public service is not more expensive compared with other European countries, but it is less efficient. The spending would also have the effect to encourage Italian to opt for private sector careers. (Efficiency gains may be a good thing, but even when you cut inefficient spending in a recession, you still end up with a procyclical fiscal position. So why not redistribute those gains into offsetting tax cuts?)
Monti schmoozes Merkel ahead of her visit to Rome today
Ahead of Angela Merkel’s visit to Rome today, Mario Monti is at pains to dispel the impression that he had blackmailed the chancellor into agreeing to spread capping intervention mechanism at last weeks EU summit. The Italian interim prime minister told Frankfurter Allgemeine Zeitung his use of a veto threat against the growth pact if there was no agreement for an intervention mechanism was not “a revolution but rather a classical negotiation method”. Monti also stressed other common points with Merkel: his pro market principles, his scepticism of Keynesian economic policy approaches and his instinctive preference for supply side policies and his support for further European integration including common budgetary control. “We need a partial mutualisation of debt but we also need a more central control of national budgets because without serious control there could be irresponsible people who would want to burden others with a part of their debt.”
Seehofer threatens Merkel over euro rescue
The Bavarian state prime minister Horst Seehofer threatened Angela Merkel that his CSU could withdraw from the coalition over disagreements concerning the euro rescue. “There will be a point where the Bavarian state government and the CSU will no longer be able to say yes and where I personally would no longer be able to be responsible for that”, Seehofer told Stern magazinereferring to the EU summit’s decisions to create a mechanism to cap rising spreads and to recapitalize directly Spanish banks. “And without the votes of CSU the coalition no longer has a majority”, he added. The chairman of the Bavarian sister party of Merkel’s CDU added that the financial burden created by all the euro crisis liabilities where “on the border” for Germany and that they could lead to market defiance towards Germany. “My biggest fear is that financial markets ask: Can Germany shoulder all this? That is the point that I think is the most dangerous one.”
Dutch say ESM equity injections into banks may require treaty change
Reuters reports that the Dutch government is wondering whether the agreed equity injections require a treaty change. (We are wondering that too.) Jan Kees de Jager said the government had initially assumed any treaty changes to allow the ESM to recapitalise banks would have to be ratified by national parliaments. That may not be the case, he said, but it was still unclear whether ratification would be needed or whether euro zone finance ministers on the ESM’s board, or council of governors, would be able to approve the changes.
Deposits return to Greek banks
Deposits have been returning into Greek banks after the June 17 elections, Kathimerini reports, with some €5bn entering into Greece’s credit system in the last couple of weeks. This has more than offset the withdrawal of €4bn-€5bn in the first two weeks of June. In May, deposits dropped by €8.5bn, the worst monthly performance in decades. Bank officials insist that some €20bn are still stashed away in safe deposit boxes, mattresses and storage rooms in homes.
Ireland to test capital markets with €500m short term bills
The Irish HE National Treasury Management Agency has announced plans to test the bond markets selling €500m of short-term debt or Treasury Bills on Thursday, the Irish Independent reports. While the borrowing rate is likely to still be higher than the rates on the IMF/ECB/EU troika bailout loans, the move had been anticipated as part of an eventual overall return to bond markets in 2013. The move is the first since September 2010.
Portugal plans to sell €3.75bn in longish bills in third quarter
Portuguese government debt agency IGCP said it plans to sell as much as €3.75bn of bills in the third quarter.The debt agency plans to sell six- and 12-month bills on July 18, on 18-month bills on September 19, Bloomberg reports.
Finland to push for collaterals against bank loans
Finland underlined its determination to get collateral in exchange for loans to Spain’s banks as the Nordic country targets similar terms to those won last year on its contribution to Greece’s second bailout, Bloomberg reports. “We have the requirements of collateral on the loans that are from the temporary vehicle,” Jukka Pekkarinen, director general at the Finnish Finance Ministry in Helsinki, said in an interview in Oslo yesterday. “The details are still open, but the principle standpoint is the same” as in the case of Greece, he said.
Ayrault revises French growth further down
In his first big speech in the French national assembly Jean-Marc Ayrault revised French growth further down to 0.3% in 2012 and to 1.2% in 2013, Le Figaro reports. Originally the expectation had been that growth would be 0.5% this year and 1.7% next year but that had already been declared unrealistic by Pierre Moscovici in the past few days. Otherwise the prime minister refused to call his government’s consolidation policy austerity and he promised his government would renegotiate on its electoral promises of hiring new teachers. But he also confirmed that he intends to bring the French deficit down to 3.0% next year and to present a balanced budget in 2017. In order to do so his government will for the time being heavily rely on tax increases (new tax rates of 45% and of 75% for the rich and new taxes on stock options among others).
Could it happen to Italy and France?
El Pais provides an interesting snippet, comparing Italian, French and Spanish banks. The article said that if similar standards of analysis were applied in the other countries, the banks there would also need large capital injections. If the euro crisis were to deteriorate, that is likely to happen. It ends with a speculation that this may be the reason why Rome and Paris supported Madrid in the question for the direct ESM capital injections.
S&P says summit deal could be a breakthrough, but implementation risks significant
Standard & Poor’s said in a statement, according to Reuters, that the summit decision marked a departure towards a recognition that “the current crisis is not exclusively a budgetary crisis of excessive public debt and deficits, but that it’s also a balance-of-payments crisis. …Measures that stabilize cross-border capital flows are now complementing fiscal austerity programs. However, we believe the risks associated with implementing these measures are significant, and it is unclear to us whether policymakers will be able to build on the agreements. As a result, the agreements reached at the summit have no immediate implications for our sovereign ratings in the eurozone. As political, economic, external, fiscal, and monetary factors evolve, we will revise our ratings and outlooks on the eurozone sovereigns accordingly. “
Paolo Manasse says price-fixing deals must have unlimited resources to work
Paolo Manasse, writing in Linkiesta, made an interesting point arising out of the economic literature. Quoting the Salant and Henderson paper from 1978, and the literature on currency pegs, he concludes that if an intervention fund does not have unlimited resources and imbalances persist, alkl systems of price fixing will sooner or later collapse, triggering a speculative attack. In the case of Italy: unless the debt dynamics is reversed, the ESM will collapse in finite time, unless it has unlimited access to the ECB. FT Alphaville says bond purchases will never get off the ground
FT Alphaville has this to say about ESM bond purchases
Amartya Sen on the intellectual failures of the eurozone crisis
This is without a doubt one of the most elegantly argued articles we have yet seen on the eurozone crisis, which is worth reading in full. Amartya Sen, writing in the Guardian, concludes with the following:
Sideways from yesterday.
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