 Welcome back to the crisis (July 2012 edition)
This time it took the market less than a week to see through the vacuous decisions of the European Council. We are right back to the crisis in the market that prevailed in the days before the summit, before Mario Monti demanded measures to help reduce Italian spread. That spread, and the Spanish spread are now back to the same level that prevailed before the summit. Spanish spreads are now at 5.45%, while German 10-year bund yields are below 1.4%. The euro fell to below $1.24 against the dollar.
As El Pais put it, the trigger for the latest rout on the markets has been yesterday’s decision by the ECB to lower interest rates by one only a quarter point, and not to resume the bond purchasing programme. The FT wrote that the surprise decision of the Chinese central to lower interest rates failed to overcome the markets’ disappointment. Equity markets fell particularly strongly in southern Europe. Investors also understood that the concerted action by global central banks reflected a concern about a sharp deterioration of the global economy. The sharpest comment came from Ashraf Laidi from Citi Index: “Today’s [Tuesday’s] decision by the ECB to cut its main interest rates by 25 bps highlights its role as a follower after its failed attempt as a leader in last year’s two rate hikes.”
Spain yesterday managed to sell €3bn in an auction of three types of bonds, including a ten-year bond where the average yield was 6.43%. Reuters reports that some hedge funds had piled into the market after the Brussels summit to close out bets on Spanish bonds falling further. However, traders say they have not seen any buying of the paper from longer-term foreign investors.
Some good news from Ireland
The best news yesterday was the successful return of Ireland to the market for bills, as the country managed to sell treasury bills at an average yield of 1.8%, oversubscribed 2.8 times. Ireland is still some time away from a return to the bond markets. Reuters said Ireland hopes to return to the bond market later this year, or next. Italy and Spain both had to pay over 2% in recent treasury bill auctions. Yields on benchmark Irish 2020 bonds have fallen by almost 100 basis points since the summit, and were almost 30 basis points lower than their Spanish counterparts at 6.27% before of the auction.
Mario Draghi says monetary policy will not achieve much
In his press conference yesterday, Mario Draghi made a statement that highlights the ECB thinking about interest rates: “It’s clear that when demand is weak the transmission of price signals to the aggregated economy is muted.” He said the main impact of the decision will be to lower the borrowing costs for banks. (The statement highlights a degree of confusion. If you think that interest rates are irrelevant in a balance sheet recession, then surely they must irrelevant both in terms of stimulating growth, as well as inflation. In that case, you might as well cut them to zero. A more plausible explanation is that there is no consensus on the ECB’s governing council for a zero refi rate.)
Fabrizio Goria says the ECB reached the end of the line
Writing in Linkiesta, Fabrizio Goria says one of the reasons for the disappointment is that the ECB reached the end of the line. With the deposit rate now at 0%, and two LTROs, the inter-banking market remains frozen. He quoted ICAP as saying that the ECB is working overtime to keep the banks afloat, just as they did between August and December 2011. And he said hedge funds may yet test the most recent decision by the European Council, and that this may lead to even higher yields. He said confidence in Italy in particular might falter upon a disappointing reaction to the spending review, which the Monti government is currently considering. He says Italy is unlikely to accept the European Commission’s recommendations to eliminate the provinces as a fiscal entity, and that the confidence Rome has benefitted from in the last few weeks may well vanish quickly.
Krugman and Stieglitz say the end of the euro is getting closer
In his blog, Paul Krugman writes that the immediate solution of the eurozone crisis requires three courses of action: an immediate bank recapitalisation; ECB intervention to drive down Spanish and Italian bond yields; and higher inflation in Germany. It is not happening, and the ECB has only done the minimum needed to survive the next day. He says he doubts the willingness by the European policy establishment to do what it takes.
Joseph Stieglitz compares the euro to a prisoner on death row who has been given another short reprieve. He says policymakers had misdiagnosed the crisis from the start, and while it is welcome that they now want to cut the link between banks and sovereigns, it is astonishing that it took them so long to recognise a problem that has been there for years. He also criticised the fiscal package as a repackaging exercise, as it involves no new money.
Weidmann rejects results of EU summit
Speaking only hours after Mario Draghi applauded last week’s EU summit results Jens Weidmann severely criticized these same results, Handelsblatt reports. The Bundesbank president particularly criticized that the conditionality for rescue aid will be loosened. “Now that punitive interest rates have been scrapped to a large extent, it is now sufficient to respect the already existing obligations in the framework of the European fiscal and macroeconomic framework in order to get fiscal help”, Weidmann said in a speech. The German central banker added that any further mutualisation of liabilities must be preceeded by “strict controls and central control possibilities and intervention rights” that be an important limitation of national sovereignty. Such changes cannot be implemented over night, Weidmann warned. If the order is inversed a stability union was not possible, the Bundesbank president warned.
Draghi sets out his conditions for the ECB as the eurozone’s bank supervisor
Mario Draghi used the ECB’s monthly press conference to spell out the conditions under which the euro central bank would be willing to become the eurozone bank supervisor, Financial Times Deutschland reports. The ECB president said that by deciding to build a eurozone bank supervisor the EU leaders had invested “substantial political capital” and he expected that the Commission legal proposal to set up the supervisor matched that. By saying this Draghi implicitly warned Brussels to water down the proposal in an attempt not to create to strong an entity outside of the Commission’s direct control. Furthermore the ECB president the supervisory task must be organized in a way that it did not lead to reputational risks for the ECB, that it did not impinge on its independence and that it be rigorously separated from monetary policy in order to avoid any “contagion” between the supervisory task and monetary policy. Draghi also vowed to cooperate closely with national supervisors and to submit the ECB to stronger democratic control.
Pro European economists in Germany launch a public appeal to support Merkel’s euro rescue policy
In a direct response to the public appeal by Ifo president Hans-Werner Sinn and 170 other economists for a citizen’s revolt against last week’s summit results and the plans for banking union, a group of pro European economists is about to launch a public campaign in favour of Angela Merkel’s euro rescue policy, Spiegel Online reports. Sinn’s appeal “damaged the reputation of German economic science”, Peter Bofinger said of he is one the five so called economic wise men. The director of the Institute for Economics, a research organization close to the employer’s federation, said the appeal was “irresponsible” because it “did not have anything to do with economic arguments”. Meanwhile Bofinger and Gustav Horn, a left wing economist close the German unions prepare a public appeal in response to Sinn and in support of Merkel’s euro policy. The chancellor also reacted to Sinn’s criticism by saying the summit results increased common control and not common liabilities. Meanwhile, 54% of the Germans feel that the different euro rescue efforts do not make any sense, a poll for Spiegel Online showed.
Mark Schieritz on the intellectual dishonesty of Hans Werner Sinn’s appeal
Writing in his blog Herdentrieb, Mark Schieritz makes an obvious but important point about Hans Werner Sinn’s appeal to the German people not to support the banking union. The appeal says the bank debt of the five crisis countries was €9tr, too much for the non-crisis countries. Schieritz says that this is the gross debt, not the amounted needed to recapitalise the banks. He cited the most pessimistic estimates for Spanish bank recapitalisation at €100-200bn. He says the argument of the appeal is based on a dishonest and deliberately misleading interpretation of numbers.
Hollande wants to ratify the fiscal pact as soon as possible
According to Le Monde Francois Hollande wants to ratify the fiscal pact as soon as possible, perhaps even as soon as this month. In order to make good on his electoral promise to “renegotiate” the fiscal pact, he wants to present the parliamentarians with a package of fiscal pact and growth pact, which he claims amounts to a renegotiation because it put growth on top of the European agenda, the plans for a financial transaction tax and the plans to build a Eurozone banking supervision. The government submitted the package to France’s constitutional council for checks if the laws are all in line with the constitution. Once the green light is given, the government would like to proceed with the ratification.
Merkel’s popularity among voters is the highest in three years
Angela Merkel’s popularity among voters is at its highest level in three years, according to a poll published on Thursday that also confirmed strong support for her stance in the euro zone debt crisis, Reuters reports. But the Infratest-ARD survey suggested Merkel’s FDP coalition partner would fail to get elected to Bundestag after next year’s election, complicating her hopes of securing a third term. The poll, conducted after an EU summit widely seen by German media as a setback for Merkel’s tough euro zone policies, showed 66% of Germans were satisfied with her performance, an increase of eight percentage points from a month before and the highest reading since 2009 when she won a second term. Her nearest rival, Frank-Walter Steinmeier, parliamentary leader of the SPD, had an approval rating of 61%. He was level pegging with Wolfgang Schäuble. Some 58% of Germans believe Merkel’s stance in the euro crisis is correct and decisive, although 85% of those polled also expect the crisis to get worse.
Greece is unable to collect tax fines
Another setback on the tax collection front in Greece. As Kathimerini reports, the finance Ministry has been unable to collect court-ordered tax fines of €12.6bn, 6.2% of GDP, according to data posted on ministry’s website. This is due partly to understaffing, the voluntary exit programme, and early retirement schemes for civil servants, as an absence of electronic procedures. They only managed to collect €630m. In addition, there are 180,000 outstanding tax cases in the Greek courts with no sign that this number will shrink significantly any time soon. As a result, the paper write, it is hardly surprising that net revenues are showing a 1.5% decline from the same period in 2011.
And finally, the Wolfson prize has a winner…
It seems that Eurointelligence was the only organisation on the planet that did not submit its proposal for a breakup of the eurozone to the Wolfson prize committee. The winner is Roger Bootle and his team at Capital Economics. It is not often that one reads a big paper that advocates the breach of hundreds of European and national laws, and that requires full co-operation of the military to implement it. But if you feel like it, this is where you can read it in full.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
The crisis is back in full force.
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