 Now we know what an ESM capital injection means: states must still guarantee it
This is probably the most outrageous eurozone story we have read in a long time. Reuters quotes an unnamed official saying that the ESM will not inject proper capital into banks after. The member state will still have to guarantee the money, and thus remains the ultimate backstop. That may sound technical. But it means that whatever the ESM injects, it is not capital, since the ultimate risk remains with the member state. After all, the idea of direct ESM capital injections is to sever the link between banks and their sovereigns. Reuters quotes a senior official as saying the following: “There is some degree of mystification going on here … in the broader public who think that under current rules the ESM could all of a sudden end up owning Bankia with the full risk of Bankia on the balance sheet of the ESM. This is very much not the case.” (It is preposterous to argue that the fault lies with the broader public as he suggests. It was a deliberate misrepresentation of a policy by the European Council. If this official is right, it means that the ESM will not ever inject capital into the banks. Now it all makes sense why we don’t need a treaty change. If you don’t change the policy, you don’t need to change the treaty.)
Spreads back up to crisis level
The post-summit rally ended on Friday. The euro is now below $1.23, and Spanish spreads have risen to 5.674bp, which must be close or at their eurozone high. The markets have clearly concluded that there was no substance to the summit’s conclusion in terms of crisis resolution. Irish spreads are still below those of Spain, but Italian spreads have also risen, but remain under 5 point.
Monti is asking for a faster implementation of EU bailout funds Italy will ask for a faster implementation of access to EFSF/ESM funds in today’s Eurogroup, according to Repubblica, in an effort to reduce investor uncertainty. “Italy is considered a debtor by northern Europe, and this despite Italy never having asked for a single euro from the EFSF, ESM,” Monti said from Aix-en-Provence. Italy and Spain have pressed Germany to adopt measures to ease their debt problems as their borrowing costs had reached unsustainable levels. And today there will be the next, effective, step, according to Repubblica. “We have asked that a mechanism be put into place which reduces the difference in the spread,” Monti said. The yield of Italian 10Y government bond is over 6.00%, 470 basis points over Germany 10Y bond.
German president criticizes Merkel for not explaining the stakes and consequences of the euro rescue
The German president Joachim Gauck criticized Angela Merkel for not explaining well enough the stakes and the consequences of the current euro rescue policy, Süddeutsche Zeitung writes. “She has the obligation to explain in great detail what his means fiscally”, Gauck told ZDF television. The chancellor is often criticized for failing to develop a coherent non-technical narrative on why it is important and in Germany’s interest to save the euro. Gauck said he would be willing to help Merkel but the main task of explaining her policy was with the chancellor. Meanwhile Norbert Lammert, president of Bundestag and member of Merkel’s CDU, put pressure on the constitutional court by saying that it would have “huge consequences” if the court rejected the ESM. The Karlsruhe judges will start with oral hearings on the matter tomorrow.
Schäuble and Moscovici will split the eurogroup chairmanship, Der Spiegel reports
According to Der Spiegel Angela Merkel and Francois Hollande agreed to split the eurogroup chairmanship. In this scenario Wolfgang Schäuble would succeed to Jean-Claude Juncker when leaves later this month and hand over to Pierre Moscovice half way through his the 2.5 year term. This solution would allow both countries to save face. Moscovici however yesterday denied splitting the eurogroup presidency was under consideration and said he not a candidate for the job. He said there would be a good “Franco-German solution” when Juncker leaves his job, according to Reuters.
Italian recession is deepening, as Italian cut home living and clothes expenditures
Italians cut their expenditures for clothes and home living. In the first weekend of the summer sales the revenues of Italian shops dropped by 20% year to year, according to Il Messaggero. “The crisis is not over in Italy, nobody wants to spend a euro,” consumer group Codacons said. Shoppers are afraid by tax rises, recession, stagnant wages and unemployment. Plus, the drop on summer sales reflects the income from the IMU property tax, which totalled over 9.5 billion euro at the end of June, relative to the first deadline of 18 June. “We need growth, not austerity,” Codacons spokesman said. Italian consumer morale hit its lowest since 1996 in June, Italian statistics office ISTAT has said. Italian GDP is expected to fall by over 2.0% this year, according to the Bank of Italy head Ignazio Visco.
Monti attacks Confidustria for driving up the spreads The Italian Prime Minister Mario Monti attacks the Italian Business Lobby Confindustria Head Giorgio Squinzi, Il Corriere della Sera reports. “Declarations of this sort make the spread and interest rates go up and affect not only the public debt, but also businesses,” Monti said. Squinzi has criticized the Italian government on latest spending review that will cut over €26bn until 2014. “It’s not enough, Italy needs of another austerity plan before the end of the year,” Squinzi said on last Saturday. In addiction, Squinzi said that “social butchery” must be avoided. Susanna Camusso, head of Italian biggest union CGIL, agreed. “We cannot accept these cuts,” Camusso said. According to the technical report of the spending review there are 24,000 redundant public employees.
Troika says Greece its off course on 210 targets, and withholds cash until September
Troika officials informed the new finance minister Yannis Stournaras on Sunday that Greece was off course on 210 targets in its loan agreement and would need to rectify this before receiving any more money, Kathimerini reports. EC, ECB and IMF officials also rejected any talk of extending the fiscal adjustment period from the end of 2014 until progress has been made with the existing targets. The Greek government was told that the earliest it can expect to receive its next loan tranche is in mid-September. This means Greece, which was due to run out of money later this month, will have to find a way to stretch its finances and that there will have to be a special arrangement for a government bond held by the ECB, which matures on August 20. Kathimerini understands that either a clause allowing it to be paid a month later will be triggered or it will be covered by the EFSF. To meet the bailout targets, the Greek government puts an extensive privatization programme at the forefront. Stournaras identified 28 privatizations, including the state natural gas, water and betting companies, as well as regional airports and ports. The new three-party coalition government in Greece was backed by all its 179 deputies in a vote of confidence in parliament. The first opinion poll since the June 17 election showed that while a majority of Greeks supported the coalition government, they were split on whether it should stick to implementing the terms of the bailout, Bloomberg reports.
Portugal’s constitutional court rules some austerity measures to be unconstitutional
Portugal’s constitutional court ruled late last week that the government’s move last year to cut public-sector workers’ traditional extra two months of salary each year from 2012-14 was unconstitutional. Dow Jones reports that the ruling won’t apply to wage cuts in 2012, which will save the government more than €1bn, but 2013/2014. In 2013, the government will need to raise €2bn to meet a deficit target of 3% of GDP of the bailout agreement. One of the options discussed are to increase income taxes. But this would completely change the composition of the bailout programme, according to Jornal de Negocios.
Official budget deficit figures released late last week showed that first-quarter budget execution deteriorated due to the government spending more than expected on unemployment benefits and receiving less from tax revenue. Budget problems have led political parties to urge the government to renegotiate terms of the bailout program, saying too much austerity is strangling the country’s economy.
ECB is preparing counter-proposal to Commission plan on bank supervision
The ECB is drawing up a counter-proposal to the Commission plan on bank supervision, Der Spiegel reports. The Governing Council last Thursday decided to present in September a the latest the central banks own proposal because the central bankers are horrified by the preparations undertaken in Brussels. At the Commission Michel Barnier, Joaquín Almunia and Olli Rehn have started to work and he issue and according to first versions of their proposal the main supervisory task would be with the EBA, the largely discredited European Banking Authority and the ECB would only receive certain specific tasks. But as of now there is also disagreement within the Governing Council with Christian Noyer of France arguing the ECB should supervise all banks within the eurozone and Austria’s Ewald Nowotny saying it should only be a very limited number of cross border systemic banks.
Asmussen says EU bank supervisor in place in 2013 We don’t really how they define “bank supervisor” but whatever it will be, it will be ready by 2013 according to Jorg Asmussen. He told La Stampa (hat tip Reuters): “There are several practical issues to solve to get to a European banking supervision… I believe that European supervision will be fully operational only during 2013.” And once the mechanism is in place, the increase in Spanish debt as a result of the ESM loan would be transferred to the banks. (So in conjunction with our top story this reads: the eurozone tries to solve the crisis through an accounting trick, by pretending there will be equity injections when, in reality, this is not the case.)
Coeure says no more ECB bond purchases Benoit Coere said the European Council decision to allow the ESM to act in the secondary market has let the ECB off the hook. The market should not expect any ECB bond purchases from now onwards. “It would be a paradox if the central bank intervened in the place of the governments,” he said, placing the ball firmly into the hands of governments. He said the only exceptions are bond purchases with the specific goal to improve monetary transmission mechanisms.
Merkel ally Von der Leyen calls Eurobonds „an option“ Ursula Von der Leyen, Germany’s social affairs minister and a close ally to Angela Merkel, called Eurobonds “an option”. Talking to Der Spiegel the member of the chancellor’s CDU said: “If there is a complete common fiscal policy with an effective debt control common bonds become an option.” However she insisted that currently the conditions were not fulfilled. Von der Leyen also criticized Francois Hollande for lowering the retirement age back to 60 years for certain categories of French. “If I look at the French I would say. Lowering the retirement age is not the right step in the long run.”
Mark Schieritz applauds the “wise men’s” special report
In his Herdentrieb blog Mark Schieritz applauds the special report the German council of economic advisor’s published last week. Schieritz concedes that federalists will criticize the report for not being daring enough in terms of mutualisation of debt and risk while eurosceptics will criticize that it goes way too far. But Schieritz thinks the report is “clear, consistent and oriented towards solutions”. He argues that the irritating aspect of Hans-Werner Sinn’s appeal against the summit results and the banking union is that that it criticizes without proposing any alternative. “The council (of economic advisors) has in the past years often retreated to pointing to liberal (and in a minority vote Keynesian) basic believes. Now it starts making proposals for the dirty reality. That is what it was created for”, Schieritz argues.
Wolfgang Munchau says that there will be no crisis resolution
In his FT column Wolfgang Munchau debunks the Yes-But commentary on the European Council’s latest decision. He says it was a catastrophic outcome because it made crisis resolution contingent on an illusionary integration process, which is going to take years to complete at best. A banking union, if done properly, would comprise elements Germany in particular is not prepared to accept, including deposit insurance, central resolution powers, and the inclusion of Landesbanken and smaller banks. Munchau recalls his prediction in November when he wrote that the European Council had 10 days left to solve the crisis. He said it was right. If they had laid the foundation for a fiscal and banking union in December, they might now be in a position to decide on the necessary banking resolution steps. But they did not agree then, and they cannot, and do not want to, solve the crisis now.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
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