On Spanish banks, the EU cannot agree on what they agreed
What was that agreement on Spanish banks? If you read today’s press, you got a lot of confusion of what was actually agreed at the summit in terms of Spanish bank rescue. Yesterday we reported a Reuters story according to which the ESM will not inject equity in European banks, and that the ultimate guarantee would still have to come from the member state.
There were loads of denials of that story – from Jean Claude Jucker and Olli Rehn, who said yesterday there will be no state guarantee. But there will be no equity injections either. Peter Spiegel and Joshua Chaffin had an excellent analysis in this morning’s FT in which they quoted a senior EU official as saying: “If the ESM lends to Spanish banks, it has to be structured so the first loss, which would be common equity, would be borne by the Spanish government.” That statement, if true, ultimately confirms yesterday’s story – that the pernicious link between banks and sovereign will not be broken. Olli Rehn’s spokesman, however, maintained: “There will be no need for a sovereign guarantee for banks being directly recapitalised by the ESM.” (I guess the meaning depends on what they mean by “sovereign guarantee”. If it is a first-tranche loss, then it is technically not a guarantee, but it is economically a guarantee, for this is what a first-tranche loss is all about.)
Wolfgang Schauble and others also played down expectations that there could be a quick deal on supervision. “That will take time, it’s complex, that’s not easy to create, but we will work on that.” He did not address the issues of how the loans would be turned into a direct equity injection.
To recap, it is completely uncertain whether, when and how the EU meets the conditionality that is needed to trigger direct ESM bank aid to Spain. And it is completely uncertain, and contested, what form that bank aid will take. If the Spanish government takes first loss, then we are talking about some hybrid type investment.
These doubts have contributed to yesterday’s increase in Spanish 10-year yields, which have risen further to over 7.1%, with the spreads at over 5.8%. The euro was at $1.2285 this morning.
That Spanish package in full – conditionality of bank aid and a new fiscal target
The two big items on Spain were the outlines – but not yet a final decision – of the ESM loan and an extended deficit target trajectory. In a concession that may hint at future leniency for Greece, the euro ministers gave Spanish Prime Minister Mariano Rajoy’s government an extra year, until 2014, to drive the budget deficit below the euro limit of 3% of GDP – and increased this year’s target from 5.4% to 6.4%. (They will miss this too, but the overshoot won’t look so embarrassing. It is extremely difficult to lower a deficit in a recession, let alone by such an extreme amount. The EU keeps on underestimating the negative impact of austerity on deficits.) In return, for the bank loan, the Spanish government, which had previously rejected the idea of a bad bank, will have to set up a separate company to manage assets of banks under EU support. The maturity of loans to Spain, starting from the EFSF, will average 12.5 years and run as long as 15 years. The programme will be taken over by the ESM, set to go into operation in the coming weeks. El Pais writes that the troika will send missions to Spain every three months, and assumes de facto powers over financial supervision of banks. The EU will impose sweeping changes throughout the financial sector. And Brussels also requires immediate new tax measures to allow the government to meet the new deficit targets. A VAT rise is now certain. El Pais says it is uncertain to which extent these new taxes would reduce the already weak demand in the Spanish economy. The agreement will be formalised July 20, along with a first €30bn tranche, which is due before the end of this month.
Official document warns that even the new deficit targets may be hard to reach
Reuters quotes from an EU document according to which even the looser targets agreed yesterday may be difficult to reach. “This budget forecast (for 2012) is still subject to major risks… A further deepening of the economic crisis and implementation risks at regional level … could imply an even larger deviation. ” the document said. “Spain is likely to fall back into recession and record negative annual economic growth in both 2012 and 2013,” the document said.
Regling confirmed, Mersch nominated, Junker reappointed
The Eurogroup confirmed Klaus Regling as head of the ESM and has nominated Yves Mersch to the ECB board. Mersch, 62, has been head of the Luxembourg central bank since 1998 and would replace Spain’s Manuel Gonzalez Paramo, who stepped down from the ECB post in May. Junker has been reappointed as eurogroup chairman, though he said he will not serve for the full 2.5 year term, the FT reports. Wolfgang Schäuble’s candidacy met resistance from some of the eurozone’s peripheral economies, who feared that the eurozone presidency would give a dominant Germany even more power to determine the bloc’s policies.
Time is running out for Rome
Italy must be saved before August, La Stampa reports citing government sources. Huge borrowing costs, recession, lowest business climate since 1998 (according to Italian statistics office ISTAT): the crisis is not over in Italy. Several government officials warned that Italy may have just few weeks to save itself, avoiding a Greek style death spiral. The spending review decree is only one step of the reforms plan arranged by Italy with the European Commission. The risks of a political deadlock in 2013 are huge. That’s why, according to La Stampa sources, the Italian PM is mulling to stay in his role for another year. Monti’s mandate expires in spring 2013.
Corriere celebrates another European victory for Monti
Mario Monti leaves Eurogroup early but as winner, Il Corriere della Sera claims. “The agreement goes in the direction desired by Italy,” government sources told Luigi Offeddu, Brussels correspondent for Il Corriere. Monti has attended the Eurogroup as Italian Finance Minister, helped by deputy Finance Minister Vittorio Grilli. On the last European Council in Brussels, Monti was fighting for “his political survival,” Il Corriere wrote. Later he obtained, also thanks to Spanish cooperation, an agreement on his proposal about a larger role of the ECB or the EU bailout funds EFSF/ESM for sovereign bonds purchase for those Eurozone members that are punished by higher interest rates but are showing good fiscal behaviour. Monti reiterates Italy did not intend to apply for a bailout or an access to EU bailout funds EFSF/ESM. Meanwhile, the yield of Italian 10 year government bond rose to 6.13% from 6.02%.
The last chance for Italy to reform its electoral law
Italian President Giorgio Napolitano has stated that the reform of electoral law can no longer be postponed, ANSA reports. Napolitano wrote to House Speaker Gianfranco Fini and Senate Speaker Renato Schifani. “It’s been a long time since the political parties announced they wanted to reach an agreement, a mutual understanding for a substitute law to the one currently in force for the Senate and House chambers,” Napolitano said. In last month the former Prime Minister Silvio Berlusconi has asked for early elections, before 2013. In addition, Berlusconi has said “It isn’t blasphemous to exit the Euro,” signalling his party Partito della Libertà openess towards a return to the Lira. The Democratic Party, who were in opposition to latest Berlusconi’s government but have joined their centre-right rivals in supporting technocrat Prime Minister Mario Monti, and the PdL released a statement of areas of agreement in February.
International economists are outraged at Sinn’s appeal against banking union
Prominent international economists are outraged at the public appeal against banking union that Ifo president Hans-Werner Sinn initiated and that was signed by more than 200 German economists, Financial Times Deutschland reports. The paper quotes Barry Eichengreen, Alberto Alesina, Charles Wyplosz, Dany Rodrik, Harold James, Alan Manning and others who call Sinn’s text ideological, superficial and free of any understanding of mechanisms at work in the current crisis. “It would lead to the collapse of the euro if the advice given in the appeal was followed”, Rodrik told FTD. Meanwhile a counter appeal in favour of banking union initiated by economists from the Goethe University in Frankfurt was signed by more than 100 economists. Also Sinn together with his colleague Walter Krämer defended his initial appeal in a text published by Frankfurter Allgemeine Zeitung under the headline “The risks of the rescue policy”.
Politicians put pressure on constitutional court ahead of today’s ESM hearing
As a sign of rising nervousness several politicians put pressure on the constitutional court ahead of today’s hearing on the ESM and the fiscal pact, Frankfurter Allgemeine Zeitung reports. “Some observers rightly criticize that the Karlsruhe judges do not have a complete understanding of European affairs which leads them sometimes to erroneous appeciations”, Alexander Graf Lambsdorff, a liberal deputy from the EU parliament said. Helmut Brandt, chief lawyer of the parliamentary group of the CDU and CSU in Bundestag warned against a ruling that would declare the German participation in the ESM and the fiscal pact unconstitutional. “It would be economically and politically fatal if such a ruling would be the outcome”, he said. Martin Schulz, the social democrat who is currently president of the EU parliament said the rulings where “sometimes marked by a lack of factual knowledge”. The Karlsruhe court will today start oral hearings.
France borrows short term at negative interest rates for the first time
For the first time France yesterday borrowed short term at negative interest rates, Les Echos reports. At their weekly issue of treasury bonds the French treasury Agence France Trésor emitted bonds with a maturity of three months at -0.005% and with six months at -0.006%. According to the paper the negative interest rate shows that investors appreciate the liquidity of the French debt market which despite France’s loss of its AAA top rating they currently consider as the only safe alternative in the eurozone to the German debt market.
Francois Hollande wants to lower labour cost in France
At the social conference in Paris Francois Hollande made it clear that he wants to reduce labour costs in order to restore the French economy’s competitiveness, Le Figaro reports. Nicolas Sarkozy had wanted to do so by shifting parts of the social contributions from the salary to VAT but the new socialist president stopped the rise of VAT. Hollande yesterday hinted that his preferred option could be raising the Contribution Sociale Géneralisée (CSG) which is taken from work and investment revenues. Raising it by one point would generate additional revenues of €11bn per year, the paper writes. While no decision has been taken so far this seems to what the government wants to do. The Medef employer’s lobby and the moderate CFDT union support raising the CSG.
Draghi hints that further rate cuts are possible
In a hearing at the EU parliament Mario Draghi yesterday hinted that further rate cuts are possible. Financial Times Deutschland reports. “We have to look at what the situation is, look at the data and the developments and then we’ll make up our minds in the Governing Council about what next actions we’ll do,” Draghi told the Economic and Monetary Affairs Committee. The ECB had lowered its main policy rate from 1.0% to the historic low of 0.75% and its deposit rate from 0.25% to 0.00%. But markets which had apparently hoped for more decisive action were disappointed by the ECB decision.
Greek think tank forecasts 6.9% contraction this year
The Greek think-tank IOBE forecasts a steeper-than-expected decline of Greek GDP by 6.9% (last forecast 5%) this year and is also raising the unemployment forecast to 23.6% (last forecast 20%). IOBE’s gloomier outlook is bleaker than EU Commission and IMF projections, predicting the economy to contract 4.7% to 4.8% respectively this year. IOBE said the government could follow a 100-day programme to kick-start the economy that included paying arrears on more than €6bn the state owes the private sector, and funnelling available funds to large infrastructure projects, Reutersreports. The IOBE was run by Yannis Stournaras until he became finance minister last week.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Getting worse again.
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A Liberdade, a cultura, a democracia e a justiça social são as nossas paixões.