 ECB is discussing interest rate thresholds for sovereign bonds
Der Spiegel has the story this morning that the ECB plans interest rate thresholds for each member state that trigger automatic and unlimited intervention. The report said the idea is being discussed in the ECB, with a decision at its next meeting in early September. It is already decided that the ECB will intervene in a more transparent manner, by publishing volumes of bond purchases per country immediately after the purchases have taken place. The story gave no details about the sources, and no indication of whether there is a majority for a clearly set-out threshold, or how the threshold is determined – as a spread of German bond rates, or some absolute value for each country. (We assume the story has been leaked by a member of the central bank’s executive board or governing council to test the public reaction in Germany.) Earlier, Spain’s economics minister Luis de Guindos said in an interview with Efe that the ECB should undertake unlimited interventions to support the Spanish government bond market. Spain will make its decision to apply for help contingent on the type of help offered. “Soft or hard” rescue of Spain taken for grantedEl Pais takes it for granted that a full-blown rescue of Spain is imminent, quoting an unnamed Minister that Mariano Rajoy will do anything to meet the 6.3% deficit target this year as a matter of personal pride, adding “there is nothing they can demand from abroad that the Government isn’t going to do already in the next months”. Finance Minister Cristobal Montoro will report on tax revenue in Mid-September, and then a decision will be made, presumably on pension cuts and further tax raises. El Pais also reports an interview with EFE on Sunday where Economy Minister Luis de Guindos suggested that the Eurogroup would debate the terms of a rescue also in mid-September. In a week of renewed diplomacy over Greece, Germany signals cautionThere were several stories out this morning, showing Angela Merkel’s limited room for manoeuvre over Greece. Quentin Peel reports in the Financial Times that Angela Merkel will insist that Greece must fulfil its commitments, and that she does not expect the Bundestag to approve a third Greek programme (which would be the consequence of an extension of the programme, as demanded by the Greek government). She will meet with Francois Hollande over dinner on Thursday, and she will try to seek a joint position with the French president, while at the same time outline her limits. Spiegel Online quotes Volker Kauder, the CDU parliamentary leader, as saying that there is “no more latitude, either on the timeframe or the matter itself”. There were similar comments from Philip Rosler, FDP chief and economics minister. Ahead of the meeting between Merkel and Antonis Samaras, the foreign ministers of the two countries will meet to overcome the difference. Der Spiegel writes that the troika is likely to conclude that the Greek deficit will be higher than originally planned – €14bn instead of €11.5bn. Greece €11.6bn cuts to be discussed this weekGreece is close to finalising a long-awaited package of €11.6bn in spending cuts for 2013-14 to comply with the terms of its second bailout and boost its chances of staying in the eurozone. The goal is for the package to be ready before Jean-Claude Juncker arrives in Athens for talks on Wednesday and Antonis Samaras travels to Berlin to meet Angela Merkel on Friday, the FT reports. The measures include fresh cuts in welfare benefits, pensions and wages in the broader public sector, though analysts and government officials have warned that the troika may not accept some of the measures and could ask for alternatives. Yannis Stournaras warned in an interview with the newspaper To Vima, that Greece’s position in the eurozone would be threatened if the country did not implement the new austerity measures. He said the troika had asked for measures in excess of €13.5bn when it came to Athens in July. Portugal ruling party support is waningSupport for Portugal’s main ruling party has ebbed to its lowest since 2011 elections although it remains just ahead of the opposition Socialists, Reuters reports. A survey by pollsters Eurosondagem showed Pedro Passos Coelho’s Social Democrats with support of 34.1% of voters, 0.5pp down from the previous poll a month ago. The Socialists had 33%, up 0.5pp. The other member of the ruling coalition, the rightist CDS-PP, received 10.1% of voting intentions, unchanged from the previous month. Although the poll showed the coalition would win a new election, its joint support has been below the roughly 46% needed for a full majority, which it currently enjoys. A new election is not due for another three years, but analysts say the government’s popularity – and its mandate for the budget cuts – may plunge if fails to deliver on its promise to take the country out of recession next year. Finland incites eurozone breakup debateFinland has contingency plans for a possible breakup of the euro, Foreign Minister Erkki Tuomioja said Friday. European affairs minister Alexander Stubb quickly clarified Mr. Tuomioja’s remarks, saying that “every government has various scenarios that they are working with. Our No. 1 scenario is that the euro zone will regain stability and we are working in a constructive way to achieve that goal.” The comments started a heated debate in Finland about bailouts and the eurozone. National Coalition MP Ben Zyskowicz says that the eurozone should stop supporting Greece if the country cannot fulfil its bailout commitments, according to YLE. The True Finns Party leader Timo Soini suggested two separate currency unions for northern and southern Europe. A recent poll by Finnish national broadcaster Yle indicated 66% of Finns want their country to avoid shouldering more financial responsibility, even if it would save the euro. EU Commission to propose that ECB supervise all banksOne of the key issues in the debate about a common European banking supervision is whether the remit should include all banks, or only the largest ones. Reuters reports on a comment by Panicos Demetriades, the new governor of the central bank of Cyprus, that the European Commission will in September propose that the ECB should supervise all European banks. The article quotes a Handelsblatt story according to which the national bodies will remain in charge for the day-to-day business, leaving the ECB in charge of systemic risks. Beware of the unaccounted debtHans-Jürgen Jakobs of Suddeutsche Zeitung has a comment warning about the problems of unaccounted for bank debt, hidden in bad banks or other off-balance sheet vehicles. He writes that the PwC estimate of a €1 trillion of bank debt does not appear in any official statistics. He says even the ECB might be forced to hive off its investments in a bad bank. There are other “shadow” operations such as the ELA, which run off the balance sheet. The real problem with all of this financial engineering is that it takes place outside the system of democratic control. Parliaments make their decisions, on an EFFS loan for example, only on the basis of official figures. Time is running out for Rajoy, say Villaverde and GaricanoWriting in the Financial Times, Jesús Fernández-Villaverde (UPenn) and Luis Garicano (LSE) say Mariano Rajoy has made a political career out of sitting things out but this is not going to work at a time of systemic crisis. They point to non-performing loans, deposit flight and rising employment as unsustainable trends. Assuming the current rescue plan for the financial sector will restore its resilience, they advocate a restructuring of insolvent state-owned corporations, private creditor bail-ins, a reform programme centered on fostering entrepreneurship and job creation, and fiscal consolidation in the medium term rather than in the short term. Financial daily advises Spanish savers to take their money abroadWith ever-faster increasing TARGET2 balances as evidence of a deposit flight, Expansion.com is now advising retail investors to put their savings into foreign banks. Dismissing the possibility of sending the money abroad directly as “only profitable to high-net-worth individuals” there follows a summary explanation of the difference between buying a deposit in a Spanish subsidiary of a foreign institution (which would fall under Spain’s deposit guarantee scheme) or a branch of a foreign institution (which would fall under the foreign deposit guarantee scheme). The article stays clear of claiming that either of the two deposit guarantee schemes is safer for the Spanish “investor”. Nonperforming loans breach 9%With data released by the Bank of Spain on Friday, Cinco Dias reports that non-performing loans for Spain’s banking sector rose in June to €164bn or 9.42%, the worst figures since records began 50 years ago. Most of the non-performing loans are to real-estate developers (with non-performing ratios of up to 30-50%). This is partly the result of two government decrees earlier in the year requiring additional provisions for loans to developers classified as ‘performing’, as explained in a Bloomberg story from April. Incidentally, back in June outgoing chairman Rodrigo Rato argued that the state intervention of Bankia was triggered entirely by such “provisions for possible future losses”. Confusion over Spanish renewable energy policyThe Spanish government’s erratic policy setting extends also to the field of energy, and the renewable industry is particularly affected as it depends on a stable regulatory regime. In mid-July industry minister José Manuel Soria announced the introduction of new energy taxes. These taxes ranged from 4% for traditional energy sources through 11% for wind, and up to 20% for photovoltaic. Last Friday, however Soria said that “renewables must increase their weight in the energy ‘mix’” and thus must continue to be promoted by the government, compatibly with solving the €24bn “tariff deficit” problem, reports Europa Press. In addition, the Minister said the government is studying the application of an additional “green cent” fee to natural gas, arguing that transportation fuels are “already penalized by the VAT raise”. In this connection, also last Friday the International Labour Organization released a report claiming that Spain could create a million new “green jobs” in addition to the existing 400,00 to 500,000. Monti says solution of eurozone crisis requires more integrationThe Eurozone can be saved only by more integration, Mario Monti said at a meeting in Rimini, Il Corriere della Sera reports. “A year ago we thought less than we do today that we were in a crisis but I believe we were in it more,” he said. Monti noted there are many risks. “The biggest tragedy for Italy and for Europe would be to see the euro break up because of our failures, which awakens the prejudices of the north against the south, and vice-versa.” According to Monti, the northern countries should recognize latest reforms of Italy’s economy, such as labor market and pension overhauls, spending review and deregulation. Crisis has hit Italian tourismThe economic crisis hits Italian tourism, Il Sole 24 Ore reports. The first data from Federalberghi, one of the major tourism business lobbies, shows that 50% of Italians stay at home during this summer. “This year’s season has been disastrous, with double-digit drops,” said an operator in Rimini, one of the most famous town of Riviera Adriatica. This summers was marked by crisis and fiscal controls by Italian tax police, like in Costa Smeralda and Costiera Amalfitana. According to tour operators lobby, these figures are “provisional but the trends in June and July and the early days of this month presage a memorably negative season.” ECB limited and conditional lending is not ‘what it takes’Piero Ghezzi writes in Vox that the ECB is unlikely to provide unlimited intervention for fear of moral hazard, and for fear of the associated credit risk. The strategy appears to be to focus on limited and conditional help, but this is unlikely to work in practice. The first issue is subordination. Mr Draghi’s comments that this issue would be dealt with lack credibility among investors, who expect the ECB to safeguard its own interests during a credit event. Secondly, limited and conditional ECB/EFSF intervention may not reduce yields enough to rule out the ‘bad’ equilibrium. He concludes that such a plan is unlikely to be a game changer.
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A Liberdade, a cultura, a democracia e a justiça social são as nossas paixões.