It looks as though the real debate about the future of ECB intervention in this crisis is played entirely on German turf. Jorg Asmussen and Jens Weidmann are now openly disagreeing on future policy, with Weidmann criticising bond purchases and Asmussen endorsing the Draghi strategy.

The ECB slapped down the report in Der Spiegel that it plans interest rate thresholds – i.e. maximum spreads or yields. Yet at the same time, Jorg Asmussen gave an interview in which he confirmed that the ECB is preparing for unlimited bond purchases. The Bundesbank, meanwhile, slapped down both, reiterated its opposition to anything.

The stories in the financial markets reflected the confusion, but the net result of the various stories were positive for Spain, whose risk premium had fallen by a whopping 100bp on the basis of the story from Spiegel. They rose again when German Finance Ministry spokesman Martin Kotthaus denied the story, and further when the Bundesbank’s monthly report came in against bond purchases.

An ECB spokesman said yesterday that it was misleading to report on decision that had not been taken (Is that not what newspapers do most of the time?). The FT points out in its coverage that the wording of the statement suggests that the idea could yet be debated.

In his interview in Frankfurter Rundschau, Asmussen clarified that Mario Draghi was really talking about unlimited bond purchases when he mentioned that the ECB would do whatever it takes. Asmussen said the new programme was more coherent than the SMP, and was consistent with the ECB’s mandate to secure price stability. He said the ECB wants to take out any expectations in the financial markets about the future of the euro. Asmussen said the ECB would still make bond purchases contingent on an official programme and structural reforms. He called an application to the ESM only a “necessary condition”, suggesting that the ECB, in turn, might add further requests.

His interview was also widely reported in the Spanish press, with Cinco Dias headlining the “confrontation between the two German ECB council members” as an indication of the intensifying policy debate within Germany.

FAZ writes that the Bundesbank has reiterated its opposition. The monthly report, out yesterday, says the Bundesbank remains of the view that bond purchases are problematic and lead to risks for stability. The article said any decision to move towards joint debt was a decision for parliament, not central bankers.

The Bundesbank’s statement was in turn criticised by Italy’s industry minister Corrado Passera who, according to Reuters, said Bundesbank criticism of ECB plans for bond buying “does not honour those who make them.” He said there had recently been an excess of “incoherent and disruptive communications which have also disturbed markets.”

FAZ writes in another article that German economists have roundly condemned the idea of interest rate thresholds. Manfred Neumann said such a decision would be the end of an independent monetary policy and would subjugate the central bank to the interests of southern European member states. Volker Wieland is quoted as saying that the ECB is going too far in the direction of fiscal policy. Jorg Kramer of Commerzbank recalled that the ECB is legally not allow to fund governments. It would destroy the confidence in the euro. One of the few who argued in favour of interest rate thresholds is Holger Schmieding at Berenberg, who call it a big step to reduce the tensions. The article contains lots of other reaction, almost exclusively negative.

Holger Stelzner says markets rates are now determined by committee

It is not really surprising that the conservative economics editor of FAZ, Holger Steltzner, condemns the idea. He said after the failure of Big Bertha – the LTRO – the ECB is now considering the Big Bazooka. His main prediction is that once the ECB embarks on this route, the bond purchases will become permanent. In this regime, the ECB not only determines the money market interest rate, but also the interest rate for loans in capital markets. He calls the interest rate command economy. The goal is that the creditors are footing the bill, and that the debtors get bailed out.

Jacques Cailloux says interest rate thresholds very unlikely

Jacques Cailloux of Nomura, according FT Alphaville, has written a very sensible comment in which he dismissed the possibility of spread targets. Instead, he argue that most likely course of action would be a yield levelling at the short end to produce a real one-size fits all monetary policy – something that would be akin to the creation of a common euro T-bill market.

Planning for Spain’s Euro exit

An article in ElPais.com (English edition) surveys the contingency plans being made for a possible Spanish exit from the Euro, after quoting an analyst from well-known consultancy firm AFI putting the odds of a Spanish exit at 20%. A scenario is described where the Spanish government is forced to introduce rationing and price controls to ensure access to essential imports, as well as capital controls. Those planning for such contingencies range from foreign multinationals to domestic firms and high-net-worth individuals. American investment banks are said to have been renegotiating their contracts with European counterparts to ensure they are not paid in a devalued currency and to protect themselves from defaults.

Populism is on the rise in Spain 

After raiding a number of supermarkets for food to donate to local food banks, the Mayor of Marinaleda (Sevilla) and United Left (IU) member of the Andalusian Parliament Juan Manuel Sánchez Gordillo is leading a march of some 400 farm workers across Andalusia to protest against unemployment, El Pais reports. Sánchez Gordillo and his union SAT has also been involved in squatting plots of land owned by the state and the military to demand that they be put to farming by unemployed journeymen.

At the other end of the social spectrum, Mario Conde, a former banker who was imprisoned for his role in the failure of Banesto in 1993, has announced the formation of a new political party called “Civil Society and Democracy”, boasting tens of thousands of twitter followers and 1,600 registrations for its upcoming foundational congress, reports El Economista.

Low growth prospects for France

France faces low growth, 0.1% this year and 0.5% next year, at least according to the latest consensus Forecast, a mean of forecasts from about 20 public and private institutes. The official forecast is 0.3% this year and 1.2% next year, much too optimistic writes Les Echos. The government has only one month left to work out its 2013 budget. To achieve a deficit 3% of GDP, the government would have to raise at least €15bn more in revenues on top of the measures already voted through in July. A revision of the growth assumptions will thus require another vote in autumn.

Le Monde: Decision time for the president

In its editorial Le Monde writes that for Francois Hollande, after 100 days in office and rising criticism of his lack of action, it is time for political decisions and reform. How to react to the economic stagnation, how to ensure a growth perspective amid an austerity budget? What role in the euro crisis management apart from a modest growth plan? How to restore confidence of the French people?  Responses are required – now. Hollande’s presidency is so far described by symbolic acts. Now it is time for him to be more ambitious.

Greece finalised €13.6bn of budget cuts

Kathimerini writes that the Greek government looks into ways on how to include measures from the €11.6bn austerity package into the 2014 budget to make it more palatable for the coalition partners. Antonio Samaras had a meeting with his economic team, to examine different scenarios for cost cuts totalling €13.5bn, to reach the target of €11.6bn, as €2bn are expected to be lost in taxes and social security contributions. The finalised budget cut plan is to be presented shortly before the troika returns mid next month. Some details emerged though. Sources told Kathimerinithe Labour Ministry put forward cuts worth €5.2bn to pensions and welfare payments in order to be sure that it would secure savings of €4.6bn.The reductions to pensions will affect those retirees who earn €800 or more per month. Also an extension of years necessary to qualify for a pension is on the table.

Mohamed El Erian on the costs of Spain’s hesitation

Writing in the FT, Mohamed El Erian makes two important points about why the current strategy pursued by Spain (and the ECB) is risky. The first is that an official programme has tended to subordinate private loans. This is why private investors have no appetite to co-finance the “troika”. As investors left, falling credit ratings and changes in collateral rules have made a re-entry more difficult. The second problem is that the programmes have so far failed to strike a balance between fiscal consolidation and growth. This has increased domestic opposition to the policies. EU leaders need to find some “innovative and imaginative solutions” to address both these issues. If this is not going to happen, “Spain’s hesitation will be followed by two new twists in Europe’s crisis: within a few weeks, a significantly larger economy would join three other eurozone members in becoming a ward of the European state; and Italy, an even bigger economy, would risk slipping to where Spain is today.”

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

It was quite a volatile day yesterday, with Spanish yields down, and Italy’s yields up.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.643	0.657	0.651
Italy	4.293	4.380	4.375
Spain	4.994	4.823	4.877
Portugal	8.465	8.540	8.534
Greece	22.777	22.874	#VALUE!
Ireland	4.572	4.900	4.895
Belgium	1.106	1.079	1.119
Bund Yield	1.498	1.511	1.516
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.236	1.2358
Yen	98.190	97.99
Pound	0.787	0.7858
Swiss Franc	1.201	1.2009
ZC Inflation Swaps
	previous	last close
1 yr	1.85	1.85
2 yr	1.78	1.77
5 yr	1.82	1.82
10 yr	2.14	2.15
Euribor-OIS Spread
	previous	last close
1 Week	-8.343
1 Month	-4.486	-2.486
3 Months	11.136	11.536
1 Year	73.021	73.021
Source: Reuters