 The Draghi rally accelerates
Looking at the market reaction, it is clear that Mario Draghi has raised massive expectations. Bond yields continued to fall yesterday, as investors are betting on a bailout of Spain and Italy. Reuters quotes an analyst as saying that the ECB now has to deliver. If it fails, spreads will rise back to new record levels. Next month is likely to prove crucial, with ECB government council meeting Sep 6, and the Constitutional Court’s ruling on Sep 12. Spain had a successful debt auction on Tuesday, placing €4.5bn in 12- and 18-month bills at 3.07% and 3.33% respectively. El Economista attributes the lower yields to the market discounting an imminent “soft rescue” of Spain, and highlights the fact that these yields are comparable to those offered by 1-year bank deposits, whereas in June the average deposit paid 2.4% and Spanish government bills paid over 5%. Spanish 10-year yields dropped to 6.24%. The Reuters story quotes an analyst as saying that traders had closed out their long bund positions, and moving into five-year Spanish bonds. The yield on benchmark 9 year Irish government bonds also fell below the psychologically important 6pc line for the first time in almost two years and to pre-bailout levels, according to the Irish Times. Some of the traders were also psyched by an Ambrose Evans-Pritchard story in the Daily Telegraph, who wrote that he could confirm the Spiegel story of an interest rate threshold. He provided the following detail: “The ECB’s director-general of market operations, Ulrich Bindseil, is spearheading the plans in talks with experts from the ECB’s family of national central banks. Market, monetary policy and risk management committees are working to put together a draft. ‘They don’t take sides. They just lay out the pros and cons and leave it to the governing council to decide,’ said one EU diplomat.”
An autumn of disappointmentsRalph Atkins writes in the FT’s Short View column that Mario Draghi’s promise may not be all that it seems. The ECB will not act until Spain officially requests a programme. Madrid wants it the other way round. Even if the ECB acted at the short end, as some commentators suggest, the ECB is likely to disappoint. “If Mr Draghi was able to remove any doubts about the future of the eurozone and German two-year yields rose to, say, 1 per cent, even a 200bp spread would imply their Spanish equivalents needed to be at 3 per cent – not far below where they are now.” With foam at his mouthDie Welt has a partisan rant by a German analyst, Erwin Grandinger, who argues that by outvoting the Bundesbank, the ECB is pursuing a policy with the intent to break European law. He calls Jorg Asmussen a Socialist, and refers to Mario Draghi’s past at Goldman Sachs to conjure up an anti-Bundesbank conspiracy. It is not really worth getting into the details. The reason we are mentioning this is to highlight that German economists are gearing up for a rhetorical battle. Alesina says: Italy should ask for helpAlberto Alesina of Harvard told to Il Messaggero in an interview that “Italy should ask for help.” Due the recent developments on financial markets, Italy should cede more sovereignty to eurozone in change of an help to calm the spread between Italian BTP and German Bund. There’s nothing wrong to give more guarantees to Europe, Alesina told to Il Messaggero. That guarantees could lock the current efforts by Mario Monti. In fact, the political elections in Italy are planned for next spring. Talking about the relation between Italy and other EU members, Alesina also said that it is “arrogant” to call Germany rigid. Preference share saga nears a milestone next FridayIn his interview with EFE last weekend, Luis de Guindos indicated that the government would introduce restrictions on the retail sale of preference shares at this Friday’s council of ministers, including a minimum investment of €100,000 for unlisted companies and requiring the client to sign a disclaimer that they are aware that the product may not be suitable for them, writes El Pais in English. This, however, provides no respite to the estimated 800,000 customers who invested around €30bn in preferred stock over the past few years as Banks and Cajas sought to raise capital. El Faro de Vigo reports that associations of victims of Novacaixagalicia are criticizing the government’s “lack of information”. According to El Faro, both the EU Commission and the Bank of Spain have refused to comment on de Guindos’ claim that the two were negotiating. There is even uncertainty on whether this Friday’s decree will contain the final decision on the issue. While the victims demand a full restitution of their savings, Consumer Protection Commissioner Michel Barnier stressed last week that the Commission wants to reduce the cost of the bank restructuring to the taxpayer. Last weekend, El Pais carried the story that thousands of people have been protesting in the Sanxenxo area, where Mariano Rajoy is known to spend his summer vacations. Spanish government to define ‘bad bank’ on FridayThe Spanish government is widely expected to institute a ‘bad bank’ this Friday, to manage the impaired (mostly) real estate assets of the four nationalised Banks and Cajas, as required by the Memorandum. El Mundo reports that it is as yet unknown what corporate form the ‘bad bank’ will take, though it is speculated that it may take the form of an investment fund. Asset valuations, the price at which real estate assets will be sold or who will manage the fund are also unknown. In addition, the real estate industry has asked to take part in the management of the new institution, “because they are the ones who really know the value of the assets”. Clash of egos on Spanish energy policyIn Monday’s newsbriefing we reported apparently contradictory policy positions by Spain’s Industry minister José Manuel Soria, advocating a higher weight for renewables a month after announcing an energy tax hike falling more heavily on them. Tuesday, Bloomberg ran a story based partly on a telephone interview with finance minister Cristóbal Montoro last week, in which he opposed Soria’s new taxes on the grounds that they would be contrary to EU law. However, the tone of the interview (“Until I decide, this isn’t going forward, whoever announces it”) caused a bust-up with Soria who said “Any type of proposal or measure in terms of energy reforms corresponds to the industry ministry” at a press conference, Reuters reports. According to Expansion the finance ministry issued a climb-down later on Tuesday. Incidentally, last week El Pais reported that European Commissioner for Energy Günther Oettinger had weighed into the Spanish policy debate with a letter to the Spanish association of renewable energy producers in which he said any measures [to address the Electricity “tariff deficit”] had to be “technology neutral and not disadvantage renewables”. (Mariano Rajoy’s refusal to create an economic vice-president thus keeping all his ministers nominally on a par under his sole authority, coupled with his own tendency to avoid making decisions or speaking in public has already caused numerous frictions between Montoro as finance minister and de Guindos as economy minister. Today’s incident between Montoro and Soria is more of the same.) Irish to issue new style amortising bondsThe National Treasury Management Agency, which manages Ireland’s debt, said last night that it will issue new style “amortising” bonds, linked to State debt following demand from potential investors within the Irish pension funds industry. The NTMA has said that it plans to raise between €3bn and €5bn over the next 18 months on amortising and inflation-linked bonds tied to Irish sovereign debt on maturities of up to 35 years. Greek government decides on wage cuts, progressive pension cuts and funding freeze for NGOsDetails about the €13.6bn in spending cuts are slowly emerging. Kathimerini writes that the Greek government has decided to leave no category of public servants and pensioners unaffected by spending cuts. Public servants on so-called special salaries, such as judges, academics and members of the security forces, will finally not be exempted from the 12% cut; the plan was temporarily dropped earlier this year. The package will also include cuts in pensions, ranging from 2% for those with €600 monthly pensions up to 20% for those who receive €2500 a month. Antonis Samaras also ordered to freeze public funding for nongovernmental organizations on Tuesday. Samaras woes the Germans ahead of his visit to BerlinAntionis Samaras gave a “blood, sweat and tears” interview to Germany’s Bild Zeitung, displaying his country’s resolve to end the crisis and pleading for more time for reforms to allow the economy to recover. Samaras said more time does not necessarily mean more money and promised that Greece will stick to its obligations. He said he decided to replace only one of ten retiring civil servants. Samaras warned a new drachma would be a catastrophe for Greece, prolong the recession and a threat for its democracy. The interview in the influential newspaper came ahead of his meeting Angela Merkel later this week and was cited widely in the German press. Italian prosecutors bring charges against FitchItalian prosecutors have concluded an investigation into recent Italian sovereign rating downgrades, bringing charges against the Paris-based rating agency Fitch, Il Sole 24 Ore reports. The prosecutors of Trani, a small city in the Southern Italy, confirmed the charges against David Riley and Alessandro Settepanni, two Fitch top managers, and their lawyer. According to Trani’s prosecutors, Riley and Settepanni are guilty of markets manipulation. The investigation was launched by Elio Lannutti, chairman of consumer association Adusbef, which said there will be another investigation in the USA, with part of the acts collected during the Trani’s prosecutors investigation. In the last month, Italian prosecutors have closed similar operations against the two other main rating agencies, Standard & Poor’s and Moody’s. Wolfgang Munchau on the German constitutional court’s outdated view of sovereigntyIn his FT Deutschland column, Wolfgang Munchau says the German constitutional court has an out of date definition of a state and of sovereignty, which it considers non divisible. He criticises an underlying prejudice in the court’s view – and that of many German commentators – that the notion of a German nation state is more natural than the notion of a European union. Historically, the German and the Italian nation states are the exception. A united Germany has less of a democratic tradition than the EU. European history has been in constant flux between outright provincialism and attempts to create straddling cross-border state structures – the EU being the latest, the most unique, and by far most successful. It is pathetic, he concludes, that given German and European history, justices would define sovereignty as a notion that can only rest in a nation state.
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