Spiegel Online leads with an update to its news story on Monday, according to which the interest rate threshold is likely to be top secret. The story said that a majority of central banks have rejected the idea of transparent interest rate caps. The article also quotes Wolfgang Schauble as saying that such a solution was problematic. This is why the next option down the line will be an unofficial version of the above.
Die Welt came out with a corroborating story this morning. It said the latest internal idea discussed in the ECB are secret interest rate targets, or alternatively spread targets, but there is also concern that these targets might be revealed (which is very likely to happen, considering that this story is also being revealed.) One of the questions discussed is what would happen to Spanish interest rates if German rates started to rise? Would the ECB then have to drive the Spanish rate up as well?
Mark Schieritz, in his blog Herdentrieb, confirms that his sources have told him that there is no majority for such a radical plan. He said the operations department of the ECB, under Ulrich Bindseil, has made technical preparation, but this is just their job. They have done the same for the LTRO. Schieritz concludes that either the ECB leaked the story, in which case it was an own goal, or the Bundesbank leaked the story in order to build up sufficient opposition in Germany. He concludes that whatever is decided on Sep 6, is likely to disappoint.
Wolfgang Munchau, in his Spiegel column, also pours cold water on the idea, pointing out that an official interest rate target would almost certainly give rise to serious legal challenges that would be counter-productive. He says the most likely, and most desirable course of action would be focus on the short-to-medium end of the maturity spectrum.
Merkel and Hollande meet today to discuss Greece
Angela Merkel and Francois Hollande meet today to fine-tune their message to Greece. They may struggle to project unity. The centre-left French government is careful to strike a balance between Hollande’s preference for growth measures over austerity and the recognition that Athens must reign in public spending as a condition for a bailout. “The president is careful who maintain the integrity of the eurozone Greece must respect its commitments while at the same time it should be given a growth perspective,” Les Echos quotes the government spokeperson Najat Vallaud-Belkacem.
Senior German coalition leaders have signalled there is little chance that Greece will be given more time as pleaded by Samaras. Angela Merkel herself poured cold water on far-reaching concessions. But Berlin and Paris may meet halfway, writes Reuters, with signs that Merkel’s conservatives, if not ready to postpone the targets, may be ready to show Athens other leeway if the troika finds it meeting the broad terms of its rescue package. “With Greece, we cannot change the cornerstones of the aid package or tamper with the principle of conditionality. But I can imagine we could adapt certain things within that framework such as interest rates or maturities on credit, like we already did with the first package,” said Merkel MP Norbert Barthle.
On his visit to Athens Jean-Claude Juncker kept alive Greek hopes of winning more time to push through austerity cuts but warned the country was staring at its “last chance” to avoid bankruptcy,Reuters reports. Juncker said a decision to grant more time would depend on the findings of a review by EU and IMF lenders on the country’s progress in fulfilling its pledges. But “as far as the immediate future is concerned the ball is in the Greek court,” he said. “In fact this is the last chance and Greek citizens have to know this.”
Latest figures show Greek budget deficit better than targeted
Right in time comes the message from the Greek finance ministry of better-than-targeted state budget deficit with a deficit of €13.2bn for the first seven months of the year compared to a target of €14.8bn, Kathimerini reports. Net public revenues fell €2.8bn short of the target in the January-July 2012 period, of which €1.4bn is income tax shortfall. This was offset by savings in public spending, which was €4.4bn less than planned, of which €1.9bn was in primary expenses, €207m in arms programmes and €160m less in interest payments.
Netherlands not impressed by Samaras plea for more time
Antonis Samaras continued his charm offensive with an interview with the Sueddeutsche Zeitung, reiterating that Greece will pay back its money to Germany. His plea for “air to breathe” has been met with hostility in the Netherlands. “If it concerns delaying reforms and budget cuts, then it is not a good idea,” the Dutch finance minister Jan Kees de Jager told reporters.
Spanish bank rescue decree to be delayed for another week
20 minutes reports that, contrary to expectations that the ‘bad bank’ and the bail-in of holders of preference shares in rescued institutions would be approved this coming Friday, vice president Soraya Sáenz de Santamaría said today that, as conversations with Europe are on-going, the decree might be postponed for another week. A third plank to be approved by end-August is a reform of the FROB bank restructuring fund to give it resolution powers. Earlier this week, according to another article in 20 minutes, Economy minister Luis de Guindos boasted that “Spain will have one of the most advanced institutional frameworks for bank resolution in Europe”, as the decree would incorporate elements of a European Directive which is still under preparation.
Draft FROB decree leaked
El Pais leads its print edition this morning claiming to have seen a draft of the decree, slated for approval this Friday, on orderly resolution of credit institutions. According to the draft, the Bank of Spain will be able to intervene an entity even it if is in compliance with regulation and economically viable, if “weaknesses are perceived”. The draft would allow the Bank of Spain to carry out an “early intervention” demanding that within 10 days institutions carry a number of possible actions to improve their viability, including restructuring their debts or even replacing their management. In this function the Bank of Spain would be subordinate to the FROB orderly restructuring fund, which would be charged with later stages of intervention: restructuring or resolution. The FROB would acquire the power to liquidate an institution judged unable to repay public aid “in a reasonable time”, but an explicit exception allowed that systemically important institutions be restructured without liquidation in any case. The FROB will be able to divide an institution into a “bridge bank” to be sold, and a “bad bank” to manage any “toxic assets”. In addition, the Government will have a majority of the governing council of the FROB, whereas up to this point the Bank of Spain and the deposit guarantee fund had a majority.
Spain to increase benefits to some long-term unemployed by taking them from others
A week ago we reported that Mariano Rajoy had reversed his announced policy to stop an existing €400 per month subsidy for the long-term unemployed, associated with job market reinsertion activities, the so-called ‘Plan Prepara’. El Pais (English edition) summarizes the large number of reforms of the program that the government has announced in the last week. Labour minister Fátima Báñez said Tuesday that the subsidy would increase to €450 for those with children. However, Soraya Sáenz de Santamaría also said Wednesday that the government does not intend to increase the program’s budget, and that the aid might be made incompatible with receiving other entitlements. Last week, PP spokesman Carlos Floriano had already suggested that young people living with their parents might become ineligible for the benefit. The reform of the plan is slated to be approved this Friday but the details are still not fully settled, said Sáenz de Santamaría.
(It is somewhat of a cliche that Spain has been able to withstand some of the highest unemployment rates in Europe, reaching 20% several times in the last 30 years, as a result of its strong “family cushion”. An example of the family cushion is the young adults who have returned to living with their family as a result of becoming unemployed in the recession. The government now proposes to force people to choose between the “family cushion” and the “social safety net”.)
Goldman Sachs expects, S&P encourages, Spain to apply for bailout
The Economic Times reports on a Goldman Sachs report suggesting that Spain will apply for a full bailout in order to take advantage of ECB support for its bonds, but that this wouldn’t happen before mid-September.
Meanwhile, Standard and Poor’s takes the curious position that a full rescue of Spain would not negatively affect its rating, reports Reuters. S&P said “the potentially advantageous terms” of the bailout would help with the “ambitious and politically challenging reform agenda”.
Dombret against ECB as bank regulator
This is a story that really does not surprise us. We always expected that the ultimate opposition against a common European bank regulator will come from Germany. Yesterday, Bundesbank board member Andreas Dombret said that the ECB should not be in charge of regulating euro zone banks on the ground that this would blur the line between monetary policy and financial regulation, and that it would affect its independence, according to Reuters.”There are good reasons not to give the ECB final responsibility, but to another authority, which would be led by a council where banks’ home countries are represented.” (He means, of course, the Bundesbank. This is mostly about inter-institutional competition, as the Bundesbank has lost sense of purpose – beyond acting as the official opposition to the ECB.)
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Highly volatile. Spreads are rising as markets are beginning to doubt some of the stories.
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| 10-year spreads |
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Previous day |
Yesterday |
This Morning |
| France |
0.625 |
0.681 |
0.700 |
| Italy |
4.112 |
4.298 |
4.308 |
| Spain |
4.690 |
4.846 |
4.911 |
| Portugal |
7.776 |
7.789 |
8.183 |
| Greece |
22.525 |
22.375 |
-1.45 |
| Ireland |
4.422 |
4.497 |
4.944 |
| Belgium |
1.062 |
1.126 |
1.172 |
| Bund Yield |
1.545 |
1.463 |
1.453 |
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| Euro Bilateral Exchange Rate |
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Previous |
This morning |
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| Dollar |
1.245 |
1.2536 |
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| Yen |
98.700 |
98.47 |
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| Pound |
0.789 |
0.7886 |
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| Swiss Franc |
1.201 |
1.2008 |
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| ZC Inflation Swaps |
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previous |
last close |
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| 1 yr |
1.84 |
1.82 |
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| 2 yr |
1.77 |
1.75 |
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| 5 yr |
1.81 |
1.8 |
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| 10 yr |
2.14 |
2.12 |
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| Euribor-OIS Spread |
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previous |
last close |
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| 1 Week |
-7.786 |
0 |
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| 1 Month |
-3.986 |
-2.486 |
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| 3 Months |
9.321 |
11.521 |
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| 1 Year |
70.521 |
72.521 |
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| Source: Reuters |
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