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German establishment attacks Mario Draghi
Jens Weidman says the planned bond purchasing programme was bordering on an unlawful act of debt monetisation;
says bond purchases were addictive like drugs;
claims that he is not the only member on the ECB’s governing council opposed to the programme;
CSU general secretary Alexander Dobrindt says Mario Draghi will enter history as Europe’s money forger;
Der Spiegel has a report that the ECB governing council is deeply divided over several aspects of the programme – especially whether it should be limited or not;
Reuters has a report according to which the ECB is considering target bands;
the Merkel-Hollande, Merkel-Samaras, Samaras-Hollande meetings yielded no announcements;
behind the scenes there is some work on a mild relaxation of the programme, falling well short of Greek demands;
Wolfgang Schauble reiterated his opposition to a new Greek programme;
Fitch warns ECB about investor subordination;
Spain introduces new economic reforms every Friday, when the cabinet meets;
details have emerged about the latest measure for the long-term unemployed, who are facing onerous conditions;
the results of the previous programmes have been disappointing;
Mario Monti aims to stimulate the economy through a series of further supply side measures;
the Italian Democrats are pushing for the reform of the country’s opaque electoral system;
Italian spending on vacations has fallen dramatically due to prices increases and the recession;
Merkel hopes that the December European Council will set a date for a treaty convention;
Wolfgang Munchau, meanwhile, says the ECB should consider a broad QE programme, rather than targeted sovereign bond purchases.
Ahead of the ECB’s decision on September 6, the Bundesbank and the Bavarian CSU have significantly stepped up their rhetoric against Mario Draghi. The CSU’s general secretary, Alexander Dobrindt, called Draghi a “money forgerer”, while Jens Weidmann said a decision to buy bonds was bordering on the monetisation of national debt. He did not go as far as calling the plan “unlawful”, but his form of words leaves open the possibilty of legal challenge, which may be supported by the Bundesbank.
Weidmann’s comments came in an interview in Der Spiegel. He said that bond purchasing programmes were addictive. In a democracy, he said, it should be up to parliaments, not governments, to decide upon such massive risks. He also said he was not alone among members of the ECB’s governing council to oppose the plan.
Bild am Sonntag has an interview with Dobrindt in which he says that Draghi is about to make history as Europe’s money forgerer. He says the plan would finance sovereign debt through the backdoor. With this, he would turn the stable north of the eurozone into an overindebted south. And for good measure, he referred to the ECB as the “inflation bank”.
Mark Schieritz says Weidmann will not try to block Draghi’s plan
Mark Schieritz (Link: http://blog.zeit.de/herdentrieb/2012/08/26/weidmann-winkt-draghis-anleiheplan-durch_5173) has read Weidmann’s interview differently. Looking at his choice of words “problematic”, “close to” monetary financing, are expressions that suggest that Weidmann is not going full force against the plan. There will be no lawsuit, and Weidmann will not resign. (We agree on the latter though the choice of words may be tactical. Weidmann is clearly fighting for a light variant of a programme, and thus he has to moderate his language. We suspect that the language will change again if the bazooka version of the programme is adopted.)
ECB is internally divided over form of intervention
Der Spiegel has more on the ECB bond purchasing programme, following last week’s story on target interest rates. Today’s issue says there is no consensus over whether the programme should be unlimited or not. It says that the northern members want to restrict the intervention to being short and tactical, to be used only when bond yields explode, while the southern members want a more sustained programme. Der Spiegel also says that Germany’s Finance Ministry was sceptical, fearing that the bond purchases would endanger its bank’s independence.
ECB mulls target bands according to Reuters
Reuters has the story that the ECB was now considering target bands, rather than interest rate targets. A final decision has yet to be made, but the target bands are considered to be the favourite among a number of central bankers. Reuters quotes an unnamed official as saying that this was being discussed in the working groups. It is not clear whether the bands applied to bond yields or to spreads.
Sitting out the Greek crisis
What leaders say in public bears little ressemblance to what they say in private. When Antonis Samaras met with Angela Merkel, it is very likely that the discussions themselves were a lot more interesting than the land press conference that followed. Merkel gave no ground over the length of the programme, and nor did Samaras. Merkel said she will make no comments until she sees the troika report. French President Francois Hollande gave out the same message, which produced a semblance of Franco-German unity on this matter. Over the weekend, Wolfgang Schauble reiterated his position that there should be no new money for Greece. Reuters points that Schauble considers the flexibility clause, according to which programmes can be adjusted in a deep recession as “not legally binding”. (We believe that the tough rhetoric is aimed at domestic consumption.)
Fitch warns about investor subordination
Fitch said on Friday that the preferential treatment the ECB enjoyed during the Greek debt restructuring will reduce the effectiveness of any new bond purchases unless the bank gives a paripassu pledge, Reuters reports. “The revealed (bond market) seniority of the ECB will reduce the effectiveness of renewed bond purchases unless it is able to credibly address the ‘seniority issue’…. Even if the ECB is able to credibly pre-commit not to exercise its preferred creditor status in the event of default, its bond purchases are likely to be associated with EFSF/ESM bond purchases/lending, implying some subordination of private creditors.”
Reforms last Friday, like every Friday
At the end of April Mariano Rajoy said at a PP rally that there would be “reforms every Friday, and next Friday too” (see El Pais, English edition (Link: http://elpais.com/elpais/2012/04/29/inenglish/1335725919_666170.html )). Accordingly, the Spanish political news cycle is dominated by a working week of speculation and leaks leading up to the press conference following the Council of Ministers on the Friday, with the weekend spent picking apart the decree as published in the official journal on the Saturday. This weekend, the most debated reform has been the extension for another six months, but with changed conditions, of the €400 subsidy for the long-term unemployed. This has overshadowed the reform of the legal framework for real estate rentals, and the one-week delay in the banking reform decree.
New conditions for subsidy to long-term unemployed
Labour minister Fátima Báñez caused an uproar with her intervention at the press conference after Friday’s council of ministers. In order to justify a new rule making people ineligible to receive the subsidy if they live with their parents and the monthly income of the family unit exceeds €481 per person, she brought up a hypothetical example of a family of four where the parents make €8,000 together, as reported by El Pais, English edition (Link: http://elpais.com/elpais/2012/08/24/inenglish/1345833911_580965.html). This was only made worse by a PP member of parliament telling a newspaper that he had a hard time making ends meet on €5,100 a month from being in Parliament and a City Council, reports El Pais, English edition (Link: http://elpais.com/elpais/2012/08/26/inenglish/1346009083_891025.html ) in another story. Another story from El Pais, English edition (Link: http://elpais.com/elpais/2012/08/26/inenglish/1346007917_148735.html) summarizes the new requirements as published in the official journal (BOE). Applicants will now be required to demonstrate that they have been “actively seeking employment” for 30 days after losing their unemployment benefits in order to be eligible for the last-resort subsidy.
In another story, this time in Spanish, El Pais (Link: http://politica.elpais.com/politica/2012/08/24/actualidad/1345808063_973990.html) presented some statistics about the so-called ‘Plan Prepara’. Half a million people have taken part in the program, which lasts a maximum of six months per person, and just over 300,000 people have finished it. Of the latter, 70% were not able to find a job, 18% obtained a placement lasting more than 2 months, and only 1% found an indefinite contract. The Minister called the results of the program “disappointing”. (It should be noted that the last-ditch character of the program, lasting only a non-renewable 6 months, was already part of the program as instituted by the previous government of José Luis Rodríguez Zapatero in 2011, and its previous incarnation for the 12 months prior to that. Also, the program already needed to be renewed by the Council of Minister every 6 months.)
German employment office to help Spain with youth unemployment
Citing a Spiegel story, Europa Press (Link: http://www.europapress.es/economia/noticia-agencia-empleo-alemania-ayudara-espana-luchar-contra-paro-juvenil-20120826125424.html) reports that the German Employment Office is preparing a conference in January with the intention to support peripheral Euro countries in tackling their high youth employment. Board member Raimund Becker is quoted saying that Germany’s dual apprenticeship system has garnered interest on the part of employment services from other countries, chief among them Spain with its 50% youth unemployment rate. He also suggested that European youth might take advantage of vocational training opportunities in Germany.
Italy is looking for new growth stimulus
Mario Monti is ready to stimulate economic growth with specific supply-side measures, Il Sole 24 Ore reports. Liberalizations, new opportunity for youth enterpreneurship, new hirings on public sector: these are, for now, the main measures of growth plan. Later on last Friday Monti said his technical government must remain focused on budget discipline to avoid an external intervention. The state schools will be boosted by over 20,000 new teachers during the next two years. Plus, young people could open an enterprise with only €1 in capital. It is not clear when the new growth measures will be implemented by Monti’s government. Actually, only 40 of total 350 planned decrees are effective. Later this week there will be several new cabinet meetings to adopt a definitive growth plan.
The fight over Italian electoral law has begun
The Italian Democratic Party secretary Pier Luigi Bersani is pushing for a reform of the electoral law, Il Corriere della Sera reports. From the annual Democratic Party meeting, Bersani said “there is scope for an electoral reform.” But “we can’t do it alone,” he added. The current Italian electoral law was introduced in 2005 by Northern League top lawmaker Roberto Calderoli. That law is also called “Porcellum” (or Pigsty), thanks to its Machiavellian functioning. The “Porcellum” allows the electorate only to vote for a fixed list selected by party leaders under a proportional system, instead to choose candidates directly. The centre-right party Partito della Libertà, created by former PM Silvio Berlusconi, does not want a new electoral law, meanwhile the Democratic Party wants a reform. “We have clarified where we stand and far we are willing to negotiate. What matters, however, is that when Italians next cast their votes, they know who they are voting into government,” Bersani said. Everything is going to happen in the next weeks, with only one certainty: due the failure in electoral law reform, early elections (instead of Spring 2013) are unlikely.
Italians’ vacations hit by economic crisis
The vacations of Italians cost 17% more than in 2011, Il Messaggero reports. According to consumer association Codacons, that’s the result of a survey conducted in last month. The Italians’ spending, in Italy and abroad, rose more than expected. “Per capita spending during summer holidays amounts to an average of 104 Euros a day,” Codacons President Carlo Rienzi said in a statement. That figure includes transport costs, accommodation, expenditure for food, beach facilities, leisure and entertainment. That’s why Italian tourism has dropped 50% since 2010, the association of Italian tour agencies, Assoviaggi-Confesercenti, said on Saturday. Only this year, bookings are down 30% (since January to last Friday). This year will be remembered as the third consecutive year of decline in tourism. “Since 2010, we’ve lost 50% of business turnover,” said Assoviaggi President Amalio Guerra. Crisis concerns, instability, fiscal control fears and recession are driving the decline.
Merkel insists on new Treaty
According to another Spiegel report, Angela Merkel hopes that the December summit could agree a concrete starting date for a convention. Der Spiegel said that Merkel European advisors were floating at meetings in Brussels. (That’s not surprising given Germany’s legal interpretation of current EU and its limits in crisis resolution. A treaty would, however, trigger referendums not only in Ireland and Denmark, but also in the UK, and is likely to prove divisive. Merkel seems determined to go down that route – a position we agree with in principle, provided the agreed revision is substantial enough and includes a change to the ECB’s statutes, a new framework of economic policy coordination that includes policies to level internal current account imbalances, plus eurobonds. This is, of course, not what Merkel has in mind when she talks about a new treaty).
Wolfgang Munchau on what the ECB should and should not do
In his FT column Wolfgang Munchau takes a cautious approach to the ECB’s proposed bond purchasing plan, and warns against exaggerated expectations. He writes that such a programme faces serious political challenges from Germany, and possibly legal challenges as well, which might reduce its overall effectiveness. He said the best action would be a broad-based programme of quantitative easing, as part of which the central banks buys sovereign and corporate bonds. Such a programme would be economically justified, and it would be legally safter than a straight government bailout. A well designed programme may be useful but is not going to solve the crisis. That would depend on progress towards a banking and economic union.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
The Spanish and Italian spreads are rising again.
10-year spreads
Previous day Yesterday This Morning
France 0.698 0.700 0.740
Italy 4.324 4.525 4.520
Spain 4.995 5.096 5.201
Portugal 7.845 7.988 8.044
Greece 22.385 22.730 -1.36
Ireland 4.543 4.591 4.971
Belgium 1.151 1.158 1.161
Bund Yield 1.379 1.355 1.36
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.251 1.2508
Yen 98.170 98.47
Pound 0.790 0.7914
Swiss Franc 1.201 1.2006
ZC Inflation Swaps
previous last close
1 yr 1.81 1.8
2 yr 1.74 1.73
5 yr 1.78 1.73
10 yr 2.1 2.09
Euribor-OIS Spread
previous last close
1 Week -7.357 -8.357
1 Month -2.100 -3
3 Months 10.214 10.314
1 Year 71.100 71.2