It came in an article in Die Zeit, in which Mario Draghi answered his German critics. The full English version was published on the ECB’s website. He made a statement that would leave orthodox’ German monetarists shiver – that the ECB has to go beyond standard monetary policy monetary tools, and that it was an institution of the European Union, not just a technical apparatus.

“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.

The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union…”

He also wrote that the eurozone badly lacks central resolution powers, quoting the example of the US, where on average 90 banks have been liquidated each year since the outbreak of the crisis.

Unsolved disagreements within ECB’s governing council over the programme

The FT has the story detailing three concrete areas of disagreements about the bond purchasing programme within the governing council. Draghi and his board have cancelled the trip to Jackson Hole this weekend to work on the plan, to be published next week.

The biggest disagreement concerns the conditionality. Some members of the governing council are concerned that the ECB will be forced to continue its bond purchases even if a country missed the targets because this would bring on a financial crisis – something the ECB is unlikely to do. Hence, the conditionality clause lacks credibility. A second area of disagreement is the question over whether the targets should be published. The third area of disagreement has been how the ECB will determine how much of the bond prices reflect the “convertibility risk” associated with a possible break-up of the eurozone

Merkel and Monti disagree politely

Suddeutsche Zeitung has a good coverage of yesterday’s meeting between Angela Merkel and Mario Monti. Merkel rejected any notion of an ESM bank licence . Monti made it clear that, while this is not possible under the current legal framework, it is always possible to change that framework. Monti said that the confidence of the markets would return once the ESM is endowed with an unlimited capacity. Monti and Merkel also disagree on the conditionality for ECB bond purchases. Merkel insists that countries should formally apply for a programme in exchange for ECB help, while Monti wants to the ECB to intervene without such conditionality.

Ahead of his visit to Berlin, Monti warned Merkel not to score an own goal by impeding ECB bond purchases. He said the capital flight would drive up Germany’s money supply, and may ultimately lead to inflation. He made his comments in an interview with Il Sole 24 ore.

In a comment in Suddeutsche Zeitung, Claus Hulverscheidt recalls the ECB’s purchases of Italian bonds in the summer of 2011, which were linked to an informal promise by Silvio Berlusconi to undertake reforms – a pledge he subsequently reneged on. Considering the possibility that Berlusconi might return to power in Italy in 2013, it would be irresponsible to engage in bond purchases without strict conditionality.

Capital flight out of eurozone periphery increases

FT Deutschland picked up on Monti’s point. Of the €75bn net outflow from Spanish banks during July, a fairly large proportion has apparently gone to Germany, which has reported an increase in deposits, and an 11.4% increase in M3 money supply. There is a now a debate in Germany whether this rise in M3 may signal future inflation (they never learn).

German inflation, meanwhile, rose from 1.7% to 2% in August, with expected eurozone inflation of around 2.5%. (In other words, Germany still undershoots the eurozone average).

Merkel rebrands her image

Spiegel Online has a story that Angela Merkel may have reacted to the negative press commentary abroad by reshaping her image, fearing that a too negative perception may ultimately damage her popularity at home, and also damage the German economy. The meetings with Antonis Samaras and Mario Monti were a lot more diplomatic than previous meetings in the chancellors, with Merkel expressing the common bonds, and her admiration for the reform efforts. She even said that her heart was bleeding when she heard stories of the plight of Greek pensioners. The Spiegel says Merkel wants to insure that she is seen as a politician striving for a solution, rather than the hardliner she is portrayed at.

A day after the bravado comes the reality check

A day after announcing Catalonia would be applying for a €5bn loan from Spain’s not-yet-functioning regional liquidity fund, Catalan government spokesman Francesc Homs admitted that the €5bn was only enough to meet this years’ maturing debt, but that it wouldn’t cover the money owed to suppliers, according to El Pais (English edition). Catalonia stopped payments to health and education suppliers in July. In addition, there was a climbdown from the initial claim that Catalonia “would not accept any political conditions”. Finance minister de Guindos said that “the only condition” would be that Catalonia meet its deficit targets this year, and the European Commission said that both the central and regional governments must meet their commitments. According toEuropa Press Homs admitted that tapping the liquidity fund would limit Catalonia’s self-government as it would be “at the mercy of banks and the Spanish government”.

The more, the better

Asked whether the €3.5bn that Valencian president Alberto Fabra said would be requested would suffice, Valencian economy councillor Máximo Buch told the press “I’m telling you, the more the better”, writes Cinco Dias. According to Buch, Valencia not only needs money to meet maturities and espouses from this year, but also they would like to obtain funds to pay arrears, if possible.

Catalonia’s request has encouraged everyone to talk about the liquidity fund. El Economista reports that six Spanish regions stated today they will not tap the fund, while Andalusia “did not rule it out”. Claiming not to need funds for the moment, but apparently concerned that Catalonia, Valencia and Murcia will already consume 50% of the allotted moneys when the fund is not yet constituted, the Asturian regional government asked the central government to guarantee all regions that need it can access funds, writes El Norte de Castilla.

In election campaign mode, the PP of Galicia (the party of the incumbent regional government) said that “Galicia is not going to be intervened”, reports Europa Press;

while El mundo quotes regional president Alberto Núñez Feijóo that “Galicia pays and Catalonia begs”.

Increased chatter about banking reform decree as Friday deadline approaches

Two days after Guindos told the IHT that Spain would only use €60bn of the €100bn pledged by the EU for the banking rescue, El Confidencial (English edition) reports that the government intends to raise the amount available for state guarantees (which don’t count against the deficit) by €41bn to €258bn, as part of the reform decree to be approved by the council of ministers on Friday. In addition, Reuters reports that Guindos told the press before a meeting of PP officials that Spain and the European Union were in agreement on the rules governing the ‘bad bank’ to be created by this Friday’s decree. De Guindos also denied that new austerity measures are being negotiated with the EU as a condition for ECB support.

Presseurop carries a Cinco Dias story that Spain wants to create its ‘bad bank’ “more quickly than the two years it took Ireland” to create NAMA, and quotes La Vanguardia that the Bank of Spain’s requirement to document all assets could delay these plans, but that the assets of the four institutions currently in receivership could be catalogued in three months. According to El Pais, the ‘bad bank’ will be a limited liability corporation (Sociedad Anónima) enjoying ample powers and exemptions from elements of Spanish corporate law, civil code and bankruptcy code: it will not be required to make a bid to shareholders when taking over an institution, it will have no cap on the amount of debt it can issue, and it will be able to sell assets without an independent appraisal or the assent of its shareholders, and transferred assets will not carry with them past tax or labour law liabilities. In addition, the Bank of Spain will decide the transfer price of the assets.

Regarding the subordinated creditor bail-in, Expansion reported Tuesday that PP parliamentary spokesman Alfonso Alonso claimed that the government was working to avoid preferred shareholders suffering losses, despite this being a condition of the Memorandum to be included in Friday’s decree. Last Friday, El Pais wrote that the losses for holders of preferred shares were the biggest bone of contention between Spain and the Commission, headlining that Brussels had forced the one-week delay in the approval of the banking reform decree.

(It is possible that the government can square this circle as Alonso spoke of “recovering the notional” whereas the draft decree talks about asset swaps at “market prices”. It would all depend on the time to recover the notional and the implied yield of the assets to be swapped.)

In an editorial on Tuesday, the Financial Times asked Rajoy to govern “for the good of Spain, not the party”, specifically to ask for a rescue.

(A case in point is the regional elections in Galicia. It has been claimed that the elections have been brought forward from next year to this Autumn at Rajoy’s behest, in order to take place before a hypothetical rescue in November. Also, there is a feeling that Rajoy might cut pensions before the end of the year in order to meet the deficit targets, which would also hurt the Galician PP’s prospects with elderly rural voters. However, the most vociferous protests on preferred shares are happening already in Galicia around Novacaixagalicia, one of the four institutions in receivership, and there’s no way Rajoy can delay beyond Friday the decree bailing the preferred shareholders in.)

Vive le couple Franco-Allemande!

“The Franco-German couple is more necessary than ever” prime minister Jean Marc Ayrault assured the French business community. “The next phase of European construction will only be possible thanks to Franco-German agreement,” he was quoted by Reuters. His comments, which seemed aimed at silencing any concerns about the Franco-German relationship, were echoed by other senior cabinet members. Foreign Minister Laurent Fabius told a meeting of French ambassadors that the Paris-Berlin axis was “crucial” to Europe.  Finance Minister Pierre Moscovici told Les Echosnewspaper that, while there had been “a period of apprenticeship”, relations with Berlin were now working well. Moscovici told Les Echos he had set up a Franco-German working group with Schaeuble to forge a common position on euro zone issues and competitiveness. “We are ready to go further in European integration provided each step includes a further element of solidarity. That is why we have not dropped the idea of pooling national public debts,” he was quoted as saying.

In the interview Moscovici said that France will create a public finances watchdog group to reassure its euro zone partners of its financial credibility and deficit-cutting measures. The 2013 budget, due to be approved by the cabinet on September 24, will also rely on more “realistic” growth assumptions.

Coalition leaders’ meeting on austerity measures inconclusive

Wednesday’s meeting between coalition leaders to agree upon the €11.5bn austerity measures for the next two years ended inconclusively, Kathimerini reports. While Finance minister Yannis Stournaras played down the disagreements as “minor”, Evangelos Venizelos appeared less absolute in his statements to the media, saying that further discussion was required on the details of the package to protect low-income Greeks. Democratic Left chief Fotis Kouvelis too said that the effort to hammer out the measures were continuing and reiterated his «categorical opposition» to horizontal cuts. The package is to be presented to troika envoys, due in Athens next week, for approval. Antonio Samaras also faces resistance from conservative MPs and cabinet members about additional wage cuts for certain categories of civil servants such as military and judicial staff and priests.

Greek government declares Hellenic Postbank non-viable

Greece’s Hellenic Postbank, a small state-controlled lender, is no longer viable, finance minister Yannis Stournaras said on Wednesday, paving the way for its sale or transfer to private investors, according to Reuters. Hellenic Postbank had invested heavily in Greek government bonds, which left it with a huge capital gap despite its hefty deposits. As part of the bailout programme, the IMF and the European Union have set aside up to €50bn to replenish the capital of those Greek banks that will be deemed viable. The others will have to be sold, transferred or wound up.  The government plans to unveil the final terms of the viable banks’ recapitalisation only by the end of September, Stournaras said. The government also postponed a deadline to report Greek banks’ results to October 31.

Dutch polls: Roemer’s Socialist party lost, Rutte’s party now leading

A second opinion poll in the Netherlands has shown a sharp drop in support for the Socialist Party, the previous front-runners, after the first televised debate between the four main party leaders on Sunday, according to the Volkskrant.  The SP lost eight seats in the latest Intomart Gfk poll. According to the poll Emile Roemer’s party would win 30 of the 150 seats in parliament, down around 25% on a week ago. The VVD, led by prime minister Mark Rutte, also dropped two seats to 33 but becomes the biggest party. Labour was the biggest winner after a star performance in Sunday’s televised debate , rising four seats to 21, though still 9 seats less than last elections. Geert Wilders’ anti-immigration PVV rose three to 18, six down on the previous election.Wilders has pulled out of a face-to-face debate on European issues with D66 leader Alexander Pechtold which should have been broadcast on Nieuwsuur on Saturday night. The general election takes place on September 12. Current polls indicate at least four parties will be needed to form a new coalition, according to DutchNews.

New trading platform to revive interbank market in Portugal

The Bank of Portugal will launch an electronic platform next week that could help loans trickle down to the bailed-out country’s battered economy, hoping that it will reignite confidence between banks in a stalled interbank money market, Reuters reports. The system to be made available on Monday will process and register unsecured interbank money market operations by domestic banks for funding of up to one year, with financial settlement to be carried out via the Bank of Portugal’s TARGET2-PT system.

Munchau says Germany has manoeuvred itself into a position where it can be blackmailed

In his column in Der Spiegel Wolfgang Munchau writes that Germany has manoeuvred itself into a position, where it can be blackmailed. By refusing bazooka-type rescues, Germany’s Target 2 imbalances is approaching the one trillion mark, as a result of which a eurozone break-up would be more costly for Germany than for others. This is something that is increasingly understood elsewhere, including in Italy.  That is why Merkel is pulling back from forcing Greece out of the eurozone, making a within-eurozone default more likely. Munchau also points to the recent paper by Thomas Mayer and Daniel Gros, who have called for a sovereign wealth fund to manage Germany’s current account surplus. He says such proposals only show that Germany has manoeuvred itself into a corner. You must be pretty desperate to make such proposals – when it would be so much easier to manage the imbalances. Munchau concludes that Germany cannot afford a euro break up, and will ultimately be prepared to pay almost any price to keep the project alive.

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
10-year spreads
	Previous day	Yesterday	This Morning
France	0.727	0.757	0.778
Italy	4.478	4.503	4.508
Spain	5.163	5.103	5.184
Portugal	8.215	8.033	8.131
Greece	22.452	22.515	-1.38
Ireland	4.590	4.545	4.990
Belgium	1.171	1.199	1.247
Bund Yield	1.349	1.38	1.375
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.254	1.2533
Yen	98.560	98.51
Pound	0.793	0.7921
Swiss Franc	1.201	1.2006
ZC Inflation Swaps
	previous	last close
1 yr	1.75	1.77
2 yr	1.69	1.71
5 yr	1.73	1.76
10 yr	2.04	2.07
Euribor-OIS Spread
	previous	last close
1 Week	-9.000	0
1 Month	-2.543	-2.443
3 Months	9.686	9.986
1 Year	69.643	69.443
Source: Reuters