We always suspected that Germany would emerge as the true opponent to any form of meaningful bank regulation. There is now an open dispute between the Commission, which wants to centrally regulation all 6000 eurozone banks, and Germany, which wants to confine this to the 20 or 25 largest banks.

In an interview with Sueddeutsche Zeitung and Les Echos, Michel Barnier made it clear that Brussels wants all 6000 banks to fall under a central regulation. He will make the official proposal September 12. Countries outside the eurozone can participate on a voluntary basis. He said a proposal to confine the centralisation of regulation to the largest banks only, would not have caught banks like Dexia, Bankia or Northern Rock, all of which triggered large state rescues. Tasks without consequences for the financial stability, like consumer protection, can remain at national supervision level.

As to the timetable, Barnier says the central regulator should start with the banks subject to an EFSF/ESM programme on January 2013, followed by the large banks in July 2013 and by all banks in 2014. He says this would pave the way for a direct funding of banks through the EFSF/ESM from January onwards.

Suddeutsche writes that the proposals are opposed particularly by the CDU, which defends the position of the savings banks and mutual banks, which are opposed to any intrusion from Brussels into their cosy operations.

Schauble rejects supervision of all banks

In a riposte in the Financial Times, Wolfgang Schauble left no doubt that he opposes the central aspect of the proposal – the control over all banks. He says the system must be effective and that means that a European regulator cannot supervise 6000 banks. He also called for the erection of Chinese Walls inside the ECB to prevent conflicts of interests between monetary policy and prudential supervision. It is also important that the supervisor is accountable to the European Parliament and the Council. He also supports the idea that member states can impose more stringent capital controls beyond the requirements of Basel III. He said it was right not to allow systemically important banks to fail after Lehman Brothers, but it was now time to move on.

Weidmann has considered resignation

Bild has the story this morning that Jens Weidmann has actually considered resignation, but decided against it “for now”. The story is that he discussed the matter with the Bundesbank’s directors. The German government has also urged him not to go. Weidmann, according to this story, has concluded that he would have a better chance to fight against the bond purchasing programme from within.

(Why is he leaking this? He obviously does not want to resign. There would not be much of a career for him, having only been at the Bundesbank for a year. It is pretty pathetic to leak the story that you are considering resignation as a negotiating device. There is no question that he will be outvoted on Thursday. And there is no question that he will go.)

Greek coalition partners continue talks, some details emerged

Representatives of the three coalition parties on Thursday continued their talks aimed at nailing down an €11.5bn austerity package for 2013 and 2014. According to Kathimerini cuts being discussed are even harsher than expected. Sources told the paper that measures include:

• the abolition of the traditional holiday payments (at Easter, Christmas and summer) for all pensioners, not just former civil servants;
• Cuts on all pensions above €800, with cuts starting at 2% and reaching 20% for the highest levels. The government hopes to raise €4.5bn through pension cuts alone.
• Fresh cuts to healthcare of €1.3bn, some €500m of cutbacks in defense and €750m in cutbacks to local authority subsidies.
• Cuts to the so-called «special salaries» of certain categories of civil servants are to raise €800m.
• As for civil servants, the likely scenario involves between 35000 and 40000 employees leaving the public sector by 2014, either through early retirement or for failing to pass an evaluation. Another 110000 are to leave the service by 2015 either through retirement or the termination of their contracts.

Towards a second bailout for Portugal?

FT Alphaville writes that for Portugal a second bailout may well be on the cards if the Troika is genuinely convinced that the government cannot do more to reach the agreed targets and that further austerity measures will just exacerbate the recession. Portugal implemented the austerity measures demanded by the creditors but will still miss the deficit target. According to the Diário Económico the deficit this year will skid to 5.3% of GDP, €1.2 billion more than expected. This was the scenario that the Minister of Finance presented to the Troika on Tuesday, beginning the fifth review of the Portuguese aid programme. The authorities admit that the international target of 4.5% is unlikely to be reached, but has not ruled out more austerity measures to cover at least part of the hole.

Rising demands on Spain’s regional liquidity fund

After Valencia’s regional spokesman said on Wednesday that “the more money, the better” from the Spanish “regional liquidity fund”, the region’s president Alberto Fabra said Thursday that Valencia would up its funding request by €1bn to €4.5bn, writes El Pais, English edition. Valencian left nationalist party Compromís demanded a debt audit and criminal charges against “those responsible for bad management”, reports Europa Press.

An Expansion story, including a chart of the debt of each of Spain’s 17 Autonomous Communities, reflects the concern that just these three regions are will now be using up more than half of the fund. Mariano Rajoy said that the fund “won’t run out of money because he knows already which regions will ask for help”, as quoted in another Expansion story. Meantime, El Pais reports that the government of Andalusia is “studying the small print” of the liquidity fund as the region loses market access. Both the regional president José Antonio Griñán (PSOE) and his deputy Diego Valderas (IU) demanded an “equitable” and “orderly” distribution of the fund, “without limiting [the regions’ policy] competences”.

Hollande visits Rajoy

After Tuesday visit by van Rompuy, Thursday it was Hollande’s turn to meet Rajoy in Madrid. On Wednesday, El Pais ran a background story on Hollande’s realignment with Merkel, forming a directory to steer the union and make decisions on Spain and Greece. The story claims rising unemployment, sagging popularity and stagnant growth have prompted Hollande to abandon “electoralist bluster” such as rallying against austerity, demanding growth policies, or fighting for “a needed rebalancing with the southern countries”.

Speaking to the reporters after the meeting, Hollande urged Europe to “take the decisions that are expected of it” at the Council summit of October 19 after “delaying important decisions for too long” which “caused doubts”, according to La Vanguardia. Rajoy said it would be “malevolent” to suggest he’s playing politics with the timing of the Galician regional elections and a possible Spanish rescue. He also made a convoluted statement that he hadn’t heard any such insinuations which didn’t mean they were not made, but that since he doesn’t believe there are malevolent people, the insinuation must not have taken place. (This sounds like a folk saying from Rajoy’s native Galicia about witches: “I never saw them, but they are there”)

Hollande also met with PSOE leader Alfredo Pérez Rubalcaba, after which the two socialist leaders demanded growth and employment measures at the October 19 Council summit, writes Publico. They also expressed concern about the growing detachment of European citizens from EU policies.

Spain manoeuvring on banking rescue and preferred shares

Quoting two unnamed sources, Bloomberg claims that Spain is considering to recapitalise Bankia without resort to the European banking rescue funds, as a way to postpone the bail-in of its subordinated creditors. The story suggest that instead of using its own money to support Bankia, the recapitalization might wait until after the first instalment of the bailout money comes in November.

(It is unclear what would be accomplished by any of this. Paragraph 17 of the Memorandum ties “subordinated liability exercises” to receipt of “public capital”, not specifically European bailout funds. And paragraph 18 requires the legal instruments for the bail-in to be in place by end-August and for the Bank of Spain to “immediately discourage” any institution which “may” need state aid from avoiding a bail-in at close to “market prices”.)

Euro breakup would cost Germany 10% of GDP

Reuters reports on an interesting calculation by Lars Feld, a member of the German Council of Economic Advisers. He calculated that Germany has total claims on the eurozone of €3.5 trillion. If a large part of this goes into default, there would be insolvencies in small and medium sized firms. This would lead to a drop of GDP in the order of 7-10%. He said even a Greek exit would carry significant risks for business.

(We think this is still far too conservative because it only includes first-round effects. A breakup of the eurozone would also trigger a massive increase in the German real exchange, and it would also likely trigger a broader financial crisis. The drop in German GDP is more likely to be in the order of 10-20% in the event of a violent breakup.)

Nowotny says economic uncertainty is growing massively

The ECB has a tendency to underplay recessions, so when a member of the governing council talks about uncertainty increasingly “massively”, it is an indication that the central bank is about to do some quite drastic – and using the economic situation as an argument for it. He said he will not jump the gun on the ECB’s official forecast, “but I can say this much: there will not be an improvement, but rather a deterioration in expectations.” He said there would be a recession in all the southern countries in 2012, and stagnation in France. He also seemed to support the idea of a banking licence for the ESM.

Irish house prices on the rise for the second month

Irish house prices grew by 0.2% in July, just the second monthly rise in five years, rekindling hopes that the market may be bottoming out, Reuters reports. Irish property prices have fallen 50% peak to trough in the past four years after a property bubble burst spectacularly, leaving banks with huge losses and homeowners with hefty mortgage repayments.

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

Getting worse again.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.757	0.829	0.845
Italy	4.390	4.564	4.554
Spain	5.103	5.290	5.365
Portugal	8.033	8.118	8.223
Greece	22.515	22.539	-1.33
Ireland	4.545	4.627	5.021
Belgium	1.199	1.261	1.281
Bund Yield	1.38	1.324	1.334
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.255	1.2514
Yen	98.680	98.12
Pound	0.792	0.792
Swiss Franc	1.201	1.2008
ZC Inflation Swaps
	previous	last close
1 yr	1.67	1.75
2 yr	1.63	1.66
5 yr	1.68	1.72
10 yr	2.09	1.99
Euribor-OIS Spread
	previous	last close
1 Week	-8.200	0
1 Month	-2.400	-4.2
3 Months	9.771	10.271
1 Year	69.657	68.157
Source: Reuters