EUROINTELLIGENCE DAILY BRIEFING, 23 de Outubro de 2012. Enviado por Domenico Mario Nuti.


German court of auditors wants Bundesbank to count gold at Fort Knox

  • Paranoia hit a new extreme in the form of an official report urging the German central bank to have formal audits of its foreign-held gold reserves;
  • report was triggered by MPs acting on rumours that the German gold stock has disappeared, or replaced by certificates of unknown quality;
  • no, it is not April 1;
  • acting on the criticism, the Bundesbank already audited domestically held reserves;
  • it yesterday released court of auditor report with blacked-out details;
  • Bundesbank says it has no doubt about the integrity of its gold holdings in the US, the UK and France, but seeks to repatriate samples of its gold holding to check for quality;
  • the troika and the Greek government edged further towards an agreement, with some differences remaining over labour market reforms;
  • the two sides have also negotiated a new lower target for privatisation revenues;
  • the troika has relaxed its position on the immediate sacking of Greek civil servants;
  • state-owned Irish Life sold its stake in Nama, which will insure that Nama can remain an off-balance sheet vehicle;
  • Cyprus invites international lenders for a round of talks on an aid package;
  • the European Commission says Portugal needs a plan B if deficit targets are not met next year;
  • the latest data show that the Spanish mortgage market continues in a free fall;
  • Eurostat revises Spain’s 2010 and 2011 budget deficit upwards;
  • after the rejection of the Economic and Monetary Affairs Committee, Yves Mersch is now facing the vote of the full assembly of the European Parliament;
  • CLO have made a remarkable come-back this year;
  • Italy has the third highest number of NEETs in the EU  – not in employment, education and training;
  • Massimo Giannini notes that Italian like Mario Monti, but not his policies;
  • an ECB working paper finds that credit rating agencies give better ratings to their clients;
  • Christopher T. Mahoney wonders when southern Europeans will start to revolt;
  • Paul de Grauwe, meanwhile, says the Bundesbank undermines the ECB in order to bring about a German departure from the eurozone.

This is the most hilarious story in our area we have come across in a long time. Suddeutsche’s front page lead is that the German court of auditors has asked the Bundesbank to weigh all the gold after German MPs acted on rumours that the German gold might no longer be there, or replaced by some certificates. The Bundesbank duly counted and weighed all the 82857 gold bars stored in Frankfurt, some 1100 tons. MPs were even allowed in the cellar to see if the gold is still there. In an ultimate act of desperation, the Bundesbank is even considering to let journalists inside the vaults. The problem is only that the gold held outside Germany has not been audited. There are no official figures, but Suddeutsche estimates about 1500 tonnes are held by the Fed, and about 800 tonnes by the central banks of England and France. The total value is some €133bn. The court of auditors has now demanded regular audits of Germany’s foreign gold reserves. The last audits from New York were from 1979/1980. The Bundesbank has since been let into the vault, but not allowed to open the boxes in which the bars are stored, something that has obviously stokes suspicions.

The Bundesbank has released the court of auditors statement, with several parts being blacked out, presumably given the continued official secrecy about the location of Germany’s gold reserves. The Bundesbank insisted that there is no doubt about the integrity of the foreign depots warning that the doubt itself could have considerable political implications. As a sign of goodwill, Suddeutsche writes, the Bundesbank wants to repatriate 50m tons from abroad, melt it and test the quality.

In an editorial, Suddeutsche writes that the gates should be opened for inspections. (yes, no kidding!).

(We are just trying to picture Jens Weidmann opening a vault in Fort Knox and discovering an IOU with a smiley on it. It is hard to beat this story in term “we were robbed” type paranoia. It also has a certain Götterdämmerung quality. We wonder how the Fed, the BoE, and the BoF reacts to these allegations, which are, after all, fuelled by the German court of auditors, an official institution of the German state. The Fed may respond by just sending the gold back to Frankfurt – that is if it is still there of course!)

Edging towards a deal, scope of disagreement has been reduced

Pressure is growing to get a deal between Greece and the troika. The scope of disagreement has been narrowed down, according to the latest update from Kathimerini. Athens and its lenders still have differences over labour reforms, particularly the reduction in compensation for sacked workers. But this seems to have been narrowed down to a disagreement over how much compensation employees who have worked at the same company for over 16 years get if they lose their job.

The two sides are also said to negotiate a new, lower target for privatization revenues. Greece will aim to raise €10bn by 2016 and €25bn by 2020. The original target when the programme started in 2010 had been €50bn by 2015. The Greek government is set to guarantee the political independence of its privatization fund, TAIPED. Greece has also examined the possibility of utilizing more than 80,000 real estate properties owned by the state, which could raise €20bn to €28bn over time.

Another matter that remains unresolved relates to the country’s civil service. The troika has reportedly dropped its demands for the immediate layoffs of 15000 civil servants but is said to be insisting on the sacking of at least 5000 public sector workers by the end of the year – either through a labour reserve scheme or through permanent dismissal – with another 5000 to go in the first quarter of 2013.

NAMA stake sold to keep €74bn off government balance sheet

State owned Irish Life sold its 17% stake in Ireland’s bad bank, NAMA Investment Ltd, set up in 2010 to give private investors a 51% stake in Nama’s ownership to satisfy EU accounting rules. The structure, designed to keep NAMA’s debts from being counted as part of the national debt, came under threat when the state took control of Irish Life. A buyer has now been found after a seven-month hunt, and Eurostat said yesterday that it is now happy to treat Nama’s debt as separate to the national debt, the Irish Independent reports.  It was bought by London-based Walbrook Capital for an undisclosed fee. But the new deal will raise eyebrows, as the new owners are linked to a previous multi-billion investment vehicle heavily criticised by the UK’s financial regulator. The sale of Irish Life’s 17% stake in NAMA keeps loans of €74bn at the country’s “bad bank” off the balance sheet of the Government, according to the Irish Times, or as the Irish Independent reports, €28bn of NAMA’s debt to be counted as part of national debt by the European statistics agency.

(Spain has a similar headache with its own bad bank.)

Cyprus pressed to finalise bailout talks

Cyprus plans to contact international lenders on Monday evening to invite them for final talks on a comprehensive aid package for the Greece-exposed island, Reuters reports. Authorities have said they want a deal with lenders by the Eurogroup meeting on November 12. Lenders have demanded salary cuts in a public service workforce, which is one of the highest paid in the euro zone, pension reform, privatizations and the creation of a “bad bank” that will assume problem debt in the financial system.  Cyprus’s leftist government says it will resist calls for privatizations, but is proposing staggered pay cuts ranging from 6.5 to 12.5% in its public sector.

Portugal needs Plan B, Commission says

Portgual delivered its budget for 2013, but the European Commission says Portugal needs a ‘Plan B’. Vitor Gaspar has one month to submit to the troika a new package of spending cuts ready in 2013, in case they begin to experience a new slippage towards the targeted deficit, writes Jornal de Negocios.

Spanish mortgage market continues to plunge

El Pais (English edition) reports on August home loan figures released by Spain’s National Statistics Institute INE. The number of new loans for the month dropped 28.5% year-on-year, and the total volume of lending dropped 30.9%. House prices have dropped 25% from their peak in early 2008, while 670,000 housing units remain unsold. El Pais attributes the downturn in the home loan market especially to the high unemployment.

Eurostat revises Spain’s 2010 and 2011 budgets upwards

According to El Pais (English edition), Eurostat has revised Spain’s 2010 and 2011 deficits upwards, to account for unpaid bills to providers at the state and local level in 2010 and 2011, and bank recapitalizations in 2011. In the Eurostat press release [PDF] most revisions of debt an deficit are downwards, except for Spain, Romania’s 2011 deficit, and Italy’s debt.

The final showdown on Yves Mersch

FT Deutschland reports on the final stage in the battle over the nomination to the ECB’s governing council, after the monetary committee rejected Yves Mersch for the job. Now it is up the EP as a whole to cast a vote, and it looks like there is some movement on the issue, where the parliament might accept Mersch in return for some undertaking to have more women in top jobs. MEPs have framed this debate entirely on gender terms. This is apparently not about Mersch’ qualification.

(If we were in the EP, we would have ask him to explain his comment a few years ago that the ECB should not cut interest rates any further to avoid falling into a liquidity trap. He obviously got the logic of a liquidity trap upside down. We feel there is indeed a question whether he is qualified for the job.)

The return of the CLO

One of the many lessons of the global financial crisis is the importance of watching the credit markets for any signs of recovery or instability. While the eurozone debt crisis continues, a recovery is taking place in the wider credit market, as this story from the FT shows. Collateralised loan obligations, debt that instruments that pool loan to low-rated companies, have shown a strong comeback. The number of companies that issue CLOs has doubled this year – a sign that the Fed’s reflationary policies are finally beginning to kick in. Separately, we are also observing some normalisation on European capital markets, though the US is clearly ahead in the trend. The money that has flown into CLOs this year is more than the last four years combined.

Italy’s 2.4m NEETs

The NEETs (not in education, employment or training) should be considered as the next focal point of the Italian crisis, Il Fatto Quotidiano writes. As the Eurofound employment report remarks, Italy’s 2.1m NEET are draining as much as 2% off Italy’s GDP, or €32.6bn. Across Europe, NEETs number about 14 million, up from 12 million in 2008, draining 1.2% off of European GDP. Italy has the third worst performance in the EU, after Greece and Bulgaria. The situation should deteriorate in 2013 as the recession continues, Il Fatto Quotidiano writes.

Italians recognize Monti’ efforts, but not those of his government

Save Monti from his agenda, urges Massimo Giannini in La Repubblica. While Monti’s support is at a maximum level since last November – 54% of Italians have confidence in Monti according to IPSOS – 66% of Italians reject the austerity packages and have lost faith in Monti’s team. For example, the reintroduction of IMU property tax has affected all real estate properties owners, only religious buildings are exempted. So, has Montismo worked? According to Giannini, yes and no. The Monti Agenda is full of smart innovations and inapplicable measures. The two biggest Italian problems are political corruption and fiscal evasion. Hitting the lower classes with new taxes will ultimately detach people from Monti.

ECB working paper finds evidence of rating agency conflict of interest reported last Friday on an ECB working paper on agency credit ratings of banks over the 21-year period since 1990. The study finds that rating agencies give better credit ratings to banks that used them to rate their issues of asset-backed securities. It also finds a correlation between larger bank size and better credit rating. The working paper concludes that these are “economically significant distortions” contributing to the creation of “too big to fail” banks, also finding that “differential risk weights recommended by the Basel accords for investment grade banks bear no significant relationship to empirical default probabilities”. (See PDF of the paper by Hau, Langfield and Marques-Ibanez)

Christopher T. Mahoney wonders whether Southern Europe will ‘revolt’ to change ECB mandate

In a column on Project SyndicateChistopher T. Mahoney describes Mario Monti as ‘clearly the intellect of the Southern leaders’, but sees him as cautious because Italy is not under market attack;

of François Hollande he says he ‘has the guts to take on Germany’ but may not grasp the magnitude of the necessary changes while Sarkozy ‘dared to question the ECB’s single mandate of price stability’;

and he says Mariano Rajoy is ‘the most radical’ but not radical enough in his demands, and ‘seems completely out of his depth’.

Paul de Grauwe says stop this campaign against the ECB

We always find there is a particular eloquence with which Paul de Grauwe makes his point, and this comment in the FT is a particularly fine example. After the decision by the ECB to act as a lender of last resort, the public criticism of the Bundesbank and its president has undermined the credibility of the policy, he argues. He writes that Jens Weidmann has been actively organising German hostility to the euro  by opposing the OMT. Now comes the kicker of his argument.

“Here is my hypothesis. The Bundesbank has been an enemy of the eurozone right from the start, for understandable reasons. Before the eurozone’s creation, the Bundesbank reigned supreme in Europe, dictating monetary conditions not only in Germany but also in all the European countries that pegged their currencies to the Deutschmark. With the introduction of the euro, the Bundesbank lost its hegemonic power and became a central bank like all the others.

The eurozone crisis has created a window of opportunity for nostalgic souls in the Bundesbank to restore its hegemonic position in Europe. This opportunity can be realised by a German exit from the eurozone, which now appears possible. If the Bundesbank wishes to precipitate such an exit, a campaign to convince the German public that the ECB’s OMT programme will lead to monetary instability could prove to be a lethal weapon.”

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

10-year spreads
Previous day Yesterday This Morning
France 0.517 0.509 0.514
Italy 3.195 3.293 3.278
Spain 3.799 3.895 3.959
Portugal 5.953 5.907 6.209
Greece 14.937 14.951 -1.63
Ireland 3.148 3.148 3.270
Belgium 0.821 0.829 0.839
Bund Yield 1.581 1.613 1.628
Euro Bilateral Exchange Rate
  Previous This morning
Dollar 1.304 1.3054
Yen 104.060 104.3
Pound 0.813 0.8152
Swiss Franc 1.210 1.2105
ZC Inflation Swaps
  previous last close
1 yr 2.02 2.01
2 yr 1.84 1.82
5 yr 1.93 1.83
10 yr 2.14 2.03
Euribor-OIS Spread
previous last close
1 Week -8.157 -8.457
1 Month -5.771 -4.971
3 Months 3.871 2.371
1 Year 46.957 46.557
Source: Reuters

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