German economics minister discourages Spanish bailout application

• According to a Spanish press report, Philip Rösler tells his Spanish counterparts that the FDP’s 93 MPs would vote against a Spanish ESM programme;
• this was one of the reasons why Mariano Rajoy had ruled out an application before the end of the year;
• a Greek economist forecasts an economic contraction of 8.8% in 2013;
• Welt am Sonntag has an investigation according to which the ECB broke its own rules in its collateral policies vis-a-vis Spanish banks;
• the article claims that the ECB had lent €16.6bn more to Spanish banks by accepting collateral that should not have been accepted, and by applying the wrong discounts;
• Spanish judges have found loopholes in the law to help them stem the flood of foreclosure cases;
• the European Parliament threatens to delay banking union if Yves Mersch is appointed to the ECB’s executive board;
• the latest EU presidency draft says the head of the new bank supervisor should have no national function;
• draft also strengthens the role of the central supervisor against national counterparts;
• Louis Gallois presents his competitiveness report to the French government, calling for a €30bn fall in social security contributions, to be funded by higher VAT;
• Angela Merkel said she sees the eurozone crisis lasting another five years;
• the Czech central bank cut its repo rate to 5bp in an effort to weaken the coruna against the euro;
• Bill Mitchell says the eurozone is about to experience a 1930s style depression as a result of policy errors;
• Eugenio Scalfari says Italian political parties should study the Grillo phenomenon, as he relies on the internet, rather than on TV, for his support;
• Wolfgang Munchau says policy is not even sufficient to solve the liquidity crisis, given the ECB’s constraints and the limits of a banking union;
• Willem Buiter and Ebrahim Rahbari, meanwhile, says that Target2 is a poor measure of the Bundesbank’s net loss exposure.

El Confidencial reports that FDP leader and economy minister Philipp Roesler has held meetings with his Spanish counterparts Luis de Guindos and Soraya Sáenz de Santamaría, citing sources that he attempted to dissuade Spain from applying for a rescue. He apparently said the FDP’s 93 members of the Bundestag would oppose it. Mariano Rajoy is understood to have thus decided to deny publicly that there will be a rescue before the end of the year.

(El Confidencial quotes a peculiar turn of phrase, that the government’s strategy is now to wait until the rescue “falls like a ripe fruit” – which to a Spanish reader recalls Franco’s assertion that “Gibraltar is not worth a war: it will fall like a ripe fruit”. )

Kontogiannis estimates Greek GDP to drop by twice the forecast 4.5% rate

In Kathimerini Dimitris Kontogiannis warns that the GDP drop might as high as 8.8%. His calculations are as follows: “The additional austerity measures in the 2013 budget amount to approximately €11bn. Some €2bn will come from revenues and around €9bn from spending cuts. Applying a fiscal multiplier of 0.25 on the above revenue figure translates into subtracting €500m from this year’s GDP. In addition, some €12.5bn will have to be subtracted from the GDP assuming a fiscal multiplier of 1.4 on the above spending cuts. Therefore, the combined impact from fiscal austerity measures is estimated at €13bn. If the €5.7bn from the previously mentioned effects are added, some €20bn-€21bn will have to be factored out from this year’s GDP… there should be a positive impact on next year’s GDP from the external account, as imports fall further and exports rise. So what do we get if we add it all up? The drop should be around €16.4bn, so GDP will end up at around €177bn-€178bn in end-2013 compared to an estimated €194bn this year, meaning a drop of around 8.8% in nominal terms.

Die Welt queries ECB over Spanish collateral quality

Welt am Sonntag reports that the ECB may have lent €16.6bn more to Spanish banks than allowed by its own collateral rules. Die Welt has carried its own investigation and found that in some cases a smaller haircut had been applied than required, while others did not meet the minimum rating requirement in the first place. Die article says of €66bn of the posted collateral had warranted a haircut of 5.5%, which would have reduced the available credit by €3.3bn. The posted T-bills should not have been accepted at all. Die Welt takes exception to the ECB explanation that it relies on the DBRS rating agency – which is alone among rating agencies to have maintained an A rating. But the article points that even this euphemistic rating only applied to Spanish long term debt. Die Welt article also accuses the ECB of applying a double standard to Spain and Ireland (the latter’s banks not having benefitted from the same treatment even though DBRS has also maintained an A-rating). An ECB spokesperson assured Die Welt that the matter (which Die Welt calls ‘curiosities of collateral policy’) would be clarified.

Spanish judges getting rebellious on foreclosure, repossession and eviction

Recently, as part of the government’s austerity drive that has seen the introduction of drug prescription fees and contributions for medical treatment or diagnostic tests, Spain’s Justice Minister Alberto Ruiz-Gallardón has introduced a draft law increasing the fees payable for various kinds of legal procedures, some of which were free up to now. Publico reports that professional associations of judges and prosecutors have reacted by proposing that legal persons be charged higher court fees. This would be directed especially at banks which are accused of “collapsing” the courts with mortgage foreclosures. According to the paper, the association Judges for Democracy argued that it would be legal for judges to delay foreclosure and eviction cases, on the argument that they would require “a greater study and analysis” because of the possibility of abusive or legally void clauses in  contracts. El Pais is also reporting that judges are ‘getting around the harsh law through avant-garde verdicts’. According to the paper, in their decisions judges are sometimes arguing that there is “unjust enrichment”, “abuse of law” or “usury”.

European Parliament threatens to delay banking union over Mersch

It’s gloves off now in the fight over Yves Mersch, who now sets to be appointed to the ECB’s executive board through a written procedure later today – unless any one government withholds its support. Reuters quotes two MEPs, Syvlie Goulard, from the liberal group, and Sven Giegold from the Greens, as saying that a decision to bulldoze Mersch into the ECB job after the parliament had explicitly rejected him, would augur ill for the future co-operation between the EU’s institutions. Goulard in particular said the EP is likely to delay the banking union, which requires approval by the EP. The Reuters article also quoted Guntram Wolff of Bruegel, who is quoted as saying that the banking union would be a suitable subject for the parliament to exercise its democratic prerogative, especially since its importance as an immediate crisis resolution tool is widely overestimated.

Latest presidency draft strengthens ECB role in banking union

FT Deutschland has an article on the latest EU presidency draft on banking union, which includes the stipulation that the new head of the supervisory body should be full time, and have no national responsibilities. The article said that Sabine Lautenschlager, head of banking supervision at the Bundesbank, is a potential candidate for the job. The new supervisory board will including four ECB representatives, and one representative each from the national supervisors. The latest draft also gives the ECB full powers, with the right of delegation.

Galois to present his competitiveness shock therapy for France

This Monday former EADS chief Louis Gallois submits his report on how to improve competitiveness in France, widely leaked in advance. It recommends a reduction in social security contributions by  €30bn, of which one third would be for the wage earner and two thirds for the employer. This results in a Social Security shortfall of 1.5% of GDP, to be financed by raising value-added tax and increasing a separate social levy that targets investment income as well as workers’ pay. He may also suggest a green tax on diesel fuel. The report also suggests twenty other measures on how to improve competitiveness. Les Echos writes that the government is likely to approve almost all measures that do not affect labour costs directly. Most of them are consensual and do not represent a significant cost to public finances, at least in the short term. The reduction in labour costs, however, is extremely sensitive and its budgetary impact heavy. Francois Hollande’s aides told Reuters shifting more of the tax burden onto households is out of the question at a time when the country is grappling with its toughest austerity budget in years in order to meet deficit-cutting goals.

Merkel sees Euro crisis lasting another 5 years

Angela Merkel told a CDU regional meeting on Saturday that the government debt crisis would last at least 5 years. An AP story carried by the LA Times quotes Merkel that “whoever thinks this can be fixed in one or two years is wrong”, something that Merkel has been saying for longer than one or two years already. Merkel also advocated “a bit of strictness” to ensure that Europe can attract international investment.

European currency wars, Czech edition

Last Thursday Bloomberg reported that the Czech Central Bank cut its repo rate from 25bp to 5bp. According to Bloomberg the CNB is trying to keep inflation above 2% as the GDP contracts slightly faster than expected this year, and Czech policymakers seem determined to weaken the Koruna relative to the Euro. Bloomberg notes parallels with Switzerland and Estonia in terms of creditworthiness and ‘safe haven’ status on the margins of the Eurozone.

Bill Mitchell looks upon Eurostat and despairs

In a scathingly titled blog post, Eurozone policy makers destroying prosperity, Australian economist Bill Mitchell on Thursday noted a slew of negative Eurozone statistics, such as above-target inflation, rising unemployment, stagnant business investment, dropping household saving rate, rising government debt-to-GDP, and high government deficits. Mitchell writes:

“This is now a full blown Depression of the scale of the 1930s travesty and, once again, its depth is a direct result of policy failure. All the indicators are coming together and providing an unambiguous verdict – that the Eurozone policy makers destroying prosperity and have relinquished any sense of capacity to govern, where that term means the capacity to advance public purpose and improve welfare.”

The Grillo phenomenon

Beppe Grillo is a  phenomenon that should be studied carefully, Eugenio Scalfari said on his Sunday’s editorial on La Repubblica. The elections in Sicily is a first sign of change in Italian politics. Grillo, with his party Movimento 5 Stelle, relies on the internet, rather than the TV where he would be forced to confront and answer questions. Instead, he prefers to communicate through monologues on video. According to Scalfari it’s a huge innovation, but it seems too far from what Italy needs. What the Movimento 5 Stelle wants to restore international confidence in Italy remains a mystery, Scalfari remarks. He concludes that Italy instead needs Monti’s agenda – a series of long-term structural reforms.

Wolfgang Munchau on solvency and liquidity

In a second column on solvency versus liquidity, Wolfgang Munchau responds to suggestions from other commentators who said eurozone entities may be insolvent not in some fundamental way, but because of rising market interest rates. In other words: if you solve the liquidity crisis, you get rid of the solvency crisis. Munchau says this was not his analysis, but even if that were the case, it is unlikely that the policies would actually solve the problem. The OMT is not yet triggered, and may never be. Even if it is, it is an operation of finite duration. The banking union will not produce a separation of sovereign and banking debt, according to Germany. The ECB is, by law, not in a position to accept any restructuring. So if you take the policy constraints serious – as he does -, it is hard to conclude that we are actually fixing the liquidity crisis, as opposed to providing only some temporary relief.

Buiter and Rahbari do the maths on Target 2

Willem Buiter and Ebrahim Rahbari take a detailed look at what would happen if the eurozone were to break up with the Bundesbank as the sole owner of the ECB. They conclude that Target2 net claims are a poor measure of the Bundesbank’s loss exposure. The 16 exiting central banks will not automatically walk away completely from their Target2 debts, they write. Many of the exiting NCBs would be able and willing to honour their obligations (which remain legally in force even after an exit). In addition, the Bundesbank would benefit from future seigniorage revenues.

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

Spreads are edging higher, euro weakens.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.771	0.776	0.778
Italy	3.462	3.631	3.630
Spain	4.141	4.211	4.306
Portugal	6.735	6.906	7.220
Greece	16.694	16.689	-1.45
Ireland	3.283	3.299	3.471
Belgium	0.969	0.974	0.995
Bund Yield	1.463	1.451	1.452
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.287	1.2829
Yen	103.710	103.12
Pound	0.802	0.8001
Swiss Franc	1.208	1.2066
ZC Inflation Swaps
	previous	last close
1 yr	1.72	1.74
2 yr	1.68	1.71
5 yr	1.78	1.85
10 yr	2.01	2.1
Euribor-OIS Spread
	previous	last close
1 Week	-7.429	-7.529
1 Month	-4.300	-3.3
3 Months	3.871	4.571
1 Year	45.757	47.357
Source: Reuters