ECB admits it messed up over Spanish collateral, but tries to play down the story

 

• Vitor Constancio says the ECB had applied the wrong collateral policies in respect of a finance operation with Spanish banks;
• he says there was confusion which credit rating to apply to which type of collateral;
• he played down the significance of the story saying that no losses were occurred;
• Spain has blocked the “written-procedure” appointment of Yves Mersch to the ECB’s executive board for now;
• the decision now goes to the European Council, which can shove Mersch into his chair through a qualified majority vote;
• as Greece prepares for a vote on the austerity and reform programme, trade union are stepping up their protests with a 48 hour general strike;
•  the Greek government is expected to win the austerity vote – albeit with a small margin;
• in response to the Gallois report, the French government unveiled its own plan for growth and competitiveness;
• it contains many of the report’s recommendations, though not the most important one of a reduction in non-wage labour costs;
• in its Article IV report on France, the IMF, too, warns about a loss in competitiveness;
• the German intelligence agency says a bailout of Cyprus would largely benefit Russian depositors;
• more details on Spanish unemployment figures show a fall in the number of contributors to social security;
• the troika imposes corporate governance reforms in Spain – by ending voting restrictions in companies;
• Angel Guria says Italy should be ready to tap the OMT;
• Iganzio Visco said several non-eurozone member states had questioned the effectiveness of the OMT at a G20 meeting;
• the Swedish central bank says it will use interest rates to contain household debt;
• James Saft says only a fall in the euro can help the eurozone now;
• Joseph Stiglitz advocates a German withdrawal from the eurozone;
• Nico Fried, meanwhile, argues that the German coalition is weak, and unable to turn the economic strength into an advantage, but it may still prevail at the next elections due to the extraordinary weakness of the opposition.

The story by Welt am Sonntag we reported on yesterday was a real cracker – and it was all true. The ECB did give Spanish bank more money than they should have. The ECB yesterday said the haircuts were miscalculated, but never caused any losses.  Vitor Constancio said yesterday that the ECB got mixed up over the type of credit ratings applied to specific bonds.

(It is impossible to say from the outside whether this mistake was deliberate or not. The Spanish banking sector was in a tight squeeze a few months ago, and it may well have been plausible for the ECB, or some of its officials, to deliberately flout the collateral rules in order to avoid a much larger financial accident. The plausibility of an improper conduct is what makes the story so damaging. The fact that no losses were incurred should be no consolation. It would be a good idea if the ECB could clear up exactly what had happened, and whether any pressure had been applied from above – or from the outside. Someone must have leaked this story to Welt am Sonntag, so clearly someone inside the ECB/ESCB is unhappy about what happened.)

Spain blocks Mersch for the ECB – but don’t hold your breath

El Pais reports that Spain on Monday blocked the appointment of Yves Mersch to the Executive Board of the ECB, citing the opposition of the European Parliament. The European Council Statement limits itself to saying that it “was not today in a position to take a decision by written procedure”, which would have required unanimity. The appointment will be on the agenda at an upcoming European Council, where the decision can be taken by qualified majority. El Pais quotes “diplomatic sources” that Spain is sour at the break of the “gentlemen’s agreement” that as one of the four largest Eurozone countries it would always have a member at the Executive Board. Last July, the European Council had chosen Mersch over Spain’s Antonio Sáinz de Vicuña (the Bank of Spain’s chief legal counsel) to replace the outgoing José Manuel González-Páramo. While Spain’s Economy Minister Luis de Guindos underscored its intention to nominate a Spanish candidate, he “neither confirmed nor denied” having a candidate in mind. It is speculated that Spain may take the opportunity to propose the candidacy of Belén Romana, a former Spanish Treasury Director General, who had been put forward to head the ESM but lost out to Klaus Regling, the chairman of the former EFSF.

(If the Spanish government was clever – which it is not – they would support a woman from Finland or Estonia. A Spanish woman would address the gender balance, but not the regional balance. To us this does not appear to be a substantive move, merely a procedural game.)

Strike waves over Greece as parliament prepares for crucial votes

Greece’s coalition government is preparing two crucial votes in parliament this week at the same time as unions are launching three days of strikes against the proposals. On Monday, public-transit workers, taxi owners and journalists around the Greek capital walked off the job. On Tuesday and Wednesday, all public-sector services are expected to be frozen in a 48-hour general strike called by the country’s two umbrella unions—private sector GSEE and public sector Adedy. They are to be joined by lawyers, engineers, hospital staff, power workers, telecommunications workers, dentists, local government employees, bank personnel, teachers, dock workers, air-traffic controllers and radio technicians. In posters around the Greek capital, GSEE says it has called the strike so “the measures do not pass.” It says: “All together we will win!” Dow Jones wires writes most analysts expect the austerity vote to pass narrowly (by 3-6 votes) on Wednesday, as well as the 2013 budget vote on Sunday.

French government to reveal its “pact for growth competitiveness and employment”

Rather than downplaying the Galois report, as widely expected by the public, the French government resorted to a risky move forward presenting its own “national pact for growth, competitiveness and employment”  with 35 measures, certain of  which are taken from the 22 measures suggested in the just published Gallois report. Les Echos lists some of the measures, many focusing on small and medium sized enterprises:  tax credits stretching payments over three years, a new public guarantee for SMEs, redirection of funds towards investment priority areas, standard VAT raised to 20% while reduced rate is lowered to 5%,, increase employee’s say in big companies, broadband for everyone, more training for employees, and a new brand “Made in France”.  According to lepoint.fr and confirmed by Les Echos the pact is intended to reduce business costs by €20bn.  No direct cut of labour costs as suggested by the Galois report.

IMF also calls on France to improve competitiveness

Just in time for the publication of the Galois report, comes the IMF’s  annual Article IV report on the French economy, which warns that “France’s growth outlook is being overshadowed by a significant loss of competitiveness,”, Reuters reports. “This loss predates the current crisis, but there is a risk it will get worse if France does not adapt at the same pace as its trading partners in Europe, notably Italy and Spain,” The IMF recommends France to ease its rigid labour regulations and lighten payroll taxes which are a disincentive to investment. The IMF repeated a recent plea for France and its European partners to show more flexibility on the pace of deficit cuts and review the timing of deficit targets if economic activity remains weak. The IMF last month cut its growth forecasts for Europe’s second-largest economy to 0.1% this year and 0.4% in 2013, from 0.3% and 0.8% respectively. Hollande’s budget relies on 0.3% and 0.8% for 2012 and 2013.

Cyprus bailout hits Russian snag in Germany

Spiegel reports that a report by the German intelligence agency is raising concerns that a Eurozone bailout of Cyprus’ banking system might mostly benefit wealthy Russian holders of offshore accounts. While Cyprus claims to be in full compliance with international money laundering regulations, the article cited doubts from the BDN and other officials. While Cyprus has not released a breakdown of depositors by nationality, the BND claims Russians hold €21bn in non-domiciled accounts, compared with a €17bn yearly GDP and a €10bn proposed bailout size.

More detail on Spanish unemployment figures

El Pais (English edition) reports on Spain’s latest unemployment figures. The Labour Ministry put the figure for jobless claims at 4.8 million, increasing by 128 thousand in October. The ministry found solace in the reduction from 134 thousand new claims in October last year, and in a better 5-month performance than for the same 5-month period a year prior. The number of workers affiliated with Social Security dropped by 73 thousand to 16.7 million in October, and is down 624 thousand year-on-year. Two million unemployed are not entitled to benefits, the highest figure in 25 years. As already reported, last month’s Active Population Survey by the National Statistics Institute put the unemployed population at 5.8 million or over 25% of the active population.

Troika to impose corporate governance reforms in Spain

El Confidencial reports that, in case Spain applies for a rescue, the troika would impose a legal reform opening up major Spanish firms to takeovers by foreign capital. The story is that, traditionally, many Spanish firms had ‘vote limitation rules’, capping voting shares regardless of the fraction of capital owned by any given shareholder. This rule protected existing boards from takeover attempts, and it was repealed by Zapatero’s government 30 months ago. Back then El Periodico reported that “at least 14 listed societies” (presumably referring to the IBEX 35) had voting caps between 3% and 33%. Earlier this year, the PP restored the voting caps, as reported by El Confidencial in June, responding to concerns by major Spanish firms that their low stock valuations opened them up to hostile takeovers.

Italy should be ready to ask for an aid, OECD’s Gurria said

Italy has to stay on strictly alert with the bazooka of EU and ECB help loaded and set to be triggered when needed, the OECD Secretary Angel Gurria told to ANSA news agency in a interview. According to Gurria, Mario Monti has made sensible reforms in Italian labour markets and pension system, but the tensions about Eurozone crisis is still present. Italy benefits of Monti’ reforms needs time to be in place, Gurria remarks. The ECB’s OMTs should be used only the yields of Italian bonds rise dangerously again, Gurria said. He also added that cutting taxes on firms and workers would be positive, such as an increase of the fight against corruption.

Visco said some G20 countries expressed scepticism about OMT

Reuters has a story quoting Iganzio Visco as saying that some G20 member s had expressed doubts about the effectiveness of the OMT at a meeting in Mexico City. Visco said in a press conference later that it was difficult to explain to non-Europeans that the sole existence of these instruments contributed to lower interest rates. Visco did not name the countries.

Swedish Central Bank to use interest rates to contain household debt

In out-of-Eurozone news, Reuters reports that the Swedish Central Bank is considering taking into account household borrowing trends in setting interest rate policy, in addition to the official inflation target. According to Reuters, the Riksbank board had been criticized for being ambiguous about whether other targets were used, and now a majority of more hawkish board members want to use household debt as a reason against further rate cuts, while more dovish members argue that “the repo rate is the wrong tool if debt is to be kept down”.

(We noted several times the difficulty Sweden had in pursuing a pure inflation target, as a result of which they defined new targets in order to allow them to do what they really want, which is to run a purely discretionary monetary policy disguised as a rules-based policy.)

James Saft says eurozone needs a devaluation

In his Reuters column, James Saft says the eurozone’s fast approaching recession is crying out for a substantial devaluation. He writes the latest data show the eurozone manufacturing sector shrinking for the 16th month in a row, “but the real horror show” was the fast deteriorating conditions in Europe’s credit markets. The credit crunch is now overshadowed by a fall in demand for credit. Saft makes the important that that the ECB, having suppored the euro through the OMT, is doing much less now to stem the recession. Throughout the crisis, the ECB has erred in being too hawkish. He concludes that improving transmission mechanism is not enough. “The ECB needs to heat up its side of the global currency war.”

Stiglitz advocates German Euro exit

Speaking at Banco Sabadell’s Barcelona School of Economics, economist Joseph Stiglitz argued that a German euro exit would be best for Eurozone economic growth, reports Cinco Dias, based on the resulting devaluation of the remaining Eurozone’s currency, which would boost exports. Stiglitz also said that, based on the experience of the 1930s in the US, the current crisis is not near its end, but at most “in its middle or even initial stage”.

A weak coalition confronted by an even weaker opposition

Nico Fried has an excellent political commentary in Suddeutsche Zeitung this morning. He writes that German citizens are making a distinction between their own vastly improved economic environment and personal circumstances, and the government’s performance. The coalition is perceived, rightly, as weak and ineffectual, as evidenced again by a coalition agreement on Sunday, in which the government cobbled together a few disparate measures – such as a subsidy to encourage women to stay at home, and the scrapping of a fee for doctors’ visits. Angela Merkel is respected because of the way she manages the euro crisis. (yes, hard to believe, but this is how it works politically in Germany – for now – but it will be interesting to see what happens when actual losses and transfers are incurred.) Fried concludes that the coalition is really tired, but unfortunately it is not even close to be at its end. The opposition SPD, being mostly obsessed with itself, is not in a position to take over the government, and it may well be that the centre-right scrapes through at the elections.

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

Spreads continue to rise. The markets are smelling a rat.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.776	0.793	0.793
Italy	3.496	3.727	3.710
Spain	4.211	4.341	4.406
Portugal	6.906	7.181	7.337
Greece	16.689	16.313	-1.44
Ireland	3.299	3.366	3.506
Belgium	0.974	0.992	1.001
Bund Yield	1.451	1.426	1.443
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.279	1.2786
Yen	102.750	102.34
Pound	0.799	0.7998
Swiss Franc	1.207	1.2073
ZC Inflation Swaps
	previous	last close
1 yr	1.74	1.73
2 yr	1.71	1.71
5 yr	1.85	1.74
10 yr	2.1	1.98
Euribor-OIS Spread
	previous	last close
1 Week	-7.129	0
1 Month	-4.100	-4.1
3 Months	3.971	3.971
1 Year	47.457	45.757
Source: Reuters