Mario Draghi express concern about breach of collateral rules by Bank of Spain

• ECB president says he takes reports of a misuse of collateral rules seriously, and sets up a committee to investigate what happened;
• says he would now take personal charge of this matter, as it effects the credibility of a single liquidity policy in the eurozone;
• divisions among international lenders are pushing Greece closer to the edge of default;
• IMF is more pessimistic about future growth than the Europeans, about the feasibility of the privatisation programme and the costs of fixing the banking system;
• the European Commission urges a relaxation in the 120% debt level target for 2020, but this is resisted by the IMF;
• negotiators says that if the IMF stance prevails, European governments will have no choice but to take losses;
• Draghi confirmed that the ECB is happy to forego profits on its Greek bond holdings, but can go no further;
• he left open the possibility of another round of ELA to fund a T-bill issue by the Greek government;
• ECB also left interest rate unchanged, and gave no clues about a possible rate cut in the future;
• Hans Werner Sinn and Draghi have different views on whether or competitiveness in the eurozone’s periphery has gone up, and how this should be measured;
• Draghi says OMT is already working though money market remain fragmented;
• Spain managed to sell a 20-year bond, but Spanish bond spreads shot up later in the day;
• the advocate general of the European Court of Justice criticises Spain’s eviction laws;
• Portuguese activists greet Merkel with a critical open letter ahead of her visit to Lisbon;
• the Greek regulator sees possibility that ban on short-selling could be lifted;
• the Greek finance minister will resubmit a salary cut for parliamentary staff – which he withdrew under duress on the day of voting;
•  there was more evidence of a sharp slowdown in Germany, with exports and imports down sharply in September;
• the German government expects further deterioration in the first half of 2012;
• Standard & Poor’s, meanwhile, says attempts to delay and water down crisis resolution policies could rekindle the crisis.

This is a serious issue, as we spotted immediately when Die Welt am Sonntag published the article that the collateral posted by Spanish banks had been miscalculated. The article gave very precise details about what happened, but it was not clear how it happened. Yesterday, Mario Draghi acknowledged a breach of collateral rules by the Bank of Spain, and says he takes this breach seriously – though he remarked that no bank had received more money as a result, FT Deutschland reports. He announced that a committee under the presidency of Erkki Liikanen would test the way national central banks handle collateral securities. He said he would now personally take charge of this problem as it affects the credibility of a single set of rules for the liquidity provision of banks.

At issue here is whether it was legitimate for the Bank of Spain to transfer a rating by the DBRS rating agency for longer-dated bonds to shorter-dated paper. The rating agency has since attached the same rating to the shorter-date paper, but that was not yet the case when the collateral was posted.

(The author of the original story has since contacted us to state that the source of his story was not the ECB, as we had surmised in our coverage on Monday. The reliance on external ratings is problematic, since the ratings are not uniform between agencies, and in this case, across maturities.)

EU keeps Greece waiting for loan

The Eurogroup may not decide on the loan disbursement to Greece next week, several newspapers report. According to the FT, international lenders remain far apart on how much debt relief for Greece is needed and who will bear the losses from lower debt repayments, requiring another round of negotiations. The IMF remains more pessimistic about Greece’s ability to return to economic growth, the amount it will collect in its €50bn privatisation programme, and how much money is needed to recapitalise the country’s banking system. The European Commission and the IMF are thus 5-10 percentage points apart on where Greece’s debt will stand by 2020, the target date in the rescue programme for returning Athens to sustainable debt levels. Also the IMF is insisting Greek debt levels are reduced to 120% of GDP by 2020, while the European Commission is urging an easing of the target to about 125% by 2022.

One senior official said that if negotiators are forced to accept the IMF’s stance, eurozone governments may have to take losses on their existing bailout loans. Eurozone officials had hoped that debt relief measures could be limited to a cut in interest rates on bailout loans – from 150bp to 80bp above interbank rates – plus giving Greece the profits earned by the ECB on their €55bn in Greek debt holdings, estimated to be between €12bn-€15bn. But this might no longer be enough.

Mario Draghi said on Thursday he had agreed to allow the profits to be passed back to Greece, but added he was unwilling to take further measures to help lower Athens’ debt burden, The ECB is also resisting rolling over €5bn in debt due next Friday, putting pressure on all sides to reach a deal quickly.

Boersenzeitung reports that Draghi, however, left open the possibility that the ECB would allow another round of Emergency Liquidity Assistance (ELA) to allow Greek banks to purchase T-bills from the Greek government. On November 16, about €3.4bn in Greek bonds fall due, which could thus temporarily funded through an ELA financed T-bill auction.

The ECB yesterday left the repo rate unchanged at 0.75%, and gave no clues as to what to do next.

Draghi weighs on causes of improved competitiveness of eurozone periphery

In its coverage of the ECB’s press conference, Stephan Balling of Boersenzeitung goes into a technical argument between Hans-Werner Sinn and Mario Draghi over the causes of the measured improvements in competitiveness. Sinn had said the increase in competitiveness, as measured by unit labour costs, of countries like Greece or Spain was mostly due to dismissals. As companies lay off the least productive workers, measured average productivity rises. Sinn prefers the GDP deflator as a better measure. Draghi said that the deflator was a problematic measure because it included energy prices.

Draghi says OMT is already working

El Pais reports Draghi as saying that the ECB cannot provide prior guarantees of the impact of the OMT bond purchases, but said the very announcement of the program has already had positive effects on monetary policy transmission, though fragmentation persists.

Spain issues long-dated debt on low demand as rescue recedes

Thursday’s Spanish bond auction included a 20-year bond, the longest maturity issued by Spain since last year, reports Bloomberg. Bloomberg recalls that Mariano Rajoy said earlier this week that a condition for Spain to apply for a rescue would be an assurance that the ECB bond buying would lower Spain’s spreads over German bonds. Some analysts quoted by Bloomberg argued that the market might force Spain into a rescue next year as ‘new supply’ of bonds is issued, while others were surprised Spain managed to place long-term debt when Rajoy is not about to apply for the ECB bond-buying ‘the market’ seems to want. Although Spain met its €4.5bn target, the relatively low demand was interpreted by Reuters to cause a sell-off of peripheral Euro bonds later in the day.

European Court of Justice weighs in on Spanish repossession laws

In response to a query by a Spanish court, the advocate general of the European Court of Justice said Spain’s eviction laws are incompatible with European consumer protection norms, as they do not allow the defaulter to calm damages for abusive clauses in mortgage contracts before the eviction is carried through, reports EuropeOnline magazine.

Publico clarifies that the Advocate General’s opinion is not binding on the ECJ, though they are indicative of future rulings. The query originated in a lawsuit filed by an evicted mortgagee alleging the mortgage contract contained abusive clauses The Spanish judge who elevated the query to the ECJ said that the opinion allows Spanish judges to consider ‘ex-officio’ whether mortgage contracts contain abusive clauses as part of eviction cases, even allowing judges to prevent an eviction. According to the paper, Spain should have aligned its legislation with European directives as early as 1995, before the now burst real estate bubble even started.

Portuguese activists greet Merkel’s visit with anti-austerity open letter

A group of Portuguese citizens have published an open letter (‘Dear Chancellor Merkel‘) on the occasion of Angela Merkel’s visit to Portugal on November 12. The anti-austerity letter, available in seven languages, says Merkel “should be considered persona non grata in Portuguese territory because [she] clearly come[s] to interfere with the Portuguese State’s decisions without being democratically mandated” by Portuguese residents. The letter also criticizes that “German economic thrust is built on a brutal crackdown on wages for over 10 years and the massive promotion of precarious labour, temporary and low-wage work that afflicts a great part of the German people“.

Greek regulator sees possibility that ban on short-selling could be lifted

In Greece, meanwhile, the market regulator gives an upbeat assessment saying a ban on short-selling stocks could be lifted early if equities keep climbing, the government wins the next bailout tranche and banks are recapitalized, according to Bloomberg. The Greek regulator introduced the short-selling ban in August 2011. The restrictions were last extended at the end of October, and are currently due to expire on Jan. 31.

Salary cut for parliamentary staff will be resubmitted

Legislation that would reduce salaries for  parliamentary staff and other privileges will be resubmitted to the House, possibly as early as next week, Kathimerini reports. Yannis Stournas had to withdraw the amendment ahead of Wednesday’s vote on a new austerity package amid threats that the employees would walk out and prevent the ballot taking place.

More evidence of a sharp slowdown in Germany

Boersenzeitung reports that German exports have gone down 2.5% during September, while imports fell 2.3%, while on annual basis the figures are -3.4% for exports and -3.6% for imports. Most of this decline came from other eurozone countries, as the crisis is now hitting Germany.

FT Deutschland reports that the German government expects a further deterioration in the first half of 2012. The paper also cites from an Ifo analysis according to which German exports will decline for the first time since the collapse of Lehman Brothers. Ifo says the dramatic collapse in demand from Italy, Spain and Portugal cannot be compensated. One of the effects of the crisis will be an increase in the percentage of non-eurozone exports.

S&P says crisis is getting worse again

Boersenzeitung reports about concerns by S&P that the positive trend since the summer is at risk of being undermined through the cacophony of politicians. The article quotes Moritz Kramer of S&P as saying that delays and attempts to water down existing agreements in respect of the banking union were a worrying sign, and would risk the entire euro rescue strategy. Investors are now beginning to doubt whether the institutions will really act.

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

Spreads are getting worse again, with Spanish spreads at 4.6. Euro weaker.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.807	0.800	0.810
Italy	3.534	3.775	3.770
Spain	4.337	4.496	4.599
Portugal	7.128	7.303	7.543
Greece	16.012	16.809	-1.38
Ireland	3.444	3.446	3.646
Belgium	0.976	0.973	0.966
Bund Yield	1.378	1.373	1.378
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.275	1.2762
Yen	101.860	101.45
Pound	0.798	0.7977
Swiss Franc	1.206	1.2056
ZC Inflation Swaps
	previous	last close
1 yr	1.59	1.58
2 yr	1.62	1.71
5 yr	1.72	1.71
10 yr	1.95	1.95
Euribor-OIS Spread
	previous	last close
1 Week	-7.229	-7.829
1 Month	-5.600	-4.8
3 Months	4.457	2.857
1 Year	47.257	44.457
Source: Reuters