- A newspaper report says officials no longer believe that the timetable for a banking union can be met
- there is continued disagreement about the scope of a banking union
- Sweden rejects the proposed legal basis for a banking union, and insists on a treaty change to ensure that the interests of non-eurozone members are safeguarded
- the Bundesbank also questions the legal base for a banking union, citing conflicts of interest with the ECB’s mandate for price stability
- the eurogroup has discussed the possibility of direct transfers to Greece, while ruling out any form of official sector involvement
- Christine Lagarde has reiterated her demand that the Eurozone should find a “real fix” for Greece, as opposed to a quick fix
- the latter, however, seems likely as Eurozone officials say the most probable outcome for next Tuesday’s meeting would be a temporary agreement to fix the budget gap until 2014 only
- this could be achieved through a cut in interest rates, and a lengthening of maturities
- Olli Rehn says Spain needs no further fiscal adjustment in respect of the 2012 and 2013 targets
- says Commission is now looking at structural deficit indicators, not only the nominal targets
- mass protests gripped large of southern Europe
- in Spain 80% of the workforce took part in a general strike
- Italy saw 100 protest rallies, with reports of violent clashes in Rome
- Beppo Grillo Italy was now at with EU and German imposed austerity
- Ignazio Visco says the rise in tax revenues does not prevent Italy’s stock of debt to keep on rising
- economists expect Eurostat to announce a Q3 drop in GDP, the second consecutive fall
- Fitch has re-graded Ireland from negative to stable
- Emilio Botin, meanwhile, argues that a properly designed banking union is critical for the solution of the Eurozone crisis.
This does not surprise us. FT Deutschland has the story that planned banking union is likely to be delayed even further, possibly to 2014, as governments have made no progress on several critical issues. Among those are the share of responsibility between the central supervisor and national supervisors, with Germany still holding out to keep most of the action in the member states. An additional problem is the insistence by Sweden, whose finance minister insists on a treaty change to accommodate the interests of the non-eurozone countries. The legal basis for the present proposals is Art 127:6, according to which special tasks can be transferred to the ECB. This is why only an ECB-based solution can be done in a fast-track procedure. A separate institution would require treaty change, which will take many years until decided, and ratified.
(Many of the proposals currently under discussion require treaty change. It has always been our criticism with the Lisbon Treaty that it is wholly unsuitable for a monetary union, and that it would soon need to be changed again. We expect such a process to start in 2014, but experience shows that this is likely to be a difficult and lengthy process – and will be completely irrelevant for crisis resolution.)
Bundesbank legal paper questions legality of ECB banking supervision
According to a story by Bloomberg, the Bundesbank seems to be siding with the Swedish legal interpretation. A published legal opinion argues that giving the ECB Governing Council responsibility for both monetary policy and bank supervision would introduce a conflict of interest. Thus, the Bundesbank concludes that a banking union would require a treaty change.
Eurogroup is discussing direct transfers
No this is not OSI, but it is important development nevertheless. Suddeutsche reports that the eurogroup meeting discussed a form of transfers for the first time, citing unnamed officials as saying that the moment had arrived for governments to explain to their citizens that a parts of taxpayers’ money, which was used for lending, is unlikely to be repaid. Germany, however, continues to reject the notion of a debt restructuring, or official sector involvement. Instead, officials are considering the possibility of a direct transfer. The article said these discussions are the backdrop to the disagreement between Christine Lagarde and Jean-Claude Juncker after the recent eurogroup meeting. Lagarde insisted that the Eurozone should stop pretending that the Greek situation is sustainable. If they do not accept a form OSI, the IMF would withdraw from the programmes, the articles says, which would increase the costs to the Eurozone governments. Ministers have been discussing cutting the Greek interest rates to zero – which would constitute a de facto transfer. The article also made the point that the ECB’s contribution – a return of profits on its Greek purchases – is likely to be much lower than previously estimated, in the middle single digits (in billion).
Eurogroup may only decide to bridge the Greek funding gap temporarily
Reuters reports that the eurogroup may only end up with a solution to bridge the Greek funding gap until 2014 in their scheduled meeting next Tuesday. The article says this would reduce the sum to €13.5bn, according to an unnamed official. Handelsblatt reports, also quoting an unnamed diplomat, that this amount could be realised by lowering interest rates on outstanding debt and extending maturities on loans.
Another Reuters story is quoting Christine Lagarde as demanding a real fix, as opposed to a quick fix.
(It is quite obvious that Lagarde is not happy about the notion of a temporary solution, which is of course what she means by a quick fix.)
Spain is off the hook for now, says Olli Rehn
This is not really a change in policy, only a change in the way policy is presented. In particular, we caution readers not to interpret Olli Rehn’s statement as an end to austerity. In a brief statement on Wednesday, Rehn said that Spain has “taken effective action” regarding its 2012 and 2013 commitments agreed last July under an “excessive deficit procedure”. Although achieving the nominal 2013 is not assured, due to the Spanish government’s optimistic projections underlying the proposed 2013 budget, the Commission concludes that “no further steps are needed at present”. The Commission will continue to monitor budgetary developments in 2013, and is demanding additional fiscal measures for 2014.
(What this is means is that Spain does not need to take addition intra-year measures in 2013 to make up for deficit shortfalls in 2012 and a very likely shortfall in 2013. There will still be additional austerity in 2014 – which means that the fiscal stance will continue to tighten during the entire recession. But the statement may nevertheless help support Spain’s position that an application for a ‘precautionary credit line’ from the EFSF should have no additional conditionality attached)
European day of action and solidarity
Hundreds of thousand Europeans took part in anti-austerity strikes across Europe, despite some violent clashes in Spain and Italy. Some 40 unions in 23 countries planned to take part in a “day of action and solidarity,” the FT reports.
Portuguese and Spanish workers closed schools, brought public transport to a halt and disrupted air travel. Spanish unions claimed 80% of the workforce was participating in the strike though the strike was fragmented. Spain’s two largest unions went on strike, but the main union representing Spain’s civil servants didn’t participate. In Portugal, the largest labour group, the General Confederation of Portuguese Workers, called the strike, but the smaller General Union of Workers, or UGT, refused to participate.
Portugal’s general strike came ahead of a final vote in parliament on a budget that will increase taxes by 30% on average. Latest figures published on Wednesday showed a worrying rise in unemployment to a record 15.8% in the third quarter compared with the April-June period, while the overall economy shrank 0.8 %, the FT reports.
Il Corriere della Sera reports that over 100 separate rallies had been organized across Italy. Italy largest union, CGIL, was one of the organisers, but many middle-class Italians also took part in the protest against “German austerity”. In Rome, there were reports of people throwing firecrackers and bottles, and pulling down street signs and causing panic, according to the police. Police also clashed with hardline protesters near Rome’s Synagogue as demonstrators hurled rocks and police fired teargas. Riccardo Pacifici, the president of Rome’s Jewish community, said the riots had created panic, prompting teachers to lock the doors to Hebrew schools as lessons were ongoing to avoid clashes.
Beppe Grillo, leader of the 5 Star Movement, weighed in with criticism of the Italian police, La Repubblica reports. He said the police should side with demonstrators, not against them. He said Italy was at a war against austerity imposed by EU and Germany.
Low interest rates may drive German savers to accept higher risks, Buba warns
The low interest rate environment has provoked a “hunt for yield” among German investors that could cause future instability in the financial system, the Bundesbank warned Wednesday. The drop in German bond yields as a result of “safe haven” inflows imply that millions of savers have suffered big shortfalls in income, which the Bundesbank fears may drive them in future to accept higher risks in an effort to maintain returns, Wall Street Journal reports. The report said that such behaviour was in part a side effect of the European Central Bank’s monetary policy in the eurozone crisis.
As Financial Times Deutschland reports, the Bundesbank express specific concern about a housing bubble, as house prices have been rising in several metropolitans areas, with price-to-rent ratio now going through the roof. The Bundesbank announced that it would try to restrict reckless bank lending to fuel the boom further.
Bank of Italy Visco warns about huge Italian public debt
Ignazio Visco has warned about future risks to Italian debt, Il Sole 24 ore reports, despite a 2.6% rise in tax revenues. During a speech in the Senate, the governor of the Bank of Italy pointed that as long as there is a deficit, the total stock of debt will keep on increasing. The main challenge for Italy is the fight against corruption and tax evasion, to avoid a derailment from the goal of a balanced budget in 2013. In September the public debt climbed to €1.9951tn, €19.5bn higher than in August.
Eurozone is now in recession
Reuters reports that the consensus forecast for Thursday’s Eurostat Q3 GDP release is a 0.2% fall, which would be the second consecutive quarterly contraction. Obviously, the contraction is much stronger in the south, but the northern economies, including Germany have also been weakening noticeably. The article points out that the critical country to watch is France.
Fitch upgrades Ireland to “stable”
Ratings agency Fitch has raised its ranking of Ireland’s creditworthiness to “stable”, last seen in late 2010, the month after the bailout, the Irish Times reports. The agency removed the risk of a further downgrade, saying the Government was making progress towards an economic recovery. Fitch expects the 2012 deficit to be close to the 8.6% target of GDP in 2012, despite the spending overruns. Government policy has so far managed to meet fiscal targets “without excess adverse impact” on economic growth in 2011 or 2012, the agency said.
Botin explains why a banking union is needed
In a comment in the FT, Emilio Botin, chairman of Santander, says a banking union is needed “to break the vicious circle between sovereign debt and bank debt, to align regulations and supervisory practices across EU member states; and to strengthen European banking.” He writes there is at present no single banking market. He writes that a properly functioning banking union must align standards for supervision. It must enhance transparency. And through a deposit insurance and single resolution mechanism, it should strengthen confidence in the system. He concludes that a proper banking union is essential for the Eurozone to overcome the crisis.
(We, too, agree with that proposition, but the way the negotiations are going we are not going to get the kind of banking union Botin advocates, only a miniature version, that pretends to be a banking union.)
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Spanish spreads are now at 4.7%.
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