EUROINTELLIGENCE DAILY BRIEFING, 27 de Novembro de 2012. Enviado por Domenico Mario Nuti.


A deal with holes

  • After 13 hours of negotiations, eurozone finance ministers reached a deal on Greece;
  • the details are subject to conflicting reports;
  • the new debt target is 124% of GDP by 2020, plus a commitment to reduce debt to below 110% by 2022;
  • there are conflicting reports about whether the latter implies a debt restructuring – and when that would happen;
  • measures include: a cut in interest rates on first bailout-programme to 0.5% in two steps;
  • maturity extension to 30 years;
  • moratorium on interest payments under second programme;
  • ECB and NCBs to forfeit profits;
  • a yet unspecified debt buyback programme;
  • one report says the offer will be for 35 cents;
  • IMF makes its disbursement conditional on the success of the auction;
  • tranche to be released in four instalments;
  • Jean-Claude Juncker said the terms should be extended to Portugal and Ireland;
  • Arnaud Montebourg causes ripples with his nationalisation threat of an Arecelor-Mittal steel factory;
  • owner says he is extremely shocked, and will hold emergency talks with President Francois Hollande today;
  • Le Monde says Montebourg has emerged as the government’s most effective spokesman on economic issues;
  • Artur Mas says a referendum on Catalan independence is due within four years;
  • Silvio Berlusconi will launch his new party on Thursday, to be called Forza Italia 2.0;
  • the Italian banking association says it would be mad to insist on a recapitalisation of Italian banks now;
  • the German IMK institute says German wages to rise only by 2.5% in 2012 and 2013, not enough to bring about adjustment;
  • The ECB is to rule on the ESM today;
  • Mathew Elberfield warns against banking union undermining the single market for finance – and opposes any eurozone residency rules for clearing houses;
  • Andrea Boitani and Rony Hamaui say banking union is subject to a Catch 22, as it is impossible to do without political union;
  • Vitor Constancio defends fiscal union on the grounds that countries with weak budgets had lost their ability to perform cyclical stabilization, Peter Praet says the advantage of collateralised lending over asset purchases is that they leave the price discovery process to the market;
  • the UK, meanwhile, makes an enlightened appointment to the BoE – very much in contrast to eurozone’s latest central bank appointment.

The eurogroup reached a deal for Greece after 13 hours of marathon negotiations, though there are conflicting reports what actually was agreed on. What is clear is that ministers agreed to reduce Greek debt to 124% of GDP by 2020 combined with a new pledge to lower down Greece’s debt to “significantly below 110%” in 2022. But then there are conflicting reports about what that means.  A below-110% debt level is considered by some journals as the most explicit hint of a write-off of loans later – either after 2014 when the second bailout programme is running out, according to Süddeutsche Zeitung or from 2016 the year when Greece is expected to reach a primary budget surplus, according to Kathimerini. Write-off remains taboo, insists Spiegel Online. The pledge of a below-110” debt level in 2022 was necessary for the IMF to accept a higher debt level in 2020, according to the FT. The single measures are as follows:

  • The interest rate on the bilateral loans under its first bailout would be cut from currently 1.5% above Libor to 0.9% in a first step and to 0.5% in a second step, when Greece reaches a budget surplus of 4.5%. This would  knock about €2bn off Greek debt levels, or 2% of GDP by 2020, according to the FT;
  • Both the bilateral loans and assistance provided under a second Greek bailout will be doubled from 15 to 30 years;
  • Interest payments on the second bailout will also be deferred by 10 years;
  • eurozone governments will give up ECB profits on Greek bonds owed to them, about €7bn according to the FT, €11bn according to Spiegel;
  • and the debt buyback programme, with no details disclosed. Spiegel reports that Greece is to offer private bondholders a price of 35 cents, while the FT writes that the buyback price for bonds could be no higher than prices at Friday’s market close.  No information also whether the buyback is financed by EFSF or not.

The FT writes that if there will be little if any premium offered to private debt-holders this is raising questions about how many will participate. Further uncertainty was added by Christine Lagarde who said the IMF would not release its part of the Greek bailout until the transaction was successfully completed.

The timetable is such that Greece will receive the payments in four disbursements, if formal approval is given by the Eurogroup by Dec. 13. The formal sign-off will depend on national parliaments approving the measures and will take place after a review of the benefits of a possible debt buyback. The first tranche of €34.4bn will then be paid out by the end of the year. The three remaining tranches of the bailout loans (€9.3bn) Greece was expecting in December will be paid next year.

Terms should be extended to Portugal and Ireland

Jornal de Negocios highlights Jean-Claude Juncker’s statement this morning according to which the new rules agreed for the loan to Greece will also be applied for Portugal and Ireland, and that this will be on the agenda for the next meeting. He also informed reporters that ministers decided,  unsurprisingly, that Portugal and Ireland need not to participate in the interest rate reduction for Greece.

The Mittal affair: How France is stumbling into a new industrial policy

For the Anglo-Saxon press this affairs underlines the anti-business attitude of the Socialist French government – it could hardly be timed better following the recent discussions about French competitiveness.

At stake is the future of two furnaces at the Florange steel factory in the Lorraine region of France, with a decision by Arcelor-Mittal in early October to run down two furnaces as a result of overcapacity, giving the French government only two months to find a new buyer. This has a triggered first an outcry by the trade unions, followed by a statement by industry minister Arnaud Montebourg in the French Senate this week, who said that a nationalisation was under consideration. See this article by Le Monde for the wider backdrop to the story.

In an interview with Les Echos, Montebourg declared that Mittal was no longer welcome in France. Les Echos then spoke to Lakshimi Mittal , who said he was extremely shocked by that statement and by the threat of nationalisation, which would put in danger Mittal’s entire operation in France, and the future of the 20000 jobs. Today, Mittal is due to meet President Hollande at the Elysee for emergency talks.

In an editorial, Le Monde looks at the extreme effectiveness with which Montebourg has positioned himself as a government minister – in contrast to finance minister Pierre Moscovici. He frightens not only the Anglo-Saxons, and but also German Social Democrats. He has becomes the economic voice of his government in the eyes of the French public in his fight to stop the de-industrialisation of France.

No definite time frame for a Catalan referendum

Spanish news coverage continues to be dominated by the aftermath of the Catalan regional election.

El Confidencial reports that Catalan Premier Artur Mas is sticking to his plan to hold a referendum, citing “clear support” for it, but not giving a precise timeline “the referendum will be held within 4 years”. By saying that the necessary coalition partner “must be clear that the referendum will be a priority” the PP is ruled out. El Confidencial analyses that both ERC and the PSC may be possible partners. The PSC advocates a move towards federalism in Spain, though El Confidencial argues that it’s been punished by the electorate for toying with the idea of a referendum on federalism. ERC is more strongly separatist than CiU.

Berlusconi to launch his new party on Thursday

Silvio Berlusconi will launch his new party on Thursday and will call it Forza Italia 2.0, The Huffington Post Italia claims. According to political sources, the media tycoon is planning to return to the old name for his breakaway party, the name with which he first run in Italian elections in 1994. The first polls are positive, the newspaper wrote. Berlusconi is considering enlisting several personalities like popular businessmen and sportsmen. The target is to reduce the gap with centre-left Democratic Party, seen at 25% in polls.

Italian banking association demands no more recapitalization for banks

The Italian banking association ABI pressed the IMF to not demand additional recapitalization of Italy’ banks, as Formiche reports. ABI claimed such a request would be disastrous for Italy’s financial system and the Italian economy. Italian banks are subject to a worse squeeze than their EU rivals, which makes them fragile. In addition, ABI remarks Italy does not need a bad bank for toxic assets nor a merger plan like Spain. The head of ABI, Giuseppe Mussari, said market access conditions are weakening, but bank revenues would improve with lighter norms and taxes.

German labour costs increase – but not enough to lead to adjustment

Boersenzeitung has a report on a study by the IMK economics institute – which is close to the German trade unions – which is forecasting a 2.5% increase in labour costs for both 2012 and 2013 – less then the 3% of 2011. The projected for this year are still above the inflation rate, but not much. The director of the institute, Gustav Horn, said the small increase would not lead to a rebalancing, and constituted a stumbling block in crisis resolution.

 ECJ to rule on ESM

Today, the ECJ to give its ruling in an important case relating to the complaint by Irish MP Thomas Pringle against the Irish ratification of the ESM. His case was originally rejected by the Irish Supreme Court, but which nevertheless referred the case to the ECJ to clear up a number of important legal issues relating to the definition of Art 125. Boersenzeitung has the details.

Pringle makes three concrete claims. The first is that the ESM violates Art 125. The second is that the accelerated ratification process was anti-constitutional. The third is that the ESM could not legally have started its operations in October, given the change to Art 136 that made this possible only becomes effective in January. Boersenzeitung says the ECJ takes this case extremely seriously, given the presence of all 27 justices at a recent hearing, which hardly ever happens. The court’s rapporteur has also indicated doubts about the EU governments interpretation of Art 125. The paper says the expectation is that the court will ultimately not declare the ESM illegal, but may insist on some minor modifications.

Eurozone central bank official warns against discrimination against “pre-ins”

Matthew Elderfield, Deputy governor of the Irish central bank, is one of the first top officials from a Eurozone country warning that banking union must not be allowed to undermine the EU single market in financial services. Referring to a case where the UK said it will sue over new ECB rules about any “clearing houses” dealing in large volumes of euro trades to be based in the Eurozone he said: “The ECB’s stance towards euro clearing by LCH is an unfortunate precedent and it is important that this philosophy does not spill over into banking supervision,” according to the Irish Independent. Elderfield called for the voting structure governance of the EBA needs to be altered to address the concerns of countries such as the UK that are outside the Eurozone, writes RTE.

Banking union is a Catch 22, Boitani and Hamaui say

Writing on Lavoce, Andrea Boitani and Rony Hamaui argue that the main purpose of giving the ECB the supervision of the banking system in Europe is to break the vicious circle between banks and sovereigns. To achieve this it is necessary to connect macro and micro prudential regulation, with deposit insurance to prevent bank runs, an authority for the orderly resolution of banking crises, and a readiness to intervene when insolvency threatens financial stability. Unfortunately, the banking union is a Catch 22: it is impossible to construct without a political union.

Vitor Constancio on fiscal union

At the Hyman P. Minsky Conference on Financial Instability in Berlin, ECB Vice-president Vitor Constancio made an economic case for fiscal union. He said countries with weak budgets had lost their ability to perform cyclical stabilization. For the stronger countries, a fiscal union it allows them to protect themselves from potential spillover effects from other countries and to avoid being forced into bailouts by impending disasters;

Peter Praet on why the ECB prioritises collateralised lending over asset price purchases

At the same event, Peter Praet defended the ECB’s policy of collateral lending against Anglo-Saxon style asset purchases. Praet argues collateralised lending left the price discovery process and the allocation of savings to market mechanisms. Reoving the stigma associated with the need for central bank liquidity was a concern throughout, which led the ECB to prefer to provide liquidity under attractive conditions so that many banks will choose to take advantage of the facilities.

Yves Mersch and Marc Carney – what a depressing contrast

We don’t usually cover the UK and other non-eurozone countries this briefing. Yesterday’s big new in the UK was that the British chancellor George Osborne picked the Canadian central bank governor Marc Carney as the next governor of the Bank of England. Carney is an economist with degrees from Harvard and Oxford, and strong experience of finance. The eurozone, by contrast, last week picked a lawyer to the ECB’s vacant post with shallow knowledge of monetary economics, with the only qualification that he has styled himself as a northern European hardliner. (We still shudder recalling his description of a liquidity trap, which, according to Mersch, occurs when central banks cut interest rates to zero).

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

Euro continues to rise.

10-year spreads
Previous day Yesterday This Morning
France 0.729 0.723 0.731
Italy 3.319 3.333 3.310
Spain 4.195 4.209 4.251
Portugal 6.543 6.682 6.858
Greece 15.011 15.086 -1.44
Ireland 3.050 3.051 3.167
Belgium 0.859 0.865 0.874
Bund Yield 1.442 1.421 1.444
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.295 1.2983
Yen 106.170 106.7
Pound 0.809 0.8096
Swiss Franc 1.204 1.2041
ZC Inflation Swaps
previous last close
1 yr 1.78 1.64
2 yr 1.81 1.68
5 yr 1.89 1.87
10 yr 2.12 2.11

Euribor-OIS Spread

previous last close
1 Week -5.400 0
1 Month -4.071 -2.171
3 Months 3.371 5.571
1 Year 42.000 41.9
Source: Reuters

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