EUROINTELLIGENCE DAILY BRIEFING, 12 de Dezembro de 2012. Enviado por Domenico Mario Nuti.



Will they delay banking union?


Eurointeligence Comment and Analysis

How can we be optimistic now, when we were pessimistic six months ago?

by Luca Fantacci and Nicolò Cavalli

In a recent column, Wolfgang Münchau recently discussed the state of the market sentiment in Europe and rhetorically asked: “What I cannot get into my head is why anybody would be optimistic now when they were pessimistic a few months earlier. Can someone explain this to me?” Here is the answer.

It’s banking union day in Brussels today, with finance ministers meeting to work out a compromise. The positions have not altered fundamentally in the last few days. Reuters has obtained a document by the Cypriot presidency, according to which banks with assets of €30bn or with assets larger than one fifth of their country’s GDP, will be supervised directly by the ECB. Critically, however, the compromise leaves the ECB with the authority to widen this remit to problem banks.  And the ECB’s Governing Council would keep the final say in supervision. The document also says that Jan 1, 2014 deadline might be reviewed.

The positions remain wide apart. Vittorio Grilli said it would be “very dangerous” to have separate rules for small banks – while Germany is clear not ready to hand over powers over its Sparkassen.

The coverage also includes a number of interesting observations regarding the complacency that is creeping back into the EU policy process, quoting a number of analysts as saying that the OMT had somewhat obviated the pressure on ministers.

(We agree. This is exactly what is happening. The eurozone crisis will return with force when investors realises that the OMT – as yet a phantom programme – will require a banking union to work. Germany is digging in on the demand to separate the SSM from the ECB, which is a legal minefield because current Treaty law only allows an ECB-based solution with Art 127.6. If that position prevails, the banking union could be delayed by a decade, depending on how long it takes to agree and ratify a new Treaty, and create a new separate supervisor from scratch.)

An ominous sign that there may be no deal on a banking union came yesterday from Berlin, where Angela Merkel played down expectations. Hilariously, she said the EU had to do more important things fist, like increase the percentage of spending on R&D, or getting unit labour costs down. (As we said, complacency is setting in again.)

Sweden and UK to stay out of a banking union

The Swedish finance minister Anders Borg says he will not stop the eurozone from proceeding, but Sweden won’t take part in it, the FT reports. Sweden’s main concern now is protect the outs Mr Borg said Sweden would be willing to back the supervision plan on condition that outsiders were protected in EBA.

In the UK, the House of Lords warned the government against “sleepwalking” into a banking union as that the outcome could hurt the City of London.

Berlusconi attacks Germano-centric policies

Silvio Berlusconi yesterday stepped up his criticism of Mario Monti, accusing him of conducting Germano-centric policies, according to Corriere della Sera, quoting Berlusconi from an interview to the Canale 5 TV station. He said when he was prime minister, he was one of the most influential politicians in the European Council, and had resisted the policies that have led Greece to the brink of a civil war. He made a number of outrageous allegations, including that Germany had ordered others to sell Italian bonds.  He called the rise in spreads following his announcement of a return to politics a con. Guido Westerwelle, the German foreign minister, warned in response that Germany will not accept to be the target of populist attacks.”

Reuters analysed the Italian polls and concluded that Berlusconi’s prospects of winning the elections are poor. However, he and his allies could have a majority in the Italian Senate, which would produce gridlock. 

Markets were calmer yesterday, with spreads stabilising at 3.45%.

Bersani says he is Monti

The strategy of the Partito Democratico is now clear, according to Pier Luigi Bersani – to continue Mario Monti’s agenda – more rigour, more austerity, but also more fairness, Corriere della Sera reports him as saying.  He is also trying to reach out to the centrist parties in order to isolate the populist.

Confidustria expect a much longer recession

The economic projections are getting much more pessimistic – and this will almost certainly play a role in the upcoming elections. According to La Republicca, Confidustria forecasts 12.2% unemployment by the end of 2013, with a tax burden rising to a crippling level of 53.9% in two years. Italy was currently trapped in a deep recession of domestic demand and product, the Italian business confederation said yesterday. It projected that the economy will continue to decline until the end of 2013 (after five consecutive quarters of decline already), with the upturn now projected to start in 2014 (which is essentially outside the forecasting horizon, and thus meaningless.)

Greece’s bond buyback received €31.8bn offers at higher than expected price

Greece completed its bond buyback program on Tuesday accepting tenders for €31.8bn. The average offer to buy back the bonds was reportedly 33.5 cents on the euro, which is more than the 30 cents hoped for. There are different reports about the shortfall in funding the higher than forecast price implies,  €1.2bn according to Kathimerini and €450m according to Reuters. What is clear though is that total debt reduction would be around 9.5 percentage points of GDP by 2020, less than the targeted 11 percentage points.

Eurozone finance ministers discussed during a teleconference on Tuesday night how to reduce the debt to meet the target. The issue will be discussed further at Thursday’s Eurogroup meeting in Brussels. The FT quotes European officials saying the margin was small enough that they did not expect the IMF to delay their part of the €34.4bn aid payment.

Greek banks had offered all or most of their roughly €17bn holdings to ensure the buyback hits its targets. A banker told Reuters that it would not be difficult to find further bondholders who might sell their holdings to make up the shortfall. “The amount could be tapped from German bad banks – they have not tendered all of their holdings,” he said. Another banker told the FT that the gap is very small and there are technical ways of bridging it.

SYRIZA leader calls for a debt relief conference

The Guardian reports that SYRIZA’s Alexis Tsipras, the leader of Greece’s opposition, has called for a “European debt conference”. Drawing parallels with the 1953 London Conference “which relieved Germany of 60% of its debt”, Tsipras advocates “a haircut not only for Greece but the entire Southern periphery”. He also said that Angela Merkel should tell the German people “before elections” that the Greek program is not working. 

Dutch finance ministry won’t confirm deficit target for next year

The new Dutch finance minister Jeroen Dijsselbloem declined on Tuesday to commit the country to bringing down its budget deficit to the European limit of 3% of GDP  next year. When asked on Dutch broadcaster RTL 7 whether he wanted to stick to the 3% budget deficit target, said: “I will give this clarity early next year.” The central bank on Monday forecast a deficit of 3.5% in 2013.

ECB says room for rate cuts is limited

Peter Praet said in an interview with the Wall Street Journal that there was little scope for a rate cut, and that the ECB should instead focus on monetary transition mechanisms. He said the problem was that existing low rates were not filtering through to the economy, but the situation was improving. He also said the ECB was technically ready for negative deposit rates.

First €40bn of ESM loans reach Spain’s FROB

Europa Press reports that the ESM has transferred a first tranche of the agreed €39.5bn bank aid to Spain bank restructuring fund FROB. The ESM loans to the FROB, at a rate of around 1%, have an average maturity of 12.5 years. In order to disburse the funds, the ESM had created various debt instruments a week earlier: €2.5bn at two month maturity, €6.5 at 10 months, €6.5bn at 18 months and a further €24bn at 2 and 3 year maturities. In a story by International Financing Review, an unnamed Eurozone official explained that this was “a payment in kind. The banks can post these bonds as collateral to the ECB and receive cash”.

(Apparently fiscal authorities can make payments by issuing debt to be monetised by the ECB, so long as a nationalised bank acts as intermediary)

Libor chickens come to Euribor to roost

Presseurop, through Le Figaro, reports on a Wall Street Journal story that “the European Commission is preparing to charge several banks with attempted collusion in fixing the Euribor”. This should come as a surprise to the European Banking Federation, which at the height of the Libor scandal smugly declared that Euribor was nothing like Libor, because being based on polling 40-something banks rather than the 16 Libor banks made the Euribor invulnerable to manipulation.

US Treasury tells Congress of its irritation at Eurozone creditor countries

According to the Daily Telegraph, the US Treasury’s ‘annual report on worldwide exchange rate abuse’ presented to the US Congress recently argues that “While the eurozone as a whole is roughly in trade balance, the EMU regime of austerity in the South without offsetting stimulus in the North is creating a contractinary bias, holding back global recovery“.

The report singled out Germany and the Netherlands, with current account surpluses at 6.3% and 9.5% of GDP respectively yet clinging to fiscal austerity policies restraining their internal demand. By contrast, the report softened the US stance on China, which “partially succeeded in shifting away from a reliance on exports for growth“, and has a surplus of 2.6% down from 10.1% in 2007. Switzerland’s surplus of 13% of GDP is qualified in the report by “unique circumstances as a safe-haven battling deflation“.

The French poverty trap

This is from Forbes (HT Greg Mankiw). The article does the math on the poverty trap of French welfare recipients.

“Let’s take an unemployed mother living alone with two children between six and 10 years old. In 2010, there were 284,445 French families in this situation that were on welfare.

This mother will be given the “Active Solidarity Income.” Since she has two children, the amount will be $1,100. If she is renting an apartment with a $650 rent, she will be given the “Housing Customized Aid,” amounting to $620. Then she will receive “Family Allowances,” which amounts to another $160. Finally, let’s add the payment known as “Allowance for the start of the school year,” which is $750 once a year, or $62.50 per month. (She might even benefit from other aids, but these are the most common.) She will be given a total of $1,942.50 per month.

Now imagine that this mother has found work and will be paid the “legal minimum wage,” which amounts to $1,820 gross—or $1,430 after taxes. Since she would be earning $1,430, she will no longer receive the “Active Solidarity income.” Her “Housing Customized Aid” will be lowered to $460, but she will still be given “Family Allowances” and the “Allowance for the start of the school year.” Therefore, her total income will amount to $2,112.50….

For this mother of two, working again will bring her family an additional income of only $170. Moreover, this $170 is likely to be lost in the cost of transportation to work, since the cost of gas in France is $7 per gallon. In any case, such a small amount of money is not an incentive to go back to work. Between staying home and working, the choice is simple: welfare is a better deal.”

Sebastian Mallaby on Japan’s lesson for the eurozone

Sebastian Mallaby’s column in the FT attempts a comparison between the eurozone and Japan. Not all of it is new. The most interesting bit is his last paragraph where he says the real difference is political:

“But the scariest lessons from a Japan-eurozone comparison are social and political. For better or worse Japan has a homogenous society and placid politics;

the Liberal Democratic party, architect of the bubble that laid waste to the economy, heads into next Sunday’s election as clear favourite.

Japan’s cohesion is both reflected in and protected by surprisingly low official unemployment, which has never risen above 5.4 per cent in the past 30 years. Contrast that with Spain or Greece, where unemployment stands at about 25 per cent, or France or Italy, where it stands at 11 per cent. Add in riots and demonstrations across Europe, and you begin to wonder how the centre can hold.”

The eurozone and Mr Micawber

Kevin O’Rourke has a nice post in the Irish Economy blog on the hope that the good times are just around the corner.

“One of the things that makes it possible for Europe’s politicians to persist with this nonsense is their conviction, like Mr Micawber, that something will turn up. There is no sign in Ireland that anything at all is turning up. The most important indicator of all, employment, is still falling, and you can see signs of strain all around if you care to look. At the panto last night, I was struck by the lack of sparkly fairy wands, light sabres, and all the rest compared with previous years: it really was very noticeable. And these were the people who could still afford to take their kids to the panto. Also noticeable was the almost complete absence of recession jokes, which were such a feature in 2008 and 2009. It just isn’t funny any more.”


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

A little calmer, with the euro back to above $1.30.



10-year spreads
Previous day Yesterday This Morning
France 0.657 0.641 0.642
Italy 3.524 3.460 3.452
Spain 4.260 4.139 4.218
Portugal 6.151 6.016 6.328
Greece 12.787 11.800 -1.33
Ireland 3.368 3.463 3.577
Belgium 0.817 0.801 0.822
Bund Yield 1.303 1.322 1.33
Euro Bilateral Exchange Rate
  Previous This morning
Dollar 1.295 1.3002
Yen 106.660 107.46
Pound 0.805 0.807
Swiss Franc 1.211 1.2115
ZC Inflation Swaps
  previous last close
1 yr 1.54 1.58
2 yr 1.53 1.66
5 yr 1.64 1.77
10 yr 1.89 2.03
Euribor-OIS Spread
previous last close
1 Week -5.700 0
1 Month -3.414 -2.914
3 Months 4.571 6.671
1 Year 42.500 42.4
Source: Reuters

Leave a Reply