Estrolabio

Hundreds of demonstrators kept a vigil in Syntagma Square outside the Greek parliament late on Sunday, angry at the prospect of more painful cuts after three years of deep recession.  Polls show three-quarters of Greece's 11 million population oppose the measures. The country’s powerful unions, meanwhile, have called a two-day national strike from Tuesday to ratchet up pressure on the government. Many companies, including the main electricity group PPC, which is slated for partial privatisation next year, have started rolling stoppages. 

Wolfgang Münchau on the Greek parliament’s tough choice

In his FT column, Wolfgang Münchau argues that – from the position of a Greek parliamentarian – it is no longer clear that they should support austerity. The latest package – or rather the slice of the package agreed last week – may have been austerity measure too many. The agreed increase in business taxes is likely to prolong the recession beyond the point in which the programme has democratic support. It was high time to switch the emphasis in the Greek programme from austerity towards growth. Munchau also criticised the discussed structure of the Greek finance plan, which includes privatisation receipts as part of the finance package itself. This is financially unsound, and political dangerous because any shortfall on privatisation receipts – which he thinks is very likely – would have to be compensated by further austerity. There are now too many obstacles on the way. The main case for austerity is the high primary deficit. A default now would bring more austerity in the short run. But the decision is no longer clear cut. The EU should never have allowed this situation to arise.

The EU is preparing a plan B on Greece

The EU is preparing contingency plans in case Greek Prime Minister George Papandreou fails to secure a parliamentary majority for his new austerity measures and the EU and IMF cannot pay out the next €12bn loan, Financial Times Deutschland reports. On Sunday Wolfgang Schäuble told Bild am Sonntag that “we are preparing ourselves for that”. In a first reaction the EU would try to win some time to convince the opposition to vote for the measures. Since Ireland and Portugal already receive emergency loans the efforts would be concentrated on Spain according to the Irish finance minister Michael Noonan. Schäuble said: “We would have to see to it that the danger of contagion on the financial system and other EU countries is contained”. Bundesbank president Jens Weidmann had alredy two weeks hinted at plans to contain a Greek crisis in case of a default. “The Euro will in this case remain stable”, Weidmann said.

Mario Draghi formally nominated as ECB chief

The European Council formally nominated Mario Draghi as next ECB president, thus avoid a a potentially harmful public dispute about. The nomination followed a long and intense debate, that ended when Hermann van Rompuy held a telephone conversation with Lorenzo Bini Smaghi, in which the Italian central bankers assured him that he believed a solution could be found. But according to the FT, Mr Bini Smaghi stopped short of giving an assurance that he would in fact resign. The FT writes that Nicolas Sarkozy also phoned Bini-Smaghi, who assured him that other duties would await before the end of the year. The FT writes the candidate most likely to replace Mr Bini Smaghi is Benoit Coeuré, the head of the French debt management agency.

France wants to convince Euro partners on its private sector involvement

According to Le Figaro and Les Echos the French authorities and the French banks have found an agreement on how to design the private sector involvement for a second Greek rescue package. According to this scenario the banks will only reinvest 70 % of the money coming out of maturing Greek bonds. 50 % will go into a new Greek bond with a maturity of 30 years while the remaining 20 % will be invested into a zero coupon bond with the purpose of securing the new Greek bond. The advantage from the French governments point of view is that the solution does not need a public backing of the new Greek bonds. The French now want to introduce the international private banker’s lobby Institute for International Finance (IIF) to their concept and then try to get the other Europeans on board.

Record levels of Euro rejection in Germany

The mood is turning sour in Germany on the Euro, polls cited to Frankfurter Allgemeine Sonntagszeitung show. According to a poll by Allensbach 71% of the Germans say that they have lost their confidence in the Euro, three years ago less than 50% said the did not trust the single currency. The trend is the same concerning further aid for Greece. Only 45% of the polled people were in favour for more rescue loans according to the polling institute Forsa, in May the figure was 51%.

Roland Berger wants to set up a European rating agency in Frankfurt

There has been much talk about the oligopoly of the US rating agencies Standard & Poor’s, Moody’s and Fitch and how their ratings are biased and detrimental to Europe. Now former consultant Roland Berger plans to set up a European rating agency in Frankfurt, according to Handelsblatt. The plan is an agency that rates globally everything that is important from a European perspective. Berger now looks for 15 to 25 founding members, about €500m to set up the agency and reserve funds of about €1bn. “With a bit of luck we can start setting the company up in 6 to 12 months”, the paper quotes Berger.

Sarkozy wants to challenge to French socialists on economic policy

Nicolas Sarkozy chooses economic policy as the central theme to challenge the socialists in the start of the presidential election campaign, Le Monde reports. Speaking in Brussels after the EU summit Sarkozy said the president of the French Court of Auditors Didier Migeaud (a socialist) had targeted his own party when he warned France risked falling victim of a debt spiral. In the presidents view the Court of Auditors had warned about the socialist’s promises to bring retirement age back to 60, not to implement a debt break in the French constitution and to loosen the current rule that only one out of two civil servants are being replaced. “I have not been elected so that France suffers one day from the same problems as Greece, Ireland or Portugal”, Sarkozy said. His communication advisor Franck Louvrier warned that with the socialists in power France would have lost her AAA rating. In order to neutralise the announcement of Martine Aubry on Tuesday to run for the Socialist’s presidential primaries Sarkozy has scheduled a press conference for the same day in order to praise his “grand emprunt” (big government bond) that was designed to stimulate the French economy in the midst of the recession.

Wolfgang Proissl says Lagarde is not in Europe’s best interest at the helm of the IMF

While Christine Lagarde is likely to get appointed to become the IMF’s next Managing Director this week Wolfgang Proissl argues in Financial Times Deutschland that the choice is not in Europe’s best interest. From the emerging countries’ perspective her appointment will be seen as the selfish attempt of the Europeans to extract as much as possible out of the IMF to safeguard their currency union. On top of that, the IMF now needs strong intellectual leadership in order to cope with the challenges of being engaged in countries that are part of a monetary union where they cannot devaluate and where the fund is a junior partner only. Lagarde, a lawyer, seems to be a lot less well equipped to provide that leadership than would be her challenger, the Mexican Central banker Augustín Carstens or the world renowned economist Stanley Fischer who was not allowed to run because of his age.

BIS calls on central banks to raise interest rates

The Bank for International Settlements writes in its annual report that the destruction of capacity in the construction and financial sector has reduced the potential growth rate, and that monetary policy should adjust to those new realities. The report says there would be no normal recovery, and that accommodative monetary policies would lead directly to a rise in inflation. The BIS was particularly critical of the Bank of England’s monetary policy stand, saying that the BoE did not react to the rise in inflation. The FT points out that the BIS stance was closer to that of the ECB than of the Fed, which only last week confirmed that interest rates would stay very low for a long time.

Spreads, Forex, and ZC Swaps.

Note the rise in Spanish and Italian spreads. We are back to the very peak of the financial crisis. The euro is weaker.  

Euro bilateral exchange rates:  

Zero Coupon Inflation Swaps