Estrolabio

Merkel condemns rating agencies

According to Tagesspiegel, Merkel said she would not rely on the assessment of the rating agencies but on the troika to make up her mind. Her comments unleashed a big debate in Germany yesterday on the role of the agencies, including condemnations that S&P and others were not acting responsibly. (But Merkel is sowing some confusion, possibly deliberately, to deflect from her own incompetent crisis management. Of course, government are not bound by the rating agencies, but it was the ECB that decided to make its approval of the scheme contingent on a no-default rating. This is the reason why everybody is staring at them. She should be complaining about the ECB, not the rating agencies.)

French banks to sweeten their offer

The FT reports that the French banks will today meet under the auspices of the Institute for International Finance in Paris to work out a modification of their proposal to make it more acceptable to Greece. The most important change is a lower coupon on the 30-year rollover bond – which was 5.5-8% under the old proposal. Under the new proposal, the basic coupon would be the Euribor 3-month rate, plus a buffer of 1.7%. The 2.5pp “kicker” would be based not on growth but on Greek inflation. (on the basis of today’s Euribor, the coupon range would be 3.3-5.8%, which is still too high, but no longer quite so mad as in the previous proposal). The article also says that the meeting will consider changes to the amount being rolled over, but adds that this would still not bring the total up to the desired €30bn.

Venizelos to ask for a Plan B

Greek banks are willing to roll over their government bonds as part of a European Union aid plan, Finance Minister Evangelos Venizelos told Bloomberg television. He will meet Wolfgang Schaeuble for a working dinner in Berlin tonight. According to Dow Jones Wires he will approach Schaeuble about seeking a more flexible timetable for Greece to sell off €50bn in state-owned assets. The Greek finance minister will also ask his German counterpart for clarification about Germany's policy in the event the rollover plan does not work.

Urpilainen wants Greece to guarantee with state property

Finland's new finance minister Jutta Urpilainen warned Finland will not provide further aid to Greece without collateral from Athens. She said that “Greece could provide shares in its extensive state property portfolio as a guarantee according to the FT.  "It has been estimated that the value of Greek [government] assets is about 300 billion euros. “There is a lot of real estate, islands and other property out there" Newsroom Finland quotes Urpilainen. She went on to say that her proposal had received some measure of support from other eurozone countries. During the election campaign, Urpilainen's Social Democratic party rested heavily on a pledge to push for guarantees on further eurozone bailouts. (With the True Finns rising in the polls, Urpilainen is addressing public anger in Finland. The fundamental problem with collateral is that this can never be enforced, except through an act of war. The Greek parliament can always change the law to nationalise the collateralised assets.)

Noonan calls EU/IMF’s earnings from Irish bailout loans excessive

The EU/IMF could make €9bn over the lifetime of the €67.5bn bailout loans, which gave fresh ammunition for Ireland’s call for lower interest rates on its bailout loans.  The Irish Independent quotes finance minister Michael Noonan describing the earnings as “excessive” when he was speaking in the Dail yesterday. The strong language comes just after exchequer figures show the Government is on track to reach its budget deficit targets and in the week when EU/IMF officials are expected to come to Ireland.

Martin Wolf on the eurozone’s choices

This is a well-argued column from Martin Wolf, based on some interesting simulations from Citibank, according to which debt-to-GDP will rise to 180% in Greece, 145% in Ireland, and 135% in Portugal, and 90% in Spain, and with no trend reversal during the forecast horizon. Wolf argues that these debt levels are not sustainable, and that the real question was now how to manage a cooperative debt restructuring, and how to restore competitiveness. The eurozone was facing a moment of truth.

Some depressing news about the adjustment in the Spanish housing market

El Pais has the latest news and estimates about the Spanish property market. In 2010, the number of unsold homes remained at about 700,000 (to be precise, the number fell by 521!), and the paper cited an estimate by an economist that it would take three years of growth between 2-3% to get rid of such a high level of surplus stock. Another estimate suggests that it will take until 2014 and 2015 for the surplus housing stock to be absorbed. The Bank of Spain estimates a 2007-2012 decline in overall house prices by 25.5%. In the first quarter this year, prices were down by 3.5%. (We think all these estimates are far too optimistic. Spain will not experience conditions like 2-3% growth for many years to come, given the scale of the adjustment. On a real basis the peak-to-trough fall is more likely to be in the region of 40-50% than 25%, as this crisis wears on.)

Constitutional judges unimpressed by complaint against EFSF

The hearing at the German constitutional court in Karlsruhe showed that the judges were unimpressed with the plaintiff’s argument that the EFSF constituted a violation of their individual basic rights, Financial Times Deutschland reports. The president of the court, Andreas Voßkuhle, made it clear from the very start that the court’s job was not to rule on the economic rationality of saving Greece and other euro countries but only to decide on the constitutionality of the decisions. The questions by the judges seem to imply that they think the complaint is on shaky legal grounds. Should this impression be confirmed they may reject the case but their decision will only be taken this autumn. The paper also has a big page on the power of the Karlsruhe court in which it explains the German judges have de facto almost grown into the role of a European high court.

Münchau on the German constitutional court

In his FT Deutschland column, Wolfgang Münchau argues that the legal case against the EFSF is rather weak. The issue is not whether German participation in the EFSF was consistent with Art. 125 TFEU, but whether Art. 125 TFEU is consistent with other parts of the European Treaties, in particular Art. 3 TEU, which stipulates the EU shall have a monetary union. Surely, the governments need to do whatever it takes to preserve the monetary union, and surely this must take precedent over strict compliance of Art. 125 TFEU. Münchau makes the broader point that such an argument would require a much clearer discourse about the nature of the crisis than the German government currently offers. If Germany did not take part in the rescue procedures, Germany would have to leave the eurozone and, by extension, the EU as well – and that would be clearly non consistent with the preamble of the German constitution.

Tensions grow between the Merkel’s federal government and the Länder

There are signs of increasing tensions between the federal government of Angela Merkel and the federal states (Länder) that are run Merkel’s Christian democrats, Frankfurter Allgemeine Zeitung writes in a front page story. According to the paper several Länder prime ministers have threatened not to vote for three important pieces of legislation this Friday on tax simplification, emission trading and ecological renovation of buildings, should their financial demands in the context of these three laws not be met. Merkel depends on the votes of these Länder in order to get the majority in the German upper house (Bundesrat). The conflict is a sign of the increasing alienation between Merkel and her most important constituencies. Also it is a precursor of conflicts that will arise once the chancellor introduces the bills to implement her tax reductions. Those plans will meet fierce Länder resistance because parts of the tax cuts will lower their tax incomes.

Has DSK told Martine Aubry he will not run in France’s presidential elections?

Martine Aubry has let it discreetly be known that Dominique Strauss-Kahn phoned her shortly after his release from his house arrest to tell her he would not be a candidate in the Socialist’s primaries to designate the party’s challenger to Nicolas Sarkozy, Le Monde writes. Aubry is in an awkward position because her own decision to run was overshadowed by the crumbling of the rape accusations against DSK and speculations that he would enter the race to become Sarkozy’s challenger. However DSK’s friends angrily deny their champion made any definite decision as to whether he will enter the French presidential race or not. Meanwhile The New York Post reports that the New York prosecutor will drop all charges against DSK shortly.

At the IMF Lagarde pays the prize of DSK’s misbehaviour

In Christine Lagarde’s terms of appointment letter with the IMF’s executive board there is a whole new paragraph about personal behaviour that was not in DSK’s terms of appointment in 2007, Financial Times Deutschland writes. It calls on Lagarde “to observe the highest standards of ethical conduct, consistent with values of integrity, impartiality and discretion”. While exercising her function she has to “avoid even the appearance of impropriety” in her conduct. Also she is expected to participate “in the ethics training program provided by the Fund’s Ethics Advisor”. The IMF explained the executive board felt that given the experiences with DSK the rules for the MD had to be detailed and the framework for the top job had to be somewhat tightened.

Spreads, Forex, and ZC Swaps.

Getting worse again. Note the almost 100bp rise in Italian and Spanish spreads. Euro weakens a little.

Euro bilateral exchange rates:  

Zero Coupon Inflation Swaps