Sexta-feira, 8 de Julho de 2011

Eurointelligence Daily Briefing - 7/7/2011

enviado por Julio Marques Mota

The crisis is back again in full force

  • A bad day for the eurozone’s periphery, as bond markets react to Moody’s latest downgrade of Portugal;
  • Portugal’s PM complains about a “punch into the stomach”, as credit default swaps reached an all-time record of 914 points;
  • EU government and the European Commission have threatened the rating agencies with reprisals;
  • Michel Barnier was mooting the idea of a rating ban for countries subject to a European programme;
  • the Paris meeting to improve the conditions of the French rollover plan descended into chaos;
  • Wolfgang Schäuble relaunches his controversial bond swap plan given the no-compromise position of the ratings agencies;
  • the Institute for International Finance proposes a bond buyback programme;
  • George Papandreou sets up a cross-party committee to calm down political tensions;
  • Christine Lagarde, in her first appearance as the IMF’s MD, hints at lower interest rates for Ireland;
  • she also calls on the Greeks to follow Portugal’s example of a cross-party consensus in favour of reform;
  • Schäuble seeks to increase privatisation revenues;
  • Guido Bohsem attacks Schäuble for his failure to repair the German budget;
  • Jean-Claude Trichet is today expected to announce his last interest rate increase;
  • Wolfgang Proissl says ECB is engaged in a poker match to regain its credibility, but with uncertain outcome;
  • the case against DSK continues after all;
  • the affair is overshadowing Martine Aubry’s presidential bid;
  • Manuel Valls says the Socialist party’s election manifesto was unrealistic;
  • the Greek government, meanwhile, has invited Germany’s president Christian Wulff to address the Greek parliament.

Eurointelligence Syndicated Column

EIP 1.0 – high time to address macroeconomic imbalances!

By: Guntram Wolff

This column argues that the euro zone has no time to waste for structural reforms given the risk of default of Greece. The new excessive imbalance procedure (EIP) could play a crucial role in fostering such structural reforms. If needed, the Commission should start the EIP procedure as early as September should countries such as Spain not deliver on their reform commitments.



Moody’s downgrade of Portugal was a crucial moment in this crisis. Peripheral bond spreads shoot up yesterday, approaching previous records during this crisis, as default fear has once again gripped the markets. Germany’s decision to relaunch its idea of an essentially involuntary bond swaps for Greek sovereign debt holders did not help improve market sentiment either.


Moody’s downgrade also incited indignant reactions from Portugal.  Prime minister Passos Coehlo called it a “punch into the stomach”, the chairman of Santander Portugal Nuno Amado “inappropriate”, and president Cavaco Silva saw“ not the slighted justification” for this downgrade. Interest rates for all maturities increased, reaching record levels especially at the three year horizon. Credit default swaps, the insurance against a government default, surged to 914 points, the highest value ever.


The political response to Moody’s downgrade and to S&P decision to kill the French debt rollover proposal) was furious. After S&P correctly concluded that a coerced default should be rated like a coerced default, EU governments and the European Commission reacted angrily, and threatened the rating agencies with a loss of their oligopoly in Europe. Michael Barnier went as far as to call for a ban a rating on countries subject to a European bailout programme, while calling on them to “respect EU rules”. (not clear to us which rule had been broken) Reuters reports that Portuguese bankers want the EU to set up its own rating agency, presumably to give policy-compliant ratings. Schäuble said yesterday that the Portuguese downgrade was unjustified because Portugal was way ahead in the implementation of the troika’s recommendations. Speaking – as he does these days - in his unofficial capacity as Portugal’s EU spokesman, Jose Manuel Barroso also wondered yesterday that “it seems strange that there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of specific issues of Europe."


(The rating agencies have not broken any rules, nor are they anti-European. They have been calling the French rollover scam for what it is. As for Moody’s rating for Portugal, we find it completely coherent that the agencies are taking the cacophonous EU policy process into account when issuing a rating. It is perfectly rational for Moody’s to say that Portugal will eventually need a second loan programme, and that, given German and Finnish politics, you cannot take this for granted. Schäuble’s comment that Portugal was ahead in implementing the measures misjudges what the rating agencies do: they provide an opinion on default probability. We would consider a Ba2 rating as still relatively generous, considering the country’s net external debt. )



Paris meeting descends into cacophony and chaos

Wolfgang Schäuble yesterday put the old German bond swap plan back on the table, under which existing debt would be swapped for longer-dating debt. He was essentially arguing that if the rating agencies say No to everything, we might as well do it properly, and get as much money out of the Greek bondholders as we can. The FT has a very good report on this, and on the parallel process in Paris, where bankers had been discussing changes to the French rollover plan, which is now essentially dead. The meeting in Paris descended into chaos, with everybody reiterating long-held opinions. The FT quotes one participant as saying that the revival of the Schäuble plan was indicative of the fact that the people involved in this process had insufficient technical understanding. The article also makes the point that the Institute for International Finance advocates the idea of a voluntary bond buyback, with EU/IMF money, which in their estimate could raise some €40-50bn. Another round of talks – with a small group of participants – is scheduled for today in Rome, according to the article.



Papandreou sets up cross party parliament committee to calm down tensions

George Papandreou announced on Wednesday the formation of a cross-party parliamentary committee with the aim of rebuilding trust in the country’s institutions and countering cases of extreme behaviour by politicians, protesters and the police, Kathimerini reports. The premier voiced alarm about the increasing number of attacks by voters on politicians, which has caused a row between ruling PASOK and the Coalition of the Radical Left (SYRIZA). The committee is also to scrutinise police conduct, as the police were criticized last week for being overzealous.



Lagarde hints at fairer interest rate deal for Ireland

Christine Lagarde has hinted that Ireland could get a fairer deal with her in the driving seat, the Irish Independent reports. In her maiden address as a new head of the IMF she said ““There is no one category of country that deserves special treatment and another one that will receive harsh treatment." An EU/IMF team is currently in Dublin assessing Ireland’s progress under the programme.



Lagarde asks Greece to imitate Portugal’s political consensus on reform

In this first press conference as the IMF’s new MD, Lagarde also asked Greece to look at Portugal’s cross party consensus for a tough reform program and to be inspired by this, according to Frankfurter Allgemeine Zeitung. Lagarde further announced that the IMF’s executive board will meet on Friday to decide the disbursement of its next loan tranche to Greece.



Schäuble wants to increase privatization revenues

Presenting his budget in the cabinet meeting Wolfgang Schäuble said he wants to increase privatization revenues to €5.1bn, according to Financial Times Deutschland. Potential candidates for a sell-off are Telekom, in which the government still has a 34% stake, Deutsche Post with a public stake of 3.5% via the public KfW bank or the public real estate company TLG. In a separate article the paper reports Schäuble grudgingly agreed to limited tax cuts.



Guido Bohsem attacks Schäuble for his failure to repair the German budget

Writing in Süddeutsche Zeitung Guido Bohsem attacks Wolfgang Schäuble for his failure to use the exceptionally high tax receipts to seriously reduce the debt level and to put the budget back on a sustainable level. Bohsem warns that the planned tax cuts and additional expenditure for reform of the army and the exit of nuclear energy mean very tough future cuts in the budget since Germany will have to respect the tight limit’s of its constitutional debt break.



Jean-Claude Trichet’s last interest rate hike

Les Echos  expects Jean-Claude Trichet to announce his “last interest rate hike” at today’s meeting of the ECB’s governing council before retiring by the end of October. Markets, economists and ECB watchers are unanimous that the ECB will raise its interest rate by 25bp from 1.25% to 1.50%. Bundesbank president Jens Weidmann, who yesterday participated in the German government’s discussion on the 2012 budget, told the cabinet that inflation in Germany was to ease in the second half of 2011, Financial Times Deutschland writes. Lower inflation in the largest eurozone economy would strengthen the thesis that the ECB will be less in a hurry to hike rates further. Meanwhile FTD polled bank economists who in their majority support the view of the Bank of International Settlement that persistently low interest rates in advanced economies were co-responsible for the build-up of speculative bubbles in emerging economies like China, India and Brazil 



Wolfgang Proissl sees the ECB engaged in big poker match to safeguard its credibility

Writing in Financial Times Deutschland Wolfgang Proissl explains that the ECB is engaged in a crucial poker match with the eurozone governments. The central bank’s refusal to accept Greek government bonds should they be downgraded to a default level is intended to force the governments to put up enough money and to design institutional solutions so that the rescue program for Greece will be perceived as credible. The ECB’s aim is to get back some of the credibility it has lost in the past 18 months as a result of its SMP program and its loosening of collateral requirements for Greece and Ireland. But if worst comes to worse, the ECB’s tough stance will turn out to be a bluff because the central bank will continue to be flexible and help saving the euro.



Greek government invites German president to address parliament

The Greek government officially invited German president Christian Wulff to address the Greek parliament, mass circulation daily Bild reports. This political gesture is intended to ease tensions that have arisen between the two countries in the context of the bailouts of Greece. Speaking to Bild the new Greek foreign minister Stavros Lambrinidis asked Greeks and Germans to stop pointing fingers at each other, to shake hands instead and to cooperate.



DSK investigation overshadows Aubry’s presidential bid

The meeting between DSK’s lawyers and representatives of the New York disctrict attourneys did not lead to dropping the charges against the former French presidential hopeful, Le Figaro reports. The DA’s office yesterday published a communiqué saying that the proceedings continued. Le Monde has a story saying that despite the doubts about the victim’s credibility, her first medical examination shortly after the alleged rape seemed to support the rape charges. Meanwhile the lawsuit in the US and the potential rape charges in France totally overshadow the attempts of the Socialist’s party chairwoman Martine Aubry to start her campaign for the Socialists primary elections in October, Le Figaro writes in a separate piece.



Valls questions Socialist’s key electoral promises

Manuel Valls, another Socialist presidential election hopeful, questioned the key promises in the party’s bid for the presidential elections, Les Echos writes. About the pledge to create 300.000 jobs for young people he said: “Obviously I don’t believe it”. On the promise to go back on the retirement age from 62 to 60 years, he commented: “There will be no return to 60 years.” The Socialist’s promises prompted the influential public thinker Alain Minc and others to predict France’s loss of its AAA rating should a socialist win the presidential elections in 2012.



Spreads, Forex, and ZC Swaps.

Back in full crisis mode. Portuguese, Irish, Italian and Spanish spreads shoot up after Portugal’s downgrade. Euro down.



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