Quinta-feira, 14 de Julho de 2011

Eurointelligence Daily Briefing

enviado por Julio Marques Mota

Sarkozy wants a summit, but Merkel does not want to go

  • There were unconfirmed reports about an EU summit yesterday, as requested by several leaders, including Nicolas Sarkozy;
  • Angela Merkel is much less keen on the idea but circumstances might force a decision soon;
  • another extraordinary day on the markets yesterday, as Italian 10-year yields push through 6% at one point;
  • Willem Buiter says Italian re-rating is game changer, as this becomes a systemic crisis;
  • German Bild tabloid agrees, for the sake of Italy;
  • Zapatero calls on Germany in particular to make greater efforts at crisis resolution;
  • at yesterday’s Ecofin consensus emerged that some form of selective default is unavoidable for Greece, which would be part of the second loan package;
  • on the table is the proposal for Greece to buy back its bond at 50% discount for roughly €70bn with EFSF money;
  • The second loan package for Greece would then need to be bigger than €115bn ;Wolfgang Münchau says situation extremely grave as leaders need to do a lot more than agree a Greek package to get out of this crisis;
  • as politicians call for a private sector participation, Moody’s has downgraded Ireland to junk, citing policy signals as among the reasons;
  • Ewald Nowotny says rating agencies add no analytic value or understanding, and express only view, which are damaging to the eurozone;
  • Giulio Tremonti seeks Italian parliament to approve his  austerity package by Sunday revamped to include privatisation and liberalisation plans;
  • some IMF directors have expressed concern that Italy’s budget savings are mostly backloaded, and thus not sufficiently credible;
  • EU finance ministers promissed support for banks that fail the stress tests;
  • First leaks of test results to be presented on Friday find that six Spanish bank and one Austrian and a Greek bank failed the stress test;
  • IMF warns Germany of low growth trend;
  • the French Greens, meanwhile, elected the Norwegian born Eva Joly as their candidate for the French presidential elections.


Reuters reports that there will be an emergency EU summit this weekend, following another day of awful news for the eurozone. Italian 10-year yields shot through 6% at one point, before settling at 5.7% in the afternoon, on the news that Giulio Tremonti headed back for talks with Italy’s opposition, amid signs that the Italian parliament may be passing Mr Tremonti’s budget with a few days.

Yesterday’s highly volatile trading underlines the markets’ acute nervousness in the eurozone’s third largest economy. Moody’s downgrade Irish debt to junk status, citing concerns over a selective default of Greece.



Reuters quotes Willem Buiter of Citigroup as saying: "We're talking a game changer here, a systemic crisis. This is existential for the euro area and the EU." He called for the EFSF to be increased to €2 trillion.


There was some confusion yesterday about whether a summit would be held. France was in favour. Van Rompuy said he did not rule it out. But Berlin was notably cool on the idea. Merkel said she sees no need, and the Germany finance ministry even said a Greek deal could wait until September. The purpose of this summit would be to halt the contagion of this crisis and fix the uncertainty surrounding the second Greek loan programme. But it was not clear last night whether such a programme could, in fact, be negotiated in time. The Institute of International Finance disagreed, saying a solution would have to be found quickly, or the markets would spin out of control.


Italy, a game changer for the German media

The German media, at least, have woken up from the lack of interest in this latest wave of the eurozone financial crisis. Spiegel Online goes as far as to say that the eurozone’s future was now at stake, as government insist on bailing in the private sector.

Italy is a game changer also for the tabloid Bild Zeitung, with two editorials urging for the eurozone to undertake whatever it takes to safe the common currency. “The honest answer is: We don’t have an alternative” the paper’s editorialist Ulrich Becker writes. He asks for a restructuring of the Greek and perhaps also the Portuguese debt, even if this is costly for public budgets and banks. “We all must be prepared to shoulder the financial consequences”. Franz-Josef Wagner in his daily letter to the readers declares his love for Italy (“the sound of Ferrari motors”, “Gucci, Versace”, “truffles, wine and cheese”). “I will not allow those shitty greedy financial jugglers to destroy my Italy.”


Greek bond buyback at 50% discount on the table

Yesterday’s Ecofin did not agree on the outline of a new programme, but there seems to be an emerging consensus among finance ministers that some form of a selected default is unavoidable for Greece.


The solution focussed on in the discussions is for Greece to buy back parts of its own debt at a discount rate of 50% of its nominal value with money from the EFSF, reports FT Deutschland. Member states seem to be prepared to do this against the will of the ECB.  This also means that the next package will need to be bigger in volume than the currently envisaged €115bn. “There will need to be more money on the table”, FTD quotes EU sources. Extra money will be needed in order to save Greek banks. The objective is to reduce the Greek debt from currently around 150% of GDP to 120% of GDP. To do so the Greek government would have to buy back discounted bonds for roughly €70bn.


Athens pushes for the EU and the International Monetary Fund to arrive at a decision about a second bailout. Government sources said Greece would need to receive its next loan installment by September 14, Kathimerini reports.



Political tensions are rising

According to El Pais, Zapatero called on Germany to make greater efforts to contain the crisis. Zapatero blames Germany for the crisis, but he uses his words carefully. He also appeared bitter that the Spanish re-rating happened despite a lack of new data.


(Like so many of his fellow PMs, he simply does not get it. The markets no longer believe that the eurozone has the capacity to solve this crisis, and this is why the crisis is spreading. We expect it won’t change even if a summit were held this weekend.)



Wolfgang Münchau on the urgency of an agreement

In his Financial Times Deutschland column Wolfgang Münchau calls on the German government to wake up from its complacent mode, as the eurozone crisis is now escalating at a rate that a collapse of the eurozone’s financial system could occur within a few days. He says with Italy and Spain now subject to speculative attack, the EFSF needs to be doubled or trebled, and various other measures taken in a relatively short period of time. Fixing the Greek crisis alone will no longer do. The world wants the EU to produce a blueprint for the solution of the entire crisis.



Moody’s cuts Ireland to junk

The more politicians talk about private-sector participation for Greece, the greater the risk of a downgrade for Ireland and Portugal. Yesterday, Moody’s cut Ireland to junk status, using similar arguments as they used in respect of Portugal last week. European finance ministers acknowledged that some form of default was likely, and this is what seems to have prompted Moody’s  to take the downgrade decision. The Irish government reacted with predictable dismay. Moody’s rating for Ireland is now Ba1 – one notch above Portugal, and as Reuters reminds us, also below Columbia’s.


The news agency also has an interview with Dietmar Horning, a Moody’s credit rating analyst, who confirmed that the present EU policy stance is directly linked .to the ratings decisions. While the eurozone was ready to provide liquidity support, there is a risk that Ireland, Portugal and Greece would be unable to return to international capital markets once their current bailout programs expire.



Notwotny, too, blames rating agencies

The Austrian central bank governor Ewald Nowotny said credit rating agencies had worsened the crisis. He said the agencies did not produce any original analysis, and thus added no value. They just gave opinions, which serve to worsen the crisis, he told Austrian television. Nowotny also reiterated criticisms from politicians, that rating agencies had a natural bias against the EU.



IMF directors critical of backloading of Italy’s austerity programme

As we noted last week, Giulio Tremonti’s much celebrated  fiscal programme relies heavily on backload measures, for 2013 and 2014 in particular. In its annual review of the Italian economy, the IMF called on Italy to continue its strategy of fiscal consolidation, and says there is additional scope for cuts in pension and labour market reform. 



Italian parliament pressed to approve €40bn austerity plan by Sunday

The Italian parliament is working on approving a €40 billion austerity plan by Sunday. Tremonti met opposition leaders to get them to support the law, La Repubblica reports.  The budge was revised and strenghtened with privatisation and liberalisation plans. The plans include incentives for municipalities to sell their shares in Eni, Enel and Finmeccanica. The Italian government will  also present a draft constitutional law to introduce the so-called golden rule, a balanced budget rule allowing deficits only for investments.



EU finance ministers promise banks that fail the stress test

EU finance ministers promised financial support for those banks that will fail the stress test of which EBA will publish the results this Friday, according to Frankfurter Allgemeine Zeitung. Press reports in various member states indicate that a lower double digit number of the 91 tested banks will fail, among them apparently six Spanish banks, the Austrian Österreichische Volksbank AG and perhaps one Greek bank. Of the 13 German banks apparently all passed the test although the two Landesbanken HSH Nordbank and NordLB only with a very small margin.



IMF warns Germany of slow long term growth trend


The IMF warned Germany yesterday in a report not to be fooled by the current strong growth rate of 3% and more, Financial Times Deutschland reports. The Fund’s economists consider this to be a merely cyclical recovery of an economy strongly dependant on exports. However investment remains week in Germany and the country’s medium to longterm perspectives remain rather at 1.25%, significantly lower than for example in the US. With its report the IMF dampens hopes of German economists like Ifo institute president Hans-Werner Sinn who has been going into German talkshows promising “a golden decade” for Germany.



Norvegian born Eva Joly will run for the Greens in French presidential elections


In their internal selection process the French Greens voted for Eva Joly to challenge Nicolas Sarkozy in the 2012 presidential elections, Le Monde writes. The Norvegian born EU parliamentarian defeated environment activist Nicolas Hulot in the party’s primaries but she hopes to keep him on board for the campaign. In the 90s Joly was one of the most powerful investigative judges in France who brought Loik Le Floch Prigent, the CEO of the then state owned oil company Elf to prison over corruption charges and made powerful politicians like Mitterrand’s former foreign minister Roland Dumas tremble, also because of corruption charges.



Spreads, Forex, and ZC Swaps

Those numbers somewhat belie the extraordinary volatility yesterday, with Italian 10-year yields shooting through 6%. Spreads come down from the peaks yesterday, but this levels are extreme and unsustainable. Something will have to give very shortly. The Euro stays under $1.40.



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