Estrolabio

enviado por Julio Marques Mota

White flag over Frankfurt

• European Central Bank suspends minimum credit rating threshold for collateral eligibility for Portugal;
• decision effectively implies that the ECB will do whatever it takes to maintain liquidity in Greece as well;
• governing council said it judges the Portuguese government’s policies to be sufficient;
• but Trichet yesterday firmly ruled out a medium-term Irish financing facility;
• ECB also raises interest rates to 1.5% as expected;
• decision came under fierce criticism from Ireland’s opposition leader, who called it foolish;
• no further increases in interest rates expected for now;
• Jan Kees de Jager says EU should force a Greek default;
• Trichet hardens the ECB’s line against a private-sector participation;
• bankers are hopelessly stuck in their debate on modifying the French rollover proposal;
• Jean-Claude Juncker says rating agencies have anti-European bias, and should not downgrade countries that were currently undertaking reforms;
• in the latest escalation of Belgium’s political crisis, NV-A rejects di Rupo’s coalition offer;
• Giulio Tremonti warns of a breakdown of civil society in Italy;
• Anshu Jain, meanwhile, looks to be the favourite to succeed Joseph Ackermann at Deutsche Bank.

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The European Central Bank suspended the minimum credit rating threshold for collateral eligibility in the case of Portugal. The ECB’s governing council said it supported the Portuguese adjustment programme, and judged that progress to far had been appropriate. Given the Portuguese government’s commitment to implement the programme in full, the governing council decided to suspend the rules “also from a risk management perspective”. Market participants immediately interpreted the news as signifying that the ECB will continue to supply liquidity irrespective of what the rating agencies do – and this will almost certainly apply to Greece as well.

Trichet also ruled out that the ECB will agree a medium-term Irish finance facility. Mr Trichet said this was not a possibility.

Oh, and the ECB also raised the refinance rate to 1.5%, as expected. Jean-Claude Trichet did not signal any further rate rises. Micheál Martin, leader of Ireland’s Fianna Fáil, called the decision foolish, and said the ECB was now actively contributing to the crisis. Mr Trichet said the governing council had not decided on a series of further interest rate increases, which suggests that this is the last rise for now. The recent economic data, and sentiment indicators, suggest that economic growth was heading down again.

Dutch finance minister advocates Greek default

Jan Kees de Jager, the Dutch finance minister who recently advocated that more Scandinavians should join the ECB’s governing council, has now had another brilliant idea. He wants to throw caution to the wind, and force participation of private bondholders, irrespective of what the rating agencies say. This is what he told Financieele Dagblad (hat tip FT): “I think we have to accept that a voluntary contribution is unrealistic... If a mandatory contribution from the banks leads to a short-term and isolated rating event, that is not so bad, because Greece cannot go to the credit markets anyway now or in the near future.”

Despite the decision to relax collateral requirements for Portugal, Mr Trichet hardened the ECB’s line on defaults during his press conference. He said one should not presume that private sector involvement was normal.

(We should not be surprised that rating agencies start to lower ratings of eurozone member states pre-emptively, if European finance ministers talk so loosely about default. Of course, a default rating would not affect Greece’ access to capital markets right now, but as we have seen in the last few days, fear of a default spreads like wildfire.)

No progress on a new bank rollover proposal

Reuters has all the details of the latest futile attempt by bankers to agree a new rollover package. Finance chiefs, meeting under the auspices of the IFC, failed to make any progress at a meeting yesterday. It was the latest in a series of meetings in recent weeks, but there was little sign of a deal, according to Reuters, which said that Thursday's meeting broke up after four hours with no conclusion. The article quoted an Italian source as saying that the meeting discussed issues beyond the French rollover plan.

Europe’s confusion over ratings agencies

Europe’s muddled thinking on rating agencies was well reflected by a statement of Jean-Claude Juncker, who like so many other politicians was convoluting two issues when he  said yesterday, first, it was wrong for a rating agency to downgrade countries that were in the process to undertake reforms, and, second, that Europe needs its own agency.

(It looks like he does not understand how rating agencies work. If Europe had its own independent credit rating agency, chances are that it would probably come to very similar conclusions as S&P, Moody’s and Fitch if it operated under a similar business model. Or does Juncker want the eurogroup to control the rating agency directly? In that case, the eurogroup or the ECB might as well produce their own ratings. But this is precisely what they have avoided in the past for political reasons. The European position on rating agencies has always been duplicitous. Also, the purpose of ratings is to signal a default probability to investors, not to reward government reform efforts. The rating agencies have simply lost confidence in the political process. So have other observers, like us.)

N-VA rejected di Rupo’s government bid

The Flemish separatist N-VA rejected the note from Elio Di Rupo, saying that it does not form a basis for successful negotiations and that the Flemish will have to foot the bill. It is not clear what happens next. All French-speaking parties and a number of Dutch-speaking parties had already agreed on the note as the basis to restart coalition talks. In theory they could press ahead with discussions, but they are reluctant to do so without the N-VA. De Morgen writes that the tenor of most comments in Flemish newspapers today is that new elections are now inevitable, though De Standaard notes that there is not a sufficient majority to dissolve parliament for this. The Belgian king Albert II had ruled out new elections so far. Consternation on the Flemish side, despair on the francophone side. Le Soir titles “ceci n’est plus un pays” (this is no longer one country).

Italy on the verge of a nervous breakdown

The crisis has hit Italy full force. Speaking at a meeting of the country’s agricultural industry association, Giulio Tremonti pained the future of Italy in dramatic terms: either the country manages to balance the budget, or the country’s civic society ceases to function. "If we don't get the budget into balance, there will be a disaster," he said. Yesterday the yield spread to German bunds reached its highest level since the start of the euro, with Italian 10 year yields reaching 5.2%. The country’s recent economic data have been disappointing, which has heightened alarm about the sustainability of the country’s debt, which now stands at 120% of GDP.

Anshu Jain likely to succeed Ackermann at Deutsche Bank

After Axel Weber’s decided to work for UBS, Deutsche Bank came under pressure to settle the succession of Josef Ackermann. According to Frankfurter Allgemeine Zeitung it will be Anshu Jain, the Indian born investment banker who is heading the bank’s London investment bank operations. But given the huge political role of Deutsche in Germany (it was Ackermann who effectively designed the bailouts for HRE during the financial crisis) und his nonexistent German language capabilities Jain will have a co-head. The most likely candidate is Jürgen Fitchen, currently responsible for the bank’s business in Germany. There had been speculation that Ackermann will become president of the supervisory board, as Spiegel Online reported, but FAZ reports that those speculations were premature.

Those bad numbers are sticky. Italian, Spanish and Portuguese spreads unchanged, euro down.

Euro bilateral exchange rates:  

Zero Coupon Inflation Swaps

Greek vote hangs in the balance

• Four Pasok members are considering to vote against the austerity programme;
• debate starts today, with two votes expected Wednesday and Thursday;
• Greek opposition leader Antonis Samaras insists on lower taxes as necessary for a return to growth;
• a poll says 75% of Greeks are opposed to the latest austerity measures;
• demonstrators are gatheringin Syntagma square ahead of the debate;
• Wolfgang Münchau criticises EU policy towards Greece, and says the argument about austerity was now too finely balanced for comfort;
• FT Deutschland reports that the EU was preparing a plan B for Greece to ring-fence the problem;
• the European Council formally appoints Mario Draghi as president of the ECB;
• the French government and banks have a reached an agreement on a Greek debt rollover;
• 71% of Germans say they have lost confidence in the euro;
• Roland Berger wants to set up a European rating agency in Frankfurt;
• Sarkozy targets his economic plan specifically at Socialist voters;
• Wolfgang Proissl argues that the appointment of Christine Lagarde to the IMF is not in Europe’s best interest;
• Spanish and Italian bonds spreads, meanwhile, are approaching crisis records.

Four PASOK members are now actively considering not to vote for the €28bn austerity programme, Kathimerini reports.  If all four MPs oppose the government, PASOK would be left with a one-seat majority unless it received support from another smaller party, such as the centrist Democratic Alliance. The Parliament started the debate on the measures today with two votes scheduled for this week, a general on vote on tax and spending targets plus the creation of a privatisation agency expected on Wednesday, and a vote on the enabling legislation on individual budget measures and privatisation of specific state assets on Thursday, Reuters reports. Deputy prime minister Theodor Pangalos was optimistic about winning the first round of votes despite discontent within his PASOK party but was more cautious about whether the government could push through the second bill.

Samaras insists on lower tax burden as a way to return to growth

Antonis Samaras on Sunday singled out taxation as his main point of disagreement on the austerity package, insisting that lower taxes are needed to help Greece return to growth and to restore some hope among Greeks, according to Kathimerini. He said that Greeks were “over-taxed” and that the new hikes included in the scheme were “too much of a burden to carry.”  Germany’s Süddeutsche Zeitung newspaper suggested that the European People’s Party, the group of  EU’s center-right parties, should consider either ousting ND or cutting its subsidies. El Pais did an approving comment on Samarras as a man who dared to say No to Angela Merkel.

Polls suggest that75% of the Greek oppose measures

Second vote passed, and now what?

Obtivemos este briefing graças ao Júlio Marques Mota e ao Domenico Mario Nuti, que o enviaram atempadamente ontem. Por problemas organizativos nossos, só hoje o publicamos. O seu interesse é manifesto.

Due to a technical glitch, a few of yesterday's email briefings were only sent out this morning. The web version was not affected. We apologise for the confusion.

Greece votes not to default this summer

• Greek parliament votes 155 to 138 for austerity package, and is expected to approve implementation bill today;
• financial markets still expectGreeceto default eventually, amid doubts that the government will implement the programme;
• the additional annual burden for an average Greek family will be in the order of one month’s salary;
• violent protests erupted in the centre ofAthensafter the vote;
• Michael Martens argues thatGreeceis going to remain a limited democracy for some time to come;
• central banks extend dollar swap lines as an insurance policy in case of a Greek default;
• Jürgen Stark tells Die Zeit that any Brady-plan element in a rollover package would contravene the Art.125 TFEU;
• Germanymay include longer-dating Greek debt instruments in the rollover package;
• Merkel and Ackermann clash over the pretence of a “voluntary” rollover;
• the Italian cabinet is due to pass a €47bn four-year austerity plan, with most of the savings earmarked for the time after the next elections;
• Nicolas Sarkozy appoints budget minister Francois Baroin asFrance’s new finance minister;
• a French legal commission will decide on July 8 whether the Christine Lagarde will be prosecuted;
• Le Monde calls on Lagarde to emancipate herself from Sarkozy;
• Patrick Welter criticises the direction the IMF had taken under DSK;
• the European Commission, meanwhile, proposes a 1% sales tax and a financial transaction levy to boost its own resources.

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In the end, the margin was decisive – 155 to 138 – but few people expect thatGreecewill be able to implement the package its MPs have voted on. In September, the troika will descend onAthensand investigate whether the programme is still on track. And it will demand that any shortfall will have to be covered by new austerity measures. The expectation is now that the Papandreou government will last until the of the year, and that a debt restructuring is now virtually inevitable.

At yesterday’s vote, all but one of Papandreou’s Socialist MPs, and one New Democracy dissenter, backed the government’s midterm economic program, Kathimerini reports. Panagiotis Kouroublis voted against the program and was ousted from the party, Elsa Papadimitriou voted for the measures, breaking ranks with her party and declaring herself an independent.

Parliament votes on the second bill today. Government and analysts expect it will also pass. The debate in Parliament resumes at 9.30am, the vote is not expected before 2pm, Reuters reports.

The relief about parliament’s approval was only brief and most headlines this morning reflect this. Analysts said the real challenge will come after the bill is voted on and the international money secured. There is a growing concern over whether the government will be able to implement the unpopular cuts in practice to meet a tight schedule imposed by the EU and the IMF. Bloomberg quotes Greek newspaper To Vima calculated the additional burden for an average family of four at €2795 a year, about the same as one month’s income.

Violence escalated in central Athensafter Parliament approved the first bill of the new austerity package, with reports of dozens of protesters and police officers being injured in running battles, Kathimerini reports. Those clashes were among the worst Athens has seen in several months, writes the WSJ.

Limited democracy in Greece

After yesterday’s endorsement of the second rescue package in the Greek parliament Frankfurter Allgemeine Zeitung’s Michael Martens takes a look at democracy in Greece and concludes that “for the foreseeable future Greece will only be a limited democracy”. According to the author the Greek government has been stripped of its sovereignty and the elected representatives can no longer take meaningful decisions. Instead they execute what the EU and the IMF tells them to do. Martens dismisses worries of economists that the rescue programs could create moral hazard and constitute an invitation to countries to be fiscally irresponsible. “No prime minister will want to pay the prize that prime minister Papandreou currently has to pay”, he writes.

Central banks prepare for Greek accident by extending Dollar swap lines

The Fed, the ECB, the Bank of England, the Bank of Canada and the Swiss National Bank extended the Dollar swap lines that would have otherwise expired August 1^st, Financial Times Deutschland reports.  Those swap lines were first created at the first height of the Geek crisis in May 2010 because European banks found it increasingly impossible to get short term dollar loans on the credit markets. The Fed therefore offered other central banks the possibility to borrow unlimited amounts of dollars which they in turn lend to their local banks. Since the Fed will not meet before August 9 and an accident in Greece is not excluded the Fed decided at their last FOMC meeting to extend the dollar swap line until August 2012.

Did Jürgen Stark jump the gun and reject the bond rescheduling package?

This is from a Reuters rendition of an interview in Die Zeit, in which Jürgen Stark said an instrument like a Brady bond was explicitly “disqualified” by Art.125 of the Treaty. He was asked about schemes under which banks would exchange their Greek bonds for new paper backed by EU states. The article concludes that this would also apply to the French bond rollover agreement, as one portion of it includes an EFSF issued, or guaranteed, zero coupon bond.

Reuters reports that Germany may include more Greek debt instruments in the package presumably because German banks hold only a relative small amount of short-dated debt. Citing “four people familiar with the talks”, the report said bond maturing up until 2020 might be included.

The FT, meanwhile, has a nice snippet from an ill-tempered conversation between Angela Merkel and Joseph Ackermann. Ackermann: “I am assuming that we will lend our hand to a solution, but not because we are doing it willingly.” Merkel retorted that private creditors should do it “willingly” because they had an interest in doing so.

Austerity comes to Italy

This is budget week in Italy, as Giulio Tremonti prepares the biggest austerity programme in the country’s modern history, but the savings are back-loaded to the end of the parliamentary terms, which may throw some of these measures in doubt. The FT has a good overview of the intrigues within the government that preceded the agreement, which is due to be voted on in the cabinet today.

The total size of the cuts is €47bn by 2014, of which €1.8bn are due this year, €5.5bn in 2013, €20bn in each 2013 and 2014. La Repubblica notes that most of the sacrifices would come after the next elections. The measures include an increase in the retirement age for women to 65 (the same as for men), an increase in health care charges, a tax on fast cars, a tax on financial transaction.

Sarkozy promotes Baroin to become finance minister

Nicolas Sarkozy promotes budget minister Francois Baroin to become finance minister. Baroin was in competition with agriculture minister Bruno Le Maire who was considered by many to be the front runner because he is elaborating Sarkozy’s electoral platform for the presidential elections and he is a German speaker. But Baroin, a former Chirac loyalist who threatened to resign in case he did not succeed to Christine Lagarde, had the support of many UMP deputies in the National Assembly and of the influential UMP chairman Jean-Francois Copé. Education minister Valérie Pecresse will replace Baroin as education minister. Le Maire, whom Sarkozy promised to get the finance ministry as late as Tuesday, gets noting and is considered the big looser. Le Monde, Les Echos and Le Figaro have a good and complete coverage of the government reshuffle. Baroin’s debut will be this Sunday when the Euro finance ministers meet in Brussels to complete discussions about the second rescue package for Greece and the bank’s involvement in paying part of it.

Lagarde’s potential legal worries

Le Figaro and Le Monde explain that Christine Lagarde will take over as the IMF’s new MD on July 5, but a legal commission will only decide on July 8 if Lagarde will be prosecuted in relation to a €1m transfer to the French tycoon Bernard Tapie to settle a year long dispute as a consequence of the Crédit Lyonnais scandal of the 1990s. Should the proceedings continue, Lagarde, who will not be protected by any immunity because all of this happened before she took over the IMF job, could be interrogated as a witness. It may even take years before the French Court of the Republic, a special court for government ministers, issues a ruling. In a nutshell, Lagarde’s handling of the Tapie case is doubtful because she decided against the recommendations of her advisors at the finance ministry in favour ofan arbitration, which ruled that the government should pay more than €200m to Tapie.

Lagarde needs to emancipate herself from Sarkozy

In its unsigned front page Editorial Le Monde criticizes Nicolas Sarkozy for calling Christine Lagarde’s nomination at the IMF a “victory for France”. If Lagarde wants to be effective and gain legitimacy with the emerging countries she needs to “get rid of the influence of the Elysée (the French presidential palace)” and to think what management of the Greek crisis is in the IMF’s best interest. Frankfurter Allgemeine Zeitung’s Patrick Welter explains in a long front page editorial that Lagarde is „not the right person“ to be at the helm of the IMF. Welter considers that DSK has set the IMF on the wrong track with his ambition to make the world’s economic government and central bank. The multiplication of tasks, its huge number of reports and its huge financial means have become a problem.“ The idea to give ever more credit and to act ever more like an insurance company against all risks creates the huge risk that the fund is stumbling from one bail-out to the next”. The IMF’s agenda should be self limitation instead and Lagarde, who sees herself in the tradition of DSK, is unlikely to promote a self limiting agenda.

Commission proposes EU tax in its budget frame work

All European newspapers report on the Commission’s proposal to introduce a 1% sales tax and a levy on financial transactions as part of plans to boost its seven-year budget to almost €1 trillion. The proposed new taxes are designed to reduce the amount EU governments must pay to Brussels, the Commission said, while increasing the block's budget by about 5% to more than €970bn between 2014 and 2020. Germany and seven other net payers ask the Commission for “very substantial savings” in the expenditure on EU officials. They want the Brussels administration to see if retirement age for officials can be raised and if the supplements for working abroad can be reduced.

Spreads, Forex, and ZC Swaps.

Spreads ease after the Greek vote. Italian spreads are back below 2%, Spanish spreads down to 2.6%. Euro strengthens.

Euro bilateral exchange rates:  

Zero Coupon Inflation Swaps