Reuters has the story that European finance ministers are preparing to discuss an increase in the funding ceiling of the EFSF, and a widening of its mandate, at next week’s eurogroup/ecofin meeting. It quotes two separate unnamed sources. One source said that it was about “getting the whole 440 billion into operation,” while another source cautioned that no decision is likely to be taken next week.
El Pais writes that the European Commission was planning to propose a “pooling” of debt issues that would benefit from EU guarantees. This would effectively constitute a first step towards a European bond. This debt pooling proposal is a hybrid construction to satisfy both advocates of a single bond, and those who are opposed. (It is essentially a single bond, without the name – and without the benefit of a large single bond market).
Bond spreads and forex
A relatively quiet day on the markets, after heavy ECB buying. Spreads remain elevated, but recovered marginally. The euro remained at just under $1.30 this morning.
10-year sovereign spreads (against 10 year German bunds)
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Euro bilateral exchange rates:
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Source: Thomson Reuters
We forgot to insert the ten-year yield chart in yesterday’s briefing. Here it is.
Barnier proposes ambitious bank stress test
After the disastrous and deceitful bank stress tests last July, the EU is now considering a tougher series of new tests, planned for February or March, Michel Barnier told the French newspapers Le Figaro. He announced that these tests would be supervised by the newly created European Banking Authority (EBA), based in London, but refused to answer the question as to whether a failure for a bank to pass this stress test would be linked to restructuring calls by the European Commission.
Roubini says it is absurd to focus on 2013
This is an interesting interview with Der Spiegel, hat tip FT Alphaville. Nouriel Roubini criticises the German government, not for insisting on investor bail-ins, which he supports, but for making a string of unworkable proposals of how to deal with debt crisis. We quote in full.
“ What the euro countries decide for 2013 is completely inconsequential. Forget 2013! The important thing is what will happen in the next three months in Portugal, Spain, Italy, and France. I can’t fathom how the EU member states can hold a summit entirely preoccupied with what will happen after the present rescue package runs out, without once mentioning what they intend to do now to help Portugal and Spain.”
Issing warns against political union through the back door
This is a news story about a comment – which is not yet published – so it may not contain all the relevant bits, but it is clear from the quotes published in, among others, the Financial Times that Otmar Issing is seriously concerned about the future of the euro. He warns against the adoption of a political union through the backdoor of a monetary union, and what he see a development towards a transfer union, in which governments remain independent, and able to conduct bad policies, while Germany would have to subsidise them on a quasi-automatic basis. It seemed he was reeling against the decision to make the implementation of the stability pact rules only semi-automatic.
Belgian king asked the two main parties to continue negotiating with mediator
King Albert II asked the leaders of the two largest political parties to support the mediator Johan Vande Lanotte in brokering a compromise over the state reform. Lanotte, after offering his resignation last week, agreed to continue his efforts and to hold privileged talks with the two leaders. The separatist NV-A party signalled that they would be ready to move on some issues if more power on social economic issues is handed over to the regions, Le Soir reports.
The French socialists agree on a timeline for designation of the presidential candidate
The Socialist candidate for the French presidential election 2012 will not be known before October 2011, le Monde reports, after a process of “open primaries” that allows anybody to vote, not just the PS members. The filing of the candidatures for these primaries will have to be made before July. All eyes are now on Dominique Strauss-Kahn, who is currently riding high in the polls.
Bank of Portugal expects economy to shrink 1.3%
The Bank of Portugal cites austerity measures and worsening credit conditions, which will push Portugal into a new recession with -1.3% this year and only slightly positive in 2012, Jornal de Negocios reports. According to their forecasts, only exports will continue to grow (5.9%), while other GDP components will contract significantly, in particular private consumption (-2.7%), public consumption (-4.6%) and investment (- 6.8%). The Central Bank’s forecast are in line with the IMF forecast (-1.4%) but much more pessimistic than the Portuguese government’s, which still expects the Portuguese economy to realise a positive growth rate this year.
Germany to raise ceiling of its bank tax
FT Deutschland led with a story according to which the German finance ministry is planning a de facto increase in the bank levy they have previously agreed as a means to finance a restructuring fund for the banking industry. The levy is calculated under a complex formula, but was previously capped at 15% of bank profits. Under the new plans, the cap will be maintained in any given year, but the capped amounts will be brought forward. The banks are furious about this proposed change, saying that it make it more difficult for them to raise new capital.
Putting the euro crisis into perspective
FT Deutschland’s Das Kapital is quoting from an OECD report, wondering why everybody is focusing on the eurozone crisis, while the US data are looking universally worse. The combined deficits of Greece, Italy, Spain, Portugal and Ireland will only be 5.3% of their GDP this year, compared to over 10% of the US. The overall debt-to-GDP ratio is higher than that of the eurozone, as are the debts of the private sector. The article concluded that it would be more rational to worry about the greenback than the euro.
Wolfgang Munchau says it is time to restructure debt
In his FT Deutschland column, Wolfgang Munchau says that the core reason of why this crisis continues is the attempt by the EU to treat a solvency crisis through a series of liquidity policies. He says he does not doubt the determination by the EU to do whatever it takes to save the euro, but these will be all liquidity measures, such as increasing the size of the EFSF, or the recently agreed ESM. But none of this resolves the excess indebtedness of the eurozone periphery. The crisis could significantly curtailed if the debt restructuring, and an ensuing restructuring of the financial sector, were to start right now.
- EU’s Rehn, Barroso Call For EFSF To Be Enhanced, Reinforced (forexlive.com)
- Germany May Soften Objections to Fund Increase as Bonds Drop (businessweek.com)
- WRAPUP 5-EU eyes easing lending, Portugal resists bailout (reuters.com)
- EU Leaders Aim for ‘Comprehensive’ Crisis Solution, Rehn Says (businessweek.com)