After 170 minutes of  debate between Francois Hollande and Nicolas Sarkozy the situation appears to be unchanged between the two contenders for Sunday’s run-off in the French presidential election. According to an online conversation on Lemonde.fr with the paper’s editorialist Francoise Fressot “Hollande came in as the favourite and he remains the favourite”. In an exchange that seemed hostile and aggressive at times, Sarkozy accused Hollande repeatedly of spreading “lies” while Hollande portraid Sarkozy as “arrogant”, “unpleasant” and “self-righteous”. In an editorial for Les Echos Guillaume Tabard said the debate had been “too long, too tense and too technical”.

On the euro crisis, the socialist candidate and the conservative incumbent reiterated their diverging positions. While Hollande advocated the issue of euro bonds guaranteed Sarkozy reiterated his opposition to such securities. “Who will guarantee them if it’s not France and Germany?”, he said. “Should we raise our debt to pay the debts of others? It’s irresponsible.” Sarkozy said the ECB had done “pretty well” in fighting the region’s sovereign debt crisis given the constraints of its mandate. “This is a global crisis”, Sarkozy said. “You think it was easy? I’m not sure you’d have done much better than us. Europe has got out of the crisis.”

Conservative leaders position themselves for the time after Sarkozy’s defeat

According to Le Journal de Dimanche’s website le lejdd.fr, leaders of Nicolas Sarozy’s conservative UMP party start to positions themselves for the time after the president’s expected defeat in the run-off elections on Sunday. In an interview with Le Figaro, UMP chairman Jean-Francois Copé he thought it important that in the future different schools of thought should be allowed to express themselves forcefully but he warned the worst case scenario after May 6 would be a return to “a divided right” when there was the right wing RPR and the center UDF. While some leading UMP figures welcomed Copé’s initiative others like his predecessor Xavier Bertrand suspected him of positioning himself for the war of succession after Sarkozy’s defeat. Bertrand called everyone to focus on nothing else than Sunday’s election.

Eurozone is sliding deeper into recession

Yesterday’s big economic news was the surprise fall in the eurozone purchasing managers’ index from   from 47.7 in Marh in 45.9 in April, the lowest level since June 2009. There are also signs that the slowdown is affecting Germany (which is usually late in the cycle), as the downturns becomes more broadly based. Yesterday saw the release of the March eurozone unemployment figures, which reach a 15-year record of 10.9%, up from 10.8% in February. The drivers of this increase were Italy and Spain. Ten year German bunds were trading at just over 1.6% - an alltime low.

German job miracle seems to come to an end

In its leading front page story Financial Times Deutschland claims that the German job miracle seems to have come to an end. According to yesterday’s seasonally adjusted figures unemployment rose by 19.000 in Apri to 2.88m, the highest rise since spring 2009. According to FTD this is a likely new trend because of the deep recession in which much of eurozone is in and that is increasingly being felt in the German economy. From mid 2009 until January 2012 the number of unemployed had dropped by roughly 20.000 each month.

Hoyer asks for €10bn for EIB capital increase

Talking to Frankfurter Allgemeine Zeitung, EIB president Werner Hoyer called for a €10bn capital increase in order to raise enough private capital to finance infrastructure projects in the order of €60bn. The EIB’s financing will be an important part of the European growth strategy that will be first discussed at a leader’s dinner by the end of May and most likely formally adopted at a growth summit in June. But the biggest challenge will be according to Hoyer for the EU governments to find enough projects worthy of support. The bank will not damage its reputation by supporting doubtful projects. Hoyer insisted the capital increase must come from paid in capital. The Austrian finance minister Maria Fektor came out against a capital increase. “The EIB is well equipped”, she said. “The member states cannot do consolidation packages and call for more money at the same time.”

Wolfgang Proissl predicts the eurozone’s economic and social situation will provoke a debate on the ECB’s mandate

Commenting in Financial Times Deutschland, Wolfgang Proissl argues that the dire economic and social situation in many euro member states will lead to a debate if the ECB’s mandate with a strong focus on inflation is still appropriate or if it should be extended growth enhancement. According to Proissl this debate will be fuelled to the likely election of Francois Hollande in France and possible changes in the power balance in Germany after two important Länder elections in Germany on Sunday. On top of that unemployment in Spain, Portugal and Greece will reach heights that look increasingly similar to the levels Germany had during the Weimar Republic and which may pose a threat to the young democracies in these three countries that where ruled by dictators only a few decades ago. Proissl calls on euro central bankers to accept a debate about the ECB’s mandate and to make their case instead of brushing off any mentioning of a changed mandate as totally unreasonable as they had done in the past. 

Venizelos warns not to vote for anti-bailout parties

Evangelos Venizelos warned Greek voters on Wednesday that they should not take the country’s eurozone membership for granted and should avoid voting for parties that might put Greece’s future at risk, Kathimerini reports. Venizelos warned that some parties were creating a front that could lead Greece back to the drachma. “This works in favour of corruption and all those who took their money out of the country and are waiting to buy up everything if we return to the drachma,” he said. Venizelos went on to say that it was a “lie” to suggest that Greece could simply reject the terms of its bailout after the May 6 elections without suffering any consequences. He said it was also a “lie” to suggest there was no danger of Greece being forced out of the eurozone. He said that the EU and the IMF could choose to provide Greece with money only to cover the servicing of its loans and forcing it to pay its public expenditure costs.

S&P raises credit rating for Greece

Standard & Poor's raised Greece's credit rating to CCC from SD (selective default) after the country completed its distressed debt exchange, the Wall Street Journal reports, with stable outlook on the country's long-term rating. The CCC rating reflects the reduction and the improved maturity of Greece's sovereign debt, taking into account the significant stress Greece's economy faces. S&P said the austerity programme has implementation risks due to the deep recession, which will result in persistent social pressures. Parliamentary elections May 6 are likely to render Greece's path to fiscal adjustment more uncertain, the rating firm also warned.

Noonan denies scaring voters

Michael Noonan has rejected claims that he is trying to scare voters in Ireland into voting Yes to the fiscal treaty, saying the Irish people are entitled to know the truth, according to the Irish Times. He said his comment that next year’s budget would be more difficult if the treaty is rejected was a “considered statement”. A No vote would oblige him to reduce his forecast for economic growth for next year, he added. Enda Kenny backed his Minister yesterday warning that if Ireland was excluded from the European Stability Mechanism, the budget deficit might have to be dealt with “in an accelerated fashion”.

Austria plans 70 year bond

Austria plans to issue bonds with a 70 years maturity from next year on, Der Standard reports.  The draft law is already with the parliament. Triple A countries are currently exploring ways on how to benefit from the low interests and this is one way to insure. The head of the debt management agency Martha Oberndorfer said a 70y bond issue is in line with rising life expectancy and a refocusing on long term rather than short term debt. Austria would be the first Eurozone country to issue such long maturity bonds. The UK and the USA are also discussing even 100-year bonds.

Spanish borrowing costs to go up at auction

Reuters reports that Spain’s borrowing costs are likely to rise by more than a percentage point at an auction of three and five year bonds today, as markets are now wondering at what point will Spanish banks lose their appetite for their country’s sovereign debt. It is the first auction since the latest downgrade by S&P, to BBB+. The Spanish treasury hopes to raise between €1.5bn and €2.5bn.

Bill Clinton criticises austerity

In a speech to the Milken Institute Global Conference, Bill Clinton criticised the European crisis response strategy. The EU should stop squabbling over austerity measures, and focus on solving the deep-seated long-term economic problems. "The prescription of austerity continues to be pushed in the face of evidence that it won't work…,” he is quoted by Reuters. He called leaders to work on a strategy "of what would work in a five-year period, a 10-year period, instead of three or six months." 

Wolfgang Munchau on why long-term solutions are not what you need in a financial crisis

In his column in Spiegel Online, Wolfgang Munchau argues that long-term solution will not get us out of a financial crisis. They will only work once the crisis is over. Munchau says he is not even sure whether structural reforms will produce as much as growth as its advocates are claiming, but even if they do, the focus now should be to avoid a debt trap, which is an imminent prospect for several eurozone countries, including Spain. And the one thing that is not sustainable in the long-run is a debt trap. Munchau concludes that the structure growth initiative by Angela Merkel and other EU leaders is likely to be another diversion from the crisis.

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

Spreads rising again, euro falling.

Labour day is a bank holiday in most parts of the eurozone – usually an occasion for trade unions to press home their demands. Yesterday it turned into a day of mass protests against austerity all over southern Europe. May protests also in Greece, where several thousands marched through the streets of Athens to protest against austerity measures that have pushed their country further into recession. Even Germany’s trade union boss said this was not time for austerity, but stimulus. Reuters reports that Italian demonstrators had clashed with police in riot gear in Turin, while French trade unions organised about 290 demonstrations all over the country.

Austerity, meanwhile, continues…

Italy uses labour days to kickstart next austerity phase

At a special cabinet meeting on Monday night, the Italian government decided to implement savings cuts of €4.2bn that were recommended in a spending review, according to Il sole 24 ore. The meeting ended with the decision to entrust Enrico Bondi, an administrator who restructured Parmalat, as an extraordinary commissioner to oversee the implementation of the cuts. The article says the exercise will involve a lot of ministries and aims at improving spending efficiency of the public sector.

Fiscal Treaty campaigning started in Ireland

Campaigning for the fiscal treaty has started in Ireland ahead of the referendum on May 31. Opposition MPs from Sinn Fein and the Socialist party accused the government of holding a gun to voters' heads to force them into a Yes vote in the referendum, the Irish Independent reports, after  Finance Minister Michael Noonan issued a stark warning that refusing to accept the European fiscal treaty would result in a much tougher budget next year.  The Referendum Commission will launch its public information campaign on Thursday, which will include TV adverts and leaflets outlining the facts of the treaty. 

The austerians strikes back

In his Financial Times column, Gideon Rachman says there is no alternative to austerity. He says the market reaction to the collapse of the Dutch coalition shows that even the richest countries are not in a position to spend their way out of the crisis. There is simply no alternative to austerity as the markets won’t lend to the countries otherwise. He says even the left understands this, as Francois Hollande’s main disagreement with Nicolas Sarkozy seems to be over the speed of deficit reduction, not the fact itself, similar to the British Labour Party’s criticism of UK fiscal austerity as “too far, too fast”. “This is small-scale quibbling – masquerading as a major doctrinal dispute.”

Writing in the Irish economy blog, Philip Lane makes the following points in defence of the fiscal treaty. He writes that eurozone countries will get out of this crisis with high debt level. This can be destabilising in itself, and is best addressed by cyclically-sensitive fiscal rules. Second, high public debt and high deficits are a barrier to the development of a truly European banking system; third, each flavour of a eurobond (that might result from the fiscal pact later) would require fiscal discipline at national level; fourth, national governments are more likely to yield revenues to a central budget if national fiscal positions are stable;

and fifth, national fiscal discipline means that backstop funding can be reserved to deal with shocks rather than fiscal malfeasance. The Fiscal Treaty thus provides one pathway to a more stable European system.

More details on that “Marshall Plan”

The EU member states are preparing a growth pact of which a capital increase of the EIB by €10bn is a key element, Süddeutsche Zeitung reports. Such a capital increase would enable the EIB to grant credits over €60bn which in turn could stimulate investments of an even much larger scale. Angela Merkel supported the initiative. „It is important that we don’t fall for the idea that growth always costs a lot of money and can only be the result of expensive stimulus programs“, she told Hamburger Abendblatt.

On top of the EIB capital increase the chancellor pleads for opening the labour markets in Europe, for lowering the entrance barriers for young workers and for using money out of the EU’s structural fund in a more focussed manner. Herman Van Rompuy is planning a dinner by the end of May to prepare for an EU growth summit in June. According to SZ earlier reports were denied by the German government according to which the EU was preparing a „Marshall plan“ in the magnitude of €200bn.

EU to start discussions on implementation of Basel III rules today

Reuters has a curtain raiser on today’s Ecofin, which will discuss the difficult issue of implementing the Basel III capital adequacy rules into European legislation. Britain and Sweden are not yet on board, both insisting on more domestic flexibility to raise capital standards above the minimum if needed. France wants a single regime, also to prevent a situation in which the UK government forces London-based banks to cut back on eurozone lending to meet capital standards. The article says no agreement is likely to be reached today.

Greek retail plunged 11.8% in February

The Wall Street Journal writes that more than one in five Greeks is now jobless, and more than 60,000 retailers have closed in the past two years. On Monday, the latest data showed retail sales volumes in February plunged 11.8% in inflation-adjusted terms as consumer spending slumped and the Greek economy continued its decline. Other data showed bank lending shrinking 4% in March. The cutbacks have also led to steep reductions in pensions and public service salaries, crimping consumer spending and pushing many Greeks to the verge of outright poverty.

Samaras promises to half unemployment in three years

These are the last days of campaigning ahead of the elections on May 6, where the leaders of the main parties focus on growth and employment issues, Kathimerini reports. Antonio Samaras promised that with ND’s growth strategy, Greece would reduce its unemployment rate to less than 10% within the next three years, down from currently 21%. Samaras suggested that the economy, currently in its fifth year of recession, could grow by 9% over this period. He said that by using just half of the €14bn in European Union structural fund due to Greece, the country could boost the economy by 7% of GDP and create 300,000 new jobs. Evangelos Venizelos also pledged to focus on job creation in the private sector. Sources said that Venizelos would this week stress the need for the next government to have at least 50% of the vote as he attempts to deter traditional PASOK supporters from voting for other parties.

Irish house prices undervalued

House prices in Ireland were undervalued by 12-26% as of the end of last year according to a study of the Irish Central Bank cited by the Irish Times. The bank’s researchers used four models to assess property prices. One model found prices were 26% below what economic fundamentals in the economy would suggest. Two other models found prices were undervalued by 16-18%. A fourth model suggested they were undervalued by 12%. The Central Bank researchers analysed the period up to the final quarter of last year. More recent figures show the decline in prices continued into 2012.The authors attributed the continued decline in house prices to a lack of investor confidence, negative future house-price expectations and an uncertain macroeconomic outlook. The deleveraging in the economy has also a significant effect on the decline.

Merkel provokes FDP by proposing minimum salary

Despite the explicit objection of the FDP, Angela Merkel proposed to set up a commission with union and employers to discuss a nationwide minimum salary, Financial Times Deutschland reports. On May 1st the chancellor said she „wanted to end those white spots on the map where workers had to live on low wages“. She pointed out that she was not in favour of a national legal minimum salary but she asked that minimum salaries should be fixed for yet unregulated sectors. FTD points out that those remarks were timed with next weekend elections in Northrhine-Westphalia and Schleswig-Holstein in mind. The chairman of Germany’s trade union federation DGB, Michael Sommer, said the unions want a national minimum wage of €8.50.

New Cyprus central bank president backs off German euro exit demand

Panicos Demetriades, the new president of the Central Bank of Cyprus backed off his earlier demand on Germany to leave the eurozone in order to solve the currency union’s problems, Financial Times Deutschland reports. As an economics professor at the university of Leicester, Demetriades had written a letter to the FT a year ago in which he said: „The departure of Greece and Portugal is not the best solution to the currency union’s troubles. In my view, the rebirth of the D-Mark makes more sense.“ Asked whether this was still his view, Demetriades told FTD that he had made those comments as an „independant academic”. Demetriades will take over from the current central bank governor Athanasios Orphanides, who failed to secure political support for a second term.

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

A little better on Friday, getting worse again.

Readers of Eurointelligence would not have been surprised that Francois Hollande had done well in the first round of the French election, and that the Dutch government was heading for the rocks. The markets, however, seemed shocked, shocked by these events. Thus, the some of the most predictable events in European politics have triggered a market rout.

As of last night, French spreads were approaching 1.6%, with Spanish and Italian both above 4%. The euro held up at over $1.31, which suggests that investors took flight into the safety German bunds, the proto risk-free security in the eurozone now. Dutch spreads (the first time we ever felt the need to report them) rose to 78bp, the highest level in three years. German 10-year yields are now at a vertigo-inducing 1.558%. Oh, and equities also dropped across the board.

The big event yesterday was the offer of resignation of Mark Rutte as Dutch prime minister, the logical consequence of the collapse of his minority government after Geert Wilders decided that he can get more political leeway out of campaigning against the EU and the eurozone. Rutte offered his resignation to Queen Beatrix, who is still pondering her options.

The really funny bit about the events in the Netherlands was the attempt Jan Kees de Jager, probably Europe’s most self-righteous finance minister, to defend his country against allegations that it has joined the ranks of Greece. "There is no correlation whatsoever between the Netherlands and the countries of southern Europe. [Our] sovereign debt is in the region of 65 percent, which is way below the euro zone average," De Jager told Reuters. (He omitted to say that Spain’s debt to GDP is also below the eurozone’s average.)

Reuters also quoted an analyst from Nomura who said that the events in the Netherlands would make it more difficult to pass the fiscal pact – which may also now become a factor in the calculation of investors.

The Netherlands is now likely to head for general elections, with June 27 named as one possibility.

(Given the fragmentation of Dutch politics, and Wilder’s discovery of a new populist subject other than immigration, it is not clear at all what the outcome of a Dutch election will be. We also believe that a shift away from the austerian political centre – to both the right and the left – is likely to make the passage of the fiscal pact harder to achieve, at least without further amendments.)

Hollande and Sarkozy are luring the Le Pen’s voters

Nicolas Sarkozy and Francois Hollande were back on the campaign trail yesterday trying to win over the 18% of the French that voted for the extreme right and anti euro candidate Marine Le Pen,Lemonde.fr reports. „This is a vote of suffering“, Sarkozy said in his campaign headquarter in Pairs. „When one suffers one has the right to make the choice one wants to make“. And the conservative incumbant went on to conclude: „I tell you: I hear you.“ Hollande was campaigning in Brittany where Le Pen had come in first of all candidates in many places. „We need to listen to them (Le Pen’s voter)“, the socialist challenger said stressing that „those men and women don’t know anymore where to look for solutions“.

Marine Le Pen is the real winner, Erik Izraelewicz says

Le Monde’s editor Erik Izraelewicz thinks the major event of France’s first round is the impressive result of the extreme right candidate Marine Le Pen. „The historic performance of the National Front’s boss (more than 18% of the votes) ist he major event of this Sunday“, he writes. „With her personality, her style and her proposals the daughter of the FN’s founder has managed to dediabolize her party as she has tried to do for a couple of years. Better than Jean-Luc Mélenchon she has managed to benefit from the fears of the most vulvernable part of the population that is affected by the crisis and to benefit from a protest vote which is looking for a strong expression. Certainly she will not stop at this. Whoever wins May 6 will have to take this into account.“

Concern across Europe after Le Pen’s strong results

The strong 18% vote for France’s extreme right candidate Marine Le Pen caused concern across Europe, Lefigaro.fr reports. Angela Merkel’s spokesman said the chancellor was „preoccupied“ with the result but added that she thinks that the problem will „be solved in the second round“. Foreign minister Guido Westerwelle said he was satisfied that „two certified democrats“ had made it to the run-off thereby indirectly denying Le Pen the label of a democrat. José Manuel Barroso’s spokesperson appealed to the French not to give in to the „populist temptation and to continue to advance a Europe of peace and growth“. Also the governments of Denmark, Finland, Sweden, Austria, Luxemburg and Belgium expressed worry and unease about Le Pen’s electoral success.

Bild sees a „euro curse“ bringing one eurozone government after the other down

The mass market daily Bild is talking about a „euro curse“ that is bringing down one eurozone government after the other. Referring to Nicolas Sarkozy the paper tells its 10m daily readers: „The closest partner of chancellor Angela Merkel could be the next European top politician who falls over the crisis. It will be a weak consolation for Sarkozy that before him many others in Europe have known the same fate“. Bild then enumerates all the euro countries that saw there governments fall as a result of the crisis: Ireland, Portugal, Italy, Greece, Spain, Slovakia and Slovenia.

Bundesbank argues for strong economic immigration to Germany

In its monthly report for April the Bundesbank argues that Germany will need between 150.000 and 200.000 immigrants per year over the next years to fill jobs if the country wants to maintain its growth potential, Financial Times Deutschland writes. The German central bank also argues that child care must be improved so that people with „family obligation“ can better participate in the labour market. The Bundesbank also argues for a longer working hours. The central bank argues that scarcety in the labour market also threatens price stability since it will very likely „lead to a stronger wage growth“.

Spanish economy contracts 0.4% in Q1

El Pais reports that Spain is now officially in recession, according to the often used measure of two consecutive quarters of negative growth. In the latest economic bulletin, the Bank of Spain estimates that the quarterly rate of GDP has fallen by 0.4% between January and March, after a 0.5% fall in Q4, 2011. Official confirmation by the National Statistics Office is due within a week. Forecasts for the current year decline in GDP are for -2%. A breakdown of the data shows that the decline is due mostly to domestic demand. Exports, which held up well until recently,  decreased slightly by the slowdown in growth across Europe, while imports were down more substantially. The governing body of the Spanish central bank express dismay at the salary increase of 2.2%, given the present economic conditions.

Eurostat includes bank capital injection into deficit calculation

EU statistics office Eurostat said Ireland’s headline deficit was 13.1% last year, including some €5.8bn or 3.7% of GDP of capital injected into the two State-controlled banks. Its inclusion in the deficit figure was a surprise, writes the Irish Times.  Eurostat expressed a specific reservation that the banks’ restructuring plans have yet to be finalised and the office calculated €5.8bn of the €15.4bn injected into the two banks as a “deficit-increasing capital transfer”. The Department of Finance said the State bank recapitalisations in July, totalling €16.5bn, had been reflected in the general government debt reported by Eurostat in September so Ireland was “no worse off”. “This is simply a statistical reclassification from financial transaction to capital transfer for deficit purposes. There is no impact on our debt position.”

The underlying deficit, excluding bank bailouts, was 9.4%, compared with the 10.6% target set under the EU-IMF programme.

Third Irish union calls for 'no' vote in EU referendum

Reuters has the story that the Technical Engineering and Electrical Union has became the third union to reject the fiscal pact in an upcoming EU referendum. The union said it was becoming increasingly obvious that austerity is not working. “The right-wing agenda of Chancellor Merkel might make sense in Germany but it is a death sentence for our economy and people," Reuters quotes TEEU General Secretary Eamon Devoy as saying. The other two unions to oppose the pact are the UNITE crafts union and the Mandate retail union. Ireland’s largest union SIPTU, which represents around 10% of the workforce, is supporting the pact.

Hans-Werner Sinn says Greece and others should quit the eurozone for their own good

Helpful as ever, Hans-Werner Sinn said Greece will never restore its competitiveness while it remains in the eurozone, and the same was true of other indebted countries. He said if Greece stayed in the euro, there will be continued mass unemployment. But if they exit, all will be well. “They will see a very sudden recovery," he said, according to Reuters. Sinn also made the point that there are limits to internal devaluation.

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

The crisis is back full force.

Spanish government bond reached the highest levels of the year, breaking through 6%. The crisis is not only back, it is back in its acute version. Reuters went so far as to report that investors expect yields to rise towards 7%, unless the ECB stopped the trend through large-scale bond purchases. The bond markets yesterday experienced massive risk aversion, with German yields falling to an all-time record low of 1.628%, though opening slightly higher this morning.

Spain also announced yesterday that it will be raising between €3.5-5.5bn in 12 and 18 month treasury bills, and two-year and ten-year bonds.

Expectations that Spain requires a bailout are now rampant in the markets, but continue to be officially denied. The latest jitters followed data showing record borrowing by Spanish banks from the ECB.

This morning, Spanish spreads reached 4.6%, while Italian spreads were at 4.1%. Reuters quoted an analyst as saying that ECB bond purchases could prove counterproductive: "The problem ... is that the bigger the position the ECB builds in a sovereign's debt, the greater the private sector holders are likely to perceive their probability of default."

A further problem was yesterday's report that the G20 may not raise significant amounts of new funds for the IMF.

Spain responds to crisis with more austerity

When in a hole, one should stop digging. Spain, did just the opposite when its government responded to market jitters with the announcement that it will seek more spending curbs. The latest story in this respect is that the Spanish government wants to bring forward to next month the imposition of budget cuts on the autonomous regions.

Italian government to revise 2012 forecast

Italian 10-year yields also rose, with spreads at 4.1% this morning. Not as bad as Spain, but going in the same direction. Reuters reports from Rome that the Italian cabinet had been due to meet yesterday to agree on a downward revision on the 2012 growth forecast. Gianfranco Polillo, under-secretary in the economy ministry, said the government would lower the previous forecast of an 0.4% contraction, but the forecast would be better than the European Commission's forecast of a 1.3% contraction.

Eurozone exports grow

Eurozone exports were up 11% in February, to reach a surplus of €2.8bn, driven by French and German exports of cars and machinery. Imports rose 7%, mainly due to demand for oil and gas during the cold days of February. On a seasonally-adjusted basis, the trade surplus was €3.7bn.

Germany rebuffs Sarkozy’s demand for a debate on the ECB, while Hollande joins in

Nicolas Sarkozy’s demand to have a debate on the ECB’s role in promoting growth in the eurozone was rebuffed yesterday in Berlin, Les Echos reports. „It is the core belief of the federal government that the role and office of the ECB be independent of encouragement and assistance from politics. And that's well known in Paris", Angela Merkel’s spokesman Steffen Seibert said. According to Le Monde Sarkozy’s demand represents a victory for Henri Guiano, the president’s eurosceptic speechwriter who in the past had been overruled by Sarkozy in order to be seen as close to Germany.

Papers point out that by starting to draw the ECB into the election campaign Sarkozy breaks the agreement he struck with Merkel and Mario Monti according to which the three leaders would refrain from any public advice to the ECB. Sarkozy`s advisors insisted that this was not about asking for changing the treaty but rather for a debate on monetary and exchange rate policy and how the two could be at the service of growth. According to Le Monde Francois Hollande ridiculed Sarkozy’s demands by saying that he had been in charge for five years and that it was a bit late now to put forward these proposals. Hollande joined the debate by saying on Monday the ECB should have intervened “massively” by lending directly to eurozone countries to save Greece and counter the sovereign debt crisis, according to the FT.

UMP chairman Copé says all pro reform Europeans must support Sarkozy

Jean-Francois Copé, chairman of Nicolas Sarkozy’s conservative UMP, says that all Europeans interested in a reform oriented France cannot but support the outgoing president. „Europe must hope for a victory of Nicolas Sarkozy“, Copé told Financial Times Deutschland. The president was „a guarantor“ of economic reforms that would be endangered by a victory of Francois Hollande. „France will de facto change because we will reduce public expendit ure. Public money has to be concentrated on those who really need it“, the UMP chairman who is tipped as a presidential candidate for 2017 said. Copé also warned that in case of a victory Sarkozy would become a more difficult EU partner than in the past. Copé gave no details but he did not rule out that in very controversial and crucial issues for France Sarkozy would return to Charles de Gaulles obstructionist policy of an empty chair in the sixties. „Everything is possible, but that is not our goal. Our goal is to succeed by having dialogue.“

Martine Aubry mentioned as Hollande’s prime minister

Since a victory of Francois Hollande currently appears to be the most likely scenario the French press is full of speculation about who would get what post in a Socialist government. According to Le Monde and Les Echos Martine Aubry would be the front runner for becoming prime minister if Hollande wins with a clear margin in the second round on May 6 and if the extreme left candidate Jean-Luc Mélenchon has done well in the first round next Sunday. The reason fort hat choice would be her strong leftish credentials since she is seen as the architect of the 35 hours week when she was labour minister in the government of Lionel Jospin from 1997 to 2002. Should Hollande win by a narrow margin only more consensual candidates like Jean-Marc Ayrault, the Socialist’s chief whip in parliament who is also perfectly fluent in German might make it. Others mentioned in this category are Michel Sapin, a veteran socialist and former finance minister under Francois Mitterrand.

Moody’s replies to Francois Hollande

Moody’s yesterday took the highly unusual decision to get involved in the French election campaign by contradicting Francois Hollande, Le Figaro reports. The Socialist candidate had said on Sunday that he expected Moody’s follow up his election victory on May 6 by lowering its Triple-A-rating that the rating agency had put under negative watch in February. Hollande insisted that by doing so Moody’s would not sanction him or his programme but the bad management under his predecessor Sarkozy. In a statement yesterday afternoon Moody’s said its February decision to put France’s rating on a negative watch did not at all imply that any decision was imminent. Le Figaro explains that rather Moody’s will decide whether to keep or change the country’s rating within 18 months starting in February.

Merkel stops attempts to prevent dissenters to speak in Bundestag

Reacting to the hostile reactions of many parliamentarians and the press Angela Merkel told her party’s chief whips Volker Kauder and Peter Altmaier to scrap the planned rules according to which only parliamentarians nominated by the party would have been able to speak in Bundestag, Bildreports. The plan was a reaction to the fact that in several discussions on euro rescue decisions dissidents from Merkel’s coalition had taken the floor to express their dissent which embarassed and angered the leadership of the three coalition partners. Commenting in Bild Ralf Schuler lauded the decision that would prevent the creation of „block parties“ in Bundestag, a term used for parties in the „Volkskammer“, the parliament of the German Democratic Republic.

Zoellick: EU preoccupied with firewall debate, focus better on support for reform efforts

In the FT Robert Zoellick writes that Europe’s fixation on the firewall debate is distracting from the fundamental issue on what the EU should do to help Italy and Spain retain political support for their reforms.  

Zoelick suggests: “Instead of quarrelling over firewalls, Europeans should add just a fraction – say €10bn – to the capital of the European Investment Bank. Under current conditions, the EIB may actually have to reduce lending. Instead, the EIB could use more capital to borrow and then invest to support structural reforms, showing Spaniards and Italians that their sacrifices will draw productive investments.”

Poverty soaring in Greece

Poverty levels have increased sharply in Greece since the crisis expanded. In 2010, before the latest series of government cutbacks, almost 28% of Greeks faced poverty and social exclusion, and is estimated to hit 40% if unemployment continues to rise this year. Family support networks, a mainstay for many Greeks, are under increasing strain, with one in five workers unemployed, pensions cut by around 30% and savings steadily eroding.

To prevent malnutrition among the most vulnerable – children, pensioners and the homeless – volunteer organisations have become critical. As the scale of the crisis mounts, Greek anti-poverty groups are expanding their activities, as featured by the FT.

It was always a fallacy that the three-year LTRO would give governments about two or three years’ time. That this is not so is now becoming obvious. The Spanish spreads are back up at 4%, and are also dragging up Italian spreads close to that level. Another acute phase of the crisis is returning, as the markets are slowly realising that an LTRO has not really changed the underlying parameters of the crisis. The latest increase in spreads was triggered by a Spanish bond auction on Thursday,   when a debt auction yielded just €2.6bn, with a target range of €2.5-3.5bn.

Mariano Rajoy now wants to step up austerity to calm the markets, by seeking a further €10bn in what he called efficiency savings in the health and education sectors. He is due to spell out the plans tomorrow. (Much of the news coverage on this story suffers from an internal contradiction. The headlines say: more austerity to calnm markets, but later in the story it emerges that austerity is what the markets are most afraid of.)

Bloomberg reports that Charles Dallara, head of the Institute of International Finance said Europe was focusing too much on austerity, and that his threatened the economic recovery. He said it was essential for the European to strengthen their firewall, and that that progress on this front had been insufficient.

Reuters Breakingviews on the hard options facing Spain

Reuters Breakingviews says Spain and the eurozone are heading for another difficult period. The overshoot in the deficit target may have been the trigger for the latest round of nervousness, but markets are worried about growth, and the rising social tensions, with youth unemployment now over 50%. The article quotes an estimate by Citigroup which says that Spanish banks could stand to lose another €200bn under a distress scenario. A full EFSF programme is too large, but a partial programme to deal with the banking system is more likely.

(Even that may overburden the EFSF/ESM. We come to a similar conclusions as Citigroup, as the Spanish housing market has much further to fall. Austerity is accelerating the Spanish crisis. We believe that the country is heading for a programme that will overburden the ESM, and simultaneously not solve the problem, as it will force an even larger fiscal adjustment.)

FT demands growth agenda for eurozone

The Financial Times calls for a eurozone growth agenda in an editorial, one that includes demand management, not just supply-side reforms. First, the article says, Europe must increase its level of investment to compensate austerity. Second, the eurozone must do more to support the internal devaluation in the periphery through co-ordinated fiscal policies to stimulate consumption in the core. Third, there is room for further monetary easing.

(Dream on. The ECB is not going to cut rates, unless pressure was rising further, and there is no chance of a coordinated fiscal policy, as everybody is tightening, albeit to varying degrees. There is some limited support from Germany’s economic strength and a likely inflation overshoot – but that is not going to produce a eurozone-wide stimulus.)

Head of Egan-Jones rating agency expects large transfers

The guy is without a doubt a maverick, but he is the head of the world’s No. 4 rating agency, and his track record has been pretty good. He told Frankfurter Allgemeine in an interview that the situation in Portugal was unsustainable. He also predicted another Greek programme, and a total loss by investors of 95%. Since this disaster will ultimately require massive transfers from the north to the south –his rating agency has downgraded Germany.

Portuguese bank’s borrowing from ECB hits new record

Portuguese banks' borrowings from the ECB jumped to a new record in March as they took advantage of its LTRO offer of cheap long-term funds, according to Reuters. The Bank of Portugal said on its website on Monday cumulative borrowing at the end of last month rose 18% to €56.3bn from €47.5bn in February and greater than the previous record level of €49.1bn in August 2010.. The March dat a reflected Portuguese banks' take-up of the February LTRO offer. According to Bank of Portugal head Carlos Costa over 80% of ECB money borrowed by Portuguese banks was now three-year funding.

Greece extended deadline for debt swap again

Greece extended a deadline for a second time on Thursday for remaining bondholders to accept a debt swap, giving Athens a little more breathing space to formulate a response to investors who have refused to sign up for swap deal, Reuters reports.  Athens gave investors on Thursday until April 20 to join in. Then the government is left with three options: continue to service the bonds, default and trigger litigation, or come up with a new offer while ensuring fair treatment for those that accepted the swap.  Greece needs to decide what it will do by May 15, when a €450m bond expires. Greece said earlier it cannot afford to fully pay holdouts and that the swap deal that domestic-law bound bondholders were forced to accept last month is the best available offer.

Main parties are hitting new lows in polls ahead of official campaign start

The popularity of Greece's two mainstream political parties fell to a new all-time low, according to poll results Monday, just days before the official start of the campaign for the country's national election. The conservative New Democracy and socialist PASOK combined would command together just 32.4% of votes, while six other parties would also be represented in parliament. The newly formed, right-wing Independent Greeks would command 7%, benefiting from languishing support for New Democracy. 10% said they wouldn't cast a vote or 19.2% haven't decided what they are going to vote. Greece will dissolve parliament on Wednesday, paving the way for the official start of the campaign for the country's national election thereafter, according to Dow Jones. Elections are expected to be held on May 6.

Greek parliament approved new money for parties

Yesterday, the Greek parliament narrowly voted Monday to grant the main political parties a 29-million-euro cash injection ahead of elections but the issue caused a significant rift, writes Kathimerini. The main parties owe more than €100m in unpaid staff and bills, and also owe large amounts to Greece’s main social security fund, IKA.

Hollande announces finance audit if elected

Francois Hollande said on Thursday he would order an audit of public finances if elected in May, Reuters reports.  The move appeared designed both to steal some of Sarkozy's show and to prepare the ground for austerity measures that could be blamed on his predecessor's handling of France's debt and deficit. It also came after a cover story in the Economist weekly entitled "France in Denial" made waves in political circles by accusing both leading candidates of lacking serious ideas for tackling the country's economic and fiscal problems.   

Sarkozy catches up in second round poll, Le Pen popular among the young

An opinion poll published today by Le Figaro suggests that Sarkozy is keeping its lead in the first round with 28.5% and increases his chances in the second round, whith Francois Hollande receiving 53% (-1pp) of the votes against Nicolas Sarkozy with 47% (+1pp).  Marine le Pen, meanwhile, is becoming frontrunner among young voters, aged 18-24, with 26% support in the latest polls (up from 13% in Q4 2011) Le Monde reports. 

German Pirates now ahead of the Green

The new Pirate party in Germany is shaking up the political landscape to such an extent that the Social Democrats and Greens have lost their polling lead over the current coalition. This is no real consolation for Angela Merkel, as this reflects a reposition among the Left. Der Spiegel has a Forsa poll out this morning according to which the Pirates have overtaken the Greens (with 13% vs 11% respectively). Merkel’s CDU/CSU has 36%, SPD 24%, and the Left 8%, and FDP 5%. This result suggests two most likely outcomes – a Grand Coalition under Angela Merkel, or a coalition of SPD, Greens and Pirates. The latter, however, would not have a majority in the current poll if the FDP were to make it into the Bundestag (something we expect to happen despite its current crisis).

Adam Posen says Germany’s unemployment rate to fall below Nairu

This is an interesting comment made by Adam Posen of the Bank of England about his estimates of the German natural rate of unemployment. According to Reuters, he said during a conference in the US that German unemployment will continue to fall from a most recent level of 6.7% to below the Nairu of about 5%. That fall would generate some inflation, he predicted, which will make things a little difficult for the ECB. Posen also expects faster wage growth in the next couple of years. Eurozone average unemployment, however, is likely to stay high.

Boeri and Garibaldi dismiss Monti’s labour reforms

Writing in Lavoce, Tito Boeri and Pietro Garibaldi gave a critical assessment of the recently agreed Italian labour reforms. The compromise maintains the principle of easier dismissals, but with fewer restrictions on the abuse of temporary contracts. They argue that the compromise will not resolve the main issue – the dual labour market, and it will increase the tax wedge and the complexity of the dismissals procedure. They conclude that it will take for more courage to open up the labour market, which will now have to be done in another reform programme.

Wolfgang Münchau on the madness of the Wolfson prize

In his FT column, Wolfgang Münchau has a go at the Wolfson prize, which asks this year how to coordinate a eurozone break-up in best possible manner. Munchau says the economic illiteracy of eurozone policymakers is matched only by the political and legal illiteracy of the economics community. A breakup of the eurozone may still be possible, he argues, but there are no friendly and cooperative ways to attain such a catastrophic outcome. Given the necessity to announce an exit relatively quickly, the options are seriously limited. If a country decided to break the treaty, and not leave the EU, a unilateral exit would drown the EU in innumerable law suits. The other options are a treaty renegotiation or an EU exit, but either option would take too long to negotiate and ratify for this to be practical, since a pre-announced changeover would produce capital flight that would be hard to stop – even with emergency legislation. By assuming all these problems away, the economics community has done itself no favours, and cemented their irrelevance in this debate.

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

Just look at those spreads.

As the news flow fizzles out, this will be our last briefing before the Easter break. The next briefing will be Tuesday, April 10.

Reuters has the story that Francois Hollande has toned down proposals for a revision of the fiscal treaty, and now accepts the principle of balanced budgets, but instead wants to supplement the treaty by adding new instruments to stimulate growth. Clarifying his position on eurobonds, Hollande is quoted as saying that he wants to add "the capacity for Europe as a whole to issue bonds, not to mutualise sovereign debt but to finance new development projects".  The article said it would now be possible to seek a compromise with Germany, and would be consistent with European Commission proposals for "project bonds", due to be reviewed at the June European Council. The article said that officials in Berlin were increasingly relaxed about Hollande's plan.

(This development tells us that the Hollande camp clearly expects to win the elections, since this will be the first important issue they have to deal with.)

Another big Spanish auction today, but interest rates are rising

There are bond auctions in Spain and Portugal this week, with Reuters predicting that interest rates are likely to rise as the Spanish austerity budget fail to calm investors’ nerves. The Spanish Treasury will sell up to €3.5bn, while Portugal will offer 18-month T-bills for the first time since the start of the EFSF programme. The article says the Spanish Treasury accelerated issuance plans in Q1, taking advantage of the LTRO. Demand for today’s auction should remain strong, but borrowing costs had already risen on the secondary markets, as investors remain concerned about the country’s future. As for Portugal, investors are doubtful whether the country can return to the bond market next year, as scheduled on under its programme.

Swap offer for Greek foreign law bonds ends today

Greece is unlikely to pay off investors of foreign law bonds due on May 15, an event likely to trigger CDS, according to Dow Jones. Greece is expected to refuse to pay bondholders who did not tender their bonds as part of the €206bn debt restructuring plan, with the backing of the euro-zone partners. The deal has already achieved a 97% participation rate.  But holders of slightly over €6bn of Greek bonds under foreign law have not yet subscribed to the deal. The swap offer is ending today at 1900 GMT.  The main industry body for CDS--the International Swaps and Derivatives Association—said on Tuesday that Greece's CDS could be triggered for a second time, this time for failure to pay.

New Greek bonds are trading at depressed levels and some investors may not be keen on buying new Greek bonds, ensuring market access for Greece stays shut for longer. Standard and Poor's Corp. said last week that Greece will likely have to restructure its new bonds as well.

Outstanding debt towards suppliers continues to rise

The outstanding debt that the state has to third parties (suppliers, construction companies etc) climbed to €6.3bn at the end of February, from €5.7bn at end-December, the Greek Finance Ministry announced on Tuesday according to Kathimerini.

Political rent-seeking continued despite PM’s call for restraint

Greek lawmakers have submitted more than 90 proposed amendments by Tuesday night, despite the newly imposed clearing requirement from the PM’s office.   Dozens of deputies, chiefly from socialist PASOK and conservative New Democracy, have submitted a raft of proposed amendments, ranging from exemptions from public sector wage cuts to the granting of fishing licenses to all small boats. Government sources told Kathimerini that all proposed changes were likely to be rejected. The same sources said that after having strong words with his ministers, Papademos was determined to put a stop to attempts by MPs trying to secure preferential treatment for supporters. The draft bills from the ministries of Interior, Development, Transport and Labour need to be voted through Parliament by next Wednesday if snap polls are to be held on May 6, as expected.

425 economists submit plans for orderly exit from the eurozone

In an attempt to win the £250000 of the „Wolfson Economics Prize“, 425 economists from all over the world submitted long and detailed plans for the orderly exit of a eurozone member, Financial Times Deutschland and Frankfurter Allgemeine Zeitung say. A jury composed of five economists – Charles Goodhart, Francesco Giavazzi and Manfred Neumann, Derek Scott, and Jean-Jacques Rosa -  has selected five finalists of which the winner will be announced on July 5. The prize’s sponsor Lord Wolfson, a member of the Conservative party and head of UK clothing retailer Next, said he wanted to make sure that the likely exit of a euro member would happen in an orderly and structured way without causing any panic on the financial markets. The youngest participant is a 10 year old boy from the Netherlands.

Czech Republic promises to respect rules of the fiscal pact

Receiving Angela Merkel in Prague, the Czech prime minister Petr Necas promised his country would respect the rules of the fiscal pact get its deficit below 3.0% despite the fact that it had not signed the treaty, Süddeutsche Zeitung reports. Merkel stressed in Prague that she had not put any pressure on Necas to respect the pact.

„Pirates“ would get 12% in German national elections

According to the most recent polls, the „Pirates“ would get up to 12% if there was a national election in Germany now, Spiegel Online writes. With such a result they would dispose of 70 deputies in Bundestag and thereby probably undermine any chances of the non-communist left (SPD and Greens) to form a coalition. But the success is also making members of the party ill at ease. The „Pirates“ have so far succeeded to enter the parliaments in state elections in Berlin and Saarland. However there is little programmatic content besides internet freedom, no party organization or leadership to speak of and members of the party fear they will be unable to fulfill the huge expectations some people have in them. Analysts say the astonishing results of the „Pirates“ reflects a general mistrust of the German public with the countries established parties.

Ireland remains highly vulnerable to economic girations

The report by Ireland’s fiscal council is out now. One of its more interesting findings rests on a simulation that shows thethe sensitivity of budgetary forecasts to changes in the macroeconomic

outlook. The reports says that in the event that a shortfall of nominal GDP growth by just 1% over 2012-2015, “the debt to GDP ratio would not stabilise by 2015 without additional discretionary measures. In any event, debt levels will remain high over the medium-term and vulnerable to negative growth shocks.”

Wolfgang Proissl asks central bankers not undermine the LTRO’s effectiveness now with loose talk about exit strategies

In a comment for Financial Times Deutschland Wolfgang Proissl warns central bankers not to undermine the effectiveness of the 3y LTROs with premature loose talk about an ECB’s exit. Proissl argues that the ECB is right to start preparing for an exit internally since the operation will be highly complicated and risky contrary to what Mario Draghi claims publicly. But right now is the wrong moment to undermine market confidence because of the still highly fragile situation in the eurozone’s crisis countries, particularly in Italy and Spain.

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

Italian and Spanish spreads are rising, but note that the 1yr Euribor-Ois is now below 100 – a sign that the stress in the banking sector is dimishing.