Spain’s 10-year spread has risen to above 500bp this morning for the first time in the eurozone;

The big news yesterday were the announcement of new elections in Greece, and the extraordinary statement by the Greek president that the country may already be subject to a run (something that can easily become a self-fulfilling prophecy). As we are writing our newsbriefing this morning, the Spanish 10-year rose to over 500 basis points for the first time. The eurozone crisis is once again in a highly acute phase.

Greece is likely to hold elections on June 17, after party leaders failed on Tuesday to agree on the formation of a government despite efforts by President Karolos Papoulias to broker a last-ditch deal. After barely two hours, the meeting was over. Kathimerini reports that Democratic Left leader Fotis Kouvelis had put forward a proposal to break the deadlock during the meeting. SYRIZA leader Alexis Tsipras had argued that it was impossible for his party to form a government with PASOK and ND as their leaders, Evangelos Venizelos and Antonis Samaras, had given the EU and IMF written pledges to keep to the terms of the loan deal. Kouvelis suggested this could be overcome by Venizelos and Samaras giving fresh pledges to back the new government’s efforts to negotiate a gradual disengagement from the EU-IMF bailout. But the proposal was not backed.

Almost immediately after the meeting, Greek party leaders were in front of cameras and supporters in spirited pre-election campaign mode.  "The message you sent is clear: 'Yes' to the euro, 'No' to those policies which devastate the Greek people," Reuters quotes Samaras.   New Democracy sources told Kathimerini that during the campaign Samaras would focus his attacks on Tsipras rather than Venizelos. The conservatives believe that they have to turn the campaign into the question of staying in the euro or returning to the drachma. They will attempt to convince voters that SYRIZA’s economic policies would lead to Greece having to leave the eurozone.

Has the Greek president invited his countrymen to take part in a bank run?

He spoke the truth, but when it comes to the likelihood of bank run, you politicians to shut up.

It emerged yesterday that George Provopoulos, head of the Greek central bank, told President Karolos Papoulias that Greeks have withdrawn as much as €700m and the situation could worsen,Bloomberg reports. “Provopoulos told me that of course there’s no panic but there’s great fear which can evolve into panic,” Papoulias said. The ECB needs to step in to guarantee the deposits of the regional lenders to fend off contagion, Yannis Ioannides, economics professor at Tufts University, told Bloomberg TV.

Leaving the euro would be a “catastrophe” for Greece, with the risk of a run on banks, former Greek Prime Minister Costas Simitis is cited by Bloomberg. Banks would have to close for at least three months while preparations, including printing a new currency, are made, Simitis said, citing the views of “experts.”

In another development, the caretaker government in Athens decided to service the interest payment on the holdouts. The government this is not a decision, merely an acknowledgement that it is not in a position to take a decision.

Cyprus likely to tap the EFSF/ESM

Cyprus’s banks sustained huge losses as a result of the Greek debt write-down, with the two biggest, Bank of Cyprus and Laiki now being called upon to proceed with significant recapitalization measures. Bank of Cyprus is already close to its goal, though Laiki is still quite far off the mark, as it needs €1.8bn in fresh capital. Newly appointed Finance Minister Vassos Shiarly said the government was ready to discuss ways in which it could contribute, if the need arises. 

A €2.5bn loan from Russia has largely covered Cyprus’s financial needs for 2012, but this money is insufficient to bolster the banking system as well if the need arises. But the fiscal deficit is already behind target and Shiarly had to announce new measures to keep the deficit below 2.5%.  Given these developments, the likelihood of Cyprus having to resort to a support mechanism to ensure the domestic banking system has the necessary capital is no longer just theoretical, writesKathimerini.

Hollande insists that the fiscal treaty must be renegotiated

In his first meeting with Angela Merkel after being sworn in as president Francois Hollande insisted last night that the fiscal pact be “renegotiated”, Les Echos reports. According to the new French president the aim is “to integrate a growth dimension” into the treaty. “Our method is to put all ideas on the table and to see afterwards how they can be legally implemented”. By staying firm on his request to actually renegotiate the treaty that has already been ratified by several euro member states and not accept simply adding growth enhancing measures Hollande was tougher with the chancellor than many expected. But the president’s calculation appears to be that the chancellor is significantly weakened by her recent electoral defeats in state elections. Also Hollande warned “without growth we cannot respect the aims that we have fixed ourselves regarding the debt and the deficit”. As a candidate Hollande has repeatedly promised to bring the deficit to 3.0% in 2013 and to present a balanced budget by 2017. But the commission last Friday warned that without drastic additional measures the French deficit would be 4.2% next year.

France trails Germany in terms of the growth rate

New Eurostat figures showed a considerable difference between France and Germany in terms of growth rates, Le Figaro reports. While Germany grew by 0.5% in Q1 of 2012 the French rate was 0% for the same period. Germany pushed up the eurozone growth to 0%. However, certain experts caution that the German rate is no precursor to strong and sustained growth in Germany. Italy’s economy shrank by 0.8% and Spain by 0.3% in Q1 2012 according to Eurostat.

Hollande names Ayrault as prime minister

Francois Hollande yesterday nominated the former the Socialist’s former chief whip in parliament Jean-Marc Ayrault prime minister, Le Monde reports. The nomination of the former German teacher who is considered to be a pragmatic social democrat will reassure those in Germany and Europe who had feared a traditional left wing politician such as the Socialist’s former chairwoman Martine Aubry. Hollande and Ayrault are working on the government portfolios which will be attributed and announced today. According to Les Echos the finance ministry will either go to Michel Sapin, a former finance minister already under Francois Mitterrand, or to Pierre Moscovici, a former Europe minister in Lionel Jospin’s government. The foreign ministry could go to former French prime minister Laurent Fabius or to Moscovici if he does not get finance. According to Les Echos, Aubry may get a big ministry for education, research and culture.

ECB and Germany fight about €35bn of guarantees

The ECB and Germany clashed in Monday night’s eurogroup meeting on what to do with €35bn of guarantees the EFSF had given to the ECB during the time of the Greek PSI, when the ECB was no longer able to accept Greek government bonds as collateral, Financial Times Deutschland reports. Germany and the EFSF argue that the ECB should repay those guarantees since the PSI had been successfully implemented and only a handful of Greek bonds were still rated as selective default (SD). The ECB, however, refers to a treaty clause that says that it may keep the guarantees as some of the Greek SD bonds are still around. The ECB also argues that the uncertain situation requires keeping the guarantees. Germany thinks the ECB’s stance is “disproportionate” while the central bank says Germany is acting under pressure of the Bundestag.

Spain involves ECB in bank programme

The Spanish government has become so desperate that it asked the ECB to get involved in the clean-up of the banking sector. El Pais said the decision was evidence that the markets are distrusting the government’s banking reform. Luis de Guindos confirmed that the ECB had “shown interest” (yeah, right). The markets, and apparently also the eurogroup, distrust the Spanish bank data, and the idea to involve the ECB is to give credence to the published data. El Pais points out this exercise is likely to fail just as the previous government’s stress tests failed to bring calm to the markets. (We think the ECB should tread with caution here. If the ECB becomes part of a general exercise in obfuscation, it, too, gets tangled up in the markets’ distrust.)

Chaotic selection process of next EBRD president

According to Financial Times Deutschland the election of the next EBRD president is totally open. The euro and EU finance ministers were unable to agree on a common candidate on their meetings Monday and Tuesday. As a result there will be five European candidates at Friday’s vote of the 65 EBRD shareholders: Next to the outgoing German president Thomas Mirow, who was proposed by Russia and Bulgaria but who is not supported by his own government, there will be candidates from France, the UK, Poland and Serbia. Given that the victor has to have a double majority of 33 of the 65 national representatives and of the countries’ capital shares in the bank it is impossible to predict the outcome. Despite the fact that the EBRD is dominated by Europeans it may now be non-European shareholders such as the US, Russia or Australia who will effectively decide who will head the London based institution. Should Mirow win the vote it would be an embarrassment for Angela Merkel who may then face headwinds getting Wolfgang Schäuble accepted as the successor to Jean-Claude Juncker as the eurogroup’s chairman.

Fitch wants another LTRO III

Given that the LTRO has failed to solve the problem, as some naïve investors, and virtually all politicians had hoped, it comes as a surprise to us that Fitch now wants another one, at least according to Reuters. The article quotes an investors survey, and says that Fitch believes another round may be necessary because many banks will not have deleveraged in time for the repayment of the second LTRO. The survey says 38% of respondents thought a third LTRO would be necessary. Additionally, 25% of investors said they would not invest in any European senior  unsecured bank debt.

John Kay says the economists’ notion of credibility is not compatible with democracy

This is a brilliant column by John Kay, who argues that the way economists and policymakers are defining credibility is not compatible with modern democracy:

„The elevation of credibility into a central economic doctrine has turned a sensible point – that policy stability is good for both business and households – into a dogma that endangers stability. The credibility the models describe is impossible in a democracy. Worse, the attempt to achieve it threatens democracy. Pasok, the established party of the Greek left, lost votes to the moderate Democratic Left and more extreme Syriza party because it committed to seeing austerity measures through. Now the Democratic Left cannot commit to that package because it would lose to Syriza if it did. The UK’s Liberal Democrats, by making such a deal, have suffered electoral disaster. The more comprehensive the coalition supporting unpalatable policies, the more votes will go to extremists who reject them.“

Robert Skidelsky on what Keynes what have done

In a commentary in the FT, Robert Skidelsky compares the austerity policies of the EU with the Versailles Treaty. He has dug out a quote by Keynes: “If they do sign, they can’t possibly keep some of the terms, and general disorder and unrest will result everywhere.” He says that there is solution to the eurozone crisis without growth.  This might mean debt restructuring, or project bonds, or both, but it has to be done. On Greece, he said, an exit with a controlled devaluation, cannot be avoided.

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

Still getting worse. Euro now at $1.27, Spanish spreads approach 5%.

Evangelis Venizelos is in talks with SYRIZA and ND today, after he gained the support on Thursday from Democratic Left leader Fotis Kouvelis – a pro-European critical of the bailout, Kathimerinireports. Kouvelis, who strongly favours Greece remaining within the euro, won 6.1% of the vote, and his 19 parliamentary seats make him a king-maker for a coalition government. Kouvelis said “I propose the formation of an ecumenical government made up of trustworthy political figures that will reflect and respect the message from the elections. This government’s mission, which will have a specific program and time frame that will last until the European elections of 2014, will be twofold: firstly, to keep the country in the European Union and euro and, secondly, to gradually disengage from the [EU-IMF] memorandum.”

A PASOK-ND-Democratic Left administration would have a total of 168 seats, but there are fears that SYRIZA’s growing popularity, along with opposition from the other parliamentary parties, all opposed to the EU-IMF memorandum, would make governing difficult. SYRIZA’s initial reaction suggests that it is unlikely to join a unity government. If new elections were held, SYRIZA is likely to win more votes.  An opinion poll conducted by Marc for Alpha TV indicated on Thursday suggests that SYRIZA would come in first. It put SYRIZA in first place on 23.8%, followed by ND on 17.4, PASOK on 10.8, Independent Greeks on 8.7, KKE on 6, Chrysi Avgi on 4.9 and Democratic Left on 4.2.

SYRIZA leader Alexis Tsipras also seem to have softened his stance when he wrote to EU officials on Thursday arguing that the election result had taken away political legitimacy from the memorandum and that the terms of the agreement should be “re-examined”, rather than rejected.

Another black hole for Bankia

Ooops, they found another hole of €2.5bn in the accounts of Bankia. As El Pais reports this morning, Bankia’s auditors noted that Bankia booked estimated future tax credits  as a real assets to the tune of €2.5bn. But to save these taxes, Bankia would need to achieve a certain level of savings, which the auditors do not think as realistic. The auditor said without these savings, the money will have to be charged against equity of BFA, Bankia’s holding company. The meaning of all of this is that Bankia will need more equity capital on top what is being pledged by the Spanish government. The new CEO said he would present a restructuring plan for the bank by the end of June.

The blame game starts in Spain

The Spanish government spent most of the day yesterday trying to blame somebody else for failure of Bankia, according to El Pais. Not a word of criticism of Rodrigo Rato, the former IMF chief who led Bankia into a state of near-bankruptcy, but instead the PP criticises Miguel Angel Ferandez Ordonez, the central bank chief, for having forced Caja Madrid to merge with Bancaja and several other smaller cajas in 2010. (The situation is, of course, very different. Bankia was essentially controlled by the PP, who has been appointing most of its council members. Passing the blame onto other is absurd in this case, and it shows the mindset of what has turned out to be one of the most incompetent governments in the eurozone. In a few months, Rayoy managed to mess up an ECB nomination, trigger a bond market attack because he postponed his budget until after the Andalusia election, and now mismanages the Bankia situation.)

Spain is playing hard to get

We cited an El Pais story yesterday, according to which the EU Commission was ready to grant Spain an extra year to get the deficit down to 3%. The FT has more details of this story this morning. The offer includes a quid-pro-quo,  an independent audit of the restructuring plan for its banks. The Commission also wants to strengthen fiscal control of the autonomous regions. The article says the Spanish government was divided, as some members feared that such a delay would be perceived in markets as evidence of creeping fiscal indiscipline.  The FT quoted an EU official as saying: “I do not understand the Spanish government as wanting an additional year.” The paper said it was likely that Spain would accept the key demand of external supervision of the restructuring of the banking sector.

This Friday, the Spanish government will also announce another bank restructuring plan to force banks to write off another €30bn in property losses. That will bring total provisions to €120bn, about 40% of the entire portfolio of real estate assets. The Bank of Spain classified €184bn as problematic at the end of last year.

Record tax revenues for the German government

The German government’s tax revnues will be higher in 2012 and 2013 than ever before, Süddeutsche Zeitung reports. According to independent tax estimates the revenues in 2013 will above €618bn. Compared with the past projection from last fall the municipalities, länder and the federal government will have additional tax revenue of around €30bn. The reasons are the good economy, low unemployment and wage rises. For Wolfgang Schäuble, the good figures are a mixed blessing, as SZ points out. Because of the elections next year many members of his coalition, especially within the FDP, will want tax breaks.

Merkel says categorically no to debt financed growth measures

In her government address ahead of her first meeting with Francois Hollande next Monday and of next week’s G8 summit, Angela Merkel categorically ruled out all debt financed growth measures, Frankfurter Allgemeine Zeitung writes. “Growth financed by debt would bring us back to the beginnings of the crisis”, the chancellor said. Merkel said that debt reduction and enhancing growth and jobs were part of the strategy to overcome the sovereign debt crisis. But growth measures only made sense if they were based on structural reforms. The opposition SPD and the Greens said they would only vote for the fiscal pact if more was done for growth.

Hollande prepares his stand-off with Merkel by meeting Van Rompuy and Juncker

Le Monde reports on how Francois Hollande is already in the middle of the euro crisis management before even having taken over his office by meeting with Herman Van Rompuy and Jean-Claude Juncker ahead of his crucial encounter with Angela Merkel next Monday. The paper points out that by meeting Van Rompuy and Juncker, Hollande wants to drive home the point that he wants to end the impression the eurozone is run by a Franco-German directorate and give more weight to the Euro institutions and their representatives. The report also stresses that Hollande met with the European Council president and the eurogroup chairman before even scheduling a meeting with José Manuel Barroso, who is seen by the French socialists as having been very close to Nicolas Sarkozy. Meanwhile in an interview the former French prime minister Michel Rocard warned Hollande against provoking “a clash” with Merkel on the fiscal pact, Lemonde.fr writes. He urged the incoming president instead to engage into patient negotiations with the German chancellor.

Hollande wants to tax the rich as of June

In a symbolic measure destined to convince the left leaning voters that he is their man, Hollande wants to raise taxes of great fortunes as of June, Les Echos reports. The additional tax is supposed to give the government additional revenues in the magnitude of €2.3bn, the report says. The paper also writes that the Banque de France foresees a 0% growth rate in France for Q2 in 2012.

Cohn-Bendit warns of a return of military dictatorship in Greece

In an interview with Le Monde, Daniel Cohn-Bendit warned that if things deteriorated as they were in the past months in Greece, there would be a return of military dictatorship. “The political process has broken down there”, the European parliamentarian said. “If we leave the Greek to themselves we risk a military coup”.

Bild stirs fears of runaway inflation in Germany

Reacting to the Bundesbank’s announcement on Wednesday that the German inflation would be above the eurozone average mass circulation daily Bild runs a story this morning under the headline: “Inflation alarm – Bundesbank softens the euro – How quickly our money will be eaten away?” The story is illustrated with the photography of a 1bn mark bill of the Weimar Republic in the 1920s when much of Germany’s private wealth was destroyed by runaway inflation. The story has a reassuring quote from Jens Weidmann who says that eurozone price stability target of just below 2% remained valid but that German inflation “could temporarily be above the (eurozone) average.” But the paper has a separate editorial comment by deputy editor Nikolaus Blome who accuses the Bundesbank of “cowardly” behaviour because it lets inflation re-emerge in Germany because inflation steals the citizens “optimism for the future”.

Samuel Brittan on nominal GDP target

People have been known to bet on when Samuel Brittan would write his next column on nominal GDP targeting, a demand he has persistently upheld in many columns over many decades. We feel the time may have arrived for this idea, especially as an alternative to austerity (which is likely to fail anyway). The idea is for policymakers to adopt a nominal GDP target of, say, 5%, which would allow for growth, while keeping an upper bound on inflationary expectations. He acknowledges the main criticism – which is the quality and frequency of the data – but this problem would be easily fixed, once such targets are adopted.

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

Panic everywhere. European shares fell, spreads rose across the board, and the euro was down below $1.30 again. The panic set in as the outside world started to comprehend the enormity of the Greek election results. The trigger was the speech by Alexis Tsipras, the young leader of the anti-austerity Syriza party that ended up in second place in Sunday’s elections. Kathimerini writes that Tsipras yesterday proposed a five point plan: immediate cancellation of the austerity programme, cancellation of the law to end collective contracts, proportional representation, nationalisation of the banks, and the formation of a committee to investigate whether Greece can pay its debts.

Tsipras has three days to form a government. He spent Tuesday in talks with leftist parties but had mixed success. He is due to meet the heads of PASOK and New Democracy on Wednesday. It is expected Tsipras will be unable to reach any agreement by Thursday, leading to PASOK taking over the mandate to form a government. After that, Papoulias will call in the party leaders to try to broker a deal. If that fails, a caretaker government will be appointed and new elections called.

Kathimerini writes  that Tsipras is to send a letter to Jose Manuel Barroso, Herman Van Rompuy and Mario Draghi to argue that the fact that PASOK and New Democracy received just 32% of the vote means that the terms of the bailout can no longer apply. Tsipras wants PASOK and New Democracy to do the same in a letter to the IMF and the EU. This prompted Antonio Samaras to accuse Tsipras of risking Greece’s membership of the eurozone. The conservative leader said his party would be prepared to back a minority government “as long as it secures the country’s position in the eurozone and its national interest.” But, he said, the leftist leader’s statement left no doubt “that he has no intention of safeguarding Greece’s European identity and future” and revealed “unbelievable arrogance.”

Jörg Asmussen became the first eurozone official to link Greek membership of the eurozone to the reform programme. He told Handelsblatt that there was no readiness from the troika’s side to re-engage in negotiations Asked if Greece should get out of the eurozone if it does not implement the program he replied that it was up to them to decide whether they want to remain a member. According to Süddeutsche Zeitung, the troika has cancelled all meetings it had planned to hold in Athens in May in order to wait for a clarification of the political situation.

Informal summit on growth agenda

Herman Van Rompuy has called EU leaders to discuss the fallout from the Greek and French elections and the increasing clamour for new measures to boost growth in Europe’s recession-struck economies at an informal meeting on May 23, according to the Irish Times. Enda Kenny said that he had urged Van Rompuy to hold a summit meeting on a growth agenda, “but there are issues that are clearly not in Ireland’s interests, including changes to corporation tax rates.” Preparations for the summit are overshadowed by the uncertain political outlook in Greece.

Bankia is threatening to become the next Northern Rock

The Bankia recapitalisation is turning out to be one of the more important developing stories of the eurozone crisis. This is an affair that looks increasingly like an Iberian Northern Rock story.

Following on from our briefing yesterday, in which we quoted an El Pais linking the resignation of Rato to the capital injection, it turns out that the Spanish government totally cocked up the transition. Mariano Rajoy started the avalanche with a rare radio interview he gave on Monday, in which he talked in vague terms about the need to recapitalise the banking system. Then Rato’s resignation letter came out. While Rajoy and Rato had earlier agreed on Rato’s eventual departure, this sudden shift came as a surprise. This was not supposed to happen this way. Rato must have realised he was being set up as fall guy, and wanted to pre-empt the news flow. The government attempt to micromanage the process clearly came unstuck. The result: denials everywhere, and worried retail investors, who are beginning to get out. The parallels to Northern Rock are obvious.

Further delevopments: El Confidencial reports that BFA, the parent group of Bankia, and Bankia are to push forward their board meetings to today. And here is their article about the retail investors starting to panic. And finally, here is El Confidencial article about the now inevitable nationalisation of Bankia, to be announced on Friday. That articles includes the detail that Deloittes, the auditors of BFA, refused to sign off on the accounts. The original plan had been to do announce the entire package on Friday – Rato successions, the recapitalisation etc.

Asmussen tells Hollande to respect fiscal pact and to get deficit down in time

In Handelsblatt interview Asmussen also said Francois Hollande would need to respect France’s obligations within the eurozone, including the ratification of the fiscal pact. “Also I expect that the new government will stand by its promise to bring the deficit below the 3% limit.” Asmussen stressed that “it must be clear to everyone that the fiscal pact that is complemented by a growth element must not be weakened in its substance”.

Merkel prepares her counter-offensive on Hollande

According to Le Figaro Angela Merkel and her lieutenants are preparing a counter-offensive to Hollande’s request to re-orient the eurozone’s crisis strategy and to keep the currency union on her path of fiscal consolidation and structural reform. The chancellor’s advisor quoted by the paper said that should growth be financed by new debt it would be Germany in the end who would have to pay for socialist’s victory. “The French economy and her finances remain in a precarious state”, Peter Altmaier, one of Merkel’s closest confidents, said. “France has no room for manoeuvre”, he added warning that all increase of deficit and debt in France would at once be sanctioned by the markets.

Bild fears Germany will have to pay for Hollande’s victory

Germany’s mass market daily Bild has an article enumerating a long list of Francois Hollande’s electoral presents. The story runs under the headline “The French will retire at age 60 … and we at age 67!”. It lists among other items the promise to freeze gas prizes for three months, to cut VAT back from 21.2% to 19%, to raise school subsidies for poor families by 25%, to lower the retirement age back from 62 to 60 years for certain categories and raise the minimum salary to €1398 per month. In a separate editorial comment Jän Schäfer explains Bild’s 10m daily readers that this is a “beautiful expensive dream”. Schäfer argues: “For years Europe has lived above its means and it has wasted billions of euros. Therefore it is no longer the time for presents but for painful reforms and consolidation programs. Otherwise others will have to pay the bill for France. And most probably that will be the Germans …”.

Spaniard to replace Regling at the helm of the ESM

The Spanish top official Belèn Romana Garcia is likely to replace Klaus Regling at the helm of the ESM, Handelsblatt reports. Regling’s departure would be a consequence of Wolfgang Schäuble’s nomination as the new eurogroup chairman which is almost certain according to the paper. Jean-Claude Juncker’s departure from the eurogroup’s chairmanship would open the way to the nomination of Yves Mersch, currently governor of Luxemburg’s central bank, to succeed to the José Manuel González-Páramo at the ECB’s executive board. The French however may lose out in the game of musical chairs, Handelsblatt points out, since their candidate to succeed to Thomas Mirow at the EBRD is encountering resistance.

CDU candidate Northrhine-Westphalia calls state elections a referendum on Merkel’s euro policy

The CDU candidate for the state elections in Northrhine-Westphalia Norbert Röttgen said next Sunday’s vote in Germany’s most populous state was a vote to strengthen Angela Merkel’s stability policy during the eurozone crisis, Frankfurter Allgemeine Zeitung reports. By transforming the election into a referendum on the chancellor’s European policy, he wants turn attention away from himself and blame the chancellor for his likely failure, Merkel and other CDU officials in Berlin think who were surprised and angry by Röttgen’s strategy. The current environment minister who was once considered to be very close to Merkel claims his strategy was agreed with the party at a recent meeting but other participants denied this was the case. Röttgen is expected to lose to the outgoing SPD state prime minister Hannelore Kraft.

Treason!

Much of the crisis commentary is about narratives. The German narrative is well known to our readers here. A quite shocking example, even to us, has been a commentary in this morning’s Welt in which the author argues that the SPD’s repositioning on the fiscal pact – falling in line with Francois Hollande – was bordering on treason (“Vaterlandsverat”). The argument, by a Dorothea Siems, is the usual one: a growth pact would cost so much money that Germany (!) would be crippled under its debt burden. We were intrigued by the word “treason” because the author clearly portrays this as a fight between French and German interests, and see the SPD trying to align itself with the enemy. (Die Welt is an awful newspaper in general, which is why we have not included it in our press review, but it is now qualifying to make it into our rogue’s gallery, along with Bild.)

What Hollande must tell Merkel

Back on earth again, this is a good column by Martin Wolf in which he outlines what Hollande has to say to Merkel. First, he must forget his domestic promises. No one will take him seriously if he does not. Second, he must embark on a serious discussion on endgame scenarios, which including five components: symmetrical adjustment, permanent transfers; external surplus for the eurozone; semi-permanent depression; total break-up. Of those five, the only sensible course is number one. Wolf concludes that the chances that Hollande can deliver are small. But he is the only chance the eurozone has got.

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

Getting significantly worse for Italy and Spain (but not France!);

euro again below $1.30.

It looks like we are up for new elections in Greece, after Antonio Samaras failed his attempt to form a government and the chances of SYRIZA to form a left wing coalition are slim. But the really interesting development yesterday is the change of positioning among the two pro-austerity parties: Samaras said ND had been the first party to call for a renegotiation of Greece’s debt deal with creditors. “We’re glad others have understood the importance of renegotiating the deal,” Samaras was cited by Kathimerini. But even PASOK leader Evangelos Venizelos, who as finance minister arranged Greece's second bailout, said according to Reuters that the deal should be renegotiated to lessen the burden on Greeks by spreading the cuts over three years instead of two. And SYRIZA is to talk to smaller leftist parties that didn’t make it into Parliament in a bid to bolster SYRIZA’s chances in the next polls.

After Samaras declared his efforts to form a government as failed, the task to form a government was passed on to the leader of the Coalition of the Radical Left (SYRIZA), Alexis Tsipras. Kathimeriniwrites that Tsipras looks for a leftist government with other small left groups. “We want to create a government of leftist forces in order to escape the bailout leading us to bankruptcy," said Tsipras. But his chances are slim. Tsipras’s key goal is to win round the Communist Party (KKE) and Democratic Left, a moderate, pro-Europe grouping. If this fails - which is likely as KKE has already ruled out any cooperations - Tsipras will reach out to other parties. But without the KKE, the other anti-bailout parties of the left cannot bring enough parliamentary seats to produce a majority. If Tsipras fails to cobble together a coalition, Socialist PASOK party is next in line to give it a go with zero chances of success. New elections are thus looming, we can expect a different campaign this time.

Hollande wants either Eurobonds of direct ECB bond purchases on the primary market

Talking to the slate.fr Francois Hollande replied to a question about Germany’s opposition to Eurobonds: “On this question we will have discussions with our partners and in particular with our German friends, but they cannot put into place two deadlocks at once: one on the Eurobonds and the other on the direct financing of debt by the ECB”. On his demands to stimulate growth the French president elect said that he did not aim at a Keynesian deficit spending program as he is committed to reducing the French deficit. Rather he was aiming at “putting into place instruments at the European level, which means increasing the capital of the European Investment Bank, mobilising structural funds and the financial transaction tax which would allow financing of infrastructure works. Also Europe could at last decide to borrow which is all what the Eurobonds or the project bonds are about”.

Italy’s PDL also wants ECB bond purchases and eurobonds inserted into the fiscal pact

This is a potentially interesting development. Italy’s PDL (Berlusconi’s party) wants ECB bond purchases firmly integrated into the fiscal pact. The Financial Times has the story from Rome that Renato Brunetta, a former minister under Silvio Berlusconi, and now PDL economics spokesman, said he wanted the possibility of eurobonds and participation of the ECB in primary debt auctions to be explicitly included into the fiscal pact. Mr Brunetta said this was the party’s agreed line. He also expressed deep frustration over Mario Monti’s decision to allow himself to be co-opted into Merkozy alliance.

Hollande wants to end the “Franco-German duopoly”

In a further reply to slate.fr Francois Hollande said that he wanted to reorient France away from her tight relationship to Germany. “While I do believe in the Franco-German motor, I do contest the idea of a duopoly”, the president elect said. Citing former French presidents and German chancellors Hollande said that they had always been careful to combine “an intergovernmental approach with a community process which was the best way to avoid that our partners felt being locked out or even worse to be subordinated”. According to the incoming president this equilibrium has been modified in the last few years. “The Franco-German relation was exclusive. The European authorities have been neglected and certain countries, especially the most fragile ones had the unpleasant impression to be faced with a directorate.”

Merkel shrugs off Hollande’s demand to renegotiate the fiscal pact

Angela Merkel politely said she would receive Francois Hollande “with open arms” when he comes to Berlin on May 15, the day of his inauguration, Süddeutsche Zeitung writes. But the chancellor warned the president elect that she was not prepared to renegotiate the fiscal pact as he had requested during the election campaign. It was “a basic approach in Europe that after elections, be it in big or small countries, we don’t put everything into question that we have decided previously”, Merkel said. The chancellor referred to her acceptance of the decision taken by her predecessor Gerhard Schröder to engage into accession negotiations with Turkey which she stuck to despite the fact that she had opposed Turkey’s EU membership during her election campaign in 2005. However Merkel is prepared to allow Hollande to score a public victory on his request to do more on growth. Advisors said that there were about €80bn of money from EU funds that were available. Also they said Germany would support making it easier for poor countries to get money from the EU’s structural funds by lowering the co-financing requirement from currently 50% to 5 to 10%. Also Berlin would support increasing the EIB’s capital by €10bn with to €2bn to €3bn provided Bundestag agrees.

Holger Steltzner says pressure on Merkel will become unbearable

“The pressure on the chancellor will increase to finally completely open up her wallet”, Frankfurter Allgemeine Zeitung’s economic editor Holger Steltzner writes. “After the growth pact the banking licence for the crisis fund or the communitarization of all debt via Eurobonds will be on the summit agenda. The same will be the case the forbidden monetary financing by the ECB, perhaps even its prize stability mandate because the Germans will have to surmount their fear of inflation which most others think is exaggerated.”

Rajoy forces Rato out of Bankia in return for a recapitalisation

El Pais has the story this morning that Mariano Rajoy has forced Rodrigo Rato to resign as chairman of Bankia to pave the way for a state injection of funds into Spain’s most troubled caja. Bankia is said to have toxic assets of more than €30bn. Bankia is one of the cajas most closely associated with the ruling Popular Party, and Rajoy felt it was necessary to force a change in the chairmanship of the bank if public money is injected into the bank. El Pais talks about a range of €7-10bn. The paper said it was not an easy decision to take, given the importance of Rato to the party. The article also said that one of the reasons was the public pressure mounted by the IMF, which had cited Bankia by name in its recent stability report as a bank in dire need of restructuring.

(This is a tiny amount of what will be needed to save the sector, or even Bankia itself, and much more in recapitalisation will ultimately be required, and it most likely to come from the ESM, as the Spanish does not have the resources to do this.)

Brussels considers giving Spain an extra year to meet the 3% target

El Pais has the story from Brussels that the European Commission is considering given Spain an extra year to meet the 3% deficit target target. The target was always an exercise in delusion, and a failure to recognise the economic dynamics of a country following such a severe financial shock. The article quoted unnamed sources as saying that it would be premature to conclude that an extra year would be granted, but added that economists in the Commission were already working on various scenarios. The article also seems to suggest that the election of Francois Hollande had an impact on the decision.

Credits in arrears are rising rapidly in Portugal

The number of Portuguese with their loans in arrears is increasing more rapidly since the beginning of the year, Jornal de Negocios reports. Over 27,800 individuals have been delaying payments during the first quarter, equivalent of 100 individuals per day,. This is three times more than the average of last year. Most are unpaid mortgage payments.  End of March there are 700.000 Portuguese who have their credits in arrears.

Bundesbank criticizes fiscal pact and ESM

In an opinion for yesterday’s public hearing of Bundestag’s budget committee on the fiscal pact and the ESM the Bundesbank harshly criticized the trend towards European risk sharing without any European control over national budgets, Financial Times Deutschland reports. “All in all the trend towards a an increasing communtarization of risks continues”, the German central bank warned. The Bundesbank contradicted the IMF and others who had argued that the fiscal pact provided for sufficient common control over the eurozone’s national budgets to justify the progressive introduction of Eurobonds. “The fiscal pact does not lay out the basis for a ‘fiscal union’ and it does by no means justify common liability as would be the case for example with Eurobonds”, the central bank said. Also the Bundesbank warned that the ESM while potentially beneficial in a situation of existential crisis also weakened the sense of responsibility of individual euro governments for their national public finances.

Why Germany’s Target 2 surplus may be good news for savers

In a column in Vox, Sebastian Dullien and Mark Schieritz argue that there is a highly welcome side effect to Germany’s large Target 2 surplus. A significant share of the changes in the Target 2 balances is effectively a transfer of risk from the balance sheets of the private sector to the Bundesbank. The assumption by Hans-Werner Sinn had been that in case of a euro exit the private sector would honour its liabilities, while the public sector would not. That is against the experience in other financial crises. Without this protection, large parts of the private sector in the core of the eurozone would be bankrupted by a member state’s euro exit overnight.

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

Markets remain nervous.

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.

Eurointeligence Comment and Analysis

The downward ratings spiral is now starting again, as the recession looms. S&P downgraded Spain by two notches to BBB+, with a negative outlook on the obvious grounds that the Spanish economy is about to fall into a black hole. The official wording is a bit different, but meaning essentially the same. In its statement, S&P said Spain will miss the deficit target as the economy contracts, and at the same time will need to provide fiscal support to the banks. As a consequence there is now an acute risk that Spanish debt would increase further.  

S&P was fairly complementary about the Spanish current account adjustment and the new government’s labour and financial reforms, which should support growth in the long-term. But S&P noted:

“In our view, the strategy to manage the European sovereign debt crisis continues to lack effectiveness. We think credit conditions, and hence the economic outlook for Spain, could now deteriorate further than we anticipated earlier this year unless offsetting eurozone policy measures are implemented to support investor confidence and stabilize capital flows with the rest of the world. Such measures at the eurozone level could include a greater pooling of fiscal resources and obligations, possibly direct bank support mechanisms to weaken the sovereign-bank links, and a consolidation of banking supervision or a greater harmonization of labor and wage policies.”

Under S&P main scenario, Spanish GDP would decline by 1.5% this year, but under an adverse scenario the decline could be as high as 4%. Under this scenario, the current account deficit would adjust faster, but the fiscal position would deteriorate further. In that case further ratings downgraded would be expected.

The Spanish government reacted with the same alienation as other governments have done before: They are not taking into account our reform effort. (If you read S&P’s statement, one discovers that they actually have taken the reforms into account. The problem is that the reforms are irrelevant in dealing with the country’s short-term problems.)

Spanish government releases a falsely translated IMF report with the intent to downplay the risks inherent in the Spanish banking sector

El Pais was in good form this morning, with a story that the preliminary findings of an IMF report on the Spanish banking sector includes a warning of a potential solvency problem as a result of hidden risks in Spanish bank balance sheets. The paper noted that the Spanish translation, released by the government, has softened the language of the report, which said that Spanish had “masked” the risk, while in the Spanish version this had been translated into a warning a “hidden” risks in relation to assets that had a downside, but no potential for an upside. The most important example of such risks is the refinancing of loans to companies and individuals who have no means of repaying them. By refinancing a non-performing loan, it is turned, technically, into a performing loan. The article quoted other examples of euphemisms contained in the Spanish version of the report. The IMF noted that the Bank of Spain has been trying to prevent the abuse of such refinancing tricks, but the lack of concrete data has fed the suspicions of international investors.

Dutch parties agree budget deal

Just three days ahead of a European deadline, the Dutch centre-right minority government was able to agree a budget deal with opposition parties that sets the country on a trajectory for a 3% budget deficit in the 2013. The two main government parties – the Liberals and Christian Democrats – managed to coopt the Green party, in addition to several small central parties, thus giving prime minister Mark Rutte a needed majority. The Dutch paper De Volkskrant reports that the agreement has an expiration of September 2012, which means that the Rutte caretaker administration can proceed normally as planned. The deal consists of cuts to education and healthcare – which one of the opposition parties immediate said it will use as a base for the upcoming election campaign. The paper also included some hilarious quotes by Geert Wilders, whose reluctance to accept the agreement brought the premature end of the coalition. He said the “Kunduz coalition” had surrendered to Brussels. Wilders promised an electoral campaign to safeguard “our sovereignty, our borders, and our future.”

The measures in full

The Volkskrant has another article listing the measures in detail. The cuts total €14bn. They include the following:

• VAT is increased by 2% to 21%.
• Tax deductions for travel are reduced, bringing €1.4bn
• No pay increase for public sector workers
• No mortgage interest rate relief for new interest-only mortgages
• Healthcare cuts of €1.6bn
• Gradual increase in the retirement age
• Increase in excise duty on alcohol and tobacco
• No indexation of tax brackets (a hidden income tax increase through fiscal drag)

Merkel rebukes Hollande on fiscal pact

Angela Merkel rebuked Francois Hollande over his request to renegotiate the fiscal pact. The pact was signed by 25 governments and thus was „not up for a new renegotiation“, the chancellor told WAZ-Mediengruppe, Germany’s biggest regional newspaper group, according to dpa newswire. Merkel stressed that growth had been for a long time „the second pillar of our strategy“ and nothing needed to be changed with this strategy. Also Wolfgang Schäuble said growth had always been part of what the government promoted and there was no need for strategy changes. „Of course we will continue to talk very intensely with the Europeans and with the future French president about what can be done in order to give more impulses for sustainable growth on this basis and in order to overcome the horribly high youth unemployment in some countries“, the finance minister told Südwestpresse, another regional daily.

Draghi wants common eurozone bank rescue authority

Mario Draghi wants euro governments to create a body that would manage bank rescues in the currency union. „In particular in the euro area, the case for strengthening banking supervision and resolution at a euro area level has become much clearer,“ Draghi said at a conference on financial integration according to Frankfurter Allgemeine Zeitung. „Work on this would be most helpful at the current juncture“, he continued.

Unemployment surges in France

For the 11th consecutive month unemployment surged in France according to national data released yesterday. Le Figaro reports that the number of unemployed registered by the French employment agency rose by 16.600 last month bringing the total number of the jobless to 2.9m. The newspaper which normally goes out of its way to support the outgoing president stressed that in 59 months at the Elysée palace Sarkozy presided over 44 months of rising unemployment. On a year on year basis unemployment has risen by 7.2%, the highest level since 1999, Le Figaro writes.

Franco-German anti euro advocates ask for return to national currencies

A group of anti-euro advocates in Germany and France have drawn up a 3-page memorandum, in which they ask for a rapid return to national currencies and the status quo ante 1999, Handelsblatt reports. Among the signatories are the four plaintiffs against the rescue measures for Greece at the German constitutional court. On the French side there is a Gaullist group called „Débout le Republique“.

Robin Wells on the impact of the eurozone on the US

An interesting article in the Guardian by Robin Wells on the impact of the likely-to-fail European austerity experiment on the US. She writes that the direct impact is relatively small in terms of trade. There are some indirect factors that are bigger, such as a potential shift in the exchange rates. But the most important is probably political, and it may be good for President Obama.

“The reality of the eurozone's troubles should lend support to President Barack Obama's campaign against GOP presidential nominee presumptive Mitt Romney and congressional Republicans. It provides a demonstration that austerity is self-defeating, that fiscal stimulus is needed in a deeply depressed economy, that recovery from a financial crisis is a slow and halting process, and that by grasping the nettle immediately, the Obama administration has succeeded in stabilizing its financial sector – while the Europeans have made a hash of it.”

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

A little better, especial for France, but Italian and Spanish ten-year spreads still above 4%.