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yesterday that George Provopoulos, head of the Greek central bank, told President Karolos Papoulias that Greeks have withdrawn as much as €700m and the situation could worsen,Bloomberg reports.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

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%.

The FT has picked up on the steady rise in French 10-year spreads (see also our table below),  which this morning stood at 1.363%, as investors are becoming nervous about the French elections, and the prospects that Francois Hollande might win and implement his programme. The article makes the point that investors have been so fixated on Spain that they have taken their eyes off the ball in France, where the deficit has come in at 5.2% last year. The article quotes one well-known economist who says that if Hollande does not immediately focus on the deficit, the bond vigilantes are likely to cross the border from Spain to France. Interestingly, the article refers to a survey of fund managers, a narrow majority of whom expect Nicolas Sarkozy to win (we suspect some of them must be confused by the dual-round voting system, and do not understand that a first-round lead does not automatically translate into a victory).

Hollande positions himself as Europe’s Anti-Merkel

In an interview with Handelsblatt, Hollande positions himself as the politician who will break Angela Merkel’s dominance of the European political scene. He reiterated his announcement not to sign the fiscal pact, if it is not amended with measures in favour of growth and employment. Also Hollande insisted that economic policies needed to be better coordinated in Europe. „All EU countries, even Germany, are suffering from a lack of economic dynamism. There is no common initiative for economic revitalization because we don’t coordinate ourselves“, he explained. The Socialist candidate also announced that he wanted to discuss with Merkel „how the European Central Bank can more strongly intervene in order to restrain the speculation against state finances“. Hollande reiterated that he had no plans to introduce the debt brake into the French constitution on the grounds that the constitution already requires balanced public finances. The candidate also underlined that he was going to implement his plans to raise taxes for millionaires to 75% and to reduce tax breaks for wealthy French by €40bn. However, Hollande said that the EU needed „the Franco-German couple in this deep crisis“, and his first foreign trip would therefore be to Berlin.

IMF sees French deficit at 3.9% in 2013 instead of 3.0%

In its Fiscal Monitor the IMF forecasted the French deficit in 2013 at 3.9%, the Le Monde blog Contes public reports. That is significantly above the 3.0% both Nicolas Sarkozy and Francois Hollande promised their EU partners to reach in that year. If the IMF projections are correct, the next president will have find additional cuts in the magnitude of €18bn.

The latest polls: according to Ifop Hollande will beat Sarkozy by a big margin

According to an Ifop poll for Le Monde Hollande and Sarkozy would both get 27% at next Sunday’s first round but Hollande would beat Sarkozy by a clear margin of 56% to 44%.

The Monti administration expects to miss deficit target

The FT reports that Italy’s government expects to miss the 3% deficit target, citing unnamed officials. This comes from the government’s annual budget forecasting document, to be considered by the cabinet on Wednesday, which (as we reported yesterday) is likely to include a higher than previously forecast recession. The new budget deficit will be 0.5%, rather 0.1%, a target the Italian government now expects to hit in 2014. Monti has said repeatedly that he would not impose additional austerity to meet the targets, but the official said Mr Monti had not yet made a final decision on the matter.

Il sole 24 ore focuses on the IMF’s forecast for Italy, showing a fall in GDP of 1.3% this year, and a rise of 0.5% in 2013, with a deficit of 1.7% this year, and 0.5% next year – which is significantly above the Italian’s government own (revised) forecasts. Public debt to GDP will peak at 123% this year, before falling back to 114% in 2014.

IMF believes that Spain will not hit 3% deficit target until 2018

This would normally have made top billing in El Pais, but the Spanish press is understandably preoccupied by the fallout of Argentina’s threatened nationalisation of its domestic Repsol activities. El Pais writes that the latest IMF forecasts say that it will take Spain until 2018 to reach the 3% deficit target, with a forecast of a 2012 deficit of 6% (as against a target of 5.3%), and 5.7% in 2013 (against a target of 3%). But the IMF is also forecasting a return to economic growth in 2013 (of 0.1%). Total public debt is set to increase to 92% by 2017, which would a containable scenario.  The article quotes Olivier Blanchard as saying that the IMF would not advise Spain to enact further austerity if the economy continued to contract. But the economic outlook for the global economy is now better than it was three months ago. The Spanish government responded to the IMF forecasts with the comment that the IMF has not always been accurate in their economic forecasts. (That is true, but the Spanish governments’ successive track record is much worse.)

Bundesbank taken to court over Target balances

According to Frankfurter Allgemeine Zeitung, the Munich based economic lawyer Bernd Schüneman and a foundation of family-run companies have taken the Bundesbank to court over embezzlement because of the target balances. „Because of the dimension of the risks those who are responsible must no longer look the other way“, the foundation’s chairman Brun-Hagen Hernekes told the paper. „The Bundesbank board and the federal government should not have let the European Central Bank act as it did. It was their duty to keep away damage from the Federal Republic and the taxpayers.“

Bild worries about Spain, the German’s favourite holiday destination

Bild is worried about Spain and its effects on the eurozone.  The headline runs: „Euro crisis: How dangerous is a Spanish bankruptcy for my money?“. The paper quotes the economist Lars Feld who warns that the repercussions could this time be worse than they were 2011. The article basically tells Bild’s 10m daily readers not to worry too much. The biggest risk according to the paper is that the euro will depreciate as a result of an escalation in Spain which would make gasoline even more expansive in Germany than it already is. But crucially there is no reason to worry about holidays already booked in Spain. „If you have booked with a German travel agent there is nothing to fear“, Bild quotes the federation of German travel agents.

Wolfgang Munchau on Andres Velasco

Writing in FT Deutschland, Wolfgang Munchau says Andres Velasco, the former Chilean economics minister, gave the best speech at this year’s INET conference (the last of the lot, held at midnight).  Velasco makes the point that eurozone policy makers have failed to consult anybody from other parts of the world with first-hand crisis experience, thus repeating all the mistakes others have made before them. Munchau lists voluntary private sector participation, and pro-cyclical austerity as among those mistakes. He concludes that the failure to consult is a consequence of European navel-gazing, a lack of interest in, and understanding of, events that occur outside its own borders, and a long tradition of economic exceptionalism.

Manfred Neumann on austerity – and the Wolfson prize

Writing in Vox, Manfred Neumann defends austerity, saying it is too early to sound the alarm, but says economists are right to consider all options, including exit. He says countries subject to a large adjustment now face three options. The first is simply to reverse the fiscal programme, which would trigger an immediate market crisis. The second is to continue austerity, but to fine-tune its composition. He favours this option, especially in view of the moderately strong global economic recovery. The third is to exit the euro, an option he prefers for Greece. He says it was legitimate for economists to consider and analyse this option acknowledging that a break-up of the eurozone as such is unrealistic, and should be discarded as an option.(Just to put this into context, Neumann is one of the judges of this year’s Wolfson prize, which asks the question of how to dismantle the eurozone. )

Also, Vox has a wider debate on whether austerity has gone too far, with contributions fromGiancarlo Corsetti, who argues that it has, from Alberto Alesina and Francesco Giavazzi, who argue that Corsetti has gone too far, and from Brad DeLong who says the costs of austerity will exceed its benefits.

Martin Wolf on why the eurozone may yet survive

In his FT column, Martin Wolf argues that the eurozone may yet survive due to the will of its political elites. But it is no optimistic column, and his prediction is that it will survive in misery.

He concludes that the most likely outcome would be a compromise under which German support will grow, with lower surpluses, and higher domestic inflation, while the periphery adjusts internally.

Support for True Finns on the decline

A year after their big parliamentary win, support for the Finns Party continues to slide, according to  YLE. A new Helsingin Sanomat poll finds that the party currently enjoys popular backing around 16%, which is some 7 percentage points down from last summer. With a backing of 23%, Prime Minister Jyrki Katainen’s National Coalition has maintained its position as the country’s largest party.

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

Some relaxation for Spain, but note the rise in French bond spreads.

Eurointeligence Comment and Analysis

Bloomberg has seen the draft of this weekend’s Ecofin, which has the extension of the ESM to a temporary €940bn – essentially by allowing EFSF and ESM to run side-by-side until the expiry of the EFSF in 2013. That means existing programmes will not be deducted from the ESM’s €500bn total, and new programmes in 2012/2013 will come from the EFSF. From 2013, the new lending capacity would be down to €500bn, but existing progammes continue separately until they expire.

Bloomberg said that this was the most probable agreement – though it goes beyond what Berlin is proposing, which is a smaller version, by not deducting existing programmes. The compromise envisages that the unused funds of the EFSF (from mid-2012 to mid-2013) should only be tapped in exceptional circumstances. But the article also said that finance ministers may make changes to the draft statement at their meeting tomorrow. The article quotes an official as saying that the likeliest outcome would be a range of between €700bn and €940bn, which means that the German proposal is not yet off the table.

The Spanish economy minister suggested that the agreement would raise the size of the ESM to around €750bn without giving details.

Weidmann compares demands for ever increasing firewalls to building the Tower of Babel

Talking in London, Jens Weidmann warned the eurozone souvereign debt crisis could not be solved with ever more money, Frankfurter Allgemeine Zeitung reports. „Policy makers have surrounded the crisis with a ‚Wall of Money’ which has meanwhile reached the heigth of €500bn“, the Bundesbank president said in a speech in London. „Ring fencing is certainly a sensible approach, but just like the ‚Tower of Babel’ the ‚Wall of Money’ will never reach heaven. If we continue to make it higher and higher we will, in fact, run into more worldly constraints – both financial and political ones.“

Belka suggests Greece should think about introducing a dual currency system

The Polish central bank president Marek Belka tells Greece to think about introducing a dual currency system in order to get competitive again. „The country seems to need some kind of a special arrangement, maybe temporary“, Belka told Financial Times Deutschland. “I am not advocating pushing Greece out of the euro. But for internal purposes we could consider for example some kind of a payment instrument which will be used inside the country, particularly by the public sector.“ The advantage of such a ‘hidden appreciation’, as the central bank governor called it, would be that goods and services could become competitive. At the same time savings in euros accumulated prior the introduction of the dual currency system would be shielded. „The Greeks will have to take an additional hit but it needs to happen in a civilized way“, Belka said.

Belka also hit out at the eurozone for including the EBRD presidency into a big package of eurozone top jobs like the eurogroup chairmanship and a ECB executive board post calling the procedure „unacceptable“. According to the central bank governor the current EBRD president Thomas Mirow from Germany was doing a „very good“ job. „But in the unclear situation where the German government does not support him we decided to submit our own candidate. If the German government supported Mirow, we would probably not have thought about submitting our own candidate.“

Sarkozy does not want to formally nominate Schäuble for the eurogroup now because of electoral reasons

According to Le Monde Nicolas Sarkozy is unlikely to formally agree to the nomination of Wolfgang Schäuble before the presidential elections, Le Monde writes. The president fears that nominating the German finance minister would formalize Germany’s dominant role in the eurozone’s crisis management in the eyes of the public. Since Francois Hollande is challenging the German leadership in the eurozone, nominating Schäuble would give the Socialist candidate the opportunity to attack Sarkozy for allowing this trend to continue.

Commission troika representative says Greece is „not yet out of the woods“

The Commission’s representative in the troika Matthias Mors told Süddeutsche Zeitung that Greece had made „progress and thus has a good chance to overcome the crisis in the eurozone“. But the official cautioned that the country is „not yet out of the woods“. According to Mors, many measures have yet to be decided some of which are going to be „painful“. Mors expressed hope that Greece’s two main parties, the conservatives and the Socialists will emerge victorious from the elections because they have pledged to continue to implement decisions taken with the troika. Also, he said there were no anti-German feelings in Greece, and German tourists should not be deterred by reports that said otherwise.

LTRO so far no effect on real economy

The FT reports that lending to the private sector fell by €11bn compared with the previous month, while the annual growth rate fell from 1.1% to 0.7%. The article quotes an economist from ING as saying that the risk of a credit crunch had still not disappeared. The article said the bank lending figures amounted to a setback, though they were better than the December data. The data also masked large intra-eurozone divergence, with highly negative growth rate in Portugal, Spain and the Netherlands, but positive growth rates in France, Italy and in particularly in Germany. M3 growth has gone up from 2.5% to 2.8%.

The crisis drives up the French savings rate

According to Les Echos latest figures from the statistical office INSEE show that the crisis has driven the French savings rate in 2011 to 16.8%, the highest figure since 30 years. That represents about €223bn. INSEE considers that the savings rate is likely to stay high due to uncertainties in France with regard to the further evolution of the crisis and high.

Investors reject enforcing losses on ten Greek foreign-law bonds

Reuters reports that only two bondholder groups out of 12 voted to enforce a debt exchange on the non-participants. Five did not reach the required quorum, and another five voted against enforcing losses. The foreign-law bonds constitute a relative small part of the Greek debt exchange, and will not scupper the programme. (The question is now what happens to those bonds, and whether Greece will default on them.)

Belgium needs further cuts of €5bn

Belgium will need to find €5bn in further savings in 2013 to meet its deficit reduction targets, according to reports in the De Tijd and L'Echo (hat tip Reuters). The 2012 total deficit reduction effort is €13bn, which should bring the deficit down to 2.8% this year, with a further 1% improvement each year until 2015. The additional €5bn is needed to achieve the target of 1.8% in 2013.

Edward Hugh does the maths on Spanish debt

This is a very detailed and thorough exercise on Spanish debt. Edward Hugh does the math on the Spanish debt, open, hidden and contingent, and concludes that Spain is heading for trouble. Impossible to summerise the arguments, but here is his conclusion:

"But the great risk they are taking in doing this is raising the acknowledged debt level, up towards the ‘high risk area’ of around 100% of GDP. When you add all the debt up we are already in the high 80% range, and two more years of ‘normal’ deficit plus more funding for the financial sector should take it through the psychological barrier. Naturally investors are noticing this, and Prime Minister Mariano Rajoy’s ‘gaffes’, and at the end of last week the Spanish ten year bond spread with the Bund equivalent went above the Italian one for the first time since last summer.”

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

Elevated, but steady. Euribor-OIS now close to 100 at 1yr.