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.

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Markets remain nervous.

Eurointeligence Comment and Analysis

This is a sobering forecasting from the IMF, according to which it will take until 2017 for Spain to reach the 2008 level of GDP – six years later than France and Germany. The 2.5m jobs lost since the onset of the crisis will not be recovered until 2022 or 2023 at best, El Pais quotes a Spanish economist. (And we assume that more jobs will get loss as the country goes through the next cycle of deleveraging and austerity.) The IMF projections assume that Spain will growth barely in 2013, and maintain a growth of under 2% until 2017. (We think this is hugely optimistic, as the deleveraging process is unlikely to be completed quickly. The article also quotes an IMF official as saying one should treat the long-term forecasts with caution.)

Bank of Spain is considering a quasi bad bank

El Pais has a short article on a presentation given by José María Roldán, director of regulation at the Bank of Spain, who proposed a scheme whereby banks would separate the property-related out of the balance sheet and hand it over to a property company, which would manage the assets. This is a kind of a bad bank, though Roldán disagreed with the term. This company would manage most of direct property assets and a majority of construction development assets that are currently weighing down the balance sheets of Spanish banks. The idea, as with a bad bank, is to provide transparency. The problem, as the paper states, is who pays for the losses if they become large?

(We like the idea because it creates a resolution mechanism, and force the sale of properties, which in turn will lead to a further significant fall in Spanish house price. It is only after this backlog is cleared that we will a proper idea of the scale of the problem.)

De Guindos tells Germans he needs no EFSF money

On a roadshow in Germany, the Spanish economics minister Luis de Guindos denied that Spain needed to tap the EFSF to recapitalize its banks, Handelsblatt reports. „We will not need money from the EFSF in order to refinance our banks“, he told the paper. There are strong doubts in Europe and at the IMF that government’s estimate, according to which only €50bn are neccessary, is accurate. The ECB and several euro member states suggest that the EFSF should be allowed to give its money directly to the banks instead of channelling it through governments first. This is vehemently opposed by Germany.

(Judging by the frequency of official denials, one would have thought that such a programme must now be imminent. We don’t think that is the case, but we believe that a programme is very likely to be necessary.)

Spanish and French bond auctions went well, but at a cost

The Spanish and French bond auctions went well yesterday, according to Reuters. The Spanish treasury sold €2.5bn, taking the issuance to over half the annual target. The bid to cover ratio was 3.3 on the shorter end of the bonds, and 2.4 at the longer end. The yield on the two year bond was 3.46%, and 5.74% for a ten-year bond. Most of the buyers seem to be Spanish banks. The article noted that Spanish yields had risen in the secondary market after the auction. France sold near €8bn of medium-to-long term bonds, with a bid-to-cover ratio of close to 3.

Sarkozy loses his nerves

Ahead of the presidential election’s first round on Sunday Nicolas Sarkozy showed his frustration over the fact that he did not manage to close the distance to Francois Hollande in the polls, Le Monde’s Arnaud Leparmentier reports on his blog L’Elysée Coté Jardin. According to the blog post, Sarkozy attacked the rules for TV and radio according to which each of the ten presidential candidates gets exactly the same air time regardless of his or her chances of making it to the second round, including four candidates whose polls are in the region of 0.5%.

The polls have recently moved back in favour of Hollande, with one poll giving him a lead in the first round. For the second, decisive round, all polls give Hollande a comfortable margin of victory.

Hollande wants to tap the citizens’ savings to finance France’s debt

If elected Francois Hollande wants to tap the savings of the French to finance the country’s debt, according to Les Echos. He said French household savings at 17% of income was very high. „The more we borrow from the French the less we have to borrow on the markets,“ he said. Hollande also explained that it would be cheaper to borrow from the French than from international investors on the markets. By the end 2011 roughly 65% of all French debt was held by international investors, the rest by French. In 2009 Nicolas Sarkozy had the same idea. He later renounced the idea because it turned out the French debt agency warned that it would be a lot more expansive to raise significant amount of debt with small private French savers than with professional international investors.

Greek banks get funding pledge but recapitalization terms delayed

Due to difficulties in reaching an agreement on the recapitalisation terms for Greek banks, the announcement of the details is likely to be postponed today. On Thursday Lucas Papademos met with Central Bank Governor Giorgos Provopoulos, but their meeting proved inconclusive regarding the details of the process. The main issue is how the private character of the lenders can be retained. But commercial lenders will receive a formal assurance from the Hellenic Financial Stability Fund (HFSF) that they are to receive €23bn if they stick to the capital enhancement plans they have submitted to the Bank of Greece, Kathimerini reports. To strengthen their Core Tier I index up to the 10 percent threshold, National Bank will need €6.6bn, Eurobank must get €4.6bn, Alpha needs €2.6bn and Piraeus should draw €4.6bn.

Venizelos wants EU and IMF to give Greece an extra year to meet fiscal targets

On the campaign trail Evangelos Venizelos said that he would push for the EU and IMF to grant the country an extra year to meet its fiscal targets moments after Christine Lagarde stressed the importance of Greece implementing the fiscal adjustment program it had agreed , reportsKathimerini. Venizelos told PASOK supporters: “In June, Greece has to decide which measures it will implement to reduce spending by €11bn by the end of the adjustment period….It falls upon us to decide this and we propose that the country push for something it can achieve easily: adjustment not over two years until 2014 but over three years, until 2015. The adjustment should be softer, more friendly for citizens and more friendly on growth.”

Portugal has two months to prove it needs no second bailout

On the Brussels blog of the FT Peter Spiegel argues that Portugal has de facto two months to convince that it does not need a second bailout. The argument is as follows:

“In September 2013, Portugal must find €9.7bn to pay off a bond that comes due. The current three-year programme calls for that money to raised by Portugal itself in medium- and long-term bond auctions, as this chart from the European Commission’s recently-released report on the Portugal bailout shows. So if Portugal needs to go back to the financial markets in September 2013, that means it must be able to show the IMF such a plan is realistic 12 months in advance – or September 2012. And if a second bailout is to be organised, negotiations over what that package will look like will probably have to begin two or three months before that. Which means Portugal has until about June – just two months from now – to convince the financial markets it is worthy.”

Dutch finance minister wants hedge funds to be closer monitored

The Dutch finance minister Jan Kees de Jager wants hedge funds and stock market speculators under the supervision of De Nederlandsche Bank (DNB) and the Financial Markets Authority (AFM), the Volkskrant reports. The proposal means that the DNB will monitor the funds, whether they are financially sound and what risks could arise. The AFM will monitor the behaviour of the funds and speculators and the products they offer.

Economists expect Ifo index to decline

Economists surveyed by Bloomberg expect the Ifo German business confidence index to decline for the first time in six months as the resurgent sovereign debt crisis threatens to curb growth. The Ifo institute’s business climate index, based on a survey of 7,000 executives, is expected to drop to 109.5 from 109.8 in March, according to the median forecast of 40 economists in a Bloomberg News survey. Ifo releases the report at 10am in Munich today.

German economic institutes disagree over debt of the crisis countries

While presenting their report on the German economy, the economic research institutes demonstrated that they profoundly disagree on how to deal with the debt of the crisis countries, Frankfurter Allgemeine Zeitung reports. Two institutes plead in favour of a European debt redemption fund. They fear the old debt creates a vicious circle of rising risk premiums, increasing servicing costs and the necessity to sustain a high primary surplus over an extended time. In order to escape from that circle the countries should be able to refinance the part above 60% with money from the redemption fund. But the Ifo Institute and the Kieler Institute für Weltwirtschaft (IfW) are strictly opposed. They argue that guaranteeing the fund would lower Germany’s rating. Also they say the pressure of the markets is necessary for those countries to reform.

How eurozone contagion might work.

This is from the IMF’s GFSR, hat tip FT Alphaville. It shows the mechanisms of how the eurozone financial crisis affects the rest of the world.

This is probably the most important story in the eurozone crisis right now – and mostly off the policymakers’ radar screen. The IMF warned in its Global Financial Stability Report that the eurozone is about to witness a massive credit crunch – of a scale that warrants a complete reboot in economic crisis resolution policies. We have going on about this problem in Spain, where the full scale of private sector deleveraging has become apparent.

The best summary, as ever, is from the report itself, emphasis ours:

“…  large EU-based banks could shrink their combined balance sheet by as much as €2.0 trillion through end-2013, or almost 7% of total assets. Although subject to considerable uncertainty, our estimate is that about one-fourth of this deleveraging could occur through a reduction in lending, with the remainder coming largely from sales of securities and noncore assets. Under the baseline, the impact on euro area credit supply is estimated at about 1.7% of present credit outstanding. Some balance sheet reduction by individual banks is necessary because high leverage is no longer supported by either markets or regulators and some activities are no longer viable. But the potential consequences of a synchronized and large-scale deleveraging warrant supervisory efforts to avoid serious damage to asset prices, credit supply, and economic activity in Europe and beyond.”

Olivier Blanchard said at the news conference that there was an urgent need for recapitalisation and resolution, and that the EFSF/ESM should be used for the recapitalisation of banks, to break what he called the “pernicious link between sovereigns and banks”.

Spanish house prices are now starting to decline

There was an unrelated story yesterday that goes a long to explain the extent of the credit crunch in Europe, at least in respect of Spain. The FT cites a report by Fitch according to which repossessed properties in Spain are selling for about half their original value, and are likely to continue to fall. (That squares or own estimate of a Spanish house price decline of over 50%, of which less than half is so far officially recorded.) Fitch said that valuations on properties that were bundled up in securitisation deals and later repossessed are also significantly lower than data from the official housing price index suggest. The FT also reported that the latest Bank of Spain data for non-performing loans have registered a jump to over 8%, the worst level since 1994. Official data show that Spanish house prices fell 3% in the first three months of the year. Fitch noted that reposed homes were valued at 25% below their original prices, but their average selling price is 48% lower. An expert is cited as saying as saying that the official house price statistics are therefore highly misleading. Fitch estimates that the overhang of unsold homes in Spain is still over 1m.

EBA to set up proper stress test infrastructure

The European Banking Authority plans to set up a data hub within two years to give outsider full transparent information on the riskiness of European banks, according to Reuters. The article quotes Andrea Enria of the EBA as saying the authority was to prove up-to-date information on banks' capital positions, sovereign debt holdings, and other stress test-style data. He said the lack of such information had been a source of market uncertainty. He said once there a common reporting framework is established, “we can go much further in terms of disclosure."

Europe’s little wall

This looks like a charity fund raiser. The IMF said yesterday that it had already secured $320bn, $200bn of which from within the EU, to increase the firewall, in other words only $120bn from outside. So much for the idea of a large foreign participation. The latest commitments were $8bn from Poland, and some money from Switzerland. The target is to get to $400bn. (The target has been adjusted so that it can be met). The biggest external commitment came from Japan with $60bn. Reuters quotes Mark Carney, of the Bank of Canada, as saying that the success of the crisis response will not depend on the firewall, but on the policies. Neither the US nor Canada have put any money.

Weidmann says it’s not the ECB’s job to solve Spain’s problems

Spain should take a rise in its bond yields as a spur to tackle the root causes of its debt woes, not look to the European Central Bank to help by buying its bonds, Jens Weidmann told Reuters. The head of the Bundesbank, who has led a push by some policymakers from core eurozone countries for the bank to begin planning an exit from its crisis mode, said no ECB policymakers favoured using the bank's bond-buying plan to target specific interest rates on sovereign bonds, and ECB board member Benoit Coeure was simply stating a fact by saying last week that the programme still existed. Weidmann also said he saw no reason to discuss a third LTRO. „We shouldn't always proclaim the end of the world if a country's long-term interest rates temporarily goes above 6 percent,“ he said referring to rates at which Spain currently has to borrow. „That is also a spur for policymakers in the countries concerned to do their homework and to win back (market) confidence through the pursuit of the reform path.“

Italy’s budget way off track, according to JP Morgan

This is a very interesting analysis from JP Morgan, as reported by FT Alphaville, showing the delusion of European governments in their deficit planning. Italy’s cabinet yesterday considered the new forecasts, which project an increases in the projected deficits for 2012 from 1.6% to 1.7%, and in 2013 from 0.1% to 0.5%. But JP Morgan looked at the raw Jan-Mar budget data, and concludes that the budget is current on a trajectory for a deficit more than twice as large for this year - €60bn, instead of the projected €26bn.  (To us, this shows that the deficit planning in the eurozone periphery is completely delusional, as is the 3% deficit target for 2013.)

German economic institutes fear for ECB’s independence

The eight leading German economic institutes fear that the ECB will lose its independence as a result of all the non-standard rescue operation for the eurozone, according to Frankfurter Allgemeine Zeitung. „Independence and credibility are at stake“, the paper quotes from their yet unpublished report on the economic situation in Germany that the institutes will today present to the government. „There is the danger that the monetary policy will no longer be able to liberate itself from this situation of constraints that has arisen“, the report warns. The institutes also criticize the government that despite the good economic situation in Germany the government will not be able to have a surplus. Additionally the institutes take a sceptical view on the euro crisis countries’ ability to fulfil their consolidation and reform obligations. According to the institutes, especially Italy and Spain are vulnerable. Should there be a prolonged recession, both countries may no longer be able to service their debt, the report warns.

Metall industry employers offer 3.0% pay rise

The German metal industry employers start negotiations on salaries in the industry by offering 3.0% pay rise over 14 months starting retroactively as of April 1 for the 3.6m workers in this sector in Germany, Frankfurter Allgemeine Zeitung reports. The powerful union IG Metall is asking for 6.5% over 12 months. Additionally the union demands that all trainees shall get definitive work contracts and that the unions will get co-decision powers over the question whether a company hires temporary workers. The public workers union Verdi had recently raised hopes for significant wage increases by obtaining a 5.6% pay rise over two years. In the past years Germany had been among the euro members with lowest real and nominal wage rises.

If elected Francois Hollande wants to raise the minimum wage

According to Les Echos, Francois Hollande wants to raise the French minimum wage SMIC if he gets elected. The Socialist candidate said that he would examine if that was a possibility „given that the SMIC had not been raised for at least three years“. Unions reacted cautiously to the announcement. The Communist CGT and the extreme Left candidate Jean-Luc Mélenchon union want to raise the SMIC to 1700€ which would be 20% more than it currently is.

Election campaign kicks off in Greece

Antonis Samaras will unveil his party’s economic programme today ahead of the May 6 elections. Samaras has called  yesterday for a «clear mandate» that will allow his party to govern without having its «hands tied,» adding that if elected ND would seek changes to Greece's austerity programme. Evangelos Venizelos also tries to draw a line behind the past distancing himself from his predecessor Papademos saying that he had been against the decision to appeal for IMF emergency loan and that he had preferred Greece to drawn up its own measures. He pledged in his TV appearance for measures to improve liquidity for small businesses, Kathimerini reports.

According to the latest polls, the two major parties would win a narrow parliamentary majority if elections were held today, Reuters reports. Support for the conservative New Democracy party was at 22.3%, down 2.5pp from a previous poll last month. The Socialist PASOK party was down 0.6pp to 17.8%. Based on those poll numbers, the election would allow the two parties to renew their coalition government.

Undecided will be decisive in Irish Referendum

The outcome of the Irish referendum on the European stability treaty on May 31st is wide open, according to the latest Irish Times/Ipsos MRBI poll which shows the result is in the hands of undecided voters. Asked whether they were likely to vote Yes or No to the treaty, 30% of voters said Yes, 23% said No, 39% were undecided and 8% said they would not vote. When undecided voters, and those who won’t vote, are excluded the Yes side is ahead by 58% to 42% but the outcome hinges on the attitude of the currently undecided voters. The Lisbon Treaty has a lead of the Yes vote at a similar stage but the referendum turned it down. Good news is that the number of ‘No’ voters has halved since October. 

Portuguese banks given money to invest in government bonds

Jornal de Negocios reports that the money that the Portuguese state will inject into the two banks, the BCP and BPI, to help these two institutions to comply with capital requirements of the European Banking Authority (EBA) will be mainly invested in government debt. The two banks cannot use those resources to increase the credit to the economy.

George Soros says he would bet against the eurozone

In an interview with Le Monde, George Soros makes a number of gloomy predictions. He said the policies of the eurozone were leading to disaster, and that the euro was now threatening the survival of the European Union. And even if the euro survived, the eurozone would face the prospect of a lost decade similar to what happened in Argentina in 1982 or in Japan ten years later. In the interview he also said that his Quantum fund had no positions in the euro, but if he were to invest, given the present political leadership, he would bet against the euro.

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Italy worsening, France worsening, Spain a little better.

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

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

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

Reuters Breakingviews on the hard options facing Spain

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

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

FT demands growth agenda for eurozone

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

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

Head of Egan-Jones rating agency expects large transfers

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

Portuguese bank’s borrowing from ECB hits new record

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

Greece extended deadline for debt swap again

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

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

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

Greek parliament approved new money for parties

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

Hollande announces finance audit if elected

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

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

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

German Pirates now ahead of the Green

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

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

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

Boeri and Garibaldi dismiss Monti’s labour reforms

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

Wolfgang Münchau on the madness of the Wolfson prize

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

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

Just look at those spreads.

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

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

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

Another big Spanish auction today, but interest rates are rising

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

Swap offer for Greek foreign law bonds ends today

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

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

Outstanding debt towards suppliers continues to rise

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

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

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

425 economists submit plans for orderly exit from the eurozone

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

Czech Republic promises to respect rules of the fiscal pact

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

„Pirates“ would get 12% in German national elections

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

Ireland remains highly vulnerable to economic girations

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

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

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

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

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

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

Bloomberg has the story that Irish central bank governor Patrick Honohan will ask the ECB’s governing council today to approve a scheme that would effectively delay a €3.1bn cash payment to the central bank. The Irish government was due to a make the payment to newly named Irish Bank Resolution Corp, which resolves the assets of the former Anglo-Irish Bank. Under normal conditions, IBRC would then use the money to pay the loan from the emergency lending assistance. The central bank would then cancel the money, to leave the overall money supply unchanged. Honohan is proposing that the government still pays IBRC in the form of a newly issued Irish government bond. This would fit in with the wish by Dublin to restructure the €30bn promissory note, which the Irish state issued in the rescue of Anglo-Irish.

The Irish Times also confirmed that these discussions were taking place. Writing in the Irish economy blog, Stephen Kinsella poses the following three questions: “1. What interest rate(s) will be charged on this(these) bond(s) and at what maturity(ies)? 2. What will fund the asset side of the balance sheet of the IBRC? 3. It looks to me like the promissory notes are going to be funded by the EFSF, or some other funding structure, but specifically what funding structure at the EU level will the bond use?”

Kinsella article ends with a reference to another report according to which the Irish government is proposing to pay off the promissory note with a bond that matures in 2025. The consequence is that Ireland would get another 13 years to pay off its promissory note.

Spain changes tactic in the grab for the eurozone jobs

El Pais has the story that Spain's Economy Minister Luis De Guindos has backed off from insisting on a Spanish representation at the ECB, and said that Spain would instead propose to get one of the top four open economic jobs–the ECB job, the eurogroup, ESM, and EBRD. De Guindos said Spain was seeking a solution that was acceptable to everyone. De Guindos said the ECB position was still open, but Spain was ready to negotiate a settlement that satisfied everyone.

Politics as usual returning to Italy in the debate over reform of dismissal laws

La Repubblica writes that there is growing opposition in the Italian parliament to the version of the new dismissal laws, as proposed by Berlusconi. On this issue, he is supported fully only by the PdL (Berlusconi’s party), while the centre-left PD want changes. The article quotes PD president Pierluigi Bersani as saying that the proposed reforms were too extreme, and would represent a massive power shift away from the employees. There is considerable disquiet about this reform in the PD. The argument for amendment is that the reform goes beyond the German laws, in which the decision on whether a dismissal is fair, is left to the courts.

Portugal’s deficit tripled due to extraordinary transfers

Portugal's core public deficit nearly tripled in the first two months of this year. Revenue from taxes fell 5.3% in the first two months of the year, which together with a 3.5% increase in expenses led to a core public deficit of €799m for the period, up from a deficit of €274m a year ago, Dow Jones quotes budget office data. The budget office said the rise in expenses was mostly due to a €348m transfer to state-owned broadcaster RTP, which had to repay debt that was due. Social security expenses rose 8.1%, which, among other things, was attributed to unemployment subsidies.

Greek deficit shrinks mainly thanks to investment cuts

Greece's budget deficit in the first two months of 2012 shrank 53% year-on-year, the finance ministry said on Wednesday. The state deficit narrowed to €495m, below the government's target of €879m. This is mainly due to the reduction in the Public Investment Programme bringing in €251m more than forecast, Kathimerini reports. There was considerable slump in value-added tax revenues 13.7% lower than last year while consumption taxes in total improved mainly thanks to tobacco and energy taxes.  There is excessive spending in social security funds, already spending 27.5% of the annual target. Worse, the country’s main fund, Social Security Foundation IKA has already collected 64.4% of the year’s planned allocation.

The successful deficit reduction played its part in promoting the Greek Deputy Finance Minister Philippos Sachinidis to become Greece’s new finance minister.

IMF calls on Belgium to prioritise fiscal consolidation

Belgium has resolved its political crisis but still faces challenges including pressure on spreads, high public debt and the fallout from the restructuring of bank Dexia SA, which may cost up to 0.75% of GDP, the IMF said in its annual Article IV report Tuesday.  "Spreads will likely remain under pressure for some time in light of the high public debt, financial sector vulnerability to market turmoil in the euro area, and the close inter-linkages between the banking sector and the Belgian sovereign," the report said. "The vulnerability of Belgium's sovereign debt to market pressures makes credible medium-term fiscal consolidation a priority." Flanders Today writes that the government will have to focus its savings on pensions, healthcare and public service jobs. Moreover IMF directors insist that all levels of government (federal, federated entities and local authorities) should contribute their fair share as far as savings efforts are concerned. The IMF directors also believe that reforms to indexation are needed to boost the Belgian economy, they call for a revision of automatic wage indexation and benefits.

Frieden wants to shift power in the eurozone from the heads of government back to the eurogroup

Luxemburgs finance minister Luc Frieden said the change of guard at the helm of the eurogroup should be used to put the euro finance ministers back in charge of managing EMU instead of the heads of state and government. Talking to Financial Times Deutschland Frieden said: „I want to strengthen the eurogroup. The heads of state and government of the eurozone should decide over the direction. All the rest must be at the level of finance ministers. Otherwise decisions are taken that cannot be implemented.“ The finance minister pointed to the chaotic back and forth around PSI in Greece as a showcase for incoherent policies that can result from the heads of state and government making policy decisions that are not appropriately prepared and thought through. Frieden abstained from openly endorsing Wolfgang Schäuble as a successor to Jean-Claude Juncker at the helm of the eurogroup but he said: „We should take the best person for the job. Wolfgang Schäuble is among the best finance ministers in the eurozone.“ Frieden also endored his compatriot, Luxemburg’s central bank governor Yves Mersch, for the ECB executive board.

Schäuble is widely criticized for unambitious budget

Wolfgang Schäuble is criticized even within his own coalition for the cornerstones of the budget 2013, the budgetary midterm perspectives until 2016 and an additional budget 2012 he presented yesterday, Frankfurter Allgemeine Zeitung reports. According to the finance minister’s plans the deficit will rise to €34.7bn this year because of €8.7bn of additional payments in the the ESM. But in 2014, 2 years ahead of time, Schäuble wants to respect the German debt brake. The first balanced budget since 1969 is foreseen for 2016. But Patrick Döring, the secretary general of the FDP, and Norbert Barthle, the CDU’s budgetary spokesman in Bundestag, criticized the budget because he does not aim for a balanced budget in 2014. Criticism for a lack of ambition also came from the opposition and major economic lobby groups. Even Jens Weidmann criticized Schäuble. „It is not very ambitious that the structural deficit of the federal government will rise this year and the budget will be balanced only in 2016“, he told Süddeutsche Zeitung. „The errors of the past when the chance was missed to use positive surprises to reduce the deficit quickly should not be repeated.“ Weidmann also reminded the finance minister that Germany had a special responsibility within Europe to reduce its deficits quickly.

Draghi applauds Germany as Bild presents him with a Prussian spiked helmet

In an interview with Bild Mario Draghi went out of his way to compliment the Germans for their anti-inflation and stability culture. The interview is illustrated with a laughing ECB president who is handed a Prussian spiked helmet by the paper’s editor and another reporter. This is in reference to Bild’s endorsement of Draghi prior to his designation when he was shown with a spiked helmet because the paper declared his monetary policy approach was „very German“. Asked how he had liked that photomontage Draghi replied: „I liked it. Prussia is a good symbol for the ECB’s most important task: to keep price stability and to protect the European savers.“ He encouraged the Germans to continue with their economic policy because it had allowed them to reinvent the European social model „without excessive debt“. But Draghi also stressed that the ECB was on its guard to watch for inflation as a consequence of its non-standard measures such as the 3y LTROs. „Should the inflation outlook deteriorate, we will immediately take preventative action“, he said. Turning to the broader euro zone crisis, Draghi said: „The worst is over, but there are still risks. The situation is stabilising. The most important euro zone figures, like inflation, the current account balance, and above all budget deficits, are better than for example in the USA.“ Investor confidence is returning, according to Draghi, and the ECB hasn't had to buy government bonds as a support for weeks. „The ball is in the governments' court. They must make the euro zone crisis-proof for the long-term.“

Barnier warns against a renegotiaton of the fiscal pact

Talking to Les Echos, Michel Barnier warned against renegotiating the fiscal compact as Francois Hollande claims he will do in case of a victory in France’s presidential elections. „It would not be good to renegotiate it“, the French competition commissioner said. He said the treaty would strengthen confidence within the eurozone, and in the rest of the world towards the eurozone. But Barnier conceded that the treaty should be complemented with growth initiatives. Among them he listed „a more active EIB“, a fund for SMEs, a European borrowing initiative for energy, telecom and transport networks, a better use of the EU’s structural funds and a real European industrial policy that should as „audacious“ as the common agricultural policy.

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

Spreads are rising again, as investors are becoming concerned about Spain.

The US is once again getting concerned about the way the eurozone handles the crisis. According to Reuters, Treasury Secretary Timothy Geithner said fiscal consolidation should be a slow process with a multiyear phase-in of reforms. “If every time economic growth disappoints, governments are forced to cut spending or raise taxes immediately to make up for the impact of weaker growth on deficits, this would risk a self-reinforcing negative spiral of growth-killing austerity,” he said.  He added that any reforms would take time, and would fail without financial support.

Greece loses billions in VAT revenues

Greece loses VAT revenues due to chronic problems of the tax collection mechanism and its performance is declining further, Kathimerini quotes central bank governor Giorgos Provopoulos. The problem is further being exacerbated by increasing tax evasion and the lack of liquidity in the market. Had Greece retained the same VAT revenues as 2008, it would have had an additional €2.3bn last year, he suggested.

Venizelos quit as finance minister, successor to be announced today

Evangelos Venizelos quit as finance minister on Monday to lead the Socialists into a general election. The name of the new finance minister is expected to be announced on Tuesday, government sources told Reuters, adding that Interior Minister Tassos Giannitsis had emerged on Monday as a possible candidate.   Deputy Finance Minister Filippos Sachinidis and the prime minister's chief economic adviser Gikas Hardouvelis were also among the possible choices to replace Venizelos at the finance ministry, while local media speculated that technocrat Prime Minister Lucas Papademos himself may take over as finance minister. 

Tax office target of shooter who lost his home over unpaid tax bill

A 70-year-old pensioner stormed into a tax office in the northern Athens firing a hunting rifle in the air several times. His property has been confiscated over an unpaid tax bill of €36000 earlier according to Kathimerini. Nobody was injured and he gave himself up within an hour. In his bag the police found explosive devices including gas canisters, three Molotov cocktail bombs and a homemade hand grenade.

Gaspar on credibility building mission

In Washington Vitor Gaspar reaffirmed that Portugal will -on its own account- not ask for more time or money and said that the guarantee of EU aid is a precaution in case Portugal faces unanticipated difficulties, quotes the Wall Street Journal. The government has been successful in selling three-, six- and 12-month Treasury bills and Gaspar said it plans to sell 18-month debt "before long." A €10bn Portuguese bond issue comes due on Sept. 23, 2013, and the current Portugal-IMF-EU deal calls for some of that to be refinanced in private market. The ECB monthly bulletin finds that Portugal’s debt is sustainable even in the event of a 5% recession, Jornal de Negocios reports.

No ‘nasty surprises’ at Greek CDS auction

The CDS auction held by 14 banks ended yesterday without nasty surprises, setting a market-wide payout of $2.5bn, or 78.5% of the $3.2bn of net outstanding CDS, the FT reports. The payout was considered fair value by many strategists and investors, who also said that this was more down to luck than design. Market participants insist lessons need to be learned from the Greek debt restructuring deal and bond exchange, and CDS, untested in a sovereign restructuring before Greece. Most importantly there should be a mechanism to settle CDS before bonds are exchanged in future restructurings.  The end result in Monday’s Greek auction was not affected by the failure to have such a mechanism. This was because the new bond maturing in 2042, used to set the final pay-out as the cheapest security to deliver, traded at similar levels to old Greek bonds.

Greek crisis makes it more difficult for German municipalities to get easy access to credit

As a result of the Greek crisis German banks are increasingly weary of lending large sums to German cities, the leading front page story of Financial Times Deutschland says. „Measured with their potential financial performance the debt of many municipalities is gigantic“, the paper quotes a leading manager of big bank based in Frankfurt. The sovereign debt crisis has sown general doubt about the creditworthiness of public debtors, FTD continues. „The debt crisis has shown that nothing is impossible“, a city debt manager of a bank tells the paper. „The debate about Greece is poison for credits for cities, the business has become a new quality“, another manger says. As a result of the general doubt, the decreased financial performance and the tougher Basel III banking rules many cities will find it increasingly difficult to find banks willing to lend, the paper says.

Impoverished cities in Northrhine-Westphalia don’t want to pay for East-Germany any more

The anticipated elections in Northrhine-Westphalia, with 18m inhabitants Germany’s largest federal state, put a strain on intra-German solidarity. Several mayors of highly indebted cities in the state have asked to put an end to the intra-German solidarity mechanism that sees billions of euros flow from the West to the East of the country, Süddeutsche Zeitung reports on its front page. „The solidarity pact for the East is a perverse instrument that no longer has any justification“, Ullrich Sierau, the social democratic mayor of Dortmund told the paper. The solidarity pact foresees that €156bn will have been transferred between 2005 and 2019 between the West and the East irrespective of the financial situation of the payer and the receiver. The mayors of Essen and Oberhausen told the paper similar things. All of these cities are heavily indebted and had to close public institutions while some of the cities in the east were doing better financially.

The „Fourth Reich“ becomes a major election campaign in Greece

Frankfurter Allgemeine Zeitung has a long story about Panos Kamenos, a former parliamentarian of Antonis Samaras’ Nea Dimokratia (ND) who is now successfully leading the new right wing anti-German populist party „Independant Greeks“ (Anexartitoi Ellines). The party is opposed to the austerity programs and what they perceive as the EU’s and the IMF’s diktats, but anti-German rhetoric is an important mobilizing factor. „We have beaten them during the war and we will beat them once again in their attempts to impose the Fourth Reich“, FAZ quotes Kammenos. The politician also asks for Germany to pay reparations for the war crimes during WWII, a demand that is in principle supported by the Greek government, as the paper points out. In 1960 Germany paid reparations in the magnitude of 115m D-Marks and several international tribunals have since ruled that the question was settled.

Bild’s Paul Ronzheimer calls the anti-German campaign in Greece „irresponsible“

Writing a comment in Bild Paul Ronzheimer calls the Greek demands „irresponsible and insolite“. He points out that these calls do nothing but to stir up discontent and frustration further against Germany which „like no other country is supporting Greece with billions of aid“. Ronzheimer concludes that „hopefully the Greek people will not fall for these electoral manoeuvres of its politicians“.

French election watch: Sarkozy’s popularity rising

Nicolas Sarkozy’s approval ratings reached the highest level for two years, according to Reuters. Pollsters LH2 report a 40% approval rating, up two percentage points from a month ago. Three Ifop polls show Sarkozy ahead of Francois Hollande in the first round of the elections, while Hollande is still substantially ahead in the second round.

No ECB bond purchases last week

The ECB has had no further bond purchases last week, as the securities market programme is slowly being phased out. The total size of the SMP now stands at €218bn. The ECB’s balance sheet is now over €3 trillion.

Colm McCarthy on Olli Rehn

This is from Colm McCarthy in the Irish Independent, via Stephen Kinsella in the Irish Economy Blog. McCarthy points out that the statement of “pacta sunt servanda”, as used by Olli Rehn in respect of the Irish promissory notes, was absurd, as the promissory notes are not subject to any pacts or treaties. The Irish government issued the promissory notes to the banks three years ago to allow them to honour their obligation to unsecured bond holders. The Irish government wants to reschedule the finance arrangement, seeking a longer duration and lower interest rates. McCarthy makes the point that the promissory notes were imposed by the ECB. McCarthy also points to the duplicity of European officials, who welcome the massive Greek debt restructuring, while insisting that Ireland should get no relief at all.

Eurointeligence Comment and Analysis

Major banks and pension funds threw their weight behind Greece's bond swap offer on Wednesday,Reuters reports, making it increasingly likely that the deal will pass and clear the way for a bailout package to avert an immediate default on its debt.  A group of banks and funds representing 40.8% of Greece's €206bn of outstanding debt said they would take part in the deal, joining other Greek and foreign banks and pension funds which have already pledged to accept the offer. In total, bank, insurers and pension funds holding bonds worth around €120bn have already declared they will take part. Some hedge funds and several Greek pension funds were holding out against the deal.  Tonight the Greek government will know the participation rate. The final countdown started.

Some high risk bets with foreign-law bonds

A game of chicken is going on between some investors and the Greek government: The Greek debt management agency yesterday threatened that it has no money to pay resistant bondholders, a message to those investors holding €20bn Greek bonds issued under foreign law. The strategy of some hedge funds is the following according to the FT: Greece can only force holders of foreign-law bonds to participate by use of CACs on a bond issue-by-issue basis, making it much easier for hedge funds to assemble blocking stakes. Some hedge funds are now buying holdouts, which leaves the Greek government four options: repay the foreign law issues in full, default on them in full, enter into a new set of restructuring negotiations, or, select some issues to repay, and some to default on.  The hedge funds bet is on getting enough blocking stake to launch a legal process so that it would cost the Greek government relatively little to repay the bond in full. It is a high risk strategy.

Nouriel Roubini

Writing in ft.com, Nouriel Roubini says that private investors in Greek bonds got a fairly sweet deal, and they should accept. The reason is that the official sector is bankrolling this entire exercise. Roubini says Greek debt will fall to an unsustainable level of 120-160% (we agree that this is a more realistic range of expectations than the oddly precise 120.5% as officially claimed). What is really happening is that private debt gets supplanted with official debt. He also makes the point that the new bonds will be subject to English law, so “if Greece were to leave the eurozone, it cannot pass legislation to convert it into new drachma debt. “This is an amazing sweetener for creditors,” Roubini concludes.

Reuters Breakingviews

Reuters Breakingviews writes that Greece is very likely to default on the holdouts, and it is not going to be a big deal. 86% of bonds are Greek-law bonds. Greece will probably make the 75% threshold (below which the offer would fail), but not the 90% outright. The CACs will thus be triggered to reach that level. It would then not be catastrophic if Greece were then to default on the holdouts. The article concludes:

“However, the latest threats have scrapped any illusions that Greece's deal with its private creditors will be ‘voluntary’. Once collective action clauses are agreed on, credit-default swaps will be triggered. Even if a chaotic default is avoided, the swap will leave a bad taste in bondholders' mouths. Private creditors will be forced to take a loss, whereas public ones will be spared.” 

Party employees protest amid outstanding wages

A crowd of angry PASOK employees blocked the entrance to the party headquarters in central Athens on Wednesday to demand four months in unpaid wages, drawing attention to PASOK’s dire finances as its cadres prepare for a leadership contest next week, Kathimerini reports. Employees of conservative New Democracy with some E132m in debt have lodged similar complaints about outstanding wages, though progress seem to have been made in paying staff their dues. Both parties are said to be pressing the Finance Ministry for funding as their debts grow and their camps gear up for early elections, expected in late April or early May.

Bild criticizes Greece for arms purchases

Bild has a big story with the headline: „In the middle of the crisis:  Greece buys weapons for €1bn“. The paper explains that according to report on arms sales and purchases within the EU in 2010, Greece purchased military equipment for more than €1bn which represents about 3% of GDP. „In order to fulfil the consolidation requirements from Brussels salaries, pensions and social expenditure are cut down in a tough manner“, the mass circulation daily explains. „But even in the midst of the crisis there seems to be enough money for the army.“

Francois Hollande wants to propose concrete treaty additions

Francois Hollande will seek to add specific measures to stimulate economic growth as part of his request to revise the fiscal compact, Reuters quotes    Pierre Moscovici, Hollande’s campaign manager. Moscovici said that this growth focus was missing in the EIB, in the project bonds, and in the lender of last resort function of the ECB. The article also mentioned that Hollande favoured eurozone bonds, and to give European institutions a greater say in eurozone policy. Hollande’s team claimed it would have the support from Italy, Austria and Spain.

Angel Merkel expresses concern about Portugal

Reuters has the story from a closed-door meeting between Angela Merkel and MPs in Berlin. She expressed concern about the rise in Portuguese yields. And she ruled out any definitive increase in the actual size of the ESM, while leaving it open that the ESM and EFSF could run side by side.

Spanish home sales plummet 30%

El Pais reports that existing Spanish home sales dropped 29.3% last year, The data reflects the ongoing crisis in the Spanish housing market (and also means that the massive overhang of unsold houses takes much longer to get rid of than originally hoped). Various policies aimed to simulate the housing market, including a broadening of tax deduction, have failed. The paper quotes industry sources as saying that buyers are waiting for another year or two, with prices expected to fall further. During 2011, the price of private accommodation fell by 6.8%.

Jürgen Stark calls the ECB’s balance sheet „appalling“

Talking to Frankfurter Allgemeine Zeitung, Jürgen Stark said the ECB’s balance sheet was of very doubtful quality. „The balance sheet of the eurosystem is not only gigantic in its dimension but also its quality is appalling“, the ECB’s former chief economist said. But Stark also criticized the balance sheet’s structure pointing out that more and more short term debt had been replaced by long term debt which would make more difficult to exit the currently very loose monetary policy stance. Stark’s criticism is likely to further fuel the debate in today’s Governing Council meeting, after Jens Weidmann criticized the ECB’s current strategy as too risky in a leaked letter to Mario Draghi last week. The ECB’s balance sheet recently surpassed the volume of €3tr. Specialists point out that while the Fed’s balance sheet had grown even more dramatically, the quality of the debt on the Fed’s balance sheet is of a better quality than in the case of the ECB after its decision in February that some central banks can accept credit claims that are significantly below investment grade.

Strong decline in Germany’s industrial orders fuels doubt about quick recovery

According to the German statistical office Destatis, industrial orders in January dropped by 2.7% compared to the previous month, Financial Times Deutschland reports. This corresponds to a level that is almost 5% lower than at the same time in 2011 and it represents the weakest figure in more than 2 years. Economists quoted by the paper said that those disappointing figures were a blow for those who had hoped for a rapid recovery in the next few months. The decline in orders is to a large extend due to a contraction of demand from within the eurozone - down by 12% from August to January.

Bavarian CSU wants monthly update on the risks of the euro rescue

Fears of uncontrollable risks related to the euro rescue operations lead deputies of Angela Merkel’s Bavarian coalition partner CSU to ask the finance ministry to provide monthly updates on these risk, Münchner Merkur writes. Based on figures provided by the finance ministry a group of deputies around the parliamentarian Johannes Singhammer calculated that the risks for Germany currently amounted to €1.05tr. „With those gigantic liability risks the federal finance minister must provide a monthly survey in order to guarantee for transparency“, Singhammer told Münchner Merkur.

Wolfgang Proissl calls on Weidmann to stop sniping at the ECB’s crisis policy

In a comment for Financial Times Deutschland Wolfgang Proissl points out that Mario Draghi told the EU heads and state of government last week that there would not be a third round of 3y LTRO thus signalling an exit from the ECB’s ultra-generous provision of liquidity. Proissl asks Jens Weidmann to use today’s Governing Council meeting to announce his own exit from publically criticizing ECB decisions he previously voted in favour of, as he did with his leaked letter in which he criticised the risks resulting from the 3y LTRO and the loosening of the collateral framework. In order to do so, Weidmann must break the still strong position of the Bundesbank’s old guard and transform the German central bank into a strong and constructive part of the eurosystem. Succeeding in this endeavour would be a historic accomplishment for Weidmann, Proissl says.

More on Germany’s Target 2 debate

Wolfgang Münchau

Writing in Spiegel Online, Wolfgang Munchau says the Target 2 analysis is correct, but not so the conclusions, especially not the attempts to meddle with the system itself and constrain the financial flows. Munchau makes three observations that stand in contrasts to Hans-Werner Sinn’s conclusions. The first, and most obvious one, is that Germany’s Target 2 claims would make it too costly for Germany to leave the euro. Germany has thus not only a political and wider economic interest, but also a short-term financial interest in keep the euro alive. Second, the causes for payment system imbalances are current account imbalances. That’s what needs fixing, not the payment system. And finally, Sinn’s comparison with the US suggests that the eurozone requires common bank backstop systems, and a common unemployment insurance to avoid such massive distortions.

Olaf Sievert

Olaf Sievert, hat tip Herdentrieb, makes the point in an open letter to Hans-Werner Sinn that the Target system itself does not grant credits. It is only a payment systems that reflects the flows of funds across borders. He warns against any measure to restrict the payment system as this would be equivalent to the introduction of a trade barrier.

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Eurointeligence Comment and Analysis

The big story of yesterday’s EU summit is that the fiscal treaty is already collapsing. You don’t find this story in the summit declaration, but in the desperate and futile attempt by Mariano Rajoy, the Spanish prime minister, to persuade his colleagues to move the Spanish deficit target, which he cannot conceivably meet, without destroying his country’s economy. Rajoy faces the choice between breaking the target, and leading Spain onto a trajectory that is not consistent with monetary union.

We have been highlighting the Spanish budget overshoot and the ensuing politics for some time now. The Spanish are trying to get this year’s deficit target of a 4.4% adjusted (considering that the deficit was 8.5% in 2011). Meeting the target would require a single year fiscal adjustment of €44bn, which as Rajoy said would destroy the welfare state.

He got a hostile response to their request to loosen the deficit target. The EU is just about to implement an auto-pilot fiscal pact, and is absolutely determined to stick to the target that everybody gets their public sector deficit down to 3% in 2013.That sentiment was summarised by the prime ministers of Sweden and Finland. El Pais quotes Frederik Reinfeldt as saying that the first to do after agreeing new budget rules cannot be to soften them.” Jurki Katainen also said it would be "completely wrong" to expand the scope to reduce the deficit. So essentially, the eurozone follows a position that everybody knows is unfeasible, for fear of losing credibility. Nobody in Brussels wants to own to the fact that austerity is not working.

If Spain were to stick to the target, it would need to make a fiscal adjustment of 4.4% this year, and a further 1.1% in 2013, plus further adjustment as the economy will weaken during that period. As the country is already in a recession, exacerbated by private and public sector deleveraging, such a massive public sector retrenchment would land Spain in a depression. Spain is now where Greece was about two years ago.

El Pais writes in another article that Spain was an example of things to come to eurozone. Spain implemented severe austerity, and yet the deficit was 8.5% of GDP, far below the 6% target. The paper quotes Jose Manual Barroso as saying that there was no discussion on the flexibility of deficit targets. The paper other countries faced a similar situation, but were reluctant to enter into this debate on the need for more fiscal breathing space.

Finance minister Luis de Guindos explained the situation to his colleagues in the eurogroup, but did not find the support he expected, El Pais writes. On the contrary, he received a reprimand from the representative of the ECB and from Olli Rehn, who had asked for more explanations about the deficit and the details of the 2012 budget before discussions on a changed deficit target can even commence. The paper writes that the response among ministers was one of deafening silence. The paper quotes unnamed diplomatic sources as saying that Rajoy and de Guindos thought they had allies in their quest to relax the targets, but that this seems to have been a misjudgement.

Faced with the choice of meeting, or breaking, an unrealistic target, Rajoy seems to be accepting that he needs to break it. He promised to present a budget that seems “reasonable and sensible”. El Pais says Spain is not alone when it comes to facing up to the reality of unrealistic deficit targets. So is the Decision to increase the ESM likely to be taken end March.

Reuters reports that the decision to increase the ceiling of the ESM could be taken by euro zone finance ministers at an informal meeting in Copenhagen on March 30-31, quote two unnamed officials. The reason is that Germany does not want to move on this issue until the Greek bond swap is done   Herman van Rompuy also confirmed that the decision could be left to finance ministers. The article said it was not immediately clear if such a decision would then have to be approved by another euro zone summit before the IMF spring meetings April 20-22.

Netherlands, which may also not meet its targets, according to the latest Dutch forecasts.

Conditional approval of Greece bailout

There are confusing news reports this morning about the EU summit and the eurogroup’s conditional approval for Greece bailout, the FT has the most comprehensive account.  According tothe FT story, reporting that eurozone ministers effectively delayed approval of more than half of the €130bn bail-out for Greece asking for more proof that the hastily agreed spending cuts and reforms would be implemented. They requested a “detailed assessment” by European Union and IMF officials by next week of implementation of 38 specific measures before handing over the remaining €71.5bn to Athens. 

What has been approved are €35.5bn worth of bonds for use as “sweeteners” for private investors taking part in the PSI, another €23bn to recapitalize the banks and a separate E35bn to ensure Greek banks access to liquidity from the ECB. Among issues that must be resolved, officials said, was a €300m gap that re-emerged when the Greek government changed the way unemployment benefits were paid.

Officials are expected to meet again on March 9 to give a final sign-off, a day after the debt swap is scheduled to be completed.

No CDS trigger, at least for now

The ISDA Determinations Committee met yesterday and decided to consider PSI not a credit event that would trigger credit default swaps (CDS), at least for now. ISDA suggested in a statement that it will re-examine in a few days’ time whether the swaps should be activated, Kathimerini reports. The ISDA committee discussed whether the ECB and national central banks in the eurozone had been given preferential treatment by not being included in the Greek debt haircut, and whether the private sector involvement plan (PSI) constituted a credit event. Both suggestions were rejected by members of the association.

FT Alphaville writes that the ISDA also voted down whether the use of CACs to encourage participation in the PSI trigger a credit event. FT Alphaville thinks this has to do with concern about the outcome of the auction that will determine the actual payouts on the CDS contracts.

EU leaders also reappointed Herman Van Rompuy for a second 2.5 year term as president of the European Council, adding the role of chairing the new biannual summits of the 17 eurozone member states.

A day after the ECB pumped E530bn of cheap, three-year liquidity into European banks, yields on Italian 10-year bonds fell below 5% for the first time since last August. Spanish yields also dropped and German Bund futures slid in a sign of investors' returning appetite. 

Decision to increase the ESM likely to be taken end March

Reuters reports that the decision to increase the ceiling of the ESM could be taken by euro zone finance ministers at an informal meeting in Copenhagen on March 30-31, quote two unnamed officials. The reason is that Germany does not want to move on this issue until the Greek bond swap is done   Herman van Rompuy also confirmed that the decision could be left to finance ministers. The article said it was not immediately clear if such a decision would then have to be approved by another euro zone summit before the IMF spring meetings April 20-22.

More About Jens Weidmann’s request to securitise Germany’s Target 2 balance

The entire Target 2 debate sounds very technical, but gets to the heart of the eurozone crisis. Jens Weidmann’s proposal to securitise has led to hostile commentary in the press.

Reuters Breakingviews writes that Jens Weidmann is more dangerous to the ECB than Axel Weber. If Weidmann was not concerned about a breakup of the EU, he would not need to talk about securitising Germany’s claims on the eurosytem – which would only ever fall foul if the euro were to break up suddenly. The proposal is to make peripheral central banks to hand over their own collateral to the central banks with Target 2 surpluses. “But it could go down like a lead balloon with the weaker central banks. Not only won't they like their credit-worthiness being questioned, they would struggle to find collateral to cover anything like the entire exposure.”

Mark Schieritz makes an important in his commentary in Herdentrieb. He says the Bundesbank is effectively asking for a double collateral. If Greece were to leave, and were uncooperative, it would not deliver the securities it had promised. In either case, the Bundesbank’s share of the claims would be lost. He says the only to avoid this is to carry the securities to Frankfurt, which would imply that you need to collateralise the surplus with gold holdings, which is hardly realistic.) If Greece, however, is co-operative, than the current system is perfectly adequate. He concludes that the Bundesbank must have come under massive public pressure through the Target 2, which has been raging in Germany.

Portugal’s capital flight

This is very interesting column by James Saft in Reuters. He points to the story that the ECB was actually once again resuming its purchases of Portuguese bonds, which he finds a more telling development than the second LTRO. The carry-trade strategy is not working there. Portuguese 10-year rate have gone up to 13%. He writes Portuguese banks are simply too weak, and there are no natural buyers of Portuguese risk left. The IMF is asking Portugal to make a budgetary adjustment of 6% of GDP, as a result of which the central bank has recently downgraded its forecast for growth to 3.3%. He says may prove optimistic, as a shrinking economy has a nasty way of making a debt burden worse. He predicts a “long, slow slide to the next bailout, punctured by intermittent forays by the ECB into bond markets in Portugal's support, each and every one of which will give private money less reason to play along.” 

Raising funds for Greece

After two Italian mayors declared last month that they would give up a month’s salary in a show of solidarity with the austerity-weary people of Greece, they met with their Greek counterparts to “create bonds of solidarity and develop networks to restore a unified Europe”, Kathimerini reports. According to one of the mayors, Marco Galdi, his decision was prompted by “deep gratitude to the Greek people,” and the desire to “produce a chain reaction throughout Europe. We cannot say that we are all brothers, but surely -- and I am fully convinced of this -- we are the sons of Greece,” he said. The mayors pledged to organize awareness campaigns in Italy and other countries to raise funds for Greece.

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

The markets are getting optimistic again.

Ireland will hold a referendum on the European Stability Treaty, creating more uncertainty for the eurozone over months. The Irish Times reports that the cabinet decision had been taken following the advice of Attorney General Máire Whelan that, “as the treaty was outside the EU architecture, on balance a referendum should be held”. No date has been set for the referendum but it is expected to take place in May or June. Kenny said that he intended to sign the treaty at a meeting with the other EU heads of Government in Brussels on Friday.

A no vote would mean Ireland would not be eligible for funds from the ESM, writes the FT. The pact can enter into force with the support of 12 of the 17 countries that use the euro, effectively removing any single nation’s veto over the accord.

Ireland aims to resume issuing debt on bond markets later this year as a first step toward ending the bailout on schedule. However, with about €20bn of borrowing costs to cover in 2014, most analysts believe it will need more official funding to meet some of its commitments, Reuters reports.

A recent opinion poll found 40% of the 1,000 Irish people questioned said they would support the treaty, with 36% against and 24% undecided.

Ireland's main opposition party Fianna Fail has said it will join the governing Fine Gael and Labor parties in campaigning for a 'Yes' vote. Sinn Fein leader Gerry Adams, whose party forms the second largest opposition bloc in the lower house and has seen its popularity surge over its anti-austerity stance, said his deputies would campaign against the treaty.

German constitutional court rejects secret committee

The German constitutional court has given a ruling that is going to make the day-to-day operation of the European Stability Mechanism more difficult. In its original ruling on the EFSF, the court demanded that the parliament must be consulted for each discussion with a budgetary implication. In response, the parliamentary majority took a decision to set up a secret nine-person committee, drawn from the 41-MP strong budget committee, to would monitor and approve the government’s ESM-related activities. The court yesterday upheld most of the complaints against the setup of a secret committee. The case was brought  by two SPD MPs.

Frankfurter Allgemeine quoted the parliament’s president as saying that the parliament will find a solution consistent with the court’s ruling shortly. The court said the committee could only be invoked for the purchase of government bonds through the ESM. The court says this was an exceptional circumstance, given the confidentially requirements. But the court said it any reduction in the ordinary rights of MPs would have to be well founded, and would have to be proportionate. It said the establishment of a permanent mini-committee for ESM affairs failed that test. The argument that it would be less bureaucratic and faster to convoke nine MPs is insufficient. If there is time pressure, the budget committee itself is suitable enough for that purpose. (That means even the argument of an emergency is not sufficient.) The court also accepted a number of procedural complaints, for example relating to the questions what if only a minority of the nine MPs turn up, as there is no system of deputies in place.  Furthermore, the committee does not reflect the majority in the Bundestag.

Dutch Parliament approved new Greek bailout

The Dutch parliament gave grudging backing to Greece's second rescue package on Tuesday saying it was needed to stabilize the currency bloc. During a debate in The Hague, a parliamentary majority voiced its support for the package, making a formal vote--which could have taken place Wednesday—unnecessary, according to Dow Jones. As expected, the Dutch minority government secured a majority through the backing of the opposition Labor Party. The government relied on the Labor Party because its key ally in parliament, the populist Freedom Party, is staunchly opposed to bailing out fellow euro-zone member states.

Greek parliament approved cuts in defense, investment and pensions

Greece's parliament Tuesday approved a law implementing steep budget and pension cuts on the first day of a two-day legislative sprint ahead of the European Council meeting, the Greek portalCapital reports. The legislation aims for budget savings worth some €3.2bn, including a €400m reduction in defence spending along with a €400m cutback in the public investment program. Other cuts reduce the operating expenses of ministries by 15% and implement a 12% reduction in pensions over €1300 per month. The bill was approved by 202 lawmakers with 80 deputies opposing them.

Greek cabinet agreed cuts on minimum wage

Earlier on Tuesday the Greek cabinet also approved measures to lower labour costs, approving a steep reduction to the minimum wage, Reuters reports. This includes a 22% cut on the standard minimum monthly wage of €751. For those under the age of 25, the cut will be 32%. In addition, there will be wage freezes on certain categories until the unemployment rate, currently 21%, falls below 10%. The reduction was one of several measures included in a new debt deal for Greece that was voted through Parliament earlier this month.

Juncker want a reconstruction commissioner for Greece

In an interview with Die Welt, Jean-Claude Juncker revived the German idea of a Kommissar for Greece, but with some important modifications. He said the eurozone would have to strengthen the Greek infrastructure through a much better use of structural funds. The same applied to improvements in competitiveness. This job requires political coordination, and should be entrusted to a European Commissioner, with a specific responsibility for the reconstruction of the Greek economy. Juncker make clear he does not want a commissioner to enforce savings, but to aid in reconstruction. It was insufficient that finance ministers deal with this matter on a monthly basis.

Troika has positive report on Portugal

The FT reports from Lisbon that the troika has produced a positive report on Portugal’s reform efforts, saying it was on track to meet the conditions of the programme, while demanding further steps. The troika’s third quarterly review paves the way for the disbursement of the third tranche, of €14.9bn, of the country’s loan programme, due in April. That would bring the total of funds received to €48.8bn, 62% of total programme. The articles quotes finance minister Vítor Gaspar as saying that the country would not ask for any increase in bail-out funds, more time to meet fiscal targets or repay loans, or any other revision in the terms of the agreement. (though the cameras showed him and Wolfgang Schauble taking about a new programme at a recent Ecofin). Gaspar said the 2011 budget deficit would be close to 4% of GDP, below the official 5.9% target, but this was achieved through a partial transfer of bank pension funds to the state, which accounted for about 3.5pp of last year’s adjustment. Gaspar the structural adjustment last year was nevertheless still above the eurozone average, at about 4pp. This year’s target is 4.5%, which Gaspar said would be met without additional consolidation measures.

The very slow path towards adjusting the Spanish deficit

El Pais writes about the incredibly slow process of getting Spain’s insane 4.4% deficit target for this year adjusted. There are fierce negotiations under way, at the Ecofin level, and with the Commission. Mariano Rajoy will raise the issue over dinner with his EU colleagues on Thursday, in the hope that the negoatiations are settled by then. The government is current preparing a budget for this week, which still sticks to 4.4% deficit target, though El Pais writes, the decision will rest with Rajoy, and is as usual likely to be made at the last minute. If there is no deal with the EU by this week, the government could publish a budget, focusing solely on the macroeconomic forecast, with all the budgetary details postponed until next week. The article says the calendar of the Spanish administration does not match that of the Commission. Olli Rehn says it might takes weeks.

ECB says Greek bond no longer acceptable as collateral

The news is unsurprising given the equally unsurprising downgrade of Greek bonds to selective default. The ECB will no longer accept Greek bonds as collateral until the debt exchange offer is complete. But there is a twist. It was previously thought that the gap would be plugged through EFSF-collateral, but this is apparently not the case. The ECB said any ensuing liquidity needs would have to be met through emergency liquidity assistance by national central banks. The FT writes that this highlights “eurozone authorities’ slowness to put in place measures agreed to support the Greek debt exchange”, as the promised support through the EFSF is not yet in place.

Fitch gives an extremely sceptical assessment of the long-term effects of the ECB’s liquidity support operations

FT Deutschland has an article on Fitch’s analysis of the impact of the European Central Bank’s liquidity operations, which came to a rather downbeat assessment. The ECB can at most delay the collapse of weak banks, but it cannot change the situation fundamentally. The rating agency said that the life support operations for weak banks would only postpone their death. The agency said it did not expect a big push of credit flows into the economy, and it saw only limited effects on the prices of government bonds.

ESM agreement likely by March or April, say the Dutch

Reuters quotes the Dutch finance minister Jan Kees de Jager as saying that an agreement to extend the ESM would be in place by March or April. He said that Germany was the only country with reservations on this matter, but his understanding was that the Germans would be ready to make a decision by then.

Sarkozy makes modest gains in French opinion polls

We still consider this to be an open race, despite the consistent polling lead of Francois Hollande.France Soir reports on the latest Ifop poll for Paris-Match, published Tuesday night, showing that the wide polling gap is closing. François Hollande leads with 28% for the first round, followed by Nicolas Sarkozy at 27%, Marine Le Pen at 18%, François Bayrou  at 12% and Jean-Luc Mélenchon at 9%. For a second round run-off Hollande still leads with a 10 point gap at 55% against Sarkozy 45% (though down from an 11 point in the previous poll.) Interestingly, the respondents are saying that Sarkozy is running the better campaign so far.

Wolfgang Munchau on Spain

In his FT Deutschland column, Wolfgang Munchau takes a closer look at Spain and concludes that the pursuit of the 4.4% deficit would be pure madness, pull the country into a depression, and would result in an inescapable debt trap for the private sector. Munchau says the problem for Spain is the relative lack of deleveraging in the private sector so far, a process that is only now beginning in earnest, and which will take several years to complete. During that time, the Spanish government can ill-afford to consolidate as well. The degree of consolidation required under the EU adjustment programmes is so extreme that it is bound to destabilise the Spanish economy. Munchau concludes that Spain, not Greece, was the biggest threat to the eurozone’s cohesion.

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Euro-dollar stable though the e/r wobbled yesterday as the news of the Irish referendum gave out.