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

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

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

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

Eurozone is sliding deeper into recession

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

German job miracle seems to come to an end

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

Hoyer asks for €10bn for EIB capital increase

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

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

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

Venizelos warns not to vote for anti-bailout parties

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

S&P raises credit rating for Greece

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

Noonan denies scaring voters

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

Austria plans 70 year bond

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

Spanish borrowing costs to go up at auction

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

Bill Clinton criticises austerity

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

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

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

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

Spreads rising again, euro falling.

Eurointeligence Comment and Analysis

In anticipation of a victory by Francois Hollande, eurozone leaders have now engaged on a verbal growth blitz – proposing a series of quack remedies to mask the effects of austerity. El Pais had the story in its Sunday edition that the European Commission is planning what the paper called a €200bn Marshall Plan to speed up investments in infrastructure and green technology, by refocusing the resources of the European Investment Bank, and using higher leverage. The goal is to do this without a single cost to the taxpayer – an effort the articles described the squaring of the circle.

(Please note that this policy does not reverse the austerity programmes, or constitute a fiscal stimulus of any kind. It is the typical case of the European Commission seeking a microeconomic answer to a macroeconomic problem.  What this exercise does is to tell us that the EU is treaty the current economic crisis as a PR challenge first and foremost.)

In this spirit, Angela Merkel announced that she was preparing a European growth agenda for the June European Council, according to Leipziger Volkszeitung on Saturday, confirming that this might include a stronger and re-focused European Investment Bank. But Merkel also stressed the fiscal pact war non-renegotiable and that a classical fiscal stimulus package was out of question. The chancellor pointed to policies that enhanced the euro countries’s competetiveness like structural reforms or labour market reforms as Germany had undertaken them 10 years ago. At a large electoral meeting on Saturday, Hollande told his supporters according to Le Monde: „For months the people of Europe have been watching France. I feel that the positions of conservative heads of government evolving as a result of the polls“.

Weekend polls confirm Francois Hollande’s solid lead

The most recent poll for Le Journal de Dimanche confirmed Francois Hollande’s position as the most likely next French president giving him a 55% to 45% lead over the incumbant Nicolas Sarkozy. There were a number of bad and embarassing reports for Sarkozy over the weekend. According to the news website Mediapart.fr Gaddhafi had offered to $50m in 2007 in order to support Sarkozy’s election campaign. The president’s advisors rebuked the story, accusing Mediapart of campaigning on behalf of the left. Also over the weekend the French billionaire Francois Pinault, a former supporter of Sarkozy, „crucified“ the president over his attempt to lure voters of the extreme right in his desperate belief that he can still win, as Le Monde put it. „He is losing his mind“, the paper quotes Pinault. „People close to him think he can still win. He is cooked! It’s like in the bunker in 1945.“

Holger Steltzner warns Hollande’s plans will lead France nowhere

Frankfurter Allgemeine Zeitung’s ultra-orthodox economic editor Holger Steltzner has a very bleak assessment of Francois Hollande’s electoral proposals. „The Socialist suggests to the voters that under his leadership France can be sheltered from the storms of globalization“, Steltzner writes. „Debt, youth unemployment, disappearing competitiveness of the French industry, the lack of SME’s, the weaknesses for job training in companies, the highest government spending level within the eurozone, the high taxes and social contributions and the bloated state sector were hardly a topic in the campaign. There was much more insistence on Hollande’s plans to raise income taxes on high revenues to 75% and to return to the retirement age of 60 years.“

Stefan Kornelius warns that Hollande will break the euro rescue consensus

This is a comment that tells us how frightened Germany’s establishment is over Francois Hollande. Süddeutsche Zeitung’s foreign policy editor Stefan Kornelius warns that Francois Hollande will break the euro rescue consensus that Angela Merkel has built over the past two years. „What Nicolas Sarkozy has helped to build and what even technical governments in Greece and Italy have supported would then be put into question“, Kornelius writes in an editorial. „After months of detailed work on the rescue package for the euro, Hollande questions its foundation: consolidation and reform against spending and maintaining. The euro rescue is becoming once again the topic of quasi-religious beliefs.“

Wolfgang Munchau makes the case for Francois Hollande

In his FT column, Wolfgang Münchau says the French are likely to get rid of Nicolas Sarkozy on the simple grounds that they despise him. Munchau estimates that Francois Hollande’s impact on the French economy is likely to be neutral, while it is highly positive on the eurozone, because he will mount the most powerful challenge to the centre-right consensus that reigns in Brussels, and that is in the way of an effective eurozone crisis resolution. He said Hollande is right to challenge Angela Merkel on the fiscal pact, and to change the narrative towards economic growth. Munchau also noted that the forthcoming elections in the Netherlands are effectively a referendum on austerity. Munchau sees the beginnings of a popular insurrection against the current policy that it likely to cost each incumbent leader their job.

Dominique Moisi on Hollande vs Sarkozy

Writing in cnn.com, Dominique Moisi writes that Francois Hollande is the very likely winner of next Sunday’s final round of the French election. He lacks charisma, but the overriding concern of the French is to get rid of Sarkozy, who would have done better if he had focused on his economic crisis management than to the right with an anti-immigrant campaign. Moisi also makes the point that in 2007, modernity meant structural reforms. Now it means policies to address inequality. But Moisi is sceptical about Hollande’s impact on European policies. He calls him a Social Democrat – “an accelerating factor in the slow evolution of the EU away from a strict austerity policy, which the Germans themselves have started to question.”

Economists plead for direct ESM capital injections into banks

In the monthly rate survey of Financial Times Deutschland prior to the ECB’s meeting on Thursday in Barcelona a majority of leading bank economists pleaded for the EFSF/ESM to be able to inject capital directly into banks instead of first lending the money to governments. Direct capital injections are supported by the ECB, the IMF and money euro governments because think it would be the only way to break the bad feedback loop between banks and the sovereign in Spain and potentially in other countries in the future. But this is vehemently opposed by Germany which considers it would be a way to circumvent conditionality. The rate survey also finds that of the 38 economists no one expects a change of interest rates on Thursday and that 37 think that the ECB will either hold its current policy rate of 1.0% over the next 12 months or lower rates to 0.75% or even 0.5%. Most economists are deeply worried about the situation in Spain with some thinking that the country will be forced to ask for some sort of a bail-out and a EU/IMF program.

Le Monde calls on the ECB to tolerate higher inflation

In its front page editorial Le Monde warns of the situation in Spain and that the country’s financial and social situation is becoming a threat to the entire eurozone. But the paper says other policies are possible to overcome the crisis more easily. „They are monetary: The European Central Bank (ECB) could allow the crisis countries to finance themselves at lower costs and thus offer a support that they have earned. Some experts argue for the injection of a small dose of inflation in order to relieve the most indebted countries.“

Venizelos urges voters to vote for pro-euro parties

The leader of Greece’s socialist party has urged voters to back pro-euro parties to boost the country’s chances of remaining in the eurozone. “Over 75% of our people say they are for Europe and the euro – this must be expressed [at the election],” said Evangelos Venizelos in interviews published on Sunday. The latest polls suggest that PASOK gets 20% of the votes and New Democracy 25%. Even if they capture less than 50% of the vote, New Democracy and PASOK could still together control an overall parliamentary majority, thanks to an extra 50 seats awarded to the front-running party under a revised electoral law.  But with Antonio Samaras likely to become the new prime minister the grand coalition would also be more fragile. “The strain of co-operating again with the socialists without the calming presence of Lucas Papademos [the outgoing technocratic premier] could tip the coalition over the brink and force another electoral contest,” the FT quotes a PASOK analyst.

ECB has no plans to relax terms of promissory notes

The ECB reiterated yesterday that it has no plans for now to relax the payment terms on more than €30bn of promissory notes to the former Anglo Irish Bank, the Irish Independent reports.  "As to whether the ECB plans to do anything about the existing terms of the contract, the answer is no -- the existing terms of the contract are the existing terms of the contract," ECB president Mario Draghi told MEPs in the European Parliament in Brussels yesterday. "We will continue to reflect on this issue with a forthcoming attitude but at the present time we have these terms of the contract," he said.

Larry Summers on the eurozone

Larry Summers gives a damning indictment of the eurozone’s crisis policy, accusing European policy makers of misdiagnosing the nature of the crisis, and thus embarking on the wrong strategy. The LTRO has turned out to be a short-lived reprieve, and may even have made things worse.

“Europe’s problem countries are in trouble because the financial crisis under way since 2008 has damaged their financial systems and led to a collapse in growth. High deficits are much more a symptom than a cause of their problems. Treating symptoms rather than causes is usually a good way to make a patient worse. So it is in Europe. Its financial problems stem from lack of growth. In any financial situation where interest rates far exceed growth rates, debt problems spiral out of control. The right focus for Europe is on growth. In this context increased austerity is a step in the wrong direction.”

 

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

Sideways, miserable.

Eurointeligence Comment and Analysis

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

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

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

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

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

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

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

Dutch parties agree budget deal

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

The measures in full

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

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

Merkel rebukes Hollande on fiscal pact

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

Draghi wants common eurozone bank rescue authority

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

Unemployment surges in France

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

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

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

Robin Wells on the impact of the eurozone on the US

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

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

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

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

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

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

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

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

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

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

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

Hollande and Sarkozy are luring the Le Pen’s voters

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

Marine Le Pen is the real winner, Erik Izraelewicz says

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

Concern across Europe after Le Pen’s strong results

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

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

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

Bundesbank argues for strong economic immigration to Germany

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

Spanish economy contracts 0.4% in Q1

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

Eurostat includes bank capital injection into deficit calculation

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

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

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

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

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

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

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

The crisis is back full force.

Eurointeligence Comment and Analysis

The surprise of the first round of the French was not Francois Hollande’s relative victory, but the position of the loosing candidates, with the right significantly ahead of the left. For details and French analysis see Lefigaro.fr, Lemonde.fr and Lesechos.fr. The latest official figures are: Hollande 28.59% and Sarkozy 27.09%, Marine Le Pen (Far Right), 18.06%, Jean-Luc Mélenchon (Communist) 11.11%, Francois Bayrou (centrist) 9.11%, and Eva Joly (Greens) 2.27%. Mélenchon and Joly urged their supporters last night to vote for Hollande in the second round.

Hollande will beat Sarkozy by 54% to 46% on May 6, according to a poll done after the first round

According to a poll by Logica Business for Le Monde and other media undertaken after the first round’s results were announced Francois Hollande will win the run-off elections against Nicolas Sarkozy in two weeks with a margin of 54% to 46%. The poll found that 60% of Marine Le Pen’s voters will cast their ballot for Sarkozy, 18% for Hollande with the rest abstaining. 86% of Jean-Luc Mélenchon’s voters will vote for Francois Hollande and almost all the rest will abstain. One third of Francois Bayrou’s voters will vote for Hollande, one third for Sarkozy and one third will abstain.

Le Pen calls herself France’s real „opposition leader“

After a result that surpassed all polls, the extreme right and anti-euro candidate Marine Le Pen called herself France’s real „opposition leader“, Lemonde.fr reports. According to the paper Le Pen has now solidly established herself and her Front National party as the country’s third political power. With last night’s result she even surpassed her father’s result when he made it into the run-off elections with 16.86%. The article says that she is now in a position to become a real danger for Nicolas Sarkozy’s centre right UMP party in the next presidential elections in 2017. The paper quote Marie-Christine Arnautu, the Front National’s vice president who says: „This was a professional campaign compared to 2002. In 2002 it was a protest vote. Today this is no longer the case.“

Some comments from Germany

Commenting the first round’s results in Frankfurter Allgemeine Zeitung political editor Günther Nonnenmacher says that France has a „scary political landscape“, with one third of voters united in extremely nationalist anti European basic beliefs. Handelsblatt’s Paris correspondent Thomas Hanke writes that Hollande is due to take over a country that is about to slip into the second division. He will have catch up with Germany in terms of reforms, convince the impatient investors, and satisfy his voters at the same time.“

Euro policy makers think that France’s new president will be litmus test for the new fiscal rules of the currency zone

Speaking to Financial Times Deutschland Olli Rehn indirectly warned France’s next president to respect the eurozone’s new fiscal rules. „It is very important that the new economic governance rules are used and produce results“, Rehn said on the margins of the IMF spring meeting. „We have had several cases like Belgium, Cyprus, Malta und Poland where the governments have adopted additional measures in order to reach their fiscal targets. Hungary has decided to do otherwise. The Commission then recommended the suspend payments from the cohesion fund and the council of ministers followed that recommendation.“ Although Rehn did not mention explicitly France, it was clear from the questions that this was what he was referring to, FTD writes. The paper also quotes Jens Weidmann who said at the IMF meeting that it was crucial that France sticks with its obligation to get the deficit down to 3.0% in 2013. According to the IMF, France will only be at 3.9% if it does not take decisive additional measures.

New Dutch elections likely after Wilders rejects budget

Budget talks in the Netherlands collapsed over the weekend, with elections now likely to happen, creating uncertainty over the pace of budget cuts and the Dutch support for the fiscal pact.  The catalyst for the crisis was Geert Wilders, who refused to agree to €14bn-to-€16bn of budget cuts needed to bring the budget deficit under the 3% limit. Seven weeks of budget talks, Wilders suddenly backed out just when a deal appeared close.  Attempting to explain why he walked out, Wilders lashed out at the European Union, saying the Netherlands should not blindly obey commands from Brussels. The PVV is 'against Europe, against the 3% and against the euro,' Wilders told reporters following the collapse of the negotiations on Saturday.  

Reuters reports that prime minister Mark Rutte will first try to reach an agreement with the opposition, including the pro-Europe Labour Party, on crucial budget cuts after his ally Geert Wilders refused to do a deal.  But even if Rutte does manage to stave off an immediate budget crisis, elections within weeks or months are most likely.   "Elections are to be expected now. I will talk to parliament (on) how to get through this situation," Rutte told reporters on Saturday. The events also put a question mark over whether parliament will approve a new fiscal pact in the euro zone.

Uncertainty over whether the Netherlands can now push through crucial budget cuts and much-needed reforms of its labour and housing markets, as well as the prospect of elections, is likely to rattle financial markets. Last week, ratings agency Fitch warned that the Netherlands, one of just four euro countries with a coveted triple-A rating, was on the verge of a downgrade in its credit status due to high debt. 

Commentators say Wilders must realise he will be alone and not be part of any future coalition government, even with the VVD. The Volkskrant said in its analysis that Wilders now has his hands free to do what he wants - carry out an election campaign but that he is paying a high price for his freedom. Radio Netherlands says Wilders might be back to the anti-establishment profile he became popular with in the past, but his party’s lack of structure and its complete reliance on one-man rule makes it ineffective. An opinion poll published on Sunday showed the Netherlands remains highly fragmented politically, suggesting that it could prove difficult to form a new coalition quickly and that Wilders' chances of forming a new government were slim. 

Samaras pledges tax cuts and social spending increases

Greek conservative leader Antonis Samaras promised on Sunday to cut taxes and increase social spending, without missing the targets set by international lenders, if he wins the May 6 national election, Reuters reports. Samaras, presenting his economic programme two weeks before the vote, said taxes should start falling, starting with a single corporate tax rate of 15%, down from 23% now, to stimulate consumption and hiring and spur economic recovery after five straight years of recession. At some point in the future, the top VAT rate should be cut to 19% from 23% now, and the top income tax rate to 32% from 45%, he said. This would reverse some of the austerity measures the country agreed to last month. But Samaras said he would respect the aim of cutting the budget deficit to 7.3% of GDP this year and further beyond. He promised spending increases of €550n on low pensions, farmers and child benefits to be paid for by savings in state-run companies and a tax on new games. Samaras insisted that he would not accept the scrapping of the 13th and 14th monthly salaries, according to Kathimerini.

Blanchard appeals to Germany to accept eurobonds and higher inflation

Olivier Blanchard appealed to Germany to accept the progressive introduction of eurobonds and temporarily higher inflation as a means to resolve the crisis and to stabilize the currency union. „When there was no fiscal pact and other instruments to ensure fiscal discipline the Germans had good reasons not to want to accept responsibility for irresponsible budgetary decisions of other countries“, the IMF’s chief economist told Financial Times Deutschland. „Now we have the fiscal pact. Therefore the Germans should accept a movement towards eurobonds.“ Blanchard also advocated temporarily higher inflation in Germany than in the rest of the eurozone. „Should the Germans wish to continue to produce at potential but with reduced current account surpluses they must accept a price level that rises more quickly than in the rest of the eurozone“, he said.

Spain’s real estate resolution company take shape

We reported about the idea of real estate resolution companies in Spain last year, but El Pais now reports that the decision to move in this direction has been taken. El Pais said the measure is undertaken to ensure foreign investors, who believe that the €53bn in property-related write offs are not sufficient, given the recession and the likely increase in non-performing loans, and further falls in house prices. The article said the Bank of Spain does not agree with that assessment, but accepts that it cannot go against the market, and have consequently drawn up the guidelines. Many details have yet to be worked out.  The model to be followed is to create several real estate companies, depending on the type of assets that are transferred: land, housing under construction, completed developments, etc. The article has lots of details of how the scheme would work. The most important aspect is that it is not a true bad bank – in other words the government is not guaranteeing its losses.

Paul Krugman compares eurozone exit with an exit from the gold standard in the 1930

In his New York Times column, Paul Krugman writes that the policy imposed on Spain were “insane”. His main point is that the present policy are more inconveivable than a eurozone exit.

“What is the alternative? Well, in the 1930s — an era that modern Europe is starting to replicate in ever more faithful detail — the essential condition for recovery was exit from the gold standard. The equivalent move now would be exit from the euro, and restoration of national currencies. You may say that this is inconceivable, and it would indeed be a hugely disruptive event both economically and politically. But continuing on the present course, imposing ever-harsher austerity on countries that are already suffering Depression-era unemployment, is what’s truly inconceivable.”

Wolfgang Münchau on the politics of a eurozone-wide bank resolution scheme

In his FT column, Wolfgang Münchau writes that a consensus has been emerging among experts that a combined eurozone-wide bank resolution, supervision, and deposit insurance scheme is what it would take to eliminate one important element of the crisis. He says advocates of such a scheme make the mistake to think that this would be much more acceptable politically than a eurobond. Münchau says he also favours such an approach, but adds the political obstacles are at least as big, if not bigger, than those to a eurobond because of the political nature of European banking, and in Germany’s case also because of the role of the banks in the supplying generous finance to the corporate sector.  He also makes the point that this could only ever be a partial solution if the agreement is unfudged, which again is very unlikely to happen.

Gavyn Davies says eurozone has lost capacity to shock – for now

Writing in the FT, Gavyn Davies says the eurozone has lost its capacity to shock the rest of the world, as the link between eurozone bond spreads and global asset prices, which was strong last year, seems to have broken down. The reason is the perception of a significantly reduced liquidity crisis, as the ECB is likely to inject further liquidity into the system, having already revealed its preferences through the LTRO. But Davies warns of two negative trends. First, the LTRO has a potentially negative effect on bank balance sheets, leaving banks exposed to a further sell-off by international investors. Second, banks have every incentive to reduce their assets, and bring about a credit crunch that turns a mild recession into a depression. The capacity to shock would then return quickly.

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

Not good at all. Italian and Spanish spreads above 4%, and also notice the gradual creep of French spreads.

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

Hollande positions himself as Europe’s Anti-Merkel

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

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

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

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

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

The Monti administration expects to miss deficit target

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

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

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

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

Bundesbank taken to court over Target balances

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

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

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

Wolfgang Munchau on Andres Velasco

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

Manfred Neumann on austerity – and the Wolfson prize

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

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

Martin Wolf on why the eurozone may yet survive

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

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

Support for True Finns on the decline

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

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

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

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.

The news flow is already starting to ebb with the start of the Easter holiday in Europe. The main story yesterday was the rise of eurozone unemployment to a eurozone-era record of 10.8% in February, with more than 17 million people now out of work, according to the latest figures fromEurostat.  The total unemployment of 10.8% was 0.1 points worse than in January, mainly driven by a rise in unemployment rate in Spain (23.6% up from 23.3%) and Italy (9.3% up from 9.1%).  El Paisreports that Spain contributed half of 10 new unemployed in February, and that youth  unemployment exceeds 50% in Spain for the first time since 1998. High unemployment is also registered in Greece (21%) and Portugal (15%), while on the other end is Germany (5.7%), the Netherlands (4.9%) and Austria (4.2%).

Belgium will have to save another €24bn to reach balanced budget in 2015

Belgium will have to save €24bn to achieve a balanced budget by 2015 according to a report to be published today by the council of finance,  Le Soir reports.  The new government under Elio Di Rupo has already saved €13bn in 2012. According to the report, the government will have to find 1.2% of GDP or €5bn more next year. In 2014, the efforts will amount to 2.1% of GDP, or about €8bn in current GDP terms. And in 2015, savings should amount to 2.9% of GDP or €11bn in current GDP.

Papademos stops last minute amendments 

Alarmed by the number of last-minute amendments political parties are trying to squeeze through Parliament ahead of the elections, Prime Minister Lucas Papademos on Monday forced a minister to withdraw one such change to legislation and has asked all members of the Cabinet to clear any alterations to bills with his office, Kathimerini reports. This task has been assigned to State Minister Giorgos Stavropoulos. As of yesterday, Stavropoulos had 86 amendments to examine.

New austerity measures might be required after election

A slowdown in reform efforts ahead of the election will require new austerity measures from the new government for this year's budget, a high-ranking official at the Finance Ministry warned on Monday, adding that the new government would be expected to carry out any new measures in June. With revenues lagging €1bn in the first two months and another poor performance in March, extra measures in June appear more likely, the official is cited by Kathimerini. The date for the election will be announced next week. The Greek press has speculated that it will be May 6.

Greek economy to shrink by 5%

Reuters has the story about a forecast by the Greek think-tank IOBE according to which the Greek economy will contract 5% this year – which is marginally more pessimistic than the forecasts of the European Commission and the IMF. Under this forecast, the recession will continue in 2013, with a recovery in 2014. The peak rate of unemployment is forecast to reach 20%, up from a current 17%.

Moody’s calls for a joint debt agency for Spain

We picked this up from an El Pais story on Spanish debt. Moody’s proposed so-called hispabonos, joint issuance of national and regional debt to improve market access of the autonomous regions and lower interest rates. But for this work Moody’s said Spain would need to introduce an effective central control system, with credible sanctions.

Italian fiscal situation improves

Corriere della Sera has the story that the cash position of the Italian government has improved during March. The popular measure used in Italy is the so-called fabbisogno – a cash flow measure expressed as gap between state revenues and expenditures net of interest. In March, the fabbisogno went down to €17.5bn from €20.6bn in March 2011.

ESRB picks a fight with the Commission

The European Systemic Risk Board (ESRB) is challenging the Commission over how the Basel III capital requirements are implemented, Financial Times Deutschland reports. In his capacity as ESRB chairman, Mario Draghi yesterday published a letter in which he asked that individual countries have a sufficient degree of flexibility in implementing the common Basel rules, for example to account for a diverging economic situation of member states – when some are subject to bubbles, while others are in a recession. In this case the common monetary policy is not effective. The ESRB wants national governments, supervisors and central banks to be able to apply macro-prudential tools swiftly. The Commission is opposed and argues that it should have the last word on whether or not EU and euro members apply those tools.

High gas price adds to inflation fears in Germany

Rising gas prices are beginning to stir a political debate and add to fears of rising inflation, Handelsblatt reports. Experts quoted by the paper warn that the increases will quickly generate additional costs for businesses in the magnitude of a double digit billion figure. The experts fear that the price developments will further depress the euro economy, and might lead to stagflation. The average gas price per litre was at around €1.70. The DIHK industry lobby says the real danger zone starts at €2. Angela Merkel so far refuses to contemplate lower gas taxes, Süddeutsche Zeitung reports.

Das and Roubini on how a euro breakup might happen

Nouriel Roubini and Arnab Das argue in a special FT comment series on a potential eurozone breakup on how this could be managed. They say that the process needs to be as carefully managed as the adoption of the euro itself. It require what they describe as a consistent legal framework, a kind of reverse EMS, and a high degree of cooperation between the ECB and national central banks to avoid disaster.

Martin Sandbu says a break-up is harmful

Martin Sandbu of the FT holds out against this, and argues that a eurozone breakup would be very harmful. He said there was no evidence that external devaluation is to be preferred over internal devaluation, and that the latter would keep up reform pressure. He said the future of the euro will not depend on politics, not economics. The best proposal so far, to turn the EFSF/ESM into a bank, has been frustrated by political opposition. He compares this to a hypothetical US government ban on quantitative easing.

(We disagree with both authors. We think that Roubini/Das are right on the economics, but they omit to say that a amicable breakup would require a full-blown treaty revision, which would require unanimity, and would take time to implement. We believe that the two most likely options are either a messy breakup, or a depressed marriage. We also disagree with Sandbu’s argument about the benefits of internal devaluations. We think that structural reforms may be desirable for other reasons, but they unrelated to the current crisis.)

Mohamed El Erian warns that the US and the eurozone are about to make a dirty deal

Writing in Project Syndicate (Please note this is not the original www.project-syndicate.org post because the link was broken this morning), Mohemad El Erian says the eurozone was once again in the mode of shifting responsibilities onto others through an attempt to increase IMF funding. He says the rest of the world should counter the risk of European complacency, and that the US should take the lead. But they seem to be heading for a dirty deal, whereby the US supports an increase in the IMF’s eurozone lending operations, in exchange for eurozone support of Jim Yong Kim, the American candidate for the World Bank.

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

Sideways, mostly.