Tag Archives: Spain

Trichet States the Obvious

The President of the ECB, Jean-Claude Trichet, has called for a “quasi-budget federation” in front of the Economic and Monetary Affairs Committee of the European Parliament. The “f” word, however, is ominously missing from the EP’s press release. Mr. Trichet went on to say that “pundits are tending to underestimate the determination of [EU] governments”.

The determination of EU to rescue the euro notwithstanding, things continue to look bad. The interest rate spread between Italian bonds and benchmark German Bunds have come to a euro-lifetime high. Belgian 10-year bonds spread to German bunds of similar maturity widened to the highest levels since at least 1993. In other words, markets are not buying the “determination” stunt, at least for now.

Hence Mr. Trichet’s comments. He is quite aware that in the long term the current institutional framework of the eurozone is NOT sustainable. Even if the ECB manages to calm the markets for the moment (which is by no means certain), new, more powerful crises may follow in the next decade, vastly undermining economic growth in the whole European Union.

So Mr. Trichet is doing two things. First, he is trying to calm the markets, which is a very sensible thing to do. Second, he is telling European politicians that the complacency on the eurozone institutional framework is no longer possible and discussions must start now. Now the question is are they listening?

 

 

The Irish Bailout: the Details and the Bigger Picture

The details of the Irish bailout are now set:

EU countries and the International Monetary Fund will provide up to €85bn in total, which may be drawn down over a period of up to 7½ years. About €50bn is aimed at bolstering Ireland’s public finances while it implements a €15bn austerity package over the next four years. Of the remaining €35bn, €10bn will be used to recapitalise Ireland’s stricken banks, while another €25bn will be a contingency fund to help support the banking system if necessary. The Irish government itself will contribute €17.5bn towards the bank contingency fund, while the IMF will put €22.5bn towards the overall package. This will also include three bilateral loans from the UK, Sweden and Denmark, with the British contribution being around €3.8bn. Ireland will pay average interest of 5.8 percent on the loans.

More importantly, the Council agreed on speedy introduction of a permanent European Stability Mechanism (ESM). An ESM loan will enjoy preferred creditor status, junior only to the IMF loan. The most important feature are the so-called collective action clauses (CACs). These clauses allow a large majority of bondholders to agree a debt restructuring that is legally binding on all bondholders. CACs are meant to ease the process of debt restructuring. The CACS will be introduced in mid-2013.

The proposal for ESM is supported by the president of the ECB, Jean-Claude Trichet. The president of the European Council, Herman van Rompuy, will present proposals for amendment of the Treaties in December.

There is, however, a problem. The financial markets seem unconvinced. As Eurointelligence notes, the problem is that the market demand for peripheral debt is weak, and from 2013 demand for peripheral bonds may dry up completely due to the bail-in rules. And the 6% interest on bailout loans may be too high for Ireland to stay solvent.

There are some ideas how to handle this. Wolfgang Münchau proposes to separate national debt from financial debt and to turn all outstanding sovereign bonds, existing and new, into a common European treasury bond. He does admit that his proposal is not actually feasible, though.

So a more practical approach is to see whether, after all, the EU rescue system can survive the waves of uncertainty. Spiegel International does just that, and notes that of all the possible next bailouts, one is a no-brainer. If Spain falls, so does the euro.

 

 

The Political Salience of the Burqa Ban

Henning Meyer from the Social Europe Journal turned my attention to this report of the Pew Global Attitudes Project measuring the public approval of the ban of face-covering veils (burqas). What I did was to compare the data for the approval rate with the percentage of the Muslim population in the respective countries (data was obtained from the 2009 report of the Pew Research Center). Not surprisingly, there is a strong positive correlation between the percentage of Muslim population and the support for the burqa ban (correlation= 0,84, R2=0,71).

The US citizens are somewhat more tolerant than the average and Britons somewhat less, but the overall correlation is quite strong.

This post is cross-posted on Think 3: Developing World.

The Existential Crisis of the Euro – Where Did We Go Wrong?

The German government is on the forefront of an attempt to restrict the volatility of the euro exchange rate. First, the German financial regulator BaFin placed a unilateral ban on naked short-selling of eurozone sovereign debt instruments, with little effect. Second, Angela Merkel proposed a comprehensive reform of the stability and growth pact, with tougher rules of the game aiming to achieve one thing in particular: that member states bear the responsibility for a solid budget management. Third, Germany is hosting an international conference on financial market regulation in Berlin.

So far, so good. The markets, however, are not impressed. In fact, some analysts say that the euro may fall below parity with the dollar in the first quarter of 2011. The problem is that the decline in the euro may hurt demand for the region’s sovereign bonds in the year when new debt will be soaring.

The President of the eurogroup, Jean-Claude Juncker, says that foreign-exchange intervention isn’t an urgent issue.

One leg of the problem according to Proffessor Michel Aglietta, is that we have a solvency problem with Greece, not a liquidity problem. He says that the austerity program for Greece is a ticking bomb that could cost dearly to the whole European Union. He advocates for immediate restructuring of the Greek debt. He also says that the eurozone will not survive without a system for budgetary transfers among eurozone members. according to him the private sector is not capable to compensate for the draconian austerity measures in Portugal, Spain, Ireland and Italy.

Jan Kregel and Rob Parenteau outline the key aspects of the eurozone predicament using the financial balance approach developed by Wynne Godley. They say that the current attempt at “budgetary discipline” in peripheral eurozone members will lead to fiscal retrenchment, private income deflation, and rising private debt distress. They warn that IMF conditionality is bound to set off the twin contagion vectors of falling trade surpluses and rising bank loan losses in the core nations.

I am not an economist. But these warnings against the current EU approach towards the eurozone crisis come from too many places (for alternative ideas see Peter Bofinger and Stefan Ried, Avinash Persaud, and Paul De Grauwe). This issue is way too serious to be decided upon in a hurry.

What Act of the Greek Tragedy?

It looks like the markets don’t really buy the “end of the Greek tragedy”. At the same time the eurozone member Slovakia will only vote on financial aid for Greece after the June national election.

Meanwhile the New Democracy party in Greece (the opposition to the left PASOK government) has obviously decided NOT to support the austerity measures.

So what is going on??? I am not sure.

Martin Wolf says that it is hard to believe that Greece can avoid debt restructuring. He also notes that several eurozone Member States have unsustainable fiscal deficits and rapidly rising debt ratios. Wolfgang Münchau says that the bilateral loans will have the so-called junior status, meaning that they will be repaid only after the repayment of existing Greek government bonds. He believes that this represents a real financial transfer from eurozone members (and particularly Germany) to Greece. He calls this „an absolute scandal“ and believes that the Bundestag could block a junior loan agreement.

This may mean a contagion, especially if the Greek situation is not resolved quickly. Spanish Prime Minister Zapatero has denied rumours that he’s preparing an aid package for Spain.

There is too much information being withheld, I think.

Obama Will Not Meet European Union

US President Barack Obama will not attend a European Union-US summit to have been held in Spain in May.

Interestingly, Mr. Gordon Brown, the British Prime Minister, spoke instead of Mr. Obama:

“A trip to Spain for a summit was never on his agenda. He strongly values the bilateral relationship with Spain.”

Division on 2020 Economic Objectives

The Spanish presidency has expressed its opinion that the 2020 economic guidelines for the European Union should be backed by some sort of sanctions. Germany was quick to criticize the idea, and the Spanish government has somewhat retreated.

But even the FT Deutschland acknowledges that the structural imbalances in the EU are already benefiting Export Germany.