http://soberlook.com/2012/06/cornered-by-other-eurozone-leaders.html?utm_source=BP_recent
Cornered by other Eurozone leaders, Merkel concedes
With Hollande supporting Italy and Spain, Germany has became isolated. "Merkozy" is no more. Worn down Merkel conceded, sending risk assets to a massive rally. Caught in a short squeeze, the euro rallied nearly 2 % this morning. But with all the hoopla, let's take a step back and see what exactly did Germany agree to in the middle of the night. Here are some highlights.1. Spanish banks will be bailed out (€100bn) directly out of ESM/EFSF rather than going through the Spanish government. This will avoid increasing Spanish government debt.Amazingly only last week Merkel said she could never agree to direct lending to these banks because she would be unlikely to "get her money back".
2. The Spanish bank bailout will not subordinate the bond holders as was expected.
3. Perhaps the most important agreement was that the European Stability Mechanism (ESM) could buy government bonds to reduce periphery borrowing costs. The only official statement was that the ESM will be used to buy bonds in “in a flexible and efficient manner”. No further details for conditions on such purchases were provided. This is clearly a victory for Mario Monti, who's been pushing hard for this measure.
EURO AREA SUMMIT STATEMENT: - ... We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States ...4. There is an agreement to set up a single banking supervisor in 2013.
That seems to be it. A few observations:
- As expected, there is no agreement on a "banking union" that would provide deposit insurance across the euro area.
- The ESM, having already committed €100bn to Spain's bank now only has €400bn of capital. Given the amount of debt the periphery nations will need to roll in the next couple of years, this is hardly credible. And the Eurozone leaders have not agreed on the details of how capital will be released. We all know how easily the leadership gets caught up bickering over the details.
- There will be pressure on the ECB to do what the ESM may be unable to do - expand the SMP program to buy more periphery bonds (so much for central bank independence). It already bought €220bn, but Monti and company will expect far more. That basically means QE.
SoberLook.com
Also from Sober Look ......
FRIDAY, JUNE 29, 2012
Germany's growing exposure
With the latest summit "agreement" (assuming it gets off the ground) Germany will continue to increase its exposure to the Eurozone periphery. The nation's exposure will grow via its share of the ESM as well as the ECB who will be buying Italian bonds. That's in addition to what is already committed via the EFSF and its share of the IMF. There are also large direct exposures via the bilateral loans pooled by the European Commission (such as loans to Greece). And then there is the exposure that the media doesn't like to talk about because of the ongoing "debate". It is the Bundesbank's TARGET2 exposure, which just hit a record of about €700bn.
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| Bundesbank's TARGET2 exposure (€bn) |
So what does 700 billion really mean in the context of Bundesbank's balance sheet? The balance sheet has grown as the exposure increased, right? But the reality is that TARGET2 is becoming an increasingly dominant component of Bundesbank's balance sheet. Almost two thirds of the central bank's assets are now tied in this "debated" exposure. And as funds flow out of the periphery states, the proportion is only getting larger.
In fact it is beginning to dwarf all the other assets. So here is a question: if you were Jens Weidmann or the the Bundestag or Angela Merkel or the German public for that matter, and you were looking at the chart below of Bundesbank's assets, what would you think? But no need to worry because these are just accounting entries and as long as the Eurozone stays intact there is no risk.
and....
http://www.spiegel.de/international/europe/german-parliament-approves-esm-and-fiscal-pact-a-841816.html
It's been a rough few years and a particularly long and stressful day for Angela Merkel. But, for now at least, Germany's chancellor can breathe a sigh of relief.
In the first vote, members of the Bundestag, Germany's federal parliament, approved the fiscal pact, which commits Germany to stricter budgetary rules, such as reducing its budget deficits to less than 0.5 percent of gross domestic product beginning in 2014. Lawmakers voted 491-111, with six abstentions, in favor of the pact, a pet project of Merkel's that was agreed on by 25 of the EU's 27 member states at a summit in January. Ireland became the first of these countries to ratify the pact in early June. A two-thirds majority, or 414 votes, was needed for the measure's passage because it involves an internationally binding commitment to limit Germany's deficit.
In the second ballot, lawmakers voted 493-106, with five abstentions, in favor of the European Stability Mechanism (ESM), the €700 billion ($890 billion) permanent bailout fund.
The Bundesrat, Germany's upper legislative chamber, which represents the interests of the states, is expected to approve both measures later in the evening.
A Day of Discord
The votes were held despite calls earlier in the day from politicians both inside and outside Merkel's center-right government to delay them until lawmakers had time to consider what effects the deal concluded at the Brussels summit would have on the ESM.
Less than 24 hours earlier, Merkel had made some tough and unexpected concessions after a marathon 15 hours of talks at an EU summit in Brussels lasting well into Friday morning. The euro-zone's 17 member countries agreed to ease the conditions for receiving aid from the ESM bailout fund. According to the agreements, euro-zone members states that fulfill the budgetary rules laid down by the European Commission can now receive aid without agreeing to tough austerity measures, and strict oversight by the troika -- composed of the European Commission, the European Central Bank and the International Monetary Fund (IMF) -- will no longer apply.
What's more, the bailout fund will be allowed to pump money directly into struggling European banks rather than pushing countries deeper into debt by loaning the money to governments themselves in exchange for austerity commitments. However, this can only happen after a single European banking supervision mechanism -- under the auspices of the ECB -- has been established, which could take some time.
Prior to the summit, Merkel had vocally opposed both steps, preferring to stick to the rules that had already been hammered out and that guaranteed strict oversight, particularly by the IMF.
As a result, Merkel was sharply criticized Friday for her concessions, with many commentators accusing her of having caved in to demands of southern European countries, particularly Spain and Italy. For example, the mass-circulation tabloid Bildran a headline Friday saying "Merkel Buckles," and Carsten Schneider, a budgetary expert with the center-left Social Democratic Party (SPD), wrote on Twitter that Merkel's government had made "a 180-degree turnaround." Likewise, Frank Schäffler, a member of the business-friendly Free Democratic Party (FDP), the junior partner in Merkel's coalition government, said: "The ink isn't even dry and the substance of the ESM treaty is already being changed." Nevertheless, others held that her actions constituted both anecessary and clever tactical maneuver.
Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy were able to secure the concessions by threatening to torpedo the €120 billion ($150 billion) European Union growth pact originally proposed by French President François Hollande, who had promised voters during his recent presidential campaign to secure a growth component to complement Merkel's fiscal pact. Even if experts doubt whether the growth pact will have much of an effect, Merkel had promised the successful passage of the pact to the opposition back home, as well as support for a financial transaction tax, in exchange for their support in ratifying the ESM and the fiscal pact in Friday's votes.
Mixed Signals
However, in a speech delivered to parliament directly before the vote, Merkel defended her concessions -- which parliament will vote on at a later date -- as a "sensible decision." She stressed that growth and employment were key for the future of the European Union, and that parliament's approval of the ESM and the fiscal pact would be "a signal for Europe" and would send "a signal of unity within and without."
Merkel's statement was followed by several hours of debate. SPD party boss Sigmar Gabriel, the first to speak, accused Merkel of having exacerbated the crisis and having been too hesitant about taking additional steps to regulate the financial markets. Although he called the recent decisions in Brussels "past due," he said his party finds them "correct."
Despite parliamentary approval of the ESM and the fiscal pact, it is not expected that the treaties will be ratified -- at least for a few weeks -- following a request by Germany's highest court to the country's president, Joachim Gauck, asking him not to sign them into law until it can complete a legal review.
At least 12,000 complaints are expected to be filed with the Federal Constitutional Court regarding the ESM and the fiscal pact. As a result of the legal complications, the ESM will not go into effect on July 1, as planned.
and....
http://www.zerohedge.com/contributed/2012-06-29/big-blink
Submitted by testosteronepit on 06/29/2012 18:58 -0400
http://www.zerohedge.com/contributed/2012-06-29/big-blink
The Big Blink?
Wolf Richter www.testosteronepit.com
Markets soared in Asia, Europe, the US, everywhere. Let the good times roll. The euro jumped to the highest level in a couple of weeks. Yields on Spanish bonds plunged to the lowest level since, well, Monday. A miracle had happened. German ChancellorAngela Merkel had blinked. Um, a little bit.
All eyes were on her at the EU summit in Brussels, the one summit that would once and for all save the Eurozone, THE summit, where she’d be forced to submit to the majority of the Eurozone, and indeed to the majority of the world, and where she’d be forced to come to her senses and give in to the demands set out before the summit.
There was the Grand Plan, issued by European Council President Herman Van Rompuy. It included all the goodies: a European Treasury with power over national budgets and how much countries could borrow; Eurobonds; a banking union that would guarantee deposits; and the ESM that would bail out banks directly.
There was French President François Hollande’s plan, first issued during his campaign, then reiterated many times since. It included Eurobonds and the ability by theEuropean Central Bank to directly buy sovereign bonds of debt sinner countries. He’d formed a triumvirate with Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy to corner Merkel.
Rajoy had been begging for help but didn’t want Spain to take the bitter medicine that the bailout Troika would prescribe if he asked for a full-fledged bailout. Hence his emphasis on bailing out the banks directly, and let Spain run its dismal affairs as it saw fit. Monti had warned last week that the Eurozone would break apart if summit attendees didn’t sign off on his list of items that were “absolutely necessary” to save the Eurozone.
So, here are the summit results on these items:
- Eurobonds? Nein.
- A banking union with tools to prop up banks and with a common deposit insurance fund. Nein.
- Allowing the ECB to buy sovereign bonds directly? Aber nein!
They did agree on a common banking regulator (even Merkel had wanted that). Of course, they already have one, the European Banking Authority (EBA), established in late 2010. It conducted “stress tests” on 91 major European banks. Results came out in July 2011. And in October, the 12th safest bank, the Franco-Belgian megabank Dexia, collapsed.
So now, they want a different regulator. The ECB should play a role, the agreement said, but.... The Federal Association of German Banks and the Federal Association of Public Banks both expressed their opposition to the ECB becoming a regulator. Since the UK declared it wouldn’t have any part of it, German banks were worried that they’d experience pressures from the regulator that UK banks would not experience. And they were worried about the conflict of interest between the ECB’s role in funding states and in supervising banks that were also funding states.
And Merkel did blink. Or at least she redrew the line in the sand: she agreed to the tweaking the European Stability Mechanism (ESM), the permanent bailout fund. The ESM doesn’t exist yet and hasn’t been ratified by a whole slew of countries, and it’s getting scrutinized by the German Constitutional Court, but assuming it will see the light of the day, it would be changed in several ways, including:
- It can bail out banks directly, rather than lending to the government which then recapitalizes the banks. This way, on paper, this new debt to bail out the banks would not raise the indebtedness of the country.
- It can buy sovereign bonds of countries that stick to their commitments to cut budgets and implement structural reforms; thus, no further austerity measures if they ask for aid.
However, funding banks directly won’t be possible until after the Eurozone banking regulator has been established. The Commission will present a proposal in the near future. If all member states pass it by the end of the year, direct aid to banks would be possible at the earliest in 2013.
So, the ESM will be able to bail out Spain and Italy, and their banks, and all the other countries, to which Slovenia may be added by end of July—and do all this with the €700 billion it may in theory have some day. In theory because the €700 billion includes the contributions of Spain and Italy, the very countries that the fund would have to bail out.
Merkel’s switcheroo on the ESM caused some consternation in Germany. “A new breach in the dam,” it was called. Others complained that “the ink isn’t dry and they already announce the next changes,” and that it was one more step towards a “transfer union.” As before, it will pass. The line in the sand has been moved. That's it. None of the fundamental problems have been solved. And the wait for Merkel’s big blink on Eurobonds continues.
In Cyprus, it’s panic time. €1.8 billion is needed by June 30. That’s just the beginning. Its banks have been eviscerated by Greek government bonds, Greek corporate debt, a real estate bubble that collapsed, and a title-deed scandal that they colluded in. It has a communist president and vast deposits of natural gas. Russia and China hover nearby. And now Cyprus points out, unwittingly, why no country should ever transfer even more sovereignty to the EU.Cyprus and the EU: Bitter Medicine.
and as far as Italy goes...... Azzurri are a good distraction right about now for Monti.....
http://soberlook.com/2012/06/italys-consumer-hits-wall-only-boost-to.html?utm_source=BP_recent
As Italy's industries slow dramatically (see Industrial Production below) and unemployment hits 10%, the consumer begins to struggle.
http://soberlook.com/2012/06/italys-consumer-hits-wall-only-boost-to.html?utm_source=BP_recent
FRIDAY, JUNE 29, 2012
Italy's consumer hits a wall. The only boost to sentiment can come this Sunday.
The latest economic indicators coming out of Italy are just awful. The recession is getting far worse than most economists had predicted. That's part of the reason Monti has been pushing so hard to get the ESM and the ECB to buy Italy's debt. With such a deep recession engulfing the nation, the fiscal situation can't be good. Here are the latest economic figures.
As Italy's industries slow dramatically (see Industrial Production below) and unemployment hits 10%, the consumer begins to struggle.
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| Italy Industrial Production (YOY) What's particularly troublesome is that Italy's inflation remains stubbornly high.
And high unemployment mixed with relatively high inflation has pushed Italy'smisery index to new recent highs.
This trend has played havoc with Italy's consumer sentiment. The index of consumer confidence is now sharply below the lows of 2008.
This decline in confidence is now translating into a record drop in retail sales. Retail sales numbers tend to be volatile, but this last decline clearly stands out (below). And that coupled with higher taxes and increased austerity measures will do more damage to industrial production and employment ....
Unfortunately at this stage there is nothing that Monti's government can do to give Italian consumers an immediate boost. The ECB who is clearly going to cut rates next week can also do little to ease tight credit conditions in Italy. There is only one thing that could (at least temporarily) boost the morale of Italian households. Italy needs to win the EURO 2012 soccer championship. So if you choose to watch the finals on Sunday, root for Italy - they need this victory even more than Spain.  |
Explanations and Comments
The following comments are from Lorenzo, who lives in Italy. He is the person who sent me the link to Termometro Polico.
Hello Mish
In the first and third chart, red=centre-left (PD+Idv+Sel+others), blue= centre-right (PdL+Lega+Others), and yellow = 5 star movement. PdL = Former Prime Minister Berlusconi's party.
The third tab shows that a centre-left plus center (green) coalition could win the election, albeit with a relatively small margin. There is a catch however: (centre-left and centre-right) do not currently exist, except as theoretical coalitions rather than political parties.
Right now PDL and PD support the Monti government, while all the other parties that they commonly ally with (Lega, IDV, SEL, etc) do not. The two main parties (PD and PDL) scorn each other but are "forced to go along", while the minor parties in both "coalitions" bad-mouth them and Monti's government to attract the resentment created by Monti's taxes reforms.
This makes it pretty hard to predict the shape the two coalitions will take and how the voters' choices will change according to it. The situation is pretty fluid right now.
Italian politics is hard to make sense of for somebody used to a simple two-parties system situation.Coalition Building
Lorenzo
For more on the difficulty of building a coalition in Italy, please see comments from Andrea in my post Reader from Italy Explains Why Early Elections Might Lead to "Deadlock".
Andrea is a reader who is from Italy but now lives in France. The pertinent section is labeled "Explaining Italian Politics".
Five Star Movement September 2011 vs. June 2016
This simple graph below shows the stunning rise of the Five Star Movement
Implications of the rise in popularity of the Five Star Movement from 3.7% in September 2011 to 20.6% in June 2012 are both massive and obvious. Yet mainstream media in the US and Europe have essentially ignored the phenomena. Mike "Mish" Shedlock
and Greece items of note......
http://hat4uk.wordpress.com/2012/06/29/greek-debt-history-how-papandreou-and-troika-turned-down-a-second-lifeboat/
GREEK DEBT HISTORY: How Papandreou and Troika turned down a SECOND lifeboat
New Greek Finance Minister: he devised a way to get Papandreou off the hook, he steered Greece into the Euro in 2001. The plot thickens.
Yannis Stournaris
How a top German consultancy fed the Greeks a lifeline…to no avail.
Yannis Stournaras, the new Minister of Finance in Greece, has landed himself a pole-position job. Stournaras is something of a thoroughbred old-Establishment Greek politician: he emerged as a force in the old days of Kostas Simitis, the former Prime Minister of Greece, who – as one source put it earlier this week – “was the master builder of the greek tragedy right at the outset”. It isn’t meant as a compliment.
The facts bear this out: one way and another, Simitis schemed to disguise the chronic problems of the Greek economy and get Greece into the Eurozone. During the period of his governance, official data presented inflation as having decreased from 15% to 3%, public deficits diminished from 14% to 3%, with GDP allegedly increasing at an annual average of 4% – and actual labour incomes increasing at a rate of 3% per year. It was largely a tissue of lies that Eurostat had caught onto by 2006: whenever any Sprout or Europol tells you the Greek collapse came as a shock to Berlin-am-Brussels after Papandreou came to power, you know you are in the presence of a fool or a liar. The eurozoners knew from Day One that Greece was a potential liability….but it suited theur hubris-fuelled ambition to have them in.
Stournaras’s nickname in Greece is ‘Mr Euro’. Frequently described as ‘the man who steered Greece into the eurozone’, he was chief economic adviser and a very close aide to former Prime Minister Costas Simitis when Greece was negotiating euro entry up until 2001.
In October 2011, Yannis Stournaras proposed and formed a Greek sovereign debt reduction scheme called KAPPA (Initiative for Protection and Exploitation of Govermental Real Estate ).
The proposal envisaged the establishment of a public company to offer a diversified portfolio of real estate and movable assets, which will then be sold to a European body (European Investment Bank or EFSF), and be disbursed immediately as €75 billion to massively reduce Greek public debt.
Codenamed “Archimedes”, it was in reality the brainchild of multinational consultancy giant Roland Berger – by far the biggest management consultancy in Germany, it turns over a whopping €0.8 billion per annum…and is based in Frankfurt. In September 2011, it had presented an ingenious plan in that City of Bankers to a Greek delegation led by Stournaras. In full, its recommendations suggested bundling Greek state assets worth €125 bn into a holding company, and selling it to the EU. This company would issue bonds, and the Greek State would be allowed to use these.
Had it gone ahead, Roland Berger predicted it would reduce Greek debt from 145% to 88% of GDP.
Enthusiastic about the idea, Stournaras submitted RB’s plan to the Papandreou goverment and the Troika together a month later. They r ejected it, and instead, Papandreou, the IMF, and the ECB chose the far more risky (and, as it turned out, damaging) option of private bondholder haircuts and a second bailout.
It’s hard not to make two simple empirical observations at this point: as the Slogpost of three days ago demonstrated, Berlin conspired with Greece eighteen months before these events to exaggerate the Greek deficit (in order to ensure full eurozone contributions to the bailout). Now here the Troika was, looking a relative gift horse in the mouth….and turning it down.
One can only suspect that, had a smaller deficit in 2009 and a sale of assets to Brussels rather than a depressed open market in 2011 gone forward, Greece would’ve got back a great deal of its independent sovereignty and access to the markets than subsequently occurred. And the extrapolation from that in turn is that Merkel, Schäuble, Brussels and Lagarde have done everything in their power to reduce the chances of Greece retaining its independence.
So we can reasonably assume that this is more or less what the unlucky members answering directly to Obersturmbannführer Schäuble under the Faskal Union can expect…..more of the same.
And while we’re down here, another little afterthought: Roland Berger is at present actively involved in a scheme to create a eurozone ratings agency….the €300 million start-up cost to be funded by a consortium of German banks in Frankfurt. Just fancy that.
If you read this and enjoyed it, you may have missed this piece from yesterday:WHY THE GLOBAL POLITICAL CLASS FEARS WHERE LIBOR WILL LEAD
Although this exclusive story achieved reasonably high hits, it ought to have gone viral: we are looking here at a cordinated sovereign State/Central Bank plot during 2008 to manipulate LIBOR rates….yet again, to save the banks. If anyone wants to comment thread on this at high-circulation sites (especially in the States) I would deem that a great favour. The US public needs to be reminded just how totally it has been raped in myriad ways by these monsters.
http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_29/06/2012_449793
Deposit withdrawals came to 8.6 bln in May
Deposits fell to 157.4 billion euros from 166 billion in April, the biggest drop since the country joined the 17-nation currency bloc in January 2001, according to a statement by the Bank of Greece on its website on Friday. Deposits have declined 52 billion euros, or 25 percent, since December 2010. “Deposit outflows reached a new historic high” after the May election led to “heightened sovereign risk” and political uncertainty, Manos Giakoumis, a research director for Euroxx Securities SA in Athens, said in an e-mailed note. “A reversal of the negative trend is anticipated in the post-election period.” Greece’s new finance minister, Yannis Stournaras, said on Tuesday that 2 billion euros of deposits had returned to the country’s bank system since the June 17 election produced a three-party coalition government committed to honoring the country’s bailout terms. Alpha Bank SA Chairman Yannis Costopoulos also told a shareholder meeting in Athens on Friday there has been a return of deposits to Greek banks in the last few days. [Bloomberg]
EU pact fuels Greek hope for milder terms
Papoulias, who went to the summit instead of Samaras as the premier is recovering from eye surgery, told reporters that the European agreement to boost growth was “particularly important” for Greece, where a deepening recession has pushed up unemployment, especially among young people. This necessitates “the adoption of all the necessary adjustments to Greece’s economic program with a view to making it more economically effective and socially just,” Papoulias said, adding that “no unilateral action” should be taken by the Greek side. His words echoed a letter from Samaras to EU leaders in which the premier vows to honor commitments to creditors but seeks modifications in view of the deeper-than-expected recession. Papoulias said he met with several EU leaders including German Chancellor Angela Merkel, European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy, noting that talks with the latter were “very constructive.” He added that he pushed for a European guarantee on bank deposits. As for the decision to allow rescue funding to be used in future for the recapitalization of banks, the president said it was positive as this aid would be dissociated from state debt. Socialist PASOK leader Evangelos Venizelos, who was also in Brussels for the European Socialist Party’s summit, also hailed the decision on recapitalization, adding that the broader European consensus boded well for Greece’s intention to renegotiate aspects of its debt deal. “There is an opportunity, there is crucial momentum in the EU and eurozone,” he said, adding, “We can draw benefits from this confluence of circumstances.’ Venizelos’s comments came ahead of the expected return to Athens early next week of officials representing Greece’s creditors, the European Commission, European Central Bank and International Monetary Fund. A spokesman for the IMF, Gerry Rice, indicated yesterday that inspectors would not shift on deficit reduction targets but were prepared to discuss how these targets will be met.
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