Tag Archives: Wolfgang Schäuble

EU: Summit, Summa, Samarium

The top EU leaders are now dressing up for another countless crisis summit in Brussels. Over the next two days the elected representatives are going to try to agree on….on something. The single most important issue however – how the new bailout fund, EFSF is going to work – is most likely to be postponed, due to a slightly difference of opinion between Angela Merkel and Nicolas Sarkozy.

“It is hopeless in terms of what it reveals a lot about the policy process in the euro zone.”


Ms Christine LAGARDE, Managing Director of the International Monetary Fund, Mr Evangelos VENIZELOS, Greek Minister for Finance

I believe I agree with the analyst at www.eurointelligence.com when they characterize the already pronounced postponement of the EFSF issue as “hopeless but not serious.” There are too many loose threads in that ball, and it would probably not be safe to put it in play. But during the two-day extraordinary meeting is expected that the EU leaders comes up with something – at least some credible statements with a bit of substance.

On Thursday, France and Germany decided that they will not able to bridge their difference over the role of the EFSF by Sunday, and need more time to work out a deal.

It is not serious in the sense that there will be an agreement a few days later – in any case before the G20 summit, the Eurointelligence points out.

Adding: “But it is hopeless in terms of what it reveals a lot about the policy process in the euro zone.”

The postponement  is due to a combination of two factors: Nicolas Sarkozy’s diplomacy, and the German Bundestag’s insistence that it needs to give a mandate to the chancellor ahead of the summit.

Merkel would not have had a mandate to negotiate anything beyond the minimalist insurance solution that was recently under discussion.

She now has to crawl back to the Bundestag each time where she gets on a plane.

Merkel and Sarkozy will hold another bilateral summit on Saturday night, and will discuss the issue on Sunday. However no decisions will be taken.

In their joint communiqué, Thursday, they pretends that everything is fine.

But it did not persuade financial markets, which reacted with an increase in bond spreads.

Italy’s spread is now back at 4%, a level as we keep on point out is not consistent Italy’s sustained membership of the euro zone.

“From a market point of view, there is too much disappointment and disunity coming out of the EU right now. A further example has been the dispute between the IMF and the EU about Greece, as the IMF challenges the EU’s optimistic projections for Greek growth,” www.eorointelligence writes.

Mr François BAROIN, French Minister for Finance and Economic Affairs - Ms Elena SALGADO, Spanish Vice-President of the Government and Minister for Economic Affairs and Finance.

It also emerged that the bank recapitalization programme will fall in the too little, too late category of responses – now likely to be below €100 billion.

If you think that undercapitalized are the core of the problem, then this will not help. If you think that recapitalization will damage growth, a weak recapitalization may very well be better than a strong one –  but it will still be negative for growth.

When it comes to the EFSF, the debate is circling around the method of leveraging.

The Germans want to continue down the route the discussions had been going until Wednesday, by using a primary market insurance scheme that would allow the EFSF to insure up to €1 trillion in new debt issuance.

On the other side: The French say this is not sufficient, favoring a banking license for the EFSF.

Reuters reports that bond market experts are severely critical of the insurance schemes because it creates a two tier bond market.

If an Italian government bond was issued under this scheme, investors would no longer classify it as a sovereign bond, but as a structured product.

Another Summit on Wednesday

A follow-up summit is now scheduled for next Wednesday, according to  Frankfurter Allgemeine Zeitung.

Since there was no political agreement, chancellor Merkel was unable to deliver her speech in front of Bundestag today and to seek a negotiating mandate by the deputies as is now required after the constitutional court rulings and the legislation about the parliament’s involvement in EU decisions with budgetary implication.

So Merkel intends now to go to parliament in the beginning of next week to deliver what she could not bring to the deputies today.

Meanwhile, Wolfgang Schäuble have explicitly ruled out that the EFSF will be refinanced via the ECB as Sarkozy wants.

Damn! I would love to see some surprises for a change!

Green Light for More Money To Greece

The first thing to come out of the summit on Friday evening, was the statement about approval of the sixth trace of financial aid for Greece.

“Ministers of the euro area, meeting in Brussels on 21 October, agreed to endorse the disbursement of the sixth tranche of financial assistance to Greece. The disbursement is foreseen for the first half of November, following approval by the Board of International Monetary Fund (IMF),” the statement says.

The Eurogroup took the decision having examined the results of the fifth review of the economic adjustment programme for Greece, on the basis of a compliance report by the European Commission and a recent analysis of the sustainability of the Greek debt by the “Troika” (European Commission, IMF and European Central Bank).

The ministers also noted that the macroeconomic situation in Greece has become worse since the fourth review , but they welcomed Greece’s “substantial fiscal consolidation efforts”, especially the austerity package that the Greek parliament approved on 20 October.

Full text of the Eurogroup Communiqué,

The Eurogroup invites the Greek authorities to continue implementing structural reforms and their privatisation programme.

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Greek Commissioner Lets Cat Out of the Bag

The Greek EU Commissioner of Fisheries, Maria Damanaki, becomes the first senior EU official who speak openly about the possibility of Greece leaving the euro zone. She warns that Greece must make sacrifices to overcome its debt crisis or face the risk of leaving the euro zone and returning to the Drachma.

“Either we agree with our lenders on a programme of tough sacrifices … or we return to the Drachma.”

Maria Damanaki

It was probably well intended, but this type of comment is actually quite dangerous, the eurointelligence.com points out in their daily briefing. I suppose it’s more dangerous for the EU than for Greece. Anyway – let’s see how the financial markets react during today’s session.

The Greek fisheries Commissioner Maria Damanaki warned Wednesday that Greece must make sacrifices to overcome its debt crisis or face the risk of leaving the euro zone and returning to the drachma.

“I am forced to speak openly. Either we agree with our lenders on a programme of tough sacrifices … or we return to the drachma,” she said, according to the semi-official Athens News Agency.

Ms. Damanaki is the first senior European official to publicly declare that the debt crisis could result in Greece leaving the euro zone and reverting to its old currency.

Olli Rehn’s spokesman immediately dismissed the idea of a return to the drachma, naturally.

(Wasn’t that the guy who publicly denied that the EU ministers was attending a meeting in Luxembourg a couple of weeks ago?)

 Well, if you want rumors, you got it!

At the moment there are rumours that Greece might consider to hold a referendum to gain a mandate for proceeding with further austerity measures, spending cuts and privatizations, Greek newspaper Kathimerini reports.

The idea was raised at a Hellenic Federation of Enterprises (SEV) conference on Tuesday by the group’s chairman, Dimitris Daskalopoulos.

Prime minister Papandreou’s aides says that the minister was not averse to the idea and had actually discussed it with ministers at Monday’s Cabinet meeting.

However, Reuters reports that the Greek government denies that a referendum is a real option.

That seems to have become like a strategy for the Greek government – deny everything.

Meanwhile back in Brussels, the politicians are running around making all kinds of proposals, inventing new words for default and then taking it all back…

Now, German finance minister, Wolfgang Schäuble, seems to have changed his mind about a so-called “soft restructuring” for Greece. (Probably something along the lines of a “reprofiling”).

Speaking with Handelslbatt, the German minister explain that a credit event might be the consequence.

(Translation; credit event = financial havoc).

On top nobody knows how to deal with such a situation in country that is part of a monetary union.

“That would be an entirely different constellation that in 1990’s in Argentina and other countries”, Schäuble adds.

But no matter how you twist it; there’s nothing soft about the austerity measures that are in store for the people of Greece. 

Talking to Frankfurter Allgemeine Zeitung, the Bundesbank president, Jens Weidmann, warns that monetary policy will not clean up the mess after a soft restructuring in Greece.

The German central bank is not opposed the restructuring in principle, he points out in his first interview since taking office this month, adding:“As a question of principle the consequences of mistakes in financial policy must not be rolled over to the central banks. That would be a monetization of state debt. There must be a clear separation of monetary and financial policy.”

Weidmann warned a soft restructuring as currently discussed for Greece – a voluntary extension of the maturities of government bonds for private investors – would inevitably have the consequence that the ECB would no longer accept these bonds as collateral.

(Not even as soft assets?)

Talking about the ECB’s securities market program (SMP) Weidman says it is currently on hold.

Explaining the rationale of the SMP he says:

“The eurosystem has acted in a phase when the fiscal policy was unable to act. By doing so it built a bridge. With the EFSF and the EFSM there are now the instruments and the end of the bridge has been reached. The ECB council agrees that the program is limited in time, the only discussion is about the right timing of the exit.”

Well, Mr. Weideman, I can assure you the EU leaders can stay irrational longer than you can stay in office!

However – as eurointelligence.com also underline – these comments are important because Weidmann chooses to bring the Bundesbank back in line with all the other central banks.

Remember that his predecessor Axel Weber marginalized himself and the Bundesbank by publicly opposing the SMP.

(…I did not mention Merkel or PMS…)

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Wolfgang Munchau: This Is a Political Crisis

I guess it was just a matter of time before the mainstream media and their economist’s discovered what I’ve been indicating for the last four, five months: The European crisis has transformed itself from an economic crisis to a political crisis.

“You cannot run a monetary union with the likes of Mr Sócrates, or with finance ministers who spread rumours about a break-up.”

 Wolfgang Münchau

“They cannot even organise a private meeting. How, then, can they solve a debt crisis? The bungling of a not-so-secret gathering of finance ministers in Luxembourg on Friday night provides an object lesson in how the politics of euro zone crisis resolution is going wrong,” Mr. Münchau writes in today’s column in Financial Times.

The drama starting on Friday evening rapidly turned into another political farce, as pointed out by this blogger the same night.

In today’s column in Financial Times Deutschland, Wolfgang Münchau, makes a summary of what we have learned from Friday’s leak to the  Spiegel Online:

The German news site’s story said Greece was considering leaving the euro zone, and that finance ministers were holding a secret meeting to discuss the issue.

The story also offered the intriguing detail that Wolfgang Schäuble, the German finance minister, had a report in his briefcase warning him of the prohibitive costs of a Greek exit.

Earlier that Friday evening, the spokesman for Jean-Claude Juncker, the prime minister of Luxembourg who also has responsibility for finance, flatly denied that the meeting was taking place at all.
That statement was obviously untrue.
The meeting ended on Friday night with the announcement that there was no discussion on a Greek exit or a Greek restructuring. I very much doubt that this statement – or indeed any official statement on the euro zone crisis – was true either.
It is my understanding that this meeting, and numerous others preceding it, discussed the whole gamut of options, including, of course, a restructuring of Greek debt.
But the fact that options are being discussed does not mean they are being pursued.
I am fairly sure that Greece is not preparing to leave the euro zone, and that the European Union rejects an involuntary debt restructuring– for now that is.
The reason for the frantic diplomatic activity is that the euro zone is running out of easy options for dealing with Greek debt.
There are valid objections to every proposal. An exit is too risky. A haircut – a loss for creditors on the outstanding principal – would kill the country’s banking system and land the European Central Bank with losses approaching €100bn.
A voluntary restructuring would not do enough to reduce the net present value of Athens’ debt to a sustainable level.
I understand collateralised lending – swapping old Greek bonds into new collateralised debt at a discount – has also been discussed.
This would subordinate every Greek bondholder, including of course the ECB.
The option to swap bonds of the European financial stability facility, the rescue umbrella, into peripheral bonds has been explicitly rejected by Berlin.
This would probably have been the cheapest option but Germany wanted to nip in the bud anything that smells of a euro zone bond.
The core issue in the euro zone crisis is not the overall size of the peripheral countries’ sovereign debt. This is tiny relative to the monetary union’s gross domestic product.
The area’s total debt-to-GDP ratio is lower than that of the UK, US or Japan.
From a macroeconomic point of view, this is a storm in a teacup.
The problem is that the euro zone is politically incapable of handling a crisis that is now contagious and has the potential to cause huge collateral damage.
The “grand bargain” – a series of institutional agreements on euro zone sovereign debt by the European Council in March – did not address the resolution of the current crisis.
That process is starting only now.
Those responsible have realised that, no matter which debt management option they choose, it will cost taxpayers hundreds of billions.
It is highly unlikely states will accept fiscal transfers of such a size without imposing extreme conditions on one another.
The political reason this crisis goes from bad to worse is an unresolved collective action problem.
Both sides are at fault.
The tight-fisted, economically illiterate northern parliamentarian is as much to blame as the southern prime minister who cares only about his own backyard.
The Greek government played it relatively straight but Portugal’s crisis management has been, and remains, appalling.
José Sócrates, prime minister, has chosen to delay applying for a financial rescue package until the last minute.
His announcement last week was a tragi-comic highlight of the crisis. With the country on the brink of financial extinction, he gloated on national television that he had secured a better deal than Ireland and Greece.
In addition, he claimed the agreement would not cause much pain.
When the details emerged a few days later, we could see that none of this was true.
The package contains savage spending cuts, freezes in public sector wages and pensions, tax rises and a forecast of two years’ deep recession.
You cannot run a monetary union with the likes of Mr Sócrates, or with finance ministers who spread rumours about a break-up.
Europe’s political elites are afraid to tell a truth that economic historians have known forever: that a monetary union without a political union is simply not viable.
This is not a debt crisis. This is a political crisis.
The euro zone will soon face the choice between an unimaginable step forward to political union or an equally unimaginable step back.
We know Mr Schäuble has contemplated, and rejected, the latter.
We also know that he prefers the former.
It is time to say so.

By Wolfgang Münchau


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