Bailout time

 

The main story in European newspapers this morning is that the EU has began to organise a bailout for Greece. Le Monde and FT Deutschland have extensive and detailed coverage of the story. There are currently talks among government on how to assemble a credit to Greece, but FTD says Angela Merkel is still reluctant to commit, unless there is much clearer evidence than so far that Greece is genuinely consolidating. The issue will come up at the February 11 economic summit in Brussels. Le Monde says the talks are still in a preparatory stage, and nothing has been decided yet.

Berlin is in particular looking towards a massive increase in government savings in Greece, beyond what prime minister Papandreou has already promised. But the paper also quotes sources as saying that a bailout is now very likely. One big difficulty is to resolve the problem how to circumvent the No Bailout clause in the Maastricht Treaty.

Barroso and Zapatero also came out yesterday saying that the euro area implies joint responsibility among their members and that no one would be left alone. There is still official denials, but talks seem to focus on several options: bilateral credits, which would mean that Germany as the large euro area membes pay the largest share; another option would be an early release of funds to Greece under the cohesion fund or through the involvement of the European Investment Bank; there seems to be agreement among member states that whatever happens, the IMF should not take the lead in a rescue.

During yesterday, the financial situation of Greece deteriorated further. Greek credit default swaps yesterday breached 400 basis points, as the country’s is now headed towards junk bond status. The markets also began to turn on Portugal, a country that is consolidating even less than Greece, a situation that reaffirms’ the fiscal conservatives’ view that once you open the floodgates of a bailout to Greece, Portugal and others will be next in line.

The FT has a report that Portugal finance minister attacked the credit rating agencies.

The euro meanwhile fell below $1.40, its lowest level against the dollar for six months.

 

Daniel Gros on PIGS

Writing in the FT, Daniel Gros argues that Greece and Portugal are in a much worse position than Spain because of their lack of domestic savings, 7.2% for Greece, and 10.2% for Portugal, while the average of the euro area is 20%, with Ireland and Spain close to that average. “This implies that Spain and Ireland will be able to finance government deficits from their national savings now that housing investment has crashed and no longer absorbs such a large chunk of savings. Greece and Portugal are unique in their reliance on foreign capital to such a large extent.”

He also makes the point that the stability pact only focus on government saving, not on the private sector, which has to be taken into account as well.

 

Sarkozy installs working group on balanced budget rules

Yesterday Nicolas Sarkozy held his Conference on public finances. As it was to be expected no concrete decisions have been taken but several working groups were set up, to study  how to install a balanced budget rule, how to control local expenditures, how to improve health insurance finance and what to do with the social security debt . Sarkozy said that the objective is to allow France to reach a zero structural deficit by 2020. Les Echos argues that wWhile there has been similar attempts like this before with little results, such an exercise is still useful to remind the French that consolidation measures will come, no matter what, and to signal financial markets that consolidation is taken seriously.

 

Economic sentiment in the eurozone on the rise

Economic sentiment in the eurozone continues to improve, the European Commission’s “economic sentiment indicator” raised for a tenth consecutive month by 1.6 points to 95.7, close to the long term average of 100.  The FT reports that a breakdown shows that the industrial sector is the main contributor to the overall  improvement, while sentiment for consumers remains unchanged.

 

Bernanke confirmed as Fed Chief

Ben Bernanke was confirmed by the US Senate for another four tear term as chairman of the Fed, reports the FT.  Thirty senators, both Democratic and Republican, voted against Bernanke and 70 voted for him. This is not as knife edge as expected after the biggest show of dissent in the Senate ever since  voting on this position began 30 years ago. Meanwhile, the Obama administration enjoyed another victory in the Senate, with a vote in favour of increasing the federal debt limit by $1,900bn to $14,300bn.

 

Austria’s finance minister for financial transaction tax

Austrian Finance minister Josef Proll called for an EU wide financial transaction tax, in an interview with Kurier (hat tip Der Standard). The tax, however, should not be passed over to customers. Banks should pay their contribution to the consolidation of public finance. 

 

Sarkozy calls for a new Bretton Woods

Gillian Tett in the FT picked out of Nicolas Sarkozy’s keynote speech in Davos his call for a new Bretton Woods system, saying that while there is a lot of French rhetoric, one should not dismiss his remarks. Sarkozy will hold the G20 presidency next year with a French government determined to advance the Bretton Woods debate as currency volatility will become the next big subject on the political agenda.

 

 

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