Tuesday, August 9, 2011

Today's links

1--European Central Bank mounts rescue for Italy and Spain – but sets its price, The Guardian

Letter to Italian PM Silvio Berlusconi demanded detailed list of reforms to timetable set by the bank

Excerpt: the latest move appears to have involved the ECB in far more than buying bonds. According to the Italian daily, Corriere della Sera, the bank's president, Jean-Claude Trichet, and his successor-designate, the governor of the Bank of Italy, Mario Draghi, sent a letter to Italy's prime minister, Silvio Berlusconi, at the end of last week dictating the terms on which the ECB was prepared to buy Italy's increasingly costly debt.

The paper said the bank's demands almost amounted to a new government programme: "The level of detail in the letter must have astonished even the recipient. There are the measures to be taken; there is the timetable according to which they must be implemented. Not even the legislative instruments that the ECB asks the government to use have been left out."

They included liberalisations, to be imposed by decree; privatisations, including those of companies owned by local authorities, to be started immediately, and sweeping reforms of the labour market to abolish the rigid distinction between cosseted "insiders" in permanent employment and "outsiders" on short-term contracts with few rights and scant entitlements. It is not clear whether Berlusconi's announcement on Friday of a new fiscal initiative was taken in response to the Trichet-Draghi letter. The prime minister, who has not interrupted his summer holiday, vowed to bring forward new measures to eliminate Italy's budget deficit.

Pierluigi Bersani, the leader of Italy's biggest opposition group, the Democratic party, demanded to know the full contents of the letter. "It is incredible and unacceptable that the opposition has until now not had any account of the conditions being imposed upon us by the European and international communities," he said.

2--Analysis: Merkel's room for maneuver on euro crisis narrows, Reuters

Excerpt: Germany's Angela Merkel has vowed for months to do all in her power to save the euro zone while doggedly resisting pressure from Brussels and other capitals to move toward some form of fiscal union for the 17-nation bloc.

Now the tension between these dual pledges -- one intended for her European partners and the other for an increasingly eurosceptic domestic audience -- is building to breaking point.

In a statement issued with French President Nicolas Sarkozy Sunday, Merkel appeared to go further than she has in the past in promising support for euro zone stragglers, pledging in essence that the bloc's rescue fund would actively buy up their debt on the open market once it gets new powers this autumn.

That promise in and of itself is probably not enough to spark a rebellion in her party or the German parliament, which must approve the changes to the European Financial Stability Facility (EFSF) and the blueprint for its successor, the European Stability Mechanism (ESM), in September.

But after crossing a series of self-imposed "red lines" on euro zone policy over the past year, Merkel has moved closer to the point where new pledges of euro solidarity could spark a serious domestic backlash.

Many lawmakers in Berlin would see an increase in the size of the EFSF, for example, as a step too far in the direction of the dreaded "transfer union" Merkel herself has repeatedly warned against, although to bail out a country the size of Italy would overwhelm the fund as it stands.

The issuance of common euro zone bonds -- a solution which would allow all members of the bloc to borrow at sustainable rates but a cost to Germany's borrowing rates -- is also a taboo that Merkel can't break without serious consequences for her own political standing, German analysts and lawmakers said.

"We've entered into a limited liability union, where countries like Germany are liable for other euro zone members but only to a limited degree. This is where Berlin wants to hold the line," Thomas Mayer, chief economist at Deutsche Bank, told Reuters.

3--Germany rejects EFSF reassessment calls, expatica

Excerpt: Germany Monday rejected calls to boost funding for the European Financial Stability Facility (EFSF) which is meant to help support the crisis-hit common currency.

There are no plans to boost the fund beyond the 440 billion euros ($624 billion) agreed by European Union heads of state and government at a summit on July 21, deputy government spokesman Christoph Steegmans said.

"The EFSF must remain as is," the spokesman told a regular briefing.

Germany is the top guarantor of the fund which was set up in 2010, contributing more than one-quarter of its guarantees which it uses to raise funds on the markets.

European leaders decided on July 21 to widen the fund's remit to allow it to buy back the bonds of eurozone countries in trouble, in addition to providing direct loans to their governments.
The fund is meant to assist the European Central Bank support the euro currency.

Germany's comments followed suggestions by the head of the European Commission Jose Manuel Barroso and by EU economic affairs commissioner Olli Rehn that funding for the EFSF be "reassessed" in view of the current financial turmoil.

4--Fatalistic Germany determined to face down calls for expansion of rescue fund, Irish Times

Excerpt: THE MELODY accompanying Berlin’s euro-zone crisis strategy is increasingly audible: Que Sera Sera. Berlin officials are convinced their strategy – whatever will be, will be – is correct. It’s an attitude tainted by an optimistic fatalism that speculative haste elsewhere in the euro zone will not improve the euro’s prospects.

“We don’t want to show ill will towards others in the euro zone, but we have a firm belief that we are right,” said a confidante of German chancellor Angela Merkel yesterday. “We have a huge interest in being correct and we want to end the cacophony.”

But how? Merkel returned from the Dolomites to Berlin over the weekend but is remaining on holidays, ostensibly not to scare markets, even if she is spending hours on the phone.

As far as she is concerned, the measures agreed at the EU’s summit on July 21st – to be ratified by national parliaments next month – are enough to guarantee the euro’s future...

“Any increase in size would only be an invitation to speculators to find out how much the euro zone is still prepared to give,” one senior unnamed official told Der Spiegel magazine. And the official had a warning to Rome: “An economy like Italy’s cannot be supported” by the EFSF.

And what of the eurobond? Even mentioning the word prompts a bad-tempered reaction in Berlin. German politicians fear such an idea would be a tough, if not impossible, sell to their voters, particularly if it weakened the reform zeal of struggling euro-zone neighbours.

“We don’t think much of any plans to socialise European debts, particularly as Germany is one of the few countries who would have to carry such a guarantee,” said Horst Seehofer, head of Merkel’s Bavarian coalition partner, the Christian Social Union, last night.

He said he was “not at all” interested in a European finance ministry but was a “big fan of automatic sanctions”.....

ECB bond-buying has been opposed by several euro zone central banks, including the Bundesbank, which opposed last week’s renewed buying of Irish bonds. In Berlin, Merkel officials respect the Bundesbank’s position but say more pragmatism is called for, at least until the EFSF is able to take over the job.

“Until then it’s up to the ECB to act,” said a Merkel adviser.

For Deutsche Bank chief economist Thomas Mayer, it is impossible to forecast whether the downgrade will generate “a summer storm or a tornado” when markets open this morning. But, he said, it has made clear the need to accelerate progress towards a fully-fledged European Monetary Fund.

5--Germany says EFSF bond-buy pledge not new, Reuters

Excerpt: Germany denied that a joint statement issued with France on Sunday had made any stronger pledges about the euro zone rescue fund's commitment to purchase the bonds of weak member states on the secondary market.

"Nothing changes from the agreements reached (by European leaders) on July 21," government spokesman Christoph Steegmans told a news conference on Monday when asked about the joint statement.

In the statement, German Chancellor Angela Merkel and French President Nicolas Sarkozy said the EFSF rescue fund would be able to intervene in the markets to buy bonds in the future on the basis of an ECB analysis and expressed confidence that this analysis would provide the "basis for secondary market interventions".

This appeared to go beyond the agreement reached at the July 21 summit, when leaders agreed to allow secondary market purchases by the EFSF, but also spelled out clear limits on such purchases.

6--Who holds US debt?, Credit Writedowns

7--Full Text: G7 Finance Ministers' and Central Bank Governors Statement on Financial Markets, Credit Writedowns

From the Statement: In the face of renewed strains on financial markets, we, the Finance Ministers and Central Bank Governors of the G-7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.

We are committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth, and welcome the decisive actions taken in the US and Europe. The US has adopted reforms that will deliver substantial deficit reduction over the medium term. In Europe, the Euro area Summit decided on July 21 a comprehensive package to tackle the situation in Greece and other countries facing financial tensions, notably through the flexibilisation of the EFSF. We are now focused on the quick and full implementation of the agreements achieved. We welcome the statement of France and Germany to that effect. We also welcome the statement of the Governing Council of the ECB.

We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth.

These actions, together with continuing fiscal discipline efforts will enable long-term fiscal sustainability. No change in fundamentals warrants the recent financial tensions faced by Spain and Italy. We welcome the additional policy measures announced by Italy and Spain to strengthen fiscal discipline and underpin the recovery in economic activity and job creation. The Euro Area Leaders have stated clearly that the involvement of the private sector in Greece is an extraordinary measure due to unique circumstances that will not be applied to any other member states of the euro area.

We reaffirmed our shared interest in a strong and stable international financial system, and our support for market-determined exchange rates. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will consult closely in regard to actions in exchange markets and will cooperate as appropriate.

We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure stability and liquidity in financial markets.

8---Who holds US debt? Credit Writedowns

Great Graphics

9--Credibility, Chutzpah And Debt, Paul Krugman, NY Times via economist's view

Excerpt: To understand the furor over the decision by Standard & Poor’s ... to downgrade U.S. government debt, you have to hold in your mind two seemingly (but not actually) contradictory ideas.

The first is that America is indeed no longer the stable, reliable country it once was. The second is that S&P itself has even lower credibility; it’s the last place anyone should turn for judgments about our nation’s prospects.

Let’s start with S&P’s lack of credibility. If there’s a single word that best describes the rating agency’s decision to downgrade America, it’s chutzpah...

America’s large budget deficit is, after all, primarily the result of the economic slump that followed the 2008 financial crisis. And S&P, along with its sister rating agencies, played a major role in causing that crisis, by giving AAA ratings to mortgage-backed assets that have since turned into toxic waste.

Nor did the bad judgment stop there. Notoriously, S&P gave Lehman Brothers ... an A rating right up to the month of its demise....

10--Which president racked up the most debt?, Daily Beast

(See chart)

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