Denmarks thinks about joining the euro
There is nothing like a financial crisis to focus one’s mind. Being a member of the ERM2 forever, but without any intention to join the euro, does not make a lot of sense. But persistent political opposition has made euro area membership unlikely, until very recently, as ordinary Danes now realise that there is a costs to their have-their-cake-and-eat-it strategy. This cost comes in terms of higher interest rates, which the central bank had to impose to maintain the krone’s exchange rate. Policy rates are now at 5.5%, which is 1.75% above those of the ECB. According to Frankfurter Allgemeine, PM Anders Fogh Rasmussen said he now considers a referendum in 2011 a possibility (We think it might happen sooner as the reality of higher interest rates bites, and as the cost of staying out becomes more transparent. And remember. As Denmark fulfils all the criteria, the country could effectively join tomorrow.)
Germany opposes deposit insurance improvements
Angela Merkel famously made the promise that all deposits are guaranteed, no matter what. But in Brussels Germany is busy to dismantle the European Commission proposals for deposit insurance reform, especially the proposal to raise the minimum threshold to €100,000, and to insure that savers are compensated within three days. Germany does not want to raise its own state guarantee of €20,000 and cites technical difficulties in the implementation of the three day rule. Frankfurter Allgemeine has details on this quotes, included tedious quotes from experts telling us that this cannot be done. (In other words, you have to be hopping mad to hold more than €20,000 in any account. Ms Merkel’s guarantees are entirely political. In other words they have no substance whatsoever.)
Strauss Kahn on the IMF anti crisis plan
In an interview with Le Monde Dominique Strauss Kahn outlines the IMF’s anti crisis plan – called “the Global regulation strategy” - he is to present to the G20 meeting on November 15. Among the five proposals are a new short term liquidity facility (€100bn without conditions according to FT Deutschland); to raise the sources of the Fund for medium term loans (such as for Iceland, Hungary and Pakistan); and to enhance the role of IMF to participate as an architect for the new international financial system; This is along the lines of Nicolas Sarkozy’s ideas for the Fund but will most likely meet resistance at least by the US. Less controversial are the other two proposals and an analysis of policy lessons from past crisis and the monitoring of the implantation of new regulation. The IMF is also interested in drawing up the new financial system
Now for some real action, Mr Sarkozy!
Philip Herzog in Le Monde argues that Sarkozy succeeded as EU president to open up new opportunities for Europe but that these need to be backed up with the willingness to really transfer power to the community. Sarkozy called for an economic government, but he has to be more concrete. In this context, the EU budget should also be on the table. A presidency for the Euro group has its merits but the needs of the other EU members shall be considered as well. Sarkozy’s wish to transform capitalism needs to be backed up by a real power transfer to of banking regulation and supervision to the EU level. And instead of talking about national wealth funds Sarkozy would do better to suggest a European investment fund. Without the willingness to transfer power the method of coordination is likely to produce more conflicts in the future.
Money market watch
European money market rates are coming down slowly, and this is good news. The three month Euribor is now a notch under 4.8%, the 12-month Euribor at a little over 4.9%. El Pais reminds that despite the fall, mortgage lenders still take September figures as a reference, which means that mortgages will show a strong increase in November, before falling back later. It also makes the point that the Euribor ist still some 25bp higher than it was during October 2007 – when the crisis was already under way.
There was some good news from the US commercial paper market. The FT reports that issuance of commercial paper rose for the first time in seven weeks, due to the Fed’s Commercial Paper Funding Facility (CPFF). Issuance rose $100.5bn in the week ending Wednesday, though this is still dwarfed by the $366bn contraction during the preceding six weeks. Analysts now expect that the worst for CP market is over. The Fed said it held a net $143.9bn of commercial paper purchased under the CPFF as of Wednesday.
Weber imposes strict conditions on loan guarantees
The Bundesbank is de facto in charge of running the loan guarantee programme, and Axel Weber yesterday laid out the terms. He said the charge would 50bp on the loan to be guaranteed, according to the FT Deutschland, but this would also depend on the bank’s rating (so it is more expensive for a bank with a lower rating). Furthermore, Weber banks should strengthen their core capital, though he gave no detail of what that means. There will be no fees for loans of less than three months, since the Bundesbank wants to keep a control over the short-term money market.
Erste Bank gets €2.7bn state capital
The Erste Bank is the first bank to draw from the Austrian recapitalization fund, receiving €2.7bn of state capital. Recapitalisation is provided without strict conditions like in Germany. Der Standard writes that if conditions would have been the same as in Germany, the Erste Bank would not have bothered to ask for the money. Instead, the Erste Bank is to pay a fixed interest rate of 8% on the capital, to be repayable in full after at least five years. The shares are not traded on the stock exchange nor does the state have any vote. Further banks are expected to follow such as Bank Austria, Bawag, Volksbanken and Raiffeisen. The recapitalization fund is limited to €15bn.
Ireland’s budget dissected
Writing in the Irish Independent, Brendan Keenan dissects the Irish budget, and concludes that the government is buildings on unrealistically optimistic forecasts. Current spending will actually go up by 10.4% this year, which means that public finance are just as unsustainable now as they were over the last five years. Since every representative from the health and education sectors complain about how the system will collapse in 2009, one should ask what they done with all this money? Public services have not increased at this rate. If one considers that the agreed in public sector wage will have to come out of existing budgets, this implies that the budgetary pressures will become enormous. He concludes that under any realistic growth forecast, there is no way the Irish will get their deficit back down below 3% in any reasonable time horizon.
Remember the stability and growth pact?
Frankfurter Allgemeine has some details about how the EU Commission will handle the newly reformed stability and growth pact, as several countries are certain to record excessive deficits. These are France, Italy, Portugal and Ireland. The paper says that the effective ceiling would be lifted to 3.5%, provided that the deficit is caused by cyclical factors. Otherwise, an excessive deficit procedure would commence, but without consequences, or at least without sanctions. The only conceivable situation in which sanctions could occur are those where the deficit is not based on cyclical factors, but on political mistakes. The paper says that this is in practice difficult to implement. One could make the case that France widened the deficit during the boom, but France will only exceed the 3% limit during the downturn, and the French government will always blame the downturn for the excessive deficit.
Is Obama a Communist?
Of course not, don’t be silly. Thomas Fricke, however, makes interesting point in his latest FT Deutschland column. The only German political party that offers an economic stimulus of the same scale as Obama is the post-Communist Left party. That tells us nothing about Obama, but a lot about how anti-stimulus thinking has pervaded mainstream German politics, which seems perfectly happy to let the economy sink into a deep hole.
The costs of a financial crisis
Writing in Vox, Luc Laeven says a new IMF database, which covers the universe of systemic banking crises from 1970 to 2007, shows that the average fiscal cost was about 15% of GDP, or three times the US’s $700bn. This column points out that quick action often lowers the ultimate cost. Moreover wishful thinking teamed with regulatory forbearance and bank liquidity plans often raises the cost by delaying vital, but politically painful, government action.
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