EU rejects stimulus
The EU can always be counted on doing the right, after exhausting all the alternatives. Yesterday’s EU summit was in the “exchausing-all-the-alternatives” phase when it confidently rejected proposals for a stimulus package. France, Italy and Austria had argued in favour of a package of help for industry, while Germany, of course, Sweden and Denmark held against a stimulus package, or in the bureaucratic words of Germany’s foreign minister Frank-Walter Steinmeier, this is not ready for a decision. (Interesting use of the word “ready”. When is an economy “ready” for a stimulus?)
US Congress and Japanese parliament have both voted on package to help industry, and China is now considering a stimulus plan. German economists are also increasing favouring the idea, with the article quoting the head of one of the institutes as favoured US-style backdated tax checks. (Now this is not going to happen. Merkel and Steinbruck have rejected a stimulus, which does not mean it is not going to happen, but it means that it is not going to happen in time, which is the whole point of a stimulus).
In France, meanwhile, some 10000 pensioners went on the street with their anger, calling on the government to increase their pensions instead of compensating bankers, reports Le Monde.
Liquidity, liquidity, liquidity – and possibly another unscheduled rate cut
If you thought it was impossible, well it is not. The ECB is injecting even more liquidity into the system, according to Frankfurter Allgemeine, offering unlimited 3- and 6-month repos for a fixed rate to alleviate the liquidity problems of a number of institutions. It looks very much that the acute situation of several is worse than we thought (and we still think that many of them are insolvent unless stock and credit market rebound which we do not expect to happen for some time). The interest rates on those repos are going to be substantially lower than market rates. This is an interesting attempt by the ECB to play money market.
Meanwhile, ECB governing council member Erkki Liikanen said money market rates are already coming down, and one would have to be patient. This takes some time.
FT Deutschland quotes Guy Quaden, the Belgian central bank governor, as saying that the economic outlook had deteriorated markedly, that the ECB was ready to act. The paper speculated on another co-ordinated rate cut with the Fed – which means it come earlier than the scheduled November meeting.
A single euro area representation at the G8?
Jean Quatremer has an interesting speculative article about the pooling of euro area seats in international institutions. France has been among those opposed to this, but Quatremer writes that Sarkozy has of late become sympathetic to this idea, and is apparently now in favour of pooling the interest in the G8. (We don’t think he means a single euro area representation, which would exclude him most of the time, but perhaps a single representation at low levels, finance ministers and below).
€28bn rescue package for Greek banks
The Greek government unveiled its rescue package of €28bn, that is 11.4% of the country's GDP, reports Kathemerini. The package includes a guarantee of €15bn for new medium- to long-term bank loans with a duration of three to five years that will be issued until the end of 2009. The guarantee will be provided at a cost of 100-150 basis points. The government will issue €8bn in special bonds to boost banks’ liquidity. These two-, three-, and five-year bonds will be placed with Greek banks against a commission of 50 to 100 basis points. €5bn are reserved for recapitalization through purchase of preferred shares. These shares will have the required characteristics of Tier 1 capital, will include a buyback option no sooner than five years, and pay the state a return of up to 10%. In these cases, the state will be represented on banks' boards of directors with the right to veto pay packages for top executives. Finance Minister Giorgos Alogoskoufis told reporters top executives' pay will not exceed the central bank governor's - around €25.000 per month- at banks participating in the support program.
Legislation will be submitted to Parliament »as soon as possible. The Greek government already raised its deposit guarantee to €100.000 for three years.
Belgian government willing to invest in Kaupthing
Deceived savers of the Icelandic Kaupthing bank gathered in front of PM’s office yesterday to demand their savings back, quotes Flanders Today De Tijd. The Belgian activities of Kaupthing depend on a Luxemburg subsidiary, which means the €100.000 guarantee from Belgian government does not hold for these depositors. They fall under Luxemburg law, where only € 20.000 is guaranteed. Finance minister Didier Reynders said that the Belgian government is willing to participate in a take-over of the bank, should that be the best way of securing the investors savings. If the bank does indeed go bankrupt thetrh investors will be compensated by the new European guideline of up to €50.000. A mutual guarantee fund in which Belgium would also partially invest is being considered.
The real test for the euro area is still ahead
In a comment for Der Standard Michael Maravec warns that the real test for the euro area is not the financial crisis but the dooming stagnation or even recession. At the EU summit Italian prime minister Silvio Berlusconi already warned that the Italian industry can no longer afford the EU objectives on climate change amid the sharp slowdown of the economy. In those times politicians at the far left and the far right in structurally weak countries call for an exit of the euro area. This will of course not solve their problem, but remaining inside the euro area means that they have face increased competition pressure.
Belgian government forgot to mention fuel tax increase
The government reintroduces the so-called cliquet system, in the budget 2009 with €159m, an increase in the excises on diesel and petrol. When there is a price drop in one of these two fuels on the international market, only half the decrease will be passed on the price of fuel. The remaining half will be absorbed by an increase in excise. The Leterme government sold this measure as an environmental intervention to discourage the use of cars. The system will only bring money to the treasury once the price falls. De Morgen confronted Leterme with his fierce opposition to this hidden tax increase when he led the opposition of his party under the Verhofstadt government. The previous government indeed implemented this system during the period 2003 to 2007, although it also reduced the fuel price by lowering the excise whenever the fuel price rose. Flanders today writes that it is remarkable that measure was never highlighted during the discussion of the budget yesterday. The Secretary of State, Clerfayt, said they ‘forgot about it’.
Another gaffe by Germany’s finance minister
Peer Steinbruck has found out in the last couple of days that regulating banking salaries is a lot more difficult than he thought, when he confidently predicted that any bank that sought capital from the federal government, would need to cut salaries to €500,000 Euro per year. First, it turns that the German government does not even enforce this rules among executives in bank it already owns, where salaries in the order of €1.5-2m are the norm for top executives, according to Frankfurter Allgemeine. Secondly, as employment lawyers have noted, existing labour contracts cannot be retrospectively. So this 500.000 cap is not going to happen, just one of those many utterances of a man of no consequence.
And by the way, Josef Ackerman and the entire board of Deutsche Bank have announce that they “voluntarily” forego the bonus for this year.
Buiter on inter-bank lending
Willem Buiter is wondering why national governments have not launched an explicit money market scheme. He proposes two alternative schemes. Either the central bank itself acts as a broker-dealer in the money market, suitably guarantee by the treasury, or failing that, the treasury insures the money market. (Our answer is that in Europe, this would have to be done at euro area wide level, and minister were not ready to set up any mechanism that could be conceivably construed, or rather misconstrued, as involving any flow of funds one country to another. This is why they chose the inordinately more expensive, less effective, and less equitable scheme, to provide a blanket guarantee of a liabilities.)
Unintended consequences of TARP
The TARP programme has had an unforeseen side effect. It pushed up mortgage rates by more than half a point. Investors appeared to have switch away from lower yield Fannie and Freddy MBS into existing bank debt, in the hope that this could be refinanced with the new government-supported bonds under the TARP scheme, according to the Financial Times.
Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.