Insurers aghast at new accounting rules

 

FT Deutschland has a story on yesterday’s proposal by the International Accounting Standards Board (IASB) for new accounting rules, and the mostly negative reaction by the German and French insurance industry. The IASB published a proposal to change IAS 39, which deals with the valuation of securities held by financial institutions. Under the proposals, bonds and other fixed income securities with fixed maturities should be valued at cost, while stocks and structured products should be valued under the principle of fair-value accounting (or mark-to-marked accounting). The German insurers say this rule change means that they would dump shares, as any losses would have affect their capital. The finance ministers of Germany and France support the industry, and call for more flexible rules. The industry wants softer rules, while IASB wants simplification. The European Commission supports the IASB.

 

Spain introduces new accounting rules

El Pais leads its economic section with the story that the Bank of Spain approved an important accounting rule change, as a result of which banks can relax their bad loan write-offs. At present, when a loan is bad for two years, it has to be written off completely. Under the new rules, a mortgage or other credit up to 80% of the value of the collateral will not have to be written off completely, but only partially. The underlying accounting assumption is that the value of collateral cannot fall to below 70% of purchase price (which in the case of Spanish property is exceedingly optimistic in our view, as we are looking at 40-50% falls in house price in the US, where the market was not nearly as crazy as in Spain).

 

 

Italy’s budget foresees 5.2% deficit in 2010

As other European countries raise their debt levels towards 80/100% of GDP, Italy’s which started out from a level of 106% is raising its debt-to-GDP much more slowly as it has foregone almost any economic stimulus. Yesterday, Giulio Trementi presented his government’s 2010 finance plan, which foresees a deficit-to-GDP ratio of 5%,down from a forecast 5.3% this year, which is relatively modest compared with other industrialised countries. The debt-to-GDP ratio is forecast to rise to 115%. The Italian government (rather optimistically in our view) forecasts 2010 economic growth at 0.5% after a forecast decline of 5.2% this year. La Repubblica has the story.

 

 

 

Pact to support Barroso

Le Monde front page has the story that the conservatives, socialists and liberals of the European Parliament agreed a tripartite pact to assure Jose Manuel Barroso a second mandate. Conservatives, who lack an absolute majority in parliament, need this deal while socialists and liberals will push in the coming weeks their ideas and candidates for the next Commission.   Socialists call for a new stimulus programme, a pact for European employment and social progress and more financial market regulation. Liberals call for a European bond and (according to a draft declaration) more European governance in economic and social matters. Despite the agreement, there are some MEPs who vote against Barroso in September irrespective of the engagements of the coming weeks.

One part of the deal is that MEPs supported former conservative Polish prime minister Jerzy Buzek as new EU Parliament president yesterday, who will be followed by the German Socialist Martin Schulz after 2.5 years.

 

Andrew Duff on Barroso

Writing in FT.com, liberal MEP Andrew Duff defends the EP’s decision to delay Barroso’s investiture until September. There would have been a danger of a no vote in July as Barroso has to negotiate support from both the Socialists and the Liberals. But he said a delay beyond September would be dangerous as it could negatively affect the Irish referendum and the Czech parliament elections, where a victory of Vaclav Klaus’ Europhobic party could still endanger the Lisbon Treaty. (To us it looks as though Barroso will get through in the end. The EP never had the guts to stand up to the Council on the appointment of the Commission president)

 

No free lunch

Two weeks after the VAT tax effectively dropped for French restaurants from 19.6% to 5.5%, the first controls show that this massive reduction was only marginally passed through to the consumers, reports Les Echos. The independents claim higher charges and higher raw material costs as a reason.

 

Irish taxpayers to pay the price for restoring financial stability

The Irish central bank governor John Hurley warned that taxpayer will have to take a hit in purchasing development loans from the banks in order to help restore them to financial stability, reports the Irish Independent. He said a "balance had to be struck" between value for the taxpayer and restoring the function of the banking system in the economy.” The Irish economy is forecasted to shrink by another 8% this year and 3% next year. With respect to monetary policy Hurley was unusually clear: "We are looking at a very gradual economic recovery and it is necessary that this is supported by monetary policy for the present".

 

 

 

Green shoots watch: more mixed signals

Euro area industrial output rose by less than expected in May, the FT reports. It was up 0.5% during May, but still 17% down from May 2008. National data revealed that the recovery had gained pace in Germany, France and Italy, but bad news from Spain level the euro area average. A further reminder how fragile the recovery is at the moment came from the (admittedly extremely volatile) ZEW index, an indicator which is based on financial analyst’s assessments. It surprisingly went down from 44 to 39 points, which gives weight to the theory that the brief economic uptick during April was probably little more than an inventory correction, as companies are producing once more to fill depleted inventories. (Note, however, that BMW said it expects demand and production to increase by the end of the year.)

 

 

Munchau on Steinbruck

In his FT Deutschland column, Wolfgang Munchau says Peer Steinbruck, the German finance ministers, suffers two fundamental weaknesses. The first, and often noted weakness, is an intellectual laziness. The second, perhaps less known problem, is a poor political judgement. His recent criticism of his own party’s pension policies, two months before the election, are reminiscent of the disastrous election campaign he led in North-Rhine Westphalia in 2005, a state in which he was premier, when we was outsted in one of the worst SPD election campaigns ever. Munchau says that Steinbruck is a lose canon, and could be very dangerous for the SPD during the upcoming elections.

 

Wolf’s pessimistic outlook

Martin Wolf writes in his FT column that the recovery will be slow and painful. But his most important judgement is about the failure of global policy makers to learn the lesson from this crisis. The financial sector has more moral hazard now than it did before it entered the crisis. The issue of global imbalances is not being addressed, including the problem of the dollar-based monetary system. The same goes for the inherent vulnerability of emerging markets.

 

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