Lagarde says stability pact should be softened

 

FT Deutschland leads its political section with an interview with Christine Lagarde, which told the paper that France seeks a softening of the stability pact. She advocates a separation into a structural deficit and a “crisis deficit”, and called for a strategy to reduce both of them separately. She says she has no hard and fast rule how to do this. The paper also reports Dutch finance minister Wouter Bos as saying that the pact is no longer suitable at times when it could take up to ten years for governments to reduce their deficits.

She made two further points. She pointedly refused to back Jean-Claude Juncker for another term at the helm of the eurogroup with the words that one has to be motivated to do the job, and that she still had to ask Juncker whether he was motivated. The paper said Lagarde might be a possible successor.

In a separate article, Ms Lagarde is quoted as saying that the European Commission should take a close look as to whether Germany’s bailout of Opel might go against EU competition rules.

 

Opel/GM

The dominant news subject this morning in European newspaper after the holiday weekend is the chapter 11 bankruptcy of General Motors, and the aftermath of the Opel rescue last week. The most memorable report is from El Pais which says the bankruptcy marks the end of the era of the automobile. Here are a few more bits on the story.

 

Merkel about Opel

Angela Merkel on why she rescued Opel: “For me it was decisive – including in respect of what I have decided – that the risks of an alternative would have politically not acceptable for me.” FT Deutschland said this frank statement was clearly a reference to the Grand Coalition, which might have collapsed alongside with Opel.

 

Munchau about Opel

In his FT column, Wolfgang Munchau notes that the Opel rescue is likely to lead to severe tensions within the EU, as the price of preserving Germany’s plants will be the closure of plants in other EU countries, including one plant in Belgium. The reason is the way the deal was negotiated, as the German government insisted that the winning bidder, Magna, preserves all four German Opel plants (which Magna had not intended to do in its original bid). The Opel rescue is the next nail in the coffin of Europe’s single market, which has been unraveling in banking and finance, public procurement, and now in cars.

 

 

What is happening to the US sectoral balances?

This is hugely important, including for us in Europe. This chart shows as the decomposition of the US current account deficit, which is not falling, but whose composition is changing. Note that household borrowing has gone negative (the US households are starting to save), and the corporate borrowing virtually disappeared. What prevents the US current account deficit from collapsing is the US government deficit. (If and when this falls, the US current account deficit will fall, and so will current account surpluses in other parts of the world). Here is the chart from Brad Setser.

 

 

 

The Fed is clueless about the jump in yields

Interesting comment by Naked Capitalism in connection with an article in Reuters, according to which the Fed professes uncertainty about why long-bond yields have gone up so sharply. Is it due to expectations of a recovery, or China’s shift towards the shorter end of the maturity spectrum? The Fed apparently believes that it cannot have anything to do with supplies, since that was known for some time. The article quotes a Fed official as saying that they are in wait-and-see mode. “So I don’t think we should be chasing a long-term interest rate.”

 

 

German elections and Europe

What kind of Europe does Angela Merkel stand for? Reading the 10-point plan published with Nicolas Sarkozy for Welt am Sonntag we don’t really know, except that it is a Europe without Turkey. They advocate more financial regulation, climate and industrial protection but there is no decisive proposal, writes Arnaud Leparmentier.  In another article, Le Monde worries that the European elections reflect the growing distance between Germany and Europe.  Facing three important regional elections in August and parliamentary elections in September, the European elections are considered secondary. Joschka Fisher put it bluntly in the Sueddeutsche, saying that Germany no longer considers Europe as a goal but as a means to impose its proper interests.

 

 

Why do the media ignore Europe?

Eddy Fourier has an interesting article in Telos this morning about why the French media are so poor when it comes to the coverage of Europe. He compares French media representation in Brussels to that of Germany, and produces some statistics showing that Germany has about twice as many journalists. He also investigates the quality of French European reporting, saying that it focuses mostly on trivia, such as Silvio Berlusconi’s marital troubles, but not on political issues. He says that France should look at what other countries, i.e. Germany, are doing. (Our suspicion is that if France did that, not much will change in reality, as the German media have also have changed in terms of their reporting of European news. We would also sound a note of caution about the statistics. The discrepancy is at least in part due to massive overstaffing in German public sector TV and radio, as well as the (still) infinitely larger number of local newspapers in Germany.)

 

 

Market movements: Out of dollars, into commodities

With green shoots sprouting all over the place, investors are returning to the pattern of trading that characterised the period before the acute phase of the crisis: out of the dollar and into commodities. Yesterday, a leading spot commodities index hit a seven-month high, according to the FT, as risk appetite is returning to the markets. West Texas Intermediate is now back up at over $68pb. The euro traded at over $1.41.

 

 

 

The return of subordinated debt

There are more and more reports about a tentative return to normal in debt market. The FT has a story this morning that the first issue of subordinated bank debt this year has succeeded, as Rabobank managed to sell a $1.5bn issue of perpetual tier-one securities with an 11% coupon. The return of this subsegment of the debt market came earlier than was expected by market experts, and should be seen as a good sign that the financial markets are recovering, and that a measured degree of risk-appetite is returning.

 

 

The return of leverage

This is an interesting story in the FT, which shows that green shoots are now appearing even in the credit market. Gillian Tett reports that one large London-based credit fund has obtained external finance to get leverage for the trade in financial instruments. While during the boom, leverage ratios of one-to-twenty were often found, one-to-five were average. Now the observing leverage ratios is one-to-one and a half – still very low, but this comes after external liquidity completely dried up last autumn.

 

The case for a European stress test

Jean Pisani Ferry and Beatrice Mauro di Weder argue in the Financial Times that Europe needs a consistent stress test scenario for the banks. They recall Japan’s experience of zombie banks, and say that Europe is currently headed in the same direction unless governments took resolute and co-ordinated actions. The proposed stress tests are uncoordinated, suitable mainly to be convenient for national supervisors. The methods are inconsistent, and it is up national authorities to publish the results. They advocate a common stress test, based on a common macro scenario, with central oversight. The article was co-authored by a large number of French and German economists, belong to their respective countries’ council of economic advisers.

 

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