German media report: EU to prepare bail out Spain

 

This is a rare one newspaper-only scoop. Frankfurter Allgemeine reports this morning that EU officials will start talks about a bail out for Spain, citing unnamed sourced in Berlin. The paper said the situation had deteriorated so much that they did not want wait until the EU summit on Thursday. It also said neither the European Commission nor the ECB excluded an aid package. The paper quoted Spanish officials as denying that they are about to ask for EU aid, and immediatedly pointed out that Greek officials made the same claims before. The trigger is the freeze in the inter-banking market last week as the markets have lost confidence in the Spanish banking sector.

In a separate news report, Frankfurter Allgemeine writes that Barroso and Trichet were worried about the state of Spanish banks, and pleaded for aid. The paper also cites the latest statistics from the BIS, according to which German banks had given credits to Spain of $202bn, more than half of which to Spanish banks. The exposure of French banks is $248bn – mostly to companies and households. The Spanish central bank estimates the extent of the bad loans to be €166bn, of which only a quarter has been written off so far.  The Spanish bank bailout fund is €99bn. One of the problems now is that Spain has immediate finance needs at a time when market interest rates are rising sharply.

The paper also reports that France is getting nervous about the effect of the crisis on its own liquidity.

In a short comment, the paper makes the point that the €750bn rescue umbrella is just another bank bailout package.

There is no whiff of any of this in the Spanish press this morning. El Pais reports on the latest BIS statistics, citing that the total exposure of European banks to Spain is €600bn (enough to bring the house down). Spain has been the beneficiary of intra-EU credit flows to a much larger extent than Greece, Portugal, and Ireland. Last week, the inter-banking market froze again in parts. The articles quotes that BIS as saying that while the single currency brought a greater diversification of risk, it warned of a contagion if any of the countries were facing solvency problems.

 

Le Monde worries about a declassement

The French are getting worried about bond spreads with Germany, which have risen above 50bp for the first time since the start of monetary union. In particular there is now concern that the country might lose the AAA status, despite the promises by the government that the French consolidation is even higher than Germany’s (what consolidation?). Le Monde recalls the situation in 1974 – the last budgetary incident! – since when the country has more or less adhered to a fiscally conservative stance.

 

 

The end of Belgium has come a step closer

This would normally be our main item. In the Belgian elections the separatist NVA has gained a surprisingly strong 30% of the votes, significantly more than the polls projected, and has become the single largest parties in Flanders. Jean Quatremer makes the point that if you add the other separatist parties, 46% of the Flemish people have voted for separation, and if you add the votes of the Christian Democrats, who want a system of confederation, that number goes up to 64%. He says the evaporation of the kingdom continues. In French-speaking Wallonia, the Socialists regained their pole position, which they lost to the liberals last time, and have already announced that they want to work with the NVA.

La Tribune has a good news report on the story, quoting socialists as saying that the results constitute a political tsunami.  Bart de Wever, the head of the NVA, said he would be ready to reach out to the Francophones, and to agree a modus operandi to unblock the gridlock that has characterised Belgian politics for the last three years. It said the most quoted scenario is for the two election winners – the NVA and the Walloon Socialists to form a joint government. Mr de Wever held out the possibility that he might support a francophone prime minister (as a separatist he does not care too much about running Belgium. What he wants is a deal that would give Flanders a much higher degree of political and economic independence from the central state.)

 

 

 

Herman van Rompuy talks to the FT – and attacks the financial markets

The FT had an interview with Herman van Rompuy, who made the extraordinary statement that, in his experience, fiscal consolidation “has no real effect on economic growth.” (An extraordinary statement of complacency. It seems that the experience of running of Belgium may, after all, not have prepared him for the job). He also criticised that the financial markets were too complacent for a decade, and were now overreacting. He said:  “Most of us are not happy with excessive market developments. But when you look at this in a broader perspective, the markets are sanctioning bad policies, sometimes excessively, disproportionately and based on rumours and prejudices.”

In a separate article drawing from the same interview, Mr van Rompuy said he did not prioritise, nor rule out the possibility of Treaty change. But he also made clear that the changes that are about to come will be done within the existing treaty. “I personally am not in favour, because I see all the problems ahead. But my position is not the most important. If there is a consensus on treaty change, I will not oppose it. We are in a crisis. We are in one of the most difficult situations you can imagine. So to exclude certain solutions would not be wise.”

 

Wolfgang Munchau on the small country mindset in the EU

You can take Barroso and van Rompuy out of the small open economy, but you can’t take the small open economy out of Barroso and van Rompuy, who babble about competitiveness, and simply do not understand that the EU, the world’s largest economy, is not the sums of its parts. Wolfgang Munchau writes in his FT column that they defend austerity programmes because, in their experience, whatever a small country does has no effect on the rest of the world. But when the EU does it, it is different. Germany, too, has the mindset of the small open economy, which leaves France as the only country, where there is a semblance of macroeconomic thinking at the top levels of government. He concludes that it will be critical for the future of EMU how France will behave – whether it will follow Germany into austerity, or risk a break.

 

Paul Krugman on how to deal with Germany and China

Paul Krugman’s blog entries have been getting progressively aggressive of late. He is now advocating a full trade war against China and Germany on the grounds that those two countries pursue egocentral policies with no regard for the rest of the world. In the case of China, the problem is obviously the exchange rate, and in the case of Germany, the drive into austerity. Mark Schieritz observed in his blog Herdentrieb that while the Europeans fully bought into the so-called non-Keynesian effects, the Americans went back to pure Keynesians. They are from Mars, we are from Venus. (should it not be the other way round?)

 

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