Friday, July 27, 2012

Could this 'concerted action' fly?

Today's edition of French daily Le Monde - which, unlike a large majority of newspapers, is delivered to newsagents at noon - features an interesting story.

According to the paper, the ECB and eurozone governments have intensified talks about the possibility of launching a 'concerted action' to keep Spain's (but also Italy's) borrowing costs at reasonable levels. The recipe is quite simple. The first step would be the eurozone's bailout funds - the temporary EFSF and, as soon as it is up and running, the permanent ESM - buying Spanish/Italian bonds on the so-called primary markets, where national treasuries try to sell newly-issued public debt.

The ECB would follow suit, and would resume its bond purchases on the secondary market - after keeping quiet for almost five months. This would tackle the short-term emergency. The second step, according to Le Monde, could be giving the ESM a banking licence, so that it can have unlimited access to ECB liquidity.

In order for this 'concerted action' to kick off, though, Spain has to make a formal request for an EFSF bond-buying programme. According to the paper, this could be overcome by offering Mariano Rajoy's government 'softer' conditions.

Sorry for once again being the bearers of bad news, but this is not as easy as it sounds. First of all, the Spanish government remains very reluctant to request anything the markets may see as a fully-fledged bailout. Just think of how consistently Rajoy and his ministers have avoided using the word rescate (bailout in Spanish) when referring to the €100bn rescue package for the Spanish banking sector. Secondly, giving Spain 'softer' conditions could potentially open Pandora's box and prompt Greece, Ireland and Portugal to ask for the same treatment.

On top of this, there are also other problems with this 'concerted action', which Le Monde seems to overlook. Should the EFSF start buying bonds, this would not necessarily mean that the German Bundesbank would suddenly change its mind and support massive bond market interventions by the ECB. See, for example, the Bundesbank's reply to Mario Draghi's latest remarks. Unusually late by German standards, but no less categorical in making clear that the bank "hasn't changed its opinion" (i.e. its opposition) to such interventions.

Now, unanimity in the ECB's Governing Council is not needed with regard to bond purchases. But it would be politically very difficult to outvote the Bundesbank over and over again - not to mention that the Dutch and the Finns are likely to be sympathetic to the German concerns. On a more technical note, bond purchases on the primary markets can be addictive, similar to what has happened with ECB liquidity to eurozone banks. In other words, it could be quite difficult for, say, Spain to finance itself in a normal fashion after EFSF/ESM purchases are phased out. As we have stressed before, no-one wants to see a situation where the eurozone faces zombie states similar to the peripheral zombie banks now reliant on ECB liquidity.

All very speculative at the moment (Le Monde does not actually mention any specific sources), but it's clear that things are moving quickly. Keep following us on Twitter @OpenEurope if you want to keep up to speed!   

8 comments:

Mary. Ireland said...

The ESM Treaty is facing questions about its legality in the ECJ: http://www.thejournal.ie/is-the-esm-legal-535053-Jul2012/

Rik said...

You forgot some important ones:
1. The parliaments will have to approve it.
A bit difficult to see the CSU approving it.
2. Court cases galore. Especially as remarked before it simply looks that the ECB is not meeting the conditions under which the Buba could transfer part of its powers to it (art. 88 GG). Which means another Constitutional Court way is open.
Merkel btw is very poor as far as legal knowledge is concerned. Roughly with every major move she has made a legal blooper.
3. This is not the stuff you want to have as Euro rescuer when still a prelimary ruling on an earlier package is to be made.
Combined with a clear necessity for a Greece 38.0 (I lost count) and most likely Italy in the waitingroom. Clear that 500 Bn is not enough.
One of the conditions is that the extra obligation should be overseeable. Probably having some interesting jurisprudence on that as well. Constitutional Court better cancel their holidays.
Anyway it looks very likely/a real possibility that after 12/9 there will be a normal procedure on the ESM. This is only a fast-track one.
4. Script probably writen by Wilders's PR agency and that of the Dutch Socialist party. Will give them a lot of votes. Although the official till now view of the SP is that the ECB should start printing. (because he is probably really of the opinion that it will have no effect on savings and pensions, so much for competent leadership in Holland/EU in general).
5. Likely other countries will have difficulties. How do you give collateral to Finland?

My guess is: approval will take a very long time at best. Either some parliament or Court will spoil it. Most likely candidate the German Constitutional Court. Leading to a referendum and a rejection there (and a great mess).

Rik said...

I come to the conclusion that this is overblown. And for the following reason.
Looking where things basically standard are leaking.

1. It is extremely unlikely that this would not have caused massive opposition in Germany with the local Min of Fin and a of lot others. And subsequently leaks (there always have been and large ones).

2. We have seen nothing of the sort.
Therefor it is not very likely that in Germany (you know the big decisionmaker) one is working on it.
Also not very likely that now leaking is under control. Especially this one needs massive coordination with ECB for instance and is highly controversial in Germany.

3. Similar has happened before. France has been the place of leaks when E-Comm plus France did some things. So it looks like that is the case here as well.
As both other major projects this way were later reversed, at least history shows that we have to see it more as a proposal from a certain corner.

4. ECB has very unlikely coordinated this properly with the Buba. It is likely discussed but this statement simply looks not first coordinated with the Buba.

5. Buba and the Dutch basically always go into the publicity before an official statement is made. T cut the discussion of. Often the Dutch are used for this. Which is also strategically better of course. Now their comments came after the official Draghi statement.
Also this points into a French, Barroso effort.

6. Merkel's as co-author statement leaves even more room than the one after the last summit. So basically says very little (not positive not negative btw).

7. German public opinion (judging on the papers is very negative). Merkel normally doesnot go against that.

8. Starting from there with a degree of uncertainty of course.
It loooks like tension is building up in the ECB. You donot do things behind the back of your major backer and largest shareholder.

9. Draghi is a competent guy, but of course it was a huge mistake by Merkel to appoint a Southener on that post. As it was to have FrouFrou (not here real first name but somebody called her that way and I found that rather funny and forgot the real name anyway) Lagarde as head of the IMF. The same as having a dodgy Portuguese iso of Schroder or Blair. You donot build a platform with he people of Europe if the one in charge of that has as motto: 'in case of doubt take the undemocratic way".

Rik said...

Referring to my earlier comment.
Later this weekend it clearly looked that my earlier analysis (and OE's btw as well) was much closer to the truth than the one of most main stream media.

This likely will have repercusions.
-It now wil look completely uncoordinated. This has: 'completely uncoordinated with the ultimate decisionmakers', written all over it.
-Draghi's credibility will likely take a big hit. Which is a very serious issue as basically he was one of the few, possibly even the only one with his reputation still intact. Moved into political waters.

Monday we likely continue where we had stopped the middle of last week.

Basically the problem is simple.
-Spain/Greece simply donot have credible management.
-Measures are by themselves already pretty marginal and badly executed.
-Nobody believes they will be a 'proper', normal borrower within say the next 5 years (or more).
-So their debt will be dumped, unless the risk on it is transferred to a creditworthy party.
-Basically at the end Germany (plus a few small ones) are the only ones able to do that.
-The ECB cannot, as it's own credibility is basically fully based on the fact that it is backed by Germany and Co.
-So with all solutions on the risk transfer front Germany has to approve. And they are very unlikely to do so.

There are no funds for a 3-5 year bail out for Spain. Probably looking at close to 1 Tn. 3 year simply looks too short (and that would be 600-700 Bn, may be more if you support the secundary market.
Plus Italy close to double the size will most likely follow. 20 Year plans for a country that changes governments roughly every year and comes up half the time with the likes of Berlusconi and similar clowns from the left, is no where near credible.

Further increase has huge legal difficulties in Germany. Basically needs a referendum. So now we will see after a few months the Germans decide what they want (and likely the Dutch/Fins as well).

So most likely outcome: Eurovoir.

Average Englishman said...

A lot has been said by many people here but it seems to me to boil down to this.

Spain, Greece, Italy et al need someone to fill up the Olympic Stadium with real money (not possible promises of money sometime maybe) and to then parachute it in to them pronto or they will default and have to go back to their own currencies. Said benefactor must also be prepared to look forward to doing the same thing again in the near future and then again further down the road until the Greeks, Spanish, Italians, etc., all miraculously change there cultures and economies and behave like good Germans, Finns, Dutch, etc.

I do not see anyone who has enough money preparing the necessary plane loads of cash. Nor do I see any real desire from the people of the debtor countries to change overnight. Therefore, it is only a matter of time before Euroland in its present form ceases to be.

If anyone reading this blog thinks I have missed something I would be very happy to be enlightened.

Bugsy said...

Average Englishman - I don't think you have missed anything.

The EU pushed advancement to far too fast, they were not ready for a common currency, perhaps never would have been.

I think France and Germany were blinded by the huge advantage in trade offered by the Euro.

The only solution is backward to their original currencies . Devalue, financial earthquake, move on.

Jesper said...

The proposals are likely to be illegal and even if treated as an academic question the answer is still: No.

I know many economists believe that by changing an indicator then the reality will change to match their manipulated measurements.
An example: In a rich country the cost of living is high, therefore a country with high property prices must be very rich. It is easier to inflate and/or fake high property prices than to actually build that kind of wealth.

Another example would be that by manipulating the price of bonds on the secondary market the underlying creditworthiness is actually improved.

I'll make water boil at 50 degrees Celsius if you'll let me manipulate the thermometer. Would that be a meaningless action or would I have dramatically found a way to change the actual physical properties of water?

Denis Cooper said...

Just on the question of legality raised by jesper above, it should be borne in mind that on March 25th 2011 EU leaders agreed to a radical EU treaty change through European Council Decision 2011/199/EU.

In this June 2011 paper by a professor of EU law, Bruno de Witte:

http://www.eui.eu/Projects/EUDO-Institutions/Documents/SIEPS20116epa.pdf

he suggested on page 6:

"By inserting an explicit provision in the TFEU which authorizes the euro area member states to put in place a financial support mechanism for countries in budgetary and financial trouble, the effect of the bail-out prohibition of Article 125 TFEU would be neutralized by a complementary norm with the same treaty rank."

Once that EU treaty change had come into force - which would be on January 1st 2013 at the earliest, under its own Article 2 - then it could be argued that it had in effect changed the ECB mandate, so measures which were previously considered a breach of its mandate would then become permissible.

That wouldn't change the politics or the economics, but it would deprive the Bundesbank of its legal argument against large scale ECB intervention.