Saturday, October 29, 2011

Letter from Brussels – Brüsseler Zwei-Klassengesellschaft

Dieser Letter from Brussels erschien heute in der Euro am Sonntag.

Auch wenn es in Brüssel immer noch Idealisten gibt, die vom einheitlichen Europa träumen, haben die Gipfel der letzten Tage genau das Gegenteil deutlich gemacht. Jenseits von Hebeln, Banken, Schuldenschnitten und Milliarden hat sich nämlich noch etwas ganz anderes gezeigt: Europa wird zur Zwei-Klassengesellschaft.

Nein, nicht die Zwei-Klassengesellschaft zwischen Arm und Reich und auch nicht die Zwei-Klassengesellschaft zwischen Nord und Süd. Europa ist auf dem besten Weg zu einer Zwei-Klassengesellschaft mit Euro- und Nicht-Euroländern.

Die Zwei-Klassengesellschaft zeigt sich in kleinen Dingen wie offiziellen Abendessen des exklusiven Euroklubs, aber auch in großen Dingen, so wie den mit offenem Visier ausgetragenen Streit zwischen dem britischen Premier Cameron und dem französischen Präsidenten Sarkozy. Beim Gipfel letzter Woche hatte der französische Präsident den britischen Premier Cameron mit wenig französischem Charme höflichst aufgefordert, zur Euro-krise doch einfach mal die Klappe zu halten.

Ist es nun schlimm, dass kleine Länder wie die Slowakei oder Estland mehr zur Eurokrise zu sagen haben als Großbritannien? Nicht wirklich. Eine wichtige Lehre aus der jetzigen Krise ist, dass eine Währungsunion ohne politische Union über kurz oder lang zum Scheitern verurteilt ist. Der einzige Weg ist also die Flucht nach vorne zu mehr politische Integration. Mittlerweile haben die meisten Euroländer das verstanden. Großbritannien jedoch nicht. Ob zu den Regeln vom Stabilitätspakt, zur Finanzregulierung oder jetzt dem Rettungsfonds, Großbritannien hat seit dem Beginn der Währungsunion, milde gesagt, mehr Zusammenarbeit eher sabotiert als stimuliert.

Wie war das noch? Mittendrin statt nur dabei. Wenn man in den nächsten Jahren Europamitgestalten will, muss man im Euroclub sein. Wer draußen bleibt soll sich nicht beschweren und einfach mal die Klappe halten.

Monday, October 24, 2011

Eurozone: We'll be right back...

The super duper master plan is not ready, yet. Eurozone leaders took some steps
but spanners are still in the works.

The first three-day session of Eurozone and European leaders and finance ministers has not yet delivered the big, ultimate, super duper master plan. To be honest, this had almost been expected. Except for uplifting comments, no new facts or conclusions were presented. However, on a more positive note, reading between the lines, listening carefully to press conferences and assessing wire reports, the meetings seem to have delivered some more details of how the plan could look like. The four elements are still the same: a second Greek bailout package including a higher private sector involvement, bank recapitalization, EFSF leverage and more economic governance. Even if politicians tried to be uplifting, there are still some important unsolved issues.

As regards the second Greek bailout package, leaked reports from the Troika suggest
that a second Greek bailout package would require more than 252bn euro to finance
Greece until 2020, instead of the 109bn euro mentioned in July. According to the leaked documents, the 109bn euro package would only be sufficient if private sector bond holders would accept a haircut of 60%. Whether Eurozone politicians can achieve such participations on a purely voluntary basis is unclear.

As regards bank recapitalization, the new ballpark number is 100bn euro. Apparently,
troubled financial institutions must first attempt to raise fresh cash from markets. If unable to do so, national governments will then have to provide back-stops. Only if governments are too weak to be able to perform this task, the EFSF could step in. However, no final agreement has been reached, yet.

As regards leverage for the EFSF, this still seems to be the biggest unfinished
construction site. According to German Chancellor Merkel, leverage through the ECB is
not an option (anymore). It looks as if two options based on the German sovereign
insurance mechanism are currently discussed. One is the original German proposal
through the EFSF and another one could bring the IMF on board, using a special purpose vehicle.

As regards economic governance, this remains a long shot. European leaders officially
backed a "limited treaty change" that will involve tightening fiscal discipline and
deepening economic union. A new fiscal discipline 'super-commissioner' for the Eurozone will be created, although it remains unclear whether this could be done without Treaty changes. Let’s not forget, Treaty changes will have to be agreed by all 27 countries and not only the Eurozone countries.

It did not come as a real surprise: this weekend’s series of Eurozone summits and
meetings did not deliver concrete results. However, the contours of the big master plan have once again become a bit clearer. In a way, it is like in the good old US television cartoons: don’t go away, we’ll be right back after these messages. See you again on Wednesday.

Friday, October 21, 2011

Ifo slows in October

And now for something completely different…While currently all eyes are on Sunday’s Eurozone summit, or better: an entire series of summits, there actually still is an economy to watch. Today’s Ifo index shows that at least the German economy is slowing, without falling off the cliff. In October, the Ifo index dropped to 106.4, from 107.5 in September. This is the lowest reading since June 2010, but still far above its historical average. The drop was almost equally driven by weaker current assessment and some further downward correction of expectations. The positive take is that the drop in expectations of latest months has slowed down.

Recent developments in financial markets and confidence indicators have brought back the bad memories of 2008 when the German economy fell into a deep black hole. Could Greece 2011 be the same as Lehman 2008? In our view, despite all similarities with 2008, there are currently important differences: orders at hand are much higher than in 2008 and inventories are much lower. While the Lehman crash hit German industry at a moment of overproduction, companies currently still have their hands full reducing the high order backlog. This time around, German companies look much better prepared to face a Lehman-type crisis. In addition, low interest rates, positive investment plans and the strong labour market should also cushion an eventual slowdown in the coming months.

For a long while, the Eurozone’s economic Superman looked invulnerable. However, with Italy and France starting to falter, Germany is now finally feeling the pain of the sovereign debt crisis. Fortunately, this is not 2008 and the economy should not collapse. Economic fundamentals are simply too sound. However, the Eurozone’s economic Superman may have finally met its kryptonite.

Thursday, October 20, 2011

Eurozone summit on Sunday

When Eurozone leaders meet on Sunday to (once again) solve the Eurozone crisis, expectations are high. Can Eurozone leaders deliver?

It is again the week of all weeks, the summit of all summits. It is again crunch time in Brussels on Sunday. Eurozone leaders will meet to present a new crisis resolution package. The framework of the anti-crisis package has become clearer in recent weeks. It is likely to consist of the following elements: bank recapitalisation, further Greek debt restructuring, leverage for the EFSF and new economic governance. However, as so often is the case, the devil is in the details – and it will be in each of these four elements.

The issue of bank recapitalisation has become the new buzz word of the euro rescuers. Bank recapitalisation should help to cushion the negative impact from a possible Greek debt restructuring and possible contagion. However, it is doubtful whether Eurozone leaders can come up with a detailed plan on Sunday, presenting single banks and required capital needs. The most likely outcome, in our view, is a rather general agreement on higher Tier 1 capital ratios (around 8% or 9%) with a timetable on how and when to increase capital.

A further Greek debt restructuring looks like the most tangible result from Sunday’s summit. A renegotiation of the July agreement could see an increase of the so-called voluntary private sector involvement from 21% to around 40%. Higher numbers were circulating initially but have become less likely. Nevertheless, even with a higher private sector involvement, Greece debt would not, yet, return to a sustainable path and Greece would still have a high fiscal deficit. Consequently, more debt restructuring or debt forgiveness is likely further down the road.

Leverage for the EFSF should have the biggest impact on financial market reactions to the Sunday package. The lack of an unconditional lender of last resort in the Eurozone is the biggest shortcoming of the current set-up of the monetary union. There is a growing awareness amongst Eurozone policymakers that even the just recently beefed-up EFSF is too small to fulfill such a role. The EFSF is still only a manual spray gun and not a big bazooka. Simply increasing the size of the EFSF by more state guarantees, however, is hardly possible in the current situation. More Eurozone countries could lose their AAA-ratings upon higher guarantees, thereby toppling the entire EFSF construction. Leveraging the EFSF could be an alternative but this is easier said than done. The currently favoured option by at least the German government is a so-called sovereign insurance mechanism. Eurozone countries could insure newly issued bonds at the EFSF against a loss of x-percent (probably 20%). This could make peripheral bonds more attractive but it still does not address the problem that there is not enough money to eventually bail-out Spain and Italy. Only if the bond insurance could bring peripheral yields down to the same level as EFSF loans and this is unlikely.

The final element of Sunday’s master plan should be a commitment to more political integration and stricter and more centralized economic governance. However, this takes time and requires Treaty changes – something the Sunday summit cannot deliver.

French president Sarkozy raised the bar for Sunday’s Eurozone summit to an impossible height. The current crisis is simply too complex and there are too many devils in the details to come up with a final, all-encompassing package with not a single question left unchanged on Sunday. However, even without the super-duper master plan, Sunday’s summit could bring new steps in the right direction.