German unemployment increased by a non-seasonally adjusted 29,100 in August, bringing the number of unemployment to the highest since April this year. Currently, 2.905 million people are without a job. This is less than in August 2011. The most alarming signal from today’s report is the fact that the non-seasonally adjusted monthly increase is the highest August increase since 1993. A clear signal that the best times of the German labour market are over. In seasonally-adjusted terms, unemployment increased slightly, leaving the seasonally-adjusted unemployment rate unchanged at 6.8%.
The strong labour market has been one of the main drivers of German growth in the first half of the year. Low unemployment, record high employment and wage increases supported private consumption and helped cushioning the industrial slowdown. Looking ahead, however, it is doubtful whether private consumption can really take over the baton as main growth driver for the German economy. Today’s numbers provide further evidence that the labour market is gradually losing steam and that the positive impact on the economy should peter out towards the end of the year. Employment expectations in the manufacturing sector have entered negative territory, most open vacancies are temporary jobs and several companies have reintroduced short-time work schemes. Obviously not the best climate for a new round of wage increases, consequently boding ill for private consumption..
The ongoing demographic change should keep a lid on any increase in German unemployment rates in the near future. However, it is hard to deny that the resilience of the German labour market is cracking up.
Friday, August 31, 2012
Monday, August 27, 2012
Ifo continues downward slide
The downward slide continues as German companies are increasingly becoming pessimistic about the future. The Ifo index continued its recent downward trend in August, dropping to 102.3, from 103.3 in July. This is the fourth consecutive drop, bringing the Ifo index to its lowest level since March 2010. With a sharp drop to 94.2, from 95.6 in July, the expectation component has now reached levels which in the past corresponded with recessions. The only upside in today’s Ifo report is that the drop in the current assessment component remained rather modest (to 111.2, from 111.6).
Exports and domestic consumption have shielded the German economy against the euro crisis virus up to now. This immunity, however, has been crumbling away quickly over recent months. The sharp drop in new orders from other Eurozone countries since the beginning of the year and continued inventory reductions have weakened the German industry. Moreover, as several companies have again started to introduce short-time work schemes support from the labour market should also diminish in the coming months. As a consequence, it looks as if the German economy will, at best, be treading water in the coming months. The latest batch of sentiment indicators even points to a contraction in the third quarter. However, let’s be clear, given the sound fundamentals of the economy, any contraction should hardly feel recessionary in Germany.
The still solid current assessment component of today’s Ifo report illustrates the relative strength of the economy. However, the headline figure and, above all, downbeat expectations clearly add to concerns that strong growth in the first half of the year was just the last flaring up of the new German Wirtschaftswunder.
Exports and domestic consumption have shielded the German economy against the euro crisis virus up to now. This immunity, however, has been crumbling away quickly over recent months. The sharp drop in new orders from other Eurozone countries since the beginning of the year and continued inventory reductions have weakened the German industry. Moreover, as several companies have again started to introduce short-time work schemes support from the labour market should also diminish in the coming months. As a consequence, it looks as if the German economy will, at best, be treading water in the coming months. The latest batch of sentiment indicators even points to a contraction in the third quarter. However, let’s be clear, given the sound fundamentals of the economy, any contraction should hardly feel recessionary in Germany.
The still solid current assessment component of today’s Ifo report illustrates the relative strength of the economy. However, the headline figure and, above all, downbeat expectations clearly add to concerns that strong growth in the first half of the year was just the last flaring up of the new German Wirtschaftswunder.
Wednesday, August 22, 2012
Solid German growth confirmed - curse or blessing for Merkel?
Solid growth confirmed. The second estimate of the
statistical office confirmed that the German economy defied the euro
crisis in the first half of the year. GDP growth in the Eurozone’s
biggest economy came in at 0.3% QoQ in the second quarter, from 0.5% in
1Q 2012. Growth was driven net exports, with exports up by 2.5% QoQ,
government (0.2% QoQ) and private consumption (0.4%). Investments were
down by 1.8% QoQ. German growth remains well-balanced but signs of
waning strength are increasing.
Looking ahead, however, there is a risk that the strong performance in the first half of the year was the last flaring up of the new German Wirtschaftswunder. The sharp drop in new orders from other Eurozone countries since the beginning of the year shows that the euro crisis has already reached the German economy. The safety net of richly filled order books and low inventories has become thinner very rapidly, not boding well for growth in the second half of the year. At the same time, low interest rates and wage increases should support domestic investment and consumption, partly offsetting the negative impact from weakening external demand. However, solid domestic demand can only cushion the slowdown of the economy but will not transform Germany into an economic island.
For German chancellor Merkel, today’s growth numbers are not as comfortable as they might look as they complicate next steps in the euro crisis. To some extent, today’s numbers are both a blessing and a curse. German growth is still too strong to convince coalition partners and also the public opinion of waning crisis immunity. However, at the same time, growth is too weak to seriously label the German economy invincible. As a consequence, chancellor Merkel looks likely to continue with her gradual strategy toward conditional integration. When Merkel meets with French president Hollande today and Greek president Samaras tomorrow, no clear decisions should be expected. Even Samaras’ latest “you-get-your-money-back” initiative in German newspapers will not (yet) do the trick. Given latest comments, chancellor Merkel seems not entirely reluctant to give Greece more time but only if it does not cost more money. In our view, however, any significant German move will only come after the next Troika report and, of course, the ruling of the Constitutional Court on 12 September.
Looking ahead, however, there is a risk that the strong performance in the first half of the year was the last flaring up of the new German Wirtschaftswunder. The sharp drop in new orders from other Eurozone countries since the beginning of the year shows that the euro crisis has already reached the German economy. The safety net of richly filled order books and low inventories has become thinner very rapidly, not boding well for growth in the second half of the year. At the same time, low interest rates and wage increases should support domestic investment and consumption, partly offsetting the negative impact from weakening external demand. However, solid domestic demand can only cushion the slowdown of the economy but will not transform Germany into an economic island.
For German chancellor Merkel, today’s growth numbers are not as comfortable as they might look as they complicate next steps in the euro crisis. To some extent, today’s numbers are both a blessing and a curse. German growth is still too strong to convince coalition partners and also the public opinion of waning crisis immunity. However, at the same time, growth is too weak to seriously label the German economy invincible. As a consequence, chancellor Merkel looks likely to continue with her gradual strategy toward conditional integration. When Merkel meets with French president Hollande today and Greek president Samaras tomorrow, no clear decisions should be expected. Even Samaras’ latest “you-get-your-money-back” initiative in German newspapers will not (yet) do the trick. Given latest comments, chancellor Merkel seems not entirely reluctant to give Greece more time but only if it does not cost more money. In our view, however, any significant German move will only come after the next Troika report and, of course, the ruling of the Constitutional Court on 12 September.
Thursday, August 2, 2012
Eurozone - Draghi misses out on Olympic medal
In a way, today’s ECB meeting had a lot in common with the last EU summit in June. The ECB did not deliver the big bazooka some market participants had hoped for. It only gave some hints at intentions and possible plans for the future. Much ado about nothing?
Of course, the macro-economic assessment was of lesser importance today. Obviously, the ECB has become somewhat more pessimistic about the economic outlook. While the ECB still expects a recovery of the economy; this recovery has now been labelled as “only very” gradual. Risks to the economic outlook remain to the downside. As regards inflation, they put somewhat more emphasis on the fact that inflation would continue to slow down in the coming month, dropping below 2% in 2013. Risks to the outlook for price developments remain, according to the ECB, broadly balanced. This latest slight downward revision of the ECB’s macro assessment and the fact that a rate cut was already discussed today, in our view, has opened the door further for another rate cut. It could already happen at the next meeting in September when the ECB staff will present its latest economic forecasts.
Expectations about big things to happen were high. Last week, ECB president Draghi had pushed himself into a very uncomfortable corner. The words that the ECB would “within our mandate the ECB is ready to do whatever it takes to preserve the euro and believe me: it will be enough” had given rise to speculation about imminent ECB action. Clearly, today’s press conference was a cold shower for these expectations. The ECB did not present any new measures. In fact, ECB president Draghi stressed the well-known ECB stance that monetary policy could not solve the Eurozone debt crisis. Draghi actually repeated the old mantra that Eurozone policymakers needed “to push ahead with fiscal consolidation, structural reform and European institution-building with great determination.” However, Draghi’s comments also made clear that the ECB will not leave Eurozone governments standing alone in the rain.
How? The ECB implicitly announced an SMP 2.0. Draghi said that “the Governing Council…may undertake outright market operations of a size adequate to reach its objective” [of maintaining price stability]. Nothing has been decided, yet, and the emphasis is on the word “may”. According to Draghi, the ECB will now investigate options and details of such an SMP 2.0 programme. One element of the investigations will be the issue of seniority. Moreover, according to the ECB, “adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions.” It is obvious that the ECB will stick to a principle of strict conditionality. Unlimited bond purchases, therefore, look highly unlikely. However, combining conditionality to a measure which is officially meant to tackle problems with monetary policy transmission sounds somewhat contradictory.
What do we make of all of this? One, a rate cut at the September meeting looks highly possible. Two, the ECB will not engage in any ground-breaking measures like unlimited bond purchases. Three, ECB liquidity access for the ESM is out of the question right now but has not entirely been ruled out if the structure and tasks of the ESM have changed. Four, the ECB will stick to a principle of conditionality. For governments this means that they can only expect some ECB support if they send an official request to the EFSF/ESM.
All in all, the outcome of today’s ECB meeting had been less surprising or disillusioning without Draghi’s strong words last week. The ECB simply sticks to its well-known strategy. For Draghi, it was very hard to elegantly get out of such a self-inflicted dilemma. The ECB has to master a balancing act between keeping maximum pressure on Eurozone governments, while at the same time not disappointing markets. Draghi managed this split in only a very rough-and-ready manner. It will definitely not earn him an Olympic medal in gymnastics.
Of course, the macro-economic assessment was of lesser importance today. Obviously, the ECB has become somewhat more pessimistic about the economic outlook. While the ECB still expects a recovery of the economy; this recovery has now been labelled as “only very” gradual. Risks to the economic outlook remain to the downside. As regards inflation, they put somewhat more emphasis on the fact that inflation would continue to slow down in the coming month, dropping below 2% in 2013. Risks to the outlook for price developments remain, according to the ECB, broadly balanced. This latest slight downward revision of the ECB’s macro assessment and the fact that a rate cut was already discussed today, in our view, has opened the door further for another rate cut. It could already happen at the next meeting in September when the ECB staff will present its latest economic forecasts.
Expectations about big things to happen were high. Last week, ECB president Draghi had pushed himself into a very uncomfortable corner. The words that the ECB would “within our mandate the ECB is ready to do whatever it takes to preserve the euro and believe me: it will be enough” had given rise to speculation about imminent ECB action. Clearly, today’s press conference was a cold shower for these expectations. The ECB did not present any new measures. In fact, ECB president Draghi stressed the well-known ECB stance that monetary policy could not solve the Eurozone debt crisis. Draghi actually repeated the old mantra that Eurozone policymakers needed “to push ahead with fiscal consolidation, structural reform and European institution-building with great determination.” However, Draghi’s comments also made clear that the ECB will not leave Eurozone governments standing alone in the rain.
How? The ECB implicitly announced an SMP 2.0. Draghi said that “the Governing Council…may undertake outright market operations of a size adequate to reach its objective” [of maintaining price stability]. Nothing has been decided, yet, and the emphasis is on the word “may”. According to Draghi, the ECB will now investigate options and details of such an SMP 2.0 programme. One element of the investigations will be the issue of seniority. Moreover, according to the ECB, “adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions.” It is obvious that the ECB will stick to a principle of strict conditionality. Unlimited bond purchases, therefore, look highly unlikely. However, combining conditionality to a measure which is officially meant to tackle problems with monetary policy transmission sounds somewhat contradictory.
What do we make of all of this? One, a rate cut at the September meeting looks highly possible. Two, the ECB will not engage in any ground-breaking measures like unlimited bond purchases. Three, ECB liquidity access for the ESM is out of the question right now but has not entirely been ruled out if the structure and tasks of the ESM have changed. Four, the ECB will stick to a principle of conditionality. For governments this means that they can only expect some ECB support if they send an official request to the EFSF/ESM.
All in all, the outcome of today’s ECB meeting had been less surprising or disillusioning without Draghi’s strong words last week. The ECB simply sticks to its well-known strategy. For Draghi, it was very hard to elegantly get out of such a self-inflicted dilemma. The ECB has to master a balancing act between keeping maximum pressure on Eurozone governments, while at the same time not disappointing markets. Draghi managed this split in only a very rough-and-ready manner. It will definitely not earn him an Olympic medal in gymnastics.
Tuesday, July 31, 2012
Gradual slowing of German labour market continues
German unemployment increased by a non-seasonally adjusted 66,900 in July, bringing the number of unemployment to the highest level since April. As a warning signal, this is the strongest July worsening since 2004. In seasonally-adjusted terms, unemployment also increased slightly, still leaving the seasonally-adjusted unemployment rate unchanged at 6.8% for the eighth month in a row. Earlier today, retail sales disappointed in June, dropping for the third consecutive month.
With high employment, dropping inflation and latest wage increases, the labour market should continue to be “the” crucial driver of domestic demand this year. To some extent, the labour market has been Germany’s active immunisation against the ongoing Eurozone crisis. However, signs that this immunisation is fading away are hard t miss. Employers have continuously downscaled their recruitment plans and employment expectations in the manufacturing industry have dropped to the lowest level since April 2010. Moreover, vacancies continue to drop, the demand for temporary work is slowing and some companies have even started to introduce short-time work schemes again.
The looming slowing of the German labour market could also put a quick end to a tender new trend: labour mobility in the Eurozone. The absence of labour mobility is often cited as one of the main problems of the monetary union. However, the current crisis has actually led to first signs of (involuntary) labour mobility; from the Eurozone periphery to Germany. Sine 2008, immigration to Germany from Spain and Greece has more than doubled. While during the same period, German employment increased by more than 3%, the number of employees with a Portuguese, Spanish or Italian nationality increased by around 6%. The number of employees with a Greek nationality increased by less than 3%. Although there still is a lack of highly skilled workers and experts in some sectors (eg in engineering), the cooling of the German labour markets should limit possibilities for further Eurozone labour market mobility.
All in all, the German labour market is clearly losing momentum. Given the high level of employment, there is no need to panic. However, indications are increasing that light-hearted times are coming to an end.
With high employment, dropping inflation and latest wage increases, the labour market should continue to be “the” crucial driver of domestic demand this year. To some extent, the labour market has been Germany’s active immunisation against the ongoing Eurozone crisis. However, signs that this immunisation is fading away are hard t miss. Employers have continuously downscaled their recruitment plans and employment expectations in the manufacturing industry have dropped to the lowest level since April 2010. Moreover, vacancies continue to drop, the demand for temporary work is slowing and some companies have even started to introduce short-time work schemes again.
The looming slowing of the German labour market could also put a quick end to a tender new trend: labour mobility in the Eurozone. The absence of labour mobility is often cited as one of the main problems of the monetary union. However, the current crisis has actually led to first signs of (involuntary) labour mobility; from the Eurozone periphery to Germany. Sine 2008, immigration to Germany from Spain and Greece has more than doubled. While during the same period, German employment increased by more than 3%, the number of employees with a Portuguese, Spanish or Italian nationality increased by around 6%. The number of employees with a Greek nationality increased by less than 3%. Although there still is a lack of highly skilled workers and experts in some sectors (eg in engineering), the cooling of the German labour markets should limit possibilities for further Eurozone labour market mobility.
All in all, the German labour market is clearly losing momentum. Given the high level of employment, there is no need to panic. However, indications are increasing that light-hearted times are coming to an end.
ECB preview - Draghi's dilemma
Latest comments from several government leaders and Mario Draghi have increased the stakes for Thursday’s ECB meeting. The pledge to do “whatever it takes” to save the euro gave rise to speculation about imminent ground-breaking actions. With these expectations, the ECB’s balancing act between providing the bare minimum to keep the Eurozone together, while at the same time keeping maximum pressure on politicians has not become any easier.
Indicators released since the last rate-setting meeting have provided no evidence that the gradual downward slide of the Eurozone economy is quickly coming to an end. A contraction of the economy in Q2 is in the offing and with the continuous drop in sentiment indicators, a technical recession (i.e. two consecutive quarters of contraction) seems hard to avoid. At the same time, credit growth remains lacklustre and inflationary pressures are fading away very quickly, opening the door for another rate cut.
With the recent intensification of market turmoil calls on the ECB to intervene have emerged again. Awaiting the German Constitutional Court’s verdict on the ESM in September, Eurozone politicians’ hands are at least partly tied. As long as the ESM is not up and running any additional claim on the EFSF to, for example, give Spain a fully-fledged bailout could easily stretch the EFSF’s capacity to its limits. Moreover, any further decisions on Greece are highly dependent on the Troika’s next assessment which will probably only be presented in September. All of this means that ideally Eurozone politicians would like to postpone all next crucial issues and decisions until the second half of September. The only one able to buy them this time is the ECB.
Last week, Mario Draghi’s statement that “within our mandate the ECB is ready to do whatever it takes to preserve the euro and believe me: it will be enough” gave rise to speculation about imminent ECB action. Maybe even ground-breaking action like a liquidity line for the ESM, caps on bond yields or at least large scale bond purchases? Statements by the German, French and Italian government leaders that they would do everything to safeguard the euro added to speculations about big things to happen.
This speculation, in our view, might be a bit exaggerated. At this stage, a liquidity line for the ESM looks highly unlikely. Even large scale bond purchases, with or without explicit targets, should in our view not be taken for granted. It is hard to believe that the ECB is really willing to make a u-turn on its crisis strategy. Up to now, the ECB has been on a balancing act between providing the bare minimum in terms of emergency aid to calm markets, while at the same time keeping maximum pressure on Eurozone politicians to continue with austerity and reforms. Any action to substantially tackle the debt crisis would come with a high risk of inviting political complacency and moral hazard. Remember that only back in June, Draghi said denied that there was any kind of tit-for-tat. Providing unprecedented ECB action at this state would be a clear game changer and almost a down payment for governments.
After his strong statements, ECB president will have to deliver something on Thursday. Chances are high that Draghi’s definition of “whatever it takes” does not necessarily match markets’ definition. A face-saving measure would be large-scale purchases of Spanish bonds on behalf of the EFSF. For this to happen, however, the Spanish government would first need to send an official request. According to German finance minister Schaeuble an unlikely scenario. This would leave the ECB with the minimalist approach for Thursday: a bit of SMP and maybe a bit of more tailor-made credit stimulus, LTRO and possibly even a rate cut.
Indicators released since the last rate-setting meeting have provided no evidence that the gradual downward slide of the Eurozone economy is quickly coming to an end. A contraction of the economy in Q2 is in the offing and with the continuous drop in sentiment indicators, a technical recession (i.e. two consecutive quarters of contraction) seems hard to avoid. At the same time, credit growth remains lacklustre and inflationary pressures are fading away very quickly, opening the door for another rate cut.
With the recent intensification of market turmoil calls on the ECB to intervene have emerged again. Awaiting the German Constitutional Court’s verdict on the ESM in September, Eurozone politicians’ hands are at least partly tied. As long as the ESM is not up and running any additional claim on the EFSF to, for example, give Spain a fully-fledged bailout could easily stretch the EFSF’s capacity to its limits. Moreover, any further decisions on Greece are highly dependent on the Troika’s next assessment which will probably only be presented in September. All of this means that ideally Eurozone politicians would like to postpone all next crucial issues and decisions until the second half of September. The only one able to buy them this time is the ECB.
Last week, Mario Draghi’s statement that “within our mandate the ECB is ready to do whatever it takes to preserve the euro and believe me: it will be enough” gave rise to speculation about imminent ECB action. Maybe even ground-breaking action like a liquidity line for the ESM, caps on bond yields or at least large scale bond purchases? Statements by the German, French and Italian government leaders that they would do everything to safeguard the euro added to speculations about big things to happen.
This speculation, in our view, might be a bit exaggerated. At this stage, a liquidity line for the ESM looks highly unlikely. Even large scale bond purchases, with or without explicit targets, should in our view not be taken for granted. It is hard to believe that the ECB is really willing to make a u-turn on its crisis strategy. Up to now, the ECB has been on a balancing act between providing the bare minimum in terms of emergency aid to calm markets, while at the same time keeping maximum pressure on Eurozone politicians to continue with austerity and reforms. Any action to substantially tackle the debt crisis would come with a high risk of inviting political complacency and moral hazard. Remember that only back in June, Draghi said denied that there was any kind of tit-for-tat. Providing unprecedented ECB action at this state would be a clear game changer and almost a down payment for governments.
After his strong statements, ECB president will have to deliver something on Thursday. Chances are high that Draghi’s definition of “whatever it takes” does not necessarily match markets’ definition. A face-saving measure would be large-scale purchases of Spanish bonds on behalf of the EFSF. For this to happen, however, the Spanish government would first need to send an official request. According to German finance minister Schaeuble an unlikely scenario. This would leave the ECB with the minimalist approach for Thursday: a bit of SMP and maybe a bit of more tailor-made credit stimulus, LTRO and possibly even a rate cut.
Thursday, July 26, 2012
Eurozone - (desperate) attempt to load the bazooka?
Markets reacted cheerfully to Austrian central bank governor Nowotny’s comments on a possible banking licence for the ESM. Too cheerfully, in our view.
The latest escalation of market tension, elevated bond yields in Southern European countries and speculation about future bailouts in the Eurozone has again given rise to concerns about the size of the Eurozone’s rescue funds, the bazooka. Remember that, despite earlier attempts to find highly sophisticated but disappointing leverage options and the famous permanent rescue fund, the ESM, currently the only active rescue fund (besides the ECB) is the temporary EFSF.
How much money can the EFSF still use? The EFSF started with a lending capacity of €440bn. Up to now, the EFSF has actually disbursed €138.3bn for Ireland, Portugal and Greece. Shortly, €30bn will follow in the first tranche for the Spanish bank bailout. Additional €85bn plus up to €70bn for Spain have already been reserved for the remainders of the bailout programmes. If all reserved disbursements will be paid out, the EFSF would only have roughly €120bn left for any future bailouts or other actions. Obviously, this is not a lot.
The ESM, with a fresh lending capacity of €500bn, was supposed to bring some relief but this relief will, at the earliest, only come after the German Constitutional Court’s verdict in September. However, even with an ESM up and running, concerns about its size are likely to continue. This is why periodically new proposals to increase the Eurozone rescue funds’ fire power are circulating. Basically, there are only two ways to increase the EFSF/ESM’s size: either Eurozone countries increase their individual shares (currently highly unlikely in several core countries) or the ECB enters stages (either directly or indirectly).
One of the favourite options for indirect ECB participation is the so-called banking licence for the ESM. The aim of this idea is to increase ESM leverage through ECB liquidity. The label banking licence is actually misleading. The ESM does not need a banking licence. As stated in the ESM Treaty, “the ESM shall be exempted from any requirement to be authorized or licensed as a credit institution”. The only thing the ECB would have to do is grant the ESM access to its liquidity operations, as the ECB already did for the European Investment Bank in 2009.
Yesterday, the Austrian central bank governor Nowotny said that he could see arguments for this banking license idea. Interestingly, Draghi had earlier opposed this idea. Markets reacted positively to this statement. Too positively, in our view.
Although we principally remain in favour of ECB leverage for the ESM to increase its fire power, it would not be the new silver bullet, nor will it come any time soon. First of all, there is no ESM, yet. It looks highly unlikely that the ECB could grant anything to an institution that does not exist. Moreover, the ESM Treaty has put a cap on the ESM’s lending capacity at €500bn. ECB leverage would not automatically increase the €500bn. According to the ESM Treaty, the ESM could increase the maximum lending capacity but it is doubtful that this would happen immediately. Moreover, the sentence “Such a decision shall enter into force after the ESM Members have notified the Depositary of the completion of their applicable national procedures” indicates that raising the lending capacity might not exclusively be determined by the ESM. In addition, the German Constitutional Court could still increase the influence of the German parliament on such crucial decisions. Finally, there remains the unsolved issue of whether ECB leverage for the ESM would be monetary financing. In a legal opinion from March 2011 the ECB stated that "Article 123 TFEU would not allow the ESM to become a counterparty of the Eurosystem under Article 18 of the Statute of the ESCB."
Yesterday’s comments might have been a first step towards of another ECB shift. However, there are still too many unsolved issues to seriously expect that the ECB would take such an action before the ESM is up and running. In our view, the Nowotny effect should fade away very quickly.
The latest escalation of market tension, elevated bond yields in Southern European countries and speculation about future bailouts in the Eurozone has again given rise to concerns about the size of the Eurozone’s rescue funds, the bazooka. Remember that, despite earlier attempts to find highly sophisticated but disappointing leverage options and the famous permanent rescue fund, the ESM, currently the only active rescue fund (besides the ECB) is the temporary EFSF.
How much money can the EFSF still use? The EFSF started with a lending capacity of €440bn. Up to now, the EFSF has actually disbursed €138.3bn for Ireland, Portugal and Greece. Shortly, €30bn will follow in the first tranche for the Spanish bank bailout. Additional €85bn plus up to €70bn for Spain have already been reserved for the remainders of the bailout programmes. If all reserved disbursements will be paid out, the EFSF would only have roughly €120bn left for any future bailouts or other actions. Obviously, this is not a lot.
The ESM, with a fresh lending capacity of €500bn, was supposed to bring some relief but this relief will, at the earliest, only come after the German Constitutional Court’s verdict in September. However, even with an ESM up and running, concerns about its size are likely to continue. This is why periodically new proposals to increase the Eurozone rescue funds’ fire power are circulating. Basically, there are only two ways to increase the EFSF/ESM’s size: either Eurozone countries increase their individual shares (currently highly unlikely in several core countries) or the ECB enters stages (either directly or indirectly).
One of the favourite options for indirect ECB participation is the so-called banking licence for the ESM. The aim of this idea is to increase ESM leverage through ECB liquidity. The label banking licence is actually misleading. The ESM does not need a banking licence. As stated in the ESM Treaty, “the ESM shall be exempted from any requirement to be authorized or licensed as a credit institution”. The only thing the ECB would have to do is grant the ESM access to its liquidity operations, as the ECB already did for the European Investment Bank in 2009.
Yesterday, the Austrian central bank governor Nowotny said that he could see arguments for this banking license idea. Interestingly, Draghi had earlier opposed this idea. Markets reacted positively to this statement. Too positively, in our view.
Although we principally remain in favour of ECB leverage for the ESM to increase its fire power, it would not be the new silver bullet, nor will it come any time soon. First of all, there is no ESM, yet. It looks highly unlikely that the ECB could grant anything to an institution that does not exist. Moreover, the ESM Treaty has put a cap on the ESM’s lending capacity at €500bn. ECB leverage would not automatically increase the €500bn. According to the ESM Treaty, the ESM could increase the maximum lending capacity but it is doubtful that this would happen immediately. Moreover, the sentence “Such a decision shall enter into force after the ESM Members have notified the Depositary of the completion of their applicable national procedures” indicates that raising the lending capacity might not exclusively be determined by the ESM. In addition, the German Constitutional Court could still increase the influence of the German parliament on such crucial decisions. Finally, there remains the unsolved issue of whether ECB leverage for the ESM would be monetary financing. In a legal opinion from March 2011 the ECB stated that "Article 123 TFEU would not allow the ESM to become a counterparty of the Eurosystem under Article 18 of the Statute of the ESCB."
Yesterday’s comments might have been a first step towards of another ECB shift. However, there are still too many unsolved issues to seriously expect that the ECB would take such an action before the ESM is up and running. In our view, the Nowotny effect should fade away very quickly.
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