Monday, February 27, 2012

Lender of last resort for financial sector but not yet for economy

The latest monetary data for the Eurozone reflect some revival of lending, particularly to households, but the risk of a credit crunch still prevails. In January, M3 growth accelerated to 2.5% YoY, from 2.0% in December. At the same time, growth in loans to household and companies increased slightly to 1.1% YoY, from 1.0% in December. The monthly flows of loans to the private sector show that loans to households increased significantly in January, while loans to non-financial corporations dropped slightly, adding to the sharp drop in December.

Today’s numbers have been awaited eagerly as they give a first impression of the impact of the ECB’s first 3-year LTRO on the Eurozone economy. The positive psychological impact on markets and, particularly, government bond markets has been obvious from the start. The economic impact, however, remains still limited. As a consequence, this week’s second 3-year LTRO is clearly not redundant.

Estimates on the possible take-up at this week’s second 3-year LTRO are almost countless and according to a recent Reuters poll range between 200bn and 1000bn euro. Our own colleagues from rate and credit strategy have come up with estimates ranging between 440bn and 600bn euro. The wide range of estimates shows that it is very hard to get a grip on the opposing drivers of liquidity demand. On the one hand, plenty of excess liquidity, the stigma factor and negative carry-trade options for core Eurozone banks with home bias would argue for a limited take-up. On the other hand, however, relaxed collateral rules by seven national central banks, continued tension in the financial sector as indicated by Moody’s decision to put 114 European banks on review for downgrade and demand from car manufacturers for ECB funding all argue for a large take-up. In a couple of days, the number guessing game will be over.

Officially, the ECB’s non-standard measures’ main purpose throughout the crisis has been to tackle and prevent a possible credit crunch in the Eurozone. Even if the ECB has managed to restore calm in markets, being the lender of last resort for the financial system, its job as the economy’s lender of last resort is not done yet.

Thursday, February 23, 2012

German Ifo defies recession fears

Did anyone say recession? Today’s Ifo index provides further evidence that the German economy only made a short stopover at the end of last year. In February, the Ifo index increased to 109.6, from 108.3 in January. The current assessment increased to 117.5, from 116.3 and expectations were also up (102.3 from 100.9).

After the first growth contraction since the end of the recession, concerns have increased that the German economy could enter a technical recession. The statistical carry-over effect from a weak month December worsened the starting position and the record high fuel prices could weigh on private consumption. At the same time, however, solid economic fundamentals, recent indicators and – despite all long-term worries – this week’s almost Greek deal bode well for at least a stabilization of the German economy.

Today’s Ifo index provides further evidence that the economic contraction at the end of last year was only a brief stopover. Austerity measures in the rest of the Eurozone and the February freeze: it looks as almost nothing can shatter German business optimism. At least some good news for the Eurozone.

Tuesday, February 21, 2012

It looks like a deal, it walks like a deal, it is almost a deal.

Last night’s Eurogroup meeting has paved the way for a second Greek bailout but the crisis marathon is not over.

A marathon meeting in the never-ending marathon of the Eurozone debt crisis. After more than 13 hours, Eurozone finance minsters last night agreed to a roadmap and a blueprint for a second Greek bailout package. In a joint effort last night, more private and public sector money was found to reduce Greece’s debt burden, aiming at bringing the Greek debt-to-GDP ratio down to 120.5% by 2020. The money will come from a haircut on bonds held by the private sector, an retroactive lowering of the interest rate on the first Greek bailout package, an accounting trick to use profits by national central banks on their Greek bonds held in their investment portfolio and, finally, the profits by the ECB on its Greek bonds under the SMP programme. However, the ECB participation remains a very indirect and vague one and is more a merry-go-around of government money. Governments could already now give money to Greece equal to future income from their national central banks stemming from portfolio investments. Moreover, the ECB could mark the profits it makes on its Greek bond holdings under the SMP programme, potentially selling them to the EFSF, and redistribute the profits to national central banks. Governments “may” use these proceeds to reduce Greek debt.

Notably, in the official Eurogroup statement there were still a couple of “welcomes”, “intentions” and “mights”, indicating that some effort is still needed to eventually sign off the second Greek bailout in early March.
A successful PSI is the first prerequisite. The Greek authorities and the private sector have agreed on the general terms of an PSI exchange offer. The offer involves a 53.5% reduction in the face value and would involve official sector support of 30bn euro. This could lead to a reduction of Greek debt by around 107bn euro.
The second prerequisite is a further loss of Greek sovereignty. There will be a permanent presence by the European Commission in Greece to increase on site-monitoring of Greek progress. Moreover, the Greek authorities intend to set up an escrow account for the second bailout money to ensure that priority is granted to debt servicing payments.

After a period of increased irritations and controversial discussions, it looks as if the Eurozone once again took another important step in the debt crisis. If all prerequisites are fulfilled, a second bailout package for Greece, amounting to up to 130bn euro until 2014 could be signed in early March. The biggest part of this package would be paid by the EFSF, the IMF contribution is still undetermined.
Last night’s principle agreement on a second bailout package for Greece is an unprecedented decision to bring a Eurozone country’s public finances back on a sustainable path. Greece should be saved, at least for the next couple of months. However, the feeling of relief is not likely to last for long. There are still many uncertainties and potential stumbling blocks in the Eurozone’s debt crisis marathon run. In the short run, several national parliaments, above all the German, Dutch and Finish parliaments will have to agree to the bailout package. Moreover, private bondholders will have to agree to PSI. If not, a forced haircut would be an alternative. Even more important, the potential stumbling blocks in the medium run look even bigger and harder to master. The quarterly spectacle of whether nor not the Greek are on track with their austerity measures and structural reforms will continue. Backlashes are almost built-in. So far, the return of economic growth in Greece is largely based on the principle of wishful thinking. The combination between more austerity, social unrest and European impatience could become explosive, with a high risk that the Greek crisis could still derail.

All in all, the bottom line of all this is that the Eurozone provides conditional financial support but Greece has to forge its own destiny. With the second bailout package, the Eurozone has again bought time for other peripheral countries to show that they are different and to put all available anti-contagion firewalls into place. The often-cited Greek can has again been kicked down the road. Good thing is that it the can is still on the road but it requires a huge amount of stamina and patience to keep it there.

Thursday, February 16, 2012

Bailout 2.0 - almost there?

Yesterday’s Eurogroup conference call did not deliver any results. Next stop for
the Eurozone crisis talks is Monday. It will probably not be the last stop.

It was a very brief press statement. Yesterday’s Eurogroup meeting had not been
cancelled but was shortened to a conference call to discuss Greece. After the conference call, the only official statement released was rather short on new information. Eurozone finance ministers are keeping the pressure high on Greece. The official statement only gave a wrap-up of latest developments, acknowledging the Greek efforts, while at the same time stressing the still missing measures. As it stands now, Greece still has to present additional consolidation measures of 325bn euro and needs to present assurances by all political leaders that austerity measures and structural reforms will be continued after the elections.

Also yesterday, Greece had taken some action to fill both gaps. On the commitment front, while PASOK leader Papandreou had already ticked the box by sending his commitment letter on Tuesday, the ND leader Samaras followed yesterday sending his in turn. On the 325 million shortfall front, intense contacts had been reactivated with the troika at a technical level but no details have been agreed, yet.

Reading between the lines of yesterday’s Eurogroup statement, some Eurozone
countries are still pushing hard for a further loss of Greek sovereignty to ensure that the plans are really implemented. It looks as if earlier proposals like a European controller for Greece or a frozen account for the next bailout package are not off the table. The latter matches recent public statements by German finance minister Schäuble, who hinted at a further loss of Greek sovereignty and even at postponing the April elections.

The next showtime for the Eurozone debt crisis will be Monday 20 February. This will be the next meeting of Eurozone finance ministers when they hope to find an agreement on a next second bailout package for Greece. The official statement sounds encouraging that there will be a decision. However, it will not be an easy meeting. There seems to be a high level of irritation and mistrust from an increasing number of Eurozone countries vis-à-vis the Greek. It looks as if more austerity measures alone will not do the deal.

What do Eurozone countries need to agree to a second bailout package? Judging from
latest statements and developments, it could be the following: Obviously, the additional 325 million euro expenditure cuts by the Greek and credible political commitment by all political parties, preferably even postponing the elections. Moreover, further measures to increase surveillance and ensure implementation of any bailout programme. A clear hint to a reinforced presence of the troika in the Greece and to the French-German idea of the creation of an escrow account meant to prioritise debt servicing. Furthermore, there needs to be an agreement on PSI (which has we have heard so often of the last weeks “is about to be finalised”). Finally, there is still the pending issue of ECB participation. Given latest ECB comments, the latest from Bundesbank president Weidmann, the ECB is still hesitant to “officially” finance any bailout package. Foregoing profits on its Greek
bond holdings seems to be an option but how is still unclear. The option to hold all Greek bonds to maturity and redistribute profits (or not yet realised profits) to national central banks looks like the preferred one. National central banks could then transfer the profits to their governments. However, this option would not reduce Greece’s debt burden. Moreover, it is questionable how this would fit into national legislation. In Germany, for example, it was recently agreed that the Bundesbank profit transferred to the government will gradually be reduced to 2.5bn euro per year. Selling its Greek bonds to the ECB is probably still the most practical option. The big question would be at which price.

The list of unsolved issues for the next Eurogroup meeting on 20 February is not short and the devil is in the details. Latest growth disappointments could even undermine the Troika’s debt sustainability analysis. With latest developments, it cannot entirely be excluded that the Eurozone even finds a way to bridge Greece’s March funding problems without agreeing on a second bailout package. Maybe it is a bit too sceptical but even Monday’s meeting might not yet bring the all-encompassing Greek package.

Wednesday, February 15, 2012

German economy takes a growth pause

Growth pause. As expected, the German economy contracted for the first time since the end of the recession in 4Q 2011. According to a first estimate, the Eurozone’s biggest economy shrank by 0.2% QoQ. Compared with 4Q 2010, this is still an increase of 2.0%. At the same time, 3Q growth was revised upwards to 0.6% QoQ, from 0.5% QoQ. Despite a disappointing fourth quarter, the year 2011 was one of best years in terms of GDP growth for the German economy.

The decomposition of growth will only be released at the end of the month but according to the press statement of the German statistical office and available monthly data, only investment and the construction sector should have grown in 4Q, all other components have remained flat or slightly negative.

Looking ahead, the statistical carry-over effect from a weak month December could still have an impact of first quarter growth. However, there are at least four good reasons why a disappointing fourth quarter should only have been a short stopover: i) the risk of a credit crunch is relatively low. Contrary to many European peers, German banks have not, yet, tightened their lending conditions. Due to restructuring during the early 2000s, German companies should be well prepared with cash or internal financing as the most likely alternatives to bank financing; ii) low inventories and still high backlog orders are an important safety net for the industry, ensuring production even if demand for German products would weaken; iii) export diversification, both in terms of product specialization and export destination, enables German exporters to benefit from almost any recovery on this planet. In 2011, three out of the five most German important trading partners were actually countries outside the Eurozone; and iv) the often mentioned solid economic fundamentals, above all the labour market and the absence of significant domestic imbalances, spares the economy from costly economic reforms.

The first economic contraction since the end of the recession turned out to be weaker than expected, confirming that the German economy only took a growth pause and is not approaching a new recession. Of course, a quick rebound is not an automatism and the big unknown for the German economy remains the sovereign debt crisis. One thing, however, is obvious: today’s numbers are no reason at all to start singing swan songs on the German economy.

Thursday, February 9, 2012

Der Griechenland-Nachrichten-Generator[tt_news]=4746&cHash=a194bf9e98be684c21a864b7de3ebdd2

ECB keeps powder dry

The ECB left interest rates unchanged at today’s meeting, somewhat weakened its easening bias and still refrains from an active role in a Greek debt restructuring.

The ECB’s assessment of the Eurozone economy was hardly unchanged from the January meeting. Actually, it was almost a verbatim copy. The economic outlook is still subject to downside risks, while the risks to price stability main balanced. In fact, latest data releases have proven the ECB right. Since the January meeting, the number of tentative signs of stabilisation at a weak level have increased. However, there was one small but important change to the ECB’s introductory statement. While the economic outlook was subject to “substantial downside risks” in January, it is now only subject to “downside risks”. A slight weakening of the easening bias.

The ECB clarified another series of new tools from its crisis-management toolbox to further fight a credit crunch in the Eurozone . Seven national central banks (Ireland, Spain, France, Italy, Cyprus, Austria and Portugal) will get more flexibility and freedom for the temporary acceptance of additional credit claims as collateral. National central banks will be reliable for eventual losses, not the Eurosystem. These measures come on top of the two 3-year LTROs. As regards the LTROs, Draghi remarked that taking up money under the 3-yr LTRO should not be considered as a stigma, but rather as a business decision. The ECB is trying everything it can provide the financial sector with liquidity.

Of course, the probably most interesting issue at the press conference was Greece and the role of the ECB’s holdings of Greek bonds in any private and/or official sector involvement to improve Greece’s debt sustainability. During the press conference, there was breaking news from Athens that the Greek government had found an agreement on more structural reforms and austerity measures. The plan will be presented to the other Eurozone finance ministers at a Eurogroup meeting tonight. As we all know, the decision on a complete second bailout package does not only depend on Greek efforts but also on upfront debt restructurings. In recent weeks, the discussion on who should take losses went beyond the private sector and started to involve the ECB.

At today’s press conference, ECB president Draghi for a long while refrained from answering any questions on a possible ECB role in a Greek debt restructuring. However, the longer the press conference, the more talkative Draghi. Even if he stuck to the line that nothing had been decided, yet, reading between the lines yielded some interesting messages. The idea that the ECB could share the losses of the PSI was “unfounded”. Moreover, Draghi repeated several times that financing government debt by the ECB was forbidden by the Treaties. In this context, Draghi also said that giving money to a bailout programme was prohibited. Even selling the ECB bonds to the EFSF could be seen as government financing. Taking profits and redistributing these to the national central banks might be a possibility. The ECB’s role in any PSI or OSI still hangs in the balance. It is obvious that the ECB is not willing to take a loss and even hesitant to sell to the EFSF. We might know more after tonight’s Eurogroup meeting in Brussels.

In its role as the fire brigade for the Eurozone economy, the ECB is leaning back, keeping its powder dry and will wait-and-see. In its role as the fire brigade for the Eurozone debt crisis, the ECB still has got its hands full. Rate cuts, however, are not yet off the table, but are highly conditional on growth.

Wednesday, February 8, 2012

Soccernomics voor Duitsland

Ondanks, of net omdat ik al meer dan tien jaar niet meer in Duitsland woon, ken ik de grenzen van Europa goed. Gewenst of niet, de Europese landen groeien steeds dichter naar elkaar toe, maar een Europese identiteit bestaat (nog) niet. Bij gebrek aan een Europees rolmodel vluchten we naar onze nationale en soms zelfs regionale identiteit. Voor de een is dat de Elfstedentocht, voor de ander de Ronde van Vlaanderen. Bij mij is dat voetbal. Als voetbalfanaat houdt bij mij de liefde voor België of Nederland op bij 22 mannen en een bal. In de Bundesliga deel ik lief en leed met Hertha BSC Berlijn, en voor wedstrijden van 'die Mannschaft' zitten mijn zoon en ik aan de buis gekluisterd. Het gaat om doorzettingsvermogen en klappen incasseren.

Net als bij Hertha BSC Berlijn is de trend van de Duitse economie neerwaarts. Lange tijd was de economie immuun voor de Europese schuldencrisis, maar in de laatste maanden van 2011 kwam de klap. De recentste cijfers tonen dat de Duitse economie voor het eerst sinds het einde van de recessie is gekrompen. Doemdenkers en analisten voorspellen weer het einde van de Duitse economische overmacht. Niet te snel oordelen. Wat nu lijkt op het kreupele voetbal van Hertha, kan snel weer het flitsende spel van die Mannschaft worden.

Het grote verschil tussen de Duitse economie en de andere Europese landen is dat Duitsland geen grote zwaktes kent. Geen probleem met de huizenmarkt zoals in Nederland, met de internationale concurrentiepositie zoals in België of in Frankrijk, of met de financiële sector zoals in Oostenrijk. Vergelijkingen met de Zuid-Europese landen zijn futiel. Ook de grootste bedreiging voor de eurozone, kredietschaarste, is voor Duitsland niet echt een gevaar. De goede relaties tussen Duitse bedrijven en de huisbanken zijn bekend. Bovendien hebben de Duitse bedrijven de afgelopen jaren behoorlijke cashreserves opgebouwd, zodat financieringen desnoods uit eigen zak kunnen worden betaald.

Geen blessuregevoeligheid en geen doping, gewoon een goed team. De lage werkloosheid is inmiddels gemeengoed, net als de kwaliteit van de Duitse exportproducten. Nog een troef is de diversificatie van de exportbestemmingen. Niet de export naar China groeide het afgelopen jaar het meest, wel die naar de VS. Duitsland heeft niet één belangrijkste handelspartner, wel een reeks van zes of zeven vrijwel even belangrijke handelspartners. Zolang op deze aarde ergens groei is, gaan er Duitse producten naartoe.

Het blijft afwachten of Hertha Berlijn na dit seizoen nog in de Bundesliga speelt, maar tegen dat die Mannschaft deze zomer op het Europese kampioenschap Voetbal schittert, is ook de Duitse economie weer uit haar winterslaap ontwaakt.

Deze column verscheen vandaag in het Belgische dagblad "De Tijd".

Monday, February 6, 2012

Drop in German IP confirms economic contraction

German industrial production dropped by 2.9% MoM in December, providing the final piece of evidence that the German economy shrunk in 4Q 2011, for the first time in almost three years. On the year, industrial production is still up by 0.9%. The drop was widely-spread across all sectors, with the sharpest drop in the construction sector (-6.4% MoM) and capital goods (-3.6% MoM). Compared with the third quarter, German industrial production is down by more than 2%.

A nice and long stretch of ten consecutive quarters of economic growth has come to an end. Since German reunification, the economy had only experienced one similar period of non-stop growth and that was between 2005 and early 2008. As in 2008, the end to the economic expansion was not homemade but driven by external factors. This time around, the Eurozone debt crisis finally took its toll on the German economy, forcing companies to reduce production. The pea counting of all available data for the fourth quarter up to now shows that the contraction of the economy was driven by both the industrial sector and private consumption. Only the construction sector grew slightly, despite today’s sharp drop, benefitting from the mild October and November weather.

Looking ahead, there are several factors pointing towards a quick rebound of the German economy. Yesterday’s increase in new orders shows that there is still sufficient lube oil for Germany’s economic engine. In fact, December was the first month since the summer in which inventories were reduced and orders at hand increased; a combination which bodes well for industrial production in the coming months. Of course, the very cold winter weather could at least temporarily spoil or delay a rebound. So far, the very cold temperatures should have been less harmful for the economy than last year’s heavy snow. However, this could change. Moreover, even if the German economy is not yet suffering from energy distortions, despite last year’s closing down of seven nuclear power plants, a long and cold winter could weigh on German trade.

Today’s industrial production data confirms the slowdown of the German economy. However, it is neither a crash landing nor a belly flopper but only a breather. Even if today’s numbers look bad, for the German economy this should have been as bad as it gets.

True Love?

In yesterday’s first joint television interview, Angela Merkel and Nicolas Sarkozy demonstrated the close German-French relationship but did not reveal any news on Greece.

German Chancellor Merkel and French president Sarkozy held a joint interview for both the French and German television. The main intention of this media event was obvious: a demonstration of the close German-French relationship, showing that the two biggest Eurozone countries were standing shoulder to shoulder to save the Eurozone. Sarkozy and Merkel did not repeat their earlier call for a special European bank account for all Greek government revenues.

The joint interview did not change the facts. There is still no news on the second Greek bail-out package. Greece still needs around €15bn in March and the Troika can only pay the next tranche of the first bail-out loan if long-term sustainability is guaranteed; a condition set by the IMF. To get this long-term sustainability, Eurozone leaders already agreed in October on a second bail-out package of €130bn, under the condition of a private sector contribution of €100bn. To prevent Greece from defaulting in March, there will have to be an agreement on the private sector involvement, more structural reforms and austerity measures from the Greek government to fulfill the Troika’s bail-out programme and additional debt restructuring from the public sector (as the latest estimates show that a bail-out package of €130bn might not be sufficient).

All negotiations will continue and all involved are playing hardball, again contemplating the possibility of a Greek default or even Greece leaving the Eurozone. Despite the current excitement and uncertainties, our baseline scenario remains that there will be an agreement on a second bail-out package for Greece. It may not necessarily be this week, as we still remember the experience of October and November last year when very strict deadlines also became rather flexible, extending the negotiation process much longer than expected.

A disorderly default would be counterproductive for the recent Spanish and Italian efforts and would probably completely reverse latest confidence gains in markets. Therefore, ring-fencing Greece at (almost) any costs to buy time for the other peripheral countries should remain the main strategy of Eurozone’s power couple. After some dissonances during the first stage of the debt crisis, the French-German cooperation could almost be labeled as true love. Let’s hope it does not end like a famous song by the British band Joy Division: “love will tear us apart, again”.

Sunday, February 5, 2012

German new orders rebound in December

Mild rebound. German new orders increased in December on the back of stronger demand from non-Eurozone countries. New orders increased by 1.7% MoM, from -4.9% in November. The increase was driven by foreign demand from countries outside the Eurozone, increasing by 4.3%. At the same time, domestic demand dropped by 1.4% MoM and Eurozone demand declined by some 7% MoM. Looking at the different sectors, both demand for consumer and capital goods increased.

German new orders have been on a rollercoaster ride during the last couple of months, with sharp monthly fluctuations probably due to bulk orders. The high volatility actually masks a trend of stabilisation.

Since the summer, the safety net for the German industry, i.e. high backlogs and low inventories, had somewhat given in under the pressure from the sovereign debt crisis. Today’s numbers confirm that this trend stopped in December. It is too early to call this a rebound. However, there is at least still sufficient demand for goods “made in Germany” to keep the industrial engine running in 2012.