More constructive hints?

ECB to Ensure That Lenders Have Enough Liquidity, Visco Says

(Bloomberg) The European Central Bank will continue to guarantee sufficient liquidity for lenders and keep up the fight against market fragmentation among the 17 countries that share the euro, Bank of Italy Governor Ignazio Visco said. “The ECB can’t but continue to pursue these objectives,” Visco said today in a speech in Rome. The ECB cut rates to a record low on July 5 on concern the euro area is slipping deeper into a recession. The central bank, headed by Mario Draghi, agreed in June to help nations in distress by acting as a buying agent for sovereign bonds purchased by government-run bailout funds. The rate cut, to 0.75 percent, is an indication of the ECB’s intention to guarantee “adequate monetary conditions” in the euro area, Visco said. “It followed other measures adopted last month designed to continue to ensure necessary liquidity for the banking system and fight the effects of the fragmentation of monetary and financial markets,” he said.

German Finance Minister Asks Court Not to Block Euro Assistance

(New York Times) The German finance minister warned on Tuesday that there would be severe consequences for the euro currency union if this country’s highest court blocks Germany’s recent ratification of two measures for fighting Europe’s financial crisis.

Officials Spar Over Who Will Guarantee Bank Losses

(WSJ) German finance minister Wolfgang Schäuble said that even once the euro zone’s bailout fund has been authorized to directly recapitalize struggling banks, the lenders’ host government should retain final liability for any losses. “We expect that the final liability of the state will remain” even once the banking supervisor is up and running, he told journalists. He added that what mattered was that the bank support wouldn’t add to a country’s debt—something that he said would be possible even under a scenario where the government retained liability for potential losses. Other officials insisted that banks’ host states wouldn’t have to guarantee any support from the bailout fund.

A Euro-Zone Strategy Shift

(WSJ) Finance ministers from the euro zone agreed that Spain need only reduce its deficit to 4.5% of gross domestic product next year, and 2.8% in 2014, in order to avoid financial penalties. The deal, Spanish Finance Minister Luis de Guindos told reporters, had been clinched without fresh demands on fiscal policy from euro-zone partners, although Eurogroup Chairman Jean-Claude Juncker had warned that there would be a thorough examination of every bank that asks for aid. “I repeat it again, and these are fundamental points, these are two completely independent agreements, they are not related in any way because there is no macroeconomic conditionality in the agreement on the memorandum [of understanding],” he said.

Noyer Warns Hollande of France’s ‘Serious’ Economic Weakness

(Bloomberg) France’s unit cost of labor of 34.20 euros an hour compares with Germany’s 30.10 euros, Italy’s 26.80 euros and 20.60 euros for Spain. Unit labor costs in France have increased by about 20 percent relative to Germany since 2000 as French companies implemented the nation’s 35-hour work-week law, according to Coe-Rexecode. “Of all advanced countries, France has registered, since 2000, the sharpest decline in its market share in global exports,” Bank of France Governor Christian Noyer said. “The drop in the number of hours worked and rigidities in working time arrangements have probably played a role” and reviving exports means tackling all sorts of restrictions that hamper activity, he said.

French current account deficit narrows in May

(AFP) The French current account deficit narrowed slightly in May, owing to a smaller shortfall in the trade of goods and a bigger surplus in services, official data showed on Monday. The Bank of France said the current account, which measures all current payments in and out of the country, showed an overall deficit of 4.1 billion euros ($5.3 billion), compared with a 4.4 billion euro shortfall in April. A breakdown of data showed that the deficit in exchanges of goods had decreased to 5.6 billion euros in May from 6.0 billion in April, while a surplus in services grew to 1.9 billion euros from 1.7 billion.

This is not good if/when implemented:

Rajoy Announces 65 Billion Euros in Budget Cuts to Fight Crisis

(Bloomberg) Spanish Prime Minister Mariano Rajoy announced tax increases and spending cuts totaling 65 billion euros in the next two-and-a-half years. Rajoy’s fourth austerity package in seven months will raise the sales levy to 21 percent from 18 percent; scrap a tax rebate for home buyers; scale back unemployment benefits; consolidate local governments and eliminate the year-end bonus for some public workers. The budget cuts are about double those previously announced. Spain’s central government budget deficit swelled to 3.41 percent of gross domestic product in the first five months of the year, approaching the full-year goal of 3.5 percent after the government brought forward transfers to regional administrations and the social-security system.

Spain Agrees to Guarantee Bond Issuance of Cash-Strapped Regions

(Bloomberg) Spain will guarantee bonds issued by regional governments to help them regain access to capital markets and ease a funding squeeze. The program will be “voluntary” for regions and will come with additional conditions on budget deficits, Antonio Beteta, deputy minister for public administration, told reporters. The plan will be presented at a meeting of regional budget chiefs on July 12, he said. “The mechanism aims to make issues more liquid and easier to place on the markets as they have a central-government guarantee,” Beteta said. Regions face redemptions of about 15 billion euros in the second half of the year, according to data on the Budget Ministry’s website.

Spain Says European Rescue for Banks Opens Door to ECB Funding

(Bloomberg) Spain’s FROB rescue fund will distribute bonds issued by the EFSF to the banks, which “can use them at the ECB if they need the liquidity,” Spanish Economy Minister Luis de Guindos told reporters. As part of the agreement for Spain’s 100 billion-euro bank bailout, one or several vehicles will be created to buy assets from lenders at a “reasonable” price, de Guindos said. Those vehicles will issue bonds that will also be eligible at the ECB. Industrywide conditions for the financial assistance include a 9 percent capital requirement, de Guindos said. A first tranche of 30 billion euros is to be used as soon as the end of the month. Remaining details will be clinched in the memorandum of understanding due to be signed on July 20, he said.

15 Responses

  1. With loan demand and economic activity down, what is the need for increased liquidity? Sounds like we have an excess of payments over purchases.

      1. @WARREN MOSLER, But the state must do, as the banks and state are now joined at the hip. Instead of a wind down of the insolvent. And the CB can always add liquidity quickly. So, is there excess liquidity in the system, and if so why?

  2. “France’s unit cost of labor of 34.20 euros an hour compares with Germany’s 30.10 euros, Italy’s 26.80 euros and 20.60 euros for Spain.”

    Is this good or bad? It seems that their GDP correlates to unit costs of labor – the ones with lowest cost of labor are performing worst.

    Also it seems that France’s trade balance had narrowed… (“French current account deficit narrows in May”)

    1. @Gary, If nothing else it tells me there isn’t a strong correlation between unemployment rates and wage rates, otherwise Spain should have the lowest unemployment numbers of those 4 countries.

      Also, if lower pay rates are “good” because it makes a country more competitive, does that mean slaves are the ideal workers?

  3. “German finance minister asks court not to block Euro assistance”

    translation = “don’t you dare let the democratic rights of our population get in the way of us fumbling our way through this crisis with half-baked ideas that may ultimately screw our people over”

  4. Warren, in your book, didn’t you go to Italy and teach them about your memes? Why have they went in reverse? They are “running out of money” and therefore have to cut lotsa jobs. If we have this kind of FAILURE in a place where you already went and had a success, looks like the MMT train is going in reverse to me, you are failing general. This is no way to win a war. Erickson is right, its all splintering and crumbling.

    http://www.reuters.com/article/2012/07/12/us-italy-data-idUSBRE86B0BL20120712

    Italy stats office threatens to stop issuing data

    MILAN (Reuters) – Italy’s national statistics body ISTAT threatened on Thursday to cease issuing data on the economy, saying it had been crippled by government spending cuts aimed at reducing national debt and righting public finances.

    The euro zone’s third biggest economy, whose statistics are closely watched as the country’s huge state debts put it at the center of the bloc’s financial crisis, would face stiff European Union fines if the flow of data is cut off, ISTAT President Enrico Giovannini was quoted as saying.

    “Spending cuts are putting ISTAT at risk. From January onwards we will not issue any statistics,” Giovannini told daily La Repubblica in an interview.

    1. @Save America, Monti must think the world is running out of “score”, INCONCEIVABLE (thanks princess bride) in a country where you already went and taught them the good MMT stuff. One of the FEW places you had a big success and its all going backwards! You know the people that got rid of DSK with that rape charge, they knew how to play in the big boyz game, but they didn’t do it right with Berlusconi, they should have caught him with an african 10 year old boy performing sodomy to really ruin him in the public eye and end his chances of coming back into office. All my Italian brothers, I visited your country last year and Amanda Knox got away with murder, what does it take in Italy to completey RUIN a public figure in the publics eyes where they have no chance to come back?

      http://online.wsj.com/article/SB10001424052702303919504577520933751473006.html

      Italy Faces ‘War’ in Economic Revamp, Monti Warns .

      By STACY MEICHTRY And CHRISTOPHER EMSDEN
      ROME—Prime Minister Mario Monti said Italy faced a “war” at home and abroad as his government pushes to revamp the euro-zone’s third-biggest economy and extricate it from the region’s debt crisis.

      The premiere’s remarks at a banking conference in Rome came as allies of the premier’s predecessor, Silvio Berlusconi, began clamoring for the controversial billionaire to run for office in the next election. That prospect is likely to unnerve investors and EU authorities who pushed for Mr. Berlusconi’s ouster in November.

      In a strongly-worded address to that departed from the premier’s sober speaking style, Mr. Monti sketched a stormy picture of the social and political tensions gripping Italy. Mr. Monti’s government has proposed slashing spending this year by €4.5 billion ($xx billion), cutting public sector jobs and other public services that have long underpinned Italian society.

      Italy “has embarked on a brutal war,” Mr. Monti said. He also said the country’s struggle extended beyond Italian shores, as it fights foreign prejudices over the Italy’s ability to tackle its high debt level and carry out long-term structural changes to its economy.

      Political parties are already girding for the end of Mr. Monti’s term next spring, worried the premier’s unpopular measures are fueling a surge of public support for anti-establishment parties. Aides to Mr. Berlusconi say his return to frontline politics could fire the base of a political party that has been bleeding voters ever since he withdrew from the political stage.

  5. Warren,

    We are all on the outlook for signs of stabilization or even a turn around, but it remains hard to find them.
    It looks the decline in the euro zone economy is steepening, not flattening. Growth forecasts for Germany and France have been lowered for 2013, but not yet for 2012. That bit still has to come.
    The political cohesion appears weak, with some supporting a rapid move towards European federalism, but others still hanging on to every last bit of sovereignty while calling for greater solidarity and pooling sovereign debt.

    Until now any aid comes with austerity and any increase in deficits via automatic stabilizers triggers more austerity. In the meantime we see automatic stabilizers being reduced if not eliminated by all kind of cuts in allowances.

    Without a full flash fiscal and political union with a Eurozone treasury and Eurobonds I do not see how the math will work unless deficits will move from the level of the member states, currency users, to the level of the ECB, currency issuer, (your ECB distribution proposal) or part of the currency issuer status will be returned to the member states (your tax backed bonds proposal).

    The ESM in its current form does not bring the needed structural solution. Total debt for the euro zone does not get reduced. It supports contagion. It is kind of accelerating disequilibrium you once described.

    A banking license for the ESM would enlarge the ESM capacity significantly and is maybe more acceptable to Germany than Eurobonds at this moment, but Draghi clearly poured some cold water on that option.

    I have 3 questions:
    1. It seems to me that any debt of the ESM, which is owned by the member states, should be added to the debt of the member states proportionately. Doesn’t this make the situation even more unsustainable?
    2. The ESM will avoid state organizations and recapitalize banks directly. The ESM is going to buy shares in banks?
    3. The ECB reduced the deposit rate to zero last week. A few days ago the amounts parked at the ECB halfed. How do you see this?

    1. @walter,

      To answer question 3: deposit facility halved, but current account increased by approx same amount. Since dep fac rate is now 0% banks are indifferent between parking excess reserves in current account or deposit facility. So nothing really changed there.

    2. @walter,

      And to answer Q1: Paid-in capital of ESM is counted in nat debt. ESM can leverage that capital by issuing bonds (not counted in nat. debt, which is logical…it’s a claim on ESM’s assets, not on nat govs). Callable capital is counted in nat. debt when it is called by ESM.

      So basically ESM can leverage itself, but intention is to keep AAA-rating (so leverage to certain extend). In the event of write downs on assets, the ESM can make use of the callable capital to recapitalise itself.

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