News Round up and Comment – 09/03/2012

11 interesting news trends today:

  1. Greece seems to have achieved a 95.7% participation rate in the public debt PSI. This means that 95.7% of the total (€206 Bn) privately held Greek public debt will suffer a haircut of 53% and then 35% of the remaining original debt will be swapped for longer term bonds. This is likely to be tantamount to a large negative liquidity shock in money markets. Either way, this means that the Greek government has opened the doors to receiving the first tranche of the second adjustment programme, the deadline for which was approaching. However, there are already German rumblings of the need for another PSI in 6 months,  much as predicted by the FT leaked DSA report of February 15
  2. Yesterday, the ECB decided to keep rates at their present level (MRO=1%). However the comments made by the ECB’s Governing Council President, Mr Graghi, and the language used seems to have created an expectation that the MRO is likely to change soon, in response to inflationary pressures. The inflationary fears are, in my view, rather exaggerated, given that they are caused by high commodity prices. Generally, if there are no increases in wages or in consumption CPI, the ECB talks tough but has no incentive to actually increase interest rates. To be continued…
  3. Reuters has a interesting article on a development that has been ignored due to the Greek crisis. Apparently, the EU sent a team of inspectors to Madrid to go through Spainish statistics and understand the causes behind the higher than expected 2011 deficit.
  4. Der Spiegel International has an interesting, albeit late, article on ESCB imbalances based on the TARGET2 controversies of CESifo’s Sinn and Citi’s Buiter. The article is interesting because its language makes the issue more tractable to the non-economics initiated reader. However, it is also relatively timely in light of recent discussions of the unwillingness of the ECB to accept to participate in the Greek PSI and take losses. Despite the self-righteous outrage of market participants, it is easy to understand the practical logic behind this step. While legally the ECB truly cannot participate in any debt restructure, practically this would accentuate fractionalisation within the relatively yound and fragile central bank. As Sinn points out to Der Spiegel, Greece owes € 108.18 Bn in TARGET2 credits to other EMU central banks, most of all the Bundesbank who has channeled the funds to the Greek central bank.
  5. The European Voice has an interesting opinion piece on German leadership in establishing a transfer union. The alternative, exit from the Euro-zone due to the specific issues described ahead, as well as many others, might push Germany towards union rather than defection.
  6. Still on the topic of leadership, the Economist’s Charlemagne blog lauds the guidance and reforms of the Italian political system introduced by Mario Monti. However, as much a fan of Mr Monti as I am I must stop short of partaking in this jubilant mood. First off, I doubt any politician has ever been or will ever be able to create economic growth. This is true in developing as well as developed economies. There are no magic wands or supernatural leaders that can swoop in and solve all the problems with the charisma of their leadership or the humility of their example. Growth is about physical and human capital; it’s about savings and it’s about institutions. While Italy probably has the first two, it faces enormous problems with the last two. While it is possible to see Mr Monti’s economic reforms creating the sort of incentives necessary for savings to increase, the risk of austerity and of a paradox of thrift feedback loop are high enough to endanger such a dynamic. Moreover, without a democratic political mandate and in the absence of an EC/ECB/IMF adjustment programme, it is unlikely that Mr Monti will have the necessary sway to implement institutional reforms that can substantially mitigate morally hazardous institutions. So, while I believe that if anyone can do it it’s him, I’m not as optimistic about the future achievements of Mr Monti.
  7. On a parallel discussion of the dynamics of the Greek bailout, EUobserver has a refreshingly different take on the Greek bailout by Jacek Saryusz-Wolski. The author argues that the source of solidarity towards Greece is due to its strategic geopolitical role as an entrance route for oil imports, its connection to the Middle East and its relationship with Russia. All very fascinating and more reasons to be added to why an exit from the Euro is unlikely.
  8. Still on the topic of understanding the drivers of decisions, the FT has a fascinating piece on how a deal that was offered to the UK in order to try to allow it to save face and withdraw its veto of the Fiscal Pact, back in December. The bargain was an exchange of positions where Lady Katherine Ashton, vice president of the European Commission, Commissioner for foreign affairs and High Representative of the Union for Foreign Affairs and Security Policy, would trade places with Michel Barnier as single market commissioner in charge of financial regulation. The idea was that this trade-off would bring the UK to the fold. However, the fear of a veto from the European Parliament, who can dismiss the whole European Commission,  and Mr Cameron higher goals, to high, and ended falling flat on his face. The trade-off never materialised.
  9. Martin Schultz, the recently elected German socialist president of the European Parliament described his political approach in an interview. EU Observer has an interesting article describing how he expects to put the European Parliament on the map by engaging in a more confrontational manner with the Member states and the Council, which are perceived as stealing the lime light from the only directly democratically elected body of the EU. As the previous note on the British veto noted, its irrelevance is only in appearance…
  10. On the international economics front, China has figured prominently in the news. Euractiv has an interesting article on how the EU is to confront China with ‘reciprocity’ in public contracts in an upcoming proposal by Belgian EU trade commissioner, Karel De Gucht. The proposal “seen by EurActiv, EU countries ‘will be given the possibility to reject foreign bids from third countries’ that fail to open their own public procurement markets to European companies”. This retaliatory step comes as a response to several such attitudes by China, such as the Airbus contracts case, which itself seems to be motivated by EU protectionism veiled by carbon emissions concerns. This is all happening a background of economic slowdown in China that is raising expectations of further monetary easing.
  11. However the EU is not the only one with whom China has trading conflicts with. Indeed, China, as most of Asia, has taken issue with India’s cotton ban export. The ban is said to be justified by concerns that supply to the domestic market will fall short of its needs due to low crop yields resulting from bad weather. However, Pakistani commentators have argued, more realistically, that domestic interest groups are behind the decision. As the pressure pilles on India, there seems to be some hope for a reversal of the ban.
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