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Interest rate on Spain’s ten-year bonds reaches 7% after new downgrade; Eurostat: Interest payments on the bailout will count as public deficit

14 Jun 2012

Moody’s downgraded Spain’s credit rating by three notches yesterday, putting it only one notch above ‘junk’ status. Following the downgrade, the interest rate on Spain’s ten-year bonds reached 7% this morning – a level deemed as unsustainable by analysts.  

Meanwhile, according to El Mundo, Spain is set to obtain a 15-year bailout loan, with an interest rate of 3% and a five-year ‘grace period’ – meaning that it would only start paying the money back in 2017. Deputy Economy Minister Fernando Jiménez Latorre said that, if confirmed, these conditions would be “very attractive.”

Cinco Días reports that the EU’s statistics office Eurostat has said that the interest payments on the bailout will have “a direct impact” on Spain’s public deficit. Separately, El País reports that the Spanish government has denied claims by EU Competition Commissioner Joaquín Almunia that it is planning to wind up one of its nationalised banks.
El Mundo Expansión EUobserver Moody’s PR El País Times El Mundo 2 Expansión 2 El Mundo 3 El Mundo 4 Expansión 3 Cinco Días Irish Times Le Monde Les Echos Les Echos  Le Monde FAZ

Threat of bank run in Greece increases ahead of elections;
YouGov poll: 69% of Germans think Greece should leave the euro
Ahead of Sunday’s election, withdrawals from Greek banks look to be accelerating, with banking sources estimating that between €600m and €900m has been leaving the Greek banking system per day, according to the WSJ.

Meanwhile, New Democracy leader Antonis Samaras supported the possible creation of a national unity government, which would seek some renegotiation of the bailout agreement. The FT reports that European officials have played down the scope for adjusting the current programme. However, Die Zeit reports that the Bundestag may debate granting Greece a third bailout package amounting to a “double-digit billion euro” figure as early as this summer, on the pre-condition that the government elected in Sunday’s elections is committed to further reforms. Stefanos Manos, leader of the small Drasi party, has said that Syriza will back down from its pledged to scrap the current bailout package as it is the only way it can maintain the salaries of civil servants, according to Kathimerini.

Crédit Agricole is reportedly preparing for a Greek exit from the euro by putting plans in place to sell off or wind down its Greek subsidiary Emporiki. Separately, La Tribune reports that a new YouGov poll shows that 69% of Germans think Greece should leave the euro. The poll also shows that 29% of respondents would vote for a return to the D-mark in a referendum on euro membership.
La Tribune FT WSJ Le Monde CityAM 2 CityAM WSJ 2 Telegraph Guardian Kathimerini FT 2 Kathimerini 2 Times Zeit Les Echos DMN

MPs urge Cameron to demand cut to EU budget through regional policy reform
The Times reports that the Fresh Start group will urge David Cameron to seek cuts to the EU budget at this month’s EU summit by demanding that EU regional development funding is removed from richer countries. The proposal, outlined by Open Europe in a report in January, would reduce the budget by about 15% overall and would have saved Britain £4.2 billion between 2007 and 2013, the period of the last multiannual EU budget. Andrea Leadsom MP, co-chair of the Fresh Start group, said, “We have got to take every chance to forward British interests.”

Open Europe research Times Conservative Home: Lilico

Commission to present plans for banking union at EU summit as Merkel warns that Germany’s strength is not “infinite”
Following the failure of the Spanish rescue to settle markets, France is set to put forward proposals at the EU summit on 28 June to allow the ESM, the eurozone’s permanent bailout fund, to lend directly to banks and to transfer greater financial supervision powers to the ECB. The move is supported by Italy and Spain but still opposed by Germany. Reuters reports that the Commission will also present broad proposals for the creation of a banking union at the summit.

The Telegraph reports that, according to German government sources, German Chancellor Angela Merkel is willing to drop her opposition to the debt redemption fund plan, a form of debt pooling, in exchange for greater fiscal oversight. However, Die Welt reports that, in a Bundestag debate ahead of next week’s G20 summit Merkel issued a warning, saying, “Germany's strength is not infinite. Therefore Germany must not overestimate its power. If Germany were overwhelmed, it could no longer work for the benefit of Europe.” Open Europe’s Director Mats Persson is quoted by USA Today discussing Germany’s role in the eurozone crisis.
FT Independent Reuters EUobserver FT 2 FT 3 FT 4 WSJ Handelsblatt Welt Welt 2 Telegraph USA Today

In an auction this morning, Italy sold €3bn of three-year bonds. Il Sole 24 Ore notes that, although the demand was reasonable, the interest rate increased to 5.3% from 3.9% in the previous auction, which took place last month.
Il Sole 24 Ore

Still no breakthrough in German talks over fiscal treaty and ESM
Yesterday’s round of negotiations between the German government and opposition over approving the fiscal treaty and the ESM bailout fund again ended without an agreement, although SPD parliamentary leader Frank-Walter Steinmeier said there had been “some rapprochement on the key points”. The parties are set to meet again on June 21, although the government is still committed to having both ratified by the end of the month. Separately, Chancellor Merkel will meet premiers of Germany’s 16 federal states later today to discuss how the debt brake contained within the fiscal treaty will affect their spending, an issue which has concerned many regional governments and municipalities reports Süddeutsche.

Meanwhile, Handelsblatt reports that EU finance ministers are set to discuss the whether to introduce the financial transaction tax – a key demand of the German opposition parties – via the enhanced cooperation procedure at their meeting next week.
Reuters Bloomberg Welt Süddeutsche FAZ Handelsblatt

Vincenzo Scarpetta: Loss of momentum in Italy’s reforms explains why Germany is wary of sharing liabilities with Club Med countries  
In an op-ed in City AM, Open Europe’s Vincenzo Scarpetta writes, “Monti has recently become more concerned with convincing Germany and others to go ahead with grand plans for a political union in the Eurozone – Eurobonds and a banking union – than completing crucial domestic reforms.”

He goes on to argue, “The loss of momentum in Italy’s reform programme perfectly summarises why, beyond the pro-integration rhetoric, Germany remains so wary of a political union in which Berlin joins liabilities with Athens, Madrid or Rome – from Eurobonds to a single bank resolution fund. From the government to the media, Germans are simply too concerned that Club Med countries would see risk-pooling in the Eurozone as an excuse to delay the necessary reforms and give in to the temptation to fund growth via more debt – which is what put them in the current mess.”

In the IHT, the President of the IFO Institute Hans Werner Sinn notes, “Some critics have argued that Germany, having benefited from the Marshall Plan, now owes it to Europe to undertake a similar rescue. Those critics should look at the numbers…Greece has received a staggering 115 Marshall plans, 29 from Germany alone, and yet the situation has not improved. Why is that not enough, Mr Obama?”
CityAM: Scarpetta CityAM: Heath FT: Barber FT: Barber WSJ Review & Outlook WSJ: Henninger Spectator: Forsyth Spectator: Van Weyer IHT: Sinn Times: Leader Times: Manolopoulos Il Sole 24 Ore EurActiv

Moody’s downgraded Cyprus’ credit rating by two notches yesterday. City AM reports that Cyprus could ask for a bailout of up to €4bn, with the government currently assessing options from Europe, China and Russia – although the latter looks the most likely according to the WSJ.
Kathimerini CityAM WSJ Les Echos Le Monde

The Telegraph reports that the Government has opted out of the EU’s Proceeds of Crime Directive, the first time Ministers have chosen not to opt in to a proposal to amend one of the EU crime and policing laws falling under the UK’s 2014 ‘block opt-out’. Dominic Raab MP is quoted as saying, “Ministers have drawn an important line in the sand.”
Open Europe research Telegraph

The FT reports that the UK Treasury has told banks to stop resisting proposed EU rules on bankers’ bonuses, despite the UK’s opposition to strict limits. According to the paper, UK ministers fear that fighting bonus curbs may encourage MEPs to unpick the compromise on bank capital rules agreed between EU member states.

In the Telegraph, Peter Oborne writes, “Do not be surprised if in due course Mr Duncan Smith were to follow the example of Enoch Powell and resign over the Coalition’s stance on Europe.”
Telegraph: Oborne

EU Foreign Minister Baroness Catherine Ashton has told MEPs that a new Special Representative for Human Rights position is to be created within the EEAS, the EU’s diplomatic service. The post will be assigned in the coming weeks, reports EUobserver.

EUobserver reports that the Danish EU presidency has abandoned hopes of introducing new rules on public access to EU documents, after member states and MEPs failed to reach an agreement on proposed transparency legislation.

EU leaders are expected to give the green light to the beginning of accession talks with Montenegro at their upcoming meeting on 28-29 June, reports ORF.

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