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Large-scale bond purchases by euro bailout funds discussed at the G20; Germany seeks to play down expectations

20 Jun 2012

At the G20 summit in Mexico, eurozone leaders discussed the possibility of the EFSF and the ESM – the eurozone’s temporary and permanent bailout funds – purchasing Spainish and other peripheral countries’ debt in a bid to cut their spiralling borrowing costs. Italian Prime Minister Mario Monti has proposed making these purchases “semi-automatic” every time the spread with Germany’s interest rates widens excessively – as opposed to the current rules under which a country has to make a formal request first. Monti told reporters, “The idea is to stabilise borrowing costs, especially for countries who are complying with their reform goals, and this should be clearly separated from the idea of a bailout.”    

Italy’s proposal has been welcomed by France and Spain, but Handelsblatt quotes a German official saying, “Bond purchases on the secondary market are being envisaged as one of several instruments for both the EFSF and the upcoming ESM. There was no discussion…about any concrete initiatives.” Open Europe’s Raoul Ruparel is quoted by the Telegraph saying, “The markets may react with relief to this plan because bond yields will come down a bit after the first purchases. But I can’t see it being a lasting antidote.” Raoul also appeared on LBC Radio this morning, discussing the outcomes of the G20 summit. Following reports of the plan being discussed at the G20 meeting, the interest rate on Spain’s ten-year bonds returned below 7% this morning, notes Expansión.    

Commenting on the summit on his Telegraph blog, Open Europe Director Mats Persson argues that: “Though eurozone countries have cut some corners in terms of the normal democratic process during the crisis, any major decision – on bailout funds, lending terms, budget supervision – still has to be approved by 17 government cabinets, and to differing degrees, by national parliaments and constitutional courts as well…This is also why the eurozone continues to resist solutions that for other G20 leaders seem like the obvious short-term fix: debt pooling, starting the ECB printing presses and getting off the back of the world economy. It sounds simple, but per definition, joint and several cross-border liabilities are incompatible with national democracy”.
G20 Leaders’ declaration Il Sole 24 Ore EUobserver Repubblica La Stampa Corriere della Sera El País Expansión Expansión 2 FAZ FT CityAM WSJ Times Irish Independent Mail Telegraph Guardian Independent EurActiv Le Monde Le Monde 2 Les Echos Les Echos 2 Les Echos 3 Telegraph 2 Irish Independent Handelsblatt Telegraph blogs: Persson FT: Editorial FT: Wolf FT: Joffe CityAM: Koehring Telegraph: Evans-Pritchard Süddeutsche: Hagelüken

Greek coalition likely to push for extension of bailout programme
A deal on the Greek coalition may be agreed as early as noon today, following meetings between the leaders of New Democracy, PASOK and the Democratic Left. Discussions are underway over who will fill the cabinet positions, with the Democratic Left likely to propose ‘ideologically aligned’ technocrats rather than party members – an approach PASOK is also considering, according to Kathimerini. Once the government is formed attention will turn to adjusting the terms of Greek bailout package. The WSJ quotes a senior European official as saying, "If we were not to change the [adjustment programme] we would be signing off on an illusion. There is scope for revision," adding that a new memorandum would be signed "during the summer." The FT cites a New Democracy adviser suggesting that the government will search for an extension in the programme rather than a radical revision.  

PASOK put forward the prospect of a cross-party ‘negotiating team’, however, this was rejected by SYRIZA as a “publicity stunt”, although the coalition parties have not ruled it out. Kathimerini reports that Nobel Prize winner Chris Pissarides could head this group. The EU/IMF/ECB troika will return to Greece once the government it finalised, with its first task being to determine exactly how far behind schedule Greece has fallen due to the two elections. DPA reports that the €1bn withheld from the May tranche of Greek bailout funds will be paid out once a government is in place. Les Echos reports that, according to Athenian bankers, the run on banks eased following Sunday’s election results.
FT CityAM WSJ FT 2 FT 3 Times Guardian Irish Independent Express EUobserver IHT Independent EurActiv Les Echos IHT 2 Mail FAZ Welt Les Echos Le Figaro El País Kathimerini Kathimerini 2 Kathimerini 3 Les Echos 2 DPA Athen’s News iefimerida Helsingin Sanomat Reuters FT: Editorial FT: Wolf FT: Joffe CityAM: Koehring Telegraph: Evans-Pritchard Süddeutsche: Hagelüken  

German Foreign Minister sets out plans for European political union
A group of ten EU Foreign Ministers, chaired by Germany’s Guido Westerwelle, have put forward proposals to use the eurozone crisis as a stepping stone towards establishing a ‘political union’ by transferring more power to the EU, including the creation of a European monetary fund, a European army and a European finance minister. The proposals were strongly criticised by Frank Schäffler, an MP with Westerwelle’s liberal FDP party, who argued that the plan was incompatible with liberal principles and that Europe “doesn’t need a centralised and planned economy.”
FT Bloomberg Handelsblatt Welt

Spanish stress tests expected to show €75bn recapitalisation need for Spanish banks
ABC reports that the deadline for the full audit of Spanish banks which was due to be completed by 31 July has now been delayed until September, according to a Spanish central bank source, although this was later denied by the finance ministry. Oliver Wyman and Roland Berger are due to present their stress test results tomorrow with the recapitalisation needs of Spanish banks expected to be put at €75bn – above the previous IMF estimate of €40bn, but still below the €100bn assigned under the recent rescue package.  

El País reports that, despite US President Barack Obama, German Chancellor Angela Merkel and French President François Hollande all calling on Spain to clarify the details of the bailout quickly, Spanish Prime Minister Mariano Rajoy told reporters after the G20 summit, “I have to deny this. I’m surprised by reports suggesting that someone has urged us to make a formal request [for the bailout]. No-one brought this issue up.”
WSJ Handelsblatt El Pais ABC CityAM Times Irish independent Guardian El País El País 2 El Mundo Expansión: Almunia Cinco Días  

Cypriot Finance Minister Vassos Shiarly warned yesterday that the government must secure financing for its banking sector by 30 June, adding that he is optimistic that it will be provided in time "either through a bilateral agreement [with Russia] or through Europe."
WSJ Bloomberg Cyprus Mail

French President Francois Hollande announced during a press conference in Mexico that a financial transaction tax would be introduced in 2013. He was evasive on the details of the tax, saying that it would be done “either within reinforced European cooperation, or between countries of several continents”. He estimated that the revenue from the tax would be “fairly large” and that its rate would be determined “by those countries concerned”.
Mail Le Monde Les Echos Le Monde 2

Commenting on yesterday’s ruling by the German Constitutional Court that the Bundestag had not been sufficiently informed about the eurozone bailouts, FAZ’s Reinhard Müller argues that “Self-determination can be exhausting and co-determination disrupting.  But participation is necessary because it legitimizes decisions in democracies. Citizens and parliaments can’t have their rights taken away.”
FAZ: Müller

Les Echos reports that the Commission will put pressure on France to reduce the scope of its limited VAT rates, which are currently set at 7%. Brussels believes that the reduced rate should only apply to specialised services at home, rather than a wider range of domestic services, which includes gardening, tutoring and cleaning.
Les Echos

FT Deutschland reports that the EU has already conceded to water down the strict capital requirement for insurers, with the newspaper disclosing that all current contracts would be exempt for 7 years from the new Solvency II regulations, due to come into force from 2014. It reports that 40% of life insurers do not currently meet the requirements.

EU plans to reform the Common Agricultural Policy by removing market distorting subsidies and including greater environmental obligations have been watered down in meetings of the agriculture Council of Ministers and the European Parliament's agriculture committee.
European Voice Parliament Open Europe Research: CAP Reform

EUobserver notes that, due to a loophole in the European Parliament’s new code of conduct, lobbyists can continue to pay for MEPs’ non-business-class flights and hotel accommodation of up to €300 a day without disclosure.

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