European war against the markets - 750 bn EUR
Monday, 10 May 2010 | 
European Affairs
(10 May 2010) With an unprecedented rescue package of up to 750 billion euros by the EU and International Monetary Fund to stabilize the ailing single currency, the euro. The goal: tame speculators. Is it enough? Well, if something the following this happens today, then you know for sure that Europe is rushing into its worst crisis since WWII:
- Greek bond yields sky-rocketing
- Stock markets continue to fall
- Private investors liquidate their SICAVs
- Euro still dropping
What was meant to be a two-hour meeting of finance ministers turned into an 11-hour negotiation. Under the aid plan, the European Commission would make 60bn euros available to support member states experiencing "difficulties caused by exceptional circumstances beyond their control".
Ms Salgado, Spanish Finance Minister, said eurozone member states would "complement such resources through a Special Purpose Vehicle", known as the European Financial Stabilisation Mechanism, or the Crisis Slush Fund, and worth 440bn euros, which they would guarantee on a pro-rota basis over a period of three years. According to Sueddeutsche.de, Germany have to guarantee 123bn euros.
The IMF will contribute an additional sum of at least half of the EU's contribution to the SPV - a total of 250bn euros.
In the package, there is also a deal with Spain and Portugal, where they promise to present even more spending cut measures to the other EU countries by the 18 May 2010.
Who will operate the Crisis Slush Fund? Will it shuffle between the Heads of State, the European Commission and the ECB?
The total banking sector asset exposure to the PIIGS are even bigger: at least 3,200bn euros! So there is no absolute truth about the figure 750bn euros, it's just a measure to convince the markets that the EU will do whatever it takes to protect its political construct, the euro. The sums pledged are huge - enough to support the borrowing of several eurozone countries for a couple of years. And central banks around the world have launched what look like co-ordinated actions to assist financial stability. So far, market reaction has been positive.
Central banks around the world on Sunday night announced that they would restore currency swap agreements that were introduced during the financial crisis, in an attempt to ease the strain on banks caused by the European sovereign debt crisis. The currency swap facilities are intended to make it easier for European banks under pressure to access funding in dollars. “These facilities are designed to help improve liquidity conditions in US dollar funding markets and to prevent the spread of strains to other markets and financial centres,” the Fed said in a release. “Central banks will continue to work together closely as needed to address pressures in funding markets.”
The European Central Bank will buy euro zone government bonds to help support fractured markets, abandoning resistance to full-scale asset purchases in light of Greece's debt crisis. The ECB said in a statement that the step, dubbed the 'nuclear option' by many economists, was justified because of government promises to meet strict budget targets and step up consolidation efforts. The scope of the purchases was yet to be determined, but the ECB said they would be offset by liquidity-absorbing operations so that the stance of monetary policy is unaffected. "The European Central Bank decided on several measures to address the severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy oriented towards price stability in the medium term," it said in a statement just after European Union finance ministers announced their own 500 billion euro crisis package. The fact that the bond purchases will be offset by liquidity absorbing operations means they will not have the same potential impact on inflation as straight purchases, such as those undertaken by the U.S. Federal Reserve and the Bank of England. In its early-morning statement, the ECB said it would also re-start dollar lending operations and bring back some of the emergency liquidity measures it had started to phase out.
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Eurozone stabilisation fund faces delay
A €440bn stabilisation fund for eurozone countries in financial trouble appears unlikely to start operations for up to two weeks because of the reluctance of Slovakia’s incoming government to approve the initiative.
Slovakia is alone among the eurozone’s 16 nations in raising objections to the fund and is coming under intense pressure from other governments as well as the European Commission to abandon its resistance.
But European Union officials said it appeared unlikely that Slovakia, which joined the eurozone in January 2009, would give the green light until a meeting of the area’s finance ministers on July 12 or later.
At roughly €4.4bn, Slovakia’s contribution to the fund is relatively small. But the centre-right parties that won its June 12 election and are in the process of forming a government campaigned on a platform of no eurozone bail-outs.
The fund, known as the European Financial Stability Facility, will issue bonds guaranteed by eurozone member-states and will pass the money to countries experiencing difficulty in refinancing debt.
In return, governments must adopt rigorous economic policies agreed with the International Monetary Fund, European Central Bank and the Commission.
Apart from the stability facility’s €440bn, governments will be able to draw on €60bn in EU funds, guaranteed by the bloc’s budget, and up to €250bn from the IMF.
Klaus Regling, a former high-ranking Commission official, took office on Thursday as the stability facility’s chief executive. “The EFSF is an integral part of the framework to safeguard financial stability in Europe,” he said.
Eurozone governments want the fund, which is a Luxembourg-registered company owned by eurozone countries, to have a top-notch triple-A credit ratings, but this remains to be negotiated with the ratings agencies.
In strictly legal terms, the fund can start operations without Slovakia’s approval as long as parliaments in other eurozone countries, representing at least 90 per cent of the €440bn commitment, have given their assent.
In political terms, however, it would send a damaging signal to financial markets if the facility got off the ground without firm support from all 16 euro area states.
Slovakia’s incoming government is also determined not to pay the country’s €800m contribution to a €110bn IMF-eurozone rescue plan that was activated in May for Greece. But this has not prevented disbursement of loans to Athens.
Strong euro hid crisis, says Herman Van Rompuy
Herman Van Rompuy, president of the European Union, has blamed the strength of the euro in recent years for blinding the eurozone to its underlying fiscal problems. He also criticised financial markets for overreacting to those economic difficulties and being too heavily influenced by “rumours and prejudices”. He said: “The markets were too indulgent in the first decade, but now they overreact a lot of the time to small incidents. “What went wrong wasn’t what happened this year. What went wrong was what happened in the first 11 years of the euro’s history. In some ways we were victims of our success. “The euro became a strong currency with very small interest rate spreads [on government bonds]. It was like some kind of sleeping pill, some kind of drug. We weren’t aware of the underlying problems.” In an interview with the Financial Times, Mr Van Rompuy said that the 16-nation bloc had been on the edge of a breakdown last month that could have caused a world crisis. But European leaders now understood that the way forward was to implement politically unpopular but necessary economic reforms, such as opening up labour markets and raising the retirement age, he said.
He is to chair a summit of EU heads of state and government in Brussels on Thursday that will approve a 10-year programme for economic reform. He acknowledged that the markets had played a useful role since the Greek debt crisis erupted last October in identifying weaknesses in eurozone economic governance. But he fully supported tougher financial market regulation, especially for credit rating agencies and derivatives markets – measures EU authorities are drawing up. “Most of us are not happy with excessive market developments. But when you look at this in a broader perspective, the markets are sanctioning bad policies, sometimes excessively, disproportionately and based on rumours and prejudices.”
Asked if he thought markets acted like “packs of wolves” – a term used last month by Anders Borg, Sweden’s finance minister – he replied: “It is not in my character to use such words.” Mr Van Rompuy said financial markets had contributed to the eurozone’s crisis by being too soft on fiscally irresponsible governments in the years after the euro’s creation in 1999. He criticised the French and German governments of the early part of the decade for relaxing the stability and growth pact – the EU’s fiscal rulebook – in 2005. “This sent the wrong signal,” he said. Mr Van Rompuy, 62, said Europe’s biggest challenge was to introduce reforms required to double the EU’s economic growth rate and safeguard its unique blend of vigorous capitalism and a generous welfare state. “The toughest thing now is reforms in the budgetary field and the economy – competitiveness, labour market reforms, the retirement age,” he said. “Of course, it will be difficult. At certain times there will be social unrest and political opposition to all this. But I know most of the leaders now. They are preparing to take huge risks because they know what is at stake for the eurozone.”
Eurozone Nations Set Up 750 bn euro Bailout Fund
Eurozone nations on Monday started setting up a massive bailout fund that could rescue any member of Europe's currency union from default, aiming to soothe market jitters that have sent the euro to a new four-month low against the dollar. The "shock and awe" financial rescue package from the European Union and the International Monetary Fund will total euro750 billion ($1 trillion) — money that can be lent to any indebted eurozone nation risking default, and intended to counter investor fears that Spain, Portugal or others could follow Greece in requiring a bailout to meet debt repayments.
The special purpose vehicle to borrow up to euro440 billion ($526 billion) will be ready this month, when countries formalize debt guarantees for some 90 percent of the package, said Luxembourg Prime Minister Jean-Claude Juncker, who led Monday's talks between eurozone finance ministers. Another euro60 billion managed by the EU's executive commission "is available to cover urgent financial needs were it to arise" in the mean time, he said, while the International Monetary Fund will provide another euro250 billion.
Germany, which will provide the largest chunk of the EU fund, has pressed other eurozone countries to make big budget cuts to reduce the chances of them needing a bailout. Markets "want to see not only actions but deeds" to shore up the currency, German Finance Minister Wolfgang Schaeuble told reporters. German Chancellor Angela Merkel vowed to "set an example" Monday by laying out plans to save euro80 billion through 2014 by reducing handouts to parents, cutting 15,000 government jobs and delaying projects such as construction of a replica of a Prussian palace in Berlin. Juncker said eurozone finance ministers wanted Spain and Portugal to build on current "significant and courageous" spending cuts with further efforts "needed beyond 2011 together with further progress" on structural reforms, such as changes to pensions, welfare or labor systems. EU Economy Commissioner Olli Rehn warned that they and others may need to prepare more budget reductions. He did not name which other countries should take action. Eurozone nations said in a joint statement that they would draft bigger cuts and tax increases if they have to and would pursue "structural reforms" to slim state running costs — such as raising retirement ages to curb pension costs. The International Monetary Fund called in a Monday report for eurozone countries facing market pressure to shun "delayed or half-hearted" budget cuts and draft more in case they can't make current targets to reduce budget deficits — the gap between government spending and income. Juncker dismissed market volatility in recent days triggered by concern that Hungary _ which does not use the euro —could be the next European government to follow Greece by risking a default. Hungarian officials last week warned that the country's deficit is growing and the country is close to default, two years after it received a bailout from the EU and the IMF. Hungary's government has downplayed those comments, which nevertheless kept the euro trading near the four-year lows it hit Friday, when it went below $1.19 for the first time since March 2006.
There is intense pressure on all eurozone countries to make cuts. However, trade unions warn that budget cuts could be going too far and could choke a fragile recovery that so far relies more on exports than domestic demand in European countries where people are still slow to spend and companies are reluctant to hire new workers. Unemployment in the eurozone reached a 10-year high of 10.1 percent in April _ adding extra welfare costs to governments struggling with higher outgoings, lower tax revenue and debt that has soared since they paid out hundreds of billions to shore up the region's banking system. Monday's talks between eurozone finance ministers will be followed by a meeting of most EU finance ministers and EU officials who will thrash out plans for long-term ways to avoid a new economic crisis, including a proposal for more EU oversight of national budgets.
Citi Pushes ECB on Sovereign Debt Insurance Plan
Citi is lobbying the European Central Bank (ECB) to consider a scheme to unfreeze the euro zone's sovereign debt market by insuring default risk rather than just offering to buy the bonds directly. The European Debt Assured Purchase (EDAP) program is designed to complement the rescue package announced by the European Union and the ECB on May 9, a key part of which was the promise to buy troubled euro members' debt. Using a portion of the 750 billion euros ($921.5 billion) rescue package to remove credit risk can stop forced selling and help restore the markets to normality, Citi argues.
"If the ECB wants the market functioning more efficiently they need another tool, other than the buyback. With EDAPs, the trading of the bonds will remain in the secondary market, where it belongs," said Nazareth Festekjian, head of capital markets products at Citi who wrote the paper. EDAPs would give existing bondholders the right to tender bonds to the ECB at par if the sovereign defaults, in exchange for a fee. The bank has discussed its proposals with German authorities, who are the biggest provider of funds for the rescue package, and the ECB.
The moves comes as U.S Treasury Secretary Timothy Geithner has urged the euro zone to take action on the debt crisis, which has wreaked havoc in global markets. The initial strong positive market reaction to the ECB's bond purchase announcement has ebbed away and secondary market liquidity has all but dried up, according to bond traders.Government bonds are typically bought as a risk-free product but increasing worries that a European country could default has increased the interest rate demanded.
No Longer Risk-Free
Risk managers are struggling to deal with the credit risk as liquidity in credit default swaps, which allow them to insure against a sovereign default, is low. Therefore, their only effective technique to mitigate risk is selling. "Do I sell to the ECB today or tomorrow? That's the risk mitigation dilemma of the moment," said Festekjian. The scheme would involve EDAPs being priced through a transparent market mechanism with an upfront fee set by a Dutch auction and then a smaller annual fee for the remainder of the underlying bond's life.
Unlike the CDS market, there would be no possibility of speculators benefiting from the credit insurance as there is no cash settlement of the EDAP contract, the usage being tied to the real holders of government bonds. The scheme's proponents argue that, unlike the ECB buying program, this allows market participants to keep capital in the system and avoid the overhang risk whereby the ECB will find it hard to ever unwind its positions. The ECB has stated that it would mitigate the bond purchases by sterilization via T-bill sales but EDAPs eliminates the possibility of quantitative easing. The ECB would earn fees for providing market participants with credit insurance.
Citi envisages the scheme covering bonds maturing within five years, still leaving a credit risk problem for the holders of longer-dated debt. EDAPs would leave the ECB at risk should there be a default or debt restructuring of a country such as Greece. But the bank is already on the hook for any bonds it is purchasing now anyway, proponents of the plan say. Some bank holders of Greek bonds are not able to participate in the ECB'S program because doing so would crystallize mark-to-market losses in their bond portfolios.
How to handle the 750 bn eur Special Purpose Vehicle
We are where we are, capital has transitioned to the state, we need public institutions which can properly manage us through this second phase sovereign debt crisis and develop a roadmap for free markets beyond a properly constituted European "Bretton Woods" style "Public Debt Bank" (its not for me to coin the name); philosophically in line with Keynes' thinking.
Read John Morrison's analysis on the EUR 750 bn Special Purpose Vehicle here.
German Parliament's Lower House Approves Euro Rescue Bill
German lawmakers approved their country’s share of the EUR 750 bn euro-region bailout in a vote today, allaying market concern that they would balk at approving a second emergency loan package in as many weeks. The lower house of parliament voted 319 to 73 in favor. The upper house, or Bundesrat, is set to pass the measure later today before the German president signs it into law.
Institut International d'Etudes Bancaires secret meeting
This weekend a secret society of top bankers meet in Stockholm. Agenda: unknown! DG Competition asks other cartels to be disbanded, but this club has existed for nearly 60 years. Journalists are not invited. Could be advised in this chaotic environment with some transparency. Some of the participants:
http://www.swedishwire.com/component/content/article/1:companies/4622:swedish-top-banker-boycotts-secret-meeting
Un-coordinated ban on naked short selling does not work!
Desperate act: Germany bans naked short selling
http://preview.bloomberg.com/news/2010-05-19/germany-fails-to-persuade-neighbors-to-join-curbs-on-speculative-trading.html
http://www.cnbc.com/id/37227456
New link: http://news.hereisthecity.com/news/business_news/10631.cntns
Eurozone rescue fund faces 'technical' delay
Eurozone finance ministers yesterday (17 May) tried to rapidly iron out wrinkles in the 750 billion euro plan they hatched a week ago to calm markets and stem fears of serial Greek-style debt crises in the currency area.
After talks in Brussels, German Finance Minister Wolfgang Schaeuble and others played down what some officials described as Franco-German differences over the way the anti-contagion mechanism would be deployed if countries needed it. "It was more about technical things than differences," the German minister said, without elaborating.
Jean-Claude Juncker, Luxembourg prime minister and chairman of the talks, also said outstanding issues were "technical" and that ministers hoped to resolve them on Friday when they would return to Brussels to discuss longer-term policy matters. Speaking at a press conference staged after midnight, Junker did not respond when asked about reports that Germany had requested parliamentary approval every time a country asks to draw from the fund. Other governments, including France, had argued against such a requirement, preferring a permanent mechanism. Pressed by journalists, Junker refused to say why the routine meeting had dragged on past midnight. "Because we're crazy," he told reporters. "Madness is irrational. You can't explain it."
Delay to €750 billion package
The package hammered out at emergency talks a week ago comprises standby funds and loan guarantees that eurozone governments could tap if shut out of credit markets as Greece was. It was produced after markets fearful of debt default turned their attention, after the rescue of Greece, to other eurozone members such as Portugal and Spain, which in return for that safety net have agreed to pursue extra austerity measures. While financial markets rallied on news of the package on Monday last week, triggering a drop in the cost they charge to refinance sovereign debt in countries including Spain and Portugal, the euro is under renewed pressure.
The euro's exchange rate versus the dollar has fallen about 7% in the past month and some 14% this year. It dipped to $1.2234 , its lowest since April 2006, at one stage on Monday.
Reform of economic governance
The finance ministers also broached questions of reform of economic governance and fiscal reform at pan-European level for the longer term, in addition to voicing support for what Juncker called "courageous" new austerity steps by Madrid and Lisbon. They agreed to consider in coming days and weeks proposals that the European Commission, the European Union's executive body, produced last week at their request. The Commission proposed that broad macroeconomic outlines of national budgets be discussed in advance at European level, and suggested speedier penalty procedures for countries that breach EU budget rules.
Schaeuble said it was time to look beyond crisis containment to concrete decisions on debt-control rules for the future. "It must be made clear that policymakers set the rules, not the markets," he said. The 16-country euro zone needed to cut deficits, discuss how to improve economic growth and find ways to strengthen the fiscal rules of the EU Stability and Growth Pact.
The bailout of Greece was a first for the euro zone, where contagion fears and now concerns that growth will be hit by austerity measures have been blamed for the dip in the euro. Some economists say, however, that a weaker euro could help the area's exports and thus offset some of the toll exacted by government spending cuts and tax increases. Luxembourg's Juncker said he was less worried about the euro's level than the pace at which the exchange rate was changing. He told a news conference the euro was "credible" and would continue to benefit from the price stability the currency bloc has enjoyed for the 11 years since its launch.
The euro's fall, analysts say, is fuelled not just by concern over bloated debts but also the risk that debt-shrinking austerity measures will stunt post-recession economic recovery. German Chancellor Angela Merkel said on Sunday that the 750 billion euro market stabilisation package had merely bought the euro zone time to address a deeper problem: a yawning gap between its strongest and weakest economies. Before the global financial crisis and recession of 2007-09, several small eurozone countries such as Greece, Portugal and Ireland, plus mid-size economy Spain, enjoyed economic growth fuelled by credit and, in the case of the latter two, housing and construction booms that have now gone bust. They are now under pressure to find other sources of growth, and some including French Economy Minister Christine Lagarde have said the flipside is that Germany should do more for Europe by boosting its domestic consumption.
Gross domestic product in the euro zone contracted more than 4% last year, far more than a dip in US GDP of around 2.4%. The European Commission forecasts that GDP will rise just 0.9% in 2010 and 1.5% in 2011, compared to US GDP gains of 2.8% and 2.5%.
Euro Falls to Lowest Level Since Lehman Collapse
The euro fell to its lowest level since the collapse of Lehman Brothers Holdings Inc. on concern that the 16-nation currency may be headed for disintegration.
The shared currency fell for a fourth week versus the dollar and a third week versus the yen, the longest losing streaks since February, as German Chancellor Angela Merkel said that Europe is in a “very, very serious situation” despite a rescue package for the region’s most indebted nations. European Central Bank Governing Council member Axel Weber speaks on financial-market regulation next week in Berlin.
“We went through a massive liquidation trade in Europe and risk-taking positions were wiped out across the board,” said Sebastien Galy, a currency strategist at BN Paribas SA in New York. “The markets are trying to figure out what the consequences are for growth. There are massive uncertainties and that will keep the downward pressure on the euro.”
The euro fell 3.1 percent to $1.2358 this week, from $1.2755 on May 7. It traded as low as $1.2354 yesterday, the weakest since October 2008. The common currency dropped 2.1 percent to 114.38 yen, from 116.81 last week. The dollar traded at 92.47 yen after gaining 1 percent last week, the first weekly gain since the five days ended April 23.
‘A Sham, A Chimera’
European policy makers last week unveiled a loan package worth almost $1 trillion and a program of bond purchases in an effort to contain a sovereign-debt crisis that has threatened to shatter confidence in the euro. ECB President Jean-Claude Trichet said the move wasn’t supported by all 22 of the bank’s Governing Council members.
The ECB said it will intervene in government and private bond markets “to ensure depth and liquidity in those market segments which are dysfunctional,” and central banks in Germany, Italy and France began buying government bonds yesterday. The ECB restarted a dollar-swap line with the Federal Reserve.
By resorting to what some economists have called the “nuclear option,” the ECB may open itself to the charge it’s undermining its independence by helping governments plug budget holes.
“The ECB’s supposed ‘independence’ has now been shown to be nothing more than a sham, a chimera, a will-o’-the-wisp,” Dennis Gartman, a Suffolk, Virginia-based economist and hedge- fund manager, said in his daily Gartman Letter on May 10. “In the end the ECB and the euro will be punished for this decision to stand down from what had previously been considered sacred.”
Success Not Guaranteed
The greenback rose against Australia’s dollar and Norway’s krone, as oil and commodities retreated, damping demand for currencies linked to growth.
The Aussie fell 0.2 percent to 88.64 U.S. cents and the krone declined 0.4 percent to 6.2465 per dollar on speculation investors reversed carry trades that had profited from Australia’s 4.5 percent central bank rate and Norway’s 2.115 one-month deposit rate.
The benchmark rate of zero to 0.25 percent in the U.S. makes the dollar a popular funding currency for such trades. Such strategies lose money as the funding currency gains because it costs more to repay the loan.
Crude oil for June delivery fell 4.1 percent last week and the Reuters/Jeffries CRB Index of 19 commodities fell 2.8 percent yesterday. Norway is the world’s sixth largest oil exporter. Australia is the world’s biggest iron ore exporter.
Gold for immediate delivery yesterday reached an all-time high of $1,249.40 an ounce in New York as investors sought to hedge against Europe’s debt crisis.
Merkel, speaking yesterday at a panel discussion by Phoenix television, said that success is not yet guaranteed. Asked about disagreements with European Union partners, she said that “some arguments are worth it,” without elaborating.
‘The Euro Is Doomed’
The German chancellor’s comments followed a report from El Pais that French President Nicolas Sarkozy threatened to pull out of the euro unless Merkel agreed to back the European Union’s bailout plan at a meeting last weekend in Brussels, citing comments Spain’s Prime Minister Jose Luis Rodriguez Zapatero made at a meeting of socialist politicians. The Madrid- based newspaper didn’t say how it obtained the information. Aides to Sarkozy, Merkel and Zapatero all denied the report.
“The euro is doomed,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC in Greenwich, Connecticut. “It’s like a clown without its makeup. The strains among the partners are becoming clear and it’s becoming harder to see global growth not being threatened by this.”
‘Head Through Parity’
The euro has lost 9 percent this year, according to Bloomberg Correlation-Weighted Indices. The dollar has gained 7.2 percent and the yen has advanced 7.9 percent.
The euro “can easily head through parity” with the U.S. dollar under a “hard landing” recovery scenario from the European deficit crisis, according to Royal Bank of Scotland Group Plc.
The forecast for the shared currency was reduced to $1.14 for the middle of next year, Alan Ruskin, head of foreign- exchange strategy at RBS Securities in Stamford, Connecticut, wrote in a note on May 13. The euro could test the key level of $1.1650 by year-end, he said.
The pound slid 1.8 percent to $1.4536, its third weekly decline versus the dollar, amid speculation that the U.K.’s governing coalition may collapse by year-end.
The U.K.’s Prime Minister David Cameron and his coalition partner, Nick Clegg, will “have a major problem keeping the left wing of the Liberal Democrats and the right wing” of the Conservatives in line, and a new election may be called before year-end, former Bank of England member David Blanchflower wrote in a Bloomberg News column on May 13.
The pound has dropped 2.8 percent against the dollar since May 11, when the Conservatives and Liberal Democrats formed a coalition government five days after elections failed to provide a clear winner.
Crisis slush fund guarantees from Germany and France - 48%
Update on the Special Purpose Vehicle", known as the European Financial Stabilisation Mechanism, or the Crisis Slush Fund, and worth 440bn euros, which euro countries would guarantee on a pro-rota basis over a period of three years.
According to Sueddeutsche.de, Germany have to guarantee 123bn euros.
According to e24.fr, France have to guarantee 88 bn euros.
That's 48% of the guarantees by the euro countries for the two most important euro economies. And not "bad" for France which has a total banking sector asset exposure to the PIIGS amounting to 911 bn euros, compared with 704 bn euros for Germany.
Spain unveils deep budget cuts
Spain's PM has outlined a plan to tackle the country's budget crisis, amid concerns that problems afflicting Greece may spread across the eurozone. Jose Luis Rodriguez Zapatero announced a 5% cut to public sector salaries, as well as reductions to pensions and regional government funding. He said the plan would save about 15bn euros ($19bn; £12.5bn) over two years.
At the weekend Spain said it wanted to drastically reduce its budget deficit, which currently stands at 11% of GDP. The aim of the new package is to trim this deficit to 6% of GDP in 2011. In his speech to parliament, Mr Zapatero revealed other details of the plan. Automatic increases in pensions will be suspended from 2011 and funding for regional governments cut. "We aim to cut civil service wages by an average of 5% in 2010 and freeze them in 2011," he added. He said his own salary and those of senior cabinet members would be cut by 15%.
Portuguese GDP up by 1.7% in real terms in the 1st quarter 2010
The Flash Estimate of the Portuguese Gross Domestic Product (GDP) points to a year on year growth rate of 1.7% in volume in the 1st quarter 2010 (the same rate was -1.1% in the previous quarter). Comparing with the previous quarter, the Portuguese GDP grew 1.0%. The GDP year on year increase in the 1st quarter 2010 was partially associated to a base effect (in the 1st quarter 2009 GDP diminished 3.7% year on year), with Domestic Demand and External Demand Balance registering an increase in their respective contributions, more intense in the first case.
Full text of EU crisis mechanism agreement
Following is a full text of the agreement reached by European Union finance ministers on Monday:
The Council and the Member States have decided today on a comprehensive package of measures to preserve financial stability in Europe, including a European Financial Stabilization mechanism with a total volume of up to 500 billion euros.
In the wake of the crisis in Greece, the situation in financial markets is fragile and there was a risk of contagion which we needed to address. We have therefore taken the final steps of the support package for Greece, the establishment of a European stabilization mechanism and a strong commitment to accelerated fiscal consolidation, where warranted.
First, following the successful conclusion of procedures in euro area Member States and the meeting of euro area Heads of State or Government, the way has been cleared for the implementation of the support package for Greece. The Commission has signed today, on behalf of the euro area Member States, the loan agreement with Greece and the first disbursement will proceed, as planned, before 19 May. The Council strongly supports the ambitious and realistic consolidation and reform program of the Greek government.
Second, the Council is strongly committed to ensure fiscal sustainability and enhanced economic growth in all Member States and therefore agrees that plans for fiscal consolidation and structural reforms will be accelerated, where warranted. We therefore welcome and strongly support the commitment of Portugal and Spain to take significant additional consolidation measures in 2010 and 2011 and present them to the 18 May ECOFIN Council. The adequacy of such measures will be assessed by the Commission in June in the context of the excessive deficit procedure. The Council also welcomes the commitment to announce by the 18 May ECOFIN Council structural reform measures aimed at enhancing growth performance and thus indirectly fiscal sustainability henceforth.
Third, we have decided to establish a European stabilization mechanism. The mechanism is based on Article 122.2 of the Treaty and an intergovernmental agreement of euro area Member States. Its activation is subject to strong conditionality, in the context of a joint EU/IMF support, and will be on terms and conditions similar to the IMF.
Article 122.2 of the Treaty foresees financial support for Member States in difficulties caused by exceptional circumstances beyond Member States' control. We are facing such exceptional circumstance today and the mechanism will stay in place as long as needed to safeguard financial stability. A volume of up to 60 billion euro is foreseen and activation is subject to strong conditionality, in the context of a joint EU/IMF support, and will be on terms and conditions similar to the IMF. The mechanism will operate without prejudice to the existing facility providing medium term financial assistance for non euro area Member States' balance of payments.
In addition, euro area Member States stand ready to complement such resources through a Special Purpose Vehicle that is guaranteed on a pro rata basis by participating Member States in a coordinated manner and that will expire after three years, respecting their national constitutional requirements, up to a volume of 440 billion euros. The IMF will participate in financing arrangements and is expected to provide at least half as much as the EU contribution through its usual facilities in line with the recent European programs.
At the same time, the EU will urgently start working on the necessary reforms to complement the existing framework to ensure fiscal sustainability in the euro area, notably based on the Commission Communication to be adopted on 12 May 2010. We underline the importance that we attach to strengthening fiscal discipline and establishing a permanent crisis resolution framework.
We underlined the need to make rapid progress on financial market regulation and supervision, in particular with regard to derivative markets and the role of rating agencies. Furthermore, we need to continue to work on other initiatives, such as the stability fee, which aim at ensuring that the financial sector shall in future bear its share of burden in case of a crisis, also exploring the possibility of a global transaction tax. We also agreed to speed up work on crisis management and resolution.
We also reiterate the support of the euro area Member States to the ECB in its action to ensure the stability to the euro area.
ECB decides on measures
The Governing Council of the European Central Bank (ECB) decided on several measures to address the severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy oriented towards price stability in the medium term. The measures will not affect the stance of monetary policy.
In view of the current exceptional circumstances prevailing in the market, the Governing Council decided:
To conduct interventions in the euro area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments which are dysfunctional. The objective of this programme is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism. The scope of the interventions will be determined by the Governing Council. In making this decision we have taken note of the statement of the euro area governments that they “will take all measures needed to meet [their] fiscal targets this year and the years ahead in line with excessive deficit procedures” and of the precise additional commitments taken by some euro area governments to accelerate fiscal consolidation and ensure the sustainability of their public finances.
In order to sterilise the impact of the above interventions, specific operations will be conducted to re-absorb the liquidity injected through the Securities Markets Programme. This will ensure that the monetary policy stance will not be affected.
To adopt a fixed-rate tender procedure with full allotment in the regular 3-month longer-term refinancing operations (LTROs) to be allotted on 26 May and on 30 June 2010.
To conduct a 6-month LTRO with full allotment on 12 May 2010, at a rate which will be fixed at the average minimum bid rate of the main refinancing operations (MROs) over the life of this operation.
To reactivate, in coordination with other central banks, the temporary liquidity swap lines with the Federal Reserve, and resume US dollar liquidity-providing operations at terms of 7 and 84 days. These operations will take the form of repurchase operations against ECB-eligible collateral and will be carried out as fixed rate tenders with full allotment. The first operation will be carried out on 11 May 2010.
Reactivation of US dollar liquidity providing operations
In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary U.S. dollar liquidity swap facilities. These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and other financial centers. The Bank of Japan will be considering similar measures soon. Central banks will continue to work together closely as needed to address pressures in funding markets.
ECB decisions
The Governing Council of the ECB decided to reactivate, in coordination with other central banks, the temporary liquidity swap lines with the Federal Reserve, and resume US dollar liquidity-providing operations at terms of 7 and 84 days. These operations will take the form of repurchase operations against ECB-eligible collateral and will be carried out as fixed rate tenders with full allotment. The first operation will be carried out on 11 May 2010.