From the pixels of Christian Dargnat, chief exec of BNP Paribas Asset Management and president of EFAMA:
The European Reward System (ERS) is a process of annual certifications by the European Commission for sovereign bond issuances by Eurozone member states that adhere to a set of definitive budget criteria defined in advance. These Certifications allow a state to benefit from a budgetary transfer from other member states when higher interest rates are paid compared to the average European system of 100 basis points more or less.
The crisis of individual state debts in the Eurozone has lead to lower interest rates from debts issued by Germany and France, and elevate rates from Italy and Spain. Since 2010, Germany and France have benefitted from savings of approximately €30 billion and €10 respectively during their issuances. Inversely, one can observe an additional cost of around €53 billion for Italy and €30 billion additional for Spain.
Arguably, none of the below matters now.
That’s the prime effect of the German constitutional court turning to the European Court of Justice for a ruling on whether the ECB’s sovereign bond-buying programme is a “structurally significant transgression of powers” under European treaty law.
Big words. But the backing of the Bundesverfassungsgericht judges (pictured right) for that view gets rendered into just another opinion, pending the ECJ’s decision. And the arc of the ECJ’s justice is long, turgidly written, but ultimately quite friendly to pieces of bailout architecture that have an odd relationship to the treaties — as in past musings on the ESM.
But the really interesting thing is that regardless, the OMT’s purpose apparently remains almost completely lost on the court. Read more
Is this contrarian? The argument from JPM is that the long awaited German Constitutional Court ruling on the ECB’s untested Outright Monetary Transactions might actually buttress the credibility of the OMT, rather than undermine it. Read more
We should probably view Ireland’s decision to exit its bailout sans precautionary credit line more like a scarf dance than a total strip show…
Ireland has evidently decided that the cost of not having a pre-arranged ECCL exceeds the cost of negotiating an ECCL under duress. The characterisation of ECCL/no ECCL = OMT/no OMT is too simplistic. The reality is a matter of degree. Not having an ECCL does not rule out OMT, it merely slows the ECB response down as an ECCL would have to be negotiated and approved first.
M. found himself waiting for Draghi surrounded by fellow journalists. He passed on a short piece of the conversation (we’ve protected the imaginary sources, naturally):
But we do often speak about the OMT, which I’ve never seen; you know D. doesn’t like me and never let me look at it, still its appearance is well known in the ECB, some people have seen it, everybody has heard of it, and out of glimpses and rumours and through various distorting factors an image of the OMT has been constructed which is certainly true in fundamentals. But only in fundamentals. In detail it fluctuates, and yet perhaps not so much as the OMT’s reality.
Click to enlarge — details (finally) of the sovereign bonds held by the European Central Bank’s inactive Securities Markets Programme, released on Thursday: Read more
Things have gotten so good recently for European banks that the idea of them repaying their LTRO cash early is getting more attention as the first date at which they can do so — January 2013 — creeps up. And there’s certainly more bank debt being issued, even by the peripherals:
A report in the Spanish paper El Confidencial says that the Spanish government is considering asking just the IMF for aid in an attempt to bypass Eurogroup conditionality.
It seems quite an unlikely option (and no sources are cited) but it may nevertheless be an indication that the government is feeling increasingly anxious about its ability to hold out on asking for a bailout. Read more
Spain’s fiscal management seems to increasingly be a case of plugging holes, watching new ones appear, ignoring them, then relenting and also plugging those… all while delaying a clearly inevitable request for assistance from Brussels.
On the positive side, the auction on Thursday marked the completion of the country’s planned funding for this year (€86bn, but there’s also €10bn in private placements issuance). On the negative side, the €4.7bn debt sale saw unenthusiastic demand, which has helped spook investors and driven 10-yr yields up. Read more
Eurozone officialdom routinely sees the eurozone itself through a rose-tinted lens.
Just listen to Francois Hollande, or any number of Spanish officials, such as Inigo Fernandez de Mesa, the country’s Treasury minister, who was talking to Reuters on Wednesday (emphasis ours):
“As we speak, my funding needs for this year are almost covered, at 95 percent, and my intention is to start funding the Treasury for next year so that we can start the year with our homework done,” said Fernandez de Mesa, who reports to Economy Minister Luis de Guindos.
That’s Spain’s 10yr spread over German Bunds dropping below 400 points for the first time since the start of April:
Spanish 10yr fell to 5.547 with Bunds touching 1.5864.
Probably something to do with Moody’s qualified endorsement: Read more
This, for Draghi’s (and everyone else’s) eyes only, from Tuesday’s FT:
A senior official within the Spanish ministry of economy said Spain did not require any money from the European Stability Mechanism, the eurozone’s state rescue fund, but would be comfortable making a request for a credit line only in order to satisfy the conditions of the ECB to begin buying bonds.
That call might not come this side of New Year.
The market has been waiting for Spain to request its very own Enhanced Conditions Credit Line for quite a while now. It’s the road to OMT. And for a (very) little while just last week while it appeared we were only a weekend away.
But it’s now looking increasingly like we are not gonna get to see any OMT buying at all in 2012. Sad. Read more
If you think Germany’s response to the crisis has been less than lightning swift so far…
JP Morgan’s Alex White argues that the German policy motor may be about to properly slow down, and with it the response to the eurozone crisis which usually moves at Germany’s speed: Read more
Citi’s Willem Buiter has gone all good idea/bad idea on us.
= the introduction of the ECB’s Outright Monetary Transactions (OMT) facility, the decision of the German Constitutional Court to allow German participation in the ESM with small additional conditions, and the strong performance of centrist, pro-European parties in the Dutch election. Read more
Well, this is good news… Reuters have corrected their copy on what had sounded like confusing remarks made on Monday by Luc Coene, Belgian central bank governor, about the maturities of the debt the OMT will buy. (It had certainly confused us, in an earlier version of this post – sorry.)
He also said parts of the new programme’s design meant there were built-in limits to how much it could spend. Read more
Charts on a certain broken transmission mechanism are popping up everywhere.
First, a chart from Exotix — ECB data from March show that 42 per cent of small businesses in Greece couldn’t get the loans they asked for: Read more
How much longer does this go on?
Spanish 2-year bond yields at 2.9 per cent – down from 6.6 per cent when we first said there was something to what Draghi was saying about convertibility risk. The Italian 2-year’s at 2.3 per cent. Longer-maturity debt has also rallied, despite falling outside the remit of the European Central Bank’s OMT purchases. Read more
As the ECB’s OMT threatens to maybe start, Jonathan Wheatley over at the FT’s beyondbrics has picked up on an interesting case of sterilisation going awry.
From Wheatley: Read more
“Was today the day that the Portuguese PSI began?,” Macro Man asks, of the OMT.
They’re noting something curious about ECB seniority in light of Thursday’s revelations about the OMT. The ‘technical features’ confirm that the OMT will receive equal treatment with ordinary bondholders if a eurozone sovereign restructures its debt. But, in the Q&A, Draghi also confirmed that the old SMP bond holdings will remain senior. It will be first in the queue, ahead of bondholders and the OMT. Read more
Here are the full ‘technical features’, which Mario Draghi read out at Thursday’s press conference. Three big things stick out:
– The ECB will apparently make a ‘legal act’ to confirm that its bond holdings under “Outright Monetary Transactions” are pari passu, not senior. Legislation signals a welcome precommitment, but a nasty fudge here: 200 billion euros of bonds held under the SMP (which programme has now been terminated) will not come under the pari passu rule. Read more