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Número 98

ANEXO I

Alvaro Espina 16 de Julio de 2013

ENTRE EL 10 DE JUNIO DE 2013 Y EL 30 DE JUNIO DE 2013

June 30, 2013, 9:35 am99 Comments Historic Mistake Watch When the Fed began its talk of “tapering” asset purchases, I warned that it might turn out to be a “historic mistake”. I guess the historic bit is still up in the air; but the mistake aspect is now glaringly obvious. Bond prices have plunged, and the Fed’s attempts to inform markets that they’ve got it all wrong have only modestly mitigated the impact. What went wrong? The Fed grossly misunderstood the nature of the relationship between its statements and market expectations. It believed that the market was listening closely to the details of what it said. In fact, the market doesn’t — and probably shouldn’t. Instead, it listens to the tone of Fed statements, and also Fed actions; it’s more a matter of character judgment than mathematics. And what the Fed conveyed with the tapering talk was a sense that its heart really isn’t in this stimulus thing. OK, a bit more detail. Right now, the Fed is doing two things in an attempt to boost the economy: it’s promising to keep short-term rates, which it controls, low; and it’s trying to reduce long-term rates directly, through bond purchases. What the Fed said was that it was thinking of slowing down those bond purchases — but not to worry, it still plans to keep short-term rates low. But as Gavyn Davies shows, the market responded by sharply marking up its expectations for future short-term rates. In April, the market thought there was almost no chance the Fed would raise rates next year; now such a rise is considered more likely than not. Fed officials are frustrated. Weren’t investors listening? But the Fed was foolish here — and the investors aren’t. The key point you always have to remember (but which the Fed somehow forgot) is that there is no way to lock in future monetary policy. Whatever the Federal Open Market Committee may say now about its plans for 2014 or 2015, it can always do something different when the future turns into the present. So what’s the point of Fed communication? Mainly it’s not about the specific numbers; it’s about conveying what kind of central bankers we’re dealing with, and hence what they’re likely to do in the future. Talk of extended easy money can help the economy now precisely because it makes the Fed sound like it’s not a conventionally-minded central bank, eager to snatch away the punch bowl; even asset purchases work mainly because they reinforce that impression of unconventionality. But when the Fed starts talking about tapering at a time when unemployment is still very high and inflation below target, it undoes all of that good work; suddenly the

FOMC starts sounding once again like a group whose fingers are already twitching as they fight the urge to grab that punch bowl. Undoing this damage is going to be very hard. One thing that will matter a lot, however, is the choice of Bernanke’s successor. If she’s a well-known dove, that could help a lot. If he’s, say, someone known for saying things like “stimulus is sugar“, look out below. http://krugman.blogs.nytimes.com/2013/06/30/historic-mistake-watch/ June 29, 2013, 10:18 am171 Comments The Always-Wrong Club Aha. Floyd Norris reminds us of the 23-economist letter from 2010, warning of dire consequences — “currency debasement and inflation” — from quantitative easing. The signatories are kind of a who’s who of wrongness, ranging from Niall Ferguson to Amity Shlaes to John Taylor. And they were wrong again. But that won’t diminish their reputations on the right, even a bit. How do I know that? Well, also on the list — presumably because they asked him to be there — is Kevin Hassett, co-author of Dow 36,000 and also a prominent denier of the existence of a housing bubble. Fool me once, fool me twice, fool me yet again — hey, never mind. Quite amazing. http://krugman.blogs.nytimes.com/2013/06/29/the-always-wrong-club/ WSJ Blogs Real-time commentary and analysis from The Wall Street Journal REAL TIME ECONOMICS Economic insight and analysis from The Wall Street Journal. November 15, 2010, 12:01 AM Open Letter to Ben Bernanke The following is the text of an open letter to Federal Reserve Chairman Ben Bernanke signed by several economists, along with investors and political strategists, most of them close to Republicans: We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment. We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus. We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy. The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

Cliff Asness, AQR Capital/ Michael J. Boskin, Stanford University, Former Chairman, President’s Council of Economic Advisors (George H.W. Bush Administration)/ Richard X. Bove, Rochdale Securities/ Charles W. Calomiris, Columbia University Graduate School of Business, Jim Chanos, Kynikos Associates/ John F. Cogan, Stanford University, Former Associate Director, U.S. Office of Management and Budget (Reagan Administration)/ Niall Ferguson, Harvard University, Author, The Ascent of Money: A Financial History of the World/ Nicole Gelinas, Manhattan Institute & e21 Author, After the Fall: Saving Capitalism from Wall Street—and Washington/ James Grant, Grant’s Interest Rate Observer/ Kevin A. Hassett, American Enterprise Institute Former Senior Economist, Board of Governors of the Federal Reserve/ Roger Hertog, The Hertog Foundation/ Gregory Hess, Claremont McKenna College/ Douglas Holtz-Eakin, Former Director, Congressional Budget Office/ Seth Klarman, Baupost Group/ William Kristol, Editor, The Weekly Standard/ David Malpass, GroPac Former Deputy Assistant Treasury Secretary (Reagan Administration)/ Ronald I. McKinnon, Stanford University/ Dan Senor, Council on Foreign Relations Co-Author, Start-Up Nation: The Story of Israel’s Economic Miracle/ Amity Shlaes, Council on Foreign Relations, Author, The Forgotten Man: A New History of the Great Depression/ Paul E. Singer, Elliott Associates/ John B. Taylor, Stanford University, Former Undersecretary of Treasury for International Affairs (George W. Bush Administration)/ Peter J. Wallison, American Enterprise Institute, Former Treasury and White House Counsel (Reagan Administration)/ Geoffrey Wood, Cass Business School at City University London A spokeswoman for the Fed responded: “As the Chairman has said, the Federal Reserve has Congressionally- mandated objectives to help promote both increased employment and price stability. In light of persistently weak job creation and declining inflation, the Federal Open Market Committee’s recent actions reflect those mandates. The Federal Reserve will regularly review its program in light of incoming information and is prepared to make adjustments as necessary. The Federal Reserve is committed to both parts of its dual mandate and will take all measures to keep inflation low and stable as well as promote growth in employment. In particular, the Fed has made all necessary preparations and is confident that it has the tools to unwind these policies at the appropriate time. The Chairman has also noted that the Federal Reserve does not believe it can solve the economy’s problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators, and the private sector.” http://blogs.wsj.com/economics/2010/11/15/open-letter-to-ben-bernanke/

ft.com comment Columnists June 30, 2013 7:21 pm The EU will regret terminating a banking union

By Wolfgang Münchau Banks are the buyers of last resort of their home countries’ national debt The EU has effectively buried the idea of a banking union. It is a decision that will have profound economic consequences for the eurozone. It kills the last chance of a resolution that could have ended the depression in the eurozone periphery. In the brave new world of the EU’s resolution regime, all risks will be shared between various categories of bank creditors, which are mostly domestic institutions, and the banks’ home states. The European Council, the gathering of EU heads of government, has long become silent on the ceremonious pledge, made in June 2012, to break the link between sovereigns and the banks. Last week’s agreement did not break it. It has not even been diluted. It has been reconfirmed. More ON THIS STORY/ Editorial EU banking union/ Lex EU bank resolution – certainty required/ EU reaches deal on failed banks/ Improvisation the rule in bank bail-in deal/ In depth European banking union ON THIS TOPIC/ Progress report – EU banking union/ EU fails to agree on bank bailout rules/ Opinion Europe open to bankers’ blackmail/ Asmussen calls for bank resolution fund WOLFGANG MUNCHAU/ Europe is ignoring the scale of bank losses/ Bond jitters threaten Europe’s calm/ Hail the honesty about Greece’s bailout/ Austerity, like a B- movie monster, will keep coming back But has the European Stability Mechanism, designed to provide assistance to members of the eurozone, not been given the right to recapitalise banks directly – up to a total of €60bn? Yes, it has, but there is a catch. For each euro the ESM uses to recapitalise a bank, it has to post two euros as collateral to maintain its own credit rating. If the ESM were to use the entire pot of €60bn, its total available free lending capacity would shrink to some €200bn – not enough to meet the obligations it is likely to face in the next few years. The way the €60bn bank recapitalisation facility is constructed, the eurozone finance ministers will have a strong incentive not to use it as a bank recapitalisation fund at all. My conclusion is that the €60bn is there not to be used. And, as I argued last week, the losses of the banking system are so large that this amount would hardly make a difference anyway. In theory, a bail-in rule should shift some of the financial burden away from the bank’s home state. But this only works to the extent that some of those shareholders and bondholders are foreigners. The trouble is that the banks have become more national since the crisis. They are the buyers of last resort of their home countries’ national debt. In return, the governments backstop their domestic banks. Most of their creditors are domestic. It therefore matters little whether the Spanish state bails out its banks or

4 whether mostly Spanish bondholders get bailed in. The bottom line is that all the risk remains in Spain. As such, it is a liability of the Spanish state in the final consequence. The debt ratio that matters as a guide to the country’s overall solvency is not the much- quoted ratio of net public debt to gross domestic product but total external debt, public and private sector combined. In the case of Spain this was almost 170 per cent of GDP at the end of 2012, according to the latest data of the World Bank. For Spain, a banking union that cuts the link between the state and banks would have been a necessary, and possibly even sufficient, guarantee for sustainable membership of a monetary union. However, that would hold true only as long as the political support for fiscal adjustment and economic reforms remains in place. Without that guarantee, I cannot see how that is possible. When policy makers last year portrayed banking union as a less onerous step than a fiscal union, it was already clear that they were either not serious about the project or at least not serious about it as an instrument of crisis resolution. As the reality about the new regime sinks in, the doubts about the viability of the monetary union could quickly resurface. In normal times, even the unsustainable can last surprisingly long. But that is not necessarily the case in times when the banking systems of several large European states are underwater. The situation in Italy is different from Spain in some important respects. Italy’s banks are not sitting on mountains of bad mortgage debt. Italy has a lower gross external debt position, at 124 per cent of GDP. But the problem in Italy is a vicious circle of a credit crunch, a recession, and a public sector with little fiscal room for manoeuvre to fix an undercapitalised banking system. The new government’s focus on a petty scheme to reduce youth unemployment when its real problem is a liquidity crunch is unbelievably misguided. With the rise in global market interest rates, the country is getting closer to an ESM programme, which would then trigger bond purchases by the European Central Bank. But the ECB cannot recapitalise the Italian banks. Nor can the Italian state. Nor can the ESM. According to Mediobanca, an Italian investment bank, the degree to which Italy can tap private wealth as a source of new funds is limited, since wealth taxes are already relatively high. So even Italy’s sustainability in the eurozone is not assured in the absence of a joint-liability banking union. How could it have come to this? It was my reading of the political situation a year ago that a majority in the European Council was quite serious about a proper banking union to be followed by a fiscal union in the future. Germany had yet to be persuaded. Then came the ECB's celebrated backstop last summer. And that killed it. The politicians no longer saw a need for policies that would be a hard sell back home. There is a still project with the name of banking union but it will be irrelevant to this crisis. That leaves the ECB. The central bank can do a lot but it cannot fix the banks. [email protected] http://www.ft.com/intl/cms/s/0/4d433ec6-de93-11e2-b990- 00144feab7de.html#axzz2XmvKNIl0

Jean Pisani-Ferry Jean Pisani-Ferry is Professor of Economics at Université Paris-Dauphine and currently serves as the Director of Economic Policy Planning for the Prime Minister of France. He is a former director of Bruegel, the Brussels-based economic think tank. La convalescencia del euro 30 June 2013 PARÍS – Hace un año la eurozona se encontraba en una situación muy delicada. Una serie de medidas (como la creación de un fondo de rescate, un tratado fiscal y la entrega de liquidez barata al sistema bancario) destinadas a impresionar a los mercados financieros no lograban su cometido. La crisis se había propagado desde la periferia monetaria de la unión a su centro. Los países del sur de Europa sufrían la liquidación de su deuda soberana y la fuga de capitales privados. Europa se fragmentaba en lo financiero y se especulaba cada vez más sobre su posible ruptura. Entonces se emprendieron dos iniciativas importantes. En junio de 2012 los líderes de la eurozona anunciaron su intención de crear una unión bancaria europea, manifestando que era necesario apoyar las bases del euro con la transferencia de supervisión bancaria a una autoridad de nivel europeo. Por primera vez desde el inicio de la crisis en Grecia, se reconocía oficialmente que la raíz del problema de la eurozona no era el desobedecimiento de reglas fiscales y que era necesario revisar los principios mismos que subyacían a la unión monetaria. La tarea por delante iba a ser necesariamente ambiciosa. En opinión de la mayoría de los observadores, para alcanzar el objetivo de los gobernantes de “romper el círculo vicioso entre bancos y países soberanos” se hacía necesaria una autoridad centralizadora para el rescate y resolución de la situación de los bancos. La segunda iniciativa vino un mes más tarde. En declaraciones del 26 de julio, el Presidente del Presidente Central Mario Draghi anunció que el BCE haría “lo que sea necesario” para preservar el euro: “Créanme, será suficiente”, señaló. El significado de esas palabras quedó claro con el anuncio subsiguiente del plan de “transacciones monetarias directas” (TMD) del BCE, en virtud del cual compraría bonos de soberanos de corto plazo emitidos por países que recibieran el apoyo condicional de los fondos de rescate europeos. Ambas medidas tuvieron efectos inmediatos y profundos sobre los mercados financieros. A ojos de Wall Street, el euro daba pasos en dirección a convertirse en una moneda normal. Comenzó a amainar la agitación en los mercados de bonos. ¿Dónde nos encontramos un año más tarde? Primero, las dos iniciativas lograron condiciones de préstamo mucho mejores para los gobiernos de los países del sur de Europa (al menos hasta que el Presidente de la Junta de Reserva Federal, Ben Bernanke, creara nuevas olas de incertidumbre con sus declaraciones a mediados de junio de que Estados Unidos iría reduciendo más de tres años de la llamada flexibilización cuantitativa). Los capitales dejaron de huir del sur de Europa y bajaron los niveles de especulación.

En segundo lugar, durante el segundo semestre del año pasado se alcanzó un acuerdo para autorizar a que el BCE supervise el sector bancario. El nuevo régimen estará funcionando plenamente dentro de un año, lo cual no es un logro pequeño si se considera la complejidad de la tarea. Tercero, se está en conversaciones para preparar los próximos pasos, en particular qué hacer con los bancos que han caído en la bancarrota y apoyar a los que se encuentran en dificultades. Hace poco los ministros acordaron un modelo de plan de acción. Así que hay claros resultados positivos, pero sigue habiendo preguntas. Un problema es de diseño: una unión bancaria es tan fuerte como su miembro más débil. Lo que les importa a los mercados no es lo que ocurre en épocas normales, ni siquiera lo que pasa cuando aumentan la incertidumbre y la volatilidad, sino los posibles escenarios en condiciones realmente adversas. Para romper el círculo vicioso entre entidades soberanas y bancos en problemas, por el cual los rescates a los bancos agotan los recursos fiscales y elevan las probabilidades de que la próxima institución financiera que se encuentre en dificultades no pueda contar con apoyo estatal, es necesario asegurar que no se va a repetir ni siquiera en las circunstancias más extremas. Meramente “debilitarlo”, como recomendaran hace poco algunos funcionarios europeos, podría terminar siendo profundamente insuficiente. Hay dos maneras de eliminar este círculo vicioso. Una es excluir del todo los rescates bancarios: solo los acreedores han de pagar los errores de los banqueros. Este tipo de regla podría proteger a los gobiernos del riesgo bancario solamente si se aplica de manera sistemática, incluso a expensas de la estabilidad financiera. En pocas palabras, los gobiernos deberían estar preparados para dejar quebrar a los bancos. La otra opción es mutualizar el costo de rescatar en el margen. Los estados podrían participar y aceptar pérdidas, pero todos los miembros de la eurozona tendrían que compartir los grandes riesgos. Hoy Europa vacila entre estos dos enfoques. Francia no quiere descartar los rescates con fondos estatales, mientras que Alemania es reluctante a mutualizar los costes presupuestarios. Se está buscando un acuerdo de compromiso, pero debe pasar la prueba de la realidad. Lamentablemente, puede que el camino medio entre dos soluciones lógicamente consistentes no posea la misma consistencia lógica. Entretanto, se ha ido socavando la credibilidad del arma atómica de Draghi. El milagro del TMD es que, desde que se anunciara hace ya un año, ha logrado el efecto deseado sin que haya sido necesario utilizarlo. Sin embargo, la fuerte oposición por parte del Bundesbank y muchos académicos alemanes ha generado dudas sobre si se usará alguna vez, y de qué manera. Para defender su legalidad en las audiencias ante el Tribunal Constitucional alemán, el BCE mismo ha argumentado que el programa TMD es un instrumento menos potente de lo que muchos creen. Si bien el gobierno alemán ha sido enfático en señalar que el sistema judicial alemán no tiene competencias sobre la legalidad de los instrumentos del BCE, los mercados han tomado nota. En unos cuantos meses se habrán cumplido cuatro años desde el inicio de la crisis en la eurozona, casi una eternidad si se lo mira desde estándares históricos. Se ha hecho mucho para superarla, pero es todavía muy temprano para dar la tarea por terminada ni cantar victoria. Traducido del inglés por David Meléndez Tormen This article is available online at: http://www.project-syndicate.org/commentary/the-unfinished-recovery-of-the-euro-by- jean-pisani-ferry/spanish

ft.com Comment Analysis June 30, 2013 9:28 pm Eurobonds: A change of gear By Ralph Atkins and Michael Stothard As banks continue to struggle, capital markets are expecting a surge in demand for the funds needed to power growth

©Alamy Fast lane: The group that built the Autostrada del Sole still uses bonds to finance projects The Autostrada del Sole, which joins Italy’s north and south and was completed in 1964, was as much part of the country’s postwar revitalisation as Fiat 500 cars and film stars wearing Gucci loafers. Behind the company that built the toll road was a deal that transformed global finance. On July 1, 1963, Autostrade had issued the world’s first eurobond. Despite its name, the bond was dollar-denominated and pitched at US currency investors operating across national borders. More ON THIS STORY/ Spanish frustration with Germany grows/ Markets Insight Europe’s FTT risks bond market backfire/ Zambia’s King Cobra rattles business/ A look back at financial innovations/ Key-man risk a commodities traders’ issue ON THIS TOPIC/ Europe split on shale gas benefits/ Central & eastern Europe Opinion, by Michael Gartside/ The Big Picture Fund industry rejects aggressive lobbying claims/ European car sales at lowest since 1993 IN ANALYSIS/ Australia What’s up Down Under/ Egypt A revolution betrayed/ Brussels Astroturfing takes root/ Croatia A cool reception on arrival “Capital at that time was not so accessible and the company wanted to reduce its reliance on the Italian state,” says Giovanni Castellucci, chief executive of Autostrade. “It was the first very big toll road anywhere and it was then copied. Now every country has an Autostrada del Sole. But ours was the first.” Exactly 50 years later, European corporate bond markets could be on the verge of another significant shift. Today’s bond pioneers believe that weaknesses in the continent’s banking system and historically low interest rates will encourage companies to tap capital markets much more for finance and rely increasingly less on bank loans. Traditional bank ties remain strong, especially in continental Europe. On some measures, emerging economies have experienced a bigger shift towards capital market

8 funding of companies since 2008. But just as the launch of eurobonds – which were named long before the birth of the European single currency – kick-started the globalisation of corporate finance, the crises of the past six years could bring Europe’s markets closer to the depth and liquidity of those in the US.

“In five to 10 years, I think the European market will look broadly similar to the US market in terms of bank and bond percentages,” says Michael Ridley, vice-chairman of investment banking at JPMorgan, whose banking career began in 1978. Eurobonds were created out of necessity – as well as changes in the 1960s in US tax rules that encouraged investors to keep dollars outside the country. But their pioneers consider Autostrade’s launch issue as part of a broader shift in capitalism in the decades after the second world war. “It was a major step along the way to the globalisation of finance and foreign exchange markets,” says Stanislas Yassukovich, former deputy chairman of London’s stock exchange, who was involved in many of the early eurobond deals. “It was also a major step in the postwar recovery in Europe – and the rest of the world for that matter.” Chris Tuffey, head of investment grade capital markets and syndicate at Credit Suisse, adds: “It made the world a smaller place.” The success of eurobonds cemented London’s position as Europe’s financial capital: SG Warburg, based in the City, topped the list of bankers to the Autostrade issue, which also included Deutsche Bank. Cross-border markets were given a further boost from the 1980s when the development of international swaps markets made it easier for companies to borrow in foreign currencies and for investors to borrow in low-interest countries to invest in higher-yielding assets. Then, in 1999, came the launch of the euro, the continent’s boldest experiment yet in economic integration. “Once the euro came into being, it accelerated hugely the growth of the European corporate bond market,” says Chris Whitman, global risk syndicate head at Deutsche Bank. The early years of this century saw a wave of issuance as European telecoms companies raised funds to buy 3G licences. “That was really the first time European markets had been aggressively peppered on a consistent basis by very large corporate deals,” recalls Bryan Pascoe, global head of debt capital markets at HSBC.

Although capital market aficionados have a strict definition of a eurobond – its legal form and tax-free status – the phrase has fallen out of use somewhat in recent years. Some original features, particularly the provision for the anonymity of investors, have gone. But cross-border issuance of corporate bonds has become ubiquitous. “Eurobonds largely replaced domestic markets in Europe – there was no point launching a bond in just one country when you can tap an international investor base at no extra cost,” says Chris O’Malley, whose book Bonds without borders will be published next year. How the market develops will depend crucially on structural changes in the continent’s financial system, triggered by the crisis of the past few years. Not all are necessarily positive. “Eurobonds were created at a time when exchange and capital controls were being removed – when everything was being opened up,” says Mr Yassukovich. “Now the trend is completely the opposite. It is not an atmosphere in which finance can prosper.” One threat is the financial transaction tax planned by 11 EU states, which would hit bond markets as well as equities. Although the final shape of the tax is still subject to much debate in Brussels, its opponents warn that the taxing of bond trading would reduce the liquidity of markets and increase issuance costs. A less high-profile concern is that regulators have unintentionally dealt the market a blow by increasing the cost to banks of holding bonds on their books. The effect has been to reduce their role as “market makers” – increasing trading risks and of panic price reactions during times of stress. “Banks’ trading desks historically had an important role as warehouses and providers of liquidity in the credit markets. While still relevant this has certainly been impacted by the tougher regulatory environment.” says Mr Pascoe. Mr Tuffey from Credit Suisse says: “The move towards capital markets in Europe has been slower partly due to uncertainty over regulation but also [because of] the huge players out there defending parochialism. German and French banks, for example, have historically lent to local corporates at generous rates.” Meanwhile, many smaller European companies remain wary of the extra transparency required under today’s more stringent rules. “It will be some time before midsized European companies overcome their disquiet about the regular reporting required by capital markets,” says Paul Watters, corporate credit strategist at Standard & Poor’s. “If you have a relationship with a bank, the detailed information that you provide remains private.” Data on corporate bond issuance show a move this year towards companies funding themselves more in debt markets and relying less on bank loans. European corporates borrowed $377bn worth of debt from the capital market in the first half of 2013, the biggest ever and more than twice that in the first half of 2006, according to Dealogic. At the same time the volume of loans from syndicates of banks has fallen sharply. The figures are volatile and not yet convincing evidence of a long-term shift. In recent weeks, global bond markets have hit a bout of turbulence, triggered by Ben Bernanke, the US Federal Reserve chairman, signalling a possible slowdown in US quantitative easing. QE was instrumental in driving demand for corporate debt as part of a global “hunt for yield”. Since Mr Bernanke’s May speech, prices have fallen, yields risen – and issuance dried up.

But bond markets have always had bouts of good times and bad times for companies to issue debt. “A little bit of stability and they will be piling back into the market,” Mr Whitman predicts. . . . Encouraging the shift will be low interest rates and increased concerns about the stability of banks – which have encouraged companies to pay much more attention to their funding requirements – and it could quickly become firmly established if European economies saw stirrings of a revival in growth. “Companies have battened down the hatches and cut back on discretionary spending. We have not yet got to the point where there is material demand for new debt funding to support growth,” argues Mr Watters. “Our gut feeling is that it is a bit like pushing a snowball down a hill. It starts slowly but picks up speed over time.” S&P argues that in coming years Europe could even have the opposite problem to a lack of demand – and there could be insufficient investor capacity in European bond markets to meet companies’ funding requirements, forcing them to tap dollar markets – just as Autostrade did in 1963. “The pressure valve in Europe has always been the liquidity available in the US dollar market,” says Mr Watters. With government finances under severe pressure and banks continuing to struggle, European policy makers want to promote alternative forms of finance. The European Commission has launched initiatives to encourage capital market development, and Andrew Haldane, the Bank of England official responsible for financial stability, warned in parliamentary evidence last month that Europe had “too much of a banking monoculture and that is not good for financial sector resilience”. “The US and Europe are on the same path towards greater and deeper capital markets but Europe just started later and is further behind,” says Monica Klingberg Insoll, a senior director at Fitch Ratings. “The market only started in 1999.” Paving the possible way ahead has been the rapid development of corporate bond markets in the world’s emerging economies. During the past quarter, emerging-market companies obtained three times as much funding from the bond markets as from bank syndicates, the biggest gap in at least a decade – even though the same regulatory pressures affecting European banks have hit emerging-market banks. “The trend of emerging-market corporates borrowing increasingly from the bond markets over their relationship banks has picked up noticeably in 2012, particularly in Asia,” says Shamaila Khan, portfolio manager at AllianceBernstein. “It is not just external debt that is growing, though. Local bond markets are getting bigger as well.” In spite of their rapid growth, however, emerging economies’ bond issuance volumes remain small compared with Europe’s. Autostrade’s managers see potential for further expansion. “We’re still on the same page as 50 years ago,” says Mr Castellucci. Using bonds, not bank loans, the group is keen to maintain its edge in motorway construction – although not all of its projects have the same cachet as the Autostrada del Sole. Mr Castellucci boasts: “We did the first privately financed toll road in the UK – the M6 around Birmingham.” Additional reporting by Rachel Sanderson http://www.ft.com/intl/cms/s/0/f3019d6e-df31-11e2-881f- 00144feab7de.html#axzz2XmvKNIl0

Economía Adiós a los convenios sin fin Los nuevos límites en la negociación colectiva dejan en un limbo legal a dos millones de trabajadores Carmen Sánchez-Silva Madrid 30 JUN 2013 - 00:41 CET21

Trabajadores de Roca reunidos en asamblea. / Uly Martín Una bomba de relojería por San Fermín. Así se titulaba el artículo que Samuel Bentolila y Marcel Jansen, de Fedea, la fundación de estudios económicos próxima al Banco de España, publicaban en abril para denunciar que apenas faltaban tres meses para que venciese la vigencia sine dieque regía para los convenios colectivos hasta la reforma laboral del Gobierno y apenas sí se había percibido algún movimiento entre empresarios y sindicatos. Aunque el fin de la denominada ultraactividad pudiese dejar a millones de trabajadores sin un marco de protección laboral el próximo 8 de julio por falta de negociación. Un hecho histórico. Al expirar el convenio, las relaciones laborales tendrían que estar sujetas a otro acuerdo de rango superior si lo hubiere (convenio sectorial, provincial...), y si no, al Estatuto de los Trabajadores, que solo fija las garantías laborales mínimas; una situación que los empresarios podrían aprovechar para recortar derechos de los trabajadores (salario, jornadas, clasificaciones profesionales, permisos, traslados…), dado el poder que les ha concedido la reforma laboral. Desde entonces, explica Marcel Jansen, el escenario ha cambiado tras el acuerdo firmado por los agentes sociales el pasado 23 de mayo para prorrogar la vigencia de los convenios. De hecho, según explica Ramón Górriz, secretario confederal de acción sindical de CC OO, si en abril empresarios y sindicatos cifraron en al menos 1.682 los convenios colectivos denunciados que perderían su validez el 8 de julio y en 3,5 millones de trabajadores los afectados; poco más de un mes después del acuerdo marco respaldado por CEOE, Cepyme, CC OO y UGT, y con la adhesión al mismo de

Cataluña, Madrid, Valencia, Canarias y algunas federaciones de Castilla y León, se han desbloqueado unos 269 convenios colectivos que regulan las condiciones laborales de 1,6 millones de trabajadores. Es decir, la desprotección actualmente recae sobre 1,9 millones de trabajadores, indica Górriz, al tiempo que señala que se está negociando la solución para la mitad de ellos. La patronal está usando el 8 de julio para presionar en las negociaciones “El Gobierno ha tratado de minimizar el problema, olvidando que afecta a millones de trabajadores”, denuncia Jansen, a quien le parece un reflejo más de la improvisación con que se está llevando a cabo la política de recortes. En su opinión, en los próximos días vamos a ver una avalancha de acuerdos entre los agentes sociales para posponer la caída automática de los convenios y evitar así el vacío legal a que se verían sometidos los trabajadores sin convenios de mayor rango a los que dirigirse para dirimir sus contenciosos con la empresa, que se escudará en el Estatuto de los Trabajadores. El investigador de Fedea considera que los derechos y obligaciones de las empresas y los trabajadores afectados por la expiración de un convenio no están claros, y sería conveniente clarificarlos lo antes posible. Hay dos doctrinas jurídicas sobre lo que puede pasar a partir del próximo 8 de julio: que las condiciones laborales de los casi dos millones de trabajadores cuyos convenios decaen se rijan por el Estatuto de los Trabajadores, lo que abre la puerta a que sufran importantes recortes, incluso hasta el nivel del salario mínimo interprofesional. O, por el contrario, y como sucede en buena parte de los países europeos donde el acuerdo colectivo no tiene fuerza de ley como en España, los convenios deberían entenderse como contratos colectivos, y al decaer sus condiciones bajarían a los contratos individuales de los trabajadores. Por tanto, cualquier ajuste salarial para los empleados en ese momento debería contar con su consentimiento. Al revés de lo que ocurrirá con las nuevas contrataciones, a las que solo se les aplicarán los mínimos del Estatuto de los Trabajadores, explica Jansen. A quién afecta La caducidad de la extensión automática de los convenios afecta a los trabajadores protegidos por convenios colectivos denunciados por la empresa o los representantes de los trabajadores en el momento de la entrada en vigor de la ley del 6 de julio de 2012 que desarrolla la reforma laboral del Gobierno. Se les daba un plazo de un año para que negociasen los acuerdos vencidos, plazo que concluye el próximo 7 de julio y que pone fin a la histórica prolongación sine die de los convenios. Los agentes sociales mantienen, a falta de buenas estadísticas oficiales (que también critica Fedea), que el pasado mes de mayo, cuando firmaron el acuerdo para prorrogar las negociaciones de los convenios y evitar su decaimiento, cifraron en 3,5 millones de trabajadores los que estaban afectados por la norma. Tras poco más de un mes de reuniones aceleradas, hoy, los trabajadores que pueden quedarse sin convenio en julio se han reducido a 1,9 millones. Una cantidad que se prevé siga bajando las próximas semanas. Eso sí, la limitación de la vigencia del marco regulador de las condiciones laborales implica un cambio en la negociación colectiva que afecta a todos los trabajadores. La mayoría de las fuentes consultadas opinan que será esta última la tendencia que se siga una vez que los acuerdos colectivos hayan expirado: que los trabajadores estén protegidos por sus contratos y mantengan sus condiciones laborales. “Resulta lógico considerar que unos derechos que vienen siendo disfrutados por los trabajadores de forma estable y prolongada han pasado a incorporarse a su acervo individual”, sostiene

José Manuel Díaz-Arias, responsable de Datadiar. Aunque “nadie sabe lo que va a pasar dentro de una semana. Implica un cambio radical en las relaciones laborales”, asegura Laura Pérez Ortiz, profesora de Estructura Económica de la Universidad Autónoma de Madrid, más optimista, como el resto de expertos, tras el acuerdo de los agentes sociales para prorrogar los convenios y que no decaigan. Sin embargo, para Toni Ferrer, secretario de acción sindical de UGT, el avance de las negociaciones para proteger los convenios de su extinción es todavía insuficiente. “Hablamos de casi dos millones de trabajadores, muchos del sector público”, afirma, “y de sectores que se han instalado en el decaimiento. Está ocurriendo en el País Vasco, donde hemos convocado una huelga el día 4 para desbloquear las negociaciones; en Cantabria, con el convenio de transportes, o en comunidades como Andalucía, Cataluña, Madrid y el País Vasco, que tienen entre 200.000 y 400.000 trabajadores cada una afectados por el inminente vencimiento de los convenios”. Ferrer asegura que UGT va a desplegar todo tipo de acciones en defensa de la negociación colectiva para ver si la CEOE reflexiona y se aviene a negociar. “Los empresarios están utilizando la ultraactividad como herramienta de presión en la negociación colectiva. Planteando un intercambio de paz social por facilidades para la empresa, principalmente contención salarial y flexibilidad interna”, sostiene Ramón Cuellas, director de recursos humanos de Logista, consciente, como el resto de los expertos consultados, de las advertencias lanzadas por muchos empresarios a los trabajadores sobre la posibilidad de aplicar el Estatuto de los Trabajadores en sus relaciones laborales si la negociación del convenio no llega a buen puerto. “Pleitearemos si quieren que decaigan los convenios, que es a lo que está jugando una parte de la patronal”, anuncia Rita Moreno, de la secretaría confederal de Acción Sindical de CC OO. CEOE y Cepyme han rechazado participar en este reportaje, pero no sin facilitar sus consignas teóricas sobre el fin de la ultraactividad (12 líneas en las que recomienda a sus asociados intensificar las negociaciones para cerrarlas en plazo, estimular la mediación y el arbitraje ante el estancamiento de la negociación, y de la posibilidad de preservar la vigencia de los acuerdos o de las partes de ellos que estimen oportunas). Se espera una avalancha de acuerdos antes y después de la fecha fatídica Porque bien es cierto que la espada de Damocles que pesa sobre los convenios denunciados ha servido de acicate para que sindicatos y empresarios aceleren algunas negociaciones y desbloqueen otras que se prolongaban durante años. Así lo confirma Martín Borrego, director general del Servicio Interconfederal de Mediación y Arbitraje (SIMA), donde la actividad se ha incrementado más del 118% este año debido a la reforma laboral, y donde en estos meses se está trabajando en 15 expedientes de ultraactividad, de los cuales en 6 se ha llegado a un acuerdo (afecta a 286.000 trabajadores), en 6 no ha habido acuerdo, y el resto está en tramitación. “Es un porcentaje de acuerdo del 40%, mucho más alto que el del resto de los ámbitos en que trabajamos”, mantiene Borrego. Pero también es cierto que la prórroga que se han dado los agentes sociales ha servido más para postergar seis meses o un año los efectos de la expiración de los convenios que para sentarse a negociar los nuevos, tal y como confirman los sindicatos, cuyo poder de negociación ha quedado al pie de los caballos tras la reforma laboral. Está claro que alargar el tiempo es una salida, pero no la solución, señala Laura Pérez Ortiz. “El empresario, que tiene toda la fuerza tras la reforma laboral, no está interesado en negociar nuevos convenios mientras no mejore la situación económica, a no ser que 14 consiga importantes recortes con ellos. Aunque tampoco está interesado en quedarse sin un marco laboral que le dé certidumbre en un entorno de tanta incertidumbre como el actual”, agrega Pérez Ortiz. “Más importante que ampliar el periodo de vigencia de los convenios sería establecer en ellos un mecanismo de solución de conflictos como la mediación y el arbitraje”, apunta Rita Moreno. “La reforma laboral ha propiciado una importante devaluación salarial, el incremento del paro y el debilitamiento de la negociación colectiva”, reprocha Ramón Górriz. “Hemos pasado de 10 millones de trabajadores cubiertos por la negociación colectiva a solo siete millones en 2012 y 1,7 millones en los primeros meses del año”, denuncia, al tiempo que se queja de los empresarios que han firmado convenios colectivos y dos días después se han descolgado de ellos gracias a la norma del Gobierno. La negociación colectiva pierde fuerza por la reforma laboral Hasta mayo de este año se han registrado 547 convenios colectivos nuevos o renovados para dar cobertura a 1,7 millones de trabajadores, frente a los 1.021 de 2012 para 2,7 millones de empleados. Durante el año pasado se registraron 3.200 convenios para siete millones de empleados. La mayoría de los acuerdos nuevos son de empresa (como alienta la reforma laboral), aunque afectan a menos trabajadores que los de ámbito superior. Su crecimiento desde el pasado año es del 73%, en tanto que los convenios sectoriales, que dan cobertura a un número mucho mayor de empleados, bajan un 65%. Mientras la negociación colectiva pierde fuerza, la inaplicación de convenios prevista por la reforma laboral no deja de aumentar. Entre enero y mayo de este año se han acumulado 1.165, que afectan a casi 81.000 empleados (en torno al 80% de las empresas que han establecido una inaplicación son pymes de menos de 50 trabajadores). Un crecimiento exponencial, teniendo en cuenta que en los únicos tres meses comparables con el año pasado se registraban, de media, una treintena de inaplicaciones, que hoy suman más de 250. Esta medida, que sobre todo está sirviendo para reducir los salarios de los trabajadores, además de otras muchas condiciones laborales, la puede poner en marcha el empresario sin necesidad de negociación, por lo que no necesita el decaimiento de los convenios colectivos para eliminar o recortar derechos. Se firman menos convenios, pero se multiplican los descuelgues “Las empresas están apretando mucho en costes y condiciones laborales. Aquí llegan compañías con unas pérdidas tremendas, muchas al borde del cierre, abocadas a extinguir empleos o a bajar los sueldos un 30% para continuar en activo”, señala Martín Borrego. En su opinión, la reforma laboral ha cambiado los ritmos de la negociación colectiva, acortándolos, y ha dado primacía al convenio de empresa y a los empresarios en la negociación, al contrario de lo que ocurría hasta 2012. Aunque la amenaza del 8 de julio ya no pesa tanto como antes. Los agentes sociales pueden seguir negociando los convenios nuevos pasada esa fecha. De hecho, los expertos anuncian una avalancha de reuniones en la semana que queda para el fatídico día y a partir de entonces. Y si no llegan a un acuerdo tras el nuevo plazo, las partes deberán someterse a un proceso de mediación o arbitraje. “Habrá muchas más mediaciones una vez entrado el mes de julio”, prevé David Díaz, socio de Baker & McKenzie. Y también más recursos ante los tribunales. http://economia.elpais.com/economia/2013/06/28/actualidad/1372438230_601189.html

Economía ANÁLISIS Covenios colectivos con paracaídas El fin de la vigencia del acuerdo supone el paso de su fuerza vinculante a los contratos individuales Jesús Lahera Forteza Madrid 30 JUN 2013 - 00:48 CET2 Antes de la reforma laboral de 2012, los convenios colectivos viajaban en confortables aviones que aterrizaban suavemente tras el fin de su vigencia porque su contenido era prorrogado de manera indefinida hasta nuevo convenio. Tras la reforma, que limita a un año esta prórroga, el viaje tiene perturbaciones y el aterrizaje es más complicado, lo que obliga a los convenios colectivos a estar provistos de paracaídas. El nuevo artículo 86.3 del Estatuto de los Trabajadores (ET), activo a partir del 8 de julio, establece que si no existe acuerdo tras un año de negociaciones, el convenio pierde su vigencia y se aplica el de ámbito superior o, en su defecto, las normas laborales. Este plazo de un año es una medida positiva porque dinamiza las negociaciones, evita la petrificación de las condiciones acordadas, obliga a una adaptación laboral a la realidad y fomenta una mayor centralización de la negociación colectiva. En contrapartida, esta solución ofrece claramente mayor poder a la parte empresarial y necesita, por ello, técnicas que disminuyan sus riesgos, ante la hipótesis de vacíos convencionales de regulación y una desorbitada devaluación salarial. Necesita, en fin, buenos paracaídas que compensen las ventajas competitivas de este nuevo modo de negociar sin red con los riesgos que origina. En este sentido, hay que destacar que la propia caída del convenio colectivo tras un año sin acuerdo es jurídicamente disponible por las partes negociadoras, que pueden articular salidas distintas. Tanto en el propio convenio como a lo largo de las negociaciones, la parte sindical y empresarial pueden acordar prórrogas generales o por materias hasta alcanzar un acuerdo, estando por ello vigentes las cláusulas convencionales anteriores a la reforma en esta dirección. También los negociadores pueden utilizar la mediación o el arbitraje voluntario en caso de desacuerdo, total o en la materia controvertida, siendo posible combinar acuerdos parciales con un laudo arbitral pactado. Así lo indica, además, el reciente acuerdo de las organizaciones sindicales y empresariales más representativas, que recomienda usar estos medios extrajudiciales en caso de bloqueo y subraya el papel esencial de la autonomía de las partes en este proceso transformador. Todos estos paracaídas pueden conllevar numerosos convenios renovados y acuerdos, tanto de contenidos puntuales como de suaves finalizaciones de unidades convencionales desfasadas e ineficientes. Hay mecanismos de seguridad para evitar la devaluación salarial a los trabajadores ¿Y qué ocurre si estas vías no dan resultado y originan un vacío laboral, que podría conllevar descensos descontrolados de salarios en los trabajadores afectados y cierto caos en la organización del trabajo? Se abriría entonces el último paracaídas: la contractualización de las condiciones convencionales susceptibles de ser individualizadas, incluyendo los salarios, sin que sea, creo, imprescindible un acto expreso de voluntad empresarial. A diferencia de una tradición jurídica normativista, el convenio puede ser configurado como un contrato colectivo interiorizado en cada

16 contrato individual de su ámbito. Desde esta perspectiva, común en el ámbito europeo, los contratos colectivos automáticamente se incorporan con fuerza vinculante a los contratos de cada trabajador en su ámbito, sin ser normas externas ni ajenas. La pérdida de vigencia del convenio colectivo no conlleva entonces su inevitable desaparición, sino tan solo la eliminación de la fuerza vinculante, quedando contractualizado su contenido en una dimensión individual. En este nuevo escenario, los trabajadores contratados bajo el convenio caído mantendrían, así, los salarios y las condiciones laborales en sus contratos de trabajo, siendo de aplicación el convenio superior, en su caso, solo a las nuevas incorporaciones. Todo ello sin perjuicio de firmar un posterior contrato colectivo, que puede cambiar estas condiciones, porque la caída tampoco descarta la continuidad de las negociaciones entre la parte sindical y empresarial. Este último paracaídas de seguridad evita el daño de una desorbitada devaluación salarial en los trabajadores afectados y logra equilibrios entre partes que han firmado un contrato de trabajo. Pero en lo que resulta esencial, apunta, con nuevas reglas, a la transformación de fondo del sistema español de negociación colectiva, que de ser siempre considerado el ejercicio de un rígido poder normativo externo pasa a ser el desarrollo de una dinámica autonomía contractual propia de una sociedad madura. Un nuevo viaje que, con todas las cautelas y con estos paracaídas abiertos, puede convertir la crisis y el cambio en una gran oportunidad para nuestro sistema de relaciones laborales con nuevos modos de negociar. Jesús Lahera Forteza es profesor titular de Derecho del Trabajo de la Universidad Complutense. http://economia.elpais.com/economia/2013/06/28/actualidad/1372418888_186112.html

Economía OPINIÓN La inflación aún es el menor de los males Los riesgos políticos, económicos y sociales de que persista el bajo crecimiento son más altos que el aumento de los precios Kenneth Rogoff 30 JUN 2013 - 00:45 CET14

Luis Tinoco Los principales bancos centrales del mundo siguen expresando su preocupación por las repercusiones inflacionarias que puede generar su lucha contra la recesión. Es un error. Comparado con los riesgos políticos, sociales y económicos que conlleva la persistencia del lento crecimiento económico tras una crisis financiera de las que ocurren solo una vez cada cien años, un arranque sostenido de inflación moderada no es algo por lo que preocuparse. Por el contrario, en la mayor parte del mundo, debiera ser bienvenido. Tal vez los argumentos en favor de la inflación moderada (digamos, entre el 4% y el 6% anual) no sean tan convincentes como al principio de la crisis, cuando planteé el tema por primera vez. Por aquel entonces, con el telón de fondo de la reticencia gubernamental a forzar quitas a la deuda, junto con unos precios de la vivienda extremadamente sobrevaluados y salarios reales excesivos en algunos sectores, la inflación moderada hubiese sido extremadamente útil. El consenso en ese momento, por supuesto, era que una robusta recuperación con forma de Vestaba a la vuelta de la esquina y que era insensato abrazar la heterodoxia inflacionista. Vi las cosas de otro modo, basándome en las investigaciones para el libro que escribí con Carmen M. Reinhart en 2009, Esta vez es distinto (Fondo de Cultura Económica). Después de examinar varias crisis financieras profundas del pasado, teníamos todos los motivos para temer una catastrófica caída del empleo y una recuperación extraordinariamente lenta. Una evaluación adecuada de los riesgos de medio plazo hubiera ayudado a justificar mi conclusión en diciembre de 2008: “Serán necesarias todas las herramientas disponibles para corregir esta crisis financiera, de una magnitud tal que solo ocurre una vez cada cien años”. Cinco años más tarde, las deudas pública, privada y externa han alcanzado niveles récord en muchos países. Todavía son necesarios enormes ajustes salariales relativos entre la periferia y el centro de Europa. Pero los bancos centrales más importantes del mundo no parecen haberlo notado. Sería una catástrofe si la recuperación descarrilara por una excesiva devoción a los dogmas antiinflacionarios

En Estados Unidos, la Reserva Federal ha puesto nerviosos a los mercados de bonos al indicar que la relajación cuantitativa ha llegado a su fin. La salida propuesta parece reflejar una tregua entre los halcones y las palomas de la Fed. Las palomas obtuvieron liquidez masiva, pero, ahora que la economía está fortaleciéndose, los halcones insisten en abandonar los estímulos. Esta es una variante moderna de la receta clásica que consiste en comenzar a ajustar antes de que la inflación cale profundamente, aun cuando el empleo no se haya recuperado por completo. Como bromeó William McChesney Martin, presidente de la Fed en las décadas de 1950 y 1960, el trabajo del Banco Central es “llevarse la ponchera justo en el momento en que la fiesta empieza a ponerse interesante”. El problema es que esta no es una recesión ordinaria, y mucha gente todavía no ha probado el ponche (y ni hablar de que alguien haya bebido con exceso). Sí, hay preocupaciones técnicas legítimas relacionadas con las distorsiones en los precios de los activos que genera la relajación cuantitativa, pero las explosiones de burbujas sencillamente no son en este momento el mayor de los riesgos. Estados Unidos tiene ahora su mejor oportunidad hasta el momento para lograr una recuperación real y sostenida de la crisis financiera. Y sería una catástrofe si la recuperación descarrilara por una excesiva devoción a los dogmas antiinflacionarios, igual que cuando algunos bancos centrales eran excesivamente devotos del patrón oro durante las décadas de 1920 y 1930. Japón afronta un acertijo diferente. Haruhiko Kuroda, el nuevo gobernador del Banco de Japón, ha enviado una clara señal a los mercados para indicar que busca una inflación anual del 2%, después de años de un crecimiento de los precios cercano a cero. Sin embargo, ahora que los tipos de interés a más largo plazo comienzan a avanzar ligeramente, el Banco de Japón parece estar haciendo una pausa. ¿Qué esperaban Kuroda y sus colegas? Si el Banco de Japón tuviese éxito al aumentar las expectativas inflacionarias, los tipos de interés a largo plazo necesariamente tendrían que reflejar una prima inflacionaria proporcionalmente mayor. Mientras las tasas de interés nominales aumenten debido a las expectativas inflacionarias, el aumento es parte de la solución, no del problema. El Banco de Japón estaría en lo correcto al preocuparse, por supuesto, de si los tipos de interés aumentaran debido a una mayor prima de riesgo y no por expectativas de mayor inflación. La prima de riesgo podría aumentar, por ejemplo, si los inversores dudaran de si Kuroda cumplirá su compromiso. La solución, como siempre en el caso de la política monetaria, es una estrategia de comunicación clara, coherente y sin ambigüedades. El Banco Central Europeo está en una situación completamente distinta. Como ya ha estado usando su balance para ayudar a reducir los costes de endeudamiento en la periferia de la zona euro, se ha mostrado cauto en su enfoque de la relajación monetaria. Pero la mayor inflación ayudaría a acelerar los ajustes tremendamente necesarios en los bancos comerciales europeos, donde muchos créditos continúan en los libros a valores muy por encima de los de mercado. También proporcionaría un telón de fondo contra el cual los salarios en Alemania podrían aumentar sin tener que disminuir necesariamente en la periferia. Cada uno de los principales bancos centrales del mundo puede presentar argumentos convincentes en favor de la cautela. Y los funcionarios de los bancos centrales están en lo cierto al insistir en reformas estructurales y planes creíbles para equilibrar los presupuestos en el largo plazo. Pero, desafortunadamente, estamos muy lejos del punto

19 en el cual los responsables de las políticas deban temer por los riesgos inflacionarios y considerar un cambio de estrategia. Debieran estar agregando bebida a la ponchera, no llevándosela. Kenneth Rogoff, execonomista jefe del FMI, es profesor de Economía y Política Pública en la Universidad de Harvard. (c) Project Syndicate, 2013. Traducción de Leopoldo Gurman. http://economia.elpais.com/economia/2013/06/28/actualidad/1372415915_325793.html

Economía El dinero cobrado por las ‘cláusulas suelo’ abre otro frente judicial Varias sentencias se apoyan en el reciente fallo del Supremo para declarar nulas las condiciones La mayoría de los jueces se decanta, contra el criterio del Tribunal, por compensar a los clientes GRÁFICO Las cláusulas de las hipotecas españolas Alejandro Bolaños Madrid 30 JUN 2013 - 00:16 CET31 Un golpe millonario a las tres entidades juzgadas, un alivio para los consumidores afectados. A bote pronto, esa fue la consecuencia de la sentencia del Tribunal Supremo que declaró nulas las cláusulas suelo incorporadas sin la suficiente información para que los clientes evaluaran su impacto. Pero la cosa no ha quedado ahí. Esta semana, el Banco de España ha pedido al resto del sector que justifique si sus cláusulas suelo se ajustan a los exigentes requisitos del Supremo. En caso contrario, deben eliminarlas. Y otras decisiones judiciales dan una nueva dimensión al caso: las que, además de anular las cláusulas, condenan a las entidades a devolver el dinero cobrado de forma indebida.

Al mismo tiempo que declaraba nulas las cláusulas suelo que BBVA, NCG Banco y Cajamar incorporaron sin la suficiente transparencia, el Supremo —a instancias de la fiscalía— procedió a “declarar la irretroactividad” de su sentencia. La banca lo interpretó como el punto final al debate sobre si tendrían que devolver dinero a clientes 20 que no pudieron beneficiarse en sus cuotas hipotecarias de la bajada del euríbor por la existencia de esas cláusulas. Bastaron unas semanas para comprobar que en los juzgados mercantiles el debate sigue abierto. Desde la sentencia del Supremo, el 9 de mayo, se han divulgado varios fallos que ignoran la conclusión del Alto Tribunal sobre la irretroactividad de la anulación de las cláusulas suelo. Este periódico ha localizado 13 resoluciones sobre el asunto. En todas, se siguen las nuevas directrices del Supremo para anular las cláusulas, pero solo dos (el Juzgado número 2 de Madrid y la Audiencia Provincial de Cádiz) se ajustan a ese guión para denegar la devolución del dinero. En las otras 11, se condena a las entidades a restituir las cantidades que los clientes demandantes pagaron de más en los últimos años. El Alto Tribunal negó en su sentencia de mayo el efecto retroactivo sobre lo pagado de más Abrió fuego la magistrada de un juzgado de Ourense, cuatro días después de la sentencia del Supremo, en la que se apoyó para anular una cláusula suelo aplicada por NCG Banco. Pero desoyó al Alto Tribunal para condenar a la entidad a devolver los 7.987 euros que cobró de más a sus dos clientas desde 2004. El resto de sentencias son de juzgados de Almería, Cáceres, Bilbao (2), Málaga (2), y Barcelona (4). Incluyen tanto a las tres entidades afectadas directamente por el fallo del Supremo (BBVA, NCG y Cajamar) como a otras (Sabadell, Popular, Unnim, Liberbank o Ipar Kutxa). Y las cantidades devueltas oscilan entre los 2.000 y los 12.000 euros. José María Fernández Seijo, titular del Juzgado número 3 de lo Mercantil de Barcelona, destaca que, desde marzo, ante la proximidad del fallo del Supremo, el goteo de demandas no cesa, “hasta 200 reclamaciones a la semana” en los juzgados barceloneses. Impacto multimillonario “La sentencia del Supremo establece que no hay retroactividad, otros han estimado otra cosa, pero en líneas generales el criterio está claro”, sostuvo el jueves Pedro Pablo Villasante, secretario general de la Asociación Española de Banca. Villasante no solo se aferró al Alto Tribunal para despejar la mayor amenaza para el sector, sino que insistió en que “hay que evitar que se extienda la duda”. “El Supremo solo ha anulado las cláusulas suelo que no se comercializaron debidamente en tres entidades”, insistió. BBVA, NCG Banco y Cajamar entendieron que la sentencia del Supremo abocaba a la anulación de sus cláusulas suelo, una decisión que, según fuentes bancarias, ha causado resquemor en otras entidades. BBVA encabezó este movimiento al anunciar que suprimía la cláusula suelo de 425.000 contratos hipotecarios. Y anticipó una caída de ingresos cercana a los 420 millones de euros anuales por la eliminación de esa condición. En el caso de NCG (90.000 clientes) y Cajamar (100.000), el impacto anual ronda los 100 millones. El Santander no comercializa cláusulas de este tipo, lo que deja a BBVA como la entidad más afectada, con casi un 25% de las hipotecas con estas condiciones (en 2010 había 1,7 millones de contratos con cláusulas suelo). Según varias consultoras, Popular y Sabadell también tendrían un impacto significativo en sus cuentas si anulan (o les fuerzan a anular) las cláusulas suelo; la incidencia sería menor en Caixabank y Bankia. En total, la supresión de la cláusula suelo reduciría los ingresos anuales del sector en unos 1.000 millones, una factura que engordaría si los fallos que condenan a la devolución de las cantidades cobradas de forma indebida acaban siendo firmes. Otra

21 forma de verlo es que ese es el dinero que recuperan los clientes, aunque las entidades avisan: encarecerán el crédito. “Esto no ha hecho más que empezar”, afirma Jesús Garriga, delegado en Galicia de Ausbanc —la asociación cuyo recurso motivó la sentencia del Supremo—, y abogado de las clientas que ganaron el juicio de Orense. Garriga sostiene que los juzgados mercantiles se despegan del Supremo en este punto, “porque solo están vinculados por la ley, y lo que dice el Código Civil es que si una cláusula se declara nula, debe considerarse como no puesta”. “Es razonable que, en casos concretos, haya dudas sobre los efectos de la sentencia del Supremo”, concede el juez Fernández Seijo. Para limitar la retroactividad a la que aboca el Código Civil, el Supremo argumentó que los bancos no habían actuado de mala fe, que siguieron las normas. Y que la restitución generalizada del dinero cobrado de más por la banca “generaría el riesgo de trastornos graves con trascendencia al orden público económico”. Francisco Pertíñez, profesor de Derecho Civil en Granada, sintetiza argumentos de las sentencias “disidentes”: “La ley está por encima de la jurisprudencia, aquí no hay ninguna laguna legal, el Supremo puede interpretar la norma, no tergiversarla”. Pertíñez añade que “el Supremo se pronunció sobre una acción colectiva de cesación”, que pedía que condenara a las entidades a dejar de aplicar la cláusula suelo. “No tenía porqué decir nada sobre la devolución de dinero”. El profesor de la Universidad de Granada, que ha hecho un informe para Unive — despacho de abogados que representa a clientes en la demanda colectiva de Adicae contra un centenar de entidades—, cree que “tanto la falta de la transparencia, como la retroactividad deben verse caso a caso”. Es el criterio que acaba de utilizar un juez de Bilbao: “En el presente caso, que es lo único que debe resolver este juzgador, no puede decirse que devolver al demandante el importe reclamado, 11.973 euros, pueda tener ningún riesgo de trastorno grave con trascendencia al orden público económico”. “Lo que no se puede es aplicar la ley del embudo. Aplicar la sentencia del Supremo para declarar que una cláusula es nula, y no aplicarla cuando lo que se decide es si hay que restituir el dinero”, discrepa Jesús Alfaro, catedrático de Derecho Mercantil de la Autónoma de Madrid. Alfaro es crítico con los argumentos dados por el Supremo para decantarse por la irretroactividad, pero también con que entrara a juzgar de forma colectiva la transparencia en miles de contratos. “Las cláusulas suelo de BBVA y de NCG Banco no tienen nada que ver”, añade Se ha condenado a entidades a restituir cobros indebidos en, al menos, 11 casos Fuentes jurídicas del sector financiero defienden que la sentencia del Supremo debe aplicarse en su integridad. Y recalcan que el fallo se tomó en Pleno, con el voto a favor de los 13 magistrados. Destacan además que el primer pronunciamiento de una audiencia provincial, la de Cádiz, es contrario a devolver el dinero. Es en esa segunda instancia, tras los recursos, donde se ventilará el caso. Y también ha habido otras audiencias provinciales, como la de Cáceres, que han atendido las demandas de devolución de dinero antes incluso del fallo del Supremo. Si la discrepancia se mantiene, el caso volverá a colocarse a tiro de piedra del Supremo. Hasta entonces —y la primera sentencia del Alto Tribunal llegó tres años después de la demanda inicial—, persistirá la incertidumbre sobre el presente y el pasado de las cláusulas suelo. http://economia.elpais.com/economia/2013/06/30/actualidad/1372544175_167709.html

Opinión TRIBUNA Una pena demasiado insoportable Los jovenes sin trabajo y sin pareja son la metáfora más triste de la crisis J. Ernesto Ayala-Dip 30 JUN 2013 - 00:00 CET Archivado en: El diagnóstico macroeconómico sobre el paro juvenil da suficiente información como para hacernos una idea cabal de cómo está la situación económica en España. (De la misma manera que unas cifras de un país mucho más rico que el nuestro, Austria, podrían hacernos pensar bastante en el alcance de la crisis económica, y moral, en el continente europeo: según un informe del Banco Central alemán, el 5% de la población acumula el 50% de la riqueza nacional y el 50% de esa misma población solo posee un 4% de esa riqueza. Carlos Elordi, 2013). El paro juvenil no es más que el capítulo más devastador del paro en general. Expertos en la materia han apuntado tres causas del paro, causas de política económica, por tanto, causas políticas: bajo nivel de impuestos, desigual distribución de los mismos y una inexplicable tolerancia con la evasión fiscal (Albert Recio, 2012). Dicho diagnóstico, y perdonen el largo paréntesis, asusta, inquieta, puede incluso invitar a las predicciones más apocalípticas y a una radical desesperanza. Pero por sobre todas las reacciones psicológicas posibles (todas justificadas) y las matizaciones que se puedan hacer (y que deben hacerse), hay otra constatación tan o más cruda que las citadas, aunque menos cuantificable: la inmensa sensación de pena e impotencia que da ver a tantos chicos y chicas menores de 25 años (seis de cada 10) desocupados en nuestro país. El paro juvenil no es más que el capítulo más devastador del paro en general Esto en un contexto de índice de desempleo general que roza el 27% y que la OCDE sitúa en el 28% para el próximo año. Otro dato igualmente lacerante: al borde de los 3 millones llegan los jóvenes (varones y mujeres) españoles en el triste capítulo de los que abandonan la búsqueda de empleo por no ver ningún horizonte que corrija su lamentable situación. Entre estos, se registran jóvenes menores de 24 años que estudian y han desistido de buscar faena. Y hay que sumar el universo de los que tienen entre 25 y 29 años, es decir un 36% que también cree que esto no hay nadie ni nada que lo vaya a remediar. Estos son algunos de los datos terribles que asuelan a nuestra juventud. Y no solo a ellos: por si no fuera poco, también a sus padres, amigos y, se me apuran, incluso a sus vecinos. ¿Quién no muestra su solidaridad con el chico que ha visto en su escalera crecer, estudiar (y en infinidad de ocasiones, abandonar los estudios para ganar un dinero más rápido sin sospechar las consecuencias nocivas de semejante decisión)? ¿O quién no siente que le puede pasar a su propio hijo, en el supuesto de que esté empleado? Desglosadas aquellas referencias, a mí me llama especialmente la atención una que afecta a un grupo concreto de jóvenes parados comprendidos entre 25 y 29 años. Los que Luis Garrido, catedrático de Sociología de la UNED, encuadra dentro del grupo de varones sin pareja. Ellos también han disminuido, como también lo han hecho los comprendidos entre los 30 y 34 años.

Claro que también se podría incluir en este desastre nacional a los titulados que no hacen la faena para la que se han sobrepreparado (esa generación a la que se ha engañado irresponsablemente con la narrativa de la preparación y el premio al esfuerzo), a los que se tienen que marchar al extranjero para encontrar puestos cualificados, incluso no tan cualificados. Pero a mí ahora me interesan exactamente esos varones de entre 25 y 34 años que no pueden independizarse (porque las chicas de la misma franja de edad sí lo han hecho, pasando del 23% al 29%) y no tienen pareja (las chicas con pareja han subido del 21% al 23%), y probablemente ni ánimo para tenerla. Es decir, contemplando las tasas de emancipación de los jóvenes españoles, me demoro donde la pena se ensancha, donde el factor emocional aprieta más: muchachos sin trabajo y sin pareja: una herida que no sabemos cuándo se cerrará y que cuando lo haga no sabremos qué argumentos esgrimiremos para llenar con algo que no sea desilusión y resentimiento la mente y el espíritu de esta generación. Esta reflexión es producto de dos circunstancias: una lectura del exhaustivo reportaje titulado El paro que más quema, firmado por Carmen Sánchez-Silva y publicado en el suplemento Negocios (28-4-13) y una frase que encontré en la novela del escritor vasco Kirmen Uribe Lo que mueve el mundo. La frase reza así: “Era un chaval de barrio y no le pedía gran cosa a la vida; si acaso, un trabajo y una novia”. La profusión de datos que nos da el reportaje de Sánchez-Silva (con algunas importantes menciones aclaratorias de Luis Garrido) y el azaroso encuentro con la cita de Uribe componen me parece la mejor metáfora del momento que estamos viviendo. Por el hecho de ser una metáfora no es menos real la situación que expongo. Ya nos gustaría. Por eso me interesa tanto esta franja de chavales sin trabajo y sin novia (o novio). Y aunque el artículo de Negocios no se refiera específicamente a chicos de barrio, yo doy por sentado que entre las líneas de su pavoroso informe estos chavales están. Su drama, ya lo sé, no es mayor que el de otros jóvenes sin faena, de otra edad y de distinta condición social, con o sin másteres, con o sin idiomas. No es un drama mayor, pero como metáfora da mucho que pensar. Y, sobre todo, da una infinita pena. ¿Es pedir gran cosa que nuestros chavales tengan trabajo y pareja? J. Ernesto Ayala-Dip es crítico literario. http://elpais.com/elpais/2013/06/05/opinion/1370460466_034276.html

Economía ANÁLISIS El fin de la ultraactividad de los convenios La desaparición afecta tanto a los acuerdos firmados antes como tras la reforma laboral Miguel Cuenca Valdivia Madrid 28 JUN 2013 - 13:24 CET3 Hace casi un año, la reforma laboral vino a acortar la duración de los convenios colectivos. Por ello, es posible que el próximo día 8 de julio muchos sectores productivos y empresas queden prácticamente sin más regulación que el Estatuto de los Trabajadores, al finalizar la vigencia de los convenios colectivos que se venían aplicando, que podrían, como digo, desaparecer. Puede llegar a tratarse de una situación del todo inusual en nuestras relaciones laborales, donde las normas que dicta el Estado en materia laboral siempre se han considerado, desde la instauración de nuestro sistema democrático y pluralista, como una base para que los interlocutores sociales establezcan regulaciones sectoriales y de empresa a través de la negociación colectiva. Por ello, la Ley del Estatuto de los Trabajadores llama constantemente a la negociación colectiva para establecer y desarrollar aspectos tan básicos de las relaciones laborales como los periodos de prueba, la clasificación profesional o el régimen disciplinario. Antes de la reforma laboral, la duración de los convenios venía siendo fijada de mutuo acuerdo por empresarios y sindicatos. Y, salvo que se pactara lo contrario, los convenios se prorrogaban por disposición legal hasta su sustitución por otro, para evitar vacíos. Esta prórroga era conocida como “ultraactividad”, término con ecos de erudición y hasta difícil de pronunciar, pero que no aludía a otra cosa que a esa voluntad legal de prorrogar el convenio, hasta su sustitución por otro. La aplicación de la legislación estatal aventura una litigiosidad judicial nada desdeñable Ahora, sin embargo, la prórroga solo dura un año. Y si en un año no se pacta un nuevo convenio, no habrá convenio. Esta desaparición puede afectar tanto a los convenios firmados después de la reforma como a los firmados con anterioridad, si no se ha pactado lo contrario. Y, por ello, es posible que desde el próximo día 8 de julio —un año después de la reforma— muchos sectores y empresas dejen de contar con convenio colectivo propio, si no se negocia otro, o se alcanza otra solución, como podría ser una nueva prórroga de un año. El objetivo de la reforma laboral era claro cuando introdujo esta regulación en julio de 2012: dotar de mayor dinamismo a la negociación colectiva, apremiando a los negociadores para que se pusieran de acuerdo en el plazo máximo de un año —no más— y evitando, al límite, situaciones de anquilosamiento de muchos convenios que, habiendo sido pensados para unos pocos años —uno, dos o tres años—, llevaban en vigor y prorrogándose más de veinte. La opción, sin embargo, por hacer desaparecer, sin más, el convenio colectivo puede plantear problemas de profundo calado, entre otras cosas porque ninguna norma laboral

25 nos dice, hoy por hoy, qué sucede exactamente cuando un convenio colectivo desaparece, no habiendo ningún otro aplicable. Normalmente, cuando se produce la derogación de una norma, la norma posterior regula provisionalmente las situaciones preexistentes; pero en nuestro caso no se dice nada. A pesar de ello, está claro que el empresario, antes y después del convenio, seguirá siendo empresario, y los trabajadores, trabajadores, y que sus relaciones, colectivas e individuales, de alguna forma habrán de regularse en lo sucesivo. Y, por más que parezca sencillo a primera vista, no es tan fácil hacer tabla rasa, porque el convenio ha estado ahí y ha regido las relaciones entre unos y otros. Son varias las soluciones que se están valorando para atender ya, en el corto plazo, al problema más perentorio que plantea la finalización de muchos convenios el 8 de julio, pero solo una solución puede considerarse óptima: aquella en que sean los propios negociadores, empresarios y sindicatos, de mutuo acuerdo, los que definan qué hacer, o no hacer, cuando el convenio va a desaparecer, si es que no firman otro. La búsqueda de estas soluciones puede intensificarse a través de los sistemas de solución extrajudicial de conflictos, a los que apela constantemente el legislador. Y lo uno y lo otro es lo que han propuesto, recientemente, los interlocutores sociales en una declaración consensuada en el máximo nivel de las organizaciones sindicales y empresariales. Otra opción podría ser, claro está, en defecto de pacto, que sea el legislador el que aclare un poco más la situación. Sin embargo, a medio y largo plazo, algo más deberíamos esperar —o desear— de los nuevos convenios colectivos que se negocien, en el sentido de que aporten soluciones propias para cada empresa y sector; y contamos con experiencias anteriores a la reforma laboral que pueden marcar la pauta. La decisión, sin embargo, de enterrar el convenio y aplicar, sin más, el Estatuto de los Trabajadores, puede ser más un problema que una solución, por poco realista con el nivel de desarrollo de las relaciones laborales en muchas empresas y sectores productivos. No olvidemos que el Estatuto —y el resto de la legislación estatal— constituye una regulación general básica, no un contrato de trabajo, ni un convenio colectivo, por lo que difícilmente puede ser válido para resolver muchos problemas cotidianos de las relaciones laborales, al menos pacíficamente. Al margen de ello, la aplicación sin más vestiduras de la legislación estatal, una vez que se da por desaparecido el convenio, puede plantear no pocas cuestiones jurídicas que, a falta de soluciones consensuadas, aventuran una litigiosidad judicial nada desdeñable en el corto y medio plazo. E incluso más allá. Porque, insisto, los problemas jurídicos vinculados a la desaparición conflictiva de un convenio pueden ser de profundo calado. Esperamos, por tanto, que interlocutores y procesos de negociación logren conjurar estos riesgos. Miguel Cuenca Valdivia es socio responsable del área laboral de KPMG Abogados. http://economia.elpais.com/economia/2013/06/28/actualidad/1372418659_831295.html

Opinión LA CUARTA PÁGINA Unión bancaria: la perspectiva europea La mala gestión de la crisis financiera ha minado la confianza entre los países de la eurozona. Vamos a una unión con limitada solidaridad fiscal y duros procesos de reestructuración, que incluirán fuertes quitas Tano Santos 28 JUN 2013 - 00:26 CET

EULOGIA MERLE La estabilidad financiera creada por las actuaciones de Mario Draghi en 2012 han creado las condiciones para que sucedan cosas dentro de nuestra unión monetaria: ajustes fiscales y reformas estructurales en los países miembros por un lado, y el rediseño de las instituciones de la eurozona por otro. En lo que se refiere a este último, la idea es profundizar la unión monetaria lo estrictamente necesario para hacerla viable, pero nada más. La unión bancaria es esa mínima reforma. Nuestra unión monetaria tiene dos errores fundamentales de diseño. El primero es la falta de una unión fiscal y el segundo que tampoco la acompaña una completa unión bancaria, una que conlleve una armonización del sinfín de leyes que afectan a todo lo bancario. Nada se va a hacer explícitamente sobre lo primero y algo sobre lo segundo. ¿Por qué la unión bancaria? Los sistemas bancarios nacionales de la eurozona están fuertemente entrelazados y son enormes cuando se les compara con el tamaño de sus respectivas economías. Variaciones en la calidad crediticia de esos sistemas bancarios nacionales, y la de los Estados que los respaldan, inducen violentos flujos de capitales dentro de nuestra unión monetaria, desestabilizándola y provocando la ruptura de los mecanismos de transmisión monetaria. Esto fuerza al BCE a intervenir repetidamente para garantizar la refinanciación de las economías nacionales, algo que por ser economías muy “bancarizadas” sucede a través de los balances bancarios. El problema empeora por lo que se denomina el bucle diabólico: las carteras de deuda nacional en los balances bancarios inducen una correlación entre la calidad crediticia del soberano y la solvencia bancaria. Así, un aumento de la prima de riesgo se traduce en una disminución del valor de la cartera de deuda soberana en los balances bancarios, deteriorando la solvencia de los bancos, lo que hace más probable una intervención del

Estado para rescatarlos, lo que hace que empeore la calidad crediticia del soberano y así sucesivamente. Romper este bucle diabólico debe ser una prioridad. Un aumento de la prima de riesgo reduce el valor de la cartera de deuda soberana de los bancos ¿Qué persigue la unión bancaria? La unión bancaria, tal y como está concebida, está encaminada a evitar fuertes variaciones en la calidad crediticia de los sistemas bancarios nacionales mediante dos instrumentos. El primero es la institución de un proceso supervisor común que haga uniforme los mecanismos de detección de problemas bancarios. Hay, sospecho, una segunda intención ligada a este instrumento y es evitar los problemas de colusión que surgen entre supervisados y supervisores nacionales en presencia de graves crisis bancarias que producen un doble problema de riesgo de azar moral: el tradicional que hay entre el banco en dificultades y el supervisor nacional y un segundo que surge entre dicho supervisor y las autoridades europeas, en particular el BCE, que tiene la responsabilidad de proveer liquidez a entidades solventes, como prestamista de última instancia, y depende del supervisor nacional para poner la línea que separa entidades solventes de aquellas con problemas de liquidez. La gestión de la crisis bancaria en Irlanda y España ha minado la confianza en los bancos centrales en su papel supervisor y dificultado el papel del BCE como prestamista de última instancia. Es por ello que es probable la progresiva eliminación del panorama supervisor de los bancos centrales nacionales, algo que va a llevar su tiempo ya que el conocimiento y los instrumentos están en ellos. La gestión de la crisis en España e Irlanda ha minado la confianza en los bancos centrales Lo segundo es el mecanismo de reestructuración bancaria. Entidades bancarias con problemas de solvencia serán intervenidas y reestructuradas desde Fráncfort. Los detalles de este mecanismo de reestructuración son cruciales ya que implican repartos de pérdidas y transferencias entre los países miembros. No es por tanto sorprendente la dureza de la negociación entre los distintos países. Estos procesos de reestructuración estarán parcialmente financiados por fondos de la eurozona capitalizados por los países miembros y con la posibilidad de apalancarse. El acuerdo por ahora es que el MEDE pueda invertir 60.000 millones de euros directamente en aquellos bancos con serios problemas de solvencia. Esto aliviará en algo el bucle diabólico antes mencionado, pero se antoja claramente insuficiente dada la magnitud de los problemas en la eurozona. Una vez que estos mecanismos estén disponibles, el BCE, se supone, podrá asumir de forma plena su papel de prestamista última instancia. Reestructuraciones bancarias y quitas de deuda. Pero precisamente para limitar las inyecciones de capital con fondos europeos, y minimizar las transferencias fiscales entre países, los procesos de reestructuración futura también estarán “financiados” por quitas de deuda bancaria, incluyendo depósitos por encima de los 100.000 euros. La lección que muchos han extraído de la crisis chipriota es que una quita por encima de esa cantidad no ha inducido pánico bancario alguno en otros países. Es probable que en un futuro no muy lejano veamos procesos de reestructuración bancaria caracterizados por fuertes quitas. La enseñanza de la crisis chipriota es que una quita por encima de 100.000 euros no ha inducido pánico bancario El principio organizador de la profundización de la unión monetaria es hacer la reforma estrictamente necesaria de la eurozona que la haga viable bajo la restricción adicional de minimizar las transferencias fiscales entre países miembros. Quitas en la deuda bancaria

28 en hipotéticos procesos de reestructuración bancaria son una fuente de financiación que cuenta con el doble beneficio de incrementar la disciplina de los acreedores y rebajar las posibles transferencias entre países miembros. Hay además un argumento de economía política para justificar este aspecto de la probable unión bancaria que viene. Quizás un ejemplo sirva mejor que ninguna otra explicación. Imagine el lector la hipotética situación en la que un Estado de la eurozona decide, pongamos, la dación en pago retroactiva, imponiendo fortísimas perdidas a sus bancos nacionales, y que luego sea el mecanismo de resolución de la eurozona el que se haga cargo de los bancos en dificultades. El Estado en cuestión desapalanca a las familias endeudadas, algo probablemente muy popular, y transfiere las pérdidas y las necesidades de recapitalización al contribuyente europeo. Una unión bancaria que no implique una transferencia de soberanía que restrinja en mucho la capacidad legislativa de los Estados miembros en todo lo relacionado al mercado bancario y financiero solo es factible si implica fuertes quitas en hipotéticos procesos de reestructuración. Nuevas pruebas de resistencia. Además antes del lanzamiento de la unión bancaria se realizarán nuevas pruebas de resistencia (ahora denominadas revisión de la calidad de los activos) para forzar una recapitalización adicional de los bancos bajo sospecha. En nuestro caso, nuestros socios intuyen que la timidez en el uso de la línea de crédito para la recapitalización de nuestras entidades financieras tenía dos motivos. El primero constituye ya toda una especialidad hispánica pues hemos cometido este error desde el principio de esta crisis, que es proceder al descubrimiento de las pérdidas y recapitalización con un ojo puesto en el impacto sobre el déficit y el endeudamiento del Estado. Esto, como ha de repetirse una y otra vez, resta credibilidad y efectividad a todo el ejercicio. El segundo motivo detrás del tímido uso de la línea de crédito, sospechan, es minimizar la inyección de capital con fondos públicos y “aguantar” hasta el lanzamiento de la unión bancaria para trasladar a la misma parte de las pérdidas latentes en nuestro sistema bancario. Las nuevas pruebas de resistencia están encaminadas a evitar esta posibilidad. La mala gestión de la crisis bancaria ha minado la confianza entre los países miembros del euro y esto se traduce en una unión bancaria con limitada solidaridad fiscal y duros procesos de reestructuración, que incluirán fuertes quitas a la deuda bancaria. Hay una relación directa entre la gestión de las crisis bancarias nacionales y la limitada unión bancaria de la eurozona que viene. Veremos si esta unión bancaria es suficiente para estabilizar la eurozona. Tano Santos es director de la cátedra David L. y Elsie M. Dodd de Finanzas en la Escuela de Negocios de la Universidad de Columbia. http://elpais.com/elpais/2013/06/26/opinion/1372256378_539867.html

Opinión TRIBUNA Alemania y el euro: ¿arquetipo o parásito? El modelo germano para Europa puede abrir más frentes de guerra monetaria y comercial con el resto del mundo Jörg Bibow 28 JUN 2013 - 00:03 CET Los Gobiernos francés y alemán emitieron recientemente una declaración conjunta titulada Juntos por una Europa más fuerte, basada en la estabilidad y el crecimiento.El comunicado recalca la necesidad de coordinar las políticas y utilizar indicadores para llegar a una evaluación conjunta de las condiciones económicas en el conjunto de la unión monetaria, los Estados miembros y cada uno de los mercados. Este nuevo intento de ahondar en la política de coordinación aspira a prevenir crisis futuras mediante la pronta identificación de cualquier desequilibrio incipiente que pudiera advertir de peligros en el horizonte. El objetivo primordial de la iniciativa es hacer que la economía europea sea más resistente y competitiva. A la vista de esa iniciativa, habría que preguntarse cuál es el punto de referencia y el modelo subyacente tras esa posible evaluación común. En este sentido, Alemania, que ha puesto al día su arsenal diplomático, está deseando que Francia esté de su lado en la plataforma de lanzamiento. Porque en algún momento habrá que precisar cuál es el punto de referencia. Aunque quizá las autoridades alemanas no deseen decirlo muy alto, está claro que consideran que Alemania es el modelo que deben seguir los socios del euro azotados por la crisis. De manera que fue Gerhard Schröder, antecesor de Angela Merkel en la Cancillería, el que tuvo que ser un poco más sugerente en el artículo titulado Para prosperar, Francia debe copiar las reformas de Alemania, que publicó el Financial Times. En alusión a la experiencia de Alemania con las reformas promovidas entre 2003 y 2005 por la Agenda 2000, cuyos frutos parece que no se apreciaron hasta años después de que Schröder abandonara el poder, el excanciller germano puso un encantador broche a su texto: “Confío en que nuestros amigos de París actúen en consecuencia”. Y es que es precisamente Francia la que últimamente ha sufrido enormes presiones para hacer lo que debe para enderezar su renqueante economía. Evidentemente, “lo que debe” es comportarse como Alemania, es decir, embarcarse en una consolidación fiscal supuestamente favorable al crecimiento y en una reforma estructural que también daría un empujón a ese crecimiento. Según la leyenda, esta estrategia permitió recuperar la competitividad a Alemania, cimentando la milagrosa resurrección de un país que hasta hacía pocos años se hallaba postrado en el lecho del “enfermo del euro”. ¿Pero es realmente Alemania el mejor modelo de excelencia o perfección que hay que seguir para gestionar la economía de la zona euro? Reducir el gasto en 2008 y 2009 llevó a la pobreza en medio de la abundancia En este sentido, es esencial comprender que hay ciertas políticas, ciertos principios o comportamientos que pueden funcionar realmente muy bien en algunas partes del sistema, pero fracasar estrepitosamente al aplicarse al conjunto. Ya se sabe que Keynes así lo indicó en su Teoría general al señalar que, para la macroeconomía, lo esencial es evitar las “falacias de la composición”. Subrayando algo evidente —que el conjunto de la economía no puede ganar más de lo que gasta—, Keynes advertía al lector de las 30 consecuencias macroeconómicas que tiene un esfuerzo conjunto por ahorrar más mediante la reducción del gasto, algo que los manuales económicos para principiantes también denominan “paradoja del ahorro”. En este sentido, los países avanzados recibieron un curso de refresco más práctico cuando entre 2008 y 2009 todo el mundo se mostró dispuesto a reducir el gasto, pero para acabar descubriendo que el funesto resultado de esa actitud sería la pobreza en medio de la abundancia. Poco después se asistió a un breve retorno del keynesianismo, cuando la coordinación de las políticas mundiales consiguió que la comunidad global avanzara al unísono, evitando que hubiera quien se aprovechara de los paquetes de estímulos de sus vecinos. A pesar de su enorme éxito, en Europa ese retorno a la razón y la virtud de la acción positiva conjunta fue efímero. Ya antes de que se permitiera que la crisis griega se tornara incontrolable, las autoridades alemanas habían comenzado a presionar para que se pasara drásticamente de las políticas de estímulo a la austeridad. De manera que las presiones de los mercados sobre Grecia y otros países proporcionaron una buena excusa, porque esos mismos mercados nunca presionaban a la propia Alemania. Más bien, esta actuaba por convicción, imponiendo entre 2011-2012 una profunda racionalización del gasto, que el año pasado condujo también a su economía al estancamiento. Puede que esto haya sorprendido incluso a la propia Alemania, porque no era la primera vez que, desde comienzos de la década de 1980, el país acometía una consolidación favorable al crecimiento, aunque cada vez con menos éxito. Una razón lo explica. Antes Alemania podía contar con que los demás no hicieran como ella, pero, al ir difundiendo el Tratado de Maastricht la “cultura de la estabilidad” germana, esa situación se ha hecho cada vez menos factible. La base teórica de la obra magna de Keynes es la existencia de un modelo económico cerrado. Como la economía global es una economía cerrada habría sido una insensatez por parte de Keynes postular que un país puede recuperarse fomentando su competitividad. Es cierto que una economía abierta puede ganar más de lo que gasta si acumula un superávit por cuenta corriente, pero para eso hace falta que otras pierdan competitividad y gasten más de lo que ganan. Las experiencias de la década de 1930 convencieron a muchos de que ese ejercicio no era una forma constructiva de avanzar. Para crecer, Berlín se alimentó de los demás hasta que sobrevino la crisis Entonces, ¿cómo funcionó la estrategia alemana en la década de 2000? En pocas palabras: al principio no dejó de agravar las dolencias de Alemania. La inversión se desplomó y el consumo se estancó, en tanto que el desempleo y las desigualdades se disparaban. La austeridad fiscal no logró reducir el déficit. Sin embargo, al final, bajando los salarios, Alemania se volvió über-competitiva y su superávit por cuenta corriente creció vertiginosamente, mientras la otra cara de la moneda, en términos comerciales y fiscales, estaba principalmente en Europa. En suma, Alemania ganaba más de lo que gastaba y de ese modo acabó recuperándose y equilibrando su presupuesto público, precisamente porque otros países —sobre todo europeos— gastaban más de lo que ganaban. Para crecer, Alemania se alimentó de los demás, hasta que, como cabía esperar, sobrevino la crisis. ¿Qué cambiaría en Europa si el continente imitara el modelo alemán? Depende. Si Alemania estuviera dispuesta a devolver el favor y gastara más de lo que gana, eso permitiría recuperarse a su antiguo huésped. La alternativa es que el resto del mundo tolerara una Europa con balanzas comerciales positivas de tipo alemán. Para funcionar, 31 el modelo alemán precisa de un huésped bien dispuesto. De no ser así, el esfuerzo conjunto por ahorrar más sin dejar de cumplir hará que Irving Fisher se una a Keynes en otra falacia de la composición: “Cuanto más pagan los deudores, más deben”. En realidad, bien pensado, Europa está ya en guerra con las ideas macroeconómicas de Fisher y Keynes. Así que lo importante es determinar si la aplicación del modelo germano a toda Europa abrirá más frentes de guerra monetaria y comercial con el resto del mundo. Con vistas al Consejo de la UE ayer iniciado, los dirigentes europeos deben ser conscientes de ello. Las recientes experiencias con la abenomics [las políticas económicas del Gobierno japonés] y la influencia del yen, y también con los paneles solares y los expertos en vino chinos son solo un anticipo de lo que Europa está mendigando en tanto que otros países ven menguar sus mercados en el continente, mientras las naciones europeas fuerzan la máquina para sacar a sus economías de la penuria recurriendo únicamente a las exportaciones. Las lecciones de la década de 1930 inspiraron las políticas globales con las que se reaccionó en 2009. Son las mismas que inspiraron el euro, que pretendía proscribir definitivamente las devaluaciones de índole competitiva. Pero de alguna manera las autoridades no percibieron que esa competitiva puja salarial a la baja acabaría teniendo las mismas consecuencias devastadoras para el conjunto de la unión monetaria. Y si no teníamos bastante con ese error garrafal, ahora corremos el riesgo de que los dirigentes europeos cometan el mismo, pero a nivel mundial. Jörg Bibow es catedrático de Economía en el Skidmore College e investigador en el Levy Economics Institute del Bard College. Traducción de Jesús Cuéllar Menezo. http://elpais.com/elpais/2013/06/26/opinion/1372246642_240224.html

Opinión LA CUARTA PÁGINA No es el Bundesbank. Son los jueces. El Tribunal Constitucional alemán debe pronunciarse sobre el Mecanismo Europeo de Estabilidad. Sea cual sea, el fallo dañará su autoridad. Es una de las consecuencias de la judicialización de la política Francisco Rubio Llorente 27 JUN 2013 - 00:00 CET

RAQUEL MARIN Se dice que la política se judicializa cuando queda en manos de los jueces (o sobre sus espaldas) el poder de decidir cuestiones puramente políticas. Ese desplazamiento, que choca con los principios propios del Estado democrático de derecho y suele ser funesto para el prestigio de la justicia, se produce en la mayoría de los casos por impulso de los órganos políticos, pero también es a veces obra de los mismos jueces. De lo primero tenemos en España muy abundantes ejemplos; el más reciente quizás, el recurso ante el Tribunal Constitucional contra la absurda Declaración del Parlamento catalán sobre el “derecho a decidir”. De lo segundo hay también ejemplos dentro y fuera de nuestras fronteras, pero pocos tan sobresalientes como el que ha conducido a la situación que hoy vivimos en Europa, cuyo destino pende de la sentencia que el Tribunal Constitucional alemán dictará (hacia septiembre, parece) sobre el Mecanismo Europeo de Estabilidad y muy en particular sobre el acuerdo del Banco Central Europeo de comprar en el mercado secundario (cuando la ocasión se presente, si es que llega a presentarse) la deuda a corto plazo emitida por los Estados que soliciten la ayuda de ese mecanismo. Lo que en su jerga anglófona llaman los economistas Outright Monetary Transactions (OMT, para los amigos). El camino que ha llevado a los jueces alemanes a tomar en sus manos la política económica europea es muy largo; de hecho, comienza con la creación de la Unión Europea y la invención del euro, condiciones impuestas por Francia para aceptar la reunificación alemana, que los franceses en general y Mitterrand en particular veían con mucho recelo. Los alemanes, con Helmut Kohl a la cabeza, abrazaron con algunos escrúpulos la idea de la Unión, pero se resistieron a disolver el marco en el seno de una moneda única, cuyo valor podría verse amenazado por la laxa política fiscal de otros Estados miembros. Para aceptar el euro exigieron por eso que el Tratado de la Unión, además de imponer al Banco Central Europeo el mismo deber que su Constitución

33 impone al Bundesbank —tener como objetivo primordial de su política monetaria la estabilidad de los precios—, le prohibiese autorizar descubiertos, conceder créditos a los Estados miembros, o comprar directamente la deuda emitida por estos. Con el fin quizás de despejar cualquier duda sobre cuál había de ser el modelo a imitar por el Banco Central Europeo, pidieron además que tuviera su sede Fráncfort, como el Bundesbank. La preocupación por la expansión del poder de las instituciones europeas era especialmente viva en Alemania A estas cautelas respecto de la moneda única, se añadieron en el Tratado de la Unión algunas otras destinadas a aliviar la preocupación por la expansión, aparentemente incontenible, del poder de las instituciones europeas. Una preocupación que compartían muchos Estados, pero que era especialmente viva en Alemania, cuyo Tribunal Constitucional venía sosteniendo, desde mucho tiempo atrás, que la primacía del derecho europeo sobre los derechos nacionales no podía llegar hasta el punto de ignorar las garantías que la Constitución alemana da a los derechos fundamentales. Una de estas cautelas es la plasmada en el precepto que impone a la Unión el deber de respetar la “identidad constitucional” de los Estados miembros. Por último, como inteligente complemento de estas estipulaciones del Tratado de la Unión, la República Federal reformó su propia Constitución para afirmar su voluntad de contribuir al desarrollo de una Unión Europea, obligada a respetar el principio de subsidiariedad al hacer uso de las competencias que los Estados le han transferido y comprometida con los principios democráticos, federativos y del Estado de derecho; en la misma reforma se abrió asimismo la posibilidad de transferir las competencias del Bundesbank a un Banco Central Europeo “independiente y cuyo objetivo prioritario sea la estabilidad de los precios”. Esta reforma, saludada frecuentemente como muestra del sólido compromiso alemán con la integración europea, entrañaba sin embargo, como después se ha visto, un riesgo para ésta. La constitucionalización de los principios de la Unión obliga a los jueces alemanes, y en especial al Tribunal Constitucional Federal, a controlar la constitucionalidad de las normas y actos del derecho europeo que hayan de aplicase en territorio alemán. Pero aunque ninguna permite escapar del embrollo creado por nociones tan confusas como las de subsidiariedad o de “identidad constitucional” — que en el Tratado de Lisboa se convierte ya en “identidad nacional”—, hay más de una manera de cumplir esta obligación. El Tribunal alemán hubiera podido optar por someter al Tribunal Europeo de Justicia sus dudas acerca de la compatibilidad de esas normas o actos con los principios europeos mencionados y partir de su respuesta para resolver sobre su aplicación en Alemania. No ha seguido esa opción y ha decidido verificar por sí mismo si, además de respetar los Derechos Fundamentales, la Unión ha actuado dentro de sus competencias y ha cumplido con su deber de respetar la identidad nacional de Alemania. El Tribunal aprovechó su primera sentencia sobre el Tratado de Maastricht para afirmar con energía su postura, que ya entonces despertó muchas inquietudes en el mundo académico y en el político, pero ha sido en la sentencia sobre el Tratado de Lisboa en donde ha proclamado en términos rotundos su facultad para someter la actividad de la Unión a un triple control: el de los derechos fundamentales, el del exceso de competencia y el de la identidad nacional. Para asegurar además que todos los alemanes pueden poner en marcha esos controles, ha construido una doctrina audaz y heterodoxa, según la cual el derecho fundamental a la participación política mediante la elección de representantes resulta violado si las cámaras así elegidas ven limitado su poder de decidir el marco social y económico en el que los alemanes desarrollan su vida.

Frente a la ley que autoriza la incorporación de este país al MEDE se plantearon 38.000 recursos Esta alambicada construcción ha sido duramente criticada por muchos y muy notables juristas alemanes. Con escaso fruto, pues con un gesto notable de arrogancia, en una sentencia de septiembre de 2011, después de enumerar con minuciosidad teutónica un buen número de esas críticas académicas, el Tribunal afirmó que no veía razón alguna para cambiar su doctrina. Y así hemos llegado hasta hoy. Dejando de lado otras precisiones, baste decir que por esta vía, frente a la ley que autoriza la incorporación de Alemania al Mecanismo Europeo de Estabilidad se presentaron alrededor de 38.000 recursos de amparo, algunos de ellos suscritos por grupos parlamentarios, diputados del Bundestag o catedráticos prestigiosos. Como ampliación de esos recursos, aun sin resolver, se han presentado a partir de septiembre del año pasado otras tantas impugnaciones del acuerdo del Banco Central sobre la OMT y es en el marco de este proceso, en el que no son partes, en donde, a solicitud del Tribunal, han presentado hace pocos días sus alegaciones el Bundesbank y el Banco Central Europeo. El Tribunal se encuentra así ante un difícil dilema. Si juzga que la actuación del Banco Central Europeo ha sido intachable, desautorizará al Bundesbank. Si, por el contrario, entiende que esa actuación es inaceptable para Alemania, censurará al Gobierno y al Bundestag el apoyo que le han dado. En ambos casos habrá dañado gravemente su autoridad. En el primero por enfrentarse con el Bundesbank, pues como Delors dijo una vez, hay algunos alemanes que no creen en Dios, pero no hay ninguno que no crea en el Bundesbank. En el segundo caso, porque no parece razonable que un órgano sin legitimidad democrática directa acuse a los órganos que encarnan esa legitimidad de haber violado precisamente el principio democrático. Y como ha de construirse a partir de categorías tan profundamente políticas como la subsidiariedad o la identidad nacional, en un caso como en el otro, aunque se formule en términos jurídicos, la decisión será interpretada en términos políticos. Justizförmige Politik, que dijo un famoso jurista alemán del siglo pasado poco partidario de la jurisdicción constitucional. Francisco Rubio Llorente es catedrático jubilado de la Universidad Complutense y director del Departamento de Estudios Europeos del Instituto Universitario Ortega y Gasset. http://elpais.com/elpais/2013/06/21/opinion/1371826224_271756.html

ft.com Comment Opinion June 27, 2013 7:09 pm Ignore the pessimists – central banks are helping By David Miles Evidence for the creation of a bubble born of QE is far from convincing, writes David Miles

©Dreamstime Much of the most vocal and opinionated analysis of the impacts of central bank asset purchases – quantitative easing – strikes me as somewhat contradictory. But it is also important and may explain the recent reaction, quite probably an overreaction, to limited news from the Federal Reserve on asset purchases. Some people seem to believe that large-scale asset purchases by central banks have created bubbles in many markets and that stopping such purchases (let alone reversing them) must cause big falls in prices. Others take the view that these central bank purchases are ineffective in stimulating demand in the wider economy. I think the evidence for either of these positions is weak. But some people believe both things – a position that I think is also contradictory as well as being profoundly pessimistic. More ON THIS STORY/ Fed big-hitters seek to quash QE fears/ Fed offers path to winding down purchases/ Bernanke sees 2014 end for QE3/ Sluggish US growth gives Fed cause for caution/ Fed fights back against ‘feral hogs’ ON THIS TOPIC/ Investors pull $8.6bn from US bond funds/ Central banks urged to stick to policy/ Bond rout threatens to hit bank funding/ Martin Wolf Careless talk may cost the economy IN OPINION/ Nicholas Lardy China may reform state groups by stealth/ James Breiding Rich played dirty but changed the world/ Carl Bridge Gillard and Australia’s undead leaders/ Peter Cunningham Cruel comedy at the Irish taxpayers’ expense The first claim – that QE has artificially boosted prices to bubble levels – does not stand up. It is certainly true that in purchasing financial assets, central banks – certainly the Bank of England’s Monetary Policy Committee – has deliberately and consciously raised the demand for these assets and that will have supported their price. Supporting asset prices helps to support growth. It means that many companies find it easier to raise funds, and that many household borrowers face lower longer-term interest rates. And by keeping the value of portfolios of wealth higher than it would have been, the spending of many of the people who own that wealth is supported. Does anyone doubt that many of the households that have seen the value of their savings accounts and other stocks and bonds rise over the past year or so would have been less inclined to spend had these instead fallen sharply in value? One of the ways that financial crises can have drawn-out consequences is when debtors’ balance sheets deteriorate as the assets that they hold lose value. This runs the risk of a 36 negative self-reinforcing spiral – a worsening economic situation pushing down on asset prices further depressing demand. By supporting asset prices, QE has helped to ensure that this sort of negative spiral has not happened in the UK. If QE had created a bubble, there would be a big risk that values will soon crash. And asset prices have fallen sharply over recent weeks as people reassess the scale of purchases by the Fed. Yet the evidence for a general bubble in asset prices is not very convincing. It is true that until the very recent sell-off the FTSE All-Share index was about back where it was in the summer of 2007 – having fallen by about 40 per cent between mid 2007 and early 2009. But in real (inflation-adjusted) terms, stocks were still down by about 20 per cent from the level they reached in 2007. Price to earnings ratios on those stocks do not look unusually high. Average house prices in the UK are – according to some national measures – only 5-10 per cent lower than the levels at the peak of early 2008. But, in real terms, they are down by about 25 to 30 per cent. Yields on government debt – both in nominal and real terms – are unusually low. Part of that reflects a belief that central banks are likely to keep short-term interest rates at low levels for some time yet. Part of it is likely to reflect a substantially higher perceived level of risk now relative to before the financial train wreck of 2007-8. That puts a premium on relatively safe assets – such as gilts. So there are good reasons why yields on less risky government debt should be low. I think some people are far too quick to label this a bubble – which I would define as a level of prices far removed from what can be expected given the fundamental economic forces at work in the wider economy. Finally what is one to make of the uniquely pessimistic – but increasingly widespread – view that central bank asset purchasing has both created multiple asset bubbles while having no impact in boosting demand in the economy? What I find implausible about this is the idea that a rise in the value of assets, and a fall in the likely future return on savings, could have no effect on stimulating someone’s spending. You would need to believe that the wealth effect – the positive impact on confidence and spending that higher wealth brings – does not work at all. There is good reason to think that many people, particularly older people, will spend more if their assets rise in value. Furthermore, to think that asset purchases do nothing to support demand in the economy you would also have to believe that investment was not at all responsive to a greater availability of funding at lower interest rates. Is that plausible? A rather less sensational view on the effects of QE is far more plausible. Central bank asset-buying has supported a wide range of prices and this has caused spending to be higher than it would otherwise have been. The writer is an external member of the Bank of England’s Monetary Policy Committee. He writes in a personal capacity. http://www.ft.com/intl/cms/s/0/1de95fc0-df2e-11e2-881f- 00144feab7de.html#axzz2XJ6cvopm

Daily Morning Newsbriefing

June 28, 2013 Eurozone sinks deeper into credit crunch and recession The latest data and forecast make sombre reading. In Ireland official data confirm a collapse in exports leading to an overall GDP contraction of 0.6% qoq in Q1 – or 2.5% annualised. So much for the idea that Ireland is a great example for the success of austerity. In Italy, Confindustria has revised its 2013 forecast for GDP down to -1.9%, and warns that the government’s current policies are not going to work. The ECB, meanwhile, reported that credit fell further in May, and that money supply continues to expand way below its reference value. The eurozone is still in a very deep recession. Ireland's economy slid into recession late last year and contracted sharply in early 2013, new and revised figures revealed, just months before it is due to exit its EU/IMF bailout programme. GDP contracted by 0.6% compared to the previous quarter on a seasonally adjusted basis. The decline was the third consecutive quarter of contraction in GDP, the Irish Times reports. The weakness was driven in part by one of the biggest quarterly declines in exports on record. In just three months, the volume of goods and services exports fell by 3.2%. Domestic demand (excluding imports and exports) fell 1.5%. Among the few positive results was an increase in GNP, a slightly narrower measure of output than GDP, see the full release for more details. The Irish government is targeting growth of 1.3% this year. Reuters quotes Michael Noonan saying when asked if that forecast would have to be revised, he would not tie himself to any particular number and that other parts of the public finances were holding up better. The report sparked angry responses from anti-austerity campaigners. Though Irish people have not protested against austerity as angrily as those in other indebted states such as Greece and Spain, many have endured salary cuts of up to a fifth and big tax rises. Unemployment has more than tripled, to 14%. Italy may have reached the bottom of the crisis, according to Confindustria research centre, but this bottom is very deep. As Il Corriere della Sera reports, the Italian business lobby said in a report that after the sixth year of the crisis, there are signs here and there of an end of the fall and some random indications of a turning point in services and some industrial markets. However, it revised its GDP forecast down to - 1.9% in 2013, from -1.1%. There is a some scattered evidence that points to a start of the recovery, but this does not represent a solid basis for a forecast. In addition, Confindustria confirms that the business climate has changed trend in the latest two months, showing an improvement in confidence. However, the tax pressure for families had reached a historic high of 44.6% of GDP in 2013 and it will remain unsustainably high in 2014, Confindustria said. According to Confindustria’ chief economist Luca Paolazzi, the latest measures approved by Letta government now will have a very

38 limited impact on Italian recovery. He said the government lacked a plan to fight the crisis, adding that Italian companies were losing competitiveness, due the rising labour costs and the falling productivity were hitting business hard. For the eurozone as a whole, the ECB reports a 1.1% contraction of loans to the private sector in May, against May 2012. M3 money supply grew at an annual rate of 2.9%, down from 3.2% in April. The combination of those data point to a serious monetary squeeze in the wider economy - and suggest that a strong recovery is highly unlikely in the medium term. The only positive news yesterday was a further increase in the European Commission economic sentiment indictor, which rose from 89.5 points in May to 91.3 points in June. The business climate indicate also improvement from a reading of -0.75 to -0.68. The main drive behind the improvement in sentiment were an increase in orders and in expectations of future production. France could miss even revised deficit goals Les Echos picked up on a report by the French court of auditors, which said that France will miss its already relaxed deficit targets for this year as well. The original plan had been for France to bring the deficit down to 3% this year, but this target has been postponed by two years. For this year the target is now 3.7%. But the court of auditors estimates a deficit of 3.8-4.1% on the assumption of a fall in GDP by 0.1%. The more GDP falls, the higher the deficit. The Prime minister said yesterday that the Court is ‘unfortunately right.’ The Court concentrates in its recommendations on 2014-2015, arguing that it will require €28bn of extra savings to reach the target, €13bn in 2014 and €15bn in 2015. It also asks the government to vote for an €12bn increase in levies to compensate for lower taxes. The court has proposed the following areas of suitable for cuts: the automatic inflation adjustment for pensions, child benefit and unemployment benefit, and cuts in health spending. Furthermore, the government should reduce employment in the public sector, and to reduce subsidies for agriculture, the media, sports, culture, housing and overseas territories. Italian Audit Court slams 2012 fiscal measures The Italian Audit Court has criticised the fiscal measures of the Monti government, and said that had contributed to the fall in GDP, as La Stampa reports. With a tax burden of 44% in 2012, there is hardly any room for manoeuvre on tax increases. The deficit targets and the mounting costs of social programs had reduced employment and consumer spending. According to the Court, Italy does not need linear cuts to public expenditure, but structural cuts. However, this kind of measure cannot be implemented until the introduction of a comprehensive spending review to reduce the influence of political parties in the economy, as Daniele Manca writes in Il Corriere della Sera. Manca also argues that the latest Letta’ plan will not be the solution to the country’ problems. It should be seen as a ploy to gain time. The procrastination on the IMU tax and the delay of the VAT increase (thanks to the rise of local taxes) are a joke and Italy should instead lower corporate taxes and begin to attract investments and cut its byzantine bureaucracy, Manca said. Italy’s youth employment down by 7% Youth employment in Italy dropped by 7% between 2008 and 2012 to 32.5% according to ISTAT. As L’Unità reports, ISTAT said 1.2pp of that number relates to 2012 or

132,000 positions. The unadjusted index of gross average earnings per hours worked decreased by 2.8% compared with April 2012, ISTAT said. The unadjusted employment index in large firms decreased by 1.4% compared with April 2012. Cyprus to swap €1bn bond Cyprus said it will launch a debt exchange swapping €1bn of government bonds for new, longer-dated debt, to meet one of the conditions of its bailout programme. Under the bond exchange, holders of government bonds maturing between 2013 and the first quarter of 2016 will be asked to swap their paper for five new bonds paying the same rates of interest but with five- to 10-year maturities. The transaction completes Cyprus's commitment under its financial adjustment programme to refinance €1bn of long-term domestic debt. New Democracy maintains poll lead The latest poll showed that Antonis Samaras’ New Democracy party maintained a narrow lead over SYRIZA even after the ERT debacle and the loss of the Democratic left as a coalition partner, which forced the PM to reshuffle his cabinet. The poll published on website Real.gr and picked up by Reuters showed that New Democracy got 28.1% against SYRIZA with 26.6%, PASOK is now at 7.8% while the Democratic Left would get 3.8% - barely above a 3-percent threshold needed to win parliamentary seats - down from 6.2% in another MRB poll in June. More than 53% of 1,014 Greeks polled after a cabinet reshuffle on Monday said they did not want snap elections but as many said they believed the new, two-party government would not make it until 2016, when its four-year term expires. Greece faces collapse of second key privatisation Greece is struggling to avoid the collapse of a second big privatisation deal, as bidders for the state gaming monopoly Opap want to cancel key terms of the deal they agreed last month. Emma Delta – a bid vehicle backed by Greek oil tycoon Dimitris Melissanidis and Czech billionaire Jiri Smejc – made the only offer for the Greek state’s 33% holding in Opap for €700m. According to documents seen by the FT, Emma Delta now wants to cancel two key elements of the deal. Greece’s privatisation agency Taiped has rejected complaints by Emma Delta threatening to pull out of the deal and take legal action if its demands are not met. Stelios Stavridis, Taiped’s chairman, insists the Opap deal must not be changed. “The country’s credibility is at stake,” he says. Stavridis, Taiped’s third chairman in less than a year, says he is still “cautiously optimistic” about persuading Emma Delta to drop its demands. “We negotiated the Opap deal in a transparent way and in line with international practice. Now we have to make it stick,” he says. A spokesman for Emma Delta, on behalf of Mr Melissanidis, declined to comment. If the Opap sale falls through, Greece’s privatisation programme will be in disarray, raising the possibility that the “troika” of international lenders could appoint international managers to replace Greek executives hired by the Athens government to sell €15bn of state assets by 2016. A failure to sell Opap would also see privatisation income to fall below €1bn this year. Taiped has pulled off only one sizeable deal this year: the €400m sale of Desfa, the natural gas grid operator to Socar, the state gas operator of Azerbaijan.

Former PP treasurer Luis Bárcenas jailed on €28m bail Former PP treasurer Luis Bárcenas was jailed on Thursday on bail of €28m, reports El País (English Edition). The judge investigating the Gürtel case involving allegations of kickbacks ordered Bárcenas imprisonment on concerns that he might destroy evidence or flee the country, after the evidence emerged suggesting that he engaged in false art sales in order to launder money. In addition, the public prosecutor also argued that Bárcenas had recently been transferring money out of his Swiss accounts into accounts in the US and Uruguay. Portugal’s opposition expected to sign post-bailout Portugal’s opposition leader António José Seguro will be asked by European lenders to underwrite the post-bailout programme. The Socialist party is internally discussing the conditions for its support, Diario Economico reports. European Institutions and sovereign creditors will require the Socialists to sign up for this programme which will include a credit line to smooth the transition. Irish attorney general to report on legal options over Anglo-Irish tapes There is continued anger in Ireland over the Anglo-tapes revealing the mocking attitude of the Anglo Irish bankers towards their rescuers as they move closer to the abyss. The Attorney General will report to the Cabinet next week on bank inquiry options. Enda Kenny has said he may have to seek a referendum asking the Irish people for greater government powers to investigate the banking crash that almost bankrupted Ireland. SSM delay watch – Mersch says it will came late next year At some point, people thought it would start in 2013, then it was January 2014, then it was July. The latest was September. Yves Mersch is now saying he expected the SSM to start “at the end of next year”, specifically "September, October, November", according to Reuters. Bloomberg notes that the draft conclusions from the European Council had omitted a previous commitment for states to put “credible backstops” in place for failing banks. The latest draft is now requiring member to “make all appropriate arrangements”. The document also omits specific reference to the ECB’s asset-quality review. In his speech, Mersch struck a sceptical tone about the compromise reached on bank resolution. He said the new system was neither rule-based nor completely discretionary, and said the important thing now was to establish a central resolution authority that enforces the new structure. The market reaction to the resolution agreement was mixed, Reuters reports in a separate story. Shares in several banks in Spain and Portugal fell, as such Spain's Banco Popular, which was down 2.5%. But the European banking sector as a whole was down only 0.1%. The article cited a banking analyst as saying that European banks were now better capitalised than ever, but this was not true to second-tier or third-tier banks in both the core and the periphery. Werner Mussler writes in Frankfurter Allgemeine that the main reason why the banking union is so popular in Brussels is that everyone has his own definition. For some it is the promise of transfers to bail out banks. For Germany and the Netherlands the banking union is a system to prevent problems in the future – not as reinsurance for zombie- banks. He said the resolution rules constitute a typically foul EU-type compromise. He welcomes the principle that shareholders and bondholders have to be bailed in to absorb losses, but this is capped at 8% of liabilities, with loads of exemptions. Several categories of liabilities are excluded from the bail-in, which begs the question

41 what would happen if the remaining liabilities are not enough. But the discretionary element is even worse, as it allows national governments to exclude further liability classes – for example depositors in general. His bottomline conclusion is that there is no single resolution system, and that the system will not protect the banks against the next crisis. And it is particularly illusionary to think that the banking union could solve the present banking crisis. Schieritz on banking union Mark Schieritz has a hard-hitting comment in his Herdentrieb blog, in which he says there is no point in getting worked up about the ESM’s lending capacity, because the ESM will play virtually no role in bank resolution in the present crisis. He said it had already become clear a few days after the June 2012 summit that Germany will not support EU-level bank resolution. The banking union, if anything, is an instrument for the solution of the next crisis, not this one. It is practically dead. He said the banking union will ultimately only accept banks with clean balance sheets. The cleaning up will be a matter for national authorities, and through bail-ins. The best contribution the ESM can make is to help states meet this challenge. He concludes with a bet that the resolution regime will probably even be irrelevant for the next crisis. We have also argued for some time that this banking union will be irrelevant for this crisis – though we were more optimistic than Schieritz about the future, though the agreement on the bail-in regime suggests that our optimism may have been misplaced. There remains a massive gap between the reality of the coming union and the hopes and expectations especially in Spain, whose banking debts are simply not sustainable under a no-bailout regime, and where the government has no fiscal room for manoeuvre. Under this regime, the only way for Spain to solve its zombie bank problem would be by leaving the eurozone. Economists critical of the EU’s cynical youth-unemployment agenda Frankfurter Allgemeine leads its business section with a story highlighting criticisms of the EU’s summit much trumpeted anti-youth unemployment crusade. This is one of the few issues on which economists on the left and the right agree, but disagreement remains over whether these puny jobs cover up a lack of structural reforms, a view shared by almost all the economists and business reps quoted in the paper, or by excessive austerity, a view uttered by Peer Steinbruck. Prantl says German elections more open than you think Heribert Prantl has a brilliant comment in Suddeutsche in which he warns not to take the outcome of the German elections for granted. He writes the key is whether the current coalition can win another majority – the polls suggest at the moment that this is not likely. In that case, everything is open. The SPD will not easily enter into a Grand Coalition with Merkel. It will then be a race between a coalition of CDU and the Greens (who will have a numeric majority, but may find it hard to work together), or a coalition between the SPD, FDP and the Greens under Steinbruck. He says many commentators are blinded by the CDU’s relative lead over other parties, by Angela Merkel’s popularity, and Peer Steinbruck lacklustre campaign. But if you look at it from the point of view of coalition dynamics – the only perspective that ultimately matters – this is actually a very tight race.

Eurozone Financial Data 10-year spreads

Previous Yesterday This Morning day France 0.610 0.602 0.592 Italy 2.940 2.777 2.807 Spain 3.037 3.025 2.971 Portugal 4.944 4.792 4.797 Greece 9.377 8.970 9.08 Ireland 2.399 2.371 2.382 Belgium 0.979 0.926 0.921 Bund Yield 1.768 1.729 1.699

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.303 1.3045

Yen 127.860 128.94

Pound 0.853 0.8556

Swiss Franc 1.230 1.2345

ZC Inflation Swaps

previous last close

1 yr 1.03 1.12

2 yr 1.07 1.08

5 yr 1.37 1.5

10 yr 1.77 1.77

Euribor-OIS Spread

previous last close

1 Week -4.743 -5.143

1 Month -5.157 -4.157

3 Months 1.014 3.214

1 Year 30.257 30.957

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-06- 28.html?cHash=8f93926389ef337b1c32c6ea5489c893

Roubini and Bremmer on Charlie Rose: Unveiling New Abnormal Author: Nouriel Roubini · June 27th, 2013 · After the Great Recession, commentators have espoused their idea of the “New Normal”—a post-growth era of stagnant developed economies. But is it so simple? Nouriel Roubini and Ian Bremmer appeared on Charlie Rose to discuss their take on what the new paradigm will be like. Roubini differentiated what he is calling the “New Abnormal”: “Our point is that this situation is one that is not a stable equilibrium, is not even a stable disequilibrium. It’s an unstable disequilibrium. Take for example the eurozone. You cannot have just a monetary union without banking, political, economic, fiscal union. Either you move towards more integration or you’re going to have more fragmentation and disintegration. So the situation we face right now in the global economy, same in the eurozone, is of a unstable disequilibrium, therefore a new abnormal, that cannot be sustained.” The “New Abnormal” stems from the patchy, anemic recovery from the global financial crisis, Roubini explained, touching on the roots of the crisis: “It’s been anemic because the financial crisis was one, first in which it was too much debt, leverage and excessive risk taking in the private sector, households, banks, financial institutions, even corporates. And now is the result of the resolution of financial crisis were the search of public debt and deficits. Historically, whenever you start with too much private and public debt, there is a painful period that can last over a decade, where growth is going to be anemic. Why? Because you have to spend less, to save more or dissave less to gradually reduce this tox of deficit and debt. And that implies that economic growth has been very weak in the United States, in Europe, in Japan and other advanced economies. And that’s going to continue. Eventually, that slow economic growth is associated with rising unemployment rate, and also with social and political unrest. That’s the situation we’re facing right now – is unstable disequilibrium, is the new abnormal. We’re ahead of decade of very low economic growth.” An imperfect policy response has exacerbated the situation: “In part we needed monetary easing, to try to avoid and prevent this Great Recession from becoming the Great Depression, but liquidity has been like a drug, a palliative, it doesn’t resolve the disease, you have to do fundamental, structural changes that’s going to increase the productivity. For example in Europe, if you don’t do them, liquidity just buys you time, but creates zombie firms, zombie households, zombie countries and governments.” To see what Bremmer and Roubini had to say about global conditions, watch the interview at Charlie Rose: http://www.charlierose.com/view/interview/12998 http://www.economonitor.com/nouriel/2013/06/27/roubini-and-bremmer-on-charlierose-unveiling-new- abnormal/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+e conomonitor%2FOUen+%28EconoMonitor%29

ft.com World Europe Brussels June 27, 2013 6:42 pm Improvisation the rule in bank bail-in deal By Alex Barker in Brussels It took a year of squabbling and two all-night negotiating sessions for EU finance ministers to finally agree common rules to wind up troubled banks. But for the next five years when lenders hit the rocks, EU leaders will forced to do what they know best: improvise. Under Thursday’s deal, the stricter regime to force creditors to foot the bill of bank failure instead of taxpayers will only come into force from 2018. It opens up a long, uncertain transition where the eurozone aims for potentially conflicting goals: clean up balance sheets, breathe life into bank funding markets and keep a lid taxpayer costs – not least in Germany. All this will be attempted against the backdrop of an incomplete banking union, with the Europan Central Bank as single supervisor trying to find its feet, no imminent prospect of a central resolution authority to call time on failed lenders, patchy national rules on how to cope with bank failure, and just a handful of countries boasting standalone resolution funds. The big challenge looming on the horizon is the ECB-led bank stress tests next spring on around 140 lenders that the ECB will directly oversee. According to Jörg Asmussen, an ECB board member, its goal is “to start with a clean slate and to restore credibility in the European banking sector after two previous stress tests failed to do so.” Yet a stress test can only be as strong as the tools available to address any weaknesses or capital shortfalls that it exposes and that cannot be filled in the market. “They can be tough, sure, but what is the point of being tough if you reveal a hole that can’t be filled?” said one senior eurozone official. “What do they do then?” More ON THIS STORY/ Lex EU bank resolution – certainty required/ Video Europe builds bailout deal/ EU reaches deal on failed banks/ Q&A haircuts, bailouts and bank union/ Video EU summit ON THIS TOPIC/ Progress report – EU banking union/ EU fails to agree on bank bailout rules/ Opinion Europe open to bankers’ blackmail/ Asmussen calls for bank resolution fund IN BRUSSELS/ EU reaches €960bn budget deal/ Brussels blog Is Greece’s bailout running out of cash?/ Bank bailout pact eludes EU ministers/ Eurozone fund empowered to support banks Here the answer is partly provided by Thursday’s agreement on so-called “bail-in” rules for creditors. Although it will not carry legal force until 2018, three years after Germany and the ECB wanted it in place, its influence will nevertheless be felt. The template may not be followed in full – particularly with regard to writing down senior creditors – but the broad principles “will be hard to breach”, said a eurozone official. In the words of Michael Noonan, the Irish finance minister who brokered the resolution deal, “bail-in is now the rule”.

Framing any decision will also be stricter European Commission conditions on approving state support, which will require countries to impose losses on shareholders and junior bondholders before any taxpayer funds can be granted to banks. “It is a big change that people are only slowly factoring in,” said one senior EU official. Public support of some kind, for the weakest institutions, will nevertheless be almost inevitable. Benoît Cœuré, another senior ECB official, has said “a credible backstop facility needs to be in place” before stress tests begin. That backstop is available in economically strong member states, but for the weak the situation is more uncertain. Loans would be available from the eurozone’s €500bn bailout fund, the European Stability Mechanism, but those come with stringent conditions for the already debt laden government. The start date for direct recapitalisation of banks by the ESM, meanwhile, is still contested. Language calling for the instrument to be ready in time for the stress test fallout was removed from some drafts of the EU leader’s summit statement. Some ECB board members say it is unlikely to be available in time. Encouraging investors once again to buy bank bonds would help mitigate state interventions. But some banks fear that the deal on bail-in – which gives member states wide discretion to exempt some creditors from losses – still leaves too much uncertainty for investors, putting further pressure on funding costs. Oliver Moullin of the Association for Financial Markets in Europe, said: “It is important that any flexibility in the application of the bail-in tool is clearly framed to minimise uncertainty, unpredictability and ‘level playing field’ issues.” Investors may handle this risk by again opting for banks in rich countries, rather than those that cannot afford to spare creditors from bail-in – reinforcing exactly the problem banking union was designed to fix. The market reaction to the bail-in deal on Thursday gave a clue: shares in banks in weak countries fell more than those in strong ones. http://www.ft.com/intl/cms/s/0/dd534582-df3e-11e2-a9f4- 00144feab7de.html#axzz2XJ6cvopm

06/27/2013 06:02 PM EU Banking Deal Why It Will Be Ignored in Times of Trouble By Christian Rickens Under a new EU deal on banking liquidations, banks and investors are supposed to get hit before taxpayers. The stricter the rules, though, the less likely politicians are to follow them. Here's how this might play out in the next crisis. Let's pretend it's the summer of 2021. German Chancellor Ursula von der Leyen is hoping for a quiet campaign and an easy victory in national elections for her conservative Christian Democrats and their coalition partner, the Green Party. But then a bomb drops. Due to misguided speculation on offshore wind parks, Deutsche HypoCommerz -- an institution created through a series of mega mergers of Deutsche Bank, HypoVereinsbank and Commerzbank that has become Europe's largest lending bank -- is in trouble. For the first time, new bank crisis rules -- agreed to eight years earlier in a late-night meeting of EU finance ministers -- have to be applied. Systemically relevant Deutsche HypoCommerz has to be wound down. Bank shareholders lose all their capital as do bondholders. Because that money together isn't enough to cover the major bank's liabilities, customers with deposits of more than €100,000 ($130,000) are also forced to cough up. Taxpayers Can Breathe Easy -- In Theory Taxpayers, by contrast, are able to breathe easy -- at least in theory. In contrast to the 2007 financial crisis, they aren't being forced this time to pony up for the gambling undertaken by major banks -- at least in theory. In contrast to 2008, the bank bailout won't throw entire countries, as was the case with Ireland or Spain, into a debt crisis -- at least in theory. In practice, however, things look different. Banking industry lobbyists and economists alike warn in unison of the terrible consequences a winding down of Deutsche HypoCommerz would have on the European economy. The president of the German banking association also warns of a "crisis of confidence," of the threat of "capital flight out of the euro zone" and of a resulting credit crunch that "could hit Germany's small- and mid-sized companies, with its millions of employees, especially hard." In the New York Times, Paul Krugman grouses at Europe for sticking naively to principles instead of living up to its responsibility at a time when the global economy is teetering on the abyss. Meanwhile, the governor of the state of Hesse, warns of the "enormous importance of Deutsche HypoCommerz for Frankfurt as a financial capital." Von der Leyen begins to worry about what she once thought was a sure-fire re-election. When two major banks in France and Britain fall into similar difficulties soon after, an exception to the rules is made at a specially convened EU summit. EU member-states assume the liabilities for the majority of the offshore junk bonds from the balance sheets of their banks and transfer them to a bad bank. At the same time, Deutsche HypoCommerz is recapitalized with a silent investment by the German government. Shareholders, creditors and major customers remain untouched.

In a night time press conference, von der Leyen notes that "not a single euro of taxpayer money" has been lost. After all, she says, interest payments will be applied to the quiet investment "as soon as Deutsche HypoCommerz is profitable again." She also says the Bad Bank will have good chances of generating profits with the credit derivatives "as soon as the market for these securities has recovered." Responding to questions by journalists, von der Leyen gives a testy reply: In no way, she says, does the deal represent any reversal of the principal of bail-ins. "Risk and liability must always be viewed in the market economy as two sides of one coin," she says. A Long List of Broken Rules Back to the present. Here's what the fictional episode shows: According to the rules that the EU member states drew up in the early morning of June 27, 2013, for dealing with the next banking crisis, just about anything goes. It is unacceptable that taxpayers have to answer for the faulty speculation of the banks -- at least not before shareholders and creditors have lost their money. And those who entrust their savings to a bank, at least over a certain sum, have a duty to inform themselves about that bank's business practices. The EU pursued this course for the first time with the Cyprus crisis. And now, at Germany's urging, it is likely to become the rule for all major European banks. But the problem lies in the word, "rule." Financial markets, politicians and citizens have long become accustomed to the EU countries following their self-imposed rules for only as long as they suit them. The Maastricht criteria were forgotten as soon as Germany wanted to borrow more money than it was allowed. And how about the ban on sharing debt liability across the currency union? That was history the moment the union began to fear the consequences of a Greek default. The list goes on and on. The test for the new banking rules, as well, will not be passed until they are applied to a major bank in the heart of the EU -- not in Cyprus, but in London, Paris or Frankfurt. And even then, they will have to be pushed forward against tremendous pressure from the banking lobby, and despite all the economic risks. Experience to date does not suggest that this will ever happen. URL: • http://www.spiegel.de/international/business/commentary-on-new-eu-bank-liquidations- deal-a-908251.html Related SPIEGEL ONLINE links: • Bail-Ins EU Deal Protects Taxpayers in Bank Bailouts (06/27/2013) http://www.spiegel.de/international/business/0,1518,908175,00.html • Battling the Crisis Disunity Plagues EU Banking Union Talks (05/15/2013) http://www.spiegel.de/international/europe/0,1518,899924,00.html • Bomb from Brussels Cyprus Model May Guide Future Bank Bailouts (04/01/2013) http://www.spiegel.de/international/europe/0,1518,891849,00.html

06/27/2013 04:30 PM Ailing Infrastructure Scrimping Threatens Germany's Future From the outside, Germany appears to have a robust economy. But a new study by a leading economic institute reveals that the country is investing far too little in infrastructure and its future, effectively saving itself to death. By SPIEGEL Staff When the main contenders in the current general election campaign talk about Germany, if often sounds as if they all belong to the same party. Chancellor Angela Merkel, of the conservative Christian Democratic Union (CDU), has praised the country as a "successful export nation." Her opponent, Peer Steinbrück, of the center-left Social Democrats (SPD), has lauded the "strong country" whose merits range from the traditional "social partnership" between German employers and employees to the "excellent university research landscape."

DER SPIEGEL Infrastructure Investment Gaps Of course there are also a few differences between the candidates, primarily when it comes to social justice. Steinbrück wants to raise taxes for the wealthy, while Merkel would like to increase pensions for retired mothers. But anyone who compares the speeches of the two top candidates is reminded of an upbeat campaign slogan from the 1980s: "Way to go, Germany!" The chancellor and her main challenger are painting a reassuring but misleading image of the country, however. For quite some time now, Germans have suspected there is little reason for complacency. Anyone who travels through the country will notice roads full of potholes, disused railway tracks and dilapidated schools. And anyone who works for one of the country's large industrial companies also knows that most new production plants are built abroad, not in Germany. 49

Now, economists have translated Germany's deficiencies into hard numbers. The German Institute of Economic Research (DIW) is presenting a study this week that proves Germany is not Europe's economic hegemon, as British weekly The Economist recently suggested on its cover. Instead, the DIW paints the picture of an ailing economy that has been seriously out of balance for years. Germans save more money than most living in the industrialized world, but they invest very little in their future, making them much weaker economically than leading politicians realize. According to the study, Germany is saving itself to death.

DER SPIEGEL National Savings Rate Comparison Chronic Lack of Investment The diagnosis is alarming. Although Germany has weathered the financial and economic crisis better than all other large industrialized nations and created over a million new jobs, this comes largely thanks to years of wage restraint by the country's trade unions. To make matters worse, the productivity of these jobs -- a decisive aspect of long-term growth and prosperity -- has contributed just as little to the current upswing as consumer demand, which has been an important growth driver in other countries. The Berlin institute points to a chronic lack of investments as the main cause for this low productivity. Both the state and the private sector spend too little money on infrastructure, education, plants and machinery. "Despite all the successes of the past few years, Germany has not created an investment basis to ensure robust growth," the researchers conclude. In other words, Germany is living off its reserves. Bridges are crumbling, factories and universities are deteriorating, and not enough is being spent to maintain phone networks. This has resulted in a massive impoverishment of the country, according to DIW calculations. Nearly 15 years ago, the state's net assets still corresponded to 20 percent of gross domestic product (GDP). When adjusted for inflation, this amounts to nearly €500

50 billion ($650 billion). By 2011, this had dwindled to 0.5 percent of GDP, or a mere €13 billion, primarily due to systematic neglect. All of Germany's political parties have pledged to spend more money on highways, transportation and education during the upcoming legislative period -- but they have often made such promises in the past. In the end, however, the already meager budgets for investment were slashed and the money was distributed to preferential groups of voters. It could be a similar story this time around. Good at Saving, Bad at Investing The investment gaps keep getting bigger, too. The investment rate, or the proportion of the domestic product used for investment, has been declining for years. In 1999, it was still at 20 percent, but today it's down to just 17 percent. Year after year, tens of billions of euros have been missing for the sorely needed maintenance of highways, railways and machinery.

DER SPIEGEL German Investments Abroad Since 1999, this has grown to become a colossal renewal backlog amounting to a trillion euros, according to the researchers' calculations. There's a simple adage in economics: Today's investments are tomorrow's growth. Accordingly, yesterday's investment gap is today's loss in prosperity. The DIW researchers have calculated the impact of this shortfall over the years. If the Germans had invested as much as the average euro-zone country over the past 15 years, annual per capita growth would have been one percentage point higher -- and the Germans would be much more affluent today. That's not to say that the Germans are poor, though. The country's savers put aside more money than practically any other industrialized nation. This is actually a good sign because savings form the basis for investments in an economy -- at least in a normal situation.

But for some time, nothing has been normal in Germany in this respect. Not only have the Germans placed a large proportion of their nest egg abroad, but the money invested there has not produced "the expected returns," as the DIW report says. "Since 1999, German investors have lost some €400 billion through bad investments abroad."

DER SPIEGEL Which Countries Invest the Most Domestically?

German industrial giants have been the main victims of this botched investment strategy. Telecommunications giant Deutsche Telekom, for example, wiped out shareholders' assets to the tune of €40 billion when it acquired two US mobile phone operators. The same thing happened to Daimler when it purchased American carmaker Chrysler for far too much. Eventually, both investments had to be largely written off as a loss. But private individuals and banks also lost vast amounts of money. They purchased US securities, acquired a stake in office buildings in Dublin or invested in Spanish resorts. A large proportion of these assets disappeared, evaporating in the chaos of the global financial and European Union debt crisis. If the Germans had invested their money at home, not only would they have received higher yields, but their country's economy would have grown more rapidly, DIW researchers discovered. This also would have produced higher tax revenues for the government. The economists draw a clear conclusion from their analysis: The government has to spend more money on day care centers and domestic railway lines while creating incentives for more private investments in areas such as the energy and telecommunications sectors. An investment package worth €75 billion a year would not only help fuel domestic growth, but also "bolster the Spanish and Italian economies," says DIW head Marcel Fratzscher. 52

At first glance, that may sound like the end of strict German budgetary policies, as politicians in Southern Europe have been urging for some time now, but in reality the DIW program is nothing of the sort. The researchers don't propose taking on additional debts. Instead, the government's money would be directed to where it produces the maximum economic benefit -- for example, in the transportation network of the western German state of North Rhine-Westphalia, Germany's commercial and industrial heartland.

DER SPIEGEL Transportation Infrastructure Investments Rotting Roadways The building looks like the bridge of a spaceship. Staff members dim the overhead lamps and green, yellow and red lights are blinking everywhere. The large monitors under the ceiling don't provide an expansive view of outer space, though. They transmit live images of traffic on North Rhine-Westphalia's autobahns. In late April, the Düsseldorf Ministry of Transportation opened this new control center in a bid to deal with its increasingly congested highways. Indeed, many of the county's bridges and autobahns still date back to the 1970s. They are rusting and crumbling everywhere, and can no longer handle the continuously rising volume of traffic. Recently, the bridge over the Rhine River near Leverkusen was closed to trucks for a number of weeks, backing up traffic for miles. This is not just a headache for North Rhine-Westphalia, but all of western Germany. Major freight traffic routes to Western Europe pass through the state. According to studies commissioned by North Rhine-Westphalia Transport Minister Michael Groschek (SPD), the state's entire highway infrastructure is in desolate condition. Of the 100 bridges inspected so far, 80 are in desperate need of repairs and maintenance. An additional 700 inspections still need to be conducted, yet Groschek already estimates that some €4.2 billion must be invested. "And things don't look any different with many railway bridges, highways and canals," he says, adding that some rail bridges are more than 100 years old.

Regional newspapers are already referring to the area's "terminal gridlock," and some companies are wondering how long they will still be able to ship their manufactured goods to the global market. One of these companies has its headquarters in the Siegen- Wittgenstein region, just east of Cologne. SMS Siemag has a global workforce of 13,500 and produces huge high-tech rolling stands for new steel mills. These machine components weigh up to 400 metric tons, and it takes weeks of precision work to manufacture them at the plant in Hilchenbach, Germany. "Up until then, we have everything well under control," says CEO Burkhard Dahmen.

DER SPIEGEL State Child Care Investments But then comes the transportation. The components have to be trucked down to large ships in the port of Hamburg or the inland harbor at Duisburg -- and this has become an odyssey. Many bridges and highways in North Rhine-Westphalia are no longer rated to handle the immense loads. They could literally collapse under the weight. When the logistics professionals map out a route, it takes ages for the shipments to arrive. "They're on the road sometimes for over a week before they reach the seaport of Hamburg," says Dahmen. The trip used to take just one day, but now there are sometimes no passable routes due to construction or closed highways. Then the company runs the risk of paying large contractual penalties because timely deliveries are a standard element of international business agreements. Transport Minister Groschek has promised to help companies like SMS Siemag, but it remains to be seen how he intends to finance the necessary work on the highway network. After all, this is not the only region where the infrastructure is crumbling. Some 20 percent of the nation's autobahns and over 40 percent of federal roads need repair.

A Meager Transportation Budget The condition of the railway network is not much better. Volker Kefer, the board member responsible for technology at Germany's national railway operator, Deutsche Bahn, calculates that if the company actually pressed ahead with all modernization and expansion projects that have been planned and budgeted, it couldn't launch any new projects until the year 2030. Nevertheless, there is a massive investment backlog. Deutsche Bahn should actually be expanding important transportation hubs like Cologne and Hamburg, meeting international obligations like the Fehmarn Belt crossing between Germany and Denmark, and improving noise-reduction measures along freight routes. But there is little to no funding available for all of this. "We have to make up our minds in Germany," says Kefer. "Either the federal government invests more money, or we will soon reach our capacity limits." There is a simple reason why the world's fourth largest economy -- and the most important transit country in Europe -- maintains a poorer transportation network in some instances than many emerging nations. The transportation budget is chronically underfinanced. The DIW experts have meticulously calculated that between 2006 and 2011 alone, the federal government, states and municipalities annually invested nearly €4 billion too little in maintaining Germany's over 650,000 kilometer (400,000 miles) of highways and its railway network encompassing some 40,000 kilometers (25,000 miles) of tracks. Since this tradition of bleeding the country dry extends back to the 1990s, there is an enormous need for investment, the researchers conclude. If Germany intends to adequately maintain its existing infrastructure, it will have to spend an additional €6.5 billion -- year after year. Falling Behind with Internet Connections Patience is not exactly one of Ute Gabriel-Boucsein's best qualities. "We were fed up with the endless waiting, the excuses and inaction of the big companies," she says. The resolute woman from the North Friesian town of Husum on the North Sea coast, not far from the Danish border, runs a fairly unique company with an equally unique name: BürgerBreitbandNetz ("CitizensBroadbandNetwork"). Founded over a year ago, the company has some 850 owners, all of them residents of Husum and surrounding communities. Collectively, they have invested some €2 million as shareholders in the company. The North Friesians intend to use the money to build a hyper-speed Internet. Over the next seven years, some 20,000 households and companies in 59 communities will be linked via a network of state-of-the-art fiber-optic cables. The plan requires an investment of roughly €70 million. The idea was hatched over two years ago out of sheer desperation. Without a fast Internet connection, it was no longer possible to sell properties, building sites and commercial lots in the thinly populated region, according to Gabriel-Boucsein, who says that "the region was in danger of hemorrhaging." And since the state offered few direct options and companies like Deutsche Telekom have no interest in sinking too much money into an area with so few inhabitants, the North Friesians have developed their own modernization plan. Work has already begun on one segment, and when it is

55 completed the first families will be provided with phone service, their own homepage and a turbo Internet connection with speeds of 50 megabits per second. It's hard to believe, but when it comes to one of the most important technologies of the 21st-century, namely building a nationwide high-speed Internet network, Germany is in danger of lagging behind the rest of the international community. Although German industry and leading technology gurus are calling for the establishment of a high-speed fiber-optic network, little progress has been made. In a study published late last year, Germany came in almost last -- far outranked by countries like Lithuania, Bulgaria and Romania. Germany's decades-old copper cable network won't be able to keep up with the rapidly increasing amounts of data and transfer speeds that will come to dominate development in the coming years. Experts like Torsten Gerpott from the University of Duisburg- Essen say that without fiber-optic cables Germany will simply no longer be a major international player. Chancellor Merkel says that she wants to see 75 percent of all Germans have a high- speed broadband connection by the year 2014. But that's hardly feasible. Speeds of up to 10 megabits are the norm these days. The switchover to fiber-optic cables would cost over €80 billion -- and no one knows where the money is supposed to come from. The state can't raise this amount of money, and Deutsche Telekom is being held back by the Federal Network Agency, which oversees the sector. Telekom CEO René Obermann complains that for a long time the agency was only interested in reducing phone and Internet rates, a fashionable policy that brought in votes. But Germany's strict price regulations made it impossible for companies to build up the necessary billions of euros in reserves to build new networks. There isn't enough funding -- just as there is a dearth of cash to implement one of the country's key industrial projects for the future, the Energiewende, Germany's plan to phase out nuclear energy and massively increase its reliance on renewable sources. Communication Breakdown Right until the end, Arno Rosenkranz was hoping for a positive signal from the company headquarters in Düsseldorf. The E.ON plant foreman and his team had perfectly prepared everything over the previous months. All of the permits had been acquired, and there was no objection to the huge project right in the heart of the Kellerwald-Edersee National Park in the central German state of Hesse, where energy giant E.ON planned to significantly increase the size of the Waldeck pump-storage power plant, which had existed since 1932. Water from an enlarged lake above ground was to flow through huge tunnels inside the mountain and fall hundreds of meters to turn new cutting-edge turbines and produce power for the Energiewende. The company planned to invest some €300 million in the project, which actually fits in perfectly with the federal government's intended reorganization of the German power system. With the help of hydroelectric power, fluctuations from solar and wind energy can be balanced out in an elegant and environmentally-friendly manner. But the company's headquarters failed to give the project the green light, citing unclear conditions in the energy sector that made the investment too risky. The situation is grotesque. For the Energiewende to succeed, hundreds of billions of euros have to be invested in new networks, wind farms and power storage facilities. But

56 banks, insurance companies, corporations and private investors are significantly scaling back their plans. Countless projects are being postponed, reduced or scrapped altogether in reaction to the indecisive and haphazard approach of politicians. Instead of doing everything possible to promote private investments in new power technologies and infrastructure, for months now the federal and state governments have not even been able to agree on a reform of the Renewable Energy Act (EEG) -- with dramatic consequences. The entire power sector -- from wind farm operators to electrical giants like RWE -- is plagued by uncertainty. Will there be a cap on subsidies for renewable energy as announced by German Environment Minister Peter Altmaier? Will storage facilities like the one in Waldeck be granted special conditions because they stabilize the network? Will the power lines for the planned offshore wind farms in the North Sea and the Baltic Sea be ready on time? And who will pay for maintaining and operating the reserve power plants that are still required? As long as such issues remain unresolved, no serious investor will be willing to put their money on the line, say officials at Trianel, the municipal utility association in Aachen, which is Germany's largest such organization and represents over 100 companies. Consequently, Trianel has just put the brakes on a €700 million project in Krefeld, where two old coal-fired power plants were to be replaced by highly efficient environmentally-friendly gas turbines, located in a business park for chemical companies. The permits, the money and the will to build are all there. "What is missing," say Trianel managers, "are reliable guidelines for how things should continue next year with the Energiewende." In the run-up to the general election in September, no decisions are likely to be made. Merkel doesn't want to give the opposition any election campaign ammunition on the Energiewende issue. For their part, the Social Democrats and the environmentally- friendly Green Party are using their influence in the state governments and in the upper legislative chamber that represents the states, the Bundesrat, to block important reforms. The bitter consequence is that hopelessly obsolete power plants and networks are not being replaced with modern technology, and it is becoming increasingly expensive to fill the gaps in power supplies. According to the DIW's calculations, though, a rapid expansion would be extremely well-invested money, even with additional subsidies. The study points out that the savings alone from the reduced use of fossil fuels like oil, gas and coal would compensate over the medium term for the billions invested in green energy. Already by the year 2020, this could boost economic growth by some 2.8 percent. Other experts recommend a slower transition to wind and solar energy to avoid significantly driving up prices. But even that would entail fundamentally restructuring Germany's power system. In addition to reliable framework conditions, this would require annual investments of up to €38 billion. When it comes to existing programs, DIW expert Claudia Kemfert says that it is primarily initiatives to make buildings more energy efficient that require more funding over the coming years. She points out that installing the right insulation or new heating systems can pave the way for immense reductions in energy consumption -- assuming, of course, that enough engineers are trained in Germany to be able to plan this transition.

Playing Catch-Up on Education The Fröbel day care center in the Berlin district of Adlershof looks a bit like paradise -- and not just because the colorful building stands out from its inhospitable surroundings. Children can browse through reading corners jam-packed with books, conduct experiments in the research area or romp around in the big yard, which includes a playground. The parents also get just about everything they want. The day care center is open year- round, usually from 6 a.m. to 8 p.m., and right next door there is a family counseling center that provides professional assistance for all issues related to raising children. As good as all this might sound, the head of the Fröbel Group, Stefan Spieker, would like to offer even more -- improving the program to match the standard in other countries. "In order to keep pace internationally, we would have to significantly improve the ratio of caregivers to children," he says. "But we don't just need more caregivers -- we also need to give them better pay to make the profession more attractive." But there's no money in government budgets for this. For years, German politicians have tirelessly repeated the mantra "we need to invest more in education" during their grand speeches -- and, at first glance, this political aspiration almost appears to have come true. Public spending on education rose by one-third from 1995 to 2009, bringing it to some €100 billion. But the reality behind these figures is anything but a success story. Expenditures actually only rose somewhat faster than inflation. With a proportion of the government budget amounting to just 5.3 percent, Germany's spending on education is not only below the EU average, but also considerably lower than in most OECD countries. And the country's ambitious nursery care program, which costs billions of euros and aims to offer care to one out of every three toddlers, is making slow headway. Nearly 200,000 spots are still needed. Still, experts have known for a long time that education is much more effective when it begins at an earlier stage in a child's life. German day care centers, however, only achieve "a mediocre level of quality" compared to international standards, as the DIW researchers note. To make matters worse, many children "whose parents have low-level education" are often not even enrolled in the first place. It would thus make sense to further improve childcare facilities for toddlers. Currently, a meager 0.1 percent of Germany's GDP goes toward educating children under the age of three. In Scandinavia, this figure is up to eightfold higher. If Germany were to use this as a guideline, federal, state and municipal governments would have to spend some €18 billion more on early childhood education than they do today. Choosing the Future, Not the Past "Politicians are making campaign promises," says DIW head Fratzscher. "But not enough is being said about how Germany can secure its economic future." His plan is an annual investment program amounting to €75 billion. The funds for this are available, according to DIW researchers. In their opinion, public finances offer sufficient leeway to raise a large proportion of this money. "Over the medium term, government budgets will enjoy increasing surpluses," as it says in the study. For the year 2017 alone, the DIW anticipates a public-sector surplus of €28 billion.

On top of this, there are some €10 billion that the federal government is allowed to raise on the capital market despite the so-called debt brake, which requires Berlin to maintain a nearly balanced budget starting in 2016. Researchers see this as an ideal opportunity as interest rates are cheaper than almost ever before. "German financial policy should make use of this excellent fiscal situation and create a roadmap today for higher potential growth in the future," DIW researchers recommend. In addition, private investments could be mobilized on a large scale if the next government creates the right conditions. Germany's savers are looking for high-yield investments. Since the beginning of the euro crisis in particular, international financial investors have also come to appreciate Germany's legal framework and stability. The only problem is that the DIW proposals don't match up with the political election campaign platforms. Anyone who wants to boost investments should not spend the money on higher pensions and more generous child-rearing benefits -- or increase taxes, as the SPD and Greens are suggesting. This could have a "significantly negative" influence, Fratzscher warns. Nevertheless, there is a fairly good chance that the DIW proposals will be heard in Berlin, although probably not over the coming weeks. Right now, Germany is in the midst of an election campaign -- and election campaigns are a time for illusions, buying votes and making empty promises. But this election campaign will end on Sept. 22, and then the politicians must govern the country. What's more, a coalition of parties, regardless of its political leanings, will have to decide on which agenda to pursue with the limited financial means available over the next legislative period -- between the future or the past, development or decay, clientelism or helping to resolve the euro crisis. "It's about the right priorities," says DIW head Fratzscher. "It's about the question of whether Germany should focus on consumption and fiscal transfers or on investments." He urges a course that is "clearly in favor of investments." BY MAX BIEDERBECK, SVEN BÖLL, FRANK DOHMEN, CHRISTIAN REIERMANN, MICHAEL SAUGA AND BARBARA SCHMID Translated from the German by Paul Cohen URL: http://www.spiegel.de/international/germany/diw-weak- infrastructure-investment-threatens-german-future-a-907885.html Related SPIEGEL ONLINE links: • Photo Gallery Weak Infrastructure Spending in Germany http://www.spiegel.de/fotostrecke/fotostrecke-98435.html • About Face Chancellor Merkel Cools on European Integration (06/25/2013) http://www.spiegel.de/international/europe/0,1518,907339,00.html • The Rise of the Fearmongers Germany's New Euroskeptic Elite (06/19/2013) http://www.spiegel.de/international/europe/0,1518,906675,00.html • Trade Talks Deal Could Double German Exports to US (06/18/2013) http://www.spiegel.de/international/business/0,1518,906407,00.html • Starchitect Trio The Men Behind Germany's Building Debacles (06/14/2013) http://www.spiegel.de/international/germany/0,1518,905472,00.html • Disastrous Public Works Projects A History of Political Deception in Germany (01/10/2013) http://www.spiegel.de/international/business/0,1518,876856,00.html 59

06/27/2013 03:34 PM Solidarity Plea 'Germans Always Looking out for Own Interests' By SPIEGEL Staff Three influential Europeans from Luxembourg, Spain and Poland call on Germany to lead the euro zone out of the crisis without pursuing its own interests. It's a very straightforward sentence, seemingly written in stone, with no caveats, a fundamental comment on political life in Europe: "Nothing can happen in the EU without the active support of Germany's chancellor, Angela Merkel." It's the conclusion reached by Britain's The Economist, at the beginning of its cover story on Germany, "The reluctant hegemon." Several lines later, the article states that Europe "is drifting towards disaster." What does everyone have against the politician whose high approval ratings remain unchallenged in Germany? Why are European politicians looking with trepidation to Brussels this week once again? There, at Thursday's meeting of the European Council, the leaders would approve a banking union if they could, but the union will not come about because Germany is applying the brakes. "At this point, I see no need to transfer even more rights to the Commission in Brussels in the coming years," the chancellor said in a recent SPIEGEL interview. For Germany's neighbors, this means that if there is to be a common economic and fiscal policy to overcome the debt crisis, Berlin will be setting the guidelines. Germany's stance on efforts to save the euro is being increasingly perceived as being unreasonable, and not just on the streets of Athens or Madrid. According to a recent poll, a majority of citizens in Italy, Poland and the Czech Republic believe that Germany is the most arrogant power in Europe. And virtually all Europeans, except the French and, of course, the Germans, feel that Germany shows the least amount of solidarity among European Union countries. How strong is the resentment against Germany among its neighbors? Is there truly a widespread fear of German hegemony in Europe? Three prominent Europeans spoke to SPIEGEL about these issues. One comes from the small country of Luxembourg, a founding member of the EU, another from Spain, an accession state, and the third from Poland, the most successful of the new member states in Eastern Europe. A View from Luxembourg Luxembourg Foreign Minister Jean Asselborn, 64, is the longest-serving foreign minister in the European Union. He is a socialist and known for being outspoken. He considers it an EU basic right of sorts that the union makes it possible for even small countries to express their views without fear of repercussions. That is precisely what Asselborn does, and even more than usual recently. He says that it bothers him to hear Berlin constantly preach: "You must, you must, you must." And this is his take on the mood at the Brussels European Council meetings: "You Germans are always only looking out for your own interests. And we supposedly do everything wrong, which is why we have to bleed."

Asselborn says that Merkel recently asked him, on the sidelines of the 150-year anniversary celebration of Germany's center-left Social Democratic Party (SPD): "Well, Jean, have you said something bad about me again?" Ironically, there has never been any serious friction between the two countries, with the exception of the problem of German tax evaders parking their money in Luxembourg banks, which has now been largely resolved. Asselborn's biggest worry is that Germans could soon begin to believe that they are better off going it alone. He says that when he reads German blogs or headlines in the tabloid newspaper Bild he sees an attitude that implies: We don't need Europe or the euro to be strong. He believes that this feeling of omnipotence is dangerous, because if that's the way Germans are beginning to think, the European idea will be finished. Germans and Their History He doesn't like to do it, but now he has to broach the subject of the Germans and their history, because, as Asselborn argues, therein lies the key to the current crisis. After all, he says, the European Union was not created out of pure philanthropy. It certainly played a role, but the Schuman Plan, the European Coal and Steel Community, which later developed into the European Community, was also a means to an end for the French, who wanted to exert control over Germany's industrial Ruhr region. The Germany army invaded Luxembourg in 1940 and occupied the country for the next four years. Some 6,000 Luxembourgers fell victim to Nazi dominance. Asselborn's mother was drafted to serve in the German Reich's labor service in Berlin, while his father, a steelworker, hid from the Nazis. Of course, says Asselborn, British and French politicians can be just as stubborn when protecting their national interests. But no one would compare them to Bismarck or Hitler, as is constantly the case with Merkel. The Germans, says Asselborn, should not forget what they owe the European Union and the euro: that Germany is now the only large country in the euro zone still experiencing economic growth. But according to Asselborn, one should also imagine Germany as a locomotive that is no longer pulling a train. It is this image that is causing resentment in Europe. Asselborn sees only one way out of the crisis: euro bonds. That is precisely what Merkel does not want. But why, exactly? "Just like Luxembourg, Germany pays about 1 percent interest to borrow money," says Asselborn. "What would be so objectionable about paying 2 percent?" There is no other solution to getting Greece, Cyprus and Portugal back on their feet, Asselborn argues. Even France would suffocate without communitization of a portion of the debt, and Italy would be in worse shape than it is now. "Italy alone has €2 trillion ($2.6 trillion) in debt, and our bailout fund contains only about €700 billion," he says. But Asselborn isn't very optimistic. He doesn't believe that Merkel will change her position before the German national elections in September. But Berlin, he says, is only making things worse by citing German taxpayers as the reason for its policy. After all, each of the provisions of the fiscal pact could have been implemented under current EU law. Why create an additional agreement? "Just to show that Germany has imposed its will on the others," he says. "It's meant to convey the sentiment that if we have to pay, it will only be under conditions that we determine." It's

61 as if they were saying: "We are applying the German system to Europe. We are doing well, so the others will do well, too." A Spanish Take on 'Austericide' Felipe González, 71, has a word for the austerity demands imposed on his country: "austericide." And he leaves no doubt as to who is administering this deadly medicine to Spain. "Europe is expected to do Germany's bidding," says González. The Socialist politician was Spain's prime minister from 1982 to 1996. One of his indelible memories is an invitation to the SPD's convention in the southwestern German city of Mannheim, a week before the death of then-dictator Francisco Franco in November 1975. At the time, German officials simply ignored bureaucratic rules and issued a one-day passport to González, who had been forced to operate underground in Spain. González had strong relationships with three former German chancellors. He was a confidant of Willy Brandt, a friend of Helmut Schmidt and a close friend of Helmut Kohl. He was one of the few to congratulate the German chancellor only hours after the fall of the Berlin Wall. He says that Kohl later told him that he could count those who had called him that night on the fingers of one hand. And it was with Germany's help that González was able to make his country an important member of the European Community. But now González, a tried-and-true friend of Germany, accuses the country of two things: focusing too heavily on its own short-term interests in the crisis, and -- this is even more dangerous -- changing its fundamental position on Europe. He insists that he is not out to blame the Germans for everything. He can be just as ruthless as Merkel in listing the Spaniards' mistakes, such as the policy of deregulation that, beginning in 1998, left it up to local governments to make land available for development as they saw fit, leading to the real estate bubble. In the boom years, says González, the Spaniards practically sucked in the savings of the French, the Germans and the British, but then used this debt only for excessive consumption. "It's foolish for the borrowers to be blaming the lenders now for having given them too much credit," he says. A Political Shift But he also accuses Germany of not having properly analyzed the crisis. González believes that it is wrong to assume that Spain's problem is one of solvency, "instead of realizing that it is in fact a liquidity problem." And the austerity policy demanded by Brussels, he says, is only exacerbating the current liquidity problem, which inevitably leads to a solvency problem. The fact that the Spaniards are now forced to swallow this poison of wrongheaded austerity demands "is partly the Germans' fault." There has been a political shift, says González, which ties in with an expression coined by former German Chancellor Gerhard Schröder. Instead of invoking a European Germany, says González, Schröder spoke of a "generation without complexes," which is typical of "the Kohl generation," which would include Merkel. EU leaders no longer butt heads over the future of the union, says González. In the past, Kohl would drum his fingers on the table in Brussels whenever his fellow European Council members tried to avoid adopting a resolution, as they often did. "And when his blood sugar levels were down, as I suspect was the case, he would occasionally slam his

62 fist on the table, causing the glasses to shake," González says. That sort of thing doesn't happen anymore, he says. Emotion has given way to detachment. And because everyone avoids having to make real decisions, he says, the basic contradiction of the euro introduction still hasn't been corrected. "We wrote in 1998 that the common currency would not function without an economic and fiscal union," he says. But then it was decided by the member states that the stability pact would have to suffice. González has reached a bitter conclusion. "The only thing that Europe's countries have in common is growing anti-Europeanism," he says. "Nationalism is dangerously on the rise, and we don't have much time left." Poland's Realist It was a surprise to hear a Polish politician saying that he feared German power less than German inactivity, just at the moment when Germany's dominant role was becoming obvious. On the other hand, Foreign Minister Radek Sikorski, 50, has never been a predictable politician. He became involved with the Solidarity movement early on, he fought alongside the Afghan mujahedeen against the Soviet occupiers, and he worked at the conservative American Enterprise Institute. In November 1989, he and historian Anne Applebaum, who would later become his wife, celebrated at the Berlin Wall. At the time, he wondered, quietly, whether Germany would soon be bursting with self- satisfaction once again, "and we Poles" would become "the victims of this self- satisfaction." But Sikorski claims to be a realist. The statement he made in 2011, he says, was "not a Polish vote for Germany's leadership in Europe, but the recognition of reality." And for Sikorski, part of that reality is that Europe is threatened. He calls the phenomenon of renationalization in some individual member states "incredibly dangerous." But he doesn't just want to complain. "We should stop making decisions in Brussels and then, for populist reasons, go home and portray Brussels as the root of all evil," he says. No one should be afraid of Germany, Sikorski says. "When we held the EU presidency," says Sikorski, "we saw that a democratic Germany, which is deeply rooted in the Union, needs other countries to be able to make positive decisions in both foreign and domestic policy. This is not a Germany we should have to fear." German Independence Of course, he says, Germany has changed. More than half a century after World War II, it has "declared its independence." For Sikorski, this declaration came in the form of Germany's refusal to take part in the Iraq war. "Germany simply said no to the United States on an important geopolitical issue," he says. Now Sikorski expects Germany to "recognize and respect the interests of its partners, as well." With undiplomatic directness, he says: "You violated the stability pact, just as the others did." This, he explains, became an excuse for other countries to emulate Germany, and for the European Commission not to impose any sanctions. Still, he is not worried about having to listen to nothing but cost-cutting proposals from Berlin in the future. "We support fiscal responsibility," says Sikorski, noting that Germans aren't the only ones familiar with hyperinflation. The Poles, he says, experienced it in the 1980s and '90s. "But we also have to avoid the opposite approach,

so as not to experience years of stagnation as a consequence of an excessively strict monetary policy," he says. He points out that Luxembourg, Spain and Poland, Germany's new, large ally in the EU, have all asked Germany to be more flexible. "Sure, you can have an incredibly strong currency," scoffs the Polish foreign minister, "but at the expense of the economy." If many countries cut costs to the point of intolerability, even the economists won't have all the answers. Sikorski says this is precisely why Poland introduced a debt limit, essentially before of all other countries, which lies at 60 percent of GDP and is significantly lower than in Germany today. The tool that could have been easily be used in the past -- relaxing monetary policy during a recession -- is no longer readily available to members of the euro zone. His recommendation is no different from those made by Asselborn or González. "The interest rates on euro bonds, which would be issued by the entire euro zone, would be very close to those of German government bonds and a great deal lower than rates on Greek or Spanish bonds," he says. However, Sikorski, like Asselborn and González, doesn't believe euro bonds will become a reality. "That would require political courage and an openness to risk, which German taxpayers aren't yet able to muster at the moment," he says. Apparently Europe's new strongman isn't quite as strong as we have been led to believe. REPORTED BY HANS HOYNG, JAN PUHL, CHRISTOPH SCHULT AND HELENE ZUBER Translated from the German by Christopher Sultan. URL: • http://www.spiegel.de/international/europe/three-prominent-europeans-challenge- germany-to-fix-euro-crisis-a-907729.html Related SPIEGEL ONLINE links: • Photo Gallery Germany As a Locomotive without a Train http://www.spiegel.de/fotostrecke/fotostrecke-98488.html • Merkel's Campaign Platform: Austerity Abroad, Profligacy at Home http://www.spiegel.de/international/topic/german_election_blog/ • About Face Chancellor Merkel Cools on European Integration (06/25/2013) http://www.spiegel.de/international/europe/0,1518,907339,00.html • The Rise of the Fearmongers Germany's New Euroskeptic Elite (06/19/2013) http://www.spiegel.de/international/europe/0,1518,906675,00.html • Angela Merkel on Europe 'We Are All in the Same Boat' (06/03/2013) http://www.spiegel.de/international/europe/0,1518,903401,00.html

Daily Morning Newsbriefing June 27, 2013 Historic agreement to strengthen pernicious links between states and banks Many news organisations have been reporting the deal finance ministers reached in the early hours this morning on the bail-in regime, with most omitting to mention the details of what the deal actually consists of. We found them hidden deeply in stories by the FT and Bloomberg. We have compiled the main elements: • New regime to become law in 2018; • Insured deposits (of under €100,000) are fully protected; • Uninsured deposits (of over €100,000) are not protected, but given preferential treatment; • Bail-ins of at least 8% of the banks total liabilities have to come to before any resolution funds are tapped; • the difficult part of the compromise relates to flexibility, the issue over which talks last week broke down. The compromise foresees that member states will be given flexibility to shield certain investors from the bail-in under clearly specified procedures, and subject to approval from the European Commission. There is a ceiling of 5% of liabilities, but all is conditional on unsecured senior bondholders being wiped out first. • member states to build up resolution funds total 1.3% of bank liabilities; The finance ministers were clearly relieved that they reached an agreement before today’s summit. We were quite amused by Michael Noonan’s comment who said, according to Der Spiegel, that the agreement was a mile stone in separating the risk of banks and states. The next step is a negotiation with the European Parliament, which is likely to be a tough procedure, as the parliament may question to which extent the relationship between banks and sovereign is really broken as part of this agreement. In a comment in the FT ahead of the agreement, Martin Sandbu writes that the last thing the eurozone needs is flexibility on national involvement. Flexibility could mean two things, both bad. First, it could lead to ad-hoc decision making. And second, it could mean that the hierarchy of loss absorption varies between countries. (which is now going to be the case). He writes banks could offer market-based products to guarantee deposits of over €100,000, such as mini-CDSs. As ever, the EU can always find agreement when there are largely technical difference, but this deal offers little more than a very broad framework for bank resolution, as large

65 depositors will be protected in some countries, but not in others. There is also a question of the credibility of deposit insurance in countries with a weak fiscal position – since these are not subject to a European backstop. The main instruments against a cross- border bank run in the monetary union remain language barrier and physical distance – most people just don’t know how to open bank accounts in countries whose language they do not speak. Letta’s desperate measures to revive Italy’s economy The Italian government approved a new decree aimed at appearing to be doing something to reduce youth unemployment. Il Corriere della Sera has details of the package, with tax breaks for companies that take on workers aged 18-29 on permanent full-time contracts worth up to €650 per month per worker for a maximum period of 18 months for new hires and 12 months for employees whose short-term or freelance contracts become open-ended. According to labour minister Enrico Giovannini, the jobs package will affect 200,000 people: 100,000 will benefit from tax breaks while another 100,000 will be affected by other measures. The total cost of this programme is €1.9bn, to be stretched over a period of three years. The breakdown shows that the lionshare of the funds will go to the south. As expected, the Letta government also decided to postpone the planned 1% rise of VAT until October. According to Il Sole 24 Ore, the government is trying to find the €1bn needed to counter-finance the suspension by the Autumn. The most likely candidate is an increase in excise duties on cigarettes and higher local taxes, but the government said these will only be temporary measures. La Stampa’s Alessandro Barbera says that could produce another fiscal shock by the end of the year. Barbera said the fiscal emergency is unchanged. He said the VAT postponement is a farce, as it does not change the fundamental problem of excessive taxation. Confindustria has calculated that the tax burden could pass the 55% threshold in December, due VAT and IMU. According to Tito Boeri, the latest decree on job is not exactly the correct package that Italy needs to revitalize the labour markets. Italy needs more liberalization on services markets and not to waste money on permanent full-time contracts, Boeri said. In particular, Italy should address its pledges in new hires or labour flexibility, not in contract protection as Letta wants, Boeri said. In a comment in Spiegel Online, Wolfgang Munchau makes the point that the ESM much reduced effective lending ceiling – as a result of the requirement to post 2-for-1 collateral on bank recaps – in conjunction with Italy’s deteriorating fiscal situation, makes a return of another active phase of the eurozone crisis more likely. Italy is very likely to apply for a programme, but there is no way the ESM can full backstop the country. Saccomanni dismisses derivatives scandal We are not sure whom he is kidding, but Fabrizio Saccomanni is claiming that there won’t be any losses from the derivatives taken out by the Italian treasury in the 1990s, some of which were restructured last year, following media reports that the valuation of these securities showed a potential €8bn loss. As La Repubblica reports, Saccomanni call the story a "misunderstanding." The Financial Times and La Repubblica said that the losses could stem from the restructuring of eight derivatives contracts with foreign banks with an overall value of €31.7bn documented in a Treasury report to the State Audit Court. According to Saccomanni there was no truth in reports that Italy had used

66 derivatives in the late 1990s to create the conditions required to enter the euro. Following the news reports, the Rome prosecutor opened an investigation into the case. Bond rout threatens to hit bank funding The FT has a story that the bond rout is affecting bank funding – one of several avenues though which it could have a negative effect on the eurozone. EU banks’ average bond spreads hit 95bp citing figures from Dealogic. The Markit iTraxx Senior Financials index has gone up by 19bp since May, but there are big differences between banks. The costs of a credit default swap for Deutsche Bank has risen by less than 5bp, while that of RBS is up 66bp. While the rise in interest rates helps increase lending margins, the benefit is more than offset by a funding squeeze. The article also points towards further regulatory challenges for the banks, such as a huge increase in asset encumbrance – assets pledged to protect insured creditors. According to the BIS, median asset encumbrance stands at 22.5%, but it could go up to 70% if all retail deposits had to be protected as well. The article also points out that bank balance sheets are now stronger than they were during the financial crisis, as banks are preparing for Basel III. France steps up resistance against Barroso France stepped up criticism of the European Commission in the last weeks. Francois Hollande increases his remarks demanding more initiatives to revive growth instead of criticising member countries for their reform efforts. More outspoken is Arnaud Montebourg who said that Jose Manuel Barroso is the fuel for the far-right Front National, others are calling Barroso a lame duck and suggesting he should never have been appointed. The spokeswoman of Hollande's government confirmed that Montebourg's remark reflected French thinking. Others say he should never have been president in the first place, suggesting that under no circumstances will Barroso get the backing from France for another mandate. Claude Bartolone told Le Parisien "Barroso is a man of the past. .. he's lost the plot. His behaviour is unbearable." Barroso denounced these comments in an interview with Les Echos, urging political leaders not to cast Europe as their enemy. He said his comments had been taken out of context and that he was targeting critics with a nationalist and protectionist agenda, not the French government. "All those who know me know that I am a true friend of France and that I greatly admire its influential culture," Barroso told the newspaper. The verbal jousting masks an array of other issues, from pressure on Paris to implement economic reforms to who will replace Barroso when his second term as Commission president ends in late 2014. Reuters quotes a Commission official saying "It's a diversion from the inability of the French to deliver essential reforms at home. Barroso is simply the latest excuse. Before it was Merkel." The harsh exchange started when Hollande bridled at being "dictated to" by the Commission over the pension reform, saying that while France would meet the deficit goals set out for it, it alone would decide how to get there. The Commission was frustrated by the rebuff since it had at the same time agreed to give France two extra years to meet its budget deficit target, generous leeway not granted to many other member states. According to the FAZ, the European Commission already backed down and softened its call on France to change the retirement age in the approved draft document for the European Summit. It now says that France should increase the effective retirement age through adjustment in life expectancy. Other pension reform recommendations are still included, such as the warning not to reduce contributions for employers and not to

67 exempt special pension schemes from the reform efforts. Francois Hollande is keen to get rid of these too at the summit. The Commission should stick to guidelines, the article quotes Hollande’s adviser, who said that all concrete measures would be considered as interference and might even jeopardise the national reform efforts. “Germany would not want the Commission to dictate it a minimum wage either.” Basel Committee produces guidelines for leverage ratio It is hard to be impressed by a proposals that banks will no longer be allowed to leverage themselves up by no more than 33 times their total assets, but it seems that even this rule is too stringent for many banks. The Basel Committee has yesterday published its guideline on the leverage ratio, which measures the ratio between core 1 tier capital to all assets, not risk-weighted. The minimum required leverage ratio under Basel 3 is 3%. The leverage ratio will be an important supplementary indicator. The disagreements are in part political – German banks don’t like this concept, as this ratio makes their chronic lack of capital more transparent, and, as Borsenzeitung remarks, the US has more generous accounting rules to allow banks to net out derivatives position, which has the effect of reducing total assets. The document goes into some detail how derivatives are treated, and how netting out should be applied. Revised Basel III leverage ratio framework and disclosure requirements (Issued for comments by 20/09/2013), disponible en: http://www.bis.org/publ/bcbs251.pdf Austerity may force early regional elections in Andalusia Sources within the Spanish Socialist Party tell El Plural that early elections in Andalusia are likely, to coincide with the European Parliament elections next Spring. The reason appears to be that Andalusian Premier José Antonio Griñán expects not to be able to approve a budget for 2014, caught between the demands of his United Left junior coalition partner and the Austerity forced on him by the Spanish government. An unnamed PSOE MP is quoted making a parallel with the position of former PM Zapatero in May 2010: "after the mistake by Zapatero, who should have called elections in may 2010 when he was forced by Brussels and the markets to change the government's policy Griñán would be opting for the good way out: I cannot pull off the project I want, so I tell the Andalusian people, make clear who is responsible, and call them to the polls" Andalusia is one of only four Spanish regions with the ability to hold early elections. The latest election was in March last year, and it was notorious for upsetting PP hopes of winning the election on the same wave of discontent that led to Rajoy's national landslide win the previous November; also, Rajoy is widely seen as having delayed the 2013 budget until after the election, which put him in an awkward position in Brussels. Catalan premier Artur Mas also held early elections last Autumn only two years after the previous elections, in part motivated by the dire budget situation of his government. A Catalan city repudiates interest payments on loan to pay off private contractors In Badalona, a suburb of Barcelona and the third largest municipality in Catalonia at over 200,000 inhabitants, the city council voted for a resolution repudiating part of its debt as odious, reports Público. The motion has no legal effects as the local government is still legally obligated to pay its debt, but it is seen as politically important. The People's Party, which runs the local government with a majority in the local council, abstained on a motion introduced by the 'Badalona Citizen's Debt Audit' group with the local United Left-Green Left party ICV-EUiA and supported by the rest of the 68 opposition parties, declaring €31m in loan interest 'illegitimate debt'. The loans in question are a result of the 2012 'contractor payment plan' of the Spanish government, which aimed at paying arrears owed by local and regional governments to private contractors. The loans were made by the public credit institution ICO and channelled through commercial banks. The council's motion is based on the notion that banks funded themselves at 1% at the ECB and then loaned what was ultimately state money to the city council at 5.54%, when "the money could go directly from one public institution (ECB) to another (State)". Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.641 0.648 0.664 Italy 3.021 3.098 3.111 Spain 3.262 3.239 3.273 Portugal 5.041 5.103 5.119 Greece 9.836 9.714 9.70 Ireland 2.454 2.487 2.505 Belgium 1.040 1.048 1.059 Bund Yield 1.808 1.806 1.793 Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.310 1.3004

Yen 128.040 127.03

Pound 0.849 0.8493

Swiss Franc 1.227 1.2265

ZC Inflation Swaps

previous last close

1 yr 0.98 1.02

2 yr 1.07 1.09

5 yr 1.33 1.36

10 yr 1.73 1.76

Euribor-OIS Spread

previous last close

1 Week -9.429 -9.429

1 Month -6.471 -3.971

3 Months 0.843 3.243

1 Year 28.086 29.386

Source: Reuters

P R E S S COUNCIL OF THE EUROPEAN UNION Brussels, 27 June 2013 11228/13 PRESSE 270 Council agrees position on bank resolution The Council today1 set out its position on a draft directive establishing a framework for the recovery and resolution of credit institutions and investment firms (11148/1/13 REV 1). It called on the presidency to start negotiations with the European Parliament with the aim of adopting the directive at first reading before the end of the year. The proposed directive is aimed at providing national authorities with common powers and instruments to pre-empt bank crises and to resolve any financial institution in an orderly manner in the event of failure, whilst preserving essential bank operations and minimizing taxpayers' exposure to losses. The directive would establish a range of instruments to tackle potential bank crises at three stages: preparatory and preventative, early intervention, and resolution. Institutions would be required to draw up recovery plans, and update them annually, setting out the measures they would take to restore their financial position in the event of significant deterioration. Resolution authorities would have to prepare resolution plans for each institution, setting out the actions they might take if an institution were to meet the conditions for resolution. Authorities would also have the power to appoint special managers to an institution if its financial situation deteriorates significantly or if there were serious violations of the law. The main resolution measures would include: – the sale of (part of a) business; – establishment of a bridge institution (the temporary transfer of good bank assets to a publicly controlled entity); – asset separation (the transfer of impaired assets to an asset management vehicle) – bail-in measures (the imposition of losses, with an order of seniority, on shareholders and unsecured creditors). Bail-in The bail-in tool would enable resolution authorities to write down or convert into equity the claims of the shareholders and creditors of institutions which are failing or likely to fail. Under the Council's general approach agreed today, eligible deposits from natural

1 The agreement was reached at a meeting of the Economic and Financial Affairs Council. 70 persons and micro, small and medium-sized enterprises, as well as liabilities to the European Investment Bank, would have preference over the claims of ordinary unsecured, non-preferred creditors and depositors from large corporations. The deposit guarantee scheme, which would always step in for covered deposits (i.e. deposits below €100,000), would have a higher ranking than eligible deposits. Exclusions Certain types of liabilities would be permanently excluded from bail-in: – covered deposits; – secured liabilities including covered bonds; – liabilities to employees of failing institutions, such as fixed salary and pension benefits; – commercial claims relating to goods and services critical for the daily functioning of the institution; – liabilities arising with an original maturity of less than seven days. National resolution authorities would also have the power to exclude, or partially exclude, liabilities on a discretionary basis for the following reasons: 1) if they cannot be bailed in within a reasonable time; 2) to ensure continuity of critical functions; 3) to avoid contagion; 4) to avoid value destruction that would raise losses borne by other creditors. Resolution authorities would be able to compensate for the discretionary exclusion of some liabilities by passing these losses on to other creditors, as long as no creditor is worse off than under normal insolvency proceedings, or through a contribution by the resolution fund (see below). Resolution fund The directive would require member states, as a general rule, to set up ex-ante resolution funds to ensure that the resolution tools can be applied effectively. These national funds would have to reach, within 10 years, a target level of at least 0.8% of covered deposits of all the credit institutions authorised in their country. To reach the target level, institutions would have to make annual contributions based on their liabilities, excluding own funds, and adjusted for risk. An exemption to this rule would allow member states to establish their national financing arrangement through mandatory contributions without setting up a separate fund. However, the member states would have to raise at least the same amount of financing and make it available to their resolution authority immediately upon its request. Member states would be free to choose whether to merge or keep separate their funds for resolution and deposit guarantee schemes (DGSs). In both cases, the combined target level would be the same. The Council's general approach on a proposed directive on DGSs, agreed in June 2011 (11359/11), sets its target level at 0.5% of covered

71 deposits. Lending between national resolution funds would be possible on a voluntary basis. Resolution funds would be available to provide temporary support to institutions under resolution via loans, guarantees, asset purchases, or capital for bridge banks. They could also be drawn on to compensate shareholders or creditors if and to the extent that their losses under bail-in exceed the losses they would have undergone under normal insolvency proceedings, in line with a "no creditor worse off principle". Moreover, the Council's compromise approach provides flexibility to national resolution authorities, subject to strict criteria and only in exceptional cases, to exclude liabilities and to use the resolution fund to absorb losses or recapitalise an institution. However, such flexibility would only be available after a minimum level of losses equal to 8% of total liabilities including own funds has been imposed on an institution's shareholders and creditors, or under special circumstances 20 percent of an institution's risk weighted assets, where the resolution financing arrangement has at its disposal ex ante contributions which amount to at least 3% of covered deposits. The contribution of the resolution fund would also be capped at 5% of an institution's total liabilities. In extraordinary circumstances, where this limit has been exceeded, and where all unsecured, non-preferred liabilities other than eligible deposits have been bailed in, the resolution authority may seek funding from alternative financing sources. Minimum loss absorbing capacity To ensure that institutions always have sufficient loss absorbing capacity, the Council's general approach provides for national resolution authorities to set minimum requirements for own funds and eligible liabilities (MREL) for each institution, based on its size, risk and business model. A review clause in 2016 would enable the Commission, based on recommendations by the European Banking Authority, to introduce a harmonised MREL applicable to all banks. ~ ~ ~ The proposed directive is aimed at transposing into EU law commitments made at the G20 summit in Washington D.C. in November 2008, when leaders called for a review of resolution regimes and bankruptcy laws "to ensure that they permit an orderly wind- down of large complex cross-border financial institutions." Based on article 114 of the Treaty on the Functioning of the European Union, the directive requires a qualified majority for adoption by the Council, in agreement with the European Parliament. http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/137627.pdf

EU Resumes Battle Over Imposing Losses at Failing Lenders By Rebecca Christie, Jim Brunsden and Andrew Frye - Jun 26, 2013 European Union finance ministers struggled for consensus as they took up an Irish- drafted compromise proposal for assigning losses at failing banks, extending a deadlock that doomed talks last week. The bloc’s 27 finance chiefs remained “quite far away” from agreement as they convened for the emergency talks in Brussels at about 6 p.m. yesterday, Sweden’s Anders Borg told reporters. Ireland’s Michael Noonan, chairing the meeting, held preliminary talks earlier to get a deal he says is key for keeping EU crisis-fighting on track. “We can and even must reach an agreement,” French Finance Minister Pierre Moscovici said. It’s “indispensable” for France and Germany to “advance together to find a solution.” Talks last week foundered on the question of which creditors face writedowns when banks fail. Some countries, such as France and Sweden, demanded more flexibility for national authorities. Others, such as Germany, sought strict rules across all 27 EU nations. On the table were ways to set thresholds for losses that would need to be assigned before national discretion would be allowed. An updated plan, circulated by Ireland, a week away from the end of its six-month rotating EU presidency, would hand regulators different degrees of flexibility depending on how they plug gaps that arise when some creditors are exempted from writedowns. ‘Liability Cascade’ “We need a clear liability cascade: first the shareholders, then the various bondholders, then the depositors -- not the insured deposits, which have always been excluded by European law -- then the member state concerned, and if that member state can’t do it, then also the European rescue fund,” German Finance Minister Wolfgang Schaeuble said yesterday. “What we saw in 2008, that the big ones make billions in profit and the community of taxpayers bears the losses; that’s something we no longer want to have,” Schaeuble said. Under the revised Irish plan, regulators would have more freedom to grant carve-outs from writedowns if the burden is shifted to other private creditors, rather than to national resolution funds. Flexibility could be applied in cases where writedowns could threaten financial stability, or cause “value destruction that would leave other creditors worse off,” according to the proposal, obtained by Bloomberg News. Schaeuble declined to comment upon arriving. Moscovici defended “limited flexibility” for national authorities, calling his stance “reasonable.”

Levies on Banks Nations would have to work within certain limits if they chose to tap resolution funds to make up the shortfalls caused by exempting some private creditors. These funds, financed by levies on the banks, couldn’t be used until 8 percent of the distressed bank’s liabilities had been wiped out, according to the document. Limits would also be placed on how much support these funds could provide. The plan also stipulates that nations can use public money, including potentially the European Stability Mechanism, to plug gaps caused by creditor exemptions if the limits on the use of resolution funds have been reached. The EU needs an approach “that allows some but limited flexibility to ensure financial stability, while still providing an ex-ante pecking order and clear rules,” Joerg Asmussen, a member of the European Central Bank’s executive board, said in a speech today in Paris. “Global investors need certainty about the rules of the game in Europe,” he said. Cycle of Contagion After more than three years of crisis and bailouts in five euro-area nations, EU leaders have pursued the banking union as a way to reassure investors that they can break the cycle of contagion between banks and sovereign debt. The ECB will take over bank oversight in the euro zone next year, and the strategy calls for bank resolution procedures to be in place along with national backstops. Leaders gathering in Brussels later today may downplay the pace of banking reforms. Draft conclusions for the summit affirm that “it is imperative to break the vicious circle between banks and sovereigns,” without setting deadlines for further action. “This is a tough negotiating chapter,” German Chancellor Angela Merkel said on June 24. Europe’s priority should be to “become more competitive,” not just increase its oversight of banks, she said. Financial Stability Denmark, one of the few European nations that has allowed some of its banks to fail, wants strict rules in all 27 countries. Sweden’s Borg countered that nations, especially those outside the euro zone, need to be able to step in when financial stability concerns become paramount. “I think you should earn flexibility,” he said. “If you have stronger banks and more money in buffers, then you should have more flexibility. And also I think we should be able to take over banks.” “If we put all the eggs in bail-in, this might be a very costly solution for Europe,” he said. To contact the reporters on this story: Rebecca Christie in Brussels at [email protected]; Jim Brunsden in Brussels at [email protected]; Andrew Frye in Brussels at [email protected] To contact the editor responsible for this story: James Hertling at [email protected] http://www.bloomberg.com/news/2013-06-25/eu-resumes-battle-over-how-to-impose- losses-at-failing-lenders.html

JUNE 26, 2013, 12:52 PM Proposed Guidelines Could Require Banks to Raise Billions in Capital By JACK EWING FRANKFURT — Big European banks may be required to raise billions of euros in new capital, making them less risky but potentially putting them at a disadvantage to their American rivals, under guidelines issued Wednesday by an organization that coordinates global bank regulation. The Basel Committee on Banking Supervision, which includes regulators from the United States, Europe, Japan and other major economies, issued a revised proposal Wednesday on how banks should calculate their so-called leverage ratios, a measure of how much of other people’s money lenders use to conduct business. If put into force, the new rules would probably fall hardest on large European institutions like Deutsche Bank and Barclays, which tend to use a high proportion of borrowed money to do business or have large portfolios of derivatives. American banks have faced controls on leverage for decades, while most European banks have not. As a result, Europe’s banks may have to struggle harder to comply with the new rules. ‘‘This will essentially be the first time European banks will be subject to a leverage ratio,’’ said Andrew S. Fei, a lawyer in the New York office of Davis Polk who specializes in bank regulation. While highly technical, the proposed rules are at the center of efforts to ensure that taxpayers never again have to bail out big banks amid a financial crisis. Banks have lobbied intensively for rules that allowed them to risk large amounts of borrowed money, which provides them the opportunity to increase profits. But the guidelines issued Wednesday appear to reflect warnings by many economists that bank risk remains too high. Stefan Ingves, chairman of the Basel Committee and governor of the Swedish central bank, said the rules would also eliminate discrepancies in the way leverage was calculated in different countries. ‘‘This ensures investors and other stakeholders will have a comparable measure of bank leverage, regardless of domestic accounting standards,’’ Mr. Ingves said in a statement. The proposed guidelines come amid signs that, elsewhere in Europe, the political will to rein in bank risk is flagging. Euro-zone finance ministers met in Brussels on Wednesday in yet another effort to reach an agreement on a so-called banking union, in which countries would share some of the cost of recapitalizing banks. Marathon talks on the subject last week ended in deadlock. The ministers were not expected to conclude the latest round of talks until late Wednesday or early Thursday, and it was uncertain whether they would be able to reach an agreement. The new rules from the Basel Committee are not binding on individual countries and would not take full effect until the beginning of 2018. Banks and other interested

75 parties have until Sept. 20 to comment on the guidelines, which could be further revised before the committee votes on the proposal. Banks that are short of capital under the new guidelines could face market pressure to raise money well before the rules take effect. That is because, beginning in 2015, the banks would be required to disclose much more information about what kind of risk they carry on their books. Some governments, anxious to avoid asking taxpayers to rescue banks again, have already been compelling lenders to raise more capital. The Prudential Regulatory Authority in Britain ordered Barclays last week to submit a plan by the end of the month on how the institution would increase capital and reduce leverage. The Bank of England warned on Wednesday that banks might need to further bolster their capital because of big swings in asset prices that had taken place in recent weeks, as markets reacted to signs that the Federal Reserve in the United States was likely to scale back its stimulus measures. ‘‘Authorities need to be alert to whether stability could be threatened by excessive leverage or liquidity risk building up in any potentially vulnerable parts of the financial system,’’ said Paul Tucker, deputy governor for financial stability at the British central bank. ‘‘That has been underlined by the abrupt correction in asset prices over recent weeks.’’ Rules on leverage have been the subject of an intense, behind-the-scenes debate between bankers and regulators for several years, as well as a source of tension between the United States and Europe. German and French regulators have pushed for rules that give banks wide discretion to estimate their risk from loans, derivatives or other assets. But American regulators, along with many economists, have argued that banks cannot be relied on to judge risk accurately. Thomas M. Hoenig, vice chairman of the Federal Deposit Insurance Corporation, told an audience in Basel in April that measures of risk based on banks’ own calculations created ‘‘the illusion that these firms are well capitalized.’’ In 2010, the Basel Committee proposed a leverage ratio of 3 percent, meaning that banks would need to hold about $1 in capital for every $33 in risk or other financial exposure. But there remained questions about how banks should be required to value their portfolios and calculate the ratio. While European banks would tend to be hit hardest by the new rules, American banks could also feel pressure. Some of the methods they use to discount derivatives exposure under American accounting rules would no longer be allowed. Higher exposure would increase their need for capital. Even with the stricter guidelines proposed Wednesday, economists expressed concern that banks were continuing to operate with thin capital cushions. ‘‘We are still looking at very low numbers from a historical perspective,’’ said Harald Benink, a professor of banking and finance at Tilburg University in the Netherlands. ‘‘If we really want to protect the taxpayers, we need to start looking at numbers that are more ambitious.’’ http://dealbook.nytimes.com/2013/06/26/proposed-guidelines-could-require-banks-to- raise-billions-in-capital/?emc=tnt&tntemail0=y

Repubblica.it Economia & Finanza con Bloomberg®26/06/2013 Il Tesoro interviene sulla mina-derivati: "Nessun pericolo per i conti pubblici" Via XX Settembre interviene sul caso dei contratti siglati negli anni Novanta, sollevato da Repubblica e FT: "Non sono stati utilizzati per entrare nella moneta unica". Ma la Procura di Roma apre un'inchiesta. Saccomanni: "Normale controllo della Corte dei Conti". La Ue rassicura, "nessun impatto sul deficit"

Articolo Tesoro, perdite potenziali di 8 miliardi. L'origine è nei derivati degli anni '90 MILANO - Non potevano mancare una reazione forte, una presa di posizione ufficiale e una miriade di strascichi all'emergere di una mina-derivati per i conti pubblici. In seguito al pericolo di perdite potenziali da 8 miliardi che emerge da un documento interno del Tesoro, di cui dà conto Repubblica stamane in edicola insieme al Financial Times, è arrivata la presa di posizione di via XX Settembre e una battuta di Mario Draghi, governatore Bce e direttore generale del Tesoro tra il 1991 e il 2001. "Il Tesoro italiano emetterà presto una dichiarazione completa per chiarire tutti gli aspetti", ha detto Draghi a chi gli chiedeva delucidazioni sulla vicenda. Puntualmente è stato esaudito e da via XX Settembre è arrivata la propria versione: "Non esiste alcun pericolo per i conti dello Stato", scrive il Tesoro in una nota, aggiungendo: "E' assolutamente priva di ogni fondamento l'ipotesi che la Repubblica Italiana abbia utilizzato i derivati alla fine degli anni Novanta per creare le condizioni richieste per l'entrata nell'euro". Per vederci chiaro, la Procura di Roma ha comunque deciso di aprire un'inchiesta sui rischi per i conti pubblici, in un fascicolo al momento senza indagati e ipotesi di reato. Il procuratore aggiunto Nello Rossi cercherà di verificare e capire la collocazione di questi derivati e rilevare i riflessi che questo tipo di notizie possono avere sui mercati, sui titoli in Borsa e sullo spread. Il tema era peraltro già stato

77 rinfacciato in passato al cancelliere tedesco Helmut Kohl, che secondo alcuni documenti del governo tedesco sarebbe stato a conoscenza della reale situazione dei conti del Belpaese, ma avrebbe ignorato gli avvertimenti a riguardo per non infrangere il percorso verso la moneta unica. Sul tema è intervenuto anche l'attuale titolare delle Finanze, Fabrizio Saccomanni, che ha parlato di un "normale controllo della Corte dei Conti. Non c'è nessun aggravio sui conti pubblici". Anche la Commissione europea ha detto la sua, scartando l'idea di un possibile impatto sul bilancio statale: "I numeri riportati sulla stampa non cambiano la nostra analisi sul deficit passato dell'Italia e le nostre previsioni sul deficit futuro," ha detto Simon O'Connor, portavoce della Commissione Ue agli Affari economici. La nota del Tesoro In tre punti, il Tesoro spiega che "fornisce regolarmente ogni sei mesi alla Corte dei Conti tutta la documentazione relativa alle operazioni condotte in strumenti di finanza derivata". Nella nota si conferma la richiesta da parte della Corte, tramite la Gdf, di documentazione "inerente alla sola attività di chiusura di un gruppo consistente di operazioni con Morgan Stanley"; richiesta alla quale il Tesoro ha risposto inviando il materiale inerente. Anche la Corte dei Conti, su quella operazione, ha precisato: "L'indagine è unicamente riferibile all'operazione, già conclusa all'inizio del 2012, con la quale si è provveduto alla chiusura di un contratto sottoscritto nel 1994 con la Banca Morgan Stanley". Al secondo punto, il Mef spiega la ratio delle operazioni in derivati. "L'attività in derivati", si legge, "è stata mirata a conseguire l'allungamento della duration complessiva del debito, al fine di proteggere da un eventuale rialzo dei tassi, pagando tasso fisso e ricevendo variabile. Tale funzione prettamente assicurativa è stata perseguita attraverso Irs (interest rate swap) e opzioni su tassi di interesse (swaption), fissando tassi a lungo termine che, al momento della sottoscrizione, risultavano storicamente ai minimi per la scadenza cui si riferivano. Bloccare attraverso derivati un tasso fisso "a pagare" in contropartita di un tasso variabile "a ricevere" rappresenta una protezione verso futuri shock sui tassi di interesse, situazione peraltro sperimentata dallo Stato italiano a più riprese e con un'evidenza particolarmente significativa a seguito della grave crisi monetaria e finanziaria del 1992". Nel realizzare questi contratti - precisa ancora il ministero - si deve tenere presente come in ogni assicurazione che "ove l'evento verso il quale ci si protegge non si verifichi, si sopporta un costo" Ma "il valore di mercato degli strumenti derivati in uno specifico momento, il cosiddetto mark to market, non è in nessun caso assimilabile a una perdita realizzata". Infine, al terzo punto, si esclude che queste operazioni siano state effettuate "per creare le condizioni richieste per l'entrata nell'euro", tanto che "sono state sempre registrate correttamente nel rispetto dei principi contabili sia nazionali che europei". La richiesta di prendere una posizione sulla vicenda era arrivata in mattinata dal presidente dell'Abi, Antonio Patuelli. "Bisogna verificare subito, mi attendo una dichiarazione ufficiale del Governo per chiarire al più presto, prima che i mercati possano fornire valutazioni improvvisate in proposito", aveva detto a Radio Anch'io. Anche dal capogruppo alla Camera del Pdl, Renato Brunetta, è arrivata una stoccata a via XX Settembre: "Conoscendo l'assoluta opacità della nostra finanza pubblica e come è gestita dal ministero dell'Economia è verosimile l'allarme lanciato da Repubblica - ha detto -. E' un ministero talmente mostruoso ma anche talmente opaco. Nessuno sa esattamente l'ammontare del debito, nessuno sa come si costruisce il 'tendenziale' sulla

78 base del quale si basano poi i conti pubblici. Conoscendo l'opacità del ministero penso sia assolutamente plausibile la notizia". (26 giugno 2013) http://www.repubblica.it/economia/2013/06/26/news/l_abi_chiede_chiarezza_al_govern o_sulla_mina_dei_contratti_derivati-61872826/ naked capitalism Wednesday, June 26, 2013 Corruption, EuroStyle: ECB Chief Draghi Fudged Italy’s Books to Secure Eurozone Entry, Italy Stuck With Derivative Losses Posted by Yves Smith at 4:06 am As readers of the financial press may recall, there was a kerfluffle over the fact that Greece had used a currency trades designed by Goldman in 2001 to mask the level of its indebtedness and secure Eurozone entry. Goldman continued to help Greece dress up its books and offered to intervene in 2009, although Greece turned them down then. The amount of debt raised, as in hidden, was €2.8 billion in 2001, and as a result of a restructuring in 2005, increased to €5.8 billion. Goldman earned large fees for these deals. These transactions were of keen interest in the Eurozone, not merely because Goldman had helped Greece fudge its accounts and without this, erm, help, Greece would not have qualified for Eurozone entry (there have been efforts to downplay the accounting finesse, since Brussels was allegedly aware of the fact that Greece really was not qualified to enter). Mario Draghi, who was then the heir apparent to Jean-Claude Trichet as ECB chief, had joined Goldman in 2002 and was head of the group that handled the restructuring in 2005. The Bank of Italy issued a denial about Draghi’s involvement that Simon Johnson read as unpersuasive. Roughly a year later, Trichet vetoed a request by Bloomberg to the ECB’s EU’s court to release more information. This was a month before the ECB nomination hearing for the new chairman. Pascal Canfin, Member of Parliament and former chairman of the ECON committee, grilled Draghi on how he could have known about these transactions and allowed them to go through. He was not satisfied with the answers. The New York Times reported after Draghi’s nomination was approved that Draghi had marketed similar transactions to European governments A new story by Financial Times shows that Draghi and the ECB had far more to hide than the Greece scandal. It appears Draghi was directly involved in arranging similar, much larger transactions for Italy while Draghi was the director general of the Bank of Italy, in 1999. Draghi then went to Goldman. The FT also reports that Draghi’s deputy on these deals, who left the Bank of Italy in 2000, returned as director general in 2012 with Draghi’s support. Sure looks like payback time. The scandal is coming to a head now because the Italian government is set to lose billions of euros as a result of restructuring of derivatives, including the 1999

79 derivatives, at the worst of the crisis. The FT stresses that all the details are not known, but the losses look to be troubling: The report does not specify the potential losses Italy faces on the restructured contracts. But three independent experts consulted by the FT calculated the losses based on market prices on June 20 and concluded the Treasury was facing a potential loss at that moment of about €8bn, a surprisingly high figure based on a notional value of €31.7bn. The names of the banks involved in these transactions have not been disclosed, but previous reports show that Morgan Stanley and JP Morgan have been among the Italy’s counterparties. There are two, possibly three, ugly implications. First, the revelation that Italy is facing previously undisclosed derivative losses comes at a time when periphery Eurozone countries are again under stress, including Italy. From Ambrose Evans-Pritchard today at the Telegraph: Mediobanca, Italy’s second biggest bank, said its “index of solvency risk” for Italy was already flashing warning signs as the worldwide bond rout continued into a second week, pushing up borrowing costs… The report warned that Italy will “inevitably end up in an EU bail-out request” over the next six months, unless it can count on low borrowing costs and a broader recovery…. taly’s €2.1 trillion (£1.8 trillion) debt is the world’s third largest after the US and Japan….Italian 10-year yields spiked to 4.8pc, up 100 basis points since the Fed began to toughen its language in May. But Mediobanca is particularly concerned about the gap that has emerged between yields on short-term bills (BOTs) and longer-term bonds (BTPs) near maturity that expire at the same time. BOTs retiring on July 31 are trading at a yield of 0.48, while the equivalent BTP is trading at 0.74pc. The reason is that BOTs are protected from debt restructuring…. Mediobanca said the trigger for a blow-up in Italy could be a bail-out crisis for Slovenia or an ugly turn of events in Argentina, which has close links to Italian business. “Argentina in particular worries us, as a new default seems likely.” Second is that given Draghi’s involvement in Italian books-cooking, it seems even more implausible than before that he did not know of the Greece deals with Goldman. Third is that if Goldman was one of the counterparties to Italy when Draghi was at the helm of the Italian central bank, his subsequent employment looks an awful lot like a payoff. The Bank of Italy and the ECB are certain to fight tooth and nail to defect questions about Draghi and might not be above using market stresses as part of their excuses for stonewalling. But the magnitude of these losses may galvanize the Italian public. The matter is now in the hands of the state auditors and the financial police, so how far this goes will also be a function of how they operate in the face of large public scandals. Stay tuned. http://www.nakedcapitalism.com/2013/06/corruption-eurostyle-mario-draghi-fudged- italys-books-to-secure-eurozone-entry-italy-stuck-with-derivative-losses.html

Why Markets Aren’t Getting the Fed’s Message By Justin Wolfers - Jun 26, 2013 Try as he might, Federal Reserve Chairman Ben S. Bernanke can’t seem to get the market to understand the central bank’s plans. The problem might be less his communication skills than what he’s trying to communicate. Since last week’s Fed meeting, at which Bernanke sought to clarify the central bank’s plans to decelerate the bond-buying program known as quantitative easing, investors have acted as if he signaled a major pullback in stimulus. A simple analysis suggests the market has overreacted. The yield on the 10-year Treasury note, a standard measure of long-term interest rates, stood at about 2.6 percent on Monday, up 0.4 percentage point from where it was before last week’s Fed pronouncements. It’s worth comparing this with previous market responses to monetary stimulus. Drawing on a dozen careful academic studies of quantitative easing, Goldman Sachs Group Inc. economist Jan Hatzius has estimated that it takes about $1 trillion in bond purchases to move long-term interest rates by 0.4 percentage point. In other words, the market’s recent reaction is roughly what would have occurred if the Fed had revealed a plan to cut back on quantitative easing by $1 trillion. The Fed did no such thing. Bernanke said the central bank expects to start tapering its $85 billion a month in bond purchases toward the end of this year, with an eye to ceasing them altogether by the middle of next year -- assuming the unemployment rate has fallen to about 7 percent. At most, he moved the tapering schedule forward by three months compared with what the market anticipated. That amounts to just $255 billion less quantitative easing. Near Zero So what spooked the market? The answer probably lies in the way the Fed has sought to distinguish its policy for quantitative easing from its policy for interest rates. When Bernanke set out the parameters for the former, he tried to emphasize that the latter had not changed. The Fed remained committed to keeping its short-term interest-rate target at or near zero until unemployment falls to 6.5 percent. The intended message: Interest rates will stay low until after the economy has recovered, so please feel confident to spend, invest and hire. Investors, though, perceived the tapering of quantitative easing as a sign that the Fed would also start raising short-term interest rates sooner than previously thought. Prices in futures markets currently suggest a high probability that the target rate will rise to 0.25 percent by May 2014. Before last week, the rate increase wasn’t expected until much later in the year. The market’s reaction means that the Fed’s extraordinary commitment to low interest rates in the future isn’t yielding the desired effect. Either investors don’t understand the

Fed’s promise, or they fear that the Fed will renege as soon as the economic outlook improves. To see why investors aren’t convinced, consider the Fed’s tortured logic. Fed officials are saying that the U.S. economy has two drivers -- one in charge of quantitative easing, the other in charge of interest rates. The former is ready to tap on the brake (or, in Bernanke’s preferred language, to ease off the gas), while the latter is on cruise control. By the Fed’s view, we shouldn’t make inferences about one from the behavior of the other. To complicate things further, Fed officials have set three separate destinations: a 7 percent unemployment rate, beyond which the central bank will cease new bond purchases; a 6.5 percent unemployment rate, below which it might start raising interest rates; and a longer-term target unemployment rate of 5 percent to 6 percent. In reality, both drivers are in the same car, facing the same weather conditions and getting their instructions from the same Fed officials. Markets recognize this and have perceived a willingness to slow the car as a lack of commitment to stimulating economic growth. As we’ve learned, investors’ interpretations can have all-too-real consequences. Central bankers are naturally conservative, so making a commitment to future policy feels somewhat radical. It’s also a strategy that can have a powerful effect if the public is convinced. My advice to Bernanke: Choose a single destination, turn on the cruise control, and make sure the markets know we have more than enough fuel to get there. (Justin Wolfers is a professor of public policy and economics at the University of Michigan, a nonresident senior fellow of the Brookings Institution and a Bloomberg View columnist.) To contact the writer of this article: Justin Wolfers at [email protected]. To contact the editor responsible for this article: Mark Whitehouse at [email protected]. Justin Wolfers Why Markets Aren’t Getting the Fed’s Message Jun 26, 2013 http://www.bloomberg.com/news/2013-06-26/why-markets-aren-t-getting-the-fed-s- message.html

ft.com Comment Columnists Last updated: June 25, 2013 7:38 pm Careless talk may cost the economy

By Martin Wolf If the Fed had been more prudent, premature tightening might have been avoided

Since the beginning of May, monetary policy has undergone a substantial tightening. This has taken the form of a rise in the yield on the bonds of highly rated governments. The yield on 10-year US Treasuries rose by 88 basis points between May 2 and the end of last week, to 2.51 per cent. This is a clear tightening of monetary conditions: a rise in these yields lead to rising borrowing costs for the private sector. It is, however, not clear that it is deliberate: longer-term bond yields are not an explicit target for monetary policy. Moreover, part of the reason for the jump in rates is rising confidence. But talk of “tapering” US quantitative easing is also a factor. It is hard to manage a policy whose effects depend on expectations. But it must be done better: this tightening is premature. That is surely not how it would appear to the Bank for International Settlements, whose annual report calls for an early end to loose policies: “Authorities need to hasten structural reforms so that economic resources can more easily be used in the most productive manner. Households and firms have to complete the repair of their balance sheets. Governments must redouble their efforts to ensure the sustainability of their finances. And regulators have to adapt the rules to an increasingly interconnected and complex financial system and ensure that banks set aside sufficient capital to match the associated risks.” Government bonds and inflation rates

More ON THIS STORY/ Markets Insight ECB needs timely response to Fed tapering/ Fed fights back against ‘feral hogs’/ Wolfgang Munchau Bond jitters threaten Europe’s calm/ Eurozone bonds turn havens amid QE nerves/ Eurozone bond yields jump in sell-off ON THIS TOPIC/ ECB exit still far off, Draghi says/ Comment How well did Sir Mervyn do?/ Global Market Overview Spreads may tighten a touch if tapering fears ease/ Editorial A cri de coeur from the central bankers

MARTIN WOLF/ More banking reform needed/ The toxic legacy of the Greek crisis/ Globalisation/ The overstated inflation danger This is central bank bromide. Worse, it is hard to understand how the BIS thinks its recommendations add up across the world economy. In essence, it suggests that the private sectors should run bigger financial surpluses, as heavily-indebted agents repay debt, while governments should run smaller deficits. Unless one assumes that advanced countries will run vast current account surpluses with the rest of the world, this is a plan for a depression. The BIS does not even consider the possibility that monetary policy has been ineffective because it is competing with the fiscal tightening the BIS has recommended. At least three further points stand out. First, the two crisis-hit economies that have made greatest use of unconventional monetary policy – the US and the UK – are also the least affected by structural rigidities – so there is no moral hazard there. Only sadists can argue that supportive monetary conditions have cushioned southern Europe against the need to reform. Second, it ignores the fact that one of the reasons for failure to reduce debt faster is economic weakness caused by the austerity it supports. Third, core inflation is low and falling in the US and eurozone. Rapid tightening risks tipping these economies into outright deflation – a risk the BIS does not even mention. Indeed, in a critique of the Federal Open Market Committee’s latest policy statement, James Bullard, president of the Federal Reserve Bank of St Louis, argues that the FOMC “should have more strongly signalled its willingness to defend its inflation target of 2 per cent in light of recent low inflation readings”. He is right: the Federal Reserve’s forecasts show core inflation at or below 2 per cent up to and including 2015. Second, he argues that “the committee’s decision to authorise the chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed”. It should have waited “for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement”. I agree. If the Fed had been more careful, this premature monetary tightening might not have happened. As it is, the fall in prices of the world’s most important financial securities could materially damage recovery, as it lowers prices of riskier assets across the world, not least in emerging countries. Gavyn Davies highlights the dangers of such a correction, citing Warren Buffett’s remark that we only discover who is swimming naked when the tide goes out. The BIS argues that if yields were to rise by 3 percentage points across the maturity spectrum in the US, mark-to-market losses would be more than $1tn, or almost 8 per cent of GDP. Losses elsewhere would be even bigger. Financial shocks are possible, as “carry trades”, in which investors have borrowed short to lend long or borrowed in low- interest currencies to lend in higher-interest ones, unwind sharply. Indeed, one of the reasons why policy makers must be careful is that investors in such trades know how vulnerable they are to a rush for the door. They will flee as soon as they fear others may do so, creating a big danger of self-fulfilling panics (see charts). The challenge in unwinding current policies is not technical. As Fed chairman Ben Bernanke explained in February 2010, exit from QE and bloated central bank balance sheets is technically straightforward. Since the Fed pays interest on reserves, it can even raise short-term rates before QE is reversed. Furthermore, such an exit is desirable, provided it occurs only when the recovery is in place.

There are three true challenges. The first is proper management of expectations. This may be too late now. But the right way to proceed, as Mr Bullard has argued, is to stress only conditions, not timetables. Nobody knows when the conditions for tightening will emerge, because nobody knows how the economy will perform. The second challenge is to address the vulnerability of the financial system – especially the systemically significant parts – to big declines in prices of safe-haven bonds. This is purely market risk, not credit risk. That can be managed by a mix of lower leverage and, if necessary, regulatory forbearance. It is unlikely that markets would cease to fund systemically significant financial institutions that have only mark-to-market losses on safe-haven government bonds. Yet the authorities will need to have plans to address such an eventuality. The third challenge is to manage the global consequences. The likely result of a credible exit will be a shift towards assets in the recovering high-income economies. For emerging countries that should be welcome, in the medium run. But they need to ensure that their financial systems, too, can cope. We should look forward to a world of higher long-term interest rates on safe-haven bonds. But we should not need to enter that world yet. Policy makers need to speak softly about exits. But the regulatory stick must be big enough to ensure the economy copes when it comes. [email protected] http://www.ft.com/intl/cms/s/0/6e925f18-dcd5-11e2-b52b- 00144feab7de.html#axzz2xj6cvopm

'Another day, another billion,' laughs Drumm - Government wants new powers and may opt to hold Referendumn - Tapes emerge of Drumm in the hours before bank guarantee

David Drumm: Former Anglo boss laughed about cash flowing out of the bank as it went bust 26 June 2013 NEW Anglo Tapes reveal bank chief executive David Drumm joking with a senior executive about the haemorrhage of funds from the institution hours before the Government bank guarantee. Related Articles [TICON-A VIDEO] Live: Dáil debates Anglo tapes controversy Cowen surprised at Anglo tapes Kenny: Banking probe will be fair How our banking collapse turned into a dramatic hostage crisis Burton demands Cowen detail phone calls on bank guarantee scheme John Downing: Taoiseach wants to see FF stitched up – and he'll get his wish Also in this section [TICON-A VIDEO] Merkel ally describes Anglo’s German comments as ‘unbearable’ [TICON-A VIDEO] Kenny ‘considering’ a second referendum to get more powers for banking inquiry Anglo tapes revelations make front page news in Germany As his bank teetered on the brink of collapse, Mr Drumm is heard laughing: "Another day, another billion". He was referring to the flight of deposits out of the doomed bank before the bank guarantee in September 2008 – running at over €1bn a day at the time. EXPLOSIVE Separately, in the wake of the furore over the revelations, it has emerged cabinet ministers are weighing up a second referendum to give the Oireachtas extra powers.

The Cabinet discussed at length yesterday how best to uncover the truth and ensure there is accountability after the banking crisis that cost the taxpayer €64bn. Although Taoiseach Enda Kenny said the Government favoured an inquiry by an Oireachtas committee, cabinet sources said there was debate about other options. Ministers are sceptical about the prospect of a weak Oireachtas inquiry uncovering the truth. Meanwhile, a separate batch of explosive Anglo Tapes reveal what was really going on as executives scrambled to save the stricken lender. Anglo management strategised about how to try to keep the ailing bank afloat – and stay one step ahead of the regulators. These tapes are being analysed by the Irish Independent investigation team and shed much new light on the hours ahead of the guarantee and the machinations involving bankers and politicians. We plan to publish the new revelations following further scrutiny and cross-checking by the investigation team. Early examination shows evidence of Mr Drumm's willingness to take expedient shortcuts and his use of colourful language, including his references to "Another day, another billion". The tapes also put politicians firmly in the spotlight. A fourth senior Anglo executive also enters the frame in these tapes for the first time. The Anglo Tapes have generated international reaction and prompted a government rethink on how to properly investigate the saga. Former Taoiseach Brian Cowen has said he is "very surprised" about the content of the Anglo Tapes – as it emerged that his Cabinet was unaware they existed. The Cabinet yesterday discussed the possibility of going back to the people with a referendum on Dail inquiries, which was defeated in October 2011 and which would give TDs far-reaching powers to probe the banking crisis. Several senior ministers from Fine Gael and the Labour Party, including Pat Rabbitte, Leo Varadkar and Joan Burton raised the prospect of an alternative way of investigating the crisis. To capitalise on the public anger generated by the Anglo Tapes, ministers discussed holding a referendum on the same day as the Seanad abolition vote in September. "That option is still live. If we were to run it, we'd have to run it with the rest of them (Seanad abolition and the Court of Civil Appeal)," a Cabinet minister said. The attitude among ministers towards the referendum was "we lost that ourselves". "Having heard the tapes, the public might take a different view on it. The Oireachtas inquiry won't be able to make findings against people and the reality is any tribunal or judicial one will go on for years and might even delay prosecutions further. "People want witnesses questioned in public and on TV," another Cabinet minister said. Public Expenditure Minister Brendan Howlin said people on the Anglo Tapes could be called before a banking inquiry.

"There is no reason in my judgment why that shouldn't be completed for the autumn session so we can actually begin an inquiry system, call people who are on the tapes now or others to give sworn evidence," he said. But he said any inquiry – no matter what format it takes – will have to stop if formal trials begin. "As soon as formal trials begin then obviously that module or that investigation would cease until the judicial process in concluded." OPTIONS Among the other options being looked at were a Commission of Investigation or a High Court Inspectorate. "I don't think a parliamentary inquiry will do the job and I'm not the only one who thinks that. The DIRT inquiry was successful because the banks knew they had to co- operate. However, that would be highly unlikely on this occasion and any inquiry could be buried down in court challenges," another minister said. Ministers believe the likelihood is there is not a hope an Oireachtas inquiry will be up and running by the end of the year. Former Taoiseach Brian Cowen, who was both Finance Minister and Taoiseach during the period when Anglo expanded from a small lender into a major bank, said he "looked forward to co-operating with any banking inquiry process that is established in the future". He said he was surprised by the content of the recordings and unaware of their existence. Meanwhile, Taoiseach Enda Kenny's chances of striking a favourable debt deal for Ireland took a knock yesterday following new revelations about how Anglo Irish tricked the country into providing a guarantee. Mr Kenny flies to Brussels tomorrow to lead a summit on banking supervision that is essential if we are to convince other countries to help share the cost of bailing out our broken banks. A spokesman for German Chancellor Angela Merkel declined to comment on the tape yesterday. In a strongly worded article in yesterday's 'Financial Times', the newspaper laments that the "diplomatic dynamite will make it harder for the government here to convince eurozone partners to lift some of the debt still burdening Irish taxpayers". By Paul Williams, Donal O'Donovan and Fionnan Sheahan Irish Independent http://www.independent.ie/business/irish/anglo/another-day-another-billion-laughs- drumm-29372488.html

Cowen surprised at content and existence of Anglo bank tapes

Brian Cowen’s Cabinet in 2008, with President Mary McAleese 26 June 2013 FORMER Taoiseach Brian Cowen has said he is "very surprised" about the content of the Anglo tapes – as it emerged that his Cabinet was unaware they existed. Also in this section [TICON-A VIDEO] Merkel ally describes Anglo’s German comments as ‘unbearable’ [TICON-A VIDEO] Kenny ‘considering’ a second referendum to get more powers for banking inquiry Anglo tapes revelations make front page news in Germany The recordings of the internal phone conversations between Anglo bankers have been in the possession of the gardai for the past four years. But this has come as news to Fianna Fail and Green ministers in the Government who signed off on the fateful bank guarantee. Current ministers, including Taoiseach Enda Kenny, Tanaiste Eamon Gilmore and Finance Minister Michael Noonan, also said they had been unaware of the recorded conversations. Mr Cowen said: "Like everyone else, I was very surprised at the tone and content of what has been said." However, he told the Irish Independent he did not want to make any further comment on the content of the tapes in case it prejudiced any prosecutions.

Fianna Fail leader Micheal Martin – who was Minister for Foreign Affairs in the last Government – also said he had not known about the Anglo tapes. His colleague Willie O'Dea, who was Minister for Defence, said the tapes had come as a "bolt from the blue" to him. "It shows there was a degree of arrogance and a lack of empathy for taxpayers that is quite nauseating," he said. He suggested that ministers would have never approved the guarantee if they had been aware of the ultimate €64bn cost of bailing out the banks. "We had to act on the information we had. I've no doubt that if the full picture was known, it's doubtful there would have been a state banking guarantee," said Mr O'Dea. Fianna Fail TD Eamon O Cuiv, who was Minister for Community, Rural and Gaeltacht Affairs, said he had not known about the Anglo tapes when in Government. He added: "We knew no more than the TDs – it was just a day in advance. Everything said in the Dail during the debate on the guarantee was as much as we knew. It's disingenuous for anybody to believe otherwise. Green Party leader Eamon Ryan, who was Minister for Communications, said he had been shocked by the existence and content of the tapes. He said he believed there was a need for an Oireachtas committee inquiry to get to the bottom of what had happened. Key members of the current Cabinet, including the Taoiseach, Tanaiste and Finance Minister, have also said they were unaware of the tapes. EVIDENCE A Department of Finance spokesman said the "general consensus" was that Government ministers had been unaware that internal phone conversations between bankers were recorded. He said even if ministers had known about the tapes, they would have had no authority to access them, adding: "It's not like asking a parliamentary question. They (the tapes) are being kept as evidence. It's not the case that a minister can demand them." By Michael Brennan Deputy Political Editor Irish Independent http://www.independent.ie/business/irish/anglo/cowen-surprised-at-content-and- existence-of-anglo-bank-tapes-29372443.html

No Time to Taper The Federal Reserve needs to loosen its grip by Ramesh Ponnuru, David Beckworth | June 25, 2013

photo credit: Getty/Alex Wong The Federal Reserve appears eager to begin “tapering,” that is, reducing the monthly bond purchases it is making to support the economic expansion. Based on FOMC projections and Chairman Ben Bernanke’s comments, the Federal Reserve expects to start tapering later this year and to end asset purchases by the middle of 2014. Though the economy is improving, this discussion is premature. The Fed should signal that it is not about to tighten money—and won’t until total dollar spending has moved closer to its pre-crisis trend. The impulse to taper is based partly on the surprising resiliency of the U.S. economy. It has fared much better than many observers expected in 2013 given the rise in taxes and the fall in federal spending. Consequently, Fed officials believe they will soon be able to scale back the bond purchases. The temptation to taper, however, is also based on the widespread but incorrect perception that the Fed has been running an extremely loose monetary policy. That perception is based on the facts that since the economic crisis hit in 2008, interest rates have been low and the Fed balance sheet has been expanding rapidly. Yet neither fact indicates loose money. As Milton Friedman explained, low interest rates can be a sign that money is tight—that it is throttling the economy—rather than loose. And it is a mistake to judge policy by looking at the money supply without also looking at the demand for money balances. Since the crisis began people have put a premium on the safety of cash and near-equivalents. Although the Fed has expanded its balance sheet, it has not fully accommodated this demand for money. Hence total dollar spending remains depressed. A better indicator, then, of whether monetary policy is loose or tight is what’s happening to nominal spending: the total amount of dollar spending in the economy. When the growth of that figure accelerates, monetary policy is getting looser; when growth decelerates, it’s getting tighter. When growth holds steady, which is what the Fed should aim for, monetary policy is in neutral. For several decades leading up to the crash, nominal spending and the total dollar income earned from it grew at roughly 5 percent a year. This steady growth got baked into households and firms’ economic plans. Many households, for example, took out long-term mortgages with the expectation that dollar incomes would, on average, keep expanding at the accustomed rate. The financial crisis, coupled with ill-advised tightening moves by the Fed in 2008, instead caused nominal income and nominal

91 spending to plummet at the fastest rate since the Great Depression. The result was turmoil in credit and labor markets. Debt burdens, for example, suddenly became much heavier than people had expected. The Fed’s rounds of quantitative expansion arrested the decline in nominal spending and is the reason the U.S. economy has been so resilient in 2013. But the economy is still growing at a slower rate than it was before the crisis. Nominal spending has averaged just under 4 percent growth since the end of the recession in 2009 and none of the lost ground from the crisis period has been made up. Based on pre-crisis trends, the level of nominal spending and total dollar income is about 10 percent below where it should be. Relative to the dollar size of the economy people expected, then, the Fed has been giving us tight money, not loose. Tapering now would make tight money tighter. That is why markets have reacted so negatively to news that the Fed is moving in that direction. A better policy would be for the Fed to announce that it is explicitly seeking to stabilize the long-run path of nominal spending. It should aim for growth of 5 percent a year, explain that if it undershoots that pace one year it will overshoot it the next to stay on track. For the next few years, that means it ought to overshoot. How much the Fed buys (or sells) each month should be based on those targets. The more credible the targets are, the less the Fed will have to do. Higher expected nominal income growth in the next few years should translate into a lower demand to hold cash today, and as money circulates at a faster pace the Fed will need to make fewer purchases to keep on its chosen track. The best way to taper, in other words, is not to set a date for tapering or even to hint at one. It’s to subordinate the Fed’s purchasing decisions to a target path for nominal spending. But if the Fed does not accept the case for targeting nominal spending, there is also a simpler argument against tighter money. The Fed is bound by law to keep both inflation and unemployment low. Since the end of the recession, inflation has on average been below its target inflation rate of 2 percent a year. The best estimate of inflation expectations we have, that calculated by the Cleveland Fed, has it running at a mere 1.4 percent per year over the next decade. Unemployment, meanwhile, has been above the Fed’s target rate of 6.5 percent. With both indicators suggesting that the Fed should be looser, it would be madness to tighten. Source URL: http://www.newrepublic.com//article/113606/federal-reserve-tapering- plans-are-too-soon

Abuse the bank guarantee, don't get caught – David Drumm Anglo bank chief's extraordinary comments to staff after bailout 25 June 2013 ANGLO Irish Bank boss David Drumm laughed about "abusing" the bank guarantee and warned his executives not to be caught abusing it, the Anglo Tapes reveal. Related Articles [TICON-A VIDEO] Top executives laughed off concerns Noonan had 'no idea about tapes' Bowe denies misleading Central Bank Martina Devlin: Behind the banter and bravado, this was an enormous fraud on us all These tapes are just the tip of the iceberg – we need a proper inquiry 'Asleep at the wheel' former regulator stays quiet Also in this section [TICON-A VIDEO] Merkel ally describes Anglo’s German comments as ‘unbearable’ Green Property: Owner of Blanchardstown centre launches €200m REIT [TICON-A VIDEO] Kenny ‘considering’ a second referendum to get more powers for banking inquiry Drumm is also heard giggling as one of his executives sings the German national anthem as deposits from Germany flow into Anglo as a result of the bank guarantee. It's the first time the former Anglo chief executive is brought directly into the controversy. His language and casual attitude to the crisis will be found extraordinary by readers. The latest revelations from the Irish Independent's 'Inside Anglo' investigation display a casual, even reckless, attitude at the bank during the financial crash. Mr Drumm can be heard laughing at the financial regulator's concerns about being seen internationally to be "abusing" the bank guarantee in late 2008. "We won't do anything blatant, but . . . we have to get the money in . . . get the f***in' money in, get it in," he tells his senior manager, John Bowe. At the time, European leaders including Germany's Angela Merkel and UK chancellor Alistair Darling were alarmed at how the guarantee could affect their banking systems. But Mr Bowe sang a "comedy" version of the anthem 'Deutschland Uber Alles' and talked about giving "two fingers" to British concern. Mr Drumm and Mr Bowe are heard laughing at the concerns that the movement of money was causing a rift between Ireland and its EU partners. Drumm declares to his colleague: "So f***in' what. Just take it anyway . . . stick the fingers up." 93

In an earlier recording, Mr Bowe laughed with another colleague, Peter Fitzgerald, about nationalisation of the bank. They described the prospect as "fantastic" – so that they could keep their jobs and become civil servants. This is the second tranche of conversations to be published by the Irish Independent, revealing an astonishing banking culture in the collapse of late 2008. Yesterday, we revealed how Anglo executives who negotiated with the Central Bank lied about the true extent of losses at the institution in the hope the State would write them an open cheque. The publication of the Anglo Tapes sparked fresh calls for a comprehensive banking inquiry across the political spectrum. - Paul Williams Special Correspondent Irish Independent http://www.independent.ie/business/irish/abuse-the-bank-guarantee-dont-get-caught- david-drumm-29369275.html

Finance Minister had 'no idea Anglo phone recordings existed'

Enda Kenny at an EU meeting in Dublin Castle yesterday Fiach Kelly Political Correspondent – 25 June 2013 FINANCE Minister Michael Noonan had no idea the Anglo tapes existed until he read yesterday's Irish Independent. Related Articles Revelation spread across the globe Also in this section [TICON-A VIDEO] Merkel ally describes Anglo’s German comments as ‘unbearable’ Green Property: Owner of Blanchardstown centre launches €200m REIT [TICON-A VIDEO] Kenny ‘considering’ a second referendum to get more powers for banking inquiry Mr Noonan – who was an opposition backbencher in 2008 but made several speeches on the banking crisis at the time – said he "always believed that Anglo had a lot to answer for".

His comments came as the Anglo tapes sparked outrage across all political parties. There were fresh calls for a comprehensive banking inquiry, from the highest levels of Government to the opposition benches in the Dail. Taoiseach Enda Kenny said he understood the "outright anger" the tapes provoked among the public and said the Government must get any banking inquiry right. Tanaiste Eamon Gilmore called the tapes "shocking" and said they underlined the need for a banking inquiry. HIGHER Mr Noonan, who was in Brussels yesterday, was asked about the initial request for €7bn, even though bank executives knew they would need more. "I kind of worked out that was happening," he said. "I remember Brian Lenihan coming into the Dail and saying to us €7bn; then a couple of weeks later it was a higher figure, and a couple of weeks later it was a higher figure again." Mr Noonan (right) also said he was not aware bank conversations had been recorded until he read the Irish Independent. He also said the inquiry legislation would be passed before the Dail summer recess "so the inquiry can be established immediately, which is quite timely". Fianna Fail finance spokesman Michael McGrath said a "comprehensive" inquiry was needed, while Sinn Fein's Pearse Doherty said "the Government's foot dragging on the banking inquiry is unacceptable". A string of TDs from all parties echoed calls for an inquiry. Mr Kenny led expressions of political outrage after the Irish Independent revealed the explosive tapes which showed how the bank's top executives lied to the former government about the true losses at the institution. Mr Kenny said he did not want to prejudice any court cases but added that the Government wanted banking inquiry legislation to be passed by the summer. This would pave the way for a banking inquiry to begin in the autumn. It will then be decided if the Oireachtas Finance Committee or the Public Accounts Committee (PAC) – or a different body entirely – will carry out the investigation. Mr Kenny also criticised the previous government which he said was "fuelling the construction economy where there was very light-touch regulation". "And the legislation that is being put through by the Government we hope will be concluded by the summer recess." He added: "Believe you me, I understand the rage and the anger of so many people who have been affected by all of this." He also said the Anglo tapes – along with rafts of other documents – could be part of the inquiry. Mr Gilmore, who is in Luxembourg on EU business, said he was "shocked" by what he had read. DAMAGING "I think that what we have heard on these tapes underlines the necessity for there to be an inquiry into what happened prior to the bank guarantee about who said what to 95 whom, about who was influencing who, about how very key and damaging decisions were made," he said. "We need to get the bottom of how the decisions were made and what was behind them. Remember that these decisions have cost the Irish taxpayer billions of euro, they have resulted in the Irish people having to bear a huge amount of pain over the last five years and they have resulted in the present Government having to take very painful decisions in order to clean up that mess." Jobs Minister Richard Bruton said the tapes were a "reminder of the failures that occurred". Education Minister Ruairi Quinn said the "whole country is very angry at the way in which our economic sovereignty was forfeited", adding that the revelations added "a new chapter to the story". Irish Independent http://www.independent.ie/business/irish/finance-minister-had-no-idea-anglo-phone- recordings-existed-29369285.html

Banks lost €500m every month last year Colm Kelpie – 26 June 2013 IRISH banks lost €500m every month last year, the International Monetary Fund's representative in Dublin has said. Also in this section [TICON-A VIDEO] Merkel ally describes Anglo’s German comments as ‘unbearable’ Green Property: Owner of Blanchardstown centre launches €200m REIT [TICON-A VIDEO] Kenny ‘considering’ a second referendum to get more powers for banking inquiry Peter Breuer told a conference that the losses needed to be reined in to avoid having to pump more emergency money into AIB, Bank of Ireland and Permanent TSB. The IMF's representative to Ireland also warned that the banks weren't building enough capital to support new lending. The warning comes as the State prepares for a fresh round of stress tests on the banks early next year. The assessments are aimed at gauging the banks' financial health and the level of losses and future losses linked to defaulted home loans and property lending. Latest figures show that one in four homeowners is struggling to make their home repayments. The Central Bank said that more than 26,000 households had made no payments on their mortgages for two years, with close to 100,000 households now three months or more in arrears, according to figures for the first three months of the year. This is up from 92,000 at the end of 2012. 96

Mr Breuer told the Budget Perspectives conference, hosted by the Economic and Social Research Institute (ESRI), that if growth stagnated at around 1pc in the coming years, then Ireland's debt levels would rise in tandem, hitting 130pc of the value of the economy by 2018. He referred to it as a "significant risk" and said "keeping an eye on debt sustainability is key". Mr Breuer reiterated comments made by the IMF last week in its latest review, which warned the Government not to use the savings from scrapping the punishing annual repayments on the Anglo Irish Bank/Irish Nationwide promissory note to ease up on its austerity programme. He urged the Government to stick with the budget plans. Alan Ahearne, NUI Galway economics lecturer and former adviser to the late former Finance Minister Brian Lenihan, warned against using the money to be pumped into the Ireland Strategic Investment Fund for so-called shovel-ready projects for the sake of it. Instead, he suggested "sustainable jobs" could be created by helping struggling small and medium businesses suffering from debt problems. He also suggested a tax on tracker mortgages. Irish Independent http://www.independent.ie/business/irish/banks-lost-500m-every-month-last-year- 29372436.html

Merkel ally describes Anglo’s German comments as ‘unbearable’ 26 June 2013 German people are disgusted and offended at comments by Anglo executives as revealed by the Irish Independent, according to a leading politician. Related Articles Anglo tapes make front page news in Germany 'Another day, another billion,' laughs Drumm Also in this section [TICON-A VIDEO] Kenny ‘considering’ a second referendum to get more powers for banking inquiry Anglo tapes revelations make front page news in Germany Burton demands Cowen detail phone calls on bank guarantee scheme Micheal Fuchs, deputy parliamentary leader of the Christian Democratic Union – the party of Chancellor Angela Merkel – said the recordings were “unbearable”. In a set of phone calls detailed by the Irish Independent, executives at the toxic Anglo Irish Bank laugh about abusing a blanket bank guarantee to beef up the books at the expense of Germany and the UK.

One conversation - taped two days after the fateful September 30, 2008 bank guarantee - hears former chief executive David Drumm giggle while his colleague John Bowe recites lines from ‘Deutschland Uber Alles’. “We are offended,” Mr Fuchs told RTE earlier today. “If you have a feeding hand you shouldn't bite into it.” He added “it’s really dangerous” language as German politicians are trying to convince local taxpayers to support European countries, such as Ireland. “It's absolutely unbearable that somebody is talking like this,” he said. Bowe said in a statement that the language used in the taped recordings of internal bank conversations "was imprudent and inappropriate." Fuchs, as reported by Bloomberg, said that he didn't believe that Europe's permanent bailout fund – the European Stability Mechanism (ESM) will be able to retrospectively provide funds to bailed-out surviving Irish banks. “As far as retrospective is concerned this is not going to be possible because the ESM can only go forward and not back. I have the feeling it is only for future problems but not for those prior to 2012.” http://www.independent.ie/business/irish/anglo/merkel-ally-describes-anglos-german- comments-as-unbearable-29374863.html

CNBC EUROPE TOP NEWS AND ANALYSIS Italy Faces Restructured Derivatives Hit Published: Tuesday, 25 Jun 2013 | 8:04 PM ET By: Guy Dinmore

Charles Bowman | Photolibrary | Getty Images Italy, Rome, city skyline from Vittorio Emanuele Monument Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the euro zone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999. A 29-page report by the Treasury, obtained by the Financial Times, details Italy's debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7 billion. While the report leaves out crucial details and appears intended not to give a full picture of Italy's potential losses, experts who examined it told the Financial Times the restructuring allowed the cash-strapped Treasury to stagger payments owed to foreign banks over a longer period but, in some cases, at more disadvantageous terms for Italy. The report does not name the banks or give details of the original contracts - questions that worried the state auditors - but the experts said they appeared to date back to the period in the late 1990s. At that time, before and just after Italy entered the euro, Rome was flattering its accounts by taking upfront payments from banks in order to meet the deficit targets set by the EU for joining the first wave of 11 countries that adopted the euro in 1999. Italy had a budget deficit of 7.7 percent in 1995. By 1998, the crucial year for approval of its euro membership, this had been reduced to 2.7 percent, by far the largest drop among the Euro 11. In the same period tax receipts increased marginally and government spending as a proportion of GDP fell only slightly. The report was submitted, as required, early this year to the Corte dei Conti, Italy's state auditors. According to a senior government official, who declined to be named, the auditors were concerned by the numbers and requested the finance police to intervene. In April police of the Guardia di Finanza visited the offices of Maria Cannata, head of the Treasury's debt management agency, asking for more information on the report

99 drafted by the agency, including details of the original derivatives contracts, the senior official said. The leaking of the 2012 Treasury report, which was also obtained by La Repubblica, the Italian newspaper, is likely to fuel debate over Italy's exposure to derivatives. It comes at a time when markets have begun to exhibit new nervousness with the cost of borrowing rising sharply recently for euro zone peripheral countries like Italy. Only a handful of Italian officials, past and present, are aware of the full picture, according to bankers and government sources. The senior government official who spoke to the Financial Times and the experts consulted said the restructured contracts in the 2012 Treasury report included derivatives taken out when Italy was trying to meet tough financial criteria for the 1999 entry into the euro. Mario Draghi, now head of the European Central Bank, was director-general of the Italian Treasury at the time, working with Vincenzo La Via, then head of the debt department, and Ms Cannata, then a senior official involved with debt and deficit accounting. Mr La Via left the Treasury in 2000 and returned as its director-general in May 2012 - with the backing of Mr Draghi, according to Italian officials. An ECB spokesman declined to comment on the bank's knowledge of Italy's potential exposure to derivatives losses or on Mr Draghi's role in approving derivatives contracts in the 1990s before he joined Goldman Sachs International in 2002. The report does not specify the potential losses Italy faces on the restructured contracts. But three independent experts consulted by the FT calculated the losses based on market prices on June 20 and concluded the Treasury was facing a potential loss at that moment of about €8 billion, a surprisingly high figure based on a notional value of €31.7 billion. Italy does not disclose its total potential exposure to its derivatives trades. The experts contacted by the FT, who declined to be named, noted that the report revealed just a six- month snapshot on a limited number of restructured contracts. Early last year Italy was prompted to reveal by regulatory filings made by Morgan Stanley that it had paid the US investment bank €2.57 billion after the bank exercised a break clause on derivatives contracts involving interest rate swaps and swap options agreed with Italy in 1994. More from the FT Austerity Is Hurting – but Is It Working? Italy 'Mad' to Seek Bailout Before Spain The Euro Still Has a Mountain to Climb An official report presented to parliament in March 2012 found that Morgan Stanley was the only counterparty to have such a break clause with Italy and disclosed, for the first time, that the Treasury held derivatives contracts to hedge some €160 billion of debt, almost 10 per cent of state bonds in circulation. The Bloomberg News agency calculated at the time, based on regulatory filings, that Italy had lost more than $31 billion on its derivatives at then market values. Releasing its own report in February on the state accounts for 2012, Salvatore Nottola, prosecutor-general of the Corte dei Conti, noted that "the damage done to the state's income constituted by the negative outcomes of derivatives contracts is particularly critical and delicate".

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The Corte dei Conti declined to comment on the report and the finance police did not respond to inquiries. A finance ministry spokesman confirmed the existence of the report but declined to comment on its contents and possible losses, citing commercial confidentiality. He would not comment on requests made by the police to Ms Cannata. Gustavo Piga, an Italian economics professor, caused a storm in 2001 when he obtained one such derivatives contract taken out in 1996 and accused EU countries of "window- dressing" their accounts. Mr Piga did not identify the country nor the bank involved but they have since been named in the media as Italy and JPMorgan. "Derivatives are a very useful instrument," Mr Piga wrote. "They just become bad if they're used to window-dress accounts," he said, accusing the unnamed country of disregarding standard derivatives contracts in order to delay until a later date its debt interest payments. Last year Der Spiegel, a German magazine, obtained official documents which it said demonstrated that in 1998 Helmut Kohl, then chancellor, decided for political reasons to ignore warnings from his experts that Italy was believed to be "dressing" up its accounts and would not meet the Maastricht treaty criteria for entry, including a budget deficit less than 3 per cent. Italian officials, including former finance minister Giulio Tremonti, have said the EU was aware and approved of Italy's use of derivatives in the build-up to euro entry. Greece followed suit two years later but irregularities in its accounts only became public in 2009. Bloomberg News lost a case before the EU General Court in 2012 when it used a freedom of information request to obtain files held by the ECB that Bloomberg said showed how Greece used derivatives to hide its debt. The Luxembourg-based court, in rejecting the case, said disclosure of the files "would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece". Additional reporting by Giulia Segreti in Rome http://www.cnbc.com/id/100843758

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ft.com World Europe June 26, 2013 1:04 am Italy faces restructured derivatives hit By Guy Dinmore in Rome

©Bloomberg Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999. A 29-page report by the Treasury, obtained by the Financial Times, details Italy’s debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn. More ON THIS STORY/ Analysis Austerity is hurting – but is it working?/ Italy ‘mad’ to seek bailout before Spain/ Editorial The euro still has a mountain to climb/ Analysis Debt crisis efforts carry boom-era echoes/ Milan swaps case puts banks in hot seat ON THIS TOPIC/ Euro dips below $1.30 against the dollar/ EU backlash over Germany’s dominant role/ Bank bailout pact eludes EU ministers/ Editorial Europe’s path in a world without QE IN EUROPE/ Reding voices concerns over UK snooping/ Brussels launches plan to integrate Roma minorities/ Russia attacked over Magnitsky case/ Speech offers hope of global action While the report leaves out crucial details and appears intended not to give a full picture of Italy’s potential losses, experts who examined it told the Financial Times the restructuring allowed the cash-strapped Treasury to stagger payments owed to foreign banks over a longer period but, in some cases, at more disadvantageous terms for Italy. The report does not name the banks or give details of the original contracts – questions that worried the state auditors – but the experts said they appeared to date back to the period in the late 1990s. At that time, before and just after Italy entered the euro, Rome was flattering its accounts by taking upfront payments from banks in order to meet the deficit targets set by the EU for joining the first wave of 11 countries that adopted the euro in 1999. Italy had a budget deficit of 7.7 per cent in 1995. By 1998, the crucial year for approval of its euro membership, this had been reduced to 2.7 per cent, by far the largest drop among the Euro 11. In the same period tax receipts increased marginally and government spending as a proportion of GDP fell only slightly.

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The report was submitted, as required, early this year to the Corte dei Conti, Italy’s state auditors. According to a senior government official, who declined to be named, the auditors were concerned by the numbers and requested the finance police to intervene.

In April police of the Guardia di Finanza visited the offices of Maria Cannata, head of the Treasury’s debt management agency, asking for more information on the report drafted by the agency, including details of the original derivatives contracts, the senior official said. The leaking of the 2012 Treasury report, which was also obtained by La Repubblica, the Italian newspaper, is likely to fuel debate over Italy’s exposure to derivatives. It comes

103 at a time when markets have begun to exhibit new nervousness with the cost of borrowing rising sharply recently for eurozone peripheral countries like Italy. Only a handful of Italian officials, past and present, are aware of the full picture, according to bankers and government sources. The senior government official who spoke to the Financial Times and the experts consulted said the restructured contracts in the 2012 Treasury report included derivatives taken out when Italy was trying to meet tough financial criteria for the 1999 entry into the euro. Mario Draghi, now head of the European Central Bank, was director-general of the Italian Treasury at the time, working with Vincenzo La Via, then head of the debt department, and Ms Cannata, then a senior official involved with debt and deficit accounting. Mr La Via left the Treasury in 2000 and returned as its director-general in May 2012 – with the backing of Mr Draghi, according to Italian officials. An ECB spokesman declined to comment on the bank’s knowledge of Italy’s potential exposure to derivatives losses or on Mr Draghi’s role in approving derivatives contracts in the 1990s before he joined Goldman Sachs International in 2002. The report does not specify the potential losses Italy faces on the restructured contracts. But three independent experts consulted by the FT calculated the losses based on market prices on June 20 and concluded the Treasury was facing a potential loss at that moment of about €8bn, a surprisingly high figure based on a notional value of €31.7bn. Italy does not disclose its total potential exposure to its derivatives trades. The experts contacted by the FT, who declined to be named, noted that the report revealed just a six- month snapshot on a limited number of restructured contracts. Early last year Italy was prompted to reveal by regulatory filings made by Morgan Stanley that it had paid the US investment bank €2.57bn after the bank exercised a break clause on derivatives contracts involving interest rate swaps and swap options agreed with Italy in 1994. An official report presented to parliament in March 2012 found that Morgan Stanley was the only counterparty to have such a break clause with Italy and disclosed, for the first time, that the Treasury held derivatives contracts to hedge some €160bn of debt, almost 10 per cent of state bonds in circulation. The Bloomberg News agency calculated at the time, based on regulatory filings, that Italy had lost more than $31bn on its derivatives at then market values. Releasing its own report in February on the state accounts for 2012, Salvatore Nottola, prosecutor-general of the Corte dei Conti, noted that “the damage done to the state’s income constituted by the negative outcomes of derivatives contracts is particularly critical and delicate”. The Corte dei Conti declined to comment on the report and the finance police did not respond to inquiries. A finance ministry spokesman confirmed the existence of the report but declined to comment on its contents and possible losses, citing commercial confidentiality. He would not comment on requests made by the police to Ms Cannata. Gustavo Piga, an Italian economics professor, caused a storm in 2001 when he obtained one such derivatives contract taken out in 1996 and accused EU countries of “window- dressing” their accounts. Mr Piga did not identify the country nor the bank involved but they have since been named in the media as Italy and JPMorgan.

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“Derivatives are a very useful instrument,” Mr Piga wrote. “They just become bad if they’re used to window-dress accounts,” he said, accusing the unnamed country of disregarding standard derivatives contracts in order to delay until a later date its debt interest payments. Last year Der Spiegel, a German magazine, obtained official documents which it said demonstrated that in 1998 Helmut Kohl, then chancellor, decided for political reasons to ignore warnings from his experts that Italy was believed to be “dressing” up its accounts and would not meet the Maastricht treaty criteria for entry, including a budget deficit less than 3 per cent. Italian officials, including former finance minister Giulio Tremonti, have said the EU was aware and approved of Italy’s use of derivatives in the build-up to euro entry. Greece followed suit two years later but irregularities in its accounts only became public in 2009. Bloomberg News lost a case before the EU General Court in 2012 when it used a freedom of information request to obtain files held by the ECB that Bloomberg said showed how Greece used derivatives to hide its debt. The Luxembourg-based court, in rejecting the case, said disclosure of the files “would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece”. Additional reporting by Giulia Segreti in Rome http://www.ft.com/intl/cms/s/0/440007a8-dd9a-11e2-a756- 00144feab7de.html#axzz2XJ6cvopm

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Tesoro, perdite potenziali di 8 miliardi. L'origine è nei derivati degli anni '90 Quegli strumenti ebbero un ruolo nel consentire il nostro ingresso nell'euro. La Corte dei Conti ha inviato la Finanza dopo il report del ministero. Ma non ha finora ottenuto i contratti di stipula di ANDREA GRECO

Il ministero dell'Economia ROMA - C'è una bomba a orologeria nei conti pubblici, nel rigo dei titoli derivati. È una perdita potenziale da almeno otto miliardi di euro, pari a oltre il 25% degli strumenti di copertura di tassi e di cambio del debito che sono stati ristrutturati dal ministero del Tesoro nel solo 2012. Si tratta di derivati accesi negli anni Novanta, anche per consentire anticipazioni di cassa che permisero al governo italiano di farsi trovare pronto all'appuntamento con la valuta unica. Ma oggi, e ancor più nei prossimi anni, quel fardello del passato presenta il conto. I dati sono frutto di elaborazioni svolte con criteri di mercato, che attualizzano i flussi attesi alla scadenza di quei derivati, e si basano sui numeri ufficiali - ma non pubblici - che il dicastero fornisce periodicamente alla Corte dei Conti, con cadenza semestrale. Repubblica ha potuto consultare la relazione del Tesoro sul debito pubblico, inviata ai pubblici controllori a inizio 2013. Sono 29 pagine, le ultime 10 sulla "Gestione delle passività e del rischio di tasso e di cambio", ottenuta di norma con coperture in derivati. Secondo un esperto funzionario del governo, la Corte li ha letti con preoccupazione, e ha voluto saperne di più. Così lo scorso aprile ha inviato la Guardia di Finanza in via XX settembre, con un mandato di esibizione di documenti in cerca delle confirmation letter, i contratti di stipula di quei derivati, che risalgono in buona parte agli anni Novanta. Finora, però, il Tesoro non ha mostrato quegli originali alle Fiamme Gialle. La Relazione è molto laconica nella descrizione dei contratti derivati oggetto di riassetto, una dozzina, tra febbraio e maggio 2012. Alla richiesta di maggiori dettagli, avanzata da Repubblica, il Tesoro non ha voluto commentare o illustrare i dati e le

106 operazioni, ribadendo che si tratta di strumenti "plain vanilla" (nel gergo finanziario significa "semplici") che servono a perseguire l'interesse dello Stato, proteggendo il debito dai rischi di oscillazione dei cambi e dei tassi di interesse. In pratica, delle forme di assicurazione che possono tutelare il Tesoro da più gravi conseguenze, ma che hanno un costo nel caso in cui l'evento dal quale ci si protegge non si verifichi. Anche la Corte dei Conti, da noi interpellata, si è trincerata dietro un no comment. E analogo no comment arriva anche dalla Banca centrale europea presieduta da Mario Draghi, che fu direttore generale del Tesoro tra il 1991 e il 2001, quando molti di quei derivati furono messi nero su bianco. Il documento, di cui oggi dà conto anche il Financial Times, è stato sottoposto all'analisi di provati esperti del settore, che hanno montato i numeri sui modelli matematici standard che il mercato utilizza per "prezzare" questi derivati. Sulla materia c'è scarsa trasparenza. Fonti del Tesoro la giustificano con l'opportunità di carattere strategico e commerciale. Ma chi ha letto quella relazione si è trovato davanti alla Stele di Rosetta degli swap italiani: una storia che risale agli anni Novanta, e che secondo i protagonisti delle vicende contribuì a tenere i conti del paese in dieta stretta quando si trattò di entrare in Europa con il primo treno. In attesa di maggiore trasparenza, solo dalle 10 pagine finali della Relazione si ricavano utili indicazioni. Le ristrutturazioni di contratti derivati sono una dozzina, tutte intercorse tra maggio e dicembre del 2012. Nelle carte si spiega "lo spirito" con cui si è ritenuto opportuno riscrivere quei contratti. Si collega all'esigenza delle banche specialiste in titoli di stato (una ventina dei soliti nomi: le tre grandi italiane, le principali europee e le maggiori banche d'affari anglosassoni) di ridurre il rischio Italia, che altrimenti non avrebbero potuto sostenere in asta alle nuove emissioni del Tesoro. Quasi una pistola alla tempia, che si spiega con la fase drammatica di fine 2011, quando lo spread sul Btp era sopra ai 500 punti base e la finanza pubblica domestica in ginocchio. "Nel corso del primo semestre 2012 è stata portata avanti la strategia di ristrutturazione e semplificazione del portafoglio derivati, analogamente a quanto fatto nei semestri precedenti", si legge nel documento. Eccone il motivo: "Uno degli effetti della crisi, che ha investito sempre più anche i debiti sovrani, è stata la diffusione tra le controparti bancarie di modelli di analisi e valutazione che esprimono il rischio di default di una controparte priva di garanzia (...) ciò si traduce, per la Repubblica, in un maggior costo nell'esecuzione di una nuova operazione o di ristrutturazione di una esistente". "Rispetto alla struttura del portafoglio derivati dello stato - continua la relazione - caratterizzato da scadenze lunghe e privo di collateralizzazione, quanto descritto ha prodotto l'affermarsi di una forte correlazione inversa (e perversa) tra andamento del tratto a lunga della curva swap, valore di mercato del portafoglio e livello dei Cds italiani, con potenziali effetti negativi anche sul mercato primario e secondario dei titoli di Stato". Dunque, la crisi porta le banche a presentare il conto dei vecchi derivati al Tesoro, in forma di ristrutturazioni che fanno emergere una perdita potenziale di 8.100 milioni. Un derivato è un contratto basato sul valore di mercato di uno o più beni (azioni, indici, valute, tassi d'interesse). Produce i suoi effetti alla scadenza, ma si può "prezzare" attualizzando i flussi attesi, in base all'andamento dei beni sottostanti. Quindi gli 8 miliardi saranno pagati, con ogni probabilità, nei prossimi anni, in forma di più interessi e più debito, perché dai conteggi (elaborati ai valori del 20 giugno) emerge il deprezzamento dei flussi medi previsti a oggi. Alcuni di questi flussi stanno già producendo i loro danni sui conti pubblici, perché tutte le clausole peggiorative, con 107 finestra temporale a oggi, sono già state esercitate dalle controparti bancarie. Solo nei prossimi anni si potrà capire se il Tesoro risparmierà qualcosa sul saldo, nell'improbabile caso in cui i movimenti degli asset su cui quei derivati si basano fossero a suo totale favore. La maggior parte delle operazioni ristrutturate riguarda interest rate swap: si tratta di derivati base, per trasformare oneri sul debito di tipo variabile in fissi, e per assicurare le casse pubbliche dal rischio di rialzo dei tassi. È una pratica normale e diffusa tra gli emittenti. Ma tutti gli swap descritti sembrano rinegoziati a un prezzo "off market", cioè non con una forte perdita iniziale per l'erario. Un'anomalia probabilmente dovuta al fatto che i contratti originari, poi revisionati, erano in realtà prestiti mascherati, che il Tesoro è oggi costretto a rimborsare a caro prezzo. Questo meccanismo, già noto agli storici dell'euro, e praticato da alcuni paesi periferici per rispettare i parametri di Maastricht, aiuta forse a comprendere come è stato possibile perdere oltre un quarto del valore nozionale sui 31 miliardi di derivati ristrutturati l'anno scorso. E getta qualche ombra sulla solidità dei conti pubblici, visto che l'Italia ha derivati per 160 miliardi, di cui un centinaio proprio in interest rate swap. L'esempio forse più anomalo riguarda la revisione dello swap su un nozionale da 3 miliardi scadenza 2036, e modificato il 1° maggio 2012. Si tratta di un contratto degli anni Novanta, in cui Tesoro vendeva alla banca di turno una swaption, ossia l'opzione a entrare in un contratto swap dal 2016 al 2036. Su quei 3 miliardi di debito pubblico, in cambio di un anticipo di cassa ricevuto all'epoca, il Tesoro si impegnò a pagare un futuro tasso fisso del 4,652% su 3 miliardi di propri titoli, ricevendo in cambio l'interesse Euribor 6 mesi (attualmente, poco più di zero). Ma nel marzo 2012, con quattro anni di anticipo, lo Stato rinegozia quello swap, e lo trasforma in un nuovo scambio di tassi - sempre fisso contro variabile - su una scadenza inferiore (circa 6 anni) e su un controvalore triplicato a 9 miliardi. La Relazione qui si ferma. Le elaborazioni indicano che quel derivato "prima versione" aveva un valore negativo per lo Stato di 900 milioni al momento del riassetto. E un valore negativo di 1.350 milioni nella versione rinegoziata. Perché mai rinegoziare un contratto aggiungendo 450 milioni di perdite attese per l'Erario? Anzi, dal marzo 2012 a oggi quel derivato ha aumentato il valore negativo di 1.550 milioni, confermando gli assunti probabilistici secondo i quali solo nel 18% dei casi poteva generare, nel tempo, un beneficio per le casse pubbliche. "Molti errori sono stati fatti negli anni Novanta per far entrare l'Italia nell'euro - racconta un funzionario governativo - e oggi si trasformano in più debito, nascosto dai conti ufficiali, in un'area molto grigia che al Tesoro solo poche persone sono in grado di comprendere e maneggiare". Talmente poche, le persone, che è stata notata la nomina di Vincenzo La Via a direttore generale del Tesoro, nella primavera 2012. Dopo un lungo cursus internazionale, La Via è tornato in via XX Settembre, dove aveva già operato tra il 1994 e il 2000. E dove aveva firmato alcuni di quei contratti derivati, oggi in fase di riscrittura. (26 giugno 2013) http://www.repubblica.it/economia/2013/06/26/news/italia_otto_miliardi_a_rischio- 61861023/?ref=NRCT-61861023-2

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Caffe Reggio Periodismo de opinión La germanización de la política económica europea: implicaciones para España, de Óscar Fanjúl en Expansión el 26 junio, 2013 en Derechos, Economía, Internacional, Libertades, Política, Sociedad OPINIÓN: EN PRIMER PLANO El autor cita a Samuelson, que alertó de que asociarse monetariamente con Alemania equivale a acostarse con un oso. También aboga por que el BCE apoye financieramente a los Estados para evitar las políticas de austeridad, a cambio de que éstos aceleren las reformas. Son muchos los que discrepan de la política económica defendida por Alemania, caracterizada por el papel restringido asignado al Banco Central Europeo, por su insistencia en las políticas de austeridad en medio de la recesión, por la casi obsesiva preocupación por el peligro de inflación y, en definitiva, por la prioridad que da a la resolución a largo plazo de los problemas estructurales, minusvalorando las dificultades cíclicas a corto. Sin embargo, es el enfoque alemán el que finalmente se ha impuesto en Europa. Como señalaba recientemente el profesor Ulrich Beck, el nuevo papel de Alemania hoy es el “del arquitecto en la construcción de la nueva Europa alemana”. El proyecto de unión monetaria implica una disciplina que hemos tardado en comprender pero que no debería sorprendernos, pues los países europeos aspiraban con él a ganar la credibilidad que suponía asociarse a la política defendida por el Bundesbank. Sobre las dificultades y riesgos que esto suponía advirtieron en su momento muchos economistas, particularmente los anglosajones y, así, Samuelson comparó asociarse monetariamente con Alemania a acostarse con un oso. Ahora bien, ¿es previsible que la prolongación de la crisis propicie un cambio sustantivo en la política económica europea? Difícilmente. Hoy no existe en Europa un liderazgo francoalemán, sólo alemán; y en este país existe el suficiente consenso social, y también político entre los cuatro grandes partidos, incluso con los sindicatos, como para no esperar que tras las próximas elecciones se produzca un cambio significativo de la política económica, a no ser que Alemania entre en recesión. Igualmente, existe también en Alemania el mismo consenso nacional respecto a la conveniencia de mantener y defender el sistema del euro. Por el contrario, el resto de los países de la eurozona no han sido capaces de articular una política económica alternativa dotada de credibilidad, ni tampoco existe en ellos una cohesión política y social comparable a la de la sociedad alemana. El éxito de Alemania desde la postguerra sólo contribuye a reafirmar su planteamiento y el Bundesbank, su gran defensor, se ha convertido, con diferencia, en la institución más influyente y respetada por el pueblo alemán. Es más, no existe en el mundo un banco central en el que los ciudadanos tengan depositada más confianza que los alemanes en el suyo, fundamentada en la creencia de que defenderá la estabilidad de la moneda con la firmeza e independencia respecto del poder político que ha mostrado durante décadas. Y el Bundesbank conoce bien qué tipo de política debe defender si quiere mantener el apoyo del público alemán. 109

Por ello resulta tan importante, aunque no se comparta, entender adecuadamente qué significa la germanización de la política económica europea y qué implicaciones tiene para países como España, y no confiar en un cambio de orientación de la misma que difícilmente se producirá. 1. La necesidad de los superávits por cuenta corriente La primera y más importante implicación es que España tiene que ser capaz de generar de forma sostenida superávits por cuenta corriente, algo inédito en su historia reciente, como única forma de reducir su endeudamiento y volver a crecer. En efecto, el principal desequilibrio macroeconómico de España lo constituye el elevado nivel de deuda, pues la pública continúa creciendo, pronto superará el 90% del Producto Interior Bruto, y las familias encuentran grandes dificultades para reducir la suya. Si los sectores público y privado deben reducir su nivel de endeudamiento, el saldo exterior por cuenta corriente debe necesariamente ser excedentario, pues estos sectores sólo pueden reducir simultáneamente su deuda si lo hacen respecto al sector exterior (por mera identidad contable, los tres saldos deben sumar cero). En este tipo de planteamiento se sustenta la política de austeridad y de reformas que defiende Alemania. Los superávit por cuenta corriente no constituyen más que el ahorro que debemos destinar a reducir nuestro endeudamiento. La austeridad, más que una imposición alemana, es una consecuencia de que como país somos hoy menos ricos de lo que hasta hace poco creíamos, y ello obliga inevitablemente a ajustar nuestro gasto y a reducir nuestro nivel de deuda. Las diferencias con Alemania son importantes, pero se refieren fundamentalmente al ritmo y a la forma en que debe hacerse este ajuste. Las reformas son necesarias para aumentar nuestra competitividad internacional, y es importante comprender que cuanto menos éxito tengamos en la generación de superávit externo mayor tendrá que ser la contracción interna del gasto necesario para conseguir un mismo objetivo de reducción de deuda. 2. La asimetría de los déficits y de los superávits Esa imprescindible corrección de los déficits exteriores de los países periféricos europeos sería obviamente más fácil si, a la vez, las economías con superávits accedieran a reducirlos aumentando su gasto. Ahora bien, ¿podemos esperar este tipo de comportamiento por parte de Alemania? No debemos, y conviene recordar que la existencia de economías dispuestas a mantener superávits de forma permanente no es un problema nuevo ni fácil de resolver. La experiencia histórica muestra sobradamente que los déficits son insostenibles y se castigan, pero no ocurre lo mismo con los superávits. Alemania difícilmente aceptará compromiso alguno que suponga eliminar este tipo de asimetría, y no está dispuesta a reducir sus superávits externos, que considera consecuencia y garantía de su competitividad, sólo para contribuir a que los países periféricos reduzcan sus déficits. El modelo de economía alemana se caracteriza por la importancia de su sector exportador y por los sostenidos superávits por cuenta corriente. Cuando recientemente el presidente Rajoy pidió que Alemania practicara una política de gasto más expansiva, la canciller Merkel reafirmó, una vez más, su negativa y se limitó a aconsejar que España aumentara sus exportaciones a Latinoamérica. 3. ¿Nos ayudará el tipo de cambio? El ritmo y la facilidad con que se produzca el ajuste de las cuentas exteriores de los países periféricos dependerá de lo que ocurra con el valor del tipo de cambio. Está claro que el valor del euro es hoy demasiado alto para lo que conviene a la deprimida

110 economía europea, y ello no es sino otra consecuencia de la fortaleza y del tamaño de la economía alemana. En este sentido, es importante recordar que Alemania y otros países de su área han visto tradicionalmente la fortaleza de su divisa de una forma distinta a como lo han hecho países como España. En efecto, en economías con recursos ociosos la devaluación de la moneda es una forma de reducir costes y de recuperar, a costa del empobrecimiento relativo que ello supone, la competitividad y el empleo. Sin embargo, otros países han considerado una moneda fuerte como un reto y como un incentivo adicional para ser más competitivo, para introducir reformas y aumentar su productividad, y cuando han tenido éxito en el empeño –y este es el caso de Alemania–, se ha convertido en el fundamento de su riqueza y fortaleza. Frente a quienes han mostrado recientemente su preocupación por la fortaleza del euro, los responsables políticos y económicos alemanes han respondido que de lo que se trata es de “aumentar la competitividad y no de debilitar la divisa”. Mientras que otros países practican hoy políticas que conducen a la depreciación de sus monedas, incluso compiten en ello, el caso japonés es un ejemplo, el BCE ha insistido en que siguen la evolución de los tipos de cambio, pero sólo para valorar la situación económica y nunca ha mostrado especial preocupación por los efectos de un euro fuerte. En definitiva, al igual que en la época del patrón oro, los países de la zona euro sólo pueden aspirar a corregir sus déficits mediante la devaluación interna, reduciendo los costes unitarios de sus bienes y servicios. 4. La balanza por cuenta corriente española: ¿problema resuelto? Uno de los aspectos más destacables del reciente ajuste español ha sido la importante mejora del saldo por cuenta corriente, que ha pasado de representar el 10% del PIB en 2007 al equilibrio, reflejo de las mejoras conseguidas en la productividad y en los costes laborales unitarios. Como consecuencia de esta evolución tan positiva de la balanza por cuenta corriente, de la productividad y de las exportaciones, algunos niegan que tengamos un problema de competitividad. Sin embargo, conviene recordar que este reequilibrio se ha conseguido a través del hundimiento de la demanda interna y del empleo. Las importaciones han retrocedido al nivel que tenían hace más de diez años. Por ello, el problema es otro: en concreto, saber si somos capaces de volver a crecer de forma sostenida a tasas del 2% ó el 3%, generando también entonces superávits por cuenta corriente, algo que no ha ocurrido en las últimas décadas y sobre lo que hay razones para tener serias dudas. Conviene tener en cuenta que una gran parte de la moderación de los costes laborales y de la flexibilidad mostrada recientemente por el mercado de trabajo se debe al impacto de la recesión y al temor real al cierre de empresas, más que a una mejora suficiente y permanente en el funcionamiento del mercado de trabajo. Es ésta, además, una situación que fácilmente podría cambiar ante una recuperación del crecimiento después de un largo periodo de reducción o estancamiento salarial y de caída del consumo y el peso de las rentas salariales en el PIB. 5. Políticas monetaria y fiscal Ante el impacto recesivo que están teniendo las políticas de austeridad, muchos defienden en los países del sur de Europa la necesidad de practicar algún tipo de política monetaria y fiscal que permita estimular la demanda. Un banquero central como Bernanke defiende, en efecto, que el comportamiento de los bancos centrales debe de ser distinto en un contexto inflacionario y en otro deflacionista como el actual. Según él,

111 frente a la inflación “la virtud de un banco central es su habilidad para decir “no”… Sin embargo, cuando no existe inflación, y el peligro es la deflación, se justifica una colaboración de la política monetaria con la política fiscal, lo que no es incompatible con la independencia del banco central, al igual que la colaboración entre países no cuestiona la soberanía de cada uno de ellos”. Por el contrario, la política alemana se basa en defender una separación estricta entre la política monetaria y la acción discrecional de los gobiernos. En este sentido, los alemanes han interpretado desde su origen la creación del euro como un paso más en la separación entre el proceso de creación de dinero y la actuación de los gobiernos. Otmar Issing, el que fuera economista jefe y miembro alemán del Comité Ejecutivo del BCE, ha señalado que, en su concepción, la introducción del euro supuso la “desnacionalización del dinero en el sentido defendido por Hayek”, de forma que “la separación entre finanzas públicas y política monetaria queda así asegurada”. Esta concepción del papel de la política monetaria y del banco central explica la resistencia alemana a que éste último colabore con la política fiscal, y la negativa a que pueda actuar como prestamista de última instancia de los gobiernos europeos. El BCE no debe colaborar en la financiación de los déficits fiscales, que deben reducirse aceleradamente, y los problemas de los países periféricos, son estructurales, no cíclicos, y éstos no se corrigen con estímulos monetarios y fiscales. 6. Conclusiones Por las distintas razones hasta aquí explicadas, creo que lo más realista para España es asumir plenamente las consecuencias de una inevitable política de austeridad y de reformas, sabiendo, además, que los efectos positivos de éstas últimas tardarán tiempo en manifestarse. En contra de lo defendido por muchos, las políticas de austeridad tienen un efecto depresivo y la única forma de compensarlo es a través de reformas microeconómicas que permitan corregir las causas de nuestros desequilibrios y que sean lo suficientemente radicales como para tener un impacto macroeconómico. Por ello, es mejor concentrarse en ciertas reformas y saneamientos fundamentales, las de los mercados de capitales y de trabajo, incluso la del energético, y no dispersarse en otras de importancia secundaria, que contribuyen más a generar reacciones sociales en contra que a tener un impacto macroeconómico. Aún así, los procesos de ajuste de devaluación interna pueden ser muy largos. Históricamente, rara vez han funcionado. No ocurrió en la Gran Depresión. La mejor alternativa sería que el Banco Central Europeo, como hace la Fed o el Banco de Inglaterra, apoyara con su política monetaria una política fiscal menos contractiva y se recapitalizara agresivamente al sector financiero a cambio de reformas más radicales acordes con la importancia de nuestros problemas. Ahora bien, ¿hay razones suficientes para ser optimista sobre la capacidad de comprometernos a las reformas que necesitamos y no, como tantas veces, hacerlas sólo a medias? Como en una ocasión señaló Churchill: “No es suficiente con hacerlo lo mejor que podamos; a veces tenemos que hacer lo que hay que hacer”. http://www.caffereggio.net/2013/06/26/la-germanizacion-de-la-politica-economica- europea-implicaciones-para-espana-de-oscar-fanjul-en-expansion/

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Opinión TRIBUNA Los jueces de lo mercantil y sus conferencias La forma de nombrar a los administradores concursales deteriora a las instituciones Guillermo Alcover Garau 26 JUN 2013 - 00:01 CET Todos los abogados y empresarios interesados, implicados o afectados por la lentitud de los procesos judiciales, coinciden en señalar que el gran problema de los juzgados de lo mercantil no es la tardanza, sino, directamente, el colapso. La demora y el aplazamiento han convertido a estos juzgados en un lugar en donde los asuntos se eternizan y, por tanto, no solo no se solucionan, sino que se agravan. No es momento de abrumar con estadísticas, pero vale la pena citar algún ejemplo. El año pasado el titular del Juzgado de lo Mercantil número 1 de Málaga declaraba a un medio de comunicación que desde que llegó al juzgado, y ante el volumen de trabajo acumulado, fijaba las vistas para 2015 y que la tensión le obligaba a tomar pastillas para dormir. No sabemos si aún las toma, pero recientemente se informaba en otro medio de comunicación que su juzgado arrastraba 2.543 asuntos y de que en el Juzgado número 2, de creación posterior, se amontonan más de 1.000 casos pendientes de resolución. La juez de refuerzo contratada para agilizar las gestiones “abandonó el juzgado después de un mes sin cobrar”. Se calcula que para resolver semejantes atascos deberían crearse en Málaga, y con carácter de urgencia, nueve juzgados de lo mercantil. El gravoso colapso judicial que padece el tejido empresarial de nuestro país sucede pese al buen hacer de la mayoría de los jueces, pero debe señalarse que algunos de ellos compatibilizan su labor jurisdiccional con la asistencia habitual a conferencias, coloquios, congresos, cursos, seminarios y encuentros que les distraen de su preceptiva ocupación. La dedicación de estos jueces a una labor distinta a la jurisdiccional tiene en algunos casos características muy peculiares: suele ser muy intensa, pues imparten numerosas conferencias y ponencias en todos los puntos de España; es singular, ya que los jueces de otros ámbitos (de lo civil, de lo penal, de lo social…) no se prodigan con tanto entusiasmo; además, se trata de una actividad particular que suele estar bien retribuida. Aunque la peculiaridad que más debería preocupar a los responsables de la administración judicial de lo mercantil es que en la organización, convocatoria y presentación de estos cursos participan la misma corte de profesionales que aspira a ocupar el cargo de administradores concursales. Esta figura, fundamental en los procesos mercantiles, es precisamente la que designan a su discreción los jueces de lo mercantil. La reforma que proponemos debería hacerse por decreto ley y con carácter de urgencia Obviamente, la participación de algunos jueces en este atractivo mercado de conferencias (cursos, congresos y seminarios) agrava objetivamente el colapso de sus juzgados, pues les absorbe el tiempo que deberían dedicar a la principal de sus obligaciones públicas. Pero además, resulta que estos jueces incurren en una actividad de dudosa compatibilidad y no puede desconocerse que su ligereza es potencialmente peligrosa. 113

Hay administraciones concursales muy codiciadas y resulta inevitable sospechar que los jueces pueden concederlas a los profesionales cuyo trato han cultivado en los sustanciosos circuitos que hemos citado. Puede ocurrir que el cargo de administrador concursal se conceda a quienes patrocinan los cursos, organizan las conferencias o asisten a los mismos pagando las generosas cuotas que cuestan las matrículas. A este respecto, y teniendo en cuenta que la retribución de los administradores concursales depende del activo de la sociedad concursada, hay que apuntar que el Instituto Nacional de Estadística señala que en el año 2011 fueron 349 los concursos con un activo superior a 10.000.000 de euros. En 2010 hubo 387 y en 2009, 357. En concursos relevantes se pueden cobrar cifras que sorprenderán a más de uno: según lo publicado en la prensa, los dos administradores concursales de Afinsa han cobrado ya más de 16.000.000 de euros y aún no ha acabado la fase de liquidación. Urge, por tanto, una solución. No hay duda de que debe vigilarse de cerca el comportamiento de los jueces, pero lo más efectivo será modificar el sistema de nombramiento de los administradores concursales. En la actualidad, el juez de lo mercantil los elige discrecionalmente de unas listas elaboradas por los respectivos colegios profesionales. No parece que el sistema vaya a resentirse si esta potestad de los jueces desaparece y el proceso de nombramiento de administradores concursales se atiene a un criterio ordenado, racional y transparente. El orden alfabético, con toda su simple e irrefutable eficacia, permitiría que los peritos cualificados y seleccionados por sus respectivos colegios profesionales, tuvieran acceso a los concursos en igualdad de condiciones. Sin que mediara ninguna arbitrariedad. La reforma que proponemos debería hacerse por decreto ley y con carácter de urgencia. La situación actual es demasiado ambigua y consolida ese estado de opinión que lleva a los ciudadanos a perder la confianza puesta en las instituciones del Estado. No es aventurado afirmar que el frecuente contacto entre los potenciales administradores concursales y los jueces de lo mercantil, a través de actividades formativas lucrativas, incide decisivamente en el deterioro de esta confianza. Guillermo Alcover Garau es catedrático de Derecho Mercantil y abogado. http://elpais.com/elpais/2013/06/18/opinion/1371575890_109284.html

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¿Otra tormenta perfecta?, de Juan Ignacio Crespo en El País el 25 junio, 2013 en Derechos, Economía, Internacional, Libertades, Política, Sociedad OPINIÓN Hace justo un mes comenzó a gestarse una tormenta perfecta. Su primer y espectacular síntoma se produjo el 23 de mayo en la Bolsa de Tokio que, tras subir más de un 70% en seis meses, cayó de repente un 7% en un solo día. Hasta ayer, la gestación de esa tormenta estaba pasando casi desapercibida (¡ni siquiera subía mucho la prima de riesgo de la deuda española!) pero, tras las recientes caídas del Ibex 35, ha empezado a resultar evidente. Tres focos principales están alimentando su potencia destructiva: la subida de los tipos de interés de largo plazo en todo el mundo; la pérdida de credibilidad de la política monetaria del Banco de Japón; y, finalmente, lo que parece ser un estrangulamiento del crédito en China. A todo esto hay que añadir un cuarto factor de inestabilidad derivado del primero de los otros tres: la fuerte salida de capitales de los mercados emergentes que hunde sus Bolsas y la cotización de sus monedas. La lógica de esa salida de capitales es sencilla: los tipos de interés tan bajos de los últimos años habían fomentado la inversión en activos con un riesgo más elevado y que pudieran proporcionar una mayor rentabilidad. El cambio de política por la Reserva Federal está provocando una reacción hiperestésica en sentido contrario. La gravedad de lo que pudiera suceder en China la evoca el paralelismo con lo sucedido en Occidente en los años previos al estallido de la crisis: el crecimiento descontrolado del crédito y el desarrollo hipertrofiado de una llamada “banca en la sombra” y de vehículos fuera del balance de los bancos del tipo de los que llevaron a la quiebra a la gran banca norteamericana en 2008 (eran sociedades de inversión que se financiaban a corto plazo e invertían a largo plazo; quebraron cuando surgieron los primeros problemas para financiarse en los mercados, y arrastraron con ellos a los bancos que los habían promovido). ¿Estallará finalmente esa tormenta perfecta? Aunque la situación es muy complicada y el peligro de una suma vectorial desafortunada de todo lo anterior podría terminar con la quiebra de alguna gran institución financiera internacional (o de algún país emergente) sería muy raro que eso se produjera a estas alturas del ciclo. Pero sí que es probable, en cambio, que la inestabilidad se intensifique en las próximas semanas hasta conseguir que el índice S&P 500 de la Bolsa norteamericana caiga un 20%-25% (hasta ahora solo ha caído un 6%) y el precio de las materias primas retroceda otro tanto. Con el consiguiente impacto sobre una economía mundial que se está desacelerando (sobre todo China) y que pudiera verse, por tanto, abocada a otra recesión global. Juan Ignacio Crespo es autor del libro Las dos próximas recesiones.

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Daily Morning Newsbriefing June 26, 2013 Italy to lose €8bn on derivatives it used to cheat its way into the eurozone This is a cracking story by La Repubblica and the FT, both of which have obtained a report originating by the Italy, according to which the country has managed to lose €8.1bn on derivatives contracts of €31.7bn. The numbers listed in the confidential report were based on current market value of the derivatives contracts, and raised the suspicion of Italy’s Court of Auditors, which has since requested more information. These contracts date back to the 1990s, when the governments of the time used derivatives to bring Italy’s deficit to GDP ratio to below 3%. Some of these contracts were subsequently renegotiated between May and December 2012. The losses related only to contracts renegotiated during that eight-month period. As La Repubblica notes, the Italian state has total derivatives exposures of €160bn, so these reported losses of €8bn are only the tip of an iceberg. What is extraordinary is the sheer scale of losses relative to total amount – about a quarter. The Rebubblica story contains the technical details of these transactions. It gives one particularly egregious example of a swaption – an option to engage in a swap – which the Italian treasury sold to a bank – involving a swap of €3bn, to be effective between 2016 and 2036. The originals terms of this swap were for the Treasury to pay a fixed rate of 4.652% in exchange for the bank paying 6 month Euribor – currently close to zero. The size of this unfavourable contract was tripled in May 2012. The bottomline calculations were that the original contract resulted in a net loss of €900m to the Italian treasury, while the renegotiated contract would lead to a loss of €1.35bn. There are a number of reasons that make this story important. The main point is not that Italy has cheated to meet the deficit criteria. That was known before. The two biggest bullets in this story are the massive fiscal risk relating to those contracts, which have the potential to derail Italy’s fiscal strategy at the worst conceivable moment. Secondly, it raises the spotlight on Mario Draghi, who was director of the Italian treasury during those years. ESM has to post €120bn in collateral if it exhausts the €60bn bank recapitalisation limit This is cracking story hidden deeply in an article in Suddeutsche Zeitung. The €60bn bank recapitalisation facility for the ESM will come at a massive cost. For each euro invested in a bank, the ESM has to post two euros in collateral to maintain its credit rating. If the entire €60bn facility were exhausted, this would reduce the funds available for lending to sovereigns by €180bn, leaving only €320bn for other lending. Of those, the paper calculates, €109bn have already been earmarked for Spain and Cyprus, leaving a little over €200bn for new lending. The paper says that the ESM had

117 confirmed these calculations, adding that the posting of collateral would become effective only once the ECB starts recapitalising banks. The article also gave a useful reminder of the SPD’s position on banking union. It quoted its finance spokesman Carsten Schneider as warning that the ESM would be able to support legacy risks – something the SPD would block because of the risks to the German taxpayer. We have concluded for some time that a €60bn pan-European lending facility is not enough. We now know that the ESM is the wrong vehicle to deliver this because of the way it is constructed. The ESM is a multilateral vehicle that works on the basis of its own credit rating. It is not thus not meant for taking risky investments. If you want to recapitalise the banks at eurozone level – for which one needs a lot more than €60bn – one has to do it under a separate regime. Ireland under shock over “the Anglo tapes” This is one of the shocking quotes from the recordings of the Anglo Irish Bank telephone conversations back in 2008, taped and revealed by the Irish Independent. In one of the recordings capital market chief John Bowe confirmed that the €7bn figure was just made up, ‘I picked it out of my arse’, in the full knowledge that they need more capital. They lied about the true extend in the hope the state would write them an open check. In the end, it cost the Irish more than €30bn. He and the director of retail banking Peter Fitzgerald laughed about the prospects of nationalisation, describing it as "fantastic" – so that they could keep their jobs and become civil servants. The tapes also imply Anglo Irish Bank boss David Drumm, laughing about "abusing" the bank guarantee and warned his executives not to be caught abusing it. Drumm is also heard giggling as one of his executives sings the German national anthem as deposits from Germany flow into Anglo as a result of the bank guarantee. The publication of the Anglo Tapes sparked fresh calls for a comprehensive banking inquiry across the political spectrum. It also raised concerns to undermine the efforts of the Irish government to get the European partners to accept a retroactive bank financing for its banks. Bundesbank calls for independent audit of bank balance sheets In Germany the Anglo Irish tapes are all over the press, nurturing the fear that foreign banks could become a liability for the German tax payer, writes the FAZ. The Bundesbank now calls for an independent audit of the banks balance sheets by external auditors before the ECB is to take over, the Borsenzeitung quotes Vice president Sabine Lautenschläger. Eventual legacy debt need to be carried out by the member state, the Bundesbank insists. After the external audit the ECB can proceed with its "Balance Sheet Assessment" to be followed by stress testing of 140 banks to establish their capital requirements and to decide on the wind down of zombie banks. Cyprus wants to pass costs for bank restructuring on to central banks The Cypriots want the ECB to pass on the Emergency Liquidity Assistance (ELA) loans to the ECB directly. The argument is that the ECB should have rejected the application of the Cypriotic central bank in the first place. Since July 2012 the president of the Cypriot central bank Panikos Demetriades asks every fortnight his 22 colleagues for permission to use ELAs for its banking system. This way the second largest Laiki Bank got €10bn until March 2013, or 60% of Cyrus’ GDP. Only once did the ECB threaten to withdraw its approval. Now Cyrus argues that the ECB should have never granted

118 the permission as Laiki was already insolvent. Demetriades said on Arte television that better informed investors withdrew their money well in time and that this had forced the central bank to replace the funds with central bank money. The ECB has thus become a complice, argues Demetriades. This is unacceptable, said Jens Weidmann in the Suddeutsche Zeitung interview and it should be made clear that it is a fiscal policy responsibility not that of the Eurosystem. In two weeks Demetriades will again ask for permission of the ELA. But there is not much chance for the ESCB to say ‘no’ after they said ‘yes’ so many times, so the article. It shows once more, how dangerous it is for the central banks to get involved in rescue operations. Portugal’s deficit falls on mom but rise on yoy basis Portugal’s deficit recovers slightly on a month to month basis, but the overall deficit increased compared to last year’s figures, as expenditures rose even as tax revenues increased, Jornal de Negocios reports. The general deficit for the first five months until May was 1.7bn, €800m lower than compared to the deficit posted until April. The deficit of the central administration and social security agency €1.91bn compared with a deficit of €1.72bn in the same period of 2012. Spending rose 5.2%, tax revenue increased 5.7%, with revenue from indirect taxes falling 4.1% and revenue from direct taxes rising 21.8%. Also rising were contributions to social protection systems (+4.7%) as well as the revenue from dividends from the Bank of Portugal. Spain's NEET rate grows also among university graduates The OECD's Education at Glance country note for Spain shows that the fraction of NEET youth (Not in Education, Employment or Training) increased from under 17% to over 24% in the 3 years since the crisis hit Spain in 2008 to 2011, when data for the report were collected, reports El País. The prevalence of the NEET phenomenon grew even among those with a higher education (over 21% in the report), which is attributed to the fact that many graduates cannot find jobs but also cannot afford postgraduate education. The article mentions tuition fee raises but those have taken plae mostly after the period covered by the report. The lower cost of an undergraduate education leads to a lower NEET rate (19%) for those with only a secondary education. Between 2008 and 2011 the number of young people in education grew by 5% across all age groups, which is seen in other OECD countries and is a common phenomenon as education acts as a safe haven in a recession. Nevertheless, unemployment rates continue to be lower the higher the leave of education. PD grassroots demand new elections Il Corriere della Sera has the story that the mood in the PD is explosive, as many party members and executives are pushing for new elections, following the latest verdict against Berlusconi. Party leaders of both PdL and PD were at pains to emphasise that the coalition would not be affected by Berlusconi’s trials, but the paper reports there is now a heightened degree of nervousness, quoting one senior PD politician as texting “Guys get ready, we are about to dance.” Draghi says exit a long way off Mario Draghi yesterday went out of his way to emphasise that the ECB is not about to withdraw monetary support to the eurozone economy on the grounds that there is now an expectation in financial market about the nearing end of low interest rates. He told a CDU meeting in Berlin that the exit is a long way because inflation was low and

119 unemployment high, Frankfurter Allgemeine quotes him as saying. There was only a stabilisation of expectations, not of the real economy, he said. Earlier in the day, Benoît Cœuré had told an audience in London that the ECB would continue to support the economy. He said the ECB had to ensure that the Fed’s change of policy would not have a negative impact on European interest rates. Writing in the FT, Ralph Atkins said Draghi needed to act fast for the eurozone not to become a major casualty of US policy. He said one escape route for the ECB would be a significant weakening in the euro, but that has not happened so far. Atkins lists fresh offers of three-year liquidity as option, perhaps on more favourable terms than in 2011, a negative deposit rate, and asset-purchase schemes. Wolf is angry at the BIS Martin Wolf is the latest commentator to dismiss the BIS annual report, which not only defends austerity, but also calls for an end to monetary accommodation. He makes the important point that the recommendations do not add up on a global level. “Worse, it is hard to understand how the BIS thinks its recommendations add up across the world economy. In essence, it suggests that the private sectors should run bigger financial surpluses, as heavily-indebted agents repay debt, while governments should run smaller deficits. Unless one assumes that advanced countries will run vast current account surpluses with the rest of the world, this is a plan for a depression. The BIS does not even consider the possibility that monetary policy has been ineffective because it is competing with the fiscal tightening the BIS has recommended.” Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.313 1.3063

Yen 127.400 127.44

Pound 0.850 0.8471

Swiss Franc 1.226 1.2256

ZC Inflation Swaps

previous last close

1 yr 0.98 1.02

120

2 yr 1.07 1.09

5 yr 1.33 1.36

10 yr 1.73 1.76

Euribor-OIS Spread

previous last close

1 Week -9.429 -9.429

1 Month -6.471 -3.971

3 Months 0.843 3.243

1 Year 28.086 29.386

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-06- 26.html?cHash=8a0ac709b4d1598092211eb12a02c9aa

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ft.com Global Economy EU Economy June 25, 2013 4:14 pm Progress report: European Union’s move to banking union By Peter Spiegel in Brussels

©Reuters Thursday’s EU summit has long been flagged as a gathering that would firmly put Europe on the path towards a “banking union”, moving authority to supervise and bail out banks from national capitals to new EU institutions in Frankfurt and Brussels. But the rush to a banking union, which started last year when it looked like Spain had become a bailout risk, has slowed and many of the main elements have either been watered down or delayed. More ON THIS STORY/ EU struggles to unlink banks from states/ Opinion Europe open to bankers’ blackmail/ ECB shuns ‘big bazooka’ to boost lending/ Asmussen calls for bank resolution fund/ Franco-German challenge to bank plan ON THIS TOPIC/ EU fails to agree on bank bailout rules/ Global Insight Blueprint for bank executioner faces shredder/ Brussels bank plans clash with Berlin/ Editorial Euro motor firing on one engine IN EU ECONOMY/ Samaras reshuffles Greek cabinet/ Q&A the Greek crisis revisited/ Output data provide hope for eurozone/ Cyprus leader calls for bailout overhaul SINGLE SUPERVISOR Objective: Transfer authority to oversee financial institutions from national capitals to the European Central Bank. At December’s EU summit, Mario Draghi, ECB chief, said it could be up and running within six to 12 months. Current status: The most significant achievement in the banking union blueprint thus far. EU finance ministers reached a deal in December, as promised, despite major disagreements over the scope and powers the new ECB supervisor would have. But the December deal includes some significant compromises. The European Commission wanted all eurozone banks under the new supervisor’s authority, noting that the bank collapses that have wreaked most havoc during the recent crisis – Ireland’s Anglo-Irish, Spain’s Bankia and Britain’s Northern Rock – have all been small or medium-sized.

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Germany resisted such sweeping authorities, in part because of pressure from the smaller, politically connected regional banks that dominate the German financial system and, under the new system, the ECB will only have direct supervision over the 200 largest banks. In addition, despite Mr Draghi’s assurances, its start date continues to slip. EU officials are now hoping it will be up and running by the middle of next year, but delays in the European parliament’s approval could push that into late 2014. DIRECT BANK RECAPITALISATION Objective: Give the eurozone’s €500bn bailout fund, the European Stability Mechanism, power to pump cash directly into shaky eurozone banks, relieving the burden on national treasuries. Many officials hoped direct recaps in bailout countries could have begun as early as last year. Current status: At a late-night meeting last Thursday, eurozone finance ministers agreed an “operation framework” for ESM direct recaps, an important achievement despite early hopes such a framework would be on the table by the end of 2012. Critics argue that last week’s deal only partially delivers on EU leaders’ vow to “break the vicious circle” that led bank bailouts to destroy balance sheets of otherwise healthy governments, such as Ireland and Spain. Rather than relieving the burden on national treasuries entirely, a direct recap requires the bank’s home country to invest alongside the ESM. The deal also further delays the time when such a tool can be used. Although some had hoped it would be operational for Spain last year, the deal now requires the single supervisor to be up and running first, as well as a deal with the European Parliament on bank bailout rules to be completed. In other words, late 2014 at the earliest. BANK ‘BAIL-IN’ RULES Objective: Commission proposals to harmonise national bank bailout and deposit guarantee schemes across the EU have been on the table for more than a year. In December, EU leaders said a final deal, including agreement with the European parliament, should be completed in time for this week’s summit. FT Series European banking union

The EU’s banking union plans seek to place eurozone banks under the overarching supervision of the ECB Current status: After an all-night meeting of EU finance ministers on Friday that stretched into Saturday morning but failed to reach a deal, the same group will reconvene in Brussels on Wednesday to have an 11th-hour go before the summit begins Thursday afternoon. The main sticking point is how much flexibility national resolution authorities should have over “bailing in” bank investors, creditors and, in extreme cases such as Cyprus, deposit holders before taxpayer money is spent on a bailout.

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A French-led group wants national authorities to be given more freedom to decide when, and on whom, losses are forced. A German-led group, backed by the commission, wants standard rules to apply to all. There is not much optimism a deal can be reached on Wednesday. But even if it is, agreement between finance ministers and the European parliament before summit day, as originally promised, is impossible. That is months away. SINGLE RESOLUTION AUTHORITY Objective: As the second major pillar of banking union, the commission is expected to propose as soon as next week the creation of a single EU authority responsible for restructuring and bailing out failing banks. Officials hope they can complete it before the European Parliament adjourns for elections next year. Current status: The timing of the commission’s legislative proposal keeps slipping. Originally, officials had hoped to have it out before this week’s summit, but Germany has resisted, saying the other elements of banking union should be finished first. Now, next week looks more likely. Even without a proposal on the table, there has been considerable shadow boxing under way, with Wolfgang Schäuble, German finance minister, publicly stating that EU treaties do not allow the transfer of powers to shut down and restructure banks to Brussels. Mr Schäuble instead suggested a “network” of national resolution authorities until EU treaties are changed. The commission not only disagrees, but also earlier this month drafted an outline seen by the Financial Times that would create a strong central authority based in Brussels largely run by Commission and ECB appointees. A Franco-German compromise paper, issued earlier this month, seeks to split the difference by creating a resolution “board” instead of a “network” or an “authority”. It remains uncertain whether the high-stakes fight can be completed before the European Parliament term ends. http://www.ft.com/intl/cms/s/0/a6e53a4a-dd96-11e2-892b- 00144feab7de.html#axzz2XJ6cvopm

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06/25/2013 11:10 AM About Face Chancellor Merkel Cools on European Integration By SPIEGEL Staff German conservatives have long been passionate supporters of increased European integration. But lately, Chancellor Angela Merkel has applied the brakes to the process. Brussels, she believes, has become part of the problem. A party needs two things to win elections: a top candidate and a campaign platform. The European People's Party (EPP), a collection of conservatives and Christian Democrats in Europe, has neither at the moment. And that has a lot to do with CDU leader Angela Merkel. Just one year ago, the German chancellor was calling for "more Europe, not less." But now she has completed a radical about-face. At the EPP summit in the Vienna Kursalon concert hall last Thursday, Merkel showed that she had transformed herself into an EU-skeptic. Her conservative colleagues were left with the impression that the German chancellor now believes that there is too much Europe. Merkel spoke with notable frequency about the problems associated with choosing a candidate to represent the party on a European level. And in the end, the group made no progress on its platform or on the issue of a candidate. What is wrong with the CDU leader? The meeting in Vienna coincides with the image of a chancellor who is deviating more and more openly from her party's traditional positions on European policy. She is increasingly distancing herself from the foreign policy tradition that the CDU, more than any other party, has maintained and upheld since the postwar period. The contrast between Merkel and Finance Minister Wolfgang Schäuble, who embodies this tradition of Christian Democratic European policy, is also becoming more noticeable. Whether it is the pace of integration, the necessity for changes to European treaties or the direct election of the European Commission president, there are no major issues on which the chancellor and her finance minister are of the same mind. Never a Passionate Supporter Merkel, now in her 14th year as party leader, has learned that she must inject a little pathos into her voice when the discussion turns to Europe. She will no doubt do so when she delivers her statement to German parliament prior to the European Union summit this Thursday. And because she is aware of the mood in her party, she did not intervene when the CDU, at its party convention in Leipzig two years ago, approved a position paper that advocated providing Brussels with significantly more power. But she was never a passionate supporter of such a path. More recently, she has been standing firm against expanding the power of Brussels institutions. And she has been particularly vehement when it comes to anything that might limit the powers held by national leaders such as herself.

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Many of her fellow conservatives, of course -- particularly those who grew up in West Germany -- still believe that Germany must be merged as completely as possible into the European entity. They see it as a natural consequence of the wrongs Germany committed during the Nazi era. Finance Minister Schäuble enthusiastically invokes the "vision of a continent growing more and more strongly together." He believes that the crisis offers an opportunity to pursue this path more quickly. Officially, at least, this is the position of the party as a whole. The CDU continues to celebrate itself as champions of European unification and their position papers read as if they had been written by former Chancellor Helmut Kohl, who became teary-eyed when he spoke of the "House of Europe." "The commitment to Europe is for us both a matter of reason and a matter of the heart," reads the CDU campaign platform, which was approved on Sunday. Top party officials have been instrumental in keeping such passion alive. Deputy party leader Ursula von der Leyen, who is Germany's labor minister, dreams of the continent growing together into a "United States of Europe." Schäuble came up with the idea of a European finance minister, who would have the power to dictate to the individual countries how much debt they could take on. And if recent CDU resolutions are to be taken seriously, the European Commission president, who is currently appointed by European leaders, will soon be elected directly by the people. Individual Countries For Merkel, however, reason trumps emotion, and her reason has led her for some time now to do everything she can to prevent further steps toward integration and prevent Brussels from gaining more power. She believes that it was precisely the unrealistic passion for a united Europe that led to the establishment of a common European currency which lacked a solid foundation. Vision? In an interview with SPIEGEL three weeks ago, Merkel warned against spending time "on theoretical discussions of how the European structures will look like in 10 or 15 years." She believes that it makes more sense to tackle the urgent problems of the euro crisis before engaging in complex debates over restructuring the bloc. Furthermore, Merkel has no intention of taking her party's resolutions seriously. She wants the EU to work. But when there is trouble, she believes that the individual countries should take the reins, most notably Germany and France. This attitude leads Ruprecht Polenz, one of the CDU's most respected foreign policy experts, to conclude "that disillusionment is spreading within the party over the issue of Europe." It has gotten to the point that Merkel feels strong enough to openly confront pro- European elements both in the German CDU and abroad. European Council President Herman Van Rompuy, for example, was supposed to prepare a strategy paper on the future of the EU and present it at the summit this Thursday. But Merkel made it clear to Van Rompuy in January that he could forget about his paper. Indeed, she has made sure that there will be no groundbreaking resolutions at all when EU leaders meet this week. Van Rompuy's efforts have been replaced by a document Merkel wrote together with French President François Hollande. Instead of strengthening the existing institutions, Merkel and Hollande merely propose a full- time president for the Euro Group, the group of euro-zone finance ministers that oversee the common currency. Officials in Brussels are outraged. "You can't be constantly sending Mr. Van Rompuy on trips to address the issue of Europe's continued development and then suddenly introduce your own paper," says

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European Parliament President Martin Schulz, who will likely be the top candidate for the Social Democrats in next year's European elections. Part of the Problem Merkel's stalling tactics are reigniting the old basic conflict that has accompanied Europe since its founding. For those on the one side, Europe will only make progress if integration and the transfer of power continues to progress. This is the bicycle theory espoused by long-serving European Commission President Jacques Delors: Those who don't keep moving ultimately fall over. Within the German government, Schäuble is a supporter of this theory. Merkel, though, believes that Brussels has become part of the problem rather than part of the solution, especially in the euro crisis. The chancellor would like to see European Commission President José Manuel Barroso, in particular, lean more strongly on heavily indebted Southern European countries to tackle domestic reform and get their budgets under control. Instead, he is now saying that the policy of austerity has reached its limits. But Merkel's Europe-skepticism is also driven by self-interest. As a result of the crisis the German chancellor has seen her power increase considerably. When she travels to Brussels for meetings of European leaders, her voice tends to hold the most sway -- if only because Germany is the strongest economy in the euro zone. She sees little reason to share her power with, for example, Barroso, a man who she helped maneuver into his current position in 2004. This also helps explain why she opposes the direct election of the Commission president -- a model supported by Finance Minister Schäuble. If European voters were to decide, heads of state and government would have less of a say, a scenario which Merkel would like to prevent. "I'm cautious in this regard," she said in the SPIEGEL interview. She argues that it is good for equilibrium among the institutions if European leaders are also involved in the decision. 'A Real Breakthrough' While the chancellor is applying the brakes, Schäuble raves about a "historic moment of European unification." The direct election, he says, would be "a real breakthrough for a true European public." And he's not the only one. Indeed, increasing numbers of German conservatives are vexed that Merkel no longer wants to discuss the long-term future of the European Union. "Europe will only emerge from the crisis if we know where we want to go," says Norbert Röttgen, a CDU member of German parliament and former environment minister. Europe, he adds, needs a new political architecture. The 70-year-old Schäuble, for his part, is once again running for a seat in German parliament in part because he sees the euro crisis as an opportunity to fix the mistakes made during the creation of the common currency. Yet Schäuble is now forced to look on as Merkel puts off European reforms indefinitely. With the campaign starting, he cannot launch a direct attack. But he has stated his position clearly: "The Commission must have a real government," he said recently. Of course, Schäuble also recognizes the challenges associated with making changes to European treaties. "A convention should only be called if there is a chance that it will produce results," he says. "But that doesn't change the fact that we will have to amend the treaties. The sooner, the better."

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Most of all, there is growing disillusionment among German conservatives over the lack of ambition shown in their new campaign platform. "It isn't enough to say that Europe has to emerge strengthened from the crisis," says CDU foreign policy expert Polenz. The CDU, he argues, also has to explain how it intends to achieve this. Spreading Discontent "We need an answer to the question of where we want to go with Europe," says European Energy Commissioner Günther Oettinger, who is a long-time CDU member. Oettinger isn't willing to simply go along with Merkel's about-face. "The direct election of the Commission president is the goal of the national CDU," he adds. Deputy CDU Chairman Armin Laschet agrees, saying: "The crisis has shown that we must strengthen European institutions." The discontent could soon spread. A rare act of resistance was on display last Friday evening in Arnsberg, a small town near Dortmund. At a meeting of state, federal and European lawmakers from the state of North Rhine-Westphalia, Laschet, the head of the CDU in the state, made no secret of his dissatisfaction with the part of the campaign platform dealing with European policy. Laschet wants his party to express more concrete prospects for Europe and said that the North Rhine-Westphalia state chapter of the CDU would adopt its own European policy guidelines before September general elections. Laschet seeks to strengthen Brussels on issues such as fighting international terrorism and organized crime, as well as energy policy. He also wants to see the Commission president be elected directly by European voters. It is a demand that Merkel abandoned long ago. BY MELANIE AMANN, PETER MÜLLER, RENÉ PFISTER and CHRISTOPH SCHULT Translated from The German by Christopher Sultan URL: http://www.spiegel.de/international/europe/german-chancellor-merkel-cools-on- european-integration-a-907339.html Related SPIEGEL ONLINE links: • Merkel Promises Austerity Abroad, Profligacy at Home (06/24/2013) http://www.spiegel.de/international/germany/0,1518,907605,00.html • Gaffe Gone Viral Merkel Mocked for Calling Internet 'Neuland' (06/20/2013) http://www.spiegel.de/international/germany/0,1518,906859,00.html • Merkel Maligned IMF Board Attacks Euro Crisis Management (06/03/2013) http://www.spiegel.de/international/europe/0,1518,903426,00.html • Angela Merkel on Europe 'We Are All in the Same Boat' (06/03/2013) http://www.spiegel.de/international/europe/0,1518,903401,00.html • Battling the Crisis Disunity Plagues EU Banking Union Talks (05/15/2013) http://www.spiegel.de/international/europe/0,1518,899924,00.html • Until Elections Do Us Part A Deep Frost in Franco-German Relations (05/01/2013) http://www.spiegel.de/international/europe/0,1518,897318,00.html

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06/25/2013 01:01 PM Cypriot President Troika Conditions 'Are Stifling Our Economy' Cypriot President Nicos Anastasiades, 66, discusses "unfair" and "bitter" conditions linked to his country's bailout that he says are "stifling" the economy. Despite her austerity drive, the leader says he supports German Chancellor Angela Merkel's re-election. SPIEGEL: In a letter to your European partners sent last week, you called for the arduously negotiated aid package to be reopened and for the conditions placed on Cyprus to be eased. Why are you seeking to annoy your creditors, particularly Germany? Anastasiades: The irritation is totally unfounded. Nowhere in my letter did I call for the deal to be renegotiated. Nevertheless, I did make clear that a few of the things the Euro Group decided on in March of this year are having serious effects on the entire Cypriot economy. What is most important to me is that we get the liquidity problems for one systemic bank in Cyprus under control. And the reactions weren't just negative, either. EU Council President Herman Van Rompuy wrote to me that he wants to raise the issues at the European Council (the powerful body representing the leaders of the 27 EU member states). SPIEGEL: You have Berlin in particular to thank for the tough conditions. Anastasiades: I found the Euro Group decision to be unfair and bitter. I had just gotten elected and the problems with the Cypriot banks had been protracted over years. I promised my voters that I wouldn't touch savings deposits and instead presented an alternative plan that fulfiled the troika's demands. However, the Euro Group insisted that savers also carry part of the costs of the aid program, which means that I have now lost credibility with my voters. But now we want to look ahead. SPIEGEL: The government in Berlin is of the opinion that Cyprus should first take care of a few more of its problems before it asks for better conditions. Anastasiades: I am not demanding any preferential treatment -- just equal treatment. The fact is that the other countries receiving aid -- Ireland, Portugal and Greece -- have received easings of conditions. Certain conditions imposed by the troika are stifling our economy. That's putting Cypriot society to the test. SPIEGEL: So you're blaming Germany's austerity dictate for Europe's recession? Anastasiades: I understant the German concerns. Germany is the largest netpayer in the European Union and that includes the EU budget as well as the (permanent euro bailout fund) ESM. The fear that German taxpayers will be forced to carry the costs of errors made by others is deeply anchored in society. However, budget discipline alone won't help us move forward. We need to drive growth at the same time. I'm pleased that Berlin has recently signaled that it will soften its austerity policies. SPIEGEL: One of the most outspoken critics of Germany's austerity policies has been French President François Hollande. To what degree do you think he has influenced Germany's change of heart?

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Anastasiades: Hollande understood early on that austerity alone is harmful to the economy. The paper that Merkel and Hollande recently presented proves that the two create better policies together than when each proposes things on their own. Take the banking union, for example. Both Merkel and Holland would like to see it implemented quickly. This shows that Germany has progressed on this front. SPIEGEL: Many of Europe's small- and mid-sized countries complain that Berlin and Paris are attempting to go over their heads to dictate the EU's policy course. Anastasiades: The relationship between large and smaller countries in the EU is like a family. In principle, they are all the same, but the parents want to know what the children are doing with the money they earn. We need the German-French engine (in the EU), but that doesn't mean that we must accept everything proposed by Merkel and Hollande. SPIEGEL: The German-French proposals imply the creation of a two-speed Europe. They want more frequent meetings of euro-zone leaders and an appointed full-time Euro Group chief and their own committee in the European Parliament. Anastasiades: If euro-zone countries and non-euro-zone countries are treated differently, then there will be a danger of a two-class Europe. If a certain policy applies exclusively to the euro zone, then this will lead to conflicts and, in the end, Europe could even fall apart. What we need is the opposite: a bigger political union and greater equality among the member states. SPIEGEL ONLINE: Elections will be held in Germany in September. As the president of Cyprus, logic would dictate that you would support Merkel's challenger Peer Steinbrück, who has criticized Merkel's "one-dimensional" austerity policies and called for a Marshall Plan for Europe. Anastasiades: I may have suffered under Angela Merkel's tough position vis-a-vis Cyprus, but I also won't forget that she supported me during my election campaign. My wish is that she will remain chancellor. Interview conducted by Christoph Schult URL: http://www.spiegel.de/international/europe/spiegel-interview-with- cypriot-president-nicos-anastasiades-a-907341.html Related SPIEGEL ONLINE links: • About Face Chancellor Merkel Cools on European Integration (06/25/2013) http://www.spiegel.de/international/europe/0,1518,907339,00.html • Letter from Nicosia Cyprus Says It Needs More Help from EU (06/19/2013) http://www.spiegel.de/international/europe/0,1518,906558,00.html • Merkel Maligned IMF Board Attacks Euro Crisis Management (06/03/2013) http://www.spiegel.de/international/europe/0,1518,903426,00.html • Insufficient Efforts Report Faults Cyprus on Money Laundering (05/17/2013) http://www.spiegel.de/international/business/0,1518,900593,00.html • Prospects for Peace 'The Differences Lie Between Turkey and Cyprus' (05/01/2013) http://www.spiegel.de/international/europe/0,1518,897562,00.html • Broad Majority German Parliament Approves Cyprus Bailout (04/18/2013) http://www.spiegel.de/international/germany/0,1518,895159,00.html

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Simon Johnson Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-founder of a leading economics blog, The Baseline Scenario. He is the co-author, with James Kwak, of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You. “La comedia de los terrores” de los bancos británicos 26 June 2013 WASHINGTON, DC – Los males se encuentran siempre en los pormenores. Y los grandes males de nuestra era económica están ocultos en los detalles de cómo las autoridades perciben el capital –los fondos de capital– de nuestros principales bancos. Autoridades gubernamentales se han identificado muy de cerca con la postura mundial distorsionada y egoísta de los ejecutivos bancarios globales. En consecuencia el riesgo más grande es para todos nosotros. En este mundo surreal, el Reino Unido tiene una influencia desproporcionada porque Londres sigue siendo el principal centro financiero –y porque los mayores bancos en los Estados Unidos y en Europa han mostrado ser muy efectivos para poner en contra a las instancias de regulación británicas y estadounidenses. Los líderes de opinión en todo el mundo esperan de los británicos un enfoque más brillante y sutil hacia el sector de políticas financieras. Por desgracia, esperan en vano. Para entender exactamente el problema, tenemos que examinar la información más reciente de la “evaluación de déficits de capital” que llevó a cabo la Autoridad de Regulación Prudencial (PRA, por sus siglas en inglés) con ocho de los principales bancos del Reino Unido. No pretendo decir que el trabajo de la PRA sea fácilmente accesible para los no especialistas, pero cualquiera que dedique un poco de tiempo a los documentos, primero reirá y después llorará. Con gran alarde (y una cobertura de prensa en general favorable), la PRA anunció que algunos bancos no tienen la capacidad de absorber pérdidas –en relación con objetivos de capital ridículamente bajos. El Comité de Política Financiera del Banco de Inglaterra (FPC, por sus siglas en inglés) señaló que el objetivo debería ser del 7% de los activos ponderados en función del riesgo según las definiciones de las normas de Basilea III. Además, de acuerdo con la presentación de la PRA esto equivale a un coeficiente de apalancamiento del aproximadamente el 3% en el caso de la mayoría de estos bancos (una vez más, según las definiciones de Basilea III), aunque un par de bancos necesitarán un ajuste adicional para llegar a ese nivel. En pocas palabras, un banco supuestamente bien capitalizado en el Reino Unido puede tener 97 centavos de deuda por cada dólar de activos (y únicamente tres centavos de capital). Una capacidad tan baja para absorber pérdidas sería insostenible en los Estados Unidos, donde las instancias de regulación establecen un coeficiente de apalancamiento

131 de entre 5% y 6% (el doble de capital sobre una base no ponderada en función del riesgo), y algunos de los funcionarios competentes presionan incluso para llegar al 10% o más. Hasta ahí las risas. La tragedia de la evaluación de la PRA es que los funcionarios británicos aparentemente creen que están realizando reformas verdaderas en lugar de generar las condiciones para que haya problemas serios. Para ser justos, la PRA tuvo el acierto de incluir las ponderaciones de riesgo y tomar en cuenta pérdidas provocadas por “los costos por las conductas futuras” (es decir, las sanciones por violar la ley serán sustanciales). Asimismo, el trato que dan los bancos a las inversiones en compañías de seguros es sensato en comparación con las alternativas. Sin embargo, la amenaza de más sufrimiento para los contribuyentes –que aún no se recuperan del costo de rescatar al Royal Bank of Scotland– es importante. La invitación a los bancos a seguir amañando el sistema de ponderación de riesgo queda claramente expresada: “en conformidad con la recomendación de la FPC, la PRA ha aceptado medidas de reestructuración que, al reducir los activos ponderados en función del riesgo mejorarán de manera creíble la adecuación de capital.” En otras palabras, ahora los bancos pueden cambiar el modo en el que calculan el riesgo –por ejemplo, manipulando sus propios modelos– para que las autoridades reguladoras los vean con mejores ojos. Las autoridades creen que están construyendo un centro financiero global resistente capaz de tomar grandes riesgos y soportar crisis mayores –ya sea internas o por contagio exterior (es decir, de la eurozona). Sin embargo, HSBC, el mejor capitalizado de todos tiene un coeficiente de apalancamiento de apenas 4.6%, mientras que el de Barclays es inferior al 3%. En un mundo profundamente inestable, estas son defensas muy endebles contra las pérdidas. El margen de error a nivel macroeconómico, prudencial y de operaciones es igualmente estrecho. Los británicos –y todos nosotros– hemos cometido muchos errores en la última década. Todos los que tienen un empleo en el Reino Unido y todas las instituciones financieras que tienen operaciones significativas en ese país –incluida una enorme proporción de todos los bancos globales– están en riesgo. El escándalo de la Libor del año pasado echó por tierra la idea de que los británicos habían impuesto cualquier tipo de norma para la conducta bancaria, mientras que el desastre del Royal Bank of Scotland destruyó la percepción de que las autoridades británicas saben cómo manejar un banco en problemas. Ahora, la PRA ha confirmado que las autoridades británicas ni siquiera comprenden a fondo las nociones básicas de la reglamentación del capital –es decir, determinar cuánto capital necesitan las principales instituciones financieras globales complejas para tener seguridad. Las autoridades británicas –y las de otros lugares– deberían tomarse un día libre para leer el libro de Anat Admati y Martin Hellwig, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It (El traje nuevo de los banqueros: lo que está mal en la banca y qué hacer al respecto), una guía para reflexionar sobre por qué necesitamos más capital en nuestro sistema financiero. Después, deberían volver y hacer su trabajo correctamente, introduciendo de manera gradual requisitos de capital mucho más elevados de forma responsable.// Traducción de Kena Nequiz This article is available online at: http://www.project-syndicate.org/commentary/the-british-financial-regulation-fiasco- by-simon-johnson/spanish

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Daily Morning Newsbriefing June 25, 2013 The end of an irrational bond market boom This is not quite the return the bond market vigilantes, but a hint that the good times may be over, as sovereign bond markets had another bad day yesterday. Italian and Spanish yields are now up 1 per cent above the lows reached during May. The Financial Times reports that the increase in yields was being fuelled in part by dealers and investors paring back their holdings as they prepare for the end of the second quarter this week. The rise in yields also affected the more creditworthy countries, with the ten- year benchmark at 1.82% in Germany, and 2.56% in the UK. The 10-year BTP spread with the Bund rose back to 300bps, the same level of April 18. According to UniCredit, the spread is likely to rise further in the following weeks due to global factors, like the Fed’ exit or Chinese imbalances. However, Berlusconi’s sentence could also affect yields in the short term, especially if it produces political instability, the Italian bank argued. Maria Cannata, the head of Italian Debt Management Office, said sees prolonged instability in bond markets, after Fed’ statement of last week. As Reuters reports, Italy is expected to issue at least €15bn of bills and bonds in the next three days. Alen Mattich of the Wall Street Journal argues that the eurozone is particularly hit by the emerging market crisis, due to two factors: a foreign exchange effect, as several emerging market currencies like the Indian rupee, the Turkish lira and the South African rand all strongly devalued since the start of the year. The second factor is a flight from risk against a backdrop of inflationary pressures in several emerging countries at a time of slow growth and unhappiness about autocratic or corrupt governments, or explosive local issues, such as the development of a park in Turkey, rising bus fares in Brazil, the removal of fuel subsidies in Indonesia, all of which have ignited much wider protests. Berlusconi convicted – what now? A Milan court declared Silvio Berlusconi guilty of sex with an underage prostitute and abuse of power to try to cover up the affair with the Italian police, and handed down a seven-year sentence and ban from holding public office for life. While the verdict does not take effect until two further levels of appeal are exhausted, it seems clear that it will affect Enrico Letta’s government, in which \ Berlusconi’ PdL is one of the two large coalition partners, as Il Corriere della Sera writes. To avoid a collapse of the coalition, Letta will meet Berlusconi and the leaders of PD and Scelta Civica over the next two days, government sources said. According to La Repubblica’ Massimo Giannini, the verdict is a milestone in the history of Italian politics and could strengthen the PD, which may govern without the support of the PdL. According to Giannini, this is the end of Berlusconi’s system of briberies, corruption and sex. Another altogether less serious scandal draw to a close yesterday with the resignation of Josefa Idem, the equal opportunity and sports minister, who resigned over tax evasion

133 allegations, after three days of media frenzy over the case. As La Stampa reports, Letta has accepted the resignation immediately. The paper says this could be the beginning of the end of Letta’ fragile coalition. We recall that Giannini wrote the same after a previous trial, but Berlusconi bounced back in an unpredictable electoral campaign. We think he is right in a long run perspective. Italian politics is likely to be a lot cleaner in five years compared to five years ago. But if the verdict ends up strengthening the PdL, the result is more political instability. Italy’s consumer confidence rises Italian consumer-confidence index climbed to 95.7 points in June, its highest level since March 2012, ISTAT said. As Il Sole 24 Ore reports, in May the index was at 86.4, although ISTAT remarked that changes regarding the poll sample used for the index and the compilation of the data may had an influence in June. However, the national statistical agency noted that the climate is now more positive than in 2012. For example, the balance concerning expectations on unemployment decreased from 104 to 78, while the future climate index increased from 81.4 to 99.1 points, reaching the record from January 2012. At the same time, the country’s net trade with non-EU countries resulted in a surplus of €2.97bn in May, higher than the €341m surplus seen in May 2012. Mediobanca warns that Italy could apply for an ESM bailout in six months Italy could ask for an ESM programme the EU aid within the next six months, Mediobanca warned in a report. Economic stagnation and political instability could be the drivers of a vicious cycle starting in the autumn, with the debate over the budget law. Mediobanca said in particular that there was no room for a large increase in wealth taxes. The country would need €400bn revenues from a wealth tax to bring the debt/GDP ratio under 100%. This is unrealistic, but there is a room for a €75bn wealth tax: €43bn from a tax on the wealthiest 10% wealthiest population; €20bn from a tax deal with Switzerland; €5bn from large fortunes; €4bn from lower interest rates on debt; €3bn from converging the fiscal treatment real estate’ financial assets. Giavazzi and Alesina argue Letta should negotiate a deficit break with the EU Francesco Giavazzi and Alberto Alesina write in Il Corriere della Sera that Italy should ask the EU to negotiate a two-year delay in meeting the fiscal target, and present a concrete plan of labour tax cuts, budget savings of €50bn at least in the first year, plus a further €50bn over the next three years. According to Giavazzi and Alesina, Letta should make the same choice of France and Spain, which also gained two more years for their fiscal consolidation. Without growth-oriented policies, Italy will derail from its commitment of a 3% deficit-to-GDP ratio and will be re-enter the EU excessive deficit procedure. This could lead to an EU/IMF intervention, Giavazzi and Alesina argues. That’s why is fundamental for Letta, and for Italy, to have the possibility of a deficit target suspension before the end of the year. Samaras reshuffles his government to avoid early elections Three days after Democratic Left pulled out of the coalition, Antonis Samaras announced his new government: Pasok leader Evangelos Venizelos becomes deputy PM and foreign minister, while Yannis Stournaras keeps his position as do several other key cabinet members. Conservative lawmaker Kyriakos Mitsotakis, a former investment banker and one of the most ardent supporters of reforms, is put in charge of the ministry of administrative reform, which has to meet the controversial target of 15000 public

134 sector firings by the end of next year. Outgoing foreign minister Dimitris Avramopoulos moved to the defence ministry. Pasok’s involvement in the new government was doubled, according to Kathimerini, with Yiannis Maniatis assuming the helm at the environment ministry and Michalis Chrysochoidis taking on a new autonomous Transport Ministry. Several other Pasok leader were given key roles. Pantelis Kapsis, a former government spokesman under Lucas Papademos, was given the top post at a new ministry for the state broadcaster and is to be tasked with overhauling the defunct ERT. The new cabinet, which includes several members of Pasok in ministerial and deputy ministerial posts, is to be sworn in at 12.30 pm on Tuesday. Four independents may also back the new, reduced coalition in parliamentary votes. The Democratic Left, which has 14 lawmakers, has also signalled it could support some reforms on a case-by-case basis to keep Greece in the euro, Reuters reports. In an updated coalition agreement to be released in the coming days, Samaras and Venizelos are expected to reiterate their pledge to meet Greece's fiscal goals. But they will reject new austerity measures and push lenders for gradual tax cuts to help soften a severe recession in its sixth year. Samaras said on Saturday the government crisis and failure to meet privatization targets, would not derail Greece's international bailout. The blog Keep talking Greece says this is only tactics to avoid early elections with Pasok, the party that gets just 4% in public opinion polls, providing 11 ministers to the new government. The blog raises also concern about new health minister Adonis Georgiadis, a right-wing politician, described as “devoted xenophobic nationalist and fan of conspiracy theories” who is now in charge of reigning in the overruns by the state health organisation Eoppy. Fear of a Syriza victory in snap elections is short-sighted Yanis Varoufakis and James Galbraith argue in the New York Times that only Syriza can save Greece now. They argue that Antonis Samaras, with the sudden closure of the state broadcaster, has overreached, presenting a real chance for the government to tumble and Syriza to emerge: “Now, the government has turned a murky debate over austerity, confidence and credit markets into an open fight over democracy and national independence. In that fight, Syriza stands as the alternative, and Mr. Tsipras now has a chance of becoming prime minister.” The authors argue that this is not a bad thing after all. The global financial sector would view a Syriza victory with horror, but that is short sighted. For America nothing vital will change, for Europe it averts a total collapse of the Greek economy, which is immanent if those failed policies do not change. Low domestic demand in Spain, from cars to toys In the first 5 months of 2013, Spain produced 4.4% more automobiles than a year earlier but domestic sales are down 6%, writes Vozpópuli. This is despite a government cash- for-clunkers programme. Exports, which account for 5/6 of Spanish car production, are up by over 8% in May over the same month of 2012.

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In a further sign of domestic demand weakness, Vozpópuli also reports that Imaginarium, a leading vertically-integrated educational toy retailer, will be closing a number of stores in Spain after a "virulent and unexpected" sales drop in last Christmas campaign, mostly in Spain but also in the rest of the "crisis countries". Since the start of the crisis, the company is diversifying away from Spain, opening stores abroad and closing nearly 10% of the ones in Spain. This trend will now intensify. First retroactive court ruling on Spain's interest rate floor mortgage clauses Last week, in a case involving three of Spain's banks, Spain's Supreme Court ruled that interest rate "floor clauses" in mortgages were abusive and thus void if they had not been communicated transparently to the borrowers at the time the contract was signed. However, the Court did not make the ruling retroactive. However, El País reports that a court in the Basque city of Bilbao has ruled that Novagalicia, one of the nationalised former Cajas, will have to return €12,000 to a couple arguing that, if the floor clauses are void, so were their economic effects. In Spain two sentences by the Supreme Court are required to set jurisprudence, so this local court ruling does not have broader legal effects. However, other judges may take the ruling into account in the future. As we reported last week from El País, it is estimated that the original Supreme Court ruling could result in a yearly loss of a few hundred million Euros in interest income for the banks involved in the original case. Overall 1.7m loans, about a third of all mortgages in Spain, have floor clauses, though not all banks used to include them in their loans. Generalising the Bilbao ruling and taking its size as representative would result in a €20bn liability for Spain's mortgage sector. French government goes soft pension reform to stop rise of Front National In Les Echos Cecile Cornudet writes that the French government is changing its tone on pension reforms in reaction to the rise of the Front National in the by-election in Villeneuve-sur-Lot, where Socialists had been eliminated in the first round and the Front National, though losing the second round, still got over 40% of the votes. The pension reform is being considered as crucial to prevent Socialist voters to swap over to the Front National. Some Socialists now call for the scrapping of the consolidation strategy altogether, a call resisted by Francois Hollande. But Socialists will react to stop the Front National from picking votes especially as the municipal election campaign is due to start in September and strikes over the pension reforms are to be expected at the same time. If there is no alternative to the pension reform, then they will at least make more exemptions. The government already signalled that those in particularly demanding professions would be hit less hard by the reform, and as Cornudet concludes this will make the reforms more expensive. The fall and decline of Germany’s AfD The latest polls suggests that Germany’s anti-euro party AfD is no longer likely to enter parliament, or even pose an indirect threat to the Merkel government. Under the somewhat dramatic headline – AfD support collapses dramatically – Bild reports that the latest INSA-Meinungstrend poll gave the AfD only 2%, down 3% from the previous week – having peaked at 5%. The paper quoted the pollster as saying that the party is certain to fail to get into the German parliament, unless there are some dramatic evens before the elections. In this poll, the SPD is at 26%, the Greens at 16%, CDU-CSU at 39%, FDP 4%, Left Party (7%). Bild says this poll suggests that a Grand Coalition is very likely.

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Wren-Lewis on the BIS annual report We recall that the annual reports of the Bank for International Settlements were once considering essential reading, especially during the pre-crisis years when it was one of the few official documents that had warned about instability. Today, the BIS annual report has become a purveyor of conventional right-wing economic thinking, but with no original insights. The Oxford economist Simon Wren-Lewis, focussing on the BIS’s ruminations on fiscal policies, has dissected the arguments (or rather the lack of arguments), piece by piece, especially the argument that the fiscal multiplier is not as high as the Keynesians are claiming. He also points out that the BIS seems incapable of crediting the ECB with the turnaround in the markets. Here is his overall conclusion: “This is more like a recitation of an article of faith than an argument. It first says reducing government debt is good for long term growth. Let’s accept that: the main arguments against austerity have never involved suggesting that long term high government debt is good for you. It’s all about when is the best time to stabilise and reduce government debt. It is the final sentence that just does not follow. Because there are long run benefits to reducing government debt, it must be the case that the sooner we start the better? No. Exercise is good for you, but you don’t start when you are down with the flu.” Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.594 0.641 0.625 Italy 2.880 2.932 2.947 Spain 3.164 3.262 3.180 Portugal 4.722 5.041 5.030 Greece 9.571 9.836 9.76 Ireland 2.385 2.454 2.474 Belgium 0.903 1.040 1.028 Bund Yield 1.735 1.808 1.793

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.311 1.3145

Yen 128.520 128.14

Pound 0.853 0.8505

Swiss Franc 1.224 1.2255

ZC Inflation Swaps

previous last close

1 yr 0.98 0.98

2 yr 1.07 1.07

5 yr 1.33 1.33

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10 yr 1.73 1.73

Euribor-OIS Spread

previous last close

1 Week -9.200 -9

1 Month -5.771 -6.771

3 Months 1.314 1.214

1 Year 27.443 24.143

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-06- 25.html?cHash=071695aa27c394e5dd646a8b8aa0ef54 Dani Rodrik's weblog

Unconventional thoughts on economic development and globalization

June 24, 2013 Prospects for future economic growth Tyler Cowen refers to some of my work in his NYT piece on dimming prospects for high growth in emerging market economies. Coincidentally, the brand new Global Citizen Foundation has just published my more substantial paper on this topic, titled “The Past, Present, and Future of Economic Growth.” There is a lot in this paper, but the bit that I think is really new is the distinction between two different growth drivers, which I call the “fundamentals” and “structural transformation” channels. Not great descriptors, but bear with me for a while to see what I am getting at. By fundamentals, I am referring to the development of fundamental capabilities in the form of human capital and institutions. Long-term growth ultimately depends on the accumulation of these capabilities—everything from education and health to improved regulatory frameworks and better governance. By structural transformation, I have in mind the birth and expansion of new (higher- productivity) industries and the transfer of labor from traditional or lower-productivity activities to modern ones. With the exception of natural-resource bonanzas, extraordinarily high growth rates are almost always the result of rapid structural transformation, industrialization in particular. Fundamental capabilities are multidimensional, have high set-up costs, and exhibit complementarities. Therefore, investment in them tend to yield paltry growth payoffs until a sufficiently broad range of capabilities has already been accumulated—that is, until relatively late in the development process. Growth based on the accumulation of fundamental capabilities is a slow, drawn-out affair.

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Growth miracles, on the other hand, are enabled by the fact that industrialization can take place in the presence of a low level of fundamental capabilities: poor economies can experience structural transformation even when skills are low and institutions weak. This process helps explains the rapid take-off of East Asian countries in the postwar period, from Taiwan in the late 1950s to China in the late 1970s. My pessimism about the future prospects for high growth derives from the suspicion that rapid industrialization will be much less feasible in decades ahead, for reasons having to do with technology, changing nature of global markets, and demand patterns. The policies needed to accumulate fundamental capabilities and those required to foster structural change naturally overlap, but they are distinct. The first types of policies entail a much broader range of investments in skills, education, administrative capacity, and governance; the second can take the form of narrower, targeted remedies. Without some semblance of macroeconomic stability and property rights protection, new industries cannot emerge. But a country does not need to attain Sweden’s level of institutional quality in order to be able to compete with Swedish producers on world markets in many manufactures. Furthermore, as I discuss in the paper, fostering new industries often requires second- best, unconventional policies that are in tension with fundamentals. When successful, heterodox policies work precisely because they compensate for weakness in those fundamentals. Here is a 2x2 matrix that summarizes growth patterns according to the strength of these two dynamics.

I leave it as an exercise for readers to figure out which parts of the world (and when) fit in what box. Or else you can read the paper. http://rodrik.typepad.com/dani_rodriks_weblog/2013/06/prospects-for-future-economic- growth.html Dani Rodrik (2013), The Past, Present, and Future of Economic Growth, Global Citizen Foundation Working Paper 1, Junio, http://www.gcf.ch/wp- content/uploads/2013/06/GCF_Rodrik-working-paper-1_-6.24.13.pdf

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June 23, 2013 Only Syriza Can Save Greece By JAMES K. GALBRAITH and YANIS VAROUFAKIS ATHENS — THE sudden closure of Greece’s state television and radio network, the Hellenic Broadcasting Corporation, known as ERT, on June 11 has led to a political drama. The network’s journalists and staff have occupied ERT buildings, and large crowds have gathered to show support. With transmitters dark, broadcasting resumed over the Internet, and soon stations all over Europe picked up the feeds. Overnight, a state-run organization that had long been reviled for corruption and cronyism became the voice of a democratic resistance. The crisis could also take down the Greek government and bring the left-wing opposition to power. This wouldn’t be a bad thing for Europe or the United States. The policies currently imposed upon Europe’s periphery are worsening the crisis, threatening Europe’s integrity and jeopardizing growth. A Greek government that rejects these self-defeating policies will do more help than harm. We traveled to Thessaloniki on June 12, the day after ERT was closed, for a scheduled interview at ET3, a local ERT station. Our interview never happened because the channel had ceased broadcasting hours before. But at the offices, we ran into Alexis Tsipras, head of the opposition party Syriza, which narrowly lost Greece’s national election last June. Mr. Tsipras is now running a campaign to reinstate ERT as a potentially independent broadcaster. Having greeted the occupiers, Mr. Tsipras walked with us to a nearby hall for an economic discussion that had acquired, suddenly, an audience of over 2,000 people. Greece’s prime minister, Antonis Samaras, closed ERT to meet European demands for public-sector cuts. If his coalition partners don’t fall in line, there will be new elections in which they will be destroyed. But Mr. Samaras may have overreached. Despite its flaws, ERT is the only mass forum for public discourse that Greeks have; closing it took all noncommercial political discourse and local news off the air. Now, the government has turned a murky debate over austerity, confidence and credit markets into an open fight over democracy and national independence. In that fight, Syriza stands as the alternative, and Mr. Tsipras now has a chance of becoming prime minister. If he succeeds, nothing vital would change for the United States. Syriza doesn’t intend to leave NATO or close American military bases. Of course, American complicity in the Greek dictatorship of 1967 to 1974 hasn’t been forgotten, and any Greek government will naturally disagree with the United States, to a degree, over the Middle East. But the fact is, Greece’s problem today is with Europe, and Mr. Tsipras doesn’t want to pick a fight with Washington. The global financial sector would view a Syriza victory with horror. But banks and hedge funds know that most Greek debt is held by European taxpayers and by the European Central Bank, and what’s left is being snapped up by investors because they know it will be paid. Big Finance is worried about what may happen elsewhere if a left-

140 wing party wins in Greece. This instinct is natural for bankers. But for the American government to adopt the same fear-driven stance would be strategically shortsighted. Indeed, right now, Syriza may be Europe’s best hope. Greeks neither want to leave the euro nor see the euro zone disintegrate, an eventuality likely to bring down the European Union. They also know that Europe’s approach to the crisis, involving increasingly harsh austerity and larger loans, has failed miserably. If these policies don’t change, the total collapse of the Greek economy is imminent. The basic requirements for reform could be met within existing European treaties. They include a mutualization of servicing sovereign debt to be mediated by the E.C.B.; restructuring of the European banks by a European Stability Mechanism turned into a kind of European equivalent of America’s post-crisis Troubled Asset Relief Program; an investment and jobs program; and a Europe-wide initiative to meet the social and human crisis by strengthening unemployment insurance, basic pensions, deposit insurance and core public institutions like education and health. Syriza plans to fight both rising hunger and a xenophobic neo-Nazi party, Golden Dawn, with school lunches and food stamps. A Syriza government would seek these reforms and the salvation of the European project. And this can be only a good thing for the United States. An unlikely campaign to change the flawed policies that govern the European Union has begun in Greece, a small, proud country that has, in the past, given quite a few ideas to the world — including one, people’s government, that we like to call by its Greek name. James K. Galbraith and Yanis Varoufakis are professors at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin. http://www.nytimes.com/2013/06/24/opinion/only-syriza-can-save- greece.html?emc=tnt&tntemail0=y&_r=1&

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Five More Years? Merkel’s Election Pledge Key for Europe BUSINESS NEWS CNBC.com | Monday, 24 Jun 2013 | 8:53 AM ET With three months to go before Germans go to the polls, Chancellor Angela Merkel put her cards on the table on Monday, maintaining her tough stance on austerity for debt- ridden euro zone nations in an election manifesto that could be at the center of EU policy for the next five years. "Against the background of the different (parties') election manifestos, the election results could have an impact on Germany's euro crisis management," Carsten Brzeski, senior economist at ING said. According to Brzeski, a continuation of Merkel's government would lead to status-quo when it comes to fighting the euro zone crisis. Merkel has blocked the creation of Eurobonds and under her Germany has resisted further burden sharing and financial integration of the euro zone. If however, the election leads to a mixed result with a grand coalition of the CDU and the opposition center-left SPD, there could be a somewhat stronger push towards more integration, particularly on the banking union, but not necessarily on further burden sharing, Brzeski said. (Read More: Europe Unable to Break Impasse on Who Pays When Banks Fail) http://www.cnbc.com/id/100836213 But if the opposition were to win and a coalition of the SPD and the Greens would come to power, Germany could be ready to take a "quantum leap" with a fully-fledged banking union, possibly even with a common deposit insurance scheme, a debt redemption fund and some form of Eurobonds, Brzeski said. The document put forward by Merkel's center-right CDU/CSU party on Monday outlines a series of generous family-friendly policies for Germans, described by some as a lurch to the left to attract as many voters as possible. It includes measures which are in sharp contrast to the fiscal reforms Merkel has insisted other euro zone countries undertake. Among them are a rise in child benefits, provisions for flexible working hours, plans for more affordable housing, rent control as well as fresh spending on infrastructure and pensions. German newspaper Handelsblatt said the measures would cost as much as 28.5 billion euros. "The CDU/CSU is by far and away in the lead and when you're in the lead you can act like a sailor who's winning the race. You just look at the boat behind you; when they go right you go right, when they go left, you go left. You'll stay ahead of them," Irwin Collier, professor of economics at the Freie Universitaet Berlin told CNBC. The latest opinion polls show that Merkel's CDU/CSU would get 40 percent of the vote while the Free Democrats – the party's preferred coalition partners – would get 6 percent. If Germans were to elect their Chancellor directly, Merkel would win 58 percent of the vote, leaving her main contender, the social democrat candidate Peer

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Steinbrueck far behind with only 15 percent. Support for Steinbrueck's SPD party stood at 22 percent while the Greens had 18 percent of the vote. (Read More: Why Odds Are Stacked Against Strong Euro) http://www.cnbc.com/id/100815637 Merkel has come under fire for the high price tag associated with the measures outlined in the election manifesto, but insists that they will not place new burdens on the taxpayer or the economy. Instead, she argues that more freedom will increase the chances of higher tax revenue. "One of the very optimistic assumptions in this platform is that economic growth will be strong enough so that there will be additional tax revenue to finance everything. If that really will happen, that's something we'll have to see," Collier said. Germany's economy seems to be bouncing back from weak demand as the global economy recovers slowly. The influential Ifo index of German business sentiment released on Monday showed German business morale edged up in June, data which may bolster Merkel's Christian Democrat CDU/CSU party further. "The German economy seems to cruise along nice and steady, defying any growth concerns," Brzeski said. "Looking ahead, the main risks for the German economy come from the outside, not from the inside." 'Founding Mother'? Those risks include further turmoil in the euro zone. For German taxpayers, a series of bailouts for heavily-indebted euro zone countries since 2009 have been increasingly difficult to stomach. The country, regarded as the engine of the European economy, is heavily dependent on exports to the rest of the euro zone and wants its partners to get their finances in order and return to growth as soon as possible. "Would a third term in office tempt Angela Merkel to speed up euro zone integration, possibly giving herself a place in the history books as the 'founding mother' of the federal states of the euro zone? Or could the emergence of the new anti-euro party, the 'Alternative for Germany', actually lead to a more nationalistic, selfish approach, eventually leading to a break-up of the euro zone?" Brzeski asked. Merkel has consistently argued that this can only be achieved by reining in public spending – a view which has put her at odds with some of her peers who argue that the harsh austerity measures are stifling growth. Steinbrueck, a former German finance minister, has voiced support for the idea of Eurobonds which Merkel has consistently opposed. She argues that jointly-guaranteed debt, which French President Francois Hollande also supports in order to reduce borrowing costs for struggling nations, would be counterproductive. (Read More: Austerity Only Way to Regain Investors' Trust: Merkel) "This would pave the way for a European debt union, in which German taxpayers would face unlimited responsibility for the debt of other countries. We refuse this," Merkel's manifesto said. Brzeski said Eurobonds are only explicitly mentioned by the Greens, but the SPD does not exclude burden sharing and explicitly proposed "project bonds" to finance common European projects.

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Merkel has also stood firm on the issue of how to share the cost of bank collapses in the EU. The latest round of talks over banking union collapsed on Saturday morning when Germany and France disagreed on the extent to which countries can impose losses on bondholders or large savers, a so-called "bail-in." The manifesto underlined the importance of a Franco-German partnership, perhaps hinting at the difficulties Merkel has encountered in working with Hollande. Her views were embraced by former French president Nicolas Sarkozy – the duo were dubbed 'Merkozy' - but relations with France have been somewhat more strained since his socialist successor took the reins. Steinbrueck has accused Merkel of slowing down progress in forming an EU-wide banking union and has voiced support for Hollande's anti-austerity stance. "It's not a done deal by a long shot…the serious politicking is going to be unfolding in the months to come...It's an interesting race. It'll go down to the wire," Collier said. © 2013 CNBC.com URL: http://www.cnbc.com/100838567

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Daily Morning Newsbriefing June 24, 2013 No deal on resolution yet – as ministers disagree over national derogations This story is a good example of why the eurozone crisis resolution policy has proved so difficult. Those who are calling the loudest for central funds are also those who want to retain a maximum of domestic sovereignty. Finance ministers have thus failed to reach an agreement on a bank resolution directive by Saturday morning, and decided to reconvene on Wednesday, the issue being how flexibly national governments are in interpreting the rules. Wolfgang Schauble has argued in favour of an inflexible approach on the grounds that it would otherwise not be possible to let the ESM co-finance the bailouts if each country applied its own rules. Pierre Moscovici has argued for a flexible law. That position is also supported by the non-eurozone member states, who want a maximum of flexibility as they have no access to the ESM. The Wall Street Journal reports that the Irish government had made a proposal on Friday to give member states the right to exclude certain investors from sharing losses, once losses equivalent to 8% of a bank's total liabilities had been imposed on investors. Beyond that threshold, national authorities would be able to draw on their national funds to plug some of the remaining losses. Consensus, however, was reached over to protect savers with deposits of under €100,000 – while deposit of over €100,000 rank equally with those of other unsecured creditors. Interbank lending is also protected from losses, while the issue of holders of derivatives is left to national authorities. But under the Irish proposals, bank resolution funds would be limited to contributing 5% of a bank’s total liability in order to prevent a quick depletion of the fund. The WSJ reports that Germany, the Netherland and Portugal were still opposing aspects of this compromise, fearing that it would risk the fragmentation of the single market by giving too much power to national governments. Frankfurter Allgemeine points to another problem. The European Parliament is demanding that banks are paying 1.5% of their secured deposits into national resolution funds, while the ministers were supporting a ceiling of 0.8%. Because of next year’s election to the European Parliament, the entire procedure needs to be completed by April 2014, which now seems doubtful. Greece’s Democratic Left party withdraws from coalition The Democratic Left party pulled out of the government on Friday over the abrupt closure of the state broadcaster, Reuters reports. This leaves Antonis Samaras’ government with a tiny majority of 153 over 300 seats in parliament. The DIMAR MPs have yet to decide whether to offer external support in parliament to keep Greece's international bailout on track. Officials from all three parties ruled out snap elections for now, which would derail the bailout programme.

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"The country doesn't need elections," Democratic Left leader Fotis Kouvelis said in a statement, saying the party would continue with its reform policy. At least two independent lawmakers have suggested they would back Samaras's government. An ongoing inspection visit to Greece by the European Union and the IMF needs to be completed as planned in July to avoid funding problems, the lenders said on Thursday. That may require new savings measures to plug the gap. PASOK is expected to get a bigger role in the government after Democratic Left's departure, with its lawmakers likely to fill more ministerial positions as part of a reshuffle expected as early as over the weekend. ERT remains off air despite the court rulings ordering it back on, though workers have continued broadcasting a 24-hour bootleg version on the Internet from their headquarters. The finance ministry ordered workers on Friday to leave ERT's headquarters, where protesters have been gathering since its closure on June 11, in order to set up the transitional broadcaster with 2,000 workers. Kathimerini reports that despite the order, hundreds of sacked workers continue to occupy the ERT's headquarters and maintain online and satellite pirate broadcasts. Greek government bond prices fell sharply in thin trading volumes on Friday to their lowest level in two months, WSJ reports. Letta government in disarray over VAT The tensions in the Italian government over the proposed VAT increased have reached fever pitch, as Enrico Letta reacted furiously after his deputy Angelino Alfano threatened to walk out of the coalition under the tax was postponed. In its Sunday edition, la Repubblica reports of a lunch on Friday by senior party officials on how to avoid a VAT increase – which would cost about €1bn a quarter. Letta says the only way to avoid it is to find the money elsewhere, and the coalition has not been able to do that. The finance ministry has said the margins were zero, and there now remained until Wednesday this week to find a compromise, when the decree to freeze VAT would have to be made. The article cites senior government sources as saying that the most to be expected is a three-month postponement until October – with a further decision by then. The difficulty is that there is no way to co-finance the freezing of the already legislated VAT increase through spending cuts, as that would take too long to do. Since other tax increases are out of the question as well, the only possibility left is to transfer spending commitments already made – leaving those projects short of funds, like the Turin-Lyon high speed railway. The coverage of Corriere della Sera focuses more on the political tensions between the two large coalition partners, which have been rising to boiling point as the PdL imposes its line to reject all tax increases as a matter of principle. The proposal to shift funds out of existing spending commitments has a similar flavour as the non-payment of bills last year, which is not really a solution to a budgetary crisis, but an accounting illusion. If the money comes out of the high-speed train – which is co-financed by the EU- that would be an economically not very sensible cut, except for the very short term, so this exercise depends critically on whether the Letta government is capable of agreeing compensating savings in the 2014 budget, while stretching unused spending commitments for 2013 beyond year-end.

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Italy's tax authorities gain automatic access to bank account transaction data Italy is putting in place a controversial information system allowing the tax authorities in their fight against tax evasion, automatic access to bank account transaction data without a court order, reports la Repubblica. This had been delayed for some time as the tax authorities negotiated an accommodation of privacy concerns. In the end, a decision was made to decouple the account information system from all other government databases, and to make the data transfer automatic without human intervention. Letta’s first cabinet crisis Italian PM Enrico Letta faces his first cabinet crisis as his he may have to force equality minister Josefa Idem to resign on allegations that she didn't pay the IMU property tax, writes la Repubblica. The Partito Democratico is particularly critical of Idem's decision to leave the matter in Letta's hands and not resign, as she protests her "honesty". Spanish government drags its feet on mortgage rate reform Though most variable-rate mortgages in Spain are indexed to the Euribor, it is not uncommon for them to be based off the so-called IRPH (reference index of mortgage loans) which is an average of the rate on new mortgages with a maturity of at least 3 years published monthly by the Bank of Spain. The use of these indices was supposed to end last April, but the Bank of Spain allowed it to continue until October. For mortgage contracts that did not explicitly list an alternative reference (usually Euribor plus a spread), a renegotiation of the mortgage contract would be necessary. Historically, the IRPH has been 1.5% to 2% higher than the 1-year Euribor. Europa Press reports that the opposition PSOE is demanding that the government approve the transition regime for IRPH loans as soon as possible, without waiting until October, as it is widely believed that this would benefit borrowers by reducing their mortgage rates. In particular, the PSOE demands that the government require IRPH to be replaced by no more than Euribor plus 1%. In a separate interview with the deputy secretary for Economy in the ministry of Economy and Competitiveness, the government position is that the issue is under study in order that "the change to contracts be as small as possible". The interviewed official argues that popular measures such as reducing mortgage rates or introducing nonrecourse mortgages would hurt bank profitability and might as a result endanger bank depositors. Irish mortgage arrears rise again Non-performing property loans in Ireland rose by 12.3% in the first quarter this year, up from 11.9% in Q4 last year. More than 18,200 home loans were in arrears of 90-180 days, with 77,349 mortgages fallen into arrears of more than 180 days, the Central Bank was quoted by the Irish Times. Many thousands of buy-to-let mortgages are also in difficulty, with 19.7% falling into arrears of more than three months compared with 18.9% the previous quarter. The level of customers in arrears for less than 90 days, though, fell for the second quarter in a row. The central bank has given lenders binding deadlines for getting to grips with the arrears, which it views as its biggest domestic policy issue, Reuters reports. Lenders have been ordered to propose sustainable mortgage solutions for 20% of distressed borrowers by the end of June and for 50% by the end of the year. They will be forced to write down the value of the loans if measures proposed are deemed unsustainable.

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Front National candidate gets 46% in by-election The far right Front National candidate lost the by-election against the conservative UMP in the second round to replace Jérôme Cahuzac in his constituency: The UMP candidate won 53,76% against the Front National candidate who mustered 46,24%, according to Liberation. The FN is triumphant, nevertheless. The constituency, considered as a left wing stronghold, shocked the nation when the boyish far-right candidate eliminated the Socialist candidate in the first round. The French papers say that Marine Le Pen’s strategy of moderation has paid off and that they are now even getting Socialists votes. Le Monde says Le Pen’s strategy and Nicolas Sarkozy’s fishing in FN territory is to blame for this debacle. Cecile Cornudet in Les Echos observed that both parties were trapped and panicked in their campaigning, with the UMP ideologically lost and Francois Hollande who did not see it coming. The Independent calls him the "Ken" of Marine Le Pen's strategy - "Barbie" being one of the FN's two members of parliament: Le Pen's blonde and glamorous 23-year-old niece, Marion Maréchal-Le Pen. The BIS and its critics The Bank for International Settlements is the bastion of conservative economic thinking. In its annual report it called on central banks no longer to encourage the global recovery, and to head for the exit. It said that the global economy was now past the height of the debt crisis, and that the emphasis of policy should now shift towards sustainable growth and stability. It also said that central banks cannot repair the balance sheet of households and financial institutions. It also strongly comes out in support of austerity, saying there was no evidence for the IMF’s assertion that fiscal multipliers are large, so that fiscal consolidation becomes difficult let alone self-defeating. Ryan Avent has a long and critical discussion of the report in the Economists’ free exchange blog. He writes that as the central bank’s central bank it should come as no surprise that the BIS reflects the central bankers’ many misconception. He calls the report the “epitaph for an era of central banking spanning the Volcker disinflation and the Great Recession—the epoch of the central banker as oracle, guru, maestro.” He then lists a large number of misconceptions, the first being that low interest rates represent policy accommodation, an error he said was also commonplace in the 1930s. He defines the role of central banks as setting the interest rate with a goal to clear labour markets. Policy is accommodate when policy rates are low relative to market clearing rates. He also criticised the obsession with balance sheet recessions. While some households may be immune to lower interest rates, that is not true for the economy as a whole. The statement that there is excess savings in the economy is equivalent to the statement that policy is tight. Rutte wants less Brussels So are we have another example of a European government, member of the eurozone, that believes that the solution to all problems lies in more national sovereignty. Reuters quotes Mark Rutte saying that he welcomes the "less Europe" proposals drafted up by his foreign minister, Frans Timmermans, who said that "the time for an ‘ever closer union’ in every possible policy area is behind us". Those proposals were immediately sized by the British government, which looks forward to a broader discussion of the recommendations.

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The true costs of bank resolution In his FT column, Wolfgang Munchau is doing some rough maths on the banking union, and the vast size of losses it will have to manage. He says the bad banks, which have bad assets of over €1bn, only include the bad assets of the past debt crisis, but not of the securities and loans that will fall foul in the future – to due bail-in rules and the double-dip recession. He says the sheer accumulation of crises will ultimately result in very large losses, given our historic experience. His estimate is that total losses to the banking system could well be 10% of all asserts – which would translate to some €2.6bn – with a large forecast error. But even if these losses are significantly smaller, they will remain large, and will need to be absorbed by capital vastly in excess of the €60bn agreed by finance ministers as the pot available to do this on a eurozone-wide scale. Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.602 0.594 0.620 Italy 2.899 3.012 2.957 Spain 3.202 3.164 3.237 Portugal 4.761 4.722 4.689 Greece 8.997 9.571 9.42 Ireland 2.471 2.385 2.354 Belgium 0.882 0.903 0.930 Bund Yield 1.667 1.735 1.79

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.320 1.31

Yen 128.960 128.92

Pound 0.855 0.8525

Swiss Franc 1.226 1.2266

ZC Inflation Swaps

previous last close

1 yr 1.18 1.15

2 yr 1.24 1.23

5 yr 1.52 1.51

10 yr 1.91 1.89

Euribor-OIS Spread

previous last close

1 Week -8.543 -8.843

1 Month -5.043 -4.143

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3 Months 1.286 2.186

1 Year 24.500 23.7

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-06- 24.html?cHash=2bc37effe4bcbd34b5bb0498a31c0bf3

Dutch want less 'Brussels', more sovereignty in EU

Fri, Jun 21 2013 AMSTERDAM (Reuters) - The Dutch government called on Friday for a "more modest, more sober but more effective" European Union, with the emphasis on national sovereignty and far less interference from Brussels. The British government welcomed the call for less Europe, which follows British Prime Minister David Cameron's promise in January to claw back powers from Brussels and hold an "in/out" referendum by 2017, if he wins re-election in 2015. "Europe has to become smaller, leaner and meaner in many areas and cost less money," Prime Minister Mark Rutte said on Friday at his weekly press conference. His foreign minister, Frans Timmermans, said in a letter to parliament that "the time for an ‘ever closer union' in every possible policy area is behind us". He listed several issues the Netherlands wants tackled differently, ranging from generous EU salaries and the expanding remit of EU agencies to the establishment of a euro zone budget and taxation policy. "These recommendations...could be translated into an action agenda for a more modest, more sober but more effective EU, starting from the principle: ‘at European level only when necessary, at national level whenever possible'," he said. The proposals will be discussed in parliament and then put to the European Commission and to the other 26 European Union members. Rutte is one of Cameron's main allies in the bloc. "We look forward to following up the Dutch recommendations," said David Lidington, Britain's Europe minister, said in a statement, adding that his country shared the "goal of creating an EU that is more modest and more effective". 150

Rutte's coalition of centre-right liberals and the centre-left Labour party was elected on a broadly pro-European agenda last September. But politicians and the public have grown wary of ceding more powers to Brussels and are increasingly frustrated by the perceived high cost of the euro-zone crisis. EU governments fear a big vote for "Eurosceptic" parties of the far left and nationalist right in next year's European Parliament elections. The Dutch government has said it will seize the opportunities offered by the appointment next year of a new European Commission and of the Netherlands' assumption of the EU's rotating presidency in 2016 to press for a changed agenda within the EU. (Reporting by Sara Webb and Thomas Escritt; Editing by Paul Taylor and Michael Roddy) http://uk.reuters.com/article/2013/06/21/uk-dutch-eu-idUKBRE95K0WQ20130621

ft.com Comment Columnists June 23, 2013 2:41 pm Europe is ignoring the scale of bank losses

By Wolfgang Münchau Consider the sheer number of crises in which lenders have lost money

©AFP It was another of those late-night agreements, which are as legally sophisticated as they are financially innumerate. Eurozone finance ministers agreed last week that the European Stability Mechanism could devote €60bn of its €500bn total lending ceiling to the recapitalisation of eurozone banks. If that is not enough, the rest of the money for

151 the recapitalisation of the eurozone’s banks will have to come from national governments, or through bail-ins of investors and depositors. So how much recapitalisation can we expect? The French newspaper Les Echos last week produced an estimate of the total assets of the bad banks that have been set up to absorb losses from the housing crash and the US credit crisis. That estimate alone is more than €1tn – though it includes the UK. How much of these assets are ultimately underwater is anybody’s guess. But you could safely assume that quite a lot of this stuff will ultimately be worthless. More ON THIS STORY/ EU struggles to unlink banks from states/ Asmussen calls for bank resolution fund/ Opinion Europe open to bankers’ blackmail/ Monetary heavyweights to clash in court/ Editorial In defence of OMT and Draghi’s ECB ON THIS TOPIC/ Eurozone fund empowered to support banks/ WOLFGANG MUNCHAU/ Bond jitters threaten Europe’s calm/ Hail the honesty about Greece’s bailout/ Austerity, like a B-movie monster, will keep coming back/ Europe’s future looks more Japanese than German This estimate only relates to the bad banks. You have to add actual and hidden losses from the rest of the banking system. We do not know how big these are since hidden losses are, by definition, hidden. To disguise a loss, banks use tricks such as “pretend and extend”: lenders can decide to renew a non-performing loan that technically becomes good again the moment the new loan is struck – at which point the borrower will technically not be in default. The reason I believe the amount of hidden losses in bank balance sheets is ultimately quite large is the sheer number and scale of the accumulated crises during which European banks managed to lose money in recent years: the US subprime crisis, a eurozone housing bubble, the Greek debt restructuring, the Cypriot bank failures and the short and sharp 2009 recession followed by the Great Recession of 2011-13, with no end in sight for southern Europe. One would hope that an asset quality review by the European Central Bank, envisaged for next year, would provide clarity. But I am doubtful. In the past, bank transparency exercises were undertaken with the intention of hiding the truth. Remember the stress tests of 2011? Or the apparently independent audit of the Spanish banking system, which concluded that Spanish banks only needed a teeny weeny bit in new capital? What makes me specifically doubtful about the ECB’s exercise is that I cannot see the central bank conceivably coming up with a number that is larger than the available capital. So instead of waiting for these estimates, here is a quick and dirty, back-of-the-envelope calculation. It has an error margin approximately the size of the Italian economy, but it nevertheless produces an order of magnitude in which to think about this problem. The total balance sheet of the monetary and financial sector in the eurozone stood at €26.7tn in April this year. How much of this is underwater? In Ireland, the 10 largest banks accounted for losses of 10 per cent of total banking assets in that country. The total loss will be higher. In Greece, the losses have been 24 per cent of total assets. The central bank of Slovenia recently estimated that losses stood at 18.3 per cent. In Spain and Portugal, the recognised losses are already more than 10 per cent, but the numbers will almost certainly be higher. Non-performing loans are also rising rapidly in Italy.

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Germany is an interesting case. The German banking system appears healthy at first sight. It certainly fulfils its function of providing the private sector with credit at low interest rates. But I still find it hard to believe that the German banking system as a whole is solvent. The country has been running large current account surpluses for a decade, currently at about 6 per cent of gross domestic product. This means German banks must have been building up huge stocks of foreign securities – a large yet unknown proportion of which are likely to default, especially if the main crisis resolution tool turns out to be a bail-in of investors. On their own, the bad banks constitute about 5 per cent of eurozone banking assets. If you add another 5 per cent from hidden losses, the losses still being generated by the double-dip recession, and future losses through the bail-in of investors, you arrive at €2.6tn. Not all of these losses will have to be made good through a recapitalisation. Some banks may have some capital reserves. Other banks may be closed. But that just distributes the losses from one end of the banking sector to another. Assume now that my estimate is wildly wrong, and deduct the size of the Italian economy from that back-of-the-envelope number. You still end up with €1tn. With this order of magnitude it mattered relatively little whether the ESM could contribute €60bn, €80bn or zero. Europe’s national governments are clearly incapable and unwilling to fill the gap. And without the money for bank resolution, it barely matters whether the European Commission will become the resolution authority that does not do the job or whether someone else does not do it. That leaves a long period of regulatory forbearance as the most likely outcome – a policy version of pretend and extend. They pretend not to see the losses, and extend the crisis. [email protected] http://www.ft.com/intl/cms/s/0/f4577204-d9ca-11e2-98fa- 00144feab7de.html#axzz2X86Sguyp

ft.com/global economy Last updated: June 23, 2013 6:21 pm Central banks told to head for exit By Claire Jones, Economics Reporter

©De La Rue Printing money: quantitative easing policies drawing to an end? Central banks must head for the exit and stop trying to spur a global economic recovery, the Bank for International Settlements has said following a week of market turbulence

153 sparked by the US Federal Reserve’s signal that it would soon cut the pace of its bond buying. US Treasury markets, which saw yields hit their highest level in almost two years on Friday, face further challenges this week as they prepare to sell an extra $99bn of debt. After last week’s global sell-off, markets in the US will also be knocked by traders winding down for the end of the second quarter. More ON THIS STORY/ BIS Annual Report/ The A-List An assault on risk/ Gavyn Davies Unwinding the world’s biggest economic experiment/ Fed decision not timed well, says FOMC member/ Bernanke throws shares into reverse gear ON THIS TOPIC/ China pulls bank system back from brink/ John Authers Bernanke strikes to great effect/ Emerging markets feel effect of US Fed/ Kremlin seeks to restrain fall of rouble IN GLOBAL ECONOMY/ Cleaner air boosts hurricane frequency/ ‘Climate bomb’ warning over China coolant release/ The Macro Sweep Thailand, eurozone/ Russia runs out of room to expand economy “One cannot reverse the Fed’s big bang moment,” said George Goncalves, strategist at Nomura Securities, adding that the scale of foreign demand for this week’s Treasury debt sales would be a crucial test of sentiment. The BIS, which counts the world’s leading monetary authorities as members, said cheap and plentiful central bank money had merely bought time, warning that more bond buying would retard the global economy’s return to health. It used its influential annual report to call on members to re-emphasise their focus on inflation and press governments to do more to spearhead a return to growth. The BIS report comes on the back of last week’s markets turmoil, fuelled by Fed chairman Ben Bernanke’s comments that the central bank could slow its $85bn monthly bond-buying programme this year and end it by mid-2014. Often referred to as the central bankers’ bank, BIS said the global economy was “past the height of the crisis” and its goal was “to return still-sluggish economies to strong and sustainable growth”. “Alas, central banks cannot do more without compounding the risks they have already created,” the BIS said, adding that delivering more “extraordinary” stimulus was “becoming increasingly perilous”. “How can central banks encourage those responsible for structural adjustment to implement those reforms? How can they avoid making the economy too dependent on monetary stimulus? When is the right time for them to pull back ... [and] how can they avoid sparking a sharp rise in bond yields? It is time for monetary policy to begin answering these questions,” the report said. Mario Draghi’s rallying cry, uttered last summer at the height of the eurozone turmoil, that the European Central Bank would do “whatever it takes” to preserve the currency bloc was now being misconstrued, it warned. “Can central banks now really do ‘whatever it takes’?” the BIS asked. “It seems less and less likely. Central banks cannot repair the balance sheets of households and financial institutions.” The BIS also railed against critics of eurozone austerity, saying there were “reasons to be sceptical” about arguments such as that of the International Monetary Fund that 154 higher fiscal multipliers meant governments’ assumptions about the trade-off between consolidation and growth had been too favourable. There was “no compelling evidence that [multipliers] are large enough to render fiscal consolidation more difficult [or actually self defeating].” Stephen Cecchetti, head of the BIS’s monetary and economic department, said at the end of last month that the initial rise in yields for US Treasuries and stock market reaction following Mr Bernanke’s hints in May that the Fed would slow its asset purchases “should come as no surprise”. Separately, the BIS said Jaime Caruana, its general manager, would remain in office until March 2017. Mr Caruana said at the BIS annual meeting on Sunday: “Ours is a call for acting responsibly now to strengthen growth and avoid even costlier adjustment down the road ... Monetary policy has done its part. Recovery now calls for a different policy mix – with more emphasis on strengthening economic flexibility and dynamism and stabilising public finances.” Additional reporting by Michael Mackenzie in New York http://www.ft.com/intl/cms/s/0/455af4a6-dc09-11e2-a861- 00144feab7de.html#axzz2X86Sguyp

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Hans-Werner Sinn Hans-Werner Sinn, Professor of Economics at the University of Munich, is President of the Ifo Institute for Economic Research and serves on the German economy ministry’s Advisory Council. He is the author of Can Germany be Saved? El caso de Alemania contra el BCE 25 June 2013 MÚNICH – El Tribunal Constitucional de Alemania está preparando la decisión que puede llegar a ser la más importante de su historia. En septiembre pasado, el tribunal permitió al gobierno alemán la firma del tratado que establece el Mecanismo Europeo de Estabilidad (MEDE), el organismo intergubernamental permanente de rescate para la zona del euro. Ahora, sin embargo, puede intentar detener el programa de transacciones monetarias directas (TMD) del Banco Central Europeo (el compromiso del BCE para comprar, ilimitadamente, los bonos gubernamentales de los países en problemas de la zona del euro que se avengan a las condiciones del MEDE). Por cierto, el tribunal alemán no tiene jurisdicción sobre el BCE –y por lo tanto, no tiene poder para juzgar sus acciones. La única institución que sí cuenta con ese poder es el Tribunal de Justicia de la Unión Europea en Luxemburgo. Pero el Tribunal Constitucional de Alemania puede juzgar si las acciones de las instituciones de la UE son compatibles con su constitución y los tratados de la Unión Europea. Si el tribunal encuentra que las acciones del BCE son ilegales, puede obligar a las instituciones alemanas –incluso al parlamento alemán. Por ejemplo, podría prohibir al Bundesbank su participación en el programa de las TMD. O podría dictaminar que la participación del gobierno alemán en el MEDE debe supeditarse a la voluntad del BCE para limitar las TMD. Udo Di Fabio, un renombrado exjuez del tribunal, ha sostenido que la corte podría incluso obligar al gobierno alemán a deshacer los tratados de la UE si no tiene éxito en frenar el programa de TMD. Los defensores del programa de TMD señalan que ha calmado a los mercados financieros al afirmar la disposición del BCE a participar como prestamista de última instancia y comprar deuda soberana antes de que un país quiebre. Al impulsar al mercado a un, así llamado, «buen» equilibrio, los rendimientos de un país en esa situación se mantendrán bajos y podrá continuar endeudándose. Señalan que los bancos centrales en todo el mundo están implementando acciones similares para estabilizar los mercados. La Reserva Federal, en particular, ha comprado enormes cantidades de bonos del gobierno estadounidense. Los opositores señalan que ese es exactamente el problema, porque el mandato del BCE es más limitado que el de la Fed. Después de todo, la zona del euro no es un país federal y el Tratado de Funcionamiento de la Unión Europea (en especial su artículo 123) prohíbe explícitamente el financiamiento monetario de los estados miembros y esa fue

156 la condición alemana para renunciar al marco. Además, afirman los opositores, ni siquiera la Fed compra bonos emitidos por estados estadounidenses en problemas, como California o Illinois. Quienes están a favor de las TMD responden que el Tratado solo prohíbe las compras directas de bonos gubernamentales; las compras indirectas en los mercados secundarios están permitidas. Pero la decisión de no prohibir las compras indirectas, arguyen los opositores, puede haber buscado permitir al BCE efectuar operaciones semanales de recompra, una práctica usada por la Banque de France para reducir las fluctuaciones en las tasas de interés de corto plazo. No fue un mandato para comprar grandes cantidades de bonos, ni anunciar esas compras, para reducir las tasas de interés de largo plazo. Por otra parte, no prohibir las compras indirectas puede entenderse principalmente como una forma de permitir a los bancos que compren bonos gubernamentales para comprometerlos como garantía para operaciones de refinanciación, asumiendo el riesgo total de la inversión. La diferencia entre las compras de bonos al gobierno y a los bancos que los compraron al gobierno es un tejemaneje que da lugar a una miríada de posibilidades para burlar la ley. Una de las principales preocupaciones del Tribunal Constitucional Alemán es la semejanza entre la Línea de Crédito para el Mercado Secundario (LCMS) del MEDE y el programa de TMD del BCE. Ambos implican la compra de bonos gubernamentales en mercados secundarios. Los dos esquemas se rigen por condiciones casi idénticas – que exigen la aprobación del MEDE de los programas de reformas de los países– y para ninguno de ellos se han alcanzado las condiciones de implementación. Pero la capacidad de la LCMS para brindar financiamiento está indirectamente limitada por el tope de responsabilidad de los estados miembros, de €700 mil millones ($920 mil millones); después de que el Tribunal Constitucional excluyera la responsabilidad solidaria ilimitada en su fallo de septiembre de 2012, la responsabilidad máxima de Alemania está fijada en €190 miles de millones. Por el contrario, el programa de TMD no tiene límites. Debido a que las pérdidas del BCE producen pérdidas de señoreaje para los tesoros nacionales respectivos de manera semejante a las pérdidas del MEDE, el programa de TMD obviamente socava el dictamen del MEDE al aumentar el riesgo de exposición por encima del nivel aprobado por los parlamentos. La semejanza entre la LCMS y el TMD también implica que al menos una de las dos instituciones está excediendo su mandato. Si las compras de bonos gubernamentales son operaciones monetarias, como afirma el BCE, el MEDE está excediéndose; si son operaciones fiscales, es el BCE quien se ha pasado de la raya. Según esta lógica, al menos una de las instituciones está quebrantando la ley. Debido a que el Tribunal Constitucional ya ha dado la luz verde al programa de la LCMS del MEDE, debiera estar claro cómo se expedirá respecto del programa de TMD. Sin embargo, en los tribunales, como en mar abierto, las predicciones a menudo resultan poco confiables. Traducción al español por Leopoldo Gurman. This article is available online at: http://www.project-syndicate.org/commentary/the-german-constitutional-court-on- omts-by-hans-werner-sinn/spanish Copyright Project Syndicate - www.project-syndicate.org

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ft.com World Europe June 23, 2013 5:44 pm Spanish frustration with Germany grows as austerity bites By Tobias Buck in Madrid

©Reuters When Spaniards talk about Germany and Germany’s leader these days, it is hard to miss the touch of frost. In newspaper columns, opinion polls and everyday conversations, there are signs of growing discontent with Berlin. Surveys highlight a widespread feeling in Spain that Germany has become too powerful in Europe, and at the same time too reluctant to help the recession-blighted countries on the continent’s periphery. Angela Merkel, the German chancellor, has emerged as a particular lightning rod, criticised and ridiculed in equal measure for her role as champion of austerity. Her popular standing in Spain has dropped sharply, amid accusations that her policies are worsening Spain’s unemployment problem. More ON THIS STORY/ IMF warns Spain against slowing reforms/ Madrid reveals fresh public sector cuts/ Eurozone bonds turn havens amid QE nerves/ Martin Wolf The toxic legacy of the Greek crisis/ Drop in ECB deposits seen as positive ON THIS TOPIC/ Support for EU austerity frays among fiscal hawks/ Enrico Letta EU must help young jobless/ Sustainable healthcare Funding/ French Socialists rally against austerity

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IN EUROPE/ Norway’s opposition mulls oil fund split/ Debate heralds change for Norway’s oil fund/ Merkel’s secret is to dull the issues/ Kurdish peace suffers blow in new clash Just over a year ago, Spaniards named Ms Merkel as their most admired leader in Europe. Now she is ranked below the leaders of France, Italy and the UK. “The countries in southern Europe have one problem right now, and it is called Merkel,” says Manuel Conejero, the owner of a small construction business in downtown Madrid. “The Germans lost two wars at a very high cost to them. Now they are intelligent enough to win this new war without firing a single shot, while other countries are left wounded.” Analysts say that Spaniards know only too well that the harsh spending cuts and painful tax raises pushed through by Mariano Rajoy were agreed and implemented in Madrid. But many see Spain’s prime minister in much the same way as he is usually depicted by Peridis, a popular cartoonist with the El Pais daily: as a tiny figure cowering in front of an oversized German chancellor. Manolo Perez, who runs a fruit shop in the centre of the capital, says: “I think Germany is making things worse here because they are telling us to tighten the screws through budgets cuts and austerity.” Ms Merkel’s standing has suffered not least because she is compared with a famous predecessor, argues Charles Powell, the director of the Real Instituto Elcano, a think-tank in Madrid. “Spaniards expected Angela Merkel to be more like Helmut Kohl,” he says. “There is this memory of Kohl sacrificing German interests for the sake of European interests. There is that kind of disappointment and perhaps also surprise at how critical some German actors have been of Spain’s economic performance.” The Germans lost two wars at a very high cost to them. Now they are intelligent enough to win this new war without firing a single shot, while other countries are left wounded - Manuel Conejero It is little wonder that Spain’s current economic policies are so closely associated with Germany. From the moment the Rajoy government took office in late 2011, it has made a conscious effort to replicate some of the strategies that helped Germany overcome its own recession a decade ago, including labour market reform and a strong focus on export growth and competitiveness. Spain is now also trying to emulate a key feature of the German education system, by encouraging more teenagers to opt for vocational training after leaving school. In the eyes of the government, these policies are already paying dividends: unit labour costs have fallen, competitiveness is rising and exports have increased sharply. The recent performance led analysts at Morgan Stanley, the US investment bank, to declare earlier this year that Spain “is on the way to becoming the euro area’s next Germany”. Yet for all the ideological overlap, tensions have also been creeping into relations between the two governments. Spanish officials say they were looking for more support from Berlin at the height of the crisis last year, and they are now keen to see faster progress on banking union than Germany will allow. Mr Rajoy has called on Berlin to do more to encourage domestic consumption, a move that Madrid hopes would further boost Spanish exports. 159

“The Spanish are looking for a more expansionary policy in Germany,” says Andrés Ortega, an adviser to the previous Spanish government who runs a political consultancy in Madrid. “They want more intervention from the European Central Bank and a greater German commitment on banking union. And they want to move towards some form of eurobond.” There is a danger that we enter a process in which one side says, ‘We are disappointed because you didn’t help us’, and the other side says, ‘We are disappointed because we don’t see that our help is having an effect’ - Thomas Stehling The Germans, meanwhile, says Mr Ortega, “are not too confident that we are making the reforms that we need”. Thomas Stehling, director of the Madrid office of the Konrad Adenauer Foundation, a think-tank with close ties to the ruling Christian Democrats, detects “a little bit of disappointed love” between the two sides. “There is a danger that we enter a process in which one side says, ‘We are disappointed because you didn’t help us’, and the other side says, ‘We are disappointed because we don’t see that our help is having an effect’.” For all the recent tensions, most officials and analysts agree that the fundamental relationship between the two countries remains intact. Germany and its social and economic model are still widely admired in Spain, while German officials are at pains to emphasise that Madrid has done more than any other country on the periphery to restore its economic strength. The Spanish debate about rising German power has – unlike in Greece, for example – been relatively free from references to Nazi Germany and Hitler. The absence of any historical enmity – Spain is one of the few countries in Europe never to have been at war with Germany – clearly helps, as do the bonds built up through migration and tourism. “Don’t forget that every year millions of Germans spend the happiest weeks of the year in Spain,” remarks one German official. Ultimately, the frustrations that have built up over the past year simply reflect a new European reality for Spain, says Mr Ortega: “Now we are decision-takers, not decision-makers, in Europe.” http://www.ft.com/intl/cms/s/0/a50ef1e8-da62-11e2-a237- 00144feab7de.html#axzz2XmvKNIl0

12/06/2013

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AHEAD OF THE TAPE June 23, 2013, 7:58 p.m. ET Question Isn't 'Will the Fed?' It's 'Can It?' By SPENCER JAKAB

The Federal Reserve's stimulus efforts have been described as a fire hose. It is a good analogy. The trillions of dollars it has unleashed on the financial system have, along with dousing recessionary flames, splashed onto areas where they weren't necessarily needed or desirable. That is the type of problem to sort out once a crisis is over.

Financial markets' thrills and spills of the past week and a half mostly have stemmed from worries about how investors will fare when the water pressure drops. Maybe that is the wrong question, though. The real economy, not just asset prices, could suffer from Fed "tapering." Some indicators suggest the economy has come close to stalling repeatedly since the recession ended four years ago. Quarterly and monthly data on employment, inflation and growth are unclear on this point. The Federal Reserve Bank of Chicago's National Activity Index, due out Monday for May, is a useful tool to cut through the fog. It is broad, using a weighted average of 85 monthly indicators spanning production, employment, housing and consumption. The index is volatile month to month around zero, a level that indicates trend growth. So economists focus on the three-month rolling average. A reading below negative 0.7 signals recession. Anything above 0.7 warns of inflation.

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There have been two fairly weak monthly readings in a row. If deterioration in U.S. manufacturing indicators from Markit and the Institute for Supply Management provide any clue, the Chicago measure probably weakened slightly in May. This would bring the rolling average close to last fall's weak patch near negative 0.5, when the latest and boldest Fed bond-buying program began. Other weak spells came in the summer of 2011 and the fall of 2010, also times of renewed stimulus. Had the Fed not stepped in aggressively at those junctures, it is possible that the economy would have slipped back into recession. But even though that didn't happen, it seems that successive rounds of monetary easing have had diminishing impact. The possibility that the Fed's firetruck will soon head back to the station while embers are still glowing is a concern. Scarier, though, is the thought that, even if the Fed stays, its equipment is no longer up to the task. Write to Spencer Jakab at [email protected] A version of this article appeared June 23, 2013, on page C1 in the U.S. edition of The Wall Street Journal, with the headline: Question Isn't 'Will the Fed?' It's 'Can It?'. http://online.wsj.com/article/SB10001424127887323300004578559830517358770.html

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WORLD NEWS Updated June 23, 2013, 8:20 p.m. ET Governments Urged to Pick Up Pace on Economy By BRIAN BLACKSTONE Efforts by the world's "overburdened" central banks to stabilize financial markets have allowed governments to delay necessary overhauls to their economies and banking systems, the Bank for International Settlements said in its annual report Sunday. The warning from the BIS, a consortium of the world's top central bankers, comes as uncertainty over the course of monetary policy, particularly in the U.S., has led to a steep selloff in equities and government bonds, threatening to touch off a new bout of global financial distress.

"It is becoming increasingly clear that central banks cannot do 'whatever it takes' to return still-sluggish economies to strong and sustainable growth," said Stephen Cecchetti, head economist at BIS. "Whatever it takes" emerged last year as a powerful verbal intervention by European Central Bank President Mario Draghi to signal the bank's willingness to use its balance sheet, within its mandate, to prop up bond markets of ailing southern European countries if needed to preserve the euro. Mr. Draghi's remarks nearly one year ago, later backed up by a conditional bond- purchase program, were so successful at reducing Spanish and Italian bond yields that the bond facility has yet to be used. But the BIS cautioned that stimulus efforts of central banks—interest rates near zero; abundant bank loans and asset purchases—come with unwanted side effects. The most dangerous, the report suggests, is that it takes pressure off governments to overhaul

163 their economies and reduce debt while delaying necessary reduction of debt in the private sector as well. "So far, continued low interest rates and unconventional monetary policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system," Mr. Cecchetti said. The ECB itself has made the same point, most recently in its financial stability review last month, as have other economists and politicians. But their warnings often go unheeded. Structural changes in core economic areas like labor markets and social security systems, which BIS repeatedly calls for, entail tough and often unpopular political decisions. BIS officials have long warned that central banks are stretched beyond their traditional mandates to stabilize inflation and financial markets, and that they are now tasked with safeguarding the world economy. But if central banks remove stimulus too soon, they risk undoing the progress that has been made in the past five years to bring financial markets back from the verge of collapse. "The size and scope of the exit will be unprecedented," the BIS said in its report. "This magnifies the uncertainties involved and the risk that it will not be smooth." This risk was highlighted by a steep global rise in government bond yields and sharp selloff in stocks after the Federal Reserve signaled on Wednesday that it may reduce the size of its asset purchases—currently $85 billion a month—later this year if the economy keeps improving. Central bankers meet around every two months at BIS headquarters in Basel, Switzerland. The group doesn't set policy, but rather serves as a forum for central bankers to exchange views about financial markets and the global economy. The BIS also defended controversial studies that concluded that high rates of government debt sharply reduce economic growth. These academic reports helped form an intellectual basis for fiscal austerity efforts in Europe, which critics say has made already deep recessions in southern Europe even worse. The most prominent of these studies was by U.S. economists Kenneth Rogoff and Carmen Reinhart. Their paper "Growth in a Time of Debt" concluded that countries with a ratio of debt to gross domestic product above 90% tended to see persistently weak activity. A graduate student and pair of professors from University of Massachusetts Amherst found a glitch in the study's calculations that appeared to challenge the conclusion. But Mr. Cecchetti said other research, including his own at the BIS, backs the conclusion that high government debt is a brake on growth. "Our reading of the evidence, especially because of our own work, is (Mr. Rogoff and Ms. Reinhart) are right in their original claims," Mr. Cecchetti said. Write to Brian Blackstone at [email protected] A version of this article appeared June 24, 2013, on page A14 in the U.S. edition of The Wall Street Journal, with the headline: Governments Urged to Pick Up Pace on Economy. http://online.wsj.com/article/SB10001424127887323683504578563283491195610.html

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June 23, 2013 Et Tu, Bernanke? By PAUL KRUGMAN For the most part, Ben Bernanke and his colleagues at the Federal Reserve have been good guys in these troubled economic times. They have tried to boost the economy even as most of Washington seemingly either forgot about the jobless, or decided that the best way to cure unemployment was to intensify the suffering of the unemployed. You can argue — and I would — that the Fed’s activism, while welcome, isn’t enough, and that it should be doing even more. But at least it didn’t lose sight of what’s really important. Until now. Lately, Fed officials have been issuing increasingly strong hints that rather than doing more, they want to do less, that they are eager to start “tapering,” returning to normal monetary policy. The impression that the Fed is tired of trying so hard got even stronger last week, after a news conference in which Mr. Bernanke seemed quite happy to reinforce the message of an imminent reduction in stimulus. The trouble is that this is very much the wrong signal to be sending given the state of the economy. We’re still very much living through what amounts to a low-grade depression — and the Fed’s bad messaging reduces the chances that we’re going to exit that depression any time soon. The first thing you need to understand is how far we remain from full employment four years after the official end of the 2007-9 recession. It’s true that measured unemployment is down — but that mainly reflects a decline in the number of people actively seeking jobs, rather than an increase in job availability. Look, for example, at the fraction of adults in their prime working years (25 to 54) who have jobs; that ratio fell from 80 to 75 percent in the recession, and has since recovered only to 76 percent. Given this grim reality — plus very low inflation — you have to wonder why the Fed is talking at all about reducing its efforts on the economy’s behalf. Still, it’s just talk, right? Well, yes — but what the Fed says often matters as much as or more than what it does. This is inherent in the relationship between what the Fed more or less directly controls, namely short-term interest rates, and longer-term rates, which reflect expected as well as current short-term rates. Even if the Fed leaves short rates unchanged for now, statements that convince investors that these rates will be going up sooner rather than later will cause long rates to rise. And because long rates are what mainly matter for private spending, this will weaken growth and employment. Sure enough, rates have shot up since the tapering talk started. Two months ago the benchmark interest rate on 10-year U.S. government bonds was only 1.7 percent, close to a historic low. Since then the rate has risen to 2.4 percent — still low by normal standards, but, as I said, this isn’t a normal economy. Maybe the economic recovery will, as the Fed predicts, continue and strengthen despite that increase in rates. But

165 maybe not, and in any case higher rates will surely mean a slower recovery than we would have had if Fed officials had avoided all that talk of tapering. Fed officials surely understand all of this. So what do they think they’re doing? One answer might be that the Fed has quietly come to agree with critics who argue that its easy-money policies are having damaging side-effects, say by increasing the risk of bubbles. But I hope that’s not true, since whatever damage low rates may do is trivial compared with the damage higher rates, and the resulting rise in unemployment, would inflict. In any case, my guess is that what’s really happening is a bit different: Fed officials are, consciously or not, responding to political pressure. After all, ever since the Fed began its policy of aggressive monetary stimulus, it has faced angry accusations from the right that it is “debasing” the dollar and setting the stage for high inflation — accusations that haven’t been retracted even though the dollar has remained strong and inflation has remained low. It’s hard to avoid the suspicion that Fed officials, worn down by the constant attacks, have been looking for a reason to slacken their efforts, and have seized on slightly better economic news as an excuse. And maybe they’ll get away with it; maybe the economic recovery will strengthen and all will be well. But rising interest rates make that happy outcome less likely. And now that everyone knows that the Fed is eager to slacken off, it will be hard to get interest rates back down to where they were. It’s sad and depressing, in both senses of the word. The fundamental reason our economy is still depressed after all these years is that so many policy makers lost the thread, forgetting that job creation was their most urgent task. Until now the Fed was an exception; but now it seems to be joining the club. Et tu, Ben? http://www.nytimes.com/2013/06/24/opinion/krugman-et-tu- bernanke.html?partner=rssnyt&emc=rss

June 24, 2013, 2:34 am5 Comments Florida Versus Spain, An Update I’ve suggested on a number of occasions that one good way to understand the problems of the euro is to compare the experiences of Florida and Spain. Both had huge housing bubbles, fed in part by buyers of coastal holiday homes, which burst. Both suffered nasty recessions as a result. But then their destinies diverged, because one was part of a fiscal as well as monetary union, while the other wasn’t. As its economy shrank, Florida paid much less in federal taxes, even as federal spending in Florida rose; I’ve estimated the de facto federal aid to Florida in 2010 at around 5 percent of GDP. That’s aid, not loans; anything on that scale would have been inconceivable in Europe. Now, as everyone knows, Spain continues to suffer, with unemployment rising ever higher; and despite ECB actions that have contained its borrowing costs, no end to the debt crisis is in sight. Meanwhile, what’s going on in Florida? Remarkably, the Florida unemployment rate is not only down, it’s slightly below the national average:

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How did that happen? It’s not because of a huge employment boom: Florida’s employment decline was much bigger than that of the nation as a whole, and it has not made up the gap:

What has happened, presumably, is out-migration: workers leaving Florida for better job markets. Oh, by the way: further evidence against the notion that “structural” mismatches explain weak employment. Now, out-migration is a big problem when it happens in Europe, because it undermines the fiscal base; but in Florida, which benefits from federal retirement and health-care programs, housing the elderly is actually an export industry. So the saga continues — and the evidence continues to mount that Europe just wasn’t ready for a single currency. June 24, 2013, 2:16 am3 Comments Dead-enders in Dark Suits The Bank for International Settlements is the central bankers’ central bank; accordingly, it tends to exhibit the prejudices of the tribe in especially concentrated form. In particular, it has been relentless in making the case for higher interest rates, on the grounds that … well, the logic keeps changing. For a while it was warning about inflation and commodity prices; when the inflation failed to materialize and commodity prices slumped again, it simply changed the 167 argument to one against bubbles, plus the quite amazing argument that central bankers must not keep rates low because that would take the fiscal pressure off governments. Who, exactly, elected these people to run the world? But in its latest report the BIS really transcends itself. Part of what makes the report so awesome is the way that it trots out every discredited argument for austerity, with not a hint of acknowledgement that these arguments have been researched and refuted at length. Early on, for example, it declares that studies have repeatedly shown that as government debt surpasses about 80% of GDP, it starts to become a drag on growth. Somebody didn’t get the memo (or, more likely, the report had already been sent to the printers when Reinhart-Rogoff-Wrong broke). And that’s just one of many. For another example, the BIS goes on at length about the alleged difficult of shifting workers out of housing into other sectors, and the role of this alleged lack of flexibility in causing sustained high unemployment. What about all those studies showing that employment fell broadly across sectors and regions, indeed across occupations and skill classes, all of which is inconsistent with this story? Never mind. But the real reason to be horrified by this report doesn’t lie in the details, it lies in the destructive incoherence of the whole vision. The BIS largely accepts a balance-sheet, debt-overhang view of the crisis; indeed, it inveighs a lot against both public and private sector debt. And it demands that everyone, public and private both, deleverage fast, starting immediately. Hello? Does anyone see the problem? If everyone is slashing spending, who will buy what they have to sell? And won’t a global depression — because that, in effect, is what they’re calling for — both undermine attempts to save and actually raise debt/GDP ratios, though a falling denominator? In fact, their own data are trying to tell them this story. They lament the fact that debt ratios have risen, not fallen, in most countries:

But they fail to note that some of the biggest increases have come in countries pursuing savage austerity. This is not, of course, a mystery: Greece has made budget cuts amounting to around 15 percent of GDP, the equivalent of $2.5 trillion in the United States, but it has been chasing a rapidly falling GDP. To some of us, this is evidence of the futility of austerity; to the BIS it’s evidence that people need to cut much more. Now, you could argue that we need sharp spending cuts by private and public debtors, but that we can avoid a global depression by using expansionary monetary policy to encourage whoever

168 is left to spend more. But noooo [/end Belushi]: the BIS is fiercely opposed to easy money, which it says just encourages irresponsibility. So the BIS is calling both for sharp cuts in public spending and for sharp cuts in private spending, encouraged by an end to easy money. I’m not sure how this is supposed to work; maybe the idea is for everyone to run a large trade surplus, at the same time. In the end, though, this isn’t about analysis, it’s about attitude. The BIS is basically embodying the notion that we must pay for our past sins, never mind the arithmetic. And the worst of it is that these views will carry some weight, because the BIS still, for some reason, retains substantial credibility.

June 23, 2013, 12:34 am242 Comments

We Were Middle-Class Once, And Young

As I noted the other day, Greg Mankiw (pdf), in his defense of the one percent, seems oddly oblivious, among other things, to the extent to which America has changed since he was young. We are a much more unequal society now, and as a consequence arguably one with a lot less intergenerational mobility too.

I argued this impressionistically — but it turns out that Miles Corak has a paper for the same volume making the argument with lots of evidence. For example, here’s data on “enrichment expenditures”, defined as “the amount of money families spend per child on books, computers, high-quality child care, summer camps, private schooling, and other things that promote the capabilities of their children”:

Not only do the affluent spend much more on their children, but the gap has grown a lot since Greg and I were young. Maybe all that spending is wasted — but I doubt it. We have become both a more unequal society and a society with more unequal opportunities.

There’s a lot more in the Corak paper, by the way. I was especially struck by the comparison of mobility in the US and Canada. I wasn’t surprised that America has less mobility, and certainly not that in America it’s hard to escape the bottom decile. But it turns out that in America it’s also much easier to stay in the top decile — hardly the image of a meritocractic society, unless you believe that America’s top decile is genetically superior to Canada’s. Anyway, we are not the society we once were — and baby boomers should realize that. 169

June 22, 2013, 2:53 am184 Comments Greg Mankiw and the Gatsby Curve A number of people have already piled on to Greg Mankiw over his defense of the one percent (pdf). Yet I do have something to add. Before I get there, a quick summary of the argument to date. Mankiw argues that the 1 percent make so much because of their high contribution to output — basically, that they have high marginal productivity. So they earn what they get; and Mankiw further argues that economic opportunity is in fact relatively if not perfectly equal. All’s fair! The critique falls along three lines. First, as Dean Baker notes, even if you believe that the glittering prizes at the top of the economic scale were fairly won, the size of those prizes is very much defined by policy choices. We live in a society that allocates rights to intellectual property in a way that yields huge rewards to a select few, that taxes top incomes at a historically low rate, and so on. Even if the game is fair, nothing says that the game has to look the way it does. Second, as Harold Pollack says, Mankiw is way too blithe in dismissing inequality of opportunity. As Pollack says, what we actually see is a very strong tendency for children of the top quintile to stay there; and a look at how that happens suggests that there’s a lot more to that persistence than the inheritance of good genes, which seems to be Mankiw’s main explanation. Third, as The Economist (!) points out, Mankiw’s attempt at a reductio ad absurdum of Ralwsian logic — hey, if we want to equalize results, why not enforce mandatory organ donation! — is just silly. Rawlsian ideas are always a matter of equalization under constraints, where these constraints involve notions of fundamental rights — that’s why Rawls didn’t say “let’s impose perfect equality, and deal with the incentive issue by using forced labor”. As The Economist says, we don’t consider vandalism against property and assault against people equivalent; the same difference makes nonsense of the income taxes = organ donation thing. So, what can I add? Well, Pollack quotes Mankiw’s casual defense of equality of opportunity: My view here is shaped by personal experience. I was raised in a middle-class family; neither of my parents were college graduates. My own children are being raised by parents with both more money and more education. Yet I do not see my children as having significantly better opportunities than I had at their age. What’s wrong with this passage? It’s not just that as a winner, someone who did extremely well, Mankiw has a sunnier perspective than he might if he had done worse. It’s also the temporal slip: Mankiw doesn’t think his children have “significantly better opportunities than I had at their age.” [My emphasis] Ahem. Greg Mankiw was born in 1958; he reached college age in the mid-1970s, that is, before the great surge in inequality. I’m 5 years older, and also grew up in that America — and it was a different country, one in which ordinary public high schools were often pretty good, in which good higher education was available cheaply at state universities, in which almost none of the vast apparatus of tutors and private instruction now used by the elite existed. It was, in short, a country at a very different place on Alan Krueger’s Great Gatsby curve. So even if it were true that Mankiw’s children now don’t have significantly better opportunities than he had then — which I doubt — this has little relevance to the disparity in opportunities between the elite and the middle class in today’s America. And yes, you do wonder how someone can teach at Harvard and not see just how many of the students come from privileged backgrounds. This doesn’t make them bad people; it does suggest that we’re much more of a hereditary oligarchy than conservatives have room for in their philosophy. http://krugman.blogs.nytimes.com/2013/06/22/greg-mankiw-and-the-gatsby-curve/

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ft.com Comment Columnists June 21, 2013 5:51 pm Unwinding the world’s biggest economic experiment By Gavyn Davies When the Fed does change direction, tightening often comes in a rapid series of interest rate rises

©Bloomberg Flight path unknown: The return of market turbulence is a taste of what could come if the Feb halts stimulus moves On Wednesday, the chairman of the Federal Reserve announced that the greatest experiment in the history of central banking might be nearing its end. Ben Bernanke’s announcement included many caveats, but the financial markets did not miss the message. Since 2009, the central bank has been buying financial assets – US Treasury bonds and some types of corporate debt – paid for by an expansion of the monetary base (so-called “printing money”). This kept interest rates low, which damaged savers but helped indebted businesses and households. It has also been the major prop for financial markets. Within about a year, if the Fed’s plans come to fruition, the US government deficit will need to be financed from private sector savings – not by the central bank. Asset markets will be left to fend for themselves as the biggest buyer withdraws from the arena. That is why some hedge funds sold off bonds this week, causing a big drop in their prices – the flipside of which is a rise in borrowing costs (or “yields”). Mr Bernanke has expressed consternation that adjustments to the path for the Fed’s balance sheet, such as the one he announced this week, can have such a profound effect on the bond market. But investors are making logical inferences from central bank behaviour. The Fed does not change direction often. When it does, tightening often comes in a rapid series of interest rate rises that are not fully anticipated by investors. More ON THIS STORY/ Fed decision not timed well, says FOMC member/ Bernanke throws shares into reverse gear/ Bernanke sees 2014 end for QE3/ Editorial Bernanke eyes the exit with caution/ Bonus video Turning point for QE supertanker ON THIS TOPIC/ Central banks told to head for exit/ China pulls bank system back from brink/ John Authers Bernanke strikes to great effect/ Emerging markets feel effect of US Fed

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GAVYN DAVIES/ Gavyn Davies Fed begins its long and gradual exit/ Gavyn Davies Bond markets and the Fed/ Gavyn Davies Why ECB is reluctant to ‘go negative’/ Gavyn Davies The ‘big one’ for global bonds? Furthermore, when the Fed was supporting markets, investors had to seek out new sources of income to replace declining interest receipts on their government bond holdings. In this so-called “reach for yield”, some of them leveraged themselves up to buy into emerging markets and bond funds – positions they are now dropping sharply. It is impossible to be sure where deleveraging will end. The last big unwind – a much smaller one – started almost exactly a decade ago. On June 25, 2003 the Federal Open Market Committee met amid expectations of a cut in the interest rate from 1.25 per cent to 0.75 per cent. Vincent Reinhart, the committee secretary, opened the meeting with some gallows humour. “On Friday”, he said “I was in line with my 11-year-old son to purchase Harry Potter and the Order of the Phoenix . . . It is somewhat longer than the briefing papers the committee has received. But it, too, considers an alternative world filled with uncertainty and great perils”.

Alan Greenspan was chief wizard at the Fed that day. Mr Bernanke, more radical than he is now, was there, but mostly stayed silent. The committee was fully aware of the dangers ahead when it decided to cut the federal funds rate by only 0.25 percentage points. The market concluded that the Fed was preparing to tighten policy sooner than expected, and sharply adjusted expectations for where it thought rates would be in the years ahead. The same thing happened this week. The previous big Fed exit, announced on February 4, 1994, was even more dramatic. It was a day that triggered such turbulence that it is etched in the memory of all bond traders. Working as a Goldman Sachs economist, I was on the bond trading floor when the Fed released an innocuous-sounding statement. The FOMC had decided “to increase slightly the degree of pressure on reserve positions . . . which is expected to be associated with a small increase in short-term money- market interest rates”. Pardon? After a few moments, there was an explosion of noise as realisation set in. The market was unprepared for the Fed change, Investors were over-leveraged and knee-deep in Mexican debt and mortgages. Equities emerged relatively unscathed. But before the bloodbath ended that November, the survival of the US investment banks was at stake. Mr Bernanke wants this time to be different. His main weapon will be transparency and forward guidance. He says the Fed will end its asset purchases only if unemployment falls below 7 per cent, reducing the risk of tightening before the economy can take it. Short-term interest rates will stay close to zero for a long time after that and eventual rises will be gradual. He wants bond prices to fall slowly, leaving time for the financial system to adjust. There are two risks with the Fed’s exit plan. The first, raised by Paul Krugman and other Keynesian economists, is that it sends a premature signal to the world economy that the central banks will tighten before the private sector recovery has achieved escape velocity. This has happened before: the Fed made this error in 1937-8 and the Bank of Japan in 2006. Macro-economists such as Michael Woodford argue that the main economic effect of the Fed’s asset purchases is that they signal to households and business that the central bank is serious about keeping short rates lower for longer than normal. These

172 stimulatory effects could now be reversed. If so, the US recovery might peter out, taking the global economy down with it. The second danger, in sharp contrast, is that the Fed has left it too late to bring market exposures under control, in which case the unwinding might take bond yields and credit spreads much higher than economic fundamentals seem to justify. In the famous phrase of Warren Buffett, the legendary investor, we only discover who is swimming naked when the tide goes out. Higher bond yields would spell danger for the financial system – and would mean rising mortgage rates at a time when the US housing market is only just starting to recover. The exit from quantitative easing was always going to be long and arduous. There is no historical playbook for the central banks to follow. Like a fighter pilot who has experienced combat only in a flight simulator, the real thing might be very different. The central bankers are confident that they have the technical tools to finish the job but, as Mr Bernanke admits, it will be like landing that plane on an aircraft carrier, and possibly in stormy seas. The writer is chairman of Fulcrum Asset Management and writes a blog on macroeconomics on FT.com http://www.ft.com/intl/cms/s/0/9763c2d2-d9c5-11e2-bab1- 00144feab7de.html#axzz2X86Sguyp

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Daily Morning Newsbriefing June 21, 2013 The ESM will get €60bn for bank recaps. Now what? This was quite a day for the eurozone: agreement late yesterday evening on the banks recaps, the Greek government on the verge of collapse, the IMF threatening to withhold the next payment for Greece, and a generalised market rout. Today we will be focusing on those central developments – all of great relevance to the future of the eurozone. Last night, the eurogroup agreed on a €60bn ceiling for direct ESM bank recapitalisation, ready to come into force in the second half of 2014, but subject to many restrictions, including that the ESM can only be tapped for systemically relevant banks after all other alternatives have been explored. Peter Spiegel of the FT notes that the conditions set out in a four page document would “likely limit its attractiveness to some potential applicants because of the requirement, insisted on by a German-led group of creditor countries, that national governments share the burden of an ESM recapitalisation.” The main rule set out in this document is that national governments have to stump up enough cash for their banks to meet the minimum capital requirement of a T1 equity ratio of 4.5% before the ESM intervenes. If a bank is above that level, national governments would have to co-fund 20% of any ESM-led capital injection. After two years that could fall to 10%. The total ESM cap for bank recapitalisation, at €60bn, could be lifted by the ESM’s board. Reuters makes the additional point that the participation percentages were at the upper end of the expected range. There is also the possibility, in theory, that the funds could be applied retroactively – for Ireland and Spain. But that would have to be decided on a case by case basis. In an article published before last night’s agreement Peter Spiegel noted that Olli Rehn was no longer talking about the separation of banking risk from sovereign risk, but of “dilution”. We liked the comment from an unnamed official close to him who acknowledged that moving all of this to the EU level had proved harder than they had anticipated. Gabriele Steinhauer has a good analytical comment in the Wall Street Journal on the state of debate about bank bail-ins. She observed that the new rules keep the eurozone right within the status quo: “The haves bail out, while the have-nots bail in.” Her article gives further details of the state of debate on bank restructuring, which seems to be bogged down by special requests from member states. France, for example, wants to use its national bailout fund, and state money until the fund is set up, to rescue a bank before large depositors get bailed in. France also seeks protection of owners of derivatives sold by the bank, and of banks that had lent to the failing bank in the inter-bank market. The ECB is also seeking exclusion of interbank loans. French officials are also making the point that the Dutch government had bailed out senior bondholders and all depositors of SNS Reaal earlier this year.

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Cyprus was also a main topic at the eurogroup meeting. Jornal de Negocios reminds in its article that In 11 months, deposits worth €15bn disappeared from Cypriot banks, which is a fall of 21% over just one year. There are no surprises in last night’s agreement on the ESM. What strikes us every time we are reading about debates in which ministers discuss precise numbers such as €60bn or €80bn is the sheer scale of the bank recapitalisations the eurozone will require. Recalling the recent Les Echos estimate of €1tr of bad debt that just in the balance sheet of the bad banks, plus the effects of eurozone restructuring since, plus a double-dip recession, total hidden losses may be a lot higher. It is clear that the ESM will not be the main vehicle for bank recapitalisation in the eurozone. And since national governments are constrained – especially by the self-imposed fiscal rules – there is little chance now that bank recapitalisation is going to happen on a sufficient scale. That would, incidentally, still have been the case if no explicit ceiling had been adopted, since the available ESM funds are also capped at €500bn. Spreads are rising again Mario Draghi got the spreads down. Ben Bernanke is getting them back up. We are still a little puzzled as to why his press conference triggered such a violent market reaction, but it did, and triggered large losses in global equity, bond and commodity markets. Our table this morning shows Spanish spreads up at 3.25%, Italian spreads at 2.96% - increases of almost 300bp since Mr Bernanke’s press conference. In addition to those spreads, the 10-year bund yield has also risen by some 100bp – so the combined effect for southern Europe is an almost half point increase in long-term market interest rates. Various debt auctions yesterday underline this trend. The average yield on a Spanish 10-year auction rose from 4.517% on June 6 to 4.765% yesterday – with falling bid to cover rations. France sold a five-year OAT (an inflation-indexed bond) at 1.24%, which compares with 0.74% in April. Overnight, the S&P was down 2.5%, Asian markets fell, and gold is now below $1300. The FTSE Emerging markets index was down 4.2%. The most plausible comment we have seen on why Mr Bernanke has sent the signal of a gradual withdrawal of the policy is by John Authers in the FT, who surmised that he wanted to reduce the likelihood of a bubble, while continuing to support the economy at the same time. In another article, the FT points out a credit crunch in China is also contributing to nervousness, after short-term money rates reached all-time highs. The market expectation of a gradual withdrawal of QE in the US has led to investors retreating from emerging market (in European peripheral) investments, as a result of which funds have been flowing back into “safe” US dollar and core euro markets. Samaras woes to carry on with or without DIMAR, after talks over state TV failed The Greek government crisis is in full swing now, as talks between coalition partners over how to proceed with the ERT broadcaster collapsed yesterday with the Democratic Left (DIMAR) threatening to leave the coalition. It remained unclear whether the disagreement was over aspects of a potential compromise on the issue of ERT or the signs of a broader crisis in the ranks of the government, writes Kathimerini. In the televised statement Antonis Samaras confirmed he has backed down on the issue of the state broadcaster by agreeing to the hiring of as many as 2000 of the 2656 old ERT employees and for broadcasting to restart as soon as possible, with all frequencies operating, but without a return to what he dubbed “the sinful status”. DIMAR will this morning announce whether it will push through with its threat.

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Antonis Samaras says the coalition would continue to govern for the next three years with or without the support of the Democratic Left, Reuters reports. Samaras's New Democracy and PASOK have 153 deputies together, a wafer thin majority in the 300- member parliament. Officials from all three parties ruled out snap elections. Greece's top administrative court on Thursday confirmed an earlier ruling suspending ERT's closure and calling for a transitional, slimmed-down broadcaster to go on air immediately. ERT remains off air despite Monday's court ruling ordering it back on. Much of the squabbling this week centred on Samaras wanting a transitional broadcaster run by only a few staff members while his two partners wanted ERT to reopen exactly as it was before until a newer version is launched. IMF to suspend aid payments to Greece unless Eurozone plugs hole Peter Spiegel in the FT got the story that the IMF has warned EU officials that it will have to stop payments to Greece by the end of next month unless eurozone leaders plug a €3bn-€4bn shortfall that has opened up in Greece’s €172bn rescue programme. The gap emerged after eurozone central banks refused to roll over €3.7bn in Greek bond holdings last month. That forced bailout lenders to speed up aid payments that were originally to go for other purposes later in the programme. Now according to IMF rules, bailout funds need to be secured for at least 12 months to allow for disbursements. This latest shortfall means Greece’s financing needs are now only covered up to the end of July 2014. Unlike previous slippages in the bailout, officials say it was not Athens fault but rather that of the other eurozone countries. They also blamed privatisation delays on “outside pressures”. The shortfall will force eurozone finance ministers to discuss “alternate sources” of funding, said an official, including the possibility of a fresh bailout programme by the end of the year. Eurozone finance ministers meeting in Luxembourg were due to discuss the Greek shortfall on Thursday evening, but a decision on how to fill it was not likely until later in the autumn, officials said. FAZ says Greek privatisation programme set to fail targets Greek privatisation programme is about to fail, writes the Frankfurter Allgemeine, as international investors shun even from attractive companies. The income target of €2.58bn this year is practically out of reach, after the tender for the DEPA gas company failed. So far the privatisation agency TAIPED only received about €70m, another €400m are expected from the DEFSA sale to a gas company from Azerbaijan, the only bidder. But the €712m from the betting company OPAP are no longer secure. The troika now pushes hard to put forward privatisation projects planned for 2014, like the port of Piraeus. But the problem is more likely a fundamental disinterest of international investors, so the article, citing i.e. Hamburg, which is required to pay €4bn to lease two container terminals in the port of Piraeus for 40 years, but now could get the whole port for just €1bn. The potential bidders are put off by the perspective of a country caught in a recessionary spiral, the article concludes. Spanish government asks central bank to void all interest rates floor agreements At the start of last week, Spain's Supreme Court ruled that interest rate floor clauses attached to mortgage loans given by three Spanish banks were to be considered abusive if minimal transparency standards hadn't been kept when the contracts were signed. Then this week the Spanish government suggested that the Bank of Spain should ensure

176 that all existing floor clauses are voided and not just those directly affected by the court sentence. Speaking on this issue on Thursday before the Spanish parliament's Economy Committee, the Governor of the Bank of Spain Luis María Linde said that eliminating floor clauses will impinge on bank profitability, and that the Bank of Spain in its capacity as supervisor would monitor the application of the sentence, reports El País. However, Linde stopped short of endorsing the government's suggestion that all floors should be voided, stressing instead that the Supreme Court's sentence does not declare such clauses illegal but enforces a transparency requirement for banks in their dealings with customers. Recovery in PMI points to slowly ending recession We are still well in recession territory, but the indices are finally improving. Markit’s flash composite PMI went up from 47.7 in May to 48.9 in June. The organisation’s chief economist has been quoted as saying that the index would translate into a 0.2% contraction in eurozone GDP during Q2. If this trend continue, GDP would stabilise in Q3, and start growing in Q4. The regional breakdown is unsurprising. Germany was at 50,9, and France at 46.8. INSEE: French economy to stutter through 2013 France will shrink this year with 0.1%, according to the French forecasting institute. INSEE expects the French economy to return to positive growth rates in the second quarter of this year but stagnation in the third quarter and only slight expansion in Q4 is not enough to turn around the French economy. French unemployment is forecasted to reach 11.1% by the end of the year and consumer spending is expected to fall 0.1%. Recovery will be insufficient for Francois Hollande to keep his pledge to turn around the trend in unemployment. French trade union says Hollande too cautious with pension reform Francois Hollande's plan for a cautious reform of the pension system is not extensive enough, the head of France's largest union said on Thursday according to Reuters. Laurent Berger, who heads the reformist CFDT union, criticised Hollande as unions, employers and officials launched three months of talks on how to fix a pension system seen running a €20bn deficit by 2020. The debate is aimed at yielding recommendations that are non-binding for the government, but will serve as the basis for a draft law to be put before parliament in September. Ceci n’est pas un eurobond Germany’s debt agency yesterday announced that it will soon launch the so-called jumbo bond – a kind of joint liability bond between the federal government and state governments. Reuters quotes the agency as saying that this was not a template for a eurobond. In fact, the German government only took a 13.5% share in the jumbo- bond, signalling its scepticism of joint liability. The article quotes a Commerzbank analyst as pointing that if it is not even possible to have a joint liability bond within Germany, how difficult will it be to organise this at eurozone-level? Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.555 0.602 0.597 Italy 2.703 2.972 2.964

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Spain 2.977 3.202 3.245 Portugal 4.528 4.761 5.030 Greece 8.656 8.997 8.98 Ireland 2.337 2.471 2.458 Belgium 0.801 0.882 0.889 Bund Yield 1.56 1.667 1.675

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.322 1.3243

Yen 129.340 129.39

Pound 0.854 0.8527

Swiss Franc 1.233 1.2267

ZC Inflation Swaps

previous last close

1 yr 1.1 1.18

2 yr 1.16 1.24

5 yr 1.42 1.52

10 yr 1.8 1.91

Euribor-OIS Spread

previous last close

1 Week -8.414 -7.514

1 Month -3.543 -2.643

3 Months 1.329 1.629

1 Year 28.057 25.757

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-06- 21.html?cHash=9c33587858741cd4998e982999a73958

ft.com/markets Last updated: June 20, 2013 11:19 pm Global sell-off raises turbulence fears By Ralph Atkins in London and Michael Mackenzie in New York An abrupt global sell-off in equities, bonds and commodities on Thursday has fuelled fears that the world is entering a fresh phase of financial turbulence as the US Federal Reserve prepares to ease its large-scale asset purchases

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Emerging markets were among the worst hit in volatile trading after Ben Bernanke, Fed chairman, on Wednesday set out the case for slowing the pace of QE3 this year as the US economy picks up momentum. As the dollar strengthened, gold prices tumbled by as much as 4.8 per cent to a two-and-a-half-year low. Oil fell 3.3 per cent. Yields on 10-year US Treasuries, which move inversely with prices, hit 2.47 per cent at one point – up from a low of 1.61 per cent in early May – although a steep fall in US equity prices later encouraged a move back into government debt. More ON THIS TOPIC/ Bernanke’s outlook to come under scrutiny/ The Short View Carry trade is carried off the field/ Editorial Bernanke eyes the exit with caution/ Investors rush to sell US corporate debt IN MARKETS/ Stocks begin recovery after heavy sell-off/ FT Alphaville Chinese monetary policy, with Maoist characteristics/ FT Alphaville The WMP whack, revisited/ Fed and China worries fuel broad sell-off Thursday’s sell-off threw firmly into reverse the rally earlier this year triggered by Japan’s aggressive action to drag its economy out of deflation. “The mood was exuberant in May after the Bank of Japan started to print money but with the Fed heading the other way everyone is suddenly very twitchy,” said Trevor Greetham, director of asset allocation at Fidelity. John Brady, managing director of interest rate sales at RJ O’Brien, said: “The risk here is that the market’s reaction is now out of the Fed’s hands – emerging market and carry trades globally are being unwound.” The nervousness was exacerbated by an escalating credit crunch in China, where short- term money rates soared to all-time highs. The FTSE Emerging markets index tumbled 4.2 per cent on Thursday – the deepest one-day slide since September 2011. The EMBI Global Diversified index of international developing country bonds fell 1.4 per cent to its lowest level since June last year and has lost almost 8 per cent since early May. The Indian rupee and Turkish lira plunged to record lows against the dollar. “Risk assets are very vulnerable, and the situation in China is not positive for near-term global growth prospects,” said John Briggs, strategist at RBS Securities. In Europe, the FTSE 100 tumbled nearly 3 per cent – also the biggest daily fall since September 2011. German 10-year Bund yields have risen in line with US Treasury yields, to reach 1.665 per cent – compared with just 1.2 per cent less than two months ago. Yields on crisis-hit southern European countries rose even more sharply – threatening further economic damage. “Europe is absolutely not ready to have higher interest rates. It has a different dynamic to the US,” said Nick Nelson, global equity strategist at UBS. US interest rate markets priced in a higher chance of rate increases starting in September and December 2014 – at odds with the majority of Fed officials who expect the first official tightening of interest rates in 2015. By lunchtime on Thursday, the S&P 500 was down 1.4 per cent. But analysts said equities would benefit if the Fed’s optimism about the pace of the economic recovery proved right – and Thursday’s sell-off might lead to a healthy correction. “The Fed has created uncertainty and that is going to keep markets volatile. I’m not so sure that is a bad thing because people were getting complacent. A bit of summer volatility is not a bad thing,” said Andrew Parry, chief executive of Hermes Sourcecap. Additional reporting by Robin Wigglesworth and Jack Farchy http://www.ft.com/intl/cms/s/0/ea02f2fe-d9c2-11e2-98fa- 00144feab7de.html#axzz2WZFC5q88

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June 20, 2013 Two Economies in Turmoil, for Different Reasons By BINYAMIN APPELBAUM WASHINGTON — The Federal Reserve chairman, Ben S. Bernanke, meant to deliver two dollops of good news on Wednesday: the economy is doing better, and the Fed is determined to keep it that way. He announced that the Fed would extend one part of its stimulus campaign, suggested that it might extend another part, and offered new details about the timing. Yet his primary audience, the investors whose decisions spread Fed policy through the economy, responded as if the news had been grim. The Standard & Poor’s 500-stock index took its worst two-day dive since November 2011 and has lost 5 percent of its value in the last month. Wells Fargo, the nation’s largest mortgage lender, raised its advertised rate on 30-year loans to 4.5 percent from 3.9 percent in the same period. The call-and-response underscores the complexity of the Fed’s task as it seeks to do more to help the economy, but not too much. Fed officials increasingly are convinced that they are finally doing enough to stimulate the economy — not just the steps already taken, but the plans they have detailed for the next several years. That is why they felt comfortable suggesting that they could begin before the end of the year to scale back their purchases of government securities. But some critics see clear evidence in the persistence of high unemployment and low inflation that the Fed should do even more. And many others are simply nervous. “People aren’t sure that the economy is well enough for the Fed to pull back,” said Paul Christopher, chief international strategist at Wells Fargo Advisors. “The market is signaling to the Fed that we don’t trust your assessment of the economy; we don’t trust your assessment of inflation.” On Wednesday, Mr. Bernanke sought to underscore that the Fed still planned to stimulate the economy on a big scale over the next few years. The central bank continues to hold short-term interest rates near zero, and Mr. Bernanke said it might maintain that policy for longer than previously expected. The Fed has amassed more than $3 trillion in Treasury securities and mortgage-backed securities, and Mr. Bernanke said that it no longer intended to sell the mortgage bonds as the economy improved. Yet public attention focused almost entirely on the least potent part of the Fed’s stimulus effort, its pledge to expand its holdings of mortgage bonds and Treasuries to increase job growth. Those purchases will continue for now, but Mr. Bernanke for the first time sketched a timeline for winding them down, beginning this year and ending next summer, as long as growth keeps pace with the Fed’s expectations. Specifically, he said that the Fed expected the unemployment rate to decline to 7 percent by next summer, from 7.6 percent in May.

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Many investors responded as if Mr. Bernanke had said only that the Fed soon intended to reduce its bond purchases. This was a good demonstration of the difference between probably and certainly. While the timeline generally corresponded to investors’ expectations, Mr. Bernanke’s remarks made it official. And his repeated insistence that investors should focus instead on the evolution of economic data worked about as well as telling people not to think about purple kangaroos. “If you draw the conclusion that I’ve just said that our policies, that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy,” Mr. Bernanke said in one response to a question at a news conference on Wednesday. Some analysts and economists said the reaction was particularly striking because the Fed seemed more committed than ever to its stimulus campaign. “They are getting very close to where I would have had them be two or three years ago,” said Joseph E. Gagnon, a former Fed economist and architect of the first round of asset purchases who is now a senior fellow at the Peterson Institute for International Economics. “I find it odd, and probably the chairman is surprised and unhappy with the market reaction, too.” The Fed declined on Thursday to comment on the market reaction to Mr. Bernanke’s remarks. But he expressed himself clearly during the news conference on the negative market response since his last public appearance in May. “Well, we were a little puzzled by that,” he said. He also acknowledged that the Fed might need to respond if the market’s reaction persisted. “It’s important to understand that our policies are economic-dependent,” he said. “And in particular, if financial conditions move in a way that makes this economic scenario unlikely, for example, then that would be a reason for us to adjust our policy.” Some analysts said that would not be necessary, arguing that the market would soon settle down. Others, however, saw legitimate reasons for concern. The Fed has made the unemployment rate the measuring stick for its stimulus effort. It doubled down on Wednesday by saying that it would buy bonds until the rate fell to 7 percent. But the unemployment rate so far has fallen almost entirely because people have stopped looking for work. The share of adults with jobs, known as the employment-to- population ratio, has barely changed over the last three years. In past recoveries, declining unemployment has encouraged people to re-enter the labor market, but some economists argue that that will not begin to happen until the rate falls well below 7 percent. “Why is monetary policy linked to unemployment rate as opposed to employment-to- population ratio?” Amir Sufi, an economist at the University of Chicago, wrote on Twitter. “Seems bonkers. Does anyone seriously think labor market is improving dramatically?” Jan Hatzius, chief economist at Goldman Sachs, wrote in an e-mail that he doubted the Fed’s current plans would be sufficient. “I am much less sanguine under our forecasts for the economy,” he wrote, “and to a somewhat lesser degree even under theirs.”

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June 22, 2013 Extreme Budget Cuts of 2014 By THE EDITORIAL BOARD The most shameful achievement of the House Republican majority has been the elimination of $1.5 trillion in discretionary spending through 2022, which has already held back the economy from substantial growth and done real damage to people and communities that depend on government dollars. The widespread pain caused by this year’s sequester is the best-known aspect of these cuts, but caps that will continue to limit virtually every program for nine more years will also be extremely harmful. Republicans, though, still aren’t satisfied, and are continuing their campaign to radically reshape Washington’s relationship to the country. The 2014 spending bills now emerging from the House Appropriations Committee are worse than in any previous year and would make some programs and departments unrecognizable. The spending limits imposed by Republicans in the Budget Control Act of 2011 will be different in the upcoming fiscal year. The arbitrary, across-the-board cuts of the sequester will come to an end for most discretionary spending (the kind that has to be renewed each year), but the severe overall limits on each department’s budget will get worse as total discretionary spending declines by 2 percent. The difference in 2014 is that lawmakers can reallocate money within departments as they see fit, within the limits, and won’t be confined by the sequester rules. House Republicans, of course, have decided to exceed the caps for their favorite programs. They want to give the Pentagon a 5.4 percent increase — $26 billion it doesn’t need — along with a 3.3 percent raise to Homeland Security. To pay for that, and still shrink the budget, they are demanding severe cuts from spending bills for which they have little use: nearly 19 percent out of the labor, health and education bill; 15 percent from the financial services oversight bill; 14 percent from the interior and environment bill; and 11 percent from the energy and water bill. Those percentages, just to be clear, represent cuts below this year’s already ruinous sequester levels. The effect is visible in several of the bills that have emerged from the Appropriations Committee: TRANSPORTATION AND HUD The overall level is cut by 9 percent, or $4.4 billion, below the 2013 sequester. That means Community Development Block Grants are cut by 45 percent to $1.6 billion, well below the $2.7 billion put in place when President Gerald Ford created the program in 1974. Amtrak would be cut by a third, as would the HOME Investment program, which creates affordable housing. ENERGY AND WATER Spending on renewable energy programs would be cut nearly in half to $1 billion. But somehow an extra $450 million was found for further development of coal, natural gas, oil and other fossil fuels. AGRICULTURE The bill cuts $120 million needed by the Commodity Futures Trading Commission to enforce the Dodd-Frank financial oversight law.

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Even more severe cuts are likely when the environment and education bills are released in the coming weeks. The Senate, though, has taken a very different approach. Rather than perpetuate the unnecessary austerity of the spending caps, the Senate budget would raise an additional $1 trillion by eliminating various tax breaks for the rich and for corporations, while still cutting an equal amount of spending in areas that are not vital. But Republicans in both chambers have ignored all entreaties from the White House and the Senate to sit down and negotiate. The White House, urging compromise, has threatened to veto any Republican spending bill outside of a negotiated budget agreement that increases vital investments. The House, apparently, would rather drag the country through yet another budget showdown. Meet The New York Times’s Editorial Board » http://www.nytimes.com/2013/06/23/opinion/sunday/extreme-budget-cuts-of- 2014.html?src=recg

Business Day Economy OFF THE CHARTS Ireland’s Turnaround May Not Be So Rosy

By FLOYD NORRIS Published: June 21, 2013

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TWO years ago, even as other troubled European economies continued to deteriorate, some economic statistics seemed to indicate that Ireland’s troubled economy had turned the corner and was growing again. The government reported that gross national product had grown in 2010 for the first time since the country’s property bubble burst in 2008, and that its current-account balance had turned positive for the first time since 1999. A positive current-account balance was a sign that the country as a whole was already paying down its overseas debt. Since that was clearly not happening to the government’s debt, it indicated a sharp turnaround for the private sector. Other statistics were not nearly as rosy. Unemployment was continuing to rise, and domestic demand — the total purchases by people and companies in Ireland — was continuing to fall. But the fact that Ireland’s current-account surplus had turned around when nothing similar had happened in such countries as Portugal, Spain and Greece was viewed as a clear sign of success for the country’s economic policies. Well, maybe not. John FitzGerald, an economist with the Economic and Social Research Institute in Dublin, pointed out last month that a quirk in the way the statistics are computed, coupled with fears of a tax law change in Britain, had produced unrealistic increases in both the balance of payments and G.N.P. figures beginning in 2009. The reasons are complicated, but the quirk is retained profits of multinational companies that chose to relocate their nation of incorporation to Ireland, even though they were, in fact, based in Britain. The G.N.P. and balance of payments data allocate those profits to Ireland, he said in a paper, even though “there is no profit to the Irish economy.” The G.N.P. figure is similar to the more widely known G.D.P. — gross domestic product — but it includes profits only of Irish citizens and companies, regardless of where they were earned instead of profits of companies operating in Ireland. In an interview, Mr. FitzGerald said the Irish statistics office understands why the numbers are misleading, but feels it cannot change them under European rules. He said that European Union taxes on its member countries were based on G.N.P. numbers. The accompanying charts show the official figures, alongside Mr. FitzGerald’s estimates of the proper ones after adjusting for the foreign-owned profits. By his estimates, the balance of payments did not turn positive until 2012, when the surplus was much smaller than the official figure. Similarly, the G.N.P. did not begin rising until last year. The International Monetary Fund, in its review of the Irish economy published this week, said Mr. FitzGerald’s numbers appeared to be better. “This adjusted G.N.P. path appears to be more consistent with other economic indicators, most notably domestic demand, which continued to fall in 2009-12,” the I.M.F. report stated. The I.M.F. forecasts that domestic demand will grow by 1 percent in 2014 after six consecutive years of decline. Government spending reductions are a major part of that weakness, but so is the country’s failure to fix the financial system. Despite huge bank bailouts that nearly bankrupted the government, the I.M.F. is still worried about the capitalization of the banks and concerned that little money is available for lending.

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Mortgage problems continue to grow. On Friday the Irish central bank said that 25 billion euros of home mortgages — more than 23 percent of the total outstanding — were behind on their payments at the end of March. Unemployment has declined a little, but remains above 12 percent for adults and more than double that for people under 25. Floyd Norris comments on finance and the economy at nytimes.com/economix. http://www.nytimes.com/2013/06/22/business/economy/irelands-turnaround-may-not- be-so-rosy.html?src=recg

ft.com World Europe Brussels June 21, 2013 2:31 am Eurozone bailout fund given power to ‘directly recapitalise’ banks By Peter Spiegel in Luxembourg Eurozone finance ministers agreed to give their €500bn bailout fund the power to pump cash directly into teetering banks on Thursday night, but only after national governments share the burden by first making their own capital investment. The power to “directly recapitalise” banks through the fund, the European Stability Mechanism, was hailed by leaders as a key achievement to help eurozone countries avoid the fate of Ireland, Spain and Cyprus, where national governments were put at risk of a cut-off from financial markets when they were unable to deal with massive bank bailouts on their own. More ON THIS STORY/ EU struggles to unlink banks from states/ Asmussen calls for bank resolution fund/ Carsten Schneider Europe remains open to bankers’ blackmail/ Monetary heavyweights to clash in court/ Editorial In defence of OMT and Draghi’s ECB IN BRUSSELS/ US pushed EU to dilute data protection/ French air traffic controllers on strike/ Brussels gets tough on single airspace plan/ China mulls probe of car imports from EU “This instrument will help preserve the stability of the euro area and help remove the risk of contagion from the financial sector,” said Jeroen Dijsselbloem, chair of the group of eurozone finance ministers who brokered the agreement in Luxembourg. Klaus Regling, head of the ESM, said he hoped the powers will be ready to use by the second half of 2014, after the European Central Bank and European Banking Authority conduct a series of asset checks and stress tests to determine whether eurozone banks are returning to health. The four-page agreement contains several conditions that would likely limit its attractiveness to some potential applicants because of the requirement, insisted on by a German-led group of creditor countries, that national governments share the burden of an ESM recapitalisation. In addition, there is no guarantee that countries like Ireland and Spain, which were given rescue aid before the ESM had such powers, will be able to receive it. Mr Dijsselbloem said any “retroactive” application would be dealt with “on a case-by-case basis”.

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Ireland, which spent more than €60bn bailing out its banks, has been seen as the most likely candidate for an ESM direct recap, since it could potentially shift billions of euros in debt from its sovereign books on to the ESM’s. But Michael Noonan, the Irish finance minister, gave no hint as to his intentions. “We’ve always argued that Ireland was an exceptional case,” Mr Noonan said before the meeting. “We’re not arguing this case for all our colleagues in the eurozone.” Under previous rules, the eurozone’s rescue fund could only lend to national governments, which could then take the cash and bail out banks on their own. But that system added to sovereign debt levels, causing what EU leaders called a “vicious loop” whereby otherwise healthy government balance sheets were brought low by bank collapses. The new system could shift a chunk of that burden on to the ESM. For banks that were below a minimum capital requirement – a tier one common equity ratio of 4.5 per cent – requesting countries would first have to put in their own cash to bring the bank up to that limit before the ESM could intervene. For banks already above that level, the country would have to put in 20 per cent of the recapitalisation cash. After the ESM direct recap system is in place for two years, that co-investment would fall to 10 per cent. However, these rules could be suspended in “exceptional cases”. The total amount of the ESM’s €500bn in firepower that can be used for bank recapitalisations was capped at €60bn, though the ESM’s board was given the ability to raise that limit. http://www.ft.com/intl/cms/s/0/f910151a-d9f9-11e2-98fa- 00144feab7de.html#axzz2WZFC5q88

BUSINESS Updated June 20, 2013, 11:08 p.m. ET Eurogroup Agrees on Rules for Bailout Fund By STEPHEN FIDLER, GABRIELE STEINHAUSER and CHRISTOPHER LAWTON LUXEMBOURG—Euro-zone finance ministers agreed on guidelines Thursday for how their bailout fund could directly shore up failing banks in the bloc's weak economies. More/ Greece Faces New Financing Threat / Europe's Economy Shifting, From Reverse to Neutral / Brussels Beat: Who Suffers When Banks Fail? It Depends. Euro-zone leaders pledged in June 2012 that they intended to break the destabilizing link between weak banks and governments with shaky finances by allowing their €500 billion ($660 billion) rescue fund to directly inject capital into banks, rather than go through the host government.

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This step would help "break the vicious circle between banks and sovereigns by diluting the link between them," said Olli Rehn, the European Union's economics commissioner. The German Finance Minister Wolfgang Schäuble heralded the decision as "an important step on the way to the banking union," the effort by governments to create more uniform treatment of banks across the 17-nation euro zone. But the maximum amount ministers agreed to devote to the task was small compared with likely needs in a major banking crisis. They agreed to limit such direct investments to €60 billion of the €500 billion fund, and would make any such capital injections through a special subsidiary. They said they hoped to have the new facility in place by the second quarter of 2014— in time for anticipated stress tests aimed at determining the strength of euro-zone banks, and before the European Central Bank starts supervising them. Ministers also set strict conditions for allowing direct recapitalizations. National governments will remain solely responsible for raising a bank's capital buffer to the minimum set by bank regulators of 4.5% of bank assets, weighted according to risk. Even after that, a bank's home country will have to contribute at least 20% to any recapitalization through the fund, called the European Stability Mechanism. That amount will go down to 10% two years after the ESM gets the new instrument. The ministers left open the possibility that Thursday's decision could benefit euro-zone countries that have already used bailout loans to prop up troubled banks. "It will have to be decided case-by-case and by mutual agreement," said Jeroen Dijsselbloem, who presides over the Eurogroup meetings. "It's up to the member states to apply for it." Ireland and Spain, and to a lesser degree Greece and Portugal, have seen their debt loads jump in recent years amid serious problems in their financial sectors. Mr. Schäuble described the retroactivity decision as "a concession to our Irish friends." But it was evident that the German minister didn't believe much money could be devoted to past recapitalizations, saying as he entered the meeting: "I don't think we have much leeway to use direct bank recapitalization…retroactively." Spain has received some €40 billion to prop up its financial sector, while Ireland used €35 billion of its €67.5 billion bailout to rescue its banks. Richer countries like Germany and the Netherlands have been reluctant to take on responsibility for their poorer neighbors' banks and Berlin, in particular, has worked to delay direct bank recapitalizations as far into the future as possible. "We want recapitalizations that don't weigh excessively on budgets of states that are already very indebted and enable us to secure the banking system," said Finance Minister Pierre Moscovici of France, who has been in favor of allowing existing bank aid to be transferred to the ESM. Separately, Jörg Asmussen, a top German official at the European Central Bank, warned against giving national authorities too much flexibility when deciding which investors and creditors have to take losses during a bank failure.

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"I think it is necessary we develop certainty in a way that investors know ex-ante what the rules of the game are," said Mr. Asmussen, who sits on the ECB's six-person executive board. He added that the central bank still believes the new bank-restructuring rules should come into effect in 2015, rather than 2018 as originally proposed. —Maarten van Tartwijk contributed to this article. Write to Stephen Fidler at [email protected], Gabriele Steinhauser at [email protected] and Christopher Lawton at [email protected] A version of this article appeared June 21, 2013, on page A8 in the U.S. edition of The Wall Street Journal, with the headline: EU Agrees On Rules For Bank Bailouts. http://online.wsj.com/article/SB10001424127887323893504578557381028947270.html

BRUSSELS BEAT Updated June 19, 2013, 7:57 p.m. ET Who Suffers When Banks Fail? It Depends Gabriele Steinhauser Europe is crafting new rules for winding down struggling banks that are meant to avoid any more expensive, taxpayer-funded bailouts as well as the financial panics triggered by surprise losses, such as those suffered by savers over the past year in Spain and Cyprus. But with several countries demanding the right to shield entire classes of bank creditors from getting burned during a failure, the new rules may keep the European Union close to its status quo: The haves bail out, while the have-nots bail in.

European Pressphoto Agency Pierre Moscovici of France, which wants to have national discretion in bailouts. In other words, governments in the richer countries will be able to prop up weak banks if they threaten to drag down the economy, while poorer ones will have to share the cost of crises with bank investors and creditors.

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At a meeting in Luxembourg on Friday, EU finance ministers are expected to reach an agreement on the new rules. They will force banks to draw up detailed plans on how they would downsize or close during a crisis, require governments to set up national resolution authorities and funds to implement bank restructurings, and spell out the order in which investors and creditors have to absorb losses. Had these rules been fully in place in 2008, all the bank failures since then in the EU, except perhaps Ireland's Anglo Irish, could have been resolved without taxpayer money, according to the European Commission, the EU's executive arm. After much back and forth, ministers are set to give an extra layer of protection even to large deposits held by individuals and small and midsize companies when allocating losses, arguing they have a harder time assessing a bank's riskiness. That comes at the expense of big corporations, whose deposits above €100,000 ($134,000) will be converted into shares at the same time as other senior, unsecured creditors. But to the dismay of the commission, which is seeking a uniform regime across the bloc, several governments also want to be able to exercise discretion over which liabilities would be excluded from losses when a bank fails. According to officials involved in the negotiations, they are likely to win. France—and it is far from alone—wants to be able to use its national resolution fund, and, until that starts functioning, public money, to step in and rescue a bank before any large depositors take a hit. Taking the Hit During a bank's failure, its investors and creditors would take losses in this order, unless a country decides to exclude them: • 1. Shareholders • 2. Junior creditors • 3. Senior creditors, large corporate deposits above €100,000 • 4. Deposits above €100,000 owned by individuals, small and medium-size companies • 5. National deposit-guarantee funds Source: WSJ reporting/EU documents That would allow governments to avoid another Cyprus scenario, where politicians are struggling to explain to voters why they didn't shield life-long savers, charities and local companies from steep losses imposed on deposits above €100,000 in the country's two biggest banks. The Spanish government, under a recent bank bailout deal with the euro zone, was also unable to protect ordinary bank customers who had been talked into converting their savings into junior bank debt that quickly went bad. Other creditors that should in the French view be close to the emergency exit are owners of derivatives sold by the failing bank, as well as banks that provided short- term loans to it—the very liabilities that sparked global panic after the collapse of U.S. investment bank Lehman Brothers in 2008. The exclusion of interbank loans is also advocated by the European Central Bank, which is growing tired of being the sole liquidity provider for Southern European banks that have lost the trust of their peers.

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The reality is, bailing in hurts, so when the broader stability of their financial system is at stake, governments will usually prefer to step in rather than take the blame. That dynamic has changed somewhat since euro countries began talking about mutualizing some banking risks by allowing their common rescue fund to directly recapitalize banks. Rich states like Finland and the Netherlands, keenly aware that they might have to make up the difference, want to keep exceptions to a bare minimum. But, as French officials are quick to point out, when the Dutch bank SNS Reaal failed earlier this year, the Netherlands bailed out senior bondholders and all large depositors. Countries outside the euro zone like the U.K. also want national flexibility, fearing that the obsession of some euro-zone governments with keeping recapitalization costs low— so they don't have to foot the bill for other countries' financial missteps—will lead to overly aggressive bail-ins at their own banks. "The application of these [bail-in] tools can be different in different countries, say in euro-zone countries and non-euro-zone countries," the Lithuanian Finance Minister Rimantas Sadzius, who will be leading negotiations on the new rules with the European Parliament, said in an interview Wednesday. Mr. Sadzius said different treatment was necessary because of bigger currency risks in non-euro countries and the absence of a bailout fund. Even advocates of more flexibility, including France, say they are ready to place some checks on the exclusions, for instance by capping how much they can cost or by having them approved by some centralized authority. The commission wants that job, but others are pushing for the European Banking Authority, where national supervisors still call the shots. Another point where things may look different for euro ins and outs and haves and have-nots is the timing of the new rules. The official kick-in date for the EU rules is likely to remain 2018, according to officials. But euro-zone finance ministers will also be having a separate discussion over the scope of the bail-in required before their common rescue fund can step in—something that officials now say could become possible in the fall of 2014. —Tom Fairless contributed to this article. Write to Gabriele Steinhauser at [email protected] A version of this article appeared June 20, 2013, on page A17 in the U.S. edition of The Wall Street Journal, with the headline: Who Pays in Bank Rescues? Depends. http://online.wsj.com/article/SB10001424127887324577904578555373710142166.html ?KEYWORDS=GABRIELE+STEINHAUSER

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How Germany Won the Euro Crisis And Why Its Gains Could Be Fleeting Alexander Reisenbichler and Kimberly J. Morgan June 20, 2013 Although the common wisdom is that Germany's success is the hard-won reward for strict economic management, the country owes much of its good fortune to the eurozone crisis. Immigrants and investors’ cash are flowing into the country from the rest of Europe, in order to escape the dire conditions that Merkel and EU technocrats helped create through their hard-line focus on austerity, structural reforms, and price stability. ALEXANDER REISENBICHLER is a Ph.D. student in political science at George Washington University. KIMBERLY J. MORGAN is Professor of Political Science and International Affairs at George Washington University. Germany seems like Europe’s lone island of fiscal stability, but trouble lurks under its impressive export-fueled growth. An obsession with debt and austerity has blocked domestic investment as the country has ignored problems such as a shrinking work force and outdated infrastructure. Germany needs to borrow and spend more or face the end of its economic miracle.

German Chancellor Angela Merkel, May 15, 2013. (Michaela Rehle / Courtesy Reuters) German Chancellor Angela Merkel must be in a mood to celebrate. Not only has the German economy bounced back from the 2008–9 financial crisis -- with revitalized export industries and record-low unemployment -- it has done so while most other European economies are still reeling. Where other countries see only economic hardship in their future, Germany sees an influx of skilled immigrants, low borrowing costs, a balanced budget, and a growing housing market. All of that is a boon for the German economy -- and for Merkel, who is up for reelection in September.

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The common wisdom is that Germany’s success is the hard-won reward for strict economic management. Yet fiscal conservatism and structural reforms alone do not account for Germany’s export-led growth, which in fact is largely the product of adjustments in business and labor relations that reinvigorated German industries. The country also owes much of its economic rebound to the specific structure of the European Monetary Union and even to the labor and financial fallout of the eurozone crisis. Immigrants and investors’ cash are flowing into the country from the rest of Europe, in order to escape the dire conditions that Merkel and EU technocrats helped create through their hard-line focus on austerity, structural reforms, and price stability. Merkel’s drive for austerity is a risky bet. Although it seems to be working to Germany’s advantage, it has failed to lift up a recession-hit Europe. But Germany benefits from an economically healthy Europe, to which it exports roughly 40 percent of its products. Already, automakers such as Daimler and Volkswagen are starting to worry about weak European sales. A crumbling eurozone, therefore, both threatens the very existence of the monetary union and makes the German economy dangerously dependent on demand from emerging markets. Greater recognition of these vulnerabilities -- and of the ways in which the German economy has benefited from the status quo -- should budge reluctant German policymakers away from austerity toward growth-oriented policies for the rest of Europe. MYTH AND MIRACLE Answers to why the German economy thrived while other European economies have struggled often point to successful belt-tightening and government policy during the past decade. The Hartz reforms of the early 2000s -- a set of welfare and labor-market measures that cut benefits and made it easier for firms to create less well-protected and often temporary low-wage jobs -- are said to have reduced labor costs and encouraged more people to work. Meanwhile, fiscal responsibility, which the German constitution mandates, supposedly underwrote Germany’s strong economic performance. German policymakers, in turn, have preached austerity and structural labor-market changes as the model for other European countries looking to foster competitiveness, boost growth, and increase employment. Yet the sources of Germany’s economic revival and continued success were not primarily labor-market reforms or fiscal conservatism but decade-long adjustments in business and labor relations coupled with Germany’s place in the monetary union. Long before the Hartz reforms, German manufacturing firms, faced with growing global competition, started to impose wage restraints and adjust working time and pay while granting job security for skilled workers. With the grudging consent of labor unions, firms developed a series of flexible instruments that allowed them to tweak working hours and pay to their economic needs, instead of touching workers’ employment protection. Firms effectively granted job security in return for labor concessions. And they could now protect their investments in skilled workers -- by temporarily cutting wages and hours, for instance -- rather than shedding workers when production declined. These innovations increased productivity, reduced costs, gave firms room to maneuver during the recent crisis, and in general, reinvigorated German industries, which are once again admired around the globe. In addition, Germany has been able to use its place within the monetary union to boost its exports. Given its highly coordinated collective-bargaining institutions, Germany has already had a clear advantage over other European states in restraining industry-wide wages. This form of internal devaluation -- an equivalent to currency devaluation based

194 on depressing wages -- has fueled an export boom and made the German economy more competitive than other eurozone countries. A relatively weak euro compared to what it would be in better economic times -- or what a strong Deutsche mark would be -- further supported German exports. Another blessing for German exporters has been the German-engineered European Central Bank, given its obsession with low inflation and price stability. Together, these adjustments in business and labor relations and Germany’s place in the eurozone, along with growing demand for high-quality goods from emerging economies such as China, have helped Germany boost its exports and employment. And although exports tumbled a little last year, export firms have preserved their overall competitiveness, as a recent study by the World Economic Forum confirms. And Merkel appears to have even more aces up her sleeve. The first is the unintended and unexpected boom in the housing market, which is fueled by the current debt crisis in Europe. Until now, Germany’s housing market had not been particularly interesting to investors, and house prices had stagnated in recent decades. Yet the debt crisis has spurred investment in German real estate, a perceived “safe haven” for investment in times of economic uncertainty and low interest rates. German workers may also be more willing to buy houses, as they have kept their jobs during the crisis and even received moderate wage increases. The Organization for Economic Cooperation and Development reckons that house prices increased by 5.4 percent in 2011 -- and by much more in the major cities. This trend has carried over into the real economy, with substantial increases in building activity in recent years (4.4 percent in 2011 and 4.2 percent in 2012). Merkel’s second ace is that Germany’s status as a safe haven has enhanced the country’s ability to borrow money at very low interest rates (at times, even negative rates) during the debt crisis. Looking for secure investments, investors flock to the German bond market. According to the Kiel Institute for the World Economy, a German think tank, the bullish bond market has saved the federal government roughly 80 billion euros between 2009 and 2013 (compared to pre-crisis interest rates), which now -- together with record tax revenues -- contributes to balancing Germany’s budget and stabilizing its public debt. Moreover, after decade-long shortages of skilled labor in the country’s manufacturing sector and an aging and shrinking society threatening the welfare state, the debt crisis triggered an influx of skilled immigrants from crisis-ridden countries -- Merkel’s third ace. This immigration spike is all the more surprising given Germany’s reputation as a country that is not particularly welcoming to immigrants (put most succinctly in Merkel’s 2010 remark that multiculturalism had “utterly failed”). Germany’s Federal Statistics Office estimates that 2012 net immigration was around 370,000 -- a number last seen two decades ago. After eight years of contraction, Germany’s population is growing. RISKY BUSINESS In short, for now, Germany enjoys the best of all worlds -- a competitive manufacturing sector and low unemployment, minimal borrowing costs in financial markets, a balanced budget within sight, a booming housing market, and a growing skilled workforce -- while many other advanced economies are suffering from declining competitiveness and staggering unemployment (France), high borrowing costs (the eurozone periphery), missed deficit targets (France and Spain), a job market that cannot match skills to needs (the United States), and the repercussions of housing bubbles 195

(Ireland and Spain). With soaring public approval ratings, prospects look good for Merkel in the upcoming Bundestag elections, even if commentators across the political spectrum (and many EU citizens) bash her austerity platform, which has sustained Germany’s economic success -- however perilously. Convincing Merkel of the cracks in Germany’s economic foundation and moving the country away from fiscal conservatism will be a tall order. But an export model that relies too heavily on emerging economies, weak domestic demand, and a further crumbling eurozone could bring down the entire monetary union and the German “miracle.” The view that austerity contributed to Germany’s postwar economic success thrives in mainstream economic thinking. Given the relative unpopularity of the ill- defined plan to end austerity advanced by Peer Steinbrück, Merkel’s Social Democratic Party contender, Merkel is unlikely to change her austerity platform much before the elections, whether at home and abroad. Steinbrück has only a slim chance of winning, after all, given his numerous political gaffes and his inability to communicate a left-of- center alternative for Europe and Germany. Yet a shift away from austerity is necessary to help revive the eurozone and generate sustainable growth in Europe. It would give European leaders more time to focus on the eurozone’s deeper problems, including the challenges of continuing to bring together very different models of capitalism and divergent levels of competitiveness. Major institutional reforms at the EU level, among them moving economic integration either forward or backward, will require extensive bargaining. Recession-hit countries need to find their own course toward increased competitiveness. All of these steps require time, a scarce commodity given the dire conditions facing many debt-ridden countries. Such a policy shift would help stabilize a crisis-ridden Europe and signal Germany’s commitment to fix the continent's systemic problems instead of just muddling through. Merkel’s path ahead is precarious. Although Germany may seem insulated from what happens in the rest of the eurozone, a closer look reveals the fragility of this export giant. Merkel should be wary. If she wants to keep the German miracle alive, she needs to help revive the rest of Europe. Merkel will have to allow for reduced austerity in the eurozone and for policies that generate more spending at home and abroad. A sluggish German economy in the last two quarters and pessimistic growth predictions should be warning signs that compel Merkel to adopt these changes. Otherwise Germany might soon rejoin the “sick men” of Europe. http://www.foreignaffairs.com/articles/139520/alexander-reisenbichler-and-kimberly-j- morgan/how-germany-won-the-euro-crisis?page=show

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ft.com/markets June 20, 2013 7:56 pm Bernanke strikes to great effect

By John Authers What exactly did he mean by that? A full trading day after Wednesday’s bulletin and press conference from the Federal Reserve, two things were evident. First, the remarks by Ben Bernanke came as a real surprise. Second, the tightening of monetary policy after four years of unprecedented lenience is under way. Ten-year Treasury bond yields, bedrock of the global financial system, have touched 2.4 per cent, up a full percentage point from their low almost a year ago. That is a significant tightening, engineered by the Fed. More ON THIS STORY/ Bernanke sees 2014 end for QE3/ Fed offers path to winding down purchases/ FT Alphaville Markets Live FOMC edition/ Obama hints at move for Bernanke/ Markets Insight It’s hard to write a happy ending to ‘QE’ ON THIS TOPIC/ Emerging markets feel effect of US Fed/ Kremlin seeks to restrain fall of rouble/ Qatar’s central bank shores up lenders/ Austria suspends central bank official JOHN AUTHERS/ Financial engineering could heal medical funding ills/ At times like these, avoid those who say they know/ Elitism destroys nations/ The Long View Timing is all during the Fed’s ‘tapering’ terror Why such a surprise? Look at inflation. An expert on Japan, Mr Bernanke is famously worried that deflation could endanger the economy. Yet he has driven long-term rates up at a point when US inflation is falling, as are inflation expectations, while China’s slowdown is pushing down commodity prices. This points towards easing, rather than talking the market into raising rates. So why scare markets with an ambitious timetable to phase out all purchases of bonds – running at $85bn a month – by the middle of next year? The Fed may believe the US labour market – still lacklustre, with reductions in the unemployment rate largely attributable to falls in the numbers looking for work – is healthier than others think. Another explanation, denied by Mr Bernanke in his press conference, is asset bubbles. The liquidity that the Fed has sent sluicing around the world has created froth, most blatantly in emerging markets. Fears were growing that the Fed would end its easing too late, giving time for asset prices to “melt up” into a bubble that could then burst. Thursday’s sell-off reveals that plenty of excess was embedded in markets. Now, the risk of a bubble is reduced, while the Fed is still stimulating markets. If unemployment does not fall or inflation rise as hoped – both real risks – it need not follow its own exit timetable. If that was the plan, it worked like a charm. http://www.ft.com/intl/cms/s/0/5ec8a6ae-d9c0-11e2-98fa- 00144feab7de.html#axzz2WZFC5q88

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ft.com World Europe Last updated: June 20, 2013 11:16 pm IMF to suspend aid payments to Greece unless bailout hole plugged By Peter Spiegel in Luxembourg

©Reuters The International Monetary Fund is preparing to suspend aid payments to Greece by the end of next month unless eurozone leaders plug a €3bn-€4bn shortfall that has opened up in Greece’s €172bn rescue programme, according to officials involved in managing the bailout. The gap emerged after eurozone central banks refused to roll over Greek bonds they hold, and comes amid signs that even the scaled-back privatisation plan Athens agreed to last year is falling behind schedule. More ON THIS STORY/ Greek coalition in disarray over reforms/ Martin Wolf The toxic legacy of the Greek crisis/ Cyprus leader calls for bailout overhaul/ Fears for Portugal and Ireland bailout exits/ Samaras buckles in wake of ruling over ERT ON THIS TOPIC/ Greece looks for salvation in EM status/ Editorial Athens’ switch-off/ Greeks strike over closure of broadcaster/ The Short View Greece is a submerging market IN EUROPE/ Germany blocks Turkey’s bid to join EU/ Messi summoned over tax allegations/ Erdogan promises Turks more prosperity/ MEPs call for clause to limit US snooping Officials involved in the Greek talks emphasised that, unlike previous slippages in the bailout, the fault did not lie with Athens but rather in other eurozone capitals. They also blamed privatisation delays on “outside pressures”. Under IMF rules, governments must have at least 12 months of financing in place to receive IMF disbursements under any bailout programme. This latest shortfall means Greece’s financing needs are now only covered up to the end of July 2014. Jeroen Dijsselbloem, the Dutch finance minister who chairs the committee of eurozone finance ministers, said at a meeting in Luxembourg on Thursday that the group had implored Yannis Stournaras, their Greek counterpart, to complete talks with the “troika” of international lenders by next month to avoid a crisis. A quick deal with Athens would enable the IMF to distribute its next aid tranche before they are forced to cut Greece off at the end of July. “We need to finish the review at the beginning of July,” said Mr Dijsselbloem, who added that negotiators would return to Athens at the start of next month “at the latest”.

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But finalising the next payment quickly has been thrown into doubt by upheaval in Athens, where the coalition government is at risk of collapse over the decision by Antonis Samaras, prime minister, to shut down the state broadcaster. “I love Greece but I’m very much looking forward to a eurogroup press conference where Greece is not going to be discussed and a summer where we don’t have any Greek crisis,” said Olli Rehn, the EU economic commissioner. Even if the IMF were able to distribute aid in July, it would only delay the day of reckoning until the next disbursement later in the year. However, that ïs likely to fall after Germany’s parliamentary elections on September 22, avoiding a need for the Bundestag to address the issue during the campaign. The shortfall would still force eurozone finance ministers to discuss “alternate sources” of funding, said an official, including the possibility of a fresh bailout programme by the end of the year. An alternative short-term fix would be for Athens to delay repayment of government arrears, but this could hamper economic recovery in a country that has seen five years of deep recession. Greece could also issue more short-term debt, but this is something lenders have sought to curtail. The IMF’s line on Greece has hardened in recent months. It recently admitted to mistakes in Greece’s first bailout while criticising the eurozone for failing to agree sooner to restructuring Greek debt. The latest gap emerged after national central banks, which were urged by eurozone leaders to roll over €3.7bn in Greek bond holdings, refused to do so when the first redemptions came due last month. That forced bailout lenders to speed up aid payments that were originally to go for other purposes later in the programme. According to three senior eurozone officials, the problem was nearly compounded when some central banks balked at passing on the profits they made on their Greek bond holdings back to Athens, which is to contribute €2.1bn to Greece this year. But the holdouts, including France, had backed down in recent days, officials said. Greece this month failed to sell off Depa, the state-owned natural gas company, and other government assets were running into similar challenges, officials said. The troubles in the Greek programme come as eurozone finance ministers on Thursday were forced to debate revising Cyprus’s €10bn bailout following a written request by the island’s president for changes in how the programme restructured the country’s two largest banks. In a letter to the Financial Times, Christos Stylianides, a Cypriot government spokesman, said Nicosia remained committed to meeting the terms of the bailout agreement, but felt the need to raise issues that could prevent targets from being hit. “The objective of the president’s intervention was to bring to the attention of our European partners important issues that are inhibiting the achievement of the objectives of the [bailout agreement],” Mr Stylianides wrote. http://www.ft.com/intl/cms/s/0/4597d074-d9bb-11e2-98fa- 00144feab7de.html#axzz2WZFC5q88

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06/20/2013 04:16 PM Disunited Kingdom Crisis Leaves Britain Deeply Fractured By Christoph Scheuermann The economic crisis has caused the United Kingdom to drift apart, creating ever- widening rifts between rich and poor, native and immigrant, English and Scot. With the anti-Europe UKIP party on the rise, Great Britain stands at a crossroads. From this vantage point, London seems almost innocent. Irvine Sellar, a real estate developer, points to a gray dome down near the Thames River. It is St. Paul's Cathedral, which was the tallest structure in the city for a quarter of a millennium, until other, taller buildings were erected in the late 20th century. First there was Tower 42 (formerly NatWest Tower), straight ahead, and later, off to the right, the skyscrapers of Canary Wharf, London's defiant answer to Wall Street. And now Sellar is gazing at the city from his tower, which looks like the 310-meter (1,017-foot) tip of a cocktail skewer, and which he named "The Shard." From there, St. Paul's is nothing but a gray spot in the midst of a view for which Sellar expects his tenants to pay a lot of money. Sellar didn't want to build an ordinary office tower, he says: "I gave the city a sculpture," the tallest building in Western Europe. The island stretches into the distance below his feet, and above him is nothing but the sky. The view of the rooftops of the British capital shows how quickly and radically the country has changed. London's silhouette is a reflection of two decades of growth, decadence and hubris. The frenzy began in the 1980s, when Great Britain was prosperous and London became a global financial center where brokers, traders and speculators were responsible for billions changing hands every day. Gone were the days of factories and trade, or so it seemed. The act of trading with money was dubbed the financial industry, and together with the real estate sector, it grew to become one of the most important industries in the kingdom, almost a new religion. Then the crisis erupted in 2008, and things have been going downhill ever since. Unemployment is now at almost 8 percent, and 27 percent of children in Britain live in relative poverty. In late March, the University of Bristol published the most comprehensive study to date on the state of British society. It concludes that a third of the population lives in precarious conditions. Millions of Britons don't have enough to eat and are unable to adequately heat their homes in the winter. "And the situation will get even worse," says David Gordon, an expert on poverty at the university, "because social services are shrinking and real wages continue to decline." The country is suffering from the consequences of the crisis. The gap between rich and poor is growing, the conflicts between left and right are becoming more heated, and a new party has taken shape to the right of the Tories, the anti-Europe UK Independence Party (UKIP). Friends and foes of Europe argue heatedly over whether remaining a member of the European Union or withdrawing from it is more likely to help the country emerge from the crisis. And in 2014, the Scots will hold a referendum over

200 whether they want to establish an independent country, one that would no longer have to share profits from the North Sea oil and gas fields with the English. An Era of Virility From the highest point in London, the kingdom seems limp. Many of the construction cranes towering over the city are idle. Waiting at the elevator of his skyscraper is Sellar, a short, restless man with curly hair, who sold gloves in Petticoat Lane in the 1960s and later built a fashion chain. He got into the real estate business in the 1980s. Like many others, he surfed on the avalanche that then-Prime Minister Margaret Thatcher had unleashed: more power for business owners and bankers, less for union officials and politicians -- and real estate for all. If a city's virility is measured by the number of cranes, and of buildings shooting up from the ground, then the 20 years leading up to the collapse of London's financial markets can be seen as a phase driven by testosterone, a time of bulls, when people could make millions without leaving their desks. Sellar hit upon the idea for the tower in the most euphoric phase of Britain's construction frenzy: the late 1990s. He met with Italian architect Renzo Piano and described the project to him. Sellar drew his inspiration from Hong Kong and Shanghai. It was a time when men like him derided the Continent for its sluggishness. Then came the crash, and a consortium from Qatar invested in Sellar's project. The sheikhs who now own the lion's share of his tower are desperately looking for tenants. A hotel and three restaurants have already signed leases, but 60,000 square meters (646,000 square feet) are still empty. The elevator speeds down to ground level at six meters per second. When the doors open, a woman in a light-colored outfit asks Sellar if he would like coffee or tea. He smiles uncomfortably. He is now 74 and a multimillionaire, and he could have retired long ago. But he wanted to build the Continent's tallest building. "You build tall because it makes more money," he says. And now Sellar, the former glove salesman, is stirring his coffee in a tower filled with empty offices. He thought that money would continue to flood into the city. Everyone thought so. London was Europe's alpha male, an urban promise that the old world could constantly reinvent itself and become cool again. It's a three-hour drive northward from London to Stickford, near the east coast. But the real distance is much greater to the village where a woman lives who never believed in the promise of coolness. Guardians of the Drawbridge The road passes through rapeseed and asparagus fields, before reaching the country house of Victoria Ayling, where she lives with her partner Kevin Couling and their three sons. Ayling is a local politician and a member of the United Kingdom Independence Party (UKIP), a party of patriots and opponents of Europe, which has already made considerable progress in its effort to drive Great Britain out of the EU. UKIP captured 23 percent of the vote in local elections in early May. Ayling's fellow party members are nipping at the heels of Prime Minister David Cameron's Tories. About a third of Tory lawmakers now favor withdrawing from the EU, and in 2017 the British people will vote on the issue in a referendum. Many Britons see Europe as the cause of their country's crisis.

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The last few meters to Ayling's house are a trip back in time to the days of the British Empire. The stables are not far from the garage. Ayling is wearing a light summer dress, even though it's just beginning to rain. She joined the Young Conservatives at 14 and later embarked on a career with the Tories. In the 2010 general election, she narrowly lost a bid to enter the House of Commons by 714 votes. Ayling is now a district and county councillor in Lincolnshire. She sees herself as a rebel, and in March she joined the UKIP. "I defected," she says, as if the country were in a civil war. There is a clear political divide in Britain, with a majority of the traditional parties, the Conservatives, Labour and the Liberals, on one side and Ayling and her UKIP friends on the other. They are still a minority, but a vocal one nonetheless. UKIP Chairman Nigel Farage has appeared frequently on television in recent months, berating politicians in Brussels and London as incompetent, cowardly and corrupt. It's a message people like to hear. Ayling says that Farage would be a good prime minister. Bulldog Patriotism In Lincolnshire, it becomes clear how public sentiment in parts of the kingdom is gradually slipping from moderate conservatism to bulldog patriotism. From Ayling's standpoint, UKIP's success is merely a symptom of a much larger upheaval, a cultural change. After coping with the loss of the Empire in the postwar period, Great Britain has been left with something akin to the phantom pain of one who has lost a limb. Ayling's father made his fortune with furniture, and her family had servants. She grew up in a country in which hierarchies that had developed throughout the centuries were still intact, and where life could be very comfortable for those at the top. But eventually the working class began to talk back, becoming rebellious. Ayling believes that this change roughly coincided with Great Britain's accession to the European Community in 1973, and with a tectonic shift in Europe's political landscape. She hopes that UKIP will help the Empire regain its old strength. What this means is a return to the 1950s and '60s. "Nowadays, you almost have to be ashamed to be British," says her partner, Kevin Couling. In school, children learn a great deal about the Holocaust and the women's suffrage movement, he says, but not much about the country's history. "They can't even name the British kings." Besides, says Couling, Polish and Latvian immigrants are taking away jobs in the asparagus fields. Ayling says that the government should crack down on illegal immigrants and criminals, and should "build more prisons." She criticizes Cameron for legalizing same- sex marriage, when in her view it would have been better to block immigration from the new EU countries of Eastern Europe. But how can he do that, given that Great Britain is a member of the EU? "He has to declare a state of emergency and close the borders," she says, although she doesn't believe that Cameron, "that coward," has the guts to do it. Ayling glances at the clock. She has a district council meeting to attend, "but it'll be a short one, because they're usually about potholes." The meeting takes place in a dark building that smells of moist cardboard. Ayling, wearing her summer dress, bursts into a heated debate over gravestones. In the rural east of England, "heated" means that someone stands up, mumbles "sorry" and wraps his

202 critical remarks in polite phrases. After an hour, someone asks if anyone knows where specific graves are located in the local cemetery. The meeting is adjourned. Later, sitting in a pub, Couling groans and says that the entire country is apathetic, that everyone is so politically correct and that no one has the courage to tell the truth anymore. In a country with such high unemployment and trillions of pounds in public debt, and with cemeteries where no one knows who is buried where, he asks, what else has to happen? "England was once a free country," says Ayling, "in the 18th century." She wants to regain that freedom. "We are an island nation," says Couling, "and now we want to withdraw to our island." The problem is that the English aren't the only ones who own that island. There are other patriots -- the Scots, for example, many of whom no longer want to share their wealth. The worse the crisis gets, the clearer do the symptoms of decline in the United Kingdom become. The Battle of Bannockburn If Europe ever becomes a museum, it won't take much to set up a department called "Early Industrial Age" in Birmingham or Newcastle. Great Britain is rusting. It has become a sluggish, despondent and anxious country. An article of clothing currently popular among young Britons is the "onesie," a sort of playsuit for adults who like to spend their days lounging in comfort -- assuming they don't have to go to work. Dennis Canavan, 70, lives in the hills northeast of Glasgow. Canavan is the chairman of the "Yes Scotland" campaign, which is fighting for Scottish independence. Bannockburn, a traumatic place in English history, is merely a stone's throw away. Scottish warriors defeated the army of the English king, Edward II, in a two-day battle at Bannockburn in June 1314. The defeat was so humiliating and devastating for the English that Scotland plans to hold a major festival next year, to celebrate the 700th anniversary of the Battle of Bannockburn. Canavan is excited about the party, to the extent that "excited" and "party" apply in this case. He is wearing baggy corduroy trousers and a fleece sweater, and he smiles precisely two times during the conversation. One of Canavan's hobbies is running marathons. He has always been an extremely persistent man. He was elected to the House of Commons for Labour in 1974. After 33 years in the British and Scottish parliaments, he retired as one of the country's longest-serving members of parliament. He had intended to start hiking again, but then Scottish Prime Minister Alex Salmond asked him if he was interested in a new project. After a bit of grumbling, Canavan agreed. The Scots have never been happy about their union with England, which has existed for 306 years. But the divisions have rarely been as great as they are today. Canavan says that Scotland would be better off without England. It would be a richer country, because it would control its own oil and gas production. It would be a more peaceful country, because it would no longer be forced to tolerate nuclear warheads on its soil or participate in the wars of the English. And it would be a fair and equitable country, because it could reverse the British government's cuts to social benefits. It would be a free country filled with proud people. "The lakes, mountains and rivers are our national heritage," says Canavan. "Scotland is the envy of the world." So why shouldn't the Scots hazard the step to independence?

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'Caught in a Straitjacket' As a Labour MP, Canavan battled with Margaret Thatcher, the daughter of a shopkeeper, who shut down mines. At the time, he was already thinking of ways to counter the power of the British government. In 1997, London incrementally granted the Scots more rights, but it wasn't enough for Canavan. He believes that Scotland is oppressed. "We are caught in a straitjacket," he says. If Canavan had his way, he would introduce the euro in Scotland tomorrow. "We need a new beginning," he says. A Second Bannockburn. There have already been a few skirmishes. Recently Nigel Farage, the English head of UKIP, had to hide in a pub in Edinburgh because an angry mob had gathered outside. Most Scots are disgusted by Farage's crude England patriotism. He eventually left the pub with a police escort. In the late summer of 2014, the Scots will vote in a referendum over whether they still want to be part of Great Britain. Anyone who believes that the proximity of the 700- year celebration is coincidental isn't familiar with the Scottish penchant for perfidious tactics. The English are opposed to Scottish independence. For months, the government in London has fired off study after study on the risks of independence. Polls show that a third of Scots support independence. "We have a mountain to climb," says Canavan. But things didn't look good for the Scots 700 years ago, either -- and in the end, they defeated the enemies from the south. Canavan smiles for the third time. In a Different Country Great Britain is currently undergoing a shift. There is a growing distance between the periphery and the center, among the individual parts of the kingdom and between the top and the bottom of society. It has never taken as much money as it does today to make it onto the Times list of the 100 wealthiest Britons. Irvine Sellar's cocktail skewer and all the other towers in London seem even taller and more imposing in the eyes of those who stand at the bottom, those who lost a great deal when England was betting on the financial industry and neglecting everything else. Society is becoming unravelled at its fringes. The information age has been slow to arrive in Bangor, in northern Wales. "They say we'll be getting faster Internet soon," says Bryn Lewis. "But they've been promising us that for a long time." Lewis is 23 and unemployed, one of about a million Britons between 16 and 24 who are out of work. He writes about his life in North Wales, a remote corner of the country, on blogs and in Internet forums. Like many of his generation, he would rather do without running water than the Internet. Nevertheless, the Internet is sometimes down for days, he says while sitting in a café in Bangor. Local public transport isn't in much better shape. Lewis doesn't have a driver's license, and there is only limited bus service into the city after 6 p.m. Wasted Youth Lewis is one of many who are too clever for the provinces and too lazy for London. His native Wales has seen better days. Its mines stopped supplying fuel for England's industrial revolution long ago. Nowadays, a young person in Wales has two choices: to be unemployed or to move away. Two businesses that still work are health clubs and the illegal amphetamine and steroid trade.

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For years, Lewis has been stumbling between a mentoring program and courses for young entrepreneurs. He was studying chemistry until a year ago, when he dropped out because he could no longer afford the tuition. He is paid a small fee for his blog posts, and he occasionally writes articles for the local newspaper. He earns the equivalent of €230 ($310) a month. He saves rent by living alternately with his father and his girlfriend. People who grow up in Bangor waste their youth on the steps of the Costa Coffee Shop or on a bench at the beach. The theater was torn down years ago, and the movie theaters have been closed for a long time. You figure out how to get booze without an ID card at an early age, says Lewis. He and a teacher recently founded the Bangor Youth Group, which hosts movie nights and lectures. But the group lacks money and a space of its own. They are now hoping to receive funding from Prince Charles' foundation. In the meantime, Lewis and his friends get together at Skerries, where a pint of beer costs 1.80. Like in every pub on the entire island, the air smells like urinal cake. Johnny and Gaz, who are playing a round of billiards, cook burgers in a fast-food restaurant during the day. Huw is studying creative writing. Arwel is 21 and stocks supermarket shelves. He has had the words "born free" tattooed onto his knuckles. His daughter Summer has just turned three, but he is no longer with her mother. She is now Lewis's girlfriend. "It's all pretty complicated here," says Lewis. He has just started writing his first novel, which takes place in a desert. Lewis doesn't want to move to a big city, London included. It's much too far away, he says. Sometimes it seems to him that London is the capital of a different country. Translated from the German by Christopher Sultan. URL: • http://www.spiegel.de/international/europe/economic-crisis-and-ukip-leave-britain- deeply-divided-a-906600.html Related SPIEGEL ONLINE links: • Photo Gallery England after the Crash http://www.spiegel.de/fotostrecke/fotostrecke-98165.html • British Girls in the Third Reich 'We Had the Time of Our Lives' (06/13/2013) http://www.spiegel.de/international/europe/0,1518,905617,00.html • Subject of Envy Britain Discovers Germany as a Model (05/06/2013) http://www.spiegel.de/international/europe/0,1518,898399,00.html • The People's Prince Ordinary Harry Keeps Royals Relevant (04/24/2013) http://www.spiegel.de/international/europe/0,1518,896111,00.html • The Flood? Western Europe Fearful of Eastern Immigration (02/21/2013) http://www.spiegel.de/international/europe/0,1518,884760,00.html • Britain's Political Poltergeist Cameron Succumbs to Growing Europhobia (01/07/2013) http://www.spiegel.de/international/europe/0,1518,876104,00.html

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Opinión TRIBUNA El cómo y cuándo de la reforma de las pensiones No es buena idea afrontar cambios profundos en medio de una dura crisis José Luis Tortuero Plaza 20 JUN 2013 - 00:01 CET En el Comité de Expertos he actuado por mí mismo, sin representar a nadie, aunque fui propuesto a iniciativa del PSOE. También es bueno que los ciudadanos sepan que nuestro trabajo en la Comisión ha sido totalmente altruista. El mandato legal al Comité se circunscribió a la elaboración de un “informe” sobre el factor de sostenibilidad. Hubiera sido deseable efectuar un análisis de la situación del Sistema de Seguridad Social donde se integrasen las posibles alternativas que determinen el equilibrio presupuestario. Este planteamiento tiene como dificultad insalvable el escaso tiempo concedido. El inconveniente de acometer solo la fijación de los factores de sostenibilidad es que actuarán, si se me permite el símil, como las guindas del pastel. El problema es que el pastel (el sistema) no ha sido perfeccionado previamente, está deformado, es incompleto y tiene una ordenación jurídica arcaica y caótica. Afirmar que el sistema de pensiones tiene problemas no es nuevo. Los ha tenido y los tendrá. Las crisis económicas y sus efectos han sido un permanente “compañero de viaje”. Ahora damos especial relevancia a otros factores. El envejecimiento de la población española que se incrementará con la llegada a la edad de jubilación del baby boom. Igualmente, el incremento constante de la esperanza de vida supondrá una extensión del tiempo cobrando la pensión. Es necesario actuar. El interrogante es cuándo y cómo. Los tiempos más duros de la crisis, con destrucción de tejido productivo y de empleo sin precedentes, reducciones salariales, congelación de las pensiones, etcétera, no son los más adecuados para afrontar reformas superpuestas, o reducciones de las pensiones sobre pensiones ya reducidas.

Seguramente es necesario un gran acuerdo político-social que comprometa el porcentaje de la riqueza nacional que estamos dispuestos a dedicar a la protección social

El sistema de protección social está demostrando que constituye un factor social de primer orden para atemperar los gravísimos efectos de la crisis, donde cada parcela de protección está cumpliendo su función social. En tiempos de crisis nuestro sistema demuestra una capacidad de adaptación que no tiene parangón respecto a otros sistemas. Además de la crisis, el actual no es momento de reforma, estamos inmersos en la aplicación de la Ley 27/2011 que provocará una disminución de las pensiones futuras. El núcleo duro de esta reforma está en la elevación de la edad de jubilación. En este orden, ¿es realista afirmar que nos jubilaremos a los 67 años? La respuesta es negativa. Es sobradamente conocido que la inmensa mayoría de los trabajadores son expulsados del mercado laboral a edades tempranas. El resultado es que el conjunto de trabajadores

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(salvo colectivos privilegiados) expulsados del mercado laboral a una edad temprana tendrán que acudir a fórmulas de jubilación anticipada, de lo que deriva una importante reducción de las pensiones, que se podrá acumular a la ya reducida por el impacto de los nuevos términos de cálculo. El gasto social en relación con el PIB en España, a la cola de los países de la UE, pone de manifiesto que nos queda un recorrido razonable para situarnos en la media de la UE. Gasto que se acelerará sustancialmente en 2050- 2060. No obstante, no parece razonable que hoy, en el peor escenario de la crisis económica, hagamos dogma de fe de las previsiones de 2060 para afrontar reformas que contribuirán a dificultar sustancialmente el crecimiento, la creación de empleo y la salida de la crisis. No hay que olvidar que contamos con un Fondo de Reserva para equilibrar en el corto plazo los efectos negativos del ciclo y que las cohortes del baby boom anuncian su llegada en un plazo (2022-2042) que nos permite actuar alejados de la urgencia. Seguramente es necesario un gran acuerdo político-social que comprometa el porcentaje de la riqueza nacional que estamos dispuestos a dedicar a la protección social, así como la procedencia de los ingresos que tendrán que ser compartidos, entre las cotizaciones sociales y las transferencias de Estado, procedentes del sistema fiscal. El sistema democrático —los ciudadanos— será el que avale las distintas alternativas. Con el mandato al Comité, hemos empezado la casa por el tejado. La actuación más razonable, prudente y acorde con el marco legal, consistiría en una reducción de los plazos previstos en la ley, y de esta forma adelantar la revisión de los parámetros vinculados a la esperanza de vida. El resultado precipitaría el ahorro del 3% del PIB asociado a la Ley 27/2011, utilizando complementariamente el Fondo de Reserva. De igual forma, debemos ser prudentes para evitar que una generación tenga que soportar “todos los impactos”. Finalmente, el factor intergeneracional debería ser aplicado a todo el sistema de pensiones. El modus operandi planteado nos proporcionaría el tiempo necesario para reordenar y modernizar el sistema, construyendo el marco adecuado sobre el que aplicar el factor de sostenibilidad. Igualmente nos permitiría actuar sobre el mercado laboral. Espacio este de vital importancia, ya que la población activa constituye el elemento de garantía del sistema de reparto. Como puede apreciarse las asignaturas pendientes son muchas y de gran envergadura. Acometerlas es cuestión de voluntad y compromiso político. José Luis Tortuero Plaza es catedrático de Derecho del Trabajo y de la Seguridad Social de la UCM y miembro del Comité de Expertos. http://elpais.com/elpais/2013/06/19/opinion/1371658768_630985.html

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Daily Morning Newsbriefing June 20, 2013 Germany rejects change in Cyprus bailout programme Germany rejected any change of the Cypriot bailout programme, as requested by Cyrpus president Nikos Anastasiades. Cyprus should implement its aid programme agreed with international lenders without further delay and there is no reason "at first sight" to change the deal, a spokesman for the German finance ministry told Reuters on Wednesday. "Rather it must be about implementing the programme consistently and without further delay. That is mostly down to Cyprus." Anastasiades letter will be discussed in the eurogroup meeting on Thursday. According to Spiegel Online there will be no change in the programme, the discussion will be more about how to reply to the letter. Cyprus government, meanwhile, denied that it is trying to wriggle out of bailout commitments, according to AFP. "For the government, there is no issue or question of renegotiating the memorandum. To the contrary," government spokesman Christos Stylianides told reporters. The European Commission set up a support group for Cyprus yesterday, to "provide technical expertise” for the implementation of the programme, and help mobilising EU funds. Rising yields cause concern for Portugal and Ireland Rising bond yields and long-term interest rates are causing concern over how Portugal and Ireland will exit their bailout programmes, the FT reports. Amid expectations that central banks in the US, Japan and elsewhere will tighten monetary policy, yields on Portugal’s benchmark 10-year bonds surged to 6.6% last week from a low of 5.2% in late May. Ireland’s 10-year yields also moved higher, rising to more than 4% from a low of 3.5% last month. Ireland, is scheduled to exit its €67.5bn bailout programme in December. Portugal, still mired in a deep recession, is due to wind up its €78bn programme six months later. Although both countries have made successful 10-year bond issues this year, concerns remain that further yield increases could delay economic recovery. Olli Rehn said this week that Brussels would look at possible “precautionary arrangements. The EU is expected to offer “precautionary” lines of credit to help the exit of the programmes. This would help the two countries to qualify for OMT and hold down bond yields on the secondary market. EU finance ministers are expected to give final approval to loan maturity extensions for both countries on Friday, although some Portuguese media reports have raised the possibility of a further delay.

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Another Spanish scandal This is an absolutely bizarre story which we had refrained from reporting because it was not clear what the facts were. However, since Spain's Finance minister had to answer questions about it in Wednesday's government control session in the Spanish Parliament, this seems as good a moment as any other to take stock. El País has a useful timeline. In the "Nóos case", involving the King's son-in-law in alleged embezzlement of public funds, the investigating judge had asked Spain's tax authorities to report on Princess Cristina's economic activities in the 10 years to 2012. Just last Saturday it became known that the report attributed to the Princess 13 real- estate sales from 2005-6, of urban and rural properties in 4 different provinces, worth €1.4m altogether. The Princess immediately denied the veracity of the information. On Sunday, some of the people who supposedly bought the properties from the Princess denied that the properties had been bought recently or from the Princess, backing their denials with property titles. On Monday, the Tax Agency refuses to make an official statement, but some tax inspectors "informally" communicate to the judge that an error might have been made in the document. The judge reacts by instructing the property registries of the 4 provinces involved to investigate. The Anti-Corruption Prosecutor's office also opens an investigation into the Tax Agency report. On Tuesday, the Tax Agency issued a self-exculpatory statement [PDF], alleging that the Agency processes "more than a billion data items", that the data received by the Agency (from notaries and property registrars) had the wrong ID number, and that the Agency was not supposed to double-check the information in its files before sending it to the judge, and reassuring taxpayers that the data the Agency uses to compile their automatically generated draft tax returns is correct. Also on Tuesday, the Princess' legal counsel said they would not file a lawsuit against the Tax Agency. Finally, on Wednesday the Finance Minister Cristóbal Montoro appeared in Parliament during the weekly government control session and answered questions from opposition MPs by, first, apologizing to the Royal Family, saying that the "clerical error" does not have a negative impact on the court proceedings, and finally that he was "not in a position to given an explanation" and asked MPs to "wait for the results" of an investigation into "the origin of the error". It is hard to imagine that at least one of the Finance Minister, the Tax Agency, the Notaries and Property Registrars, the Princess, or her husband, won't emerge from this mess with egg on their faces in the best of cases or, worse, with an indictment for "falsehood on public documents". At the moment, it is the credibility of the Tax Agency that appears most damaged, just in the final weeks of the year's income tax filing period. Berlusconi's conviction upheld Corriere della Sera reports that Italy's Constitutional Court has upheld, against Berlusconi's appeal, a procedural decision on "legitimate impediment" taken in early 2010 by the Milan courts. The case, in which Berlusconi had been found guilty in the lower court and on appeal, will now proceed to the Court of Cassation for final sentencing. The sentence currently under stay includes a 5-year inhabilitation for public office, which given Berlusconi's age would end his political career if it came into effect. This could have political implications as it has been suggested that Berlusconi might attempt to bargain for an indult in exchange for continued support for Letta's

209 government. However, amid wailing and gnashing of teeth from his followers, and the usual protestations of judicial persecution, Berlusconi was quick to reassure that the Popolo della Libertà's support for Letta's government would continue. The 2010 decision challenged before the Constitutional Court and now upheld was to reject Berlusconi's allegation of "legitimate impediment" to appear in court. The court thus allowed itself to proceed in absentia rather than postpone the proceedings to a later date. After Berlusconi had repeatedly used his PM's agenda to allege "legitimate impediment", the Milan judge had scheduled court sessions in advance, so that Berlusconi could not deliberately schedule events clashing with his court appearances. In the course of that trial, which took place while he was PM, Berlusconi legislated immunity from prosecution for members of the cabinet, and then a special interpretation of "legitimate impediment" applicable only to cabinet members; both special laws were struck down by the Constitutional Court as unconstitutional which then led to the showdown on legitimate impediment that was now under appeal. Italian government considers postponement of VAT increase There is a sense of despair in the Italian government about the economic consequences of an increase in VAT, and the attempts to find some alternatives are becoming desperate. Corriere della Sera quotes economic development minister Flavio Zanonato as saying that the government was trying everything in its power to find an alternative, but time is running out as this tax is due to be levied in ten days. The article says the most likely alternative would consist of a simple postponement of the VAT increase by three months – which would cost about €1bn. This would at least spare the summer tourist season. IMF review: Ireland on track to exit bailout programme this year Ireland has a good chance of exiting its bailout this year but would benefit from more European support in cleaning up its indebted banks and the safety net of precautionary funding, the IMF said on Wednesday according to Reuters. The IMF also said it would not support calls by some politicians in Ireland to scale back targets for budget cuts and tax increases in 2014 and 2015 on the basis of savings from a bank debt deal struck with the ECB earlier this year. Even though taking a precautionary credit line brings its own political difficulties, it would give Ireland an “extra layer of confidence.” The Fund kept its growth forecasts for 2013 and 2014 unchanged, at 1.1% and 2.2% respectively. The Irish Times reports that a definitive decision on ESM funds for AIB and Bank of Ireland could be delayed until the autumn of next year. Greek coalition partners struggle to find compromise over ERT The leaders of the Greek coalition partners are to meet again today at 8.30pm for the third attempt in less than a week to resolve a dispute over state broadcaster ERT after a three-and-a-half-hour meeting Wednesday failed to yield a compromise, Kathimerini reports. Both junior partners repeated their demands for ERT to reopen immediately and for its signal to be restored so that broadcasting can resume. They also called for a reassessment of the basis of the tripartite administration’s policy programme agreement. There was little comment from ND’s camp after the talks Wednesday. On Thursday the Supreme Administrative Court which ruled on Monday that the government had the right to shut down ERT but not to cut the broadcaster’s signal, is to convene in the wake of varying interpretations of its decision by politicians as well as legal experts. A court decision is not expected before Friday.

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As Greece’s coalition leaders struggled to solve a dispute over the closure of state broadcaster ERT on Wednesday, troika envoys said they were leaving Athens for a “pause” but are expected to resume by the end of the month, according to their statements (IMF, European Commission) Finland's economy set to shrink this year The Finnish finance ministry revised downwards their growth forecast, expecting Finland's GDP to shrink 0.4% this year rather than growing 0.4% as it forecast in March, Reuters reports. It also cut its 2014 growth forecast to 1.2% from a previous 1.6%. The government acknowledged the slowdown wasn't caused by the euro zone's long-running debt crisis alone, but also by a struggle among traditional industries to respond to globalisation and technological change. The finance ministry also said the weaker outlook meant the government needs to take a closer look at its fiscal plans. Portugal’s president signed off bill over holiday payments There had been much fuss about a bill regulating the payment of holiday allowances to civil servants and pensioners in Portugal over the last few weeks. But now, after just one day of consideration, the Portuguese President signed off the law. The bill allows the Executive to pay holiday allowances in June to only one part of civil servants, postponing payments to the others to November. The leader of the opposition António José Seguro said the president will need to explain how he could sign off such a controversial decision in just one day. Bundestag will debate OMT purchases in advance This is a slightly puzzling story by DPA-AFX, which quotes Wolfgang Schäuble as saying during a banking conference that each ECB purchase of sovereign bonds would become subject to a public debate in the Bundestag, which would potentially limit the ECB’s independence. That process of democratic accountability would make ECB decisions calculable. Is he saying that the Bundestag gets the right of an ex-ante debate before the decision is carried out? That would surprise us, and would render the whole programme ineffective. It is not clear to us what the legal basis would be, as the ECB does not answer to the German parliament, and certainly does not have to provide it with market-sensitive information. German commercial banks favour Euro FDIC The German banking association BDB – the one that represents the private banks – became the first organisation in the wider banking lobby to come out in the support of a European-wide deposit insurance scheme, as Reuters reports. We suspect that one reason for this change is that large commercial banks will fall under the ECB as a supervisory agency, and have now accepted this regime change. But the BDB cautioned that this was not for now. The association of the savings banks DSGV said it vehemently rejected the idea of deposit insurance. It said if such a scheme had been in place this year, the German savers would have had to fund the collapse of the Cypriot banking system. Manasse on a decade of reform inertia Paolo Manasse said the severity of the Italian downturn is without a doubt a cyclical phenomenon, but the persistance of economic weakness – essentially no growth since entry into the eurozone – was the “legacy of more than a decade of a lack of reforms in

211 credit, product and labour markets, which suffocated innovation and productivity growth, and resulted in wage dynamics that were completely decoupled from labour productivity and demand conditions. Italy’s reform inertia contrasts with the situation elsewhere and opened up a competitive gap this crisis brought to the fore, with dramatic and long-lasting consequences. Has Bernanke just announced a rise in European interest rates? Mark Schieritz takes a look at Ben Bernanke’s latest press conference when he said that the market had overreacted to his statement that the bond purchases would be scaled down at some point. But the markets react to that statement again by pushing yields higher, for which there are two explantions. Either the Fed has given out a signal of a rate rise, which the markets are correctly interpreting, or the Fed has lost the control over the financial markets. No matter which interpretation is correct, the interest rates are rising, and this is not good for Europe. A rise in US interest rates that is not followed by the ECB could have potentially positive implications for Europe, as it would affect the US/Euro exchange rate. In reality however, the opposite happened, as much dollar-based emerging market investment is now flowing back to the eurozone, which is pushing up the eurozone. And most, once the rate cycle turns up in the US, a trigger-happy ECB might use the first excuse to do the same. And that, indeed, would be bad news for the eurozone economy. James Kwak on the gullibility of journalists This is a very interesting post by James Kwak in the Baseline Scenario blog, in which he makes a strong case in favour of Anat Admati’s and Martin Hellwig’s call for much increased capital ratios, and he credits the authors of having brought much clarity into the public debate on this important issue. But even after all this work, the gullible media continues to believe the lie that higher capital ratios would be bad for growth. He points to the latest paper by Admati and Hellwig, which catalogs and addresses these claims. Among the simple false categories of error is the statement that capital is “set aside”. In the highly misleading category is the claim that higher capital requirements would force banks to reduce their lending. “If increased equity requirements cause banks to reduce their lending, the reason is that they do not want to increase their equity,” as Kwak quotes from the paper. If they cannot raise equity, then they should not be in business in the first place. SPD tumbles to 22% Here is the latest Forza poll for Stern-RTL Wahltrend. The SPD is imploding: CDU/CSU 40% FDP 6% SPD 22% Greens 15% The Left 8% Frankfurter Allgemeine celebrates 65th birthday of the D-Mark This is not an obituary – but an actual birthday celebration. Frankfurter Allgemeine celebrates the 65th birthday of the D-Mark, born in 1948, and still going strong in active semi-retirement. The article presents a short history of the D-Mark in the form of a personal biography. Quem deus vult perdere, dementat prius

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Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.606 0.555 0.585 Italy 2.770 2.883 2.774 Spain 3.032 2.977 3.022 Portugal 4.609 4.528 4.605 Greece 8.564 8.656 8.63 Ireland 2.385 2.337 2.277 Belgium 0.838 0.801 0.831 Bund Yield 1.527 1.56 1.669

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.339 1.3251

Yen 127.190 128.87

Pound 0.858 0.858

Swiss Franc 1.232 1.2319

ZC Inflation Swaps

previous last close

1 yr 1.1 1.1

2 yr 1.16 1.16

5 yr 1.42 1.42

10 yr 1.8 1.8

Euribor-OIS Spread

previous last close

1 Week -5.529 -8.029

1 Month -4.814 -2.914

3 Months 1.086 1.486

1 Year 29.157 26.257

Source: Reuters

http://www.eurointelligence.com/professional/briefings/2013-06- 20.html?cHash=c45a4e67f603c33a27c9d6ffc5537ee6

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Opinión TRIBUNA La resistencia a la privatización de la sanidad La sociedad española no acepta las revoluciones al estilo de Margaret Thatcher Enrique Gil Calvo 19 JUN 2013 - 00:00 CET Desde hace algún tiempo, una parte del partido en el poder está tratando de privatizar la sanidad, como ya ocurre con la enseñanza concertada. El intento se inició en la Comunidad Valenciana donde ya ha avanzado bastante, y después se trasladó a territorios vecinos como Castilla-La Mancha, aunque también a Cataluña. Pero donde la privatización ha cobrado mayor impulso ha sido en Madrid, dado el interés de Esperanza Aguirre en trasplantar la revolución neoliberal de Margaret Thatcher, cuando privatizó el National Health Service con resultados nefastos. Y tras retirarse del poder, ha sido su sucesor quien se ha propuesto culminar la obra de su mentora, privatizando de una tacada parte de la sanidad madrileña. Para ello se cuenta con una coyuntura muy favorable, dada la exigencia europea de recortar el gasto público para atajar el déficit fiscal. Pero ¿logrará el PP sacar adelante su revolución privatizadora, dada la mayoría absoluta de la que goza? Cabe dudarlo, aunque nada más sea por dos razones (aunque podrían alegarse otras, derivadas de sus efectos perversos y demás disfunciones técnicas). La primera y políticamente más significativa es la firme resistencia profesional y ciudadana que se están encontrando, mucho más intensa de cuanto cabía esperar. Las encuestas ya advertían de que la opinión pública española se opone frontalmente a la privatización del Estado de bienestar. Pero los estrategas del partido en el poder contaban con que esa oposición ideológica no se tradujese en resistencia activa. Y no ha sido así. Por el contrario, las movilizaciones contra los recortes y privatizaciones de la sanidad están siendo constantes y cada vez más frecuentes e intensas. Es la ya famosa marea blanca, surgida en Madrid el año pasado, que vino a sumarse a la marea verde contra los recortes en la enseñanza que ya recorría nuestras calles desde que Zapatero se vio conminado a cercenar nuestro Estado de bienestar. Como se sabe, 2012 fue el año de más elevada conflictividad en España, en protesta contra el gran ajuste que nos impuso el Eurogrupo como condición al rescate de nuestra banca. De ahí que a partir de septiembre ardiesen las calles de indignación, con miles de manifas en protesta contra los despidos y recortes. Y las dos grandes estrellas nacientes de la movilización ciudadana fueron el Stop Desahucios de la PAH y sobre todo la marea blanca, precisamente. Pues en efecto, todos los estamentos y colegios profesionales de la sanidad pública, con los sindicatos médicos a la cabeza, han organizado la más activa resistencia contra la privatización sanitaria que ya está en marcha, pero que quizá tenga que replantearse a la vista de la persistente oposición popular. Pero existe otra razón más de fondo que técnicamente se conoce como path dependence, expresión que se traduce como dependencia de la senda o trayectoria institucional recorrida. La idea fue propuesta por el historiador económico Paul David en 1985 para referirse a la imposibilidad de cambiar en los teclados de ordenador el sistema Qwerty que se adoptó por primera vez en las máquinas decimonónicas de escribir. Pero después fue consagrada como concepto en su libro Instituciones por Douglass North, el fundador del neoinstitucionalismo, que obtuvo el Premio Nobel de Economía en 1993. A partir de él se entiende como dependencia de la senda la predisposición institucional a continuar la misma trayectoria recorrida desde el origen, lo que puede resumirse en la fórmula: “El pasado importa porque

214 tiene poder de veto”. El politólogo Paul Pierson trasladó el concepto desde la historia económica a las instituciones políticas, y el sociólogo Esping-Andersen lo aplicó a las políticas públicas en su libro Los tres mundos del Estado de bienestar, que identificó tres modelos institucionales de protección social: el liberal o anglosajón, el nórdico o socialdemócrata y el continental o cristianodemócrata, con otra variante mediterránea o posautoritaria. La reforma de los servicios públicos está constreñida por sus orígenes La idea fuerza es la siguiente: las posibilidades de reforma de los servicios públicos están limitadas y constreñidas por sus orígenes fundacionales, de modo que una vez emprendido un sendero de desarrollo ya no se lo puede abandonar, debiendo continuarse con meras reformas a lo largo de la misma trayectoria. Y es que las decisiones adoptadas en el pasado crean precedentes, condicionando por tanto las que puedan adoptarse después. Dos ejemplos recientes lo ilustran bastante bien. El Gobierno de Zapatero intentó crear con su Ley de Dependencia una red de servicios sociales inspirada en el modelo nórdico. Pero al desarrollarla, lo que se estableció no fue nada parecido a ese modelo, sino un mero refuerzo del viejo familismo mediterráneo, que pone a los mayores discapacitados bajo la dependencia doméstica de sus cuidadoras familiares. Y el otro ejemplo es el intento del presidente Obama, que se propuso crear en EE UU un sistema público de salud parecido al modelo continental europeo, de tipo universalista. Pero también fracasó en su intento, pues lo que al final terminó por establecerse fue otra versión del sempiterno asistencialismo liberal anglosajón. Y con el actual intento del PP de trasplantar a España el modelo anglosajón de privatización de la salud quizá suceda otro tanto. Thatcher pudo privatizar el National Health Service en perfecta coherencia con el modelo liberal anglosajón que tuvo su origen histórico en Reino Unido, pues la nacionalización británica de la sanidad solo fue una secuela de la II Guerra Mundial. Mientras que la sanidad española nació como pública desde su origen en la revolución desde arriba de Maura, y sobre todo tras su desarrollo por el franquismo a imitación del modelo fascista italiano, para luego completar su universalización con los Gobiernos socialistas de González. De ahí que la cultura política de los españoles haya heredado una preferencia congénita por la sanidad pública, igual que heredó su preferencia por la vivienda social de propiedad privada (un modo de domesticar a la clase obrera que el franquismo también importó del fascismo). Y si esto no sucede con la educación privada, que goza de la preferencia de los españoles, es porque nuestro sistema de enseñanza nació históricamente con una doble red: pública y estatal para las clases populares, privada y religiosa para las clases medias. Pero lo que cuenta con tanta aceptación para el sistema educativo no parece que pueda alcanzarla para el sanitario. Así que se equivocan los conservadores que pretenden importar la revolución privatizadora de la señora Thatcher, pues la dependencia de la senda histórica recorrida probablemente lo impedirá. Aquí lo más que se puede trasplantar es el ordoliberalismo germánico de austeridad burocrática, pero no el neoliberalismo anglosajón del capitalismo de casino. Por eso es de temer que si lo intentan les salga un artefacto contra natura. Aunque será el tiempo quien ponga finalmente a cada cual en su lugar. Enrique Gil Calvo es catedrático de Sociología de la Universidad Complutense de Madrid. http://elpais.com/elpais/2013/06/04/opinion/1370349404_493779.html

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The Baseline Scenario What happened to the global economy and what we can do about it The Politics of Intellectual Fashion Posted on June 17, 2013 by James Kwak | 10 Comments By James Kwak Update: See bottom of post. For years now, Anat Admati has been leading the charge for higher capital requirements for banks, especially large banks that benefit from government subsidies, first in a widely cited paper and more recently in her book with Martin Hellwig, The Banker’s New Clothes.1 Admati’s great service has been clearing the underbrush of misunderstandings and half-truths so that it is possible to have a debate about the benefits of higher capital requirements. Yet even after all this work, the media (and, of course, the banking lobby) continue to repeat claims that are simply false or highly misleading. In another effort to beat back the tides of ignorance, Admati and Hellwig have put out a new document, “The Parade of the Bankers’ New Clothes Continues,”2 which catalogs and addresses these claims. In the simply false category, the most common is probably that capital is “set aside”; in fact, banking capital is assets minus liabilities, and the capital requirement places no restrictions on what a bank can do with those assets. In the highly misleading category is the claim that higher capital requirements would force banks to reduce their lending. Banks can respond to higher capital requirements by raising more equity capital or by reducing their balance sheets. As Admati and Hellwig write, “If increased equity requirements cause banks to reduce their lending, the reason is that they do not want to increase their equity.” (If they can’t sell new shares, then they have more fundamental problems and probably shouldn’t be in business.) And why don’t they want to increase their equity? Because executives have one-way compensation packages based on return on equity, which is not adjusted for risk, so they don’t want to increase the denominator. As Admati and Hellwig no doubt realize, this is not a battle that is going to be won solely with truth, light, and logic. The banking lobby has a vested interest in sowing confusion, with masterpieces like the IIF’s “report” claiming that higher capital requirements would shrink the global economy by 3.2 percent. And as long as bankers say that such-and-such a regulation will hurt growth and kill jobs, they will get a hearing. Ultimately, it’s all about politics, which was roughly the message of 13 Bankers. (Which is another reason why, in the long run, the only things that matter are campaign finance reform and early childhood education.) Update: Banks’ unwillingness to increase equity by selling shares (or by not doing buybacks and dividends) is not simply due to one-sided bonus packages tied to ROE. A perhaps more serious problem is that of debt overhang. In short, if a company already has a lot of debt and its solvency is in question, shareholders will be reluctant to put

1 http://bankersnewclothes.com/ 2 http://bankersnewclothes.com/wp-content/uploads/2013/06/parade-continues-June-3.pdf 216 more equity into the firm. That new money would mainly provide greater security to creditors, increasing the value of the firm’s debt, without providing much benefit to equity holders. So in this case, it’s not just the bank’s managers who resist selling new shares; they are actually doing so in the interests of shareholders (but not society). (For much more, see this paper by Admati et al.). There are two solutions to this problem. First, if the bank really is insolvent, it should be shut down. Second, if it isn’t, regulators could force the bank to retain its earnings rather than paying them out in dividends and buybacks; over time, that would increase the amount of equity in the firm. Creditors could also refuse to lend to a bank that is too highly leveraged—but in the case of systemically important banks, creditors don’t really care, because they know they will be bailed out in a crisis. (That is undeniable, even for people who think that managers and shareholders might not be bailed out.) http://baselinescenario.com/2013/06/17/the-politics-of-intellectual-fashion/

ft.com World Europe Brussels EU struggles to unlink banks from states

Peter Stiegel Posted on 19 June 2013 by admin Last month, in a little-noticed speech urging national leaders to move quickly to create a European “banking union”, Olli Rehn, the EU’s economic chief, said giving such powers to Brussels would help by “diluting” the link between collapsing banks and national governments forced to bail them out. That “vicious circle”, as EU summiteers termed it a year ago, lay at the heart of the eurozone crisis, with Ireland, Spain, Cyprus and potentially Slovenia forced to seek EU rescue aid when they could not afford on their own to bail out banks that went wild in the cheap credit years before the crisis hit. People who have spoken to Mr Rehn said his use of the word “diluting” was intentional, and it was telling: for months, EU leaders had promised they would be “breaking” that link entirely, not diluting it. But as banking union has moved from a concept a year ago to the nitty-gritty of political negotiation, completely severing that link – making bank oversight and rescues the responsibility of the EU rather than its member states – has proven harder than many anticipated. At the heart of the disagreement is one vision, shared by EU institutions and a France- led group of member states, of a quick, clean break with strong, sweeping authorities given to Brussels and Frankfurt, versus a German-led group that is insisting that liability for cleaning up banks must sit with those responsible for creating the mess in the first place.

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EU finance ministers will try to resolve at least part of that debate on Thursday and Friday ahead of a major EU summit next week. But ambitions to get most if not all of the major banking union issues on the table for debate at the summit have fallen by the wayside. Publicly, officials insist the delays are due to the logistical difficulties of turning the European Central Bank into the single supervisor of all eurozone financial institutions and the technical complexities of giving the eurozone’s €500bn bailout fund, the European Stability Mechanism, the power to bail out banks directly. But privately, other officials acknowledge much of the delay can be laid at the feet of complacency that has settled in as financial markets have cooled, as well as the gradual move into the season of the German election campaign, which could prevent any major decisions until after September’s vote. – Mujtaba Rahman, Eurasia Group risk consultancy “Talking about technical delays to ECB supervision or ESM direct bank recapitalisations does not do the debate justice,” said Mujtaba Rahman, head of European analysis at Eurasia Group risk consultancy. “Is northern Europe willing to get behind institutions that will allow the euro to perform better as a currency? If not, there is always going to be a viability question hanging over the eurozone.” The debate over ESM direct recaps, on the agenda for Thursday’s meeting of eurozone finance ministers, is perhaps the most telling. When it was announced at last June’s summit, advocates saw it as an artful way of pulling Spain off the cliff: if the ESM, rather than Madrid, could foot the bill to rescue teetering Bankia, there was no reason to worry about Spanish sovereign debt levels. But the proposal, which was supposed to be debated last December, was delayed until this month. And now, according to a four-page proposal prepared for finance ministers obtained by the Financial Times, it has been put at the back of the queue, awaiting decisions on other elements of banking union to be decided first. An EU official said the first ESM recaps are unlikely until the autumn of 2014. And even then, the link it was supposed to break may not be broken at all. The proposal says the national government would have to put in its own money alongside the ESM in any bank rescue, except in exceptional cases. As Mr Rehn might say, that would dilute the link, but not break it. http://offshorecorporatesource.com/eu-struggles-to-unlink-banks-from-states/

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06/19/2013 08:45 AM Letter from Nicosia Cyprus Says It Needs More Help from EU In a letter to euro-zone leaders, Cypriot President Nicos Anastasiades has asked that the bailout package for his country be revisited. The effects on the island nation's economy have been much greater than expected, he writes. EU leaders are "puzzled." Less than three months have passed since the European Union, together with the International Monetary Fund (IMF), assembled a €10 billion ($13.4 billion) bailout package for Cyprus to prevent the country's banking system from collapsing. But Nicosia, according to reports in the Financial Times and the Wall Street Journal, already finds itself in need of additional help. In a letter sent to euro-zone leaders last week, and obtained by both business dailies on Tuesday, Cypriot President Nicos Anastasiades says that the bailout package, which included the restructuring of the country's two largest banks, was "implemented without careful preparation" and that it has damaged the island nation's economy to a greater degree than expected. "The economy is driven into a deep recession, leading to a further rise in unemployment and making fiscal consolidation all the more difficult," Anastasiades wrote, according to a passage quoted by the Financial Times. "I urge you to review the possibilities in order to determine a viable prospect for Cyprus and its people." The Cyprus bailout was, if not the most expensive, certainly the most rancorous of the aid packages the euro zone has yet assembled for an ailing member state. A first deal, which called on all savers with deposits of €20,000 or more to participate in propping up the country's wobbly banks, was rejected by the government in Nicosia. It accepted a similar deal seven days later -- with only savers holding more than €100,000 in savings required to take part. 'Complete Reversal' In addition to closing Cyprus' second-biggest bank, Laiki, and merging parts of it with the Bank of Cyprus, the country's largest financial institution, the deal also included a €13 billion package of austerity measures pledged by Nicosia. The EU aid package was to prevent the government from going bankrupt, with none of the money earmarked for the country's banks. Brussels' bumbling in the lead up to that bailout package has been widely criticized. And Anastasiades' letter comes just weeks after the IMF itself also criticized the EU's bailout strategy, though its assessment focused specifically on the first Greek bailout, worth €110 billion. The IMF, however, has also noted the risks associated with the Cyprus bailout. In May, the institution noted in a staff report that the impact of the bank restructuring and consolidation plans were "highly uncertain" and that risks were "substantial and tilted to the downside." Still, the Cypriot president's letter has left EU officials "puzzled," according to the Financial Times. He asks that the restructuring of Laiki and the Bank of Cyprus be partially undone, a request that would more or less mean the renegotiation of the entire

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package. "Essentially, he is asking for a complete reversal of the program," an unnamed EU official told the paper. cgh URL: http://www.spiegel.de/international/europe/cyprus-asks-for- improvements-to-bailout-deal-a-906558.html Related SPIEGEL ONLINE links: • Merkel Maligned IMF Board Attacks Euro Crisis Management (06/03/2013) http://www.spiegel.de/international/europe/0,1518,903426,00.html • Insufficient Efforts Report Faults Cyprus on Money Laundering (05/17/2013) http://www.spiegel.de/international/business/0,1518,900593,00.html • Battling the Crisis Disunity Plagues EU Banking Union Talks (05/15/2013) http://www.spiegel.de/international/europe/0,1518,899924,00.html • 'Abject Error' How the Cyprus Deal Hurts EU Strategic Interests (04/03/2013) http://www.spiegel.de/international/europe/0,1518,892331,00.html • Life after the Fall The Aftermath of the Cypriot Banking Collapse (04/02/2013) http://www.spiegel.de/international/europe/0,1518,891852,00.html 06/19/2013 03:19 PM The Rise of the Fearmongers Germany's New Euroskeptic Elite By Stefan Willeke Many Germans believe it is time to abandon the euro. They're part of a growing movement spurred by influential populists from the worlds of business and academia. Their arguments stoke fear but offer no clear alternatives. The day the euro falls apart will feel like paradise, or at least if Dirk Müller is there to host the event. Müller can come up with an unforgettable melody for even the worst of calamities. And to do that, he wouldn't even need more than his warm, dark voice, which can even cloak horror in ghoulish but beautiful sounds. The refrain would probably consist of a quote Müller has repeated often, because it seems to fit to every occasion: "That's it, Mr. Müller. Mr. Müller, that's it." But, at the moment, Mr. Müller still has a problem being Mr. Müller, because his voice is threatening to abandon him. He has spent too much time in TV studios lately, talking his new book "Showdown" onto the best-seller lists, and his voice has become hoarse. The man who likes to go by the nickname "Mister Dax," because he was once a well- known stock trader and gave a face to the German stock market (and its blue-chip DAX index), still has to endure this evening in Rottweil, a town on the edge of the Black Forest in southwestern Germany. He has taken a pill against hay fever, another against the flu and a cough suppressant. It's mid-May, a week in which the mass-circulation newspaper Bild is warning against inflation, the weekly magazine Stern is running a cover story titled "Is My Money at Risk Now?" and the local paper, the Schwarzwalder Bote, is running the headline "A Passion For Europe in Free Fall." It's Müller time. In a side room at a decommissioned power plant that has been converted into an auditorium, Müller is preparing for his appearance. With a cough, he announces his

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"grand tour through Europe." Perhaps there is no better way to illustrate Europe's condition than in a power plant that has lost power, where a red carpet is unrolled for a man who is a gifted speaker and who plays with his initials as if they were a promise -- Dirk Müller, DM (the symbol for the former German currency, the deutsche mark). The parking lot outside is full. It's an ordinary Thursday evening in a German town, and close to 500 people have come to the event, for which tickets cost €69.90 ($94), or about the price of entry to a pop concert. But the topic is Europe's crisis, and the event turns out to be one of the most heavily attended at the Neckartal Power Plant. In a few minutes, when Müller begins speaking, a few in the audience will pull out their notepads and jot down his key points. Müller has even secured the rights to the name "Mister Dax," which is how many people address him. He steps onto the stage and turns on his laptop. He shows the audience a photo of American warships and talks about the "battle for future global dominance." He switches to an image of a paper airplane flying in a thunderstorm. The paper airplane is a €50 bill. "In my opinion, the euro cannot function," Müller says. Suddenly the laptop crashes and the screen goes dark. Müller could simply say: "Sorry, my computer crashed." Instead, he says: "The system has collapsed." Müller is a warner. He warns against running Europe into the ground "out of convenience," merely for the purpose of preserving the euro, which, according to Müller, is much too strong for the weak countries in the south but too weak for the strong German economy. He warns against conditions like those in Greece. "Flags with swastikas on them; that's Greece in 2013." He warns against "lost generations" in Portugal and Spain. "The euro isn't bringing us peace," he says. "In fact, the euro is the spirit of discord." He names three politicians: former Reich Chancellor Heinrich Brüning, former Chancellor Gerhard Schröder and current Chancellor Angela Merkel. "A potential for infection is developing," he says, "and it can break out at any time." He insinuates, quips and laces his speech with sarcasm. He doesn't claim that the Americans tried to subjugate the International Monetary Fund (IMF), or that the IMF subsequently took Europe hostage. He expresses himself more deftly rather than allowing himself to be pinned to an ideology. He doesn't shout, and he remains perfectly pleasant. The top 10 percent of the German population owns two-thirds of all wealth in Germany, he says. Then he points out that the lines are becoming blurred and adds, with a smile, that he doesn't want to sound like Sahra Wagenknecht, a vocal politician in Germany's far-left Left Party. Growing Uncertainty and Unrest A strange mixture is brewing in Germany. Week after week, the voices calling for an end to the European monetary union are growing louder. There are the people who represent the financial world, such as Müller. There is the new anti-euro party Alternative for Germany (AfD), which enjoys the backing of disappointed conservatives. And then there are also sociologists with ties to the center-left Social Democratic Party (SPD), such as Wolfgang Streeck, the director of the Max Planck Institute for the Study of Societies, in the western German city of Cologne. Streek sees the monetary union as the "Babylonian captivity of a politically emancipated market system." There is also Thilo Bode, founder of the European consumer rights group Foodwatch, who sees the drachma as the cure for the ailing Greek economy. There is growing unrest on both the left and right sides of the political spectrum. Both camps are attacking the euro from the fringes, and both aim to garner support from the

221 center of society. Intelligent people, including entrepreneurs, trade unionists, academics and party officials, are starting to team up. Many bill themselves as genuine Europeans. There are also a few conspiracy theorists, crazies and hard-liners. But most are presentable and educated. Have they discovered an issue that is gaining political traction in Germany and is capable of radically transforming Europe? And what motivates these people? Müller's appearance in Rottweil was scheduled for 90 minutes, but he ends up speaking for almost three hours. No one in the room interrupts him. At the end, once the roar of applause has died down, Müller signs autographs at the book table. So many people want autographed copies of his book that he can hardly tear himself away. He finally ends up standing at the bar in the lobby, talking about the history of money. The Frankfurt Stock Exchange, he says, used to be a place where small and mid-sized companies could raise capital, but those days are gone. Today, he says, the market is a place where gamblers meet, a system that is destroying itself and losing its purpose. It's almost midnight when Müller finally leaves the former power plant. His chauffeur is waiting in the parking lot. Müller is quick to point out that the chauffeured car has only been rented for the evening. He also notes, with suspicious regularity, how little he actually profits from his speaking engagements, and that he only receives "a fraction" of the evening's ticket revenue. Müller has latched onto a subject that appeals to audiences. The stock wave that he was riding for years is now being replaced by the euro wave. It could become seductively powerful. Müller is also profiting from the crisis. He is about to go on a diving vacation in the Maldives, where he intends to put his mobile phone on silent and relax a little. When asked about what he plans to do on vacation, he says: "Nothing much, really." Things happen during Müller's vacation that he doesn't hear about. Bernd Lucke, an economics professor at the University of Hamburg and head of the new Alternative for Germany party, tweets: "Many countries only want to stay in the euro because they are getting billions in aid payments." One of the responses on Twitter reads: "The agreements are just for the stupid sheep, not for the EU fascists." Someone else writes: "Don't worry, Gullible Fritz will go and work for someone else." According to a new study from Washington, some 60 percent of Germans approve of the European Union, which is 8 percent less than a year ago. About two-thirds of Germans want to keep the euro, while one-third wants the deutsche mark back. A group of respected German economists has published a case for the euro. In polls, the anti- euro party fluctuates between 2 and 3 percent. In the last two years, SPIEGEL has run seven cover stories warning against a euro that is in acute danger, crumbling or softening. And yet the euro has stood firm. Predicting an Inevitable Collapse of the Euro A man is going for a stroll in an upscale residential neighborhood of the Bad Godesberg district of Bonn, the former capital city in western Germany. He says that he stood at the "cradle of the euro," together with then-Chancellor Helmut Kohl and then- Bundesbank President Hans Tietmeyer. Joachim Jahnke was a member of the SPD and served as a head of section in the Ministry of Economics. Now retired, the 74-year-old dispatches weekly email newsletters that often argue against the euro. "The deutsche mark was a sort of ersatz nationality," Jahnke says.

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Jahnke can speak at length over how the euro can still be saved -- through a comprehensive minimum wage in Germany, for example or through transfer payments to Southern Europe. But he also says: "The Germans will eventually be fed up with constantly paying for things." Unless something serious happens, the euro will break apart in three to five years, Jahnke predicts. Opponents of the common currency believe that time is on their side. It's like leaving a box of matches on a bench near the edge of a forest. Eventually someone comes along and puts a lit match to a dry branch. If the common currency no longer existed, Europe's crisis-ridden countries could devalue their national currencies and strengthen their economies, because prices for their products would drop and their markets would become more competitive. This is an important argument for euro opponents -- and it's correct. But if the euro were to disappear, Germany's export economy would collapse, because the German currency would then appreciate substantially. Unemployment would rise sharply, and the engine of the economy would be eliminated. This is also true, and it's something that opponents of the euro don't like to hear. But there is also another important question: What would happen to Europe if it were deprived of the common currency? Saving What Can Still Be Saved? Heiner Flassbeck took the first flight from Geneva to Berlin. He was a state secretary under former Finance Minister Oskar Lafontaine, and both men failed in rapid succession. But that was in the last millennium. Most recently, Flassbeck was working as chief economist for a United Nations organization, and he now lives in a French village outside Geneva. "Germany does everything right," say his neighbors. Flassbeck claims the opposite is true, but the French don't believe him. Perhaps it'll be different in Berlin. The Rosa Luxemburg Foundation, which is associated with the Left Party, has invited Flassbeck to speak, and the auditorium in the building occupied by the Neues Deutschland newspaper is full. Flassbeck has a dark tan and is wearing a suit and tie. A few days earlier, he appeared at a conference sponsored by the Ver.di public services union, and he has also recently spoken in Basel, Warsaw and Paris. He was interviewed by the German business newspaper Handelsblatt, and he has written articles in the weekly newspaper Die Zeit. Things are suddenly going well for Flassbeck, and even he seems surprised. He refers to the economy as a machine that requires servicing. But the leftists in the room don't like the word "machine," and they aren't interested in servicing anything. When a member of the audience calls him "Heiner," Flassbeck frowns disapprovingly. During the break, he stands at a bar table and grumbles about the "drivel" he is forced to put up with here. The leftists are engaged in ideological debates, Flassbeck says, whereas he is here to talk about numbers. If he established a party, it would have only one item on its platform: Flassbeck is right. Of course, he had long anticipated that Europe was heading for a crisis. He can now repackage the theories he has always espoused and, in doing so, make himself seem younger than he is. Flassbeck glances at the vats of soup covered with napkins and rails against "this Socialist fare." He has no objection whatsoever, he adds, to eating lunch in a restaurant instead. Before long, Flassbeck is sitting at a restaurant table in Berlin's trendy Mitte district, trying to choose between ravioli with or without truffles. With truffles, he finally

223 decides. "I have studied all the world's financial crises," Flassbeck says, and he concludes that what Europe needs to do now is "to save what can still be saved." But what will be left of the euro zone if the crisis-ridden countries withdraw? "Germany," Flassbeck replies. "Hmm, the Netherlands, Belgium…" France? "No, France has to exit." Finland? "Yes, Finland." Germany, Finland, Holland and Belgium. Is there any political vision left? "Oh," says Flassbeck, "the political vision is dead, anyway." The truffles are excellent, he adds. Chancellor Merkel's much-repeated response to the euro crisis has been: "If the euro dies, Europe dies." It has been an important sentence, but it still lacks a rationale. Without it, the remark feels like an empty claim, and yet the issue deserves more than that. In recent weeks, there has been much talk about debt, support purchases and bailout funds. But it would be more convincing if the economic reflections were not disconnected from the social dimension. The appeal of the European Union and its precursors has always been how they aim for immediate goals in order to achieve more distant ones. The common market was intended as a first great step on the road to political successes. The experiment began with a transnational organization creating a common market for coal and steel, while the common currency followed almost 50 years later. The idea was that Europe would begin in the wallet but not end there, that it would start on a small scale and then grow larger. The idea was also to weather crises, tolerate unreasonable demands and follow through to the end. Vague 'Alternatives' On a Friday afternoon, Bernd Lucke steps onto an ICE train at the station in the northern German city of Lüneburg, takes a seat in the dining car and immediately starts making phone calls. Lucke, chairman of the anti-euro party Alternative for Germany (AfD), is speaking loudly and clearly, as if the conductor had asked him to make an announcement. He ends his call, puts away his mobile phone and keeps talking. He turns away a little and looks around, so that it is no longer clear whether he is having a conversation with the SPIEGEL interviewer, the other passengers in the car or the entire world. We lower our voices as a signal to Lucke to lower his, but the party leader doesn't take the hint. In fact, he starts speaking even louder, as if he were personally in charge of determining the noise level in the car. Though it wasn't intended, we end up having a panel discussion with Lucke in the dining car. Outside, the sun peeks out here and there, but Lucke says that heavy rain showers are in the forecast for southern Lower Saxony. He is headed for Clausthal-Zellerfeld in north- central Germany, where he is scheduled to deliver a ceremonial address to the "Barbara Academic Sports Association." He says that he looked into whether his hosts might be somehow politically objectionable, but found that they were OK. He leaves the car shortly before Hanover, where the train stops and the doors open. A young mother with a stroller is standing at the exit. Lucke rushes over and offers to help

224 her. The woman can hardly say "No, thank you" quickly enough to prevent Lucke from taking control of her stroller. In Hanover, the weather is still pleasant. If it doesn't start raining, says Lucke, it'll be the weather forecast that was wrong, not him. It's odd, he says, but a journalist from the Wall Street Journal was supposed to join him, and yet he hasn't heard from the man. When asked to describe what constitutes the "alternative" in the name of his party, Lucke says that he had preferred the name "adieu" but failed to convince others. We have to ask him several times about the alternative, and about what would change in this country if Lucke could exert some influence, until he finally understands, saying that it's about politics and about structuring things, not just the euro. Lucke, the economics professor, suddenly seems highly inept, saying things like: "The government must become fiscally responsible. It has to take the will of the people seriously." He has no idea what alternative he is supposed to describe. He calls himself a European, but he has no use for Europe. He has done nothing but open a betting shop at which customers can place wagers on the demise of the euro. When Lucke gets off the train in Goslar, a small historic city in Lower Saxony, a young man addresses him on the platform. The stranger walks excitedly alongside Lucke, and says that he initially couldn't believe that he had actually spotted Bernd Lucke, the man from the talk shows. But suddenly he was quite sure, he says. "It's very nice that you are gracing Goslar with your presence, Professor Lucke," says the young man, before he shuffles away. Lucke watches him go and says: "See?" At home in Winsen an der Luhe, Lucke rides his bike to the commuter train station in the morning and takes it to nearby Hamburg, where he delivers his lectures, and takes the same train back home in the evening -- or at least that used to be his daily routine. Now he's a person whose opinion European politicians discuss in prime time. He gives them something to think about, although sometimes they have trouble coming up with answers. The fight against the euro has catapulted his life into the world of grand gestures. He would never admit it, but he owes a lot to the euro. He is a person who sticks to numbers and relations, but they say nothing to him about the underlying ideas. Defining the Notion of 'Europe' A story about Europe could begin in June 1914, and it could be about Gavrilo Princip, a Bosnian Serb who killed Archduke Franz Ferdinand, the heir to the Austro-Hungarian throne, in Sarajevo. The ensuing events led to the outbreak of the World War I, which was a European war until shortly before it ended and resulted in carnage that would have previously seemed unimaginable. A European story could also begin in 1870, when one of the Franco-Prussian wars erupted, which is commemorated by the Victory Column in Berlin. But a European story could also begin earlier, in 1813, at the Battle of the Nations, near the eastern German city of Leipzig, when the European powers fought what was the biggest war in European history prior to World War I. Also worth mentioning is the SPD's 1925 Heidelberg Program, in which there were suddenly calls for a "United States of Europe." And then there was the Morgenthau Plan, which didn't materialize but called for the destruction of German industry after World War II. A far more extensive account would have to be devoted to the American Marshall Plan, the European reconstruction program worth billions that benefited Germany in particular. One could talk about solidarity, aid payments and borrowed trust. Or about overcoming the logic of war,

225 about the attempt to abandon the categories of victory and defeat, and to replace them for a spirit of cooperation. Perhaps the story should return to Sarajevo, where the 1984 Winter Olympics were held, an event that resembled a festival of cultures before the city was transformed into the hell of the Bosnian war eight years later. We would end up with a contradictory story, but it would be instructive, because it would tell us that Europe has already been tested more severely than by an economic crisis. But to engage in this discussion, it's important to recognize more in the European Union than merely a series of financial transactions. One has to divine the historical dimension, and the sheer magnitude and importance of events. One has to have a political consciousness, or at least a memory -- and maintain it. Tenacious Campaigning Against the Euro On June 11, as Germany's Federal Constitutional Court is debating a complaint against the euro bailout policy, Hans-Olaf Henkel is at Berlin's Tegel Airport, boarding an Airbus jet bound for Vienna. He likes to spend time abroad, where he is treated as a guest and isn't contradicted as often. He was just in London, where he blasted the euro at an event, after former Chancellor Schröder had just lauded the European idea. Henkel likes to use the term "unity euro." It's reminiscent of the name of the state party in the former East Germany, the Socialist Unity Party of Germany (SED), and it sounds somehow calamitous. The British were on his side, Henkel says with a chuckle. In the 1990s, Henkel was a hard-nosed president of the Federation of German Industries (BDI). He is a holdover from the cretaceous age of industrial society, and he would be forgotten today if he hadn't clung to the TV studios. The talk show is Henkel's greenhouse. Outside, he would be overgrown with weeds by now. But as soon as artificial light is added, he straightens up, stretches his neck and blossoms. The anti- euro party AfD has made Henkel into its best-known advocate. The euro is preventing him from withering away. In the flight to Vienna, Henkel talks about a man who called him an "asshole." It was an anonymous email with a very short message: "Asshole." The only thing identifying the sender was the email address, but when Henkel turned the matter over to his attorney, he said that he couldn't help him. It was too time-consuming, he said, and it wouldn't be possible to find out who the sender was. Undeterred, Henkel sat down at his computer and searched the Internet for the email address. After a considerable effort, he finally found the same email address on a welcome message in the electronic guestbook of a hotel in Bavaria. It had to be the person he was looking for. Henkel called the hotel and said that he wanted to send the guest photos from a vacation they had taken together. The hotel gave him the person's phone number. Henkel's attorney called the number and demanded €1,000 (Ed's note: In Germany, so-called "crimes against one's honor," such as insulting words or gestures, can lead to hefty fines and sometimes even jail sentences). Henkel wanted the man who had called him an "asshole" to donate the money to the good people of Amnesty International. A Dangerous and Divisive Issue The story offers insight into how tenaciously Henkel wages his campaign against the euro. If we wonder why the prophets of doom are capable of filling entire auditoriums with people, the answer is always the same: fear. They take advantage of the fears of

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those with less education, their fear of losing what they have achieved and their fear of being robbed. For these people, it's easy to envision our faraway neighbors in Southern Europe as thieves. In this way, the populists' arguments combine with the emotions of their audiences. It's a dangerous mixture. The AfD is a political force worth taking seriously. It has the potential to draw voters away from the major parties, especially Merkel's center-right Christian Democratic Union (CDU). Professors are among the supporters of the AfD, which lends it more credibility, especially among voters without an academic education. Unlike the Pirate Party, the anti-euro party has a clear central theme that everyone understands. It is a disciplined organization, not some chaotic group. And the key question surrounding the euro is not being asked in the governing bodies of the major parties. Indeed, the demise of the euro is a topic with a fuse. The character with whom opponents of the euro identify most is the businessman, and the character they despise most is the historian. The businessman sees the euro as nothing but a means of payment, something replaceable, a few paltry coins and bills. The historian sees through the euro and recognizes a political rationale. The businessman shrinks the euro's importance while the historian enlarges it. The businessman holds up a €10 bill and says: This could soon be 20 deutsche marks again. The historian recognizes the contours of the continent in the €10 bill. When the flight has landed in Vienna, Henkel gets up and asks: "What should I call my book? 'Euro Deceivers?' Or perhaps 'Euro Liars'?" He isn't quite sure. Maybe the word "liar" is too strong. The new book comes out in a few weeks, he says, and perhaps he'll have Oskar Lafontaine write the introduction. Henkel feels good when he surrounds himself with people who thrive on subversive theories. No one wanted to give a laudatory speech for Thilo Sarrazin, the politician who published an anti-immigrant and -Muslim tirade in 2010 that sparked major public outrage. But Henkel agreed to do it. Henkel gives one of his presentations at a tourist hotel in the afternoon. He usually begins by saying that he initially made the mistake of believing in the euro. "My mistake" -- it's an expression he likes to use. People who acknowledge their mistakes seem confident. Then he attacks the euro. The interesting thing is that Henkel has the shrewdness to approach the European drama from an economic standpoint. The sad thing is that his shrewdness doesn't generate any political ideas, or at least nothing that a government could do anything with. When asked what the alternatives are, he praises the quality of training in German companies. He suddenly sounds like someone from the chamber of commerce. On the way back to the airport, Henkel says that he has made up his mind. The book will be called "Euro Liars." Translated from the German by Christopher Sultan URL: • http://www.spiegel.de/international/europe/new-anti-euro-figures-in-germany-offer- vague-ideas-and-fan-fears-a-906675.html Related SPIEGEL ONLINE links: • Photo Gallery Leading Euro Naysayers in Germany http://www.spiegel.de/fotostrecke/fotostrecke-98190.html

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• Crisis Course High Court Skeptical of ECB Bond Buys (06/12/2013) http://www.spiegel.de/international/europe/0,1518,905246,00.html • Angela Merkel on Europe 'We Are All in the Same Boat' (06/03/2013) http://www.spiegel.de/international/europe/0,1518,903401,00.html • Letter From Berlin Anti-Euro Party a Growing Challenge for Merkel (05/14/2013) http://www.spiegel.de/international/germany/0,1518,899803,00.html • German Euro-Skeptic Party Gaining Ground (05/07/2013) http://www.spiegel.de/international/germany/0,1518,898524,00.html • German 'Alternative' Parallel Currency Idea Carries Great Risks (04/22/2013) http://www.spiegel.de/international/business/0,1518,895731,00.html • The Know-It-All Party Anti-Euro 'Alternative for Germany' Launches (04/12/2013) http://www.spiegel.de/international/germany/0,1518,894081,00.html • From Black to Orange SPIEGEL ONLINE's Guide to German Political Parties (02/28/2013) http://www.spiegel.de/international/germany/0,1518,886188,00.html

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Return of Drunk Bernanke: What the Fed chairman might want to say, but probably won’t By Neil Irwin, Updated: June 19, 2013 In March, when Ben Bernanke last faced the press for a news conference, we brought you “Drunk Ben Bernanke,” our best guess as to how the Federal Reserve chairman might respond to questions thrown at him if he were feeling particularly blunt. That is, how might an inebriated Bernanke face the press. Alas, our efforts back then to swap his water glass for gin were unsuccessful, and the chairman answered queries with his typical, level-headed, calm and cautious understatement. But if he were to decide to go on a bender before his news conference today, at the conclusion of the Fed’s latest two-day policy meeting, here’s what we suspect we’d hear. Question: So, when are you going to taper the pace of Federal Reserve bond purchases, currently $85 billion a month? Bernanke: Sigh. Okay. I know that whatever I say to this, markets are going to hyperventilate and swing based on every pause and comma and adjective. It’s kind of exasperating, but I guess that’s the world we live in now. So I’ll just put it all on the table. You guys are focused on the wrong thing! You want to interpret us going from $85 billion a month to, say, $70 billion a month in September versus December versus next year as conveying a ton of information about how loose or tight monetary policy is going to be years into the future. It’s not so. It’s more a judgment based on factors like whether we’re convinced the economy is gaining momentum, whether we expect inflation to rise to our target or decline farther, and how worried we are about the impact our purchases have for the functioning of the bond markets. So, we could taper sooner but still continue QE for longer, and the total scale of purchases could continue for longer. We’ll let the data be our guide. You should, too. And don’t get me started about people using the taper talk to suggest that we’re going to raise short-term interest rates sooner rather than later. We just told you in December, and at every meeting since then, that we won’t hike rates until unemployment gets down to 6.5 percent or inflation is set to go over 2.5 percent. So, it’s fine if you want to change your assessment of when that might be based on incoming economic data. But if

229 you’re changing that assessment based on something Jim Bullard or Eric Rosengren said about what we’ll do in the next few meetings, you’re doing it wrong. Seriously, though, when are you going to taper? [Smacks head] When the time is right. And when do you expect that to be? Eh, the next few meetings. Maybe September. Maybe December. Maybe early next year. We’ll see. Do you think the recent volatility over the changing perceptions of Fed policy amounts to a communications failure? [Shrugs] Well, what are we supposed to do? We’re a committee of 19 members who have to arrive at one policy decision. Each of those 19 has his or her own public platform for airing views and his or her own unique set of factors to weigh. It’s not even as simple as hawks versus doves. There are people who worry more about undershooting our inflation target versus weak job growth. There are people who worry a lot about asset bubbles versus those who think those risks are overblown. There are people who think it wise to enumerate exactly what they believe would be “substantial improvement” in the labor market to trigger tapering and those who would rather be a little vague. If you want to overreact to everything those 19 people say, that’s your problem, not mine. Are you surprised that fiscal tightening hasn’t weakened the economy more? A little. But that just makes me that much angrier at Congress. If they had followed my advice and moved more cautiously on short-term deficit reduction, and avoided this idiotic sequester, we would probably have a quite healthy little expansion going on right now. Instead, we’re pushing our foot on the accelerator while fiscal policy is putting on the brakes, and even though the car is still moving forward, there’ s a lot of damage done. Like worn-down brake pads, I guess? Man, I probably should slow down. I guess in this metaphor, the worn-down brake pads are stock market volatility and maybe a bubble in high-yield debt? Or something? As you know, the president seemed to suggest that you will be stepping down when your term ends in January. If the president asked you, would you serve another four-year term? Guys, look, the writing is on the wall. I’ve been keeping quiet about it, because it probably isn’t good for confidence if I’m on record as being a lame duck. But, of course, I’m stepping down! Nothing about this last couple of months of hyperventilating about tapering has made me especially eager to stick around for the next four years. Will you miss us? You probably don’t want to ask me that. http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/19/return-of-drunk- bernanke-what-the-fed-chairman-might-want-to-say-but-probably- wont/?wpisrc=nl_wnkpm

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The Second Battle Of Thermopylae Author: Edward Hugh · June 19th, 2013 · According to legend and some historians, by making a stand in the Thermopylae pass 300 brave Spartans valiantly saved the day for the entire Greek army in the face of a Persian force of overwhelming strength and manpower. More than 2,000 years later some 11 million Greeks might be considered to have carried out a rather similar operation by single handedly facing-off a massed horde of frantic global speculators on behalf of the entire Euro Area population – at no mean cost to themselves in terms of wealth, employment and general well-being. Or at least that is the conclusion which could be drawn from reading through the latest self-critical review issued by the IMF dedicated to the lessons which can be learned from the to-date handling of the country’s deep economic and social crisis. The document, entitled Ex Post Evaluation of Exceptional Access Under the 2010 Stand-By Arrangement (henceforth referred to as the Evaluation Document), does not mince its words, and suggests that Greece suffered a worse than necessary recession due to the reluctance of Europe’s leaders to agree on debt restructuring from the outset. The reason for this reluctance is obvious with hindsight, the Euro Area was institutionally ill-prepared for the kind of crisis which was unfolding while the interconnection of the European capital markets and the banking sectors meant the financial systems of a number of other European countries were at risk. Contagion from Greece was a major concern for euro area members given the considerable exposure of their banks to the sovereign debt of the euro area periphery.

Earlier debt restructuring could have eased the burden of adjustment on Greece and contributed to a less dramatic contraction in output. The delay provided a window for private creditors to reduce exposures and shift debt into official hands. This shift occurred on a significant scale and left the official sector on the hook. An upfront debt restructuring would have been better for Greece although this was not acceptable to the euro partners. A delayed debt restructuring also provided a window for private creditors to reduce exposures and shift debt into official hands. As seen

231 earlier, this shift occurred on a significant scale and limited the bail-in of creditors when PSI eventually took place, leaving taxpayers and the official sector on the hook. – IMF Evaluation Document The contents of the Evaluation Document were widely reported on in the press (see for example here), and produced a swift response from EU Commission representatives, including an “I don’t think it’s fair and just that (the IMF) is trying to wash its hands and throw dirty water on European shoulders,” from Economic and Monetary Affairs Commissioner Olli Rehn. The little phrase that caused all the problems was the report’s assertion that “An upfront debt restructuring would have been better for Greece although this was not acceptable to the euro partners.” Obviously, when a dispute becomes as public as this, something, somewhere is going on. Trying to fathom what it was I couldn’t help noticing that the publication of the Evaluation Document coincided almost exactly in timing with the issuing of the Fund’s latest report on the current (rather than the initial) Greek programme – The Third Review Under the Extended Arrangement Under the Extended Fund Facility (what a mouthful that is, henceforth the Third Review) – where curiously the international lenders let slip the significant little detail that next year Greece is expected to have a funding shortfall of some 4 billion Euros. Almost immediately denials that any kind of talks were ongoing about any kind of forthcoming debt pardoning for the country started to surface in Germany, (or see here). In my case the light dawned when reading more thoroughly through the Third Review document I came across the following paragraph: The macroeconomic outlook, debt service to the Fund, and peak access remain broadly unchanged and euro area member states remain committed to an official support package that will help keep debt on the programmed path as long as Greece adheres to program policies. Capacity to repay the Fund thus depends on the authorities’ ability to fully implement an ambitious program. It continues to be the case that if the program went irretrievably off-track and euro area member states did not continue to support Greece, capacity to repay the Fund would likely be insufficient.

Now all of this may sound – at least to the uninitiated – like a load of old bureaucratic mumbo-jumbo, but actually there are a number of key statements here which may help to put the recent internal Troika tiff in some sort of broader and more intelligible perspective. Sometimes in order to get to grips with a highly complicated argument thread it helps to go to the endpoint and then work your way back. It also helps to bear in mind that the recent Evaluation Document is as much about the future as it is about the past – and in particular the scenario which will come into play in 2020 and 2022 when the current programme’s debt to GDP targets are expected to be achieved.The cited paragraph talks about three issues: the macroeconomic outlook, the commitment of euro area member states to support Greece and keep the debt on the programmed path as long as Greece adheres to the programme’s requirements, and the danger that should the programme go “irretrievably off track”, and euro area member states not give the necessary support then the country’s capacity to repay the Fund would clearly be insufficient – ie the IMF would be left holding the can, and Fund employees would be faced with the complicated task of explaining to its non-European members why losses had been incurred.

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So now I understand the nervousness a bit better. Crudely put the position is this – as long as the IMF continue to write reviews stating the Greek programme is on track then the euro area member states are on the hook to make up any shortfall in Greek debt performance. This is a commitment they undertook during negotiations on the second bailout agreement. On the other hand, if the IMF were to start producing reports stating that the programme was off-track because of Greek non-compliance, rather than for example arguing that the numbers were out of whack due to faulty macroeconomic forecasts (some of them from the EU Commission itself), then the euro area member states would be off the hook from additional stepping up to the plate with the result that the IMF would end-up taking a loss. Complicated isn’t it? That is why the rule of starting out from the assumption that nothing is ever exactly what it seems to be is normally a good one to work by. What is obvious from reading through the documentation is that the IMF is keen to highlight the guarantees given by Greece’s euro area peers at the time of setting up the Extended Fund Facility (2012) that “adequate support” would be provided to bring Greece’s debt down below 110% of GDP in 2022 (ie that there would be some form of debt pardoning) should the country comply with the terms of its programme and the debt dynamics still not turn out right. Since we now have a track record on all this, and since staff economists at the Fund have also recently conducted a debt sensitivity analysis which came up with the finding that given slight under-performance on GDP and inflation outcomes the debt could still be as high as 147% of GDP come 2022 , the issue is no mere trifle. This is, in my opinion, why so much emphasis is now being placed in Washington on the fact that Greece’s short term interests were to some extent sacrificed for the greater good of the eurozone, a justification which may make the bitter pill of Euro-partner losses on their loans to Greece easier to sell to their respective electorates. Well, since nothing is really valid in this world until it is tested (like the June 2012 commitment to mutualise some of Spain’s bank losses), and since 2020 is still a relatively long way away, it isn’t hard to understand why the good folks in Washington might want to see the commitment in Europe tested a good deal sooner, which is where, I think, next year’s 4 billion euro funding shortfall comes in. I cite the latest review document (my emphasis): The program is fully financed through the first half of 2014, but a projected financing gap of €4 billion will open up in the second half of 2014. Thus, under staff’s current projections, additional financing will need to be identified by the time of the next review, to keep the program fully financed on a 12-month forward basis, and the Eurogroup has initiated discussions already on how to eliminate the projected 2014 gap. In this regard, the Eurogroup commitment made in both February and November 2012 to provide adequate support to Greece during the life of the program and beyond, provided that Greece fully complies with the program, is particularly important. Again the essentials are hard to-get-through-to for all the bureaucrat-speak, but the last sentence says it all – “The Eurogroup Commitment…to provide support to Greece….is particularly important.” A Deeper Than Necessary Recession?

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Greece’s recession has been one of the deepest peacetime recessions ever experienced in industrialized economies, and bears comparison with the great depressions of the 1930s in the US and Germany (see chart prepared by the IMF below). Overall, the economy contracted by 22 percent between 2008 and 2012 and unemployment rose to 27 percent; youth unemployment now exceeds 60 percent. As domestic demand shrank across all areas, net exports provided support largely through shrinking imports. Indeed as opposed to other countries on Europe’s periphery exports actually shrank in Greece in both 2011 and 2012. The issue this raises is was such devastation really necessary in a country participating in a currency union which could have expected support from other participants?

Naturally the country “cheated” on its partners, and sacrifices were inevitable but surely a more pragmatic and equitable solution could have been found. Simply punishing a country for what is perceived to have been “wrong doing” accomplishes little and may put a great deal at risk, including amongst those not directly involved. As the IMF points out in the Third Review, Greece was forced into one of the largest fiscal adjustments seen anywhere to date (see chart below).The primary adjustment in 2010–12 amounted to 9 percent of GDP, and was much higher (15 percent of GDP) in cyclically-adjusted terms. The same outcome could have been achieved over a slightly longer period of time had a more constructive attitude been taken. On the other hand the IMF take the view that some sort of rapid fiscal adjustment was unavoidable (but how rapid?) given that the Greece had lost market access and official financing could be considered to have been as large as politically feasible. They conclude: It is difficult to argue that adjustment should have been attempted more slowly. The required adjustment in the primary balance, 14½ percentage points of GDP, was an enormous adjustment with relatively few precedents, but was the minimum needed to bring debt down to 120 percent by 2020. Moreover, despite the starting point being slightly worse than thought to be the case when the 2010 Stability Program was drawn up, the SBA-supported program had already extended the period over which the Maastricht deficit target would be achieved from 3 to 5 years. Since the program only ran through mid-2013, the last part of this adjustment would occur after the program and the conditionality had ended. Moreover, debt would still be increasing when the program ended.

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One of the key points to note here is the observation that the program only ran through mid-2013. This is a knock-on consequence of the type of program originally set up (the so-called Standby Arrangement – or SBA). SBA’s are by their very nature designed and intended for short term liquidity support prior to a reasonably rapid return to market access. But Greece’s needs, as is now obvious, were longer term and involved solvency issues. Had a decision been taken at the outset to set up an Extended Funding Facility (the 2012 program is of precisely this type) then the time horizon could have been longer, but part of the reason an EFF was not chosen was because the solvency issue was not recognised and debt restructuring was not on the table, so the argument at this point becomes somewhat circular. That is to say, had the will been there at the outset to use an Extended Funding Facility and had the realistic view (recognized with hindsight) that debt restructuring was inevitable been taken, then the Greek fiscal correction would still have been significant, but more extended in time, and with less overall damage to the economy’s private sector. And the damage was severe. The employment loss was dramatic (see chart) and as in other countries who have suffered a similar, if more benign, fate (Spain, Portugal) it is hard to see how earlier levels are ever going to be recovered given anticipated future growth rates.

The social and economic consequences of the over ambitious fiscal correction have gone well beyond the downsizing of the country’s bloated public sector, and no part of

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Greek society has been spared. Among Greek households the fall in disposable income between 2009 and 2011 nearly doubled the previous debt-to-disposable-income ratio (which rose to 96 percent – higher than the peak observed in Latvia). Falling property prices have raised mortgage loan-to-value ratios from around 70 percent on average before the crisis (lower than in European peers) to close to 90 percent in 2012 (currently higher than even in Spain). House prices fell by 11.8% in the year to the end of March, according to the residential price index published by realtors Knight Frank following a 9.8% drop a year earlier. For a country which didn’t really have a property boom before the crisis this is very striking. In the non-financial corporate sector the decline in profits has affected firms’ ability to service debt, with the interest coverage ratio dropping from 24 percent in 2001 (one of the highest in Europe) to 2.4 percent in 2012 (higher only than Portugal). As a result Non-performing loans in both the household and corporate sectors have risen sharply (see chart below for the corporate case) and in 2013 are expected to pass the 30% of total loans mark.

All this distress and impairment naturally creates problems where previously few existed. The Euro firewall building process meant that most of Greece’s sovereign debt risk was transferred from other European banks to Greek ones, with the consequence that when the debt restructuring finally did come these banks all needed recapitalizing by the state leading the country to have to borrow yet more money to pay for this. Now that the only external imbalance correction process is what the IMF calls the “recessionary path” (rather than a more comprehensive internal devaluation – see below) these same banks are being faced with substantially more losses on their general loan books, possibly leading to the need for yet more recapitalization, and so on. Divergences Within The Troika On Deflation? “Deflation is a protracted fall in prices across different commodities, sectors and countries. In other words, it is a generalised protracted fall in prices, with self-fulfilling expectations. Therefore, it has explosive downward dynamics. We do not see anything like that in any country“. Mario Draghi answering the question “do you see any risk of deflation in some countries in the euro area?” at this months ECB press conference “Macroeconomic developments are broadly as expected. The economy is rebalancing apace: the current account deficit is now shrinking fast, by 6½ percent of GDP in 2012; the competitiveness gap has been reduced by about half as last year’s labor market

236 reforms are facilitating significant wage adjustment; and deflation is finally setting in“. – IMF Third Programme Review (my emphasis). Leaving aside a small quibble about the definition of deflation Mario Draghi selects for himself – for self-fulfilling expectations about an ongoing fall in prices to set in prices first need to start falling – there is no doubt that in the case of Greece prices are now falling, and the arrival of this crude kind of deflation (rather than what we could call the Draghi variety) in any country is surely an issue which most of the world’s central bankers beyond the confines of the ECBs governing council are certainly not blasé about, if only because unless it is handled properly it can transform itself into the kind Mr Draghi so rightly fears . According to the IMF Third Review

In response to Greece’s now high output gap, headline HIPC inflation fell to 0.3 percent at end-2012 (from over 2 percent at end-2011) and turned negative in March (- 0.2 percent) and April (-0.6 percent). Core inflation (excluding energy and unprocessed food), which has been negative for some time, fell further to -1¼ percent in March. The GDP deflator also turned negative in 2012 (-¾ percent). The striking thing, leaving aside the issue of definition, is that the IMF actually seem to welcome the fact deflation is finally arriving in Greece – due to the competitiveness impact it will have on the Greek price level. But it is here I think that one can discern some sort of difference of opinion within the Troika itself. It seems likely that the IMF would actually agree with Mario Draghi that Japanese-style deflation is probably not on the cards in Greece at the moment (although given the depth of the country’s problems and the fact that the countries workforce has now started shrinking – due to demographic shifts and emigration – who the hell really knows, I certainly wouldn’t put my hand in the fire one way or the other on this one). But the IMF are concerned about an ongoing fall in wages and incomes in the context of continuing increases in the price level, and hence welcome the drop in prices as part of an internal devaluation which is seen as essential to restore international competitiveness. The far-reaching labor market reforms put in place in early 2012 have contributed to deeper wage corrections than in other recent crisis cases and substantial adjustment in the ULC-based REER. Less encouraging has been the weak and delayed response of prices to wage reductions, owing largely to product market rigidities. This asymmetry in price adjustment has led to a substantial erosion in real incomes and demand, and placed a disproportionate burden on wage earners relative to the self employed and the corporate sector. It has also left the CPI-based REER overvalued in 2012 by about 9 percent (Box 2). With the headline inflation now in negative territory and a widening inflation differential with the euro area, the extent of overvaluation is gradually

237 reducing and relative prices between the tradable and nontradable sectors are adjusting. – IMF 2013 Article IV Consultation So why might the other parts of the Troika – the EU Commission and the ECB – be more nervous about the consequences of this drop in the price level? They are concerned about the impact on Greek debt dynamics is the obvious answer. This drop in prices is now seen as essential and inevitable by the Fund, but is still to some extent being resisted in Brussels and Berlin. Again, the reason for the reticence is obvious, “we’re on the hook” – remember, if Greek debt is above the 110% of GDP target in 2022, or reaches levels in the intervening years that make this level obviously unattainable, for reasons of lower than anticipated GDP or price growth then the Euro Area peer countries are committed to making up the difference.

The chart below shows the results of a Debt Sustainability Analysis carried out by Fund economists during the period of the first bailout. What is clear is that the two main risk items for debt snowballing are lower than anticipated GDP growth and deflation. As the IMF itself observes in the Evaluation Document: Since the shocks considered were fairly mild, this sensitivity analysis demonstrated the precariousness of the debt trajectory. For example, the deflation shock considered in the DSA (3 percent more) would not have made much difference to the internal devaluation, but would have caused debt to jump to 175 percent of GDP.

In the Third Review the Fund goes even further on the basis of a new Debt Sustainability analysis – “If nominal growth averages 1 percent lower than the 4 percent baseline projection, debt will be 134 percent in 2020 with an only modest

238 declining path thereafter“. That is to say, if the sum of GDP growth and inflation is 1% less than forecast in the baseline scenario debt will rise substantially. So Whither Greece? Is Grexit About To Become An Option Again? According to Citi’s Chief Economist Willem Buiter, the man who coined the term Grexit, the possibility of Greece exiting the euro zone has receded “markedly” in recent months. “We still believe that there is a fairly high risk of Grexit in coming years, but no longer put it in our base case at any particular date,” Citi said in a research note co- authored by Buiter published in May. Reading this assessment at the time of its publication the argument seemed reasonable to me. But after 48 hours of poring over IMF documentation on the country I am no longer so sure that this conclusion is as solid as it seems. My feeling now is that, despite Buiter’s recent pronouncements, Grexit may well come rapidly back on the agenda after the German elections. I think markets are soothing themselves with an overoptimistic expectation of how committed German politicians are to moving towards banking and fiscal union – Draghi bond buying at the ECB is another issue, but the Greeks by and large don’t have bonds to sell, they just have debt obligations to the official sector. Put another way, as Wolfgang Munchau argues in this week’s Financial Times, “The OMT is not designed to address the solvency problems of various private and public entities in the eurozone”, and Greece’s coming problems are surely of the solvency and not the liquidity kind. The key issue really hangs around the obligations the Euro partners entered into with the IMF last December to fund any shortfall in Greek funding and debt-reduction needs as long as the IMF continues to give the country a pass mark during the ongoing reviews. Looking over and over again through the numbers the IMF put forward it is clear to me that there is really very little wiggle room left on Greek debt dynamics, and that the IMF are fully aware of this as their Debt Sustainability exercises demonstrate, hence initial attempts to distance themselves from EU institutions in the Evaluation Document. The move reminds me of one of Leo Messi’s attempts to lose his markers while languishing near the edge of the penalty box. One swift lunge and its in the net. Now one possibility which lies before us is obviously that the IMF gives the country a red flag in a review. That wouldn’t be so difficult given the way Greece works. Yet actually, for reasons discussed in the introductory section to this piece, the Fund has precious little interest in doing this, since the country’s Euro peers could then simply walk away from their funding obligations and the IMF would be last man standing on the debt, a situation they repeatedly stress they are anxious to avoid. Nonetheless, let us assume they do throw up a red flag, what would be the consequences? Well, not another EU backed aid programme surely. The red flag would mean the issue of possible Grexit would be directly back on the table, since core Europe would surely be extremely reluctant to accept politically unpopular losses for a country that wasn’t complying, and it is hard to see what the solution to ongoing funding shortfalls coupled with non-compliance would be if it wasn’t euro exit. So now let’s assume that the country gets a series of continuing green flags, but that nominal GDP performance is less than projected in the programme’s baseline scenario – it may not be politically correct to say this, but it is hard not to get the impression that the inflation and growth numbers for 2015 to 2018 (showing nominal GDP growth of

239 around 4.7%) have been devised explicitly to bring Greek debt into the region of 120% by 2020, at least on paper. The probability of under-performance is thus high. Cognizant of this looming difficulty the Fund seem to be already attempting to force the issue by looking for a 4 billion Euro down-payment on their commitment from the Euro partners in 2014. Then, supposing they wanted to accelerate the Euro partners Greek bail-in process they would only have to revise down their post 2014 inflation and GDP forecasts to make even more money needed quite quickly. But, if we think about it a bit, the political logic for ongoing debt pardoning in Greece by other EU member states isn’t especially clear given that Italy, Portugal, Ireland and Spain could all easily have debt levels over 110% of GDP come 2022. So how can you justify making Greece a special case in the positive sense? I think the more likely outcome is that core Europe will try to wriggle out of its obligations following the German elections, and that this move will lead to a surge in uncertainty about Greece’s future, with Grexit once more becoming an openly discussed option. http://www.economonitor.com/edwardhugh/2013/06/19/the-second-battle-of- thermopylae/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3 A+economonitor%2FOUen+%28EconoMonitor%29

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Daily Morning Newsbriefing June 19, 2013 El Plural: Rajoy may have received €1.5m in party bonuses over 20 years El Plural reports that one of the plaintiffs in the Bárcenas case has compiled a list of all of the supplementary payments given to PP leaders since 1990 according to the available documentation, and is asking the judge to verify whether the income was declared to the tax authorities. According to these data the PP paid a total of €22m to its leaders between 1990 and 2011, with PM Mariano Rajoy receiving the largest share, at over €1.5m altogether. In other news, El Confidencial writes that Rajoy and nine of his ministers receive between €900 and €1,800 a month from the Spanish Parliament for "expenses occasioned by parliamentary activities", despite having their expenses separately reimbursed. The paper calls this a "covert, tax-free gratification". Spain's economy minister optimistic about growth as bad loans and sovereign yields rise Speaking at the opening of the UIMP Summer School, Spain's Economy minister Luis de Guindos said Spain's bank restructuring fund FROB had at least €10bn in liquidity and the Spanish Treasury enjoys access to the bond markets, writes Cinco Días. De Guindos thus sees no need for Spain to draw any of the nearly €60bn remaining from the EU funds made available for Spain's banking rescue last Summer. According to the minister, the Bank of Spain only expects banks to need about €2bn in new bank capital over the next two year, which they should be able to raise in the markets, to make up for the estimated €10bn in additional provisions from the new requirement to treat refinancings as doubtful loans. According to Público, de Guindos also said that the recession might have passed "an inflection point" and that negative growth in the second quarter would be close to zero. According to Bank of Spain data reported by El Mundo, bad loans by Spanish banks rose by half a point since March to 11% in April, and over 2% year-on-year. Bad mortgage loans rose to 4% from 3% a year earlier, while bad loans to property developers are up to 29%. Meanwhile, Reuters reports that an auction of Spanish 6- and 12-month notes on Tuesday saw yield rising after months of falls. It's possible that the not-so-bad recession in the second quarter, if confirmed, would be the same kind of seasonal effect that led to unemployment dropping substantially in May but staying level after correcting for seasonal effects. Grillo and the return of history as a farce This must be one of the best modern examples of Karl Marx’ famous observation in his Brumaire essay that historic events occur twice – as a tragedy and as a farce. After

241 the bad local election results, Beppe Grillo is now conducting an old-fashioned purge of his Movimento 5 Stelle, triggered by criticism of his leadership style by an M5S senator – as we had reported. Grillo has now taken his battle against Adele Gambero to the next level, by forcing an online plebiscite with the motion to expel her from the party. The move is supported by a narrow majority of the M5S MPs – which as the FT suggests could indicate that the party might split over this. La Repubblica talked about mobbing in a front page editorial, recalling the prediction of a commentator who had observed a few months ago that the real test of any new party is how it will deal with dissent. That question has now been comprehensive answered. Latest Italian gross bad loan data up 22% from a year earlier Cyprus president Nicos Anastasiades called for a complete overhaul of the bailout programme, warning that the government may not be able to meet the terms of the current arrangement as its economy was harmed much more than expected. The FT obtained a copy of the letter Anastasiades sent last week to the Eurogroup and the troika. Although there is no explicit request for more funds it effectively asks for more money. The president asks for part of the €9bn given to Laiki bank in ELA- assistance to be converted into long-term bonds. These bonds would be used to unwind the partial merger of the “good” bit of Laiki with Bank of Cyprus. Anastasiades argues that Laiki received the so-called “emergency liquidity assistance” last year “under very questionable circumstances. Belgium raises 2013 borrowing target to pre-fund 2014 Belgium has increased its borrowing target for this year, taking advantage of low interest rates to pre-fund some of its requirements in 2014, Reuters quotes the Belgian debt agency on Tuesday. Belgium's gross borrowing requirement will rise to €42.43bn from €39.99bn earmarking €6.15bn for 2014 pre-funding - almost €2bn more than the initial amount envisaged. The treasury has already raised 60% of its annual funding plan, with a further bond issue due next Monday. There is €28bn of outstanding debt due to mature next year. Belgium continues to shift to more longer than shorter-dated issues. The debt agency said that it would issue €40bn of medium- and long-term bonds (OLOs), €3bn more than initially planned. It also wants to cut short-term debt by €2bn, double the level previously planned. Slovenia's 'bad bank' gets first bad debt transfer end of June Slovenia's newly-established 'bad bank' expects to complete the first transfer of non- performing loans s on June 28, bank officials said on Tuesday according to Reuters. Slovenia's coalition government has established a bad bank, known as The Company for Management of Bank Claims (DUTB), to ring-fence some €3.3bn in bad loans, or just under half the total estimated amount of bad debt. Andrej Sircelj, president of DUTB's management board, said the transfer of bad loans from Slovenia's biggest bank, Nova Ljubljanska Banka (NLB), was already under way. The banks will receive state- guaranteed bonds worth 1.1 billion euros in return. He later told Reuters the DUTB may issue its first bond in July, though he declined to provide details of the issue. Papachelas: Greek coalition needs to learn to break taboos On Kathimerini Alexis Papachelas writes politicians took some tough decisions to slash pensions and salaries but they are foot-dragging with the public sector overhaul. The coalition has failed in the simple task of agreeing on the closure of even one single state

242 entity, the ERT broadcaster. Even if the shutdown was carried out badly, the problem remains that the government needs to break taboos. A close look also suggests that even if they flag out progress it often turns out to be a masquerade – like the announcement of a merger between two hospitals when in fact all they did is to abolish one of the two boards. He concludes: ”The country needs to learn to live with such changes, and on a practical level this means that its politicians need to finally take the decisions that so many thousands of Greeks have already had to take at great cost over the past few years.” More on banking union delays Frankfurter Allgemeine has another article on delays of banking union, saying that all aspects of it are now behind schedule. It recalls that the European Council wanted the directives for bank resolution passed before June 2013. Likewise the rules on the recapitalisation of banks should have been passed in the first half of the year. And they have not passed the legislation for the single supervisory mechanism – which is held up over a dispute about whether and to which extent the SSM is answerable to the European Parliament. A vote is now expected to take place in September – also because the German Bundesrat will not cast its own vote on the German end of the legislation until July 5, as a result of which the process is now running into the summer holiday season. As a result, the SSM will not take up work until September 2014 at the earliest. And it can only start to recapitalise bad banks once it is fully active (which might not even straight away). The paper writes that there is a further unresolved dispute about the funds the ESM should earmark for bank resolution. Germany wants to cap the previous range of €50-70bn towards the lower end. Furthermore, the German government wants to delay that decision too, after the council and the parliament have decided on deposit insurance. But that, too, is going to take a long time to settle. Olli Rehn, meanwhile, as Reuters reports, is urging the eurogroup to reach a speedy conclusion on bank recapitalisation at its meeting in Luxembourg tomorrow. Suddeutsche Zeitung writes that a further complicating factor is the motion by France and German to replace Jeroen Dijsselbloem with a permanent eurogroup chief. This is not an issue on the agenda on Thursday, but it has caused anger in the Netherlands – something that is unlikely to be conducive to the process. The delays do not surprise us. It is clear, of course, that Germany is trying to delay the day of reckoning, not only because of the elections. But then, a banking union is a hugely complex issue, which many of its advocates underestimated. If you are serious about it, you realise that all sorts of EU and national laws are affected if a non-domestic institution were to talk into a bank and close it down, without the consent of the government or the national parliament. We are not even sure that banking union is consistent with the German constitution – possible the next test for the constitutional court. It is possibly the biggest policy error of all to have linked bank resolution to the banking union. EU car sales drop to 20 year low Car sales are often a reliable bellwether of the economy, so the news of a 20 year low in EU-wide car registrations is not reassuring. Reuters reports on figures from the Association of European Carmakers, which show that car registrations during May were 5.9% lower than in May 2012. The seemingly good figures for April are now considered to have been distorted by calendar effects. Over the first months of the year,

243 total EU sales were down 6.8%, relative to the same period in 2012. Germany underperformed the EU, with sales down 8.8%, while in France and Italy they were down over 11%. The UK, by contrast, posted an 11% annual increase for May. Steinbrück’s not really alternative euro strategy The eurozone plays virtually no role in the German elections – which is somewhat strange since the next parliament will probably spend a large portion of its time dealing with its various aspects. Yesterday, Peer Steinbruck outlined some of his thinking on the eurozone, which is different from Merkel's. He criticised her fiscal consolidations policies for the eurozone as leading to political and social crises – something she has not on her agenda, he said. His big idea was a European Marshall plan funded by the EU budget. He also does not exclude explicitly further contribution from Germany, Frankfurter Allgemeine reports. Reuters, meanwhile, has an interesting comment from hedge fund manager Galia Velimukhametova. A fund manager at GLG, which is part of Man Group, she said that Germany would end up spending more than 10% of its GDP to support a transfer union. Germany may get some concessions, like haircuts on debt, but it will cost a fortune to sort out the haemorrhaging of the banking sector. The SPD has concluded some while ago that it cannot score points in German politics by criticising Merkel’s eurozone policies, except on competence grounds. Helmut Schmidt, probably Steinbruck’s biggest supporter, said recently that Merkel does not understand finance, and in this same vein, Steinbruck presents himself as being more competent, but not fundamental different. The idea of Marshall plan funded by the EU budget is downright bizarre – since it already exists. It is called structural funds. It would take a change in macroeconomic policies and the underlying treaty provisions that pin them down to make a real difference to southern member states – and Steinbruck is not proposing that either. His campaign is going nowhere, as the party is now internally divided over all sorts of issues. And there seems to be little for power this time. The SPD is clearly planning for a return to power in 2017. Wolf on a triple tragedy Martin Wolf argues that the Greek crisis triggered a number of tragic misunderstandings. Here is his summary: “In brief, the Greek crisis proved a triple calamity: a calamity for the Greeks themselves; a calamity for the popular view of the crisis inside the eurozone; and a calamity for fiscal policy everywhere. The result has been stagnation, or worse, particularly in Europe. Today, we have to recognise that the huge falls in output relative to pre-crisis trends may well never be recouped. Yet the reaction of policy makers has not been to admit the mistakes, but to redefine acceptable performance at a new, lower level. It is a sad story.” Eurozone Financial Data

10-year spreads

Previous day Yesterday This Morning

France 0.610 0.606 0.563 Italy 2.790 2.807 2.763 Spain 3.106 3.032 3.011 Portugal 4.778 4.609 4.811

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Greece 8.625 8.564 8.54 Ireland 2.440 2.385 2.340 Belgium 0.839 0.838 0.807 Bund Yield 1.481 1.527 1.571

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.338 1.3387

Yen 127.140 127.68

Pound 0.852 0.8563

Swiss Franc 1.233 1.2323

ZC Inflation Swaps

previous last close

1 yr 1.09 1.1

2 yr 1.15 1.16

5 yr 1.41 1.42

10 yr 1.79 1.8

Euribor-OIS Spread

previous last close

1 Week -5.671 -5.671

1 Month -4.957 -4.957

3 Months 1.171 1.171

1 Year 27.586 28.886

Source: Reuters

http://www.eurointelligence.com/professional/briefings/2013-06- 19.html?cHash=bff92b633efe6bfc2b89ff254cef0c78

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Economía EXAMEN A LA ECONOMÍA ESPAÑOLA » El FMI pide otra reforma laboral que abarate el despido y baje los sueldos El Fondo ve necesario abaratar más los costes laborales para reducir un paro "inaceptable" El organismo aplaude la propuesta de lo expertos para reformar las pensiones Rebaja el optimismo y advierte de que las perspectivas económicas siguen siendo díficiles Se alínea con Bruselas y recomienda ampliar la base de algunos impuestos indirectos Las 10 recetas del Fondo para España

DESCARGABLE El informe anual del FMI Amanda Mars Madrid 19 JUN 2013 - 17:35 CET2775

AFP LIVE! El Gobierno había prometido en Bruselas una reforma laboral “extremadamente agresiva”, pero su resultado final, una vez puesta en marcha, no ha resultado suficiente para el Fondo Monetario Internacional (FMI), que acaba de hacer públicas las conclusiones de su misión a España y reclama otra gran modificación que, de facto, abarate más el despido y facilite la rebaja de salarios. El objetivo, señala el documento, es reducir un nivel de desempleo “inaceptablemente alto”. Los inspectores del FMI elogian la labor reformista del Ejecutivo de Mariano Rajoy, gracias a la cual “los desequilibrios exterior y fiscal se están corrigiendo rápidamente”, pero echan un jarro de agua fría a la campaña emprendida por el Gobierno —y por altos ejecutivos de empresas— en las últimas semanas por transmitir una imagen de optimismo y la idea de que España ya ha pasado lo peor y ve —a lo lejos— luces que indican la salida de la crisis. No es así, según el FMI, que se limita a señalar que “aunque hay signos de que la contracción de la economía podría terminar pronto, las perspectivas siguen siendo difíciles”. Las previsiones del organismo son más negativas que las del Gobierno. Admite que “un escenario más positivo similar al previsto por el Gobierno es ciertamente posible, especialmente a medio plazo si se llevan a cabo las reformas previstas”, pero que también hay riesgos a la baja.

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MÁS INFORMACIÓN/ El FMI alerta: “Las perspectivas siguen siendo difíciles” / Las 10 recetas del FMI para España / Más de seis millones de parados / Los economistas prevén que la recesión siga en España hasta 2014 / Cinco años entre tinieblas Pero el Fondo, que en sus reuniones de primavera ya propinó un duro varapalo a las perspectivas económicas de España, pide ir más allá de lo previsto, sobre todo en el ámbito laboral. “La reforma laboral del año pasado supuso mejoras sustanciales y está teniendo impacto”, señala el FMI, en línea con lo que sostiene el Ejecutivo, si bien los datos de la Encuesta de Población Activa (EPA) quitan la razón a ambos: se han destruido más de 800.000 puestos de trabajo desde que entró en vigor el nuevo marco regulatorio. Sin embargo, añade el Fondo, “la dinámica del mercado de trabajo necesita mejorar para reducir suficientemente el desempleo”. El jefe de la misión para España, James Daniel, ha apuntado en la presentación de las conclusiones del informe en la sede del Banco de España, que en efecto la cuarta economía europea atisba algunos signos de recuperación, pero "ese no es el tema", ha recalcado, sino "si esa reactivación es suficiente para crear empleo". España, ha recordado después, históricamente, ha sido capaz de crear trabajos con crecimiento de a partir de 1,5%. El FMI insiste por eso en la rebaja salarial, que cree que aún tiene recorrido, ya que, según Daniel, el nivel de los sueldos no ha variado mucho desde antes de la crisis. Según afirma el Fondo en el informe, su propuesta es que “se alineen los costes de despido para los contratos indefinidos con la media de la Unión Europea y que se incrementen de forma más gradual con la antigüedad”, además de “reducir el número de contratos, ampliar el uso del nuevo contrato permanente”. El documento también plantea una mayor precisión de las causas objetivas de despidos, dado que reclama “reducir el margen de interpretación judicial de los despidos objetivos”. Y es que una consecuencia de la actual reforma laboral ha sido que muchos casos de despidos acaban en los tribunales, donde se determina si en efecto la empresa tenía causas objetivas para despidos procedentes. Sueldos más bajos El Fondo también considera que los sueldos tienen que seguir bajando en España. Propone “el compromiso de los empresarios de generar incrementos significativos en el empleo a cambio de la aceptación por los sindicatos de una significativa moderación salarial”, además de otras vías para fomentar la contratación como “algunos incentivos fiscales a través de reducciones inmediatas en las cotizaciones a la Seguridad Social compensadas por incrementos en la recaudación por imposición indirecta en el medio plazo”. Y también cree que, a no ser que la situación cambie en los próximos meses, son necesarias “reformas más profundas en la negociación colectiva” con el fin de facilitar que las empresas con problemas puedan aplicar rebajas salariales por debajo del convenio colectivo que las rigen, es decir, las llamadas “cláusulas de descuelgue”. "El déficit sigue siendo muy alto, pero los ajustes afectan al crecimiento", según el jefe de la misión Además de dar el visto bueno al documento sobre pensiones presentado por el comité de expertos que convocó el Gobierno, el organismo internacional pide mejoras en los mecanismos de control de los presupuestos y los gastos públicos. En este apartado, deja el recado de que se potencie la independencia “real y aparente” del consejo fiscal

247 independiente con unos mandatos no renovables para su presidencia de cinco años o más. En el ámbito fiscal, James Daniel ha advertido de que aunque "hay que continuar la consolidación, el ritmo debe ser gradual". "El déficit sigue siendo muy grande y no es sostenible, pero los ajustes afectan al crecimiento", ha añadido antes de incidir en que también se puede actuar del lado de los ingresos. "¿Cómo? Hay muchas posibilidades, sobre todo en el ámbito de los impuestos indirectos", ha dicho Daniel, si bien ha dejado claro que no está pidiendo una subida del IVA. En su lugar, ha abogado por que "se aumenten los ingresos sin necesidad de tocar los tipos". Es decir, por aumentar la base impositiva (incrementado los productos que pagan las tasas más elevadas), en línea con una de las últimas recomendaciones de Bruselas. Prudencia con los dividendos de la banca En cuanto al sector financiero, pide una suavización del desapalancamiento financiero, de modo que el proceso de reestructuración sea compatible con que el flujo crediticio llegue a las empresas, uno de los grandes problemas de la economía española en este punto de la crisis. A los bancos les pide reforzar el capital, entre otras cosas con mucha prudencia en el reparto de dividendos. Entre el resto de recetas, el FMI pide crear una "comisión de crecimiento" independiente para impulsar las reformas, cambiar el régimen de insolvencia empresarial (para facilitar las reestructuraciones de deuda) y personal, medidas para reactivar el crédito, aplicar el factor de sostenibilidad de las pensiones propuesto por los expertos y elaborar un presupuesto plurianual. Pero no todo son deberes para España. El FMI también pide que el Banco Central Europeo (BCE) adopte nuevas medidas para frenar la fragmentación de los mercados financieros en Europa (por los cuales los países con problemas pagan altos intereses financiarse mientras a los fuertes puede resultarles prácticamente gratis) y que Bruselas avance en la unión bancaria. Además, pide que el Banco de España mantenga abierta la opción del rescate "para ayudar a cimentar la confianza del mercado y reducir los tipos de interés". Sobre la posibilidad de que la línea de crédito de la ayuda se prorrogue, Daniel ha defendido que el debate se aborde con calma a finales de año. Sin salir de sus indicaciones al antiguo instituto emisor español, el jefe de la misión del FMI ha defendido la necesidad de que el continúe de cerca con la supervisión. También, ha valorado las pruebas de resistencia a nivel local de las que, apunta, podría concluirse que las entidades necesiten más capital. "Europa tiene que ayudar más a España", ha destacado Daniel, que ha reconocido que el principal problema que actualmente tiene el país está en la falta de crédito para las empresas solventes, por lo que instado al BCE a que garantice que su política llega a todas partes. http://economia.elpais.com/economia/2013/06/19/actualidad/1371632728_241733.html

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IMF Demands Spain to Tighten its Ruthless Labor Reform Escrito por Ana Luisa Brown

19 de junio de 2013, 11:57Madrid, Jun 19 (Prensa Latina) The International Monetary Fund (IMF) today called the conservative Spanish government for another turn to its ruthless labor reform, which allows to make even more cheaper workers layoff and facilitate wage cuts. That's one of the main requirements contained in the report on the Spanish economy, which takes place once a year by the multilateral institution and serves as the basis for its recommendations. In the conclusion of his recent visit to Madrid, the IMF urged the Executive of the right-wing Popular Party (PP), responsible on February 2012, of a tough transformation in the labour market, to go further away in its questioned labour reform. According to the institution headed by Christine Lagarde, the changes introduced by the PP in this area are insufficient to reduce an unacceptably high rate of unemployment in an economic environment still difficult. Although she admitted that the reform of last year supposed improvements, the Fund indicated that the dynamics of the labor market needs to improve to sufficiently reduce unemployment, which now exceeds six million 200 thousand people. In parallel, she considered unavoidable the social search for agreement between employers and unions so as to make employers commit themselves to generate significant increases in employment in exchange for workers to accept a significant wage moderation. Dissatisfied with its own recipes, the IMF warned that European country that a fiscal tightening too quickly could damage its economic growth, and stressed that additional measures are not desirable for this year. http://www.plenglish.com/index.php?option=com_content&task=view&id=1529711&Itemid=1 también: http://www.ft.com/intl/cms/s/7eeef508-d8c3-11e2-a6cf- 00144feab7de,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2 F7eeef508-d8c3-11e2-a6cf- 00144feab7de.html&_i_referer=http%3A%2F%2Finagist.com%2Fall%2F347360252599074816%2F#ax zz2WZFC5q88

249 euronews Hedge funds brace for renewed debt crisis Reuters, 18/06 20:39 CET By Laurence Fletcher MONACO (Reuters) – The euro zone’s debt crisis may be far from over, while Japan’s money-printing gamble to revive its economy could destabilise global markets if it doesn’t work, some hedge fund managers say. They are taking the view that the rally in financial markets over much of the past year, fuelled by central bank money printing, could mask a failure to tackle some European countries’ and banks’ debt problems, and the sell-off of recent weeks may be the start of a longer downward move. “(A Cyprus-style bailout) will probably happen somewhere in Europe again,” said Galia Velimukhametova, fund manager at GLG, part of hedge fund manager Man Group , at the GAIM conference in Monaco on Tuesday. Cyprus was bailed out by the EU and the International Monetary Fund earlier this year, with some depositors having to take losses. “Germany is going to have to spend more than 10 percent of its GDP to support transfer union … They may ask for concessions – a haircut for debt, deposit measures to contain a capital flight,” Velimukhametova said. Bond markets, particularly in peripheral countries such as Italy and Spain that had been facing rising borrowing costs, rallied sharply after European Central Bank head Mario Draghi’s pledge last July to do “whatever it takes” to protect the euro zone from collapse. However, Velimukhametova said domestically-focused banks in some southern European markets could suffer as loan problems re-emerge. “Our best investment idea would be (to) short domestic financials of peripheral European countries,” she said. “There is a real asset quality problem in those financial institutions. “We’ve done a lot of analysis. Non-performing debt … in Italy is high teens, in Spain is high single-digits or low double-digits. However, usually after the audit, these things double or triple.” Other managers are similarly cautious. “The European crisis is far from being over,” said Philippe Gougenheim, CEO of Swiss-based Gougenheim Investments, who has gone short French government bonds against German bonds and is short the euro against the dollar. “Deficits in Spain and France are worse than expected, growth is still negative in several countries and unemployment is reaching record levels. This trend is not sustainable and we expect a bumpy road for European markets.”

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Sushil Wadhwani, CEO of Wadhwani Asset Management and a former member of the Bank of England’s Monetary Policy Committee, said some politicians had been “lulled into a false sense of security” by the ECB’s bond-buying promises and had shown “no signs whatsoever” of making structural reforms. MOST WORRIED However, Wadhwani said he was most worried over the next two to three years about Japan, which in April pledged to inject about $1.4 trillion into its flagging economy in an effort to end two decades of stagnation. The move, coupled with stimulus efforts by Japanese prime minister Shinzo Abe, sent stocks rallying and the yen tumbling and proved a much-needed boost for struggling managers of macro-economy-oriented funds. One trader at a multi-billion dollar hedge fund, speaking on condition of anonymity, told Reuters the trade had proved “tremendous” for his firm and for many others. However, Wadhwani said the Bank of Japan could be forced by politicians to buy “a lot more JGBs (Japanese government bonds) than is optimal in terms of its inflation target”. “You could get debt monetisation, which would meaningfully destabilise global markets and make the exit process (from central bank stimulus) problematic globally.” He said his favourite trade over the next 12 months would be shorting JGBs and U.S. Treasuries. Another manager, speaking on condition of anonymity because the views were personal, was looking for investments that either won’t suffer or will profit if equities fall. “Is it just a shock that we’ve had, or the prelude to an eruption, in which case we’re in very dangerous territory,” the manager said. “If Japan’s revival doesn’t materialise, then that could be the moment when people start to question their basic trust in the system and in countries’ status as lender of last resort. “People may start to question how are we ever going to get out of government indebtedness.” (Editing by Greg Mahlich and David Holmes) http://www.euronews.com/business-newswires/1995352-hedge-funds- brace-for-renewed-debt-crisis/

251 euronews German banks signal support for euro deposit guarantee scheme Reuters, 19/06 12:54 CET

FRANKFURT (Reuters) – German banking association BDB signalled it may drop its opposition to a pan-European deposit guarantee scheme, a radical step under which German lenders would absorb some of the losses of failed banks in other European states. Until now, Germany’s banks have been opposed to any plans for funding bank rescues from outside of Europe’s largest economy, slowing progress for creating a European Banking Union. “A common deposit guarantee scheme is needed,” Juergen Fitschen, co-chief executive of Deutsche Bank and president of Germany’s BDB banking association, said on Tuesday in a statement embargoed for Wednesday. “Banking union is the right step. You can’t always show people the cold shoulder,” Fitschen said, referring to Germany’s scepticism toward a pan-European bank resolution mechanism and deposit protection scheme. European Union leaders committed to a banking union last June, but deep cracks have since emerged, with Germany in particular raising doubts about its overall feasibility. Fitschen made clear that he was not in favour of the immediate introduction of such a scheme. BDB represents listed banks such as Commerzbank and Deutsche Bank.

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“Not today, I just hope that one day we will get there. The concerns that we have, are justified,” he said, referring to fears that Germany would have to pay for sloppy lending standards and supervision in countries with failed banking systems. The first step, to create a single bank supervisor under the European Central Bank, looks set to be in place by mid-2014. A second step, the creation of a resolution agency, and a third leg, creation of a single deposit guarantee scheme, have encountered opposition. Fitschen also said large banks are needed, downplaying the idea that banks that are “too big to fail” will pose a threat to the economy going forward. The creation of a pan- European resolution mechanism will help guard against the need for taxpayer-funded bailouts, he said. “If you are convinced that you can wind down a large bank, then why do we think about ‘too big to fail’,” Fitschen said. Upon being asked if there is such a thing as a bank that is too big, Fitschen said, “I don’t know how I should answer this question. What’s important is that banks have enough capital and liquidity.” (Reporting By Edward Taylor; editing by Jane Baird) http://www.euronews.com/business-newswires/1996074-german-banks-signal-support- for-euro-deposit-guarantee-scheme/

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CNBC EUROPE NEWS Cyprus President Calls for Bailout Overhaul to Save Economy Published: Tuesday, 18 Jun 2013 | 11:34 AM ET By: Peter Spiegel

Nicos Anastasiades Aris Messinis | AFP | Getty Images Cyprus' president has asked euro zone leaders for a complete revamp of his country's 10 billion euro ($13.4 billion) bailout, warning Nicosia may not be able to meet the rescue's current terms because it has harmed the country's economy and banking system even more than expected. In a letter sent last week and obtained by the Financial Times, Nicos Anastasiades wrote that the restructuring of the country's two largest banks, the centerpiece of the March rescue, was "implemented without careful preparation", wiping out the working capital of many Cypriot companies and requiring unprecedented capital controls that were suffocating the island's economy. "[T]he economy is driven into a deep recession, leading to a further rise in unemployment and making fiscal consolidation all the more difficult," Mr Anastasiades wrote to the heads of three EU institutions and the International Monetary Fund. "I urge you to review the possibilities in order to determine a viable prospect for Cyprus and its people." (Read More: Cyprus Ignored Bailout and Bank Warnings: EU's Rehn) Mr Anastasiades has asked EU leaders to unwind the complex restructuring and partial merger of its two largest banks, which account for 80 percent of the domestic banking sector, backed by further euro zone loans. A senior euro zone official directly involved in the Cypriot talks said EU officials were "puzzled" by the letter, adding finance ministers would discuss it at a regularly scheduled meeting Thursday but were unlikely to view it favorably. "Essentially, he is asking for a complete reversal of the program," the official said, adding that the failure to prepare for the bailout's impact was partially the fault of Mr Anastasiades' government, which voted down a first agreed rescue before succumbing to a similar deal nine days later.

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Mr Anastasiades' warning comes less than a month after the IMF issued a stinging criticism of the EU's handling of Greece's first 110 billion euro bailout, arguing its assumptions were far too optimistic. (Read More: Cyprus Bailout in Danger as Opposition Grows) The Cyprus bailout forced the closure of the island's second-largest financial institution, Laiki bank, and a drastic restructuring of its largest, Bank of Cyprus. Controversially, it required depositors with more than €100,000 in both banks to pay for the banks' bailout through seizures of cash in their accounts. None of the 10 billion euro in rescue loans from the EU and IMF is to go to shoring up either bank, bailout lenders stipulated. But in his letter to the eurogroup of finance ministers and "troika" of international lenders, Mr Anastasiades said those terms had proven too onerous for Bank of Cyprus, the island's only remaining "mega-systemic bank", and were making it nearly impossible for the bank to raise the cash needed to run its day-to-day operations. "The success of the program approved by the eurogroup and the troika depends upon the emergence of a strong and viable BOC," he wrote. Although the letter does not request it explicitly, Mr Anastasiades is in effect asking for further euro zone loans on top of the existing 10 billion euro sovereign bailout - something specifically ruled out by a German-led group of countries at the time. (Read More: Portugal's Banks Fear 'Cyprus Virus') He asks for part of the 9 billion euro given to Laiki in so-called emergency liquidity assistance by the eurosystem's central banks to be converted into long-term bonds. These bonds would be used to unwind the partial merger of the "good" bit of Laiki with Bank of Cyprus. Mr Anastasiades argues that Laiki received the so-called "emergency liquidity assistance" last year "under very questionable circumstances" - a direct criticism of the European Central Bank, which approves all ELA lending. The barb is an apparent reference to the ECB's decision to approve lending to Laiki even after it became clear to many critics it was insolvent. Jorg Asmussen, the ECB board member responsible for euro zone crisis issues, defended the decision during a grilling by the European parliament last month, arguing the possibility of a future recapitalization with public money meant it was still viable at the time. http://www.cnbc.com/id/100825009

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Parlamento Europeo / En portada

Financial Transaction Tax: MEPs push wide scope and attention to pension funds Others Economic and monetary affairs / Economic and monetary union − 18-06-2013 - 14:45 The Economic and Monetary Affairs Committee stood by its guns on Tuesday in supporting the Commission's proposal for a wide-scope financial transaction tax, with stocks and bond trades taxed at 0.1% and derivatives trades taxed at 0.01% in 11 EU countries. The committee proposed lower rates until January 2017 for trades in sovereign bonds and the pension fund industry's trades. A new legal ownership principle was also inserted to make tax avoidance more costly. Taking the floor after the vote Anni Podimata (S&D, EL), Parliament's lead MEP on the matter welcomed the committee's tenacity. "Despite very intense lobbying, today's vote proved that Parliament remains consistent and coherent in its approach to this tax", she said. A wide scope The committee's position backs the Commission proposal that the financial transaction tax (FTT) should cover a wide range of financial instruments, be it stocks, bonds or derivatives. At the same time, the adopted text addresses specific concerns, notably the issue of pension funds and their need to be active on the financial markets. Tax rates The committee text retains the headline tax rates proposed by the Commission, i.e. 0.1% for trades in stocks and bonds and 0.01% on derivatives trades. However it also says participating countries should be allowed to apply a higher rate to riskier "over the counter" trades (which are less tightly controlled and transparent than stock exchange traded instruments). The committee position also says that trades in sovereign bonds should be only taxed at 0.05% until 1 January 2017 and, up until that same date, trades of pension funds would only be taxed at 0.05% for stocks and bonds and 0.005% for derivatives. It adds that when evaluating the FTT's performance, the European Commission should pay special attention to the rate of taxation with regard to pension funds. FTT: expensive to avoid The adopted text introduces provisions to make evading the FTT potentially far more expensive than paying it. The text links payment of the FTT to the acquisition of legal ownership rights. This means that if the buyer of a security did not pay the FTT, he or she would not be legally certain of owning that security and would be unable to clear the trade centrally. Next steps The European Parliament has a consultative role on taxation matters. It is now up to the 11 member states participating in the enhanced cooperation arrangement to reach a deal. The Commission has said that it expects the FTT to be up and running by 1 January 2014. In the chair: Sharon Bowles (ALDE, UK) http://www.europarl.europa.eu/sides/getDoc.do?pubRef=- %2f%2fEP%2f%2fTEXT%2bTA%2b20130611%2bTOC%2bDOC%2bXML%2bV0%2f%2fE S&language=ES

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CNBC EUROPE NEWS IMF: Spain's 'Hard Won' Solvency Needs Protection Published: Wednesday, 19 Jun 2013 | 5:06 AM ET By: Jenny Cosgrave, Staff Writer

Getty Images "Proactive vigilance" is needed to safeguard the "hard won" solvency of Spain's banking system, and Europe needs to do more to ease Spain's financial woes, the International Monetary Fund has warned. In the fund's concluding statement from its most recent visit to Spain, the IMF said decisive action had been taken to clean up the country's banks, but it has so far not been enough to reverse the "financial fragmentation" the country is facing. (Read More: Spanish and Italians CEOs Best Paid in Euro Zone) The banking crisis in Spain has wiped out billions of euros of investors' money, with shares in nationalized lender Bankia tanking some 93 percent in the last year. The European Union (EU) approved 100 billion euros in aid for Spain's banking system earlier this month . "Losses need to be promptly recognized and distressed assets sold to avoid tying up resources that could flow to more productive uses," the IMF said. (Read More: Bon Jovi Waives Fee for Crisis-Hit Spain Concert) The fund also urged euro-area authorities to do more to "ease Spain's adjustment" by pushing through rules on banking union and keeping monetary policy loose. "Recent euro-area actions have reduced tail-risks and financial market stress. Nevertheless, these initiatives have not been sufficient to reverse financial fragmentation, fix the broken transmission mechanism, and deliver higher growth and employment, neither for the euro-area nor Spain," the IMF said. (Read More: Spain Unemployment Rate Hits Record 27.16% in First Quarter) "Of particular importance to Spain would be moving faster to full banking union, which would help break the sovereign/bank loop by allowing Spanish firms to compete for funds on their own merits rather than on their country of residence," the fund added. Further ECB measures are also needed to reduce the very high borrowing costs that Spain's private sector faces, the IMF said. —By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave http://www.cnbc.com/id/100827158

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ft.com Comment Editorial June 18, 2013 6:31 pm A good day for Britain in Europe Compromise on market rules can and will protect the City After 30 excruciating months of negotiation, EU ambassadors have struck a preliminary deal over the Markets in Financial Instruments Directive (Mifid), a cornerstone in the regulation of financial markets. The agreement includes an important clause protecting the City of London against discrimination – proof that Britain’s interests are best served when the government sits at Europe’s top table rather than outside the room. The update of Mifid is part of a global push for greater transparency and better policing of trading activities that began with the Group of 20 agreement in 2009. With the US already at the final stages in the implementation of Dodd-Frank, it was time for Europe to agree on common rules. More ON THIS STORY/ Eurozone seeks ‘Tobin tax’ incentives/ Robin Hood tax A long shot/ Regulatory tsunami floods business/ Funds rush to dodge new European rules/ Brussels proposes €30bn ‘Tobin tax’ ON THIS TOPIC/ Quick View Hard bargaining starts on Mifid II/ UK agrees EU deal on City regulation/ EU agrees breakthrough in market rules/ Dutch banks demand commission-free ranges EDITORIAL/ Holding UK banks to higher standards/ Eyes on the prize in EU-US trade/ Co-operative bust/ China’s dissidents One of Mifid’s most important aims is to push over-the-counter trading activities into more transparent exchanges. The expansion of the OTC derivatives market was one of the reasons for the rapid interbank contagion during the financial crisis. When one bank goes bust, this shock quickly spreads down the financial chain, with consequences that are potentially systemic. The details of the legislation – including how much trading can be done on off-exchange venues known as “dark pools” and the exact limits to high-frequency trading – will be subject to negotiation. The proposal will be looked at by the European Council, Commission and parliament, all of which can modify the final text. These discussions, however, are not expected to affect the safeguard obtained by the UK, which states that no proposal from any regulator should “directly or indirectly, discriminate against a member state . . . as a provision of investment services and activities in any currency”. A similar clause was included in last December’s agreement on the formation of a European banking union. This week’s deal should lay to rest the European Central Bank’s attempt to move clearing houses handling a large amount of euro-denominated transactions into the currency union. This would affect the UK operations of LCH.Clearnet, one of the world’s largest clearers. Frankfurt argues that the financial market infrastructure serving the currency union has to be located within its borders to avoid potential clashes among central banks if things go wrong. But the ECB still has to prove that the location of LCH.Clearnet was an obstacle to its response to the crisis. The UK Treasury has taken the case to the European Court of Justice. It argues that the ECB’s land-grab infringes the single market. The process that led to compromise on Mifid may have been difficult but it is a good example of the way forward for Britain in Europe. EU institutions are increasingly meddling with the City. The decision to impose a strict cap on bankers’ bonuses is the most visible example of this new approach. Yet Britain should still be confident in its ability to strike deals. In principle, there is no reason why what is good for the UK should not be good for the rest of Europe too. http://www.ft.com/intl/cms/s/0/aa65c53a-d810-11e2-9495- 00144feab7de.html#axzz2WZFC5q88

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Daily Morning Newsbriefing June 18, 2013 Four options for ESM bank recaps Reuters reports that the eurogroup finance ministers will discuss the bail-in rules for an ESM bank recap this Thursday. The document distinguishes between the final bail-in regime – which will be part of the bank recovery and resolution directive (BRRD) - and ad hoc rules that cover a transitional period. For the latter, the document outlines four options. The first is to amend state aid rules to facilitate national bail-ins. Under the current state aid rules, depositors and senior bondholders are not protected in a case of insolvency. Under the second option, the European Commission would decide who must contribute to a bank’s restructuring in agreement with the government concerned, with the help of the ECB. Under option three, the governments and the ESM would decide jointly; and under option four, the finance ministers would decide. The options also discussed various limits, including the exemption of all depositors, not just deposits up to €100,000. Jorg Asmussen of the ECB gave a speech yesterday, in which he warns about the consequences of an insufficient resolution regime. While he said that member states were primarily responsible for dealing with legacy debt, the eurozone will need a strong resolution authority with the instruments and powers to wind up banks in difficulty in an orderly manner. Asmussen’s proposal goes against the German government’s preference of keeping resolution a largely national affairs (option 3 in the list above). Suddeutsche, meanwhile, reports that the banking union is likely to face delays, which plays into the hands of governments, who fear that their banks do not have sufficient capital next spring. We already reported on the ratification delays for the SSM, but this article says the discussions on resolution are also being dragged out. It says Michel Barnier will not present the BRRD until after the European summit, and there is further disagreement about how the ESM should fund resolution. The article says the combined delays make it unlikely that the process can be completed before the next elections to the European Parliament next May. The article quotes Sven Giegold of the Greens as accusing the Merkel government of delaying banking union. He said the tussle about the German end of the legislation only delays the entire process. Interesting also is a quote from a source in the US treasury who is predicting that the Asset Quality Review by the ECB would unearth very big surprises. We are not so certain about the latter. While an honest exercise would indeed unearth big surprises, we have not yet witnessed a single honest stress test exercise to date. Remember the AQR in Spain, which served the purpose to allow the Spanish government to lie about the recapitalisation needs, and which discredited the reputation of several independent auditors. We think it is inconceivable that any European institution, including the ECB, would publish a figure of hidden losses if there are insufficient funds to recapitalise the banks.

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Les Echos: €1 trillion of doubtful or illiquid assets stored in Europe’s bad banks Six years after the subprime crisis, more than €1 trillion of doubtful or illiquid assets are stored in the "bad banks" writes Les Echos on its front page, which used national or internal bad banks for this calculation. But this is only the tip of the iceberg, the article warns. Hundreds of bllions of euros are hidden in the banks throughout Europe. Cacib of Credit Acricole, which had no bad bank, revealed 1.15bn of doubtful assets when it was wind down end of 2012. For Franco-Belgian bank DEXIA, it will take 63 years alone to liquidate the €266bn assets of and with its exclusive reliance on refinancing through the markets a slight increase in refinancing costs could easily blow up the costs. In Germany there are €600bn in toxic or non-strategic assets to liquidate, so the article. A ticking time bomb crippling the finance sector for a long time, says the article. Berlusconi says Italy should bust deficit targets Corriere della Sera and La Republica have detailed articles on Silvio Berlusconi’s criticisms of the Letta government, which yesterday reiterated its absolute commitment to the 3% deficit target – for which it is prepared to raise VAT by one percentage point. Berlusconi yesterday said Italy was a net contributor to the EU, and such should challenge the consensus, and simply insists on its position. Repubblica quotes him as saying that the Italian government should make the point “without slamming heels but with courage and authority to tell these gentlemen that under these conditions we are go after you with your damn austerity.” He also criticised the Letta government for setting the wrong priorities. He said cutting expenses by 1%, instead of raising taxes, is not that hard. Every company know how to cut budgets by this amount. The article gives the response by PD general secretary Guglielmo Epifani who said that Berlusconi unnecessary provocations were weakening the country. Greek court orders state TV reopened, coalition talks focus on reshuffle The Supreme Administrative court in Greece ordered the state broadcaster ERT back on air while it is restructured, Reuters reports. All parties claimed victory from the ruling, which failed to specify whether ERT must restart with programming as before or only partially resume operations until its re-launch. During talks with his coalition partners, Antonis Samaras offered to reopen a pared-down version of ERT under temporary management, reshuffle the cabinet and update the coalition's agreement to improve cooperation among parties according to sources. PASOK's Venizelos said Samaras had appeared to accept the option of a cabinet reshuffle and better coordination, and that the three political leaders would meet again on Wednesday to agree on how to implement the court ruling. The threat of early elections appeared to recede as talk shifted to the reshuffle. Netherlands and Belgium prepare new round of austerity measures The Dutch coalition parties are set to begin negotiations on a new austerity programme to cut the budget deficit by €6bn (1% of GDP) next year, NRC Handelsblad reported last week. In April the Dutch government had decided to postpone new austerity measures, on hopes that the economy would recover. The forecast institute CPB now expects the deficit to reach 3.7% in 2014, and growth to decline 1% this year and to recover 1% next year, Bloomberg reports. The Dutch central bank is even more pessimistic in its forecast for next year, expecting the Dutch economy to contract 0.8% this year and barely grow with 0.5% in 2014, and saying in its bi-annual report that extra consolidation measures are necessary, according to Economic Times. The government now aims to reach a deal on the new austerity programme in August,

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Finance Minister Jeroen Dijsselbloem said last Friday. He promised that he would look for ways to stimulate growth but warned there was no easy fix. The Belgian government needs to find €500m in budget savings this year to be sure of avoiding EU sanctions, Prime Minister Elio Di Rupo said Friday in Brussels. Budget Minister Olivier Chastel said the country's independent budget monitoring committee announced that ministers need to find €524m of additional savings in order to comply with the EU goal of a federal budget deficit of 2.5% this year, Dow Jones reports. The committee also said the country will need to find savings of €3.5bn in its 2014 budget. The country has already made budget savings of around €18bn—equivalent to about 5% of annual economic output—since Mr. Di Rupo’s six-party coalition took office in December 2011, writes the Wall Street Journal. Finland’s PM Jyrki Katainen also joined in saying that he could not rule out additional austerity measures to keep the budget under control if the economy didn’t turn around soon. He wants labour market organisations to do their share in restoring growth, YLE reports. Biggest parties reach 'Grand Bargain' on Spain's position at the next European Council Spain's leading parties PP and PSOE reached an agreement billed as a Grand Bargain on the position Spain should defend at the European Council summit at the end of the current month. The agreement includes three demands: setting up the European Youth Guarantee, giving an impetus to the plan that the EIB lends to SMEs, and funding growth measures from the EU budget. Público writes that sources within the leading opposition party PSOE credit Spain's King Juan Carlos with mediating to make the Grand Bargain possible, including meetings with former PMs González, Aznar and Zapatero. However, as the deal was agreed between the PP and PSOE without involvement of the other parties in the Spanish parliament the smaller parties decided to boycott the signing of the agreement, writes El País. Nevertheless the PSOE's deputy Secretary General Elena Valenciano said that she expects the smaller parties to vote for the agreement when it is presented to the parliament before the European Summit.

Aside from the dubious economics behind these schemes, the politics is interesting. Voter intent for the two main parties is at historical lows, with the PP having lost a half and the PSOE a third of their support since the general election barely 18 months ago, and approval ratings for PM Mariano Rajoy and opposition leader Alfredo Pérez Rubalcaba are also sagging. Thus, shutting out the small parties may prove to be a political mistake. It's possible that in other times such a King-brokered Grand Bargain would have been met with enthusiasm but presently the King's popularity is also a at a low after a series of gaffes last year as well as the corruption case involving his son-in- law. It is doubtful that this transparent attempt at shoring up the popularity of all involved will succeed, and the political show of unity has been undermined by the exclusion of the smaller (but growing) parties. Finally, the actual content of the agreement is rather bland: the EU budget simply does not have the size to be able to fund any macroeconomically relevant growth agenda, and the other two measures are basically agreed already and, while they may arrest the downward spiral of the Eurozone periphery they are unlikely to restart growth.

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Bundesbank warns of slowdown to economic growth this summer The Bundesbank was extraordinary cocky in its expectations of a strong economic recovery at the beginning of this year, but all this is gone now. Reuters quotes from the latest monthly report that the Bundesbank now expects a weakening of economic activity during the summer. Since industrial orders were weak in April, production expectations have since been scaled back significantly. The same also goes for exports in the short term. For Q2, however, the Bundesbank’s indicator shows a robust growth. Why is the euro so strong? The Wall Street Journal has talked to a number of currency analysts to find out the reason’s behind the euro’s current strength. It said that on the futures market, bearish euro positions have fallen 90% in the past two weeks, citing data from the Commodity Futures Trading Commission. The euro now enjoys a safe bet status, despite the crisis, largely for technical reasons. The expected end of QE in the US has prompted traders to unwind bets in emerging markets. What also drives the euro is the unwinding of carry trades as the outlook for interest rates becomes less certain. Another potential reasons is the increase in the eurozone’s current account surplus. Eurostat yesterday published data for the April 2013 trade surplus of the EU27 of €9.2bn – roughly 1% of GDP. SPD against ESM as resolution authority We know that the SPD does not speak with one voice on banking union. One of the influential voices is Carsten Schneider, the finance spokesman, who argued in the FT that he is opposed to Angela Merkel’s proposal to empower the ESM with the rights of bank resolution. He said as an equity investor, the ESM might incur losses and would have to be compensated with fresh capital from member states, which in turn effects its lending capacity. He cites an estimate where for each euro invested in a bank, the total lending capacity goes down by three euros. Worse, this source of money would defer painful adjustment by the banks. He favours an independent resolution authority and a resolution fund, financed by the FTT. Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.621 0.610 0.613 Italy 2.817 2.860 2.839 Spain 3.122 3.106 3.137 Portugal 4.855 4.778 5.037 Greece 8.539 8.625 8.60 Ireland 2.473 2.440 2.421 Belgium 0.848 0.839 0.851 Bund Yield 1.47 1.481 1.502

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.334 1.3334

Yen 126.620 126.43

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Pound 0.849 0.8506

Swiss Franc 1.231 1.2326

ZC Inflation Swaps

previous last close

1 yr 0.95 1.09

2 yr 1.23 1.15

5 yr 1.54 1.41

10 yr 1.79 1.79

Euribor-OIS Spread

previous last close

1 Week -6.171 -6.171

1 Month -4.829 -5.229

3 Months 1.700 0.4

1 Year 30.657 31.557

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-06- 18.html?cHash=7dd54ba60a844c3377ad73af2f1e3b07

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Daily Morning Newsbriefing June 17, 2013 What will it take for the ESM to invest in a bank? Reuters reports on a document to be presented to the eurogroup in Luxembourg, which sets out the rules for the ESM in recapitalising banks. As expected, these rules are highly restrictive. A private sector bail-in will come before an ESM contribution. The ESM could only become a shareholder of a bank if the capital is below critical adequacy levels, and if the bank was considered systemic for the eurozone as a whole. The procedure is as follows: If a bank gets into difficulty, the ECB, the European Commission and the ESM would evaluate the bank’s assets through a stress test, and determine how much is can absorb in losses. The ESM will check whether the bank has the minimum legal common equity Tier 1 ratio of 4.5%. If the bank does not meet the minimum, the government would provide between 10 and 20% of the money needed to bring the bank's capital to the level required by the ECB as the supervisor. The document says the burden sharing between ESM and member states is constructed to deal with legacy assets. But if the government cannot meet the demands, the ESM can suspend a contribution. When the ESM becomes a shareholder of a bank, it would tackle strategy and business models, business performance, hiring and firing of senior management and board members. The recapitalisation rules are to be reviewed at least every two years. FDIC says Deutsche Bank 'horribly undercapitalized' Reuters quotes FCIC vice chairman Thomas Hoenig as saying Deutsche Bank was ‘horribly undercapitalised’, and one of the worst global banks based on a particular measurement of leverage ratios, adding that the bank had no margin for error. Hoenig said the Basel III rules allow banks to appear well-capitalised when they are not because the rules allow banks to use complicated measurements of how risky their loans are to determine the capital they must hold. But the leverage ratio – equity to total assets, not risked-weighted – gives a much different picture. Hoenig said Deutsche’s leverage ratio was only 1.63%. Deutsche said the number was 2.1% and 4.5% under GAAP. The difference in those numbers is mostly due to the way derivatives are calculated. The FDIC later clarified that Hoenig was speaking in a private capacity. Senior debt issues by banks slump The FT has the story that the issuance of senior debt by European banks has fallen to its lowest level in more than a decade. The article says the reason is that investors are becoming fearful of becoming bailed in. This year to date EU banks have issued $132bn in senior debt, down from $158bn over the same period last year, and the lowest total since 2002, citing data compiled by Dealogic. Investors’ appetite for subordinated debt has quadrupled to $16bn, but still shy of the 2008 record of $78bn. 264

Spain's interest rate floors in mortgages, voided on "transparency" concerns In an important opinion last week, Spain's Supreme Court ruled that interest rate floor clauses in mortgage contracts are to be considered abusive if there is any doubt that the inclusion of the clause in the contract was transparent, reports El País. The immediate effect will be that BBVA, Cajamar, and the nationalised Novagalicia, which were defendants in the lawsuit leading to the Supreme Court's decision, will cease to apply interest rate floors to their existing mortgages, with immediate effect. It is estimated that the measure will cost the industry hundreds of millions of euros per year in interest income, though the Supreme Court also clarified that the decision won't imply reimbursements of past payments. According to the paper, up to a third of all mortgages in Spain have floor clauses. Fears that Spain's bad bank will depress housing prices further Last week we reported on Fitch' view that Spain's bad bank SAREB would need to tread a fine line between depressing property prices by flooding the market and missing its sale targets. In fact, the SAREB had been demanding from its sales staff that their asking prices be 25% above market. However, also last week this rule was relaxed and the SAREB will now be selling its properties at market prices. El Confidencial writes that this will be the coup de grace for individual homeowners trying to sell their own properties as the SAREB will now enter into direct competition with them. Spain to investigate Deloitte's role in Bankia's failure El País reports that Spain's economy minister has opened an investigation into Deloitte's role as auditor of Bankia in connection with the floating of Bankia in the stock exchange in mid-2011, barely 10 months before the bank went under. The ministry's Acccounting and Audit Institute (ICAC) is responding to concerns about lack of independence of the auditor. While Deloitte calls the investigation a technicality, while Bankia board members blamed Deloitte for not warning in time in their depositions before the judge investigating the failure of Bankia. Personal bankruptcies on the rise in Spain El Confidencial has a report on personal bankruptcy in Spain. Spanish law allows natural persons access to the same bankruptcy procedure as legal persons only since 2003, but the number of people who took advantage of the possibility was exceedingly small prior to 2008-9. Now, 15% to 20% of all cases taken on by bankruptcy lawyers involve legal persons. However, because any remaining debt after liquidation of assets remains according to Spanish law, bankruptcy is not as beneficial to individuals as it is for firms. In the first quarter of 2013, just under 200 people declared personal bankruptcy, which is less than 7% of all bankruptcies. Bankruptcy can be favourable to families with substantial unsecured debt (typically consumer debt), which can usually be written down, and would be able to pay their mortgage if the rest of the debt went away. Another favourable case is when the bankruptcy has been precipitated by the failure of a firm that the person had provided a loan guarantee to. It is also relatively common to fold personal debt into a refinanced mortgage with a longer maturity and notional than the original mortgage, as this typically lowers the interest payments. Italy is trying to revitalize its economy through soft loans, investments The Italian government launched its decree to stimulate the economy. As Il Corriere della Sera reports, the Italian State-backed Cassa Depositi e Prestiti fund will provide €5bn in soft loans, at mid-internal market retail rates, for companies that update their

265 production process by purchasing new machinery worth of €2bn. In addition, the decree also cuts home and business electricity bills by a total of €500m per year, trying to ease the austerity measures imposed in 2012, while the infrastructure sector will obtain €3bn for public works projects this year, with the aim to create 30,000 jobs. In particular: €600m for improvements in the national rail network, €300m for maintaining tunnels and bridges, €300m for improving school buildings, €100m for projects in small communities. Italian homeowners who owe less than €120,000 won’t have their homes repossessed, unless they own more than one. Writing La Stampa, Marcello Sorgi argues the decree constitutes an extreme attempt to provide a positive supply shock to a stagnant economy, but it seems only a reallocation of existing funds without any performance criteria. This is the last chance of a recovery before the end of the year, when many companies will run out liquidity. In the meantime, Fabrizio Saccomanni has suggested that the European Investment Bank should use its €10bn capital increase towards creating up to €60bn in financing for SMEs. The attempt of restoring credit access channel for firms would only work if the EIB lend the money directly, not through the banks, Il Sole 24 Ore writes. The paper also called for a deduction of labour costs in the regional tax IRAP that would reduce payroll taxes by 11pp. Saccomanni says Italy has no alternative but to raise VAT According to La Repubblica, Fabrizio Saccomanni it was preposterous to cut the IMU property tax without raising the VAT by 1%, as doing so would force massive spending cuts elsewhere. According estimates by the Italian treasury, the scrapping of IMU would cost €4bn, while freezing a VAT increase scheduled next month, from 21% to 22%, would cost another €4bn. The abolition of the IMU was the key demand by Silvio Berlusconi, who threatened to pull out of the coalition. A simultaneous freeze of both tax would require 8bn in spending cuts, which the Letta could not survive politically, as noted by independent think tank Istituto Bruno Leoni. That’s why every discussion around these taxes is useless. Rift in Greek coalition government over ERT closure continues Antonis Samaras sought to defuse tensions with coalition partners over his surprise shutdown of the state broadcaster last week by offering to quickly relaunch programming—with a reduced staff, the WSJ reports. But his offer was rejected by the coalition partners demanding that the broadcaster remains fully operational while restructuring take place. However, both have said they would continue to support the government, and most analysts expect some kind of compromise to be reached at a meeting of the three party leaders today evening, after the ruling of the Supreme Administrative Court whether or not to hear an appeal from ERT staff, which could prompt the judges to order the broadcaster to resume service until a final verdict, Kathimerini reports. A poll by Metron Analysis for the Ependytis newspaper found that 68% disagreed with the decision to shut down ERT. 49% said the coalition government should remain in place against 47% preferring snap elections. According to the Kapa poll there is a clear preference for political stability, with 57% saying that there should not be another early election. Both polls show New Democracy and SYRIZA would be neck and neck, with a slight 0.3pp advantage for ND, Reuters reports. The turbulence created by the ERT decision has also sparked speculation about Samaras’s future. It has been reported that his position within New Democracy might be

266 insecure. On Saturday, Foreign Minister Dimitris Avramopoulos issued a statement on ERT, interpreted by some as a symbol of distancing himself from Samaras. Hundreds of ERT workers, meanwhile, extended their days long sit-in at the company's headquarters north of Athens over the weekend, sending out live programming over the Internet. Private-sector journalists also went on strike, causing a nationwide news blackout, although some returned to work on Saturday after a court ruled the strike illegal. French should work longer, panel says The French should pay contributions for longer to get a full pension and well-off pensioners should pay more taxes, says the much-awaited ‘report Moreau’. The advisory panel recommends increasing the contributions period needed for a full pension from 41.5 years now to up to 44 years, though the statutory retirement age would not change, Reuters reports. The panel also suggests increasing part of the pension contributions by 0.1 percentage points per year between 2014 and 2017, and to share that equally between employers and employees. Well-off pensioners would get smaller tax rebates, pay more social security contributions and their pension would temporarily not be fully indexed to inflation. The government has said it will study proposals from the report but is not bound by them for its planned revamp of the pension system later this year. The objective of the reform is to balance the accounts of the pension system by 2020, which would otherwise face a funding deficit of about €20bn by then. After receiving the consultative report on Friday, Prime Minister Jean-Marc Ayrault said pension reform was "absolutely within reach" and that the efforts asked of the French people would not be "overwhelming." Les Echos objects, saying all recommendations imply painful efforts from all sides. Major labour unions have said they would oppose an increase in contribution periods as well as a change in how public sector pensions are calculated. They have warned of protests if they were unhappy with the upcoming reform, which they will discuss with employer groups on June 20-21. SPD in turmoil as Steinbruck and Gabriel fall out over banking union It is not looking good for the SPD ahead of the September elections. In a Spiegel interview, Peer Steinbruck criticised SPD party leader Sigmar Gabriel for failing to support him, a conflict Suddeutsche Zeitung said had overshadowed the party convention over the weekend. Gabriel tried to paper over the cracks, with some embarrassing remarks about his political marriage to Steinbruck. What triggered the latest spat was a dispute within the party’s parliamentary faction about whether the SPD should support banking union, or not. Steinbruck was in favour. Gabriel was sceptical. Gabriel also attacked Steinbruck for not showing enough engagement in the election campaign. Suddeutsche writes the party’s grandees are absolutely aghast at this internal fight between the SPD’s two most important leaders. Do they know what large scale means? The Wall Street Journal seems impressed by an OECD study claiming large-scale emigration from southern to northern Europe. 34,000 Greeks and 28,000 Spaniards moved to Germany between September 2011 and September 2012, according to preliminary data, apparently the highest immigration numbers in 17 years. The total number of immigration into Germany is 116,000 in the 12 months to September 2012 –

267 which is a bit more than 0.1% of the German population. The OECD noted this was somewhat less than an exodus. The article quoted László Andor, EU commissioner for labor, as saying that Greeks and Spaniards should not just be looking at migration as a solution. The question is whether emigration is a benevolent factors for the crisis countries at all. Those who leave are mostly highly qualified workers, who would otherwise be paying taxes in their home countries. Nor is it clear either that they will return home once the economy picks up. Ifo says US, UK and Spain would benefit most from free trade zone Frankfurter Allgemeine has an article about an Ifo study, showing that the US and the UK would benefit most from the setup of a free trade zone. Germany would be a minor beneficiary. For the US, GDP per capital would increase by 13.4% over 10 to 15 years. For the UK, the benefit would be 9.7%, for Spain 6.6%, and for Germany 4.7%. A free- trade union would also have a negative impact of intra-eurozone trade. German trade with the southern eurozone countries would decline by 30%, with France by 23%. What do the bond market tremors mean for the eurozone? In his FT column, Wolfgang Munchau discusses the implication of last week’s mini bond market crash on the eurozone. He says the impact will be indirect, but that does not mean it will be small. At one level, it should affect the eurozone crisis because a credible central bank backstop and a banking union would make the eurozone immune against such kind of market shocks. But he points out that both of those programmes are highly uncertain. The limits of the OMT became clear in the German constitutional court last week. And the banking union currently under construction will not fulfil the fundamental economic task of separating banking risk from sovereign risk – at least not in the foreseeable future. He concludes that it does not take much for a virtuous circle of low market rates to turn into a vicious circle of high rates. If global bond prices go down, the eurozone will be highly exposed simply because it has not used the quiet times to construct a robust protective umbrella. Wren-Lewis on multipliers at the ZLB Simon Wren-Lewis has a blog post on multipliers based on a paper by Farhi and Werning. He discusses the difference in the multiplier between a closed economy and a monetary union. The closed economy result is clear. The multiplier at the ZLB is larger than one. But he says you cannot extend this logic to a monetary union. In a closed economy, nominal interest rates are fixed at the ZLB. An increase in government spending would thus generate inflation, reducing real rates, which in turn will increase current consumption relative to its steady state. That measn the multiplier is larger than one. The logic in a monetary union is different because nominal exchange rates are fixed, and you have to take into account the price level relative to the monetary union. And in that case the multiplier might actually be below one. However, as the Farhi and Werning paper shows, once consumers are credit-constrained, the multiplier may also exceed one. His post also discussed the effect on the multiplier by various monetary policy regimes, such as price-level target. He concludes that the of the policy regime for the multiplier is crucial. We like his concluding remark: “But of course they all know that, don’t they!”

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De Grauwe and Yuemei say Germans misunderstand nature of OMT risk In a well-argued commentary on Vox, Paul de Grauwe and Yuemei Ji argue that the Germans seem to misjudge the true nature of the risk posed by central bank purchases of government debt. They argue it is wrong to apply private-company default principles to a central bank. ECB bond-purchase transform public bonds into the monetary base, and sovereign-default risk into inflation risk. The real question is: What is the non- inflationary limit to money-base expansion? The general answer is that this depends upon the economic situation. The specific answer for the eurozone right now is that it is much higher in the presence of a liquidity trap. Mody on why Latvia is wrong to seek eurozone membership Ashoka Mody has a well argued article on the Bruegel website, arguing why Lativa is delusional in trying to enter the eurozone. The argument in favour is make the country’s fixed exchange rate regime – defended with extreme pain – irrevocable. But he says the economics does not make sense as there are no gains. You give up the flexibility, but there is no added benefit from gaining new credibility – which Latvia has clearly gained during the crisis. Latvia may also fail to gain competitiveness. He cites Olivier Blanchard’s argument that the country’s best hope would be to bridge the large productivity difference from the world technology frontier. But this is exactly what they used to say about Portugal, where it did not work. And if Latvia manages to pull this off, it could do so as well outside the eurozone than inside. His overall conclusion is that there is nothing to gain for Latvia by entering the euro, but much to lose. Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.646 0.621 0.623 Italy 2.839 2.880 2.859 Spain 3.099 3.122 3.172 Portugal 5.004 4.855 5.155 Greece 8.676 8.539 8.49 Ireland 2.580 2.473 2.846 Belgium 0.871 0.848 0.859 Bund Yield 1.526 1.47 1.491

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.331 1.3324

Yen 126.700 126.21

Pound 0.851 0.849

Swiss Franc 1.232 1.2307

ZC Inflation Swaps

previous last close

1 yr 0.93 0.95

2 yr 1.1 1.23

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5 yr 1.52 1.54

10 yr 1.9 1.79

Euribor-OIS Spread

previous last close

1 Week -6.171 -4.671

1 Month -3.971 -2.971

3 Months 1.729 3.729

1 Year 29.771 31.871

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-06- 17.html?cHash=356e2bfdef1a7ce407792630f0d46d3a

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Daily Morning Newsbriefing June 14, 2013 Letta government to raise VAT Il Corriere della Sera and other Italian papers are leading with the news that finance minister Fabrizio Saccomanni and another cabinet ministers said yesterday that Italy cannot simultaneously afford to cut the IMU housing tax and not implement an envisaged rise in VAT, and would thus opt to raise VAT. Saccomani said to do both would cost €8bn, and it would be completely unrealistic to find those savings elsewhere. In its coverage, La Repubblica writes that Saccomanni is now becoming a controversial within the coalition, as Silvio Berlusconi appears to appear chosen him as the successor to Mario Monti as target for his verbal attacks. The VAT increase is threatening to drive a gulf between the two largest parties, the PD and Berlusconi’s PdL. The paper quoted a senior PdL source as saying that Saccomani cannot simply say there is no money. This is not, after all, a technical government. For this type of governance, one may as well have kept the Monti government in place. What we found strange revealing in Corriere’s coverage is the jubilant first sentence in Corriere’s article: “Realismo al governo”. It is interesting that even after this long and severe depression, the Italian establishment still believes that it that a pro-cyclical fiscal tightening is realistic. What we found even more bizarre was Saccomanni’s statement that Italy had promised the ECB to respect the target. A separate article on the economics of the fiscal adjustment mentions the ECB’s latest monthly bulletin, which had underlined the benefits for Italy to meet the fiscal targets. Il Sole 24 ore notes in a commentary that there are no easy options for the Letta governments, since all tax relief has be recouped elsewhere from the budget. The paper says that the Letta government cannot succeed simply be reshuffling taxes, but would also need to take a hard look at benefits. That chance was missed in the previous couple of years. The most important thing to remember about any fiscal announcements from Italy is that there is no change to the overall fiscal balance. That means in the short run, none of these end-of-austerity pronouncements will have any positive effect on the economy. If you want to discuss best ways to apply austerity – a second order issue for now though clearly important for the medium-to-long – then surely a rise in VAT is probably the worst thing that can happen right now – much worse even than a wealth tax on housing since the latter brings in at least some revenue from savings – as it constitutes a wealth tax. Even with these measures, Italy will miss the 2.9% deficit target, since the economy is likely to go into another convulsion once VAT is raised. What do the market tremors means for the eurozone Not a good day for the markets, of course, but what does it all mean? A Reuters analysis notes that investors anticipate a gradual return to a more normal level of interest rates, which in turn would result in a zero total return over the next five years for investors benchmarked to the popular Barclays US Aggregate Bond Index. Much of the

271 disagreement among analysis and commentators is about whether the sharp rise in yields, and falls in equity markets, is an overreaction especially since the Fed is not about to do anything in the short term. One of the people quoted in the article said the Fed would continue QE for 12-18 months, and then gradually raise rates. The market rout also affected the eurozone. Italy's three-year borrowing costs jumped to their highest level since March at an auction on Thursday, Reuters reports. Italian treasury sold €3.42bn of three-year bonds at 2.38%, up from 1.92% in May. The bid to cover ratio was 1.34. Reuters columnist James Saft noted that this was a great time to worry again about a return of the eurozone crisis (you have to be a bond market investor to think that it has ever gone). His overall point is that with luck, all will be well, but it’s all dependent on luck. He says if luck runs out, southern European sovereigns may find it difficult again to fund themselves at low interest rates. He also makes the explicit point that investors had not yet fully understood Jorg Asmussen’s statement that the OMT is effectively, though not officially, limited. And he also quotes financial commentators as saying that bondholders may grow concerned about where they stand in relation to official creditors. “Why hold a Spanish bond if you will only lose out to the ECB and other officials if the credit goes to the wall? Though much was done to damp down worries last year, the only true example we have is Greece, where private lenders suffered a haircut and euro public sector ones did not.” Greek bond yields rise this week, market return next year unlikely Greek bond yields have seen the biggest rise in the euro zone market, with 10y bond borrowing costs moved above 10% this week, Reuters reports, after a privatisation scheme of the national gas company, considered as crucial to meeting the terms of its bailout, failed to attract binding bids and its bourse was downgraded to emerging market status. The rise in 10-year yields is now more than a percentage point above those on 30-year debt from around flat three weeks ago after Fitch upgraded twice- bailed-out Greece's credit ratings. Some analysts say they could hit 15% near term. Last month there was talk that a partial market return could be possible next year. Analysts say now that this target looks out of reach. Fitch sees continued weakness in Spain’s real estate market Reuters carried a statement by Fitch arguing that Spain’s real estate market is likely to remain depressed for many years, with prices likely to hit bottom after 2014. This is based on sales figures by Spain’s SAREB bad bank, which closed 550 sales in the three months since February, though a further 3,000 sales are reported to be in progress. Fitch argues that the pace of sales needs to speed up if the SAREB is to meet its target of selling 42,500 properties in 5 years, which risks depressing prices further. A complication cited by Fitch is that the SAREB’s majority shareholders are private banks that the SAREB itself is in competition with on liquidating the respective property portfolios. In addition, Cinco Días cites the opinion of Fitch’s Managing Director for Financial Institutions that Spain’s banking system is unlikely to need a second European aid programme. Fitch expects Spanish banks to need additional provisions of €10bn as a result of the new Bank of Spain rules on the treatment of restructured of refinanced loans, but the rating agency said banks are likely t be able to raise that capital in the markets. The story makes no mention of the recent speculation about Spain needing an

272 time extension of last year’s European banking rescue as a result of the upcoming ECB stress test of European banks. IMF warns of high risks for Portugal to miss its targets The IMF begins to doubt its own programme, is the headline in Jornal de Negocios. In its seventh evaluation on Portugal, the IMF is casting doubt that the programme’s core objectives can be reached as economic recovery becoming elusive. "The solid social and political consensus that to date has buttressed strong program implementation has weakened significantly," it said. "With only modest improvement in price- competitiveness indicators, there remains a risk that ongoing reforms—however comprehensive—will be insufficient to boost supply conditions in a time frame and magnitude that prevent a protracted demand slump." Portugal needs policies that lead to a reduction in nominal wages, something that has not happened sufficiently yet, according to the report. The report also warns that "Debt dynamics could become unsustainable under a combined shock scenario." The publication followed the IMF’s approval on Wednesday to ease Portugal’s deficit targets, by 1 and 1½ percentage points of GDP in 2013 and 2014. While the IMF mission chief Abebe Aemro Selassie rejects calls for a debt restructuring he calls on the ECB: "We see more the need for intervention by the ECB, policies by the ECB to help facilitate greater credit access" to small-to-medium-sized firms, the Wall Street Journal reports. For this, the ECB will have to help break the bottleneck on lending to the private sector. Regling says IMF should quit the troika Frankfurter Allgemeine has an interview with Klaus Regling, in which he accuses the IMF of failing to understand the rules of the eurozone. He says it would be best to get rid of the troika in the long run. The paper notes that Jose Manuel Barroso also supports the idea of getting rid of the IMF – though Regling adds the important detail that the IMF was (unfortunately) the only institution with any experience in crisis resolution. Regling was particular furious about the IMF’s paper. “The IMF pokes fun at the stability pact, and declares itself responsible for economic growth,” he said. That shows that it does not understand and respect the rules underpinning the monetary union. Possible further delay in SSM Frankfurter Allgemeine has the story that the single supervisory mechanism may face further delays, as the European Parliament decided it will not vote on the SSM until the German Bundesrat has passed its vote – which is scheduled to take place only after July 5. But that is the last day in which the European Parliament is in session, which makes a final vote likely only after the recess in September. Since the ECB can hire any staff until the EP casts the vote, the delayed vote will set back the SSM timetable by some two months, and would postpone the start of the SSM from July 2014 until September 2014. This is what happens when you are dealing with second-order priority projects. We have long come to the conclusion that the EU is not in a hurry over banking union. The crisis resolution will have to occur without it. It is best to think to banking union as an important long-term institutional change, but not as a crisis tool.

273

Why Steinbruck is failing Jan Fleischhauer has a good column in Spiegel Online, in which he tries to explain why Steinbruck’s campaign is not taking off. The fundamental problem with Steinbruck, he writes, is a deep arrogance, an almost total lack of interest in what others are sayings. Despite some recent attempts to appear a little softer, this arrogance does not work for a candidate who is trying to gain power from opposition – as opposed to defending power. He said it is no surprise that Helmut Schmidt backs him. He sees in Steinbruck a politician of similar ilk to himself. But Schmidt, too, never gained power from opposition, since he inherited the throne. Barry Eichengreen: Lessons from Greece tragedy On Project Syndicate Barry Eichengreen looks at the lessons of a Greek Tragedy arguing that if Greece had written down its debt by two-thirds at the onset of the crisis, it would have been able to recover quickly, with luck within a year. But the European Commission opposes debt restructuring as did the IMF under Dominique Strauss Kahn, given the influence of French and German governments, which adamantly opposed debt relief. Eichengreen says that Greece should have acted unilaterally. Presenting the decision for restructuring as a fait accompli to its EU partners would have enabled Greece to shape the dialogue with the ‘troika’ and gather support for reforms inside Greece, working together rather than against social partners. Instead Greece has chosen to heed troika’s advice, ending up eroding the trust even further. Greece does the best it can under the situation but the lesson from this example should not be lost for others. Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.648 0.646 0.625

Italy 2.828 2.719 2.757

Spain 3.077 3.099 3.023

Portugal 4.896 5.004 4.920

Greece 8.773 8.676 8.57

Ireland 2.576 2.580 2.597

Belgium 0.865 0.871 0.847

Bund Yield 1.552 1.526 1.488

Euro Bilateral Exchange Rate Previous This morning Dollar 1.333 1.3337 Yen 125.720 126.44 Pound 0.852 0.8504

274

Swiss Franc 1.228 1.2304

ZC Inflation Swaps

previous last close 1 yr 1.05 0.93 2 yr 1.13 1.1 5 yr 1.42 1.52 10 yr 1.8 1.9

Euribor-OIS Spread

previous last close

1 Week -5.514 -5.614 1 Month -4.171 -4.271 3 Months 1.700 3.8 1 Year 30.943 31.343

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-06- 14.html?cHash=6c5775fd7d5c349ab6c16f30945ddf38

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June 13, 2013 Sympathy for the Luddites By PAUL KRUGMAN In 1786, the cloth workers of Leeds, a wool-industry center in northern England, issued a protest against the growing use of “scribbling” machines, which were taking over a task formerly performed by skilled labor. “How are those men, thus thrown out of employ to provide for their families?” asked the petitioners. “And what are they to put their children apprentice to?” Those weren’t foolish questions. Mechanization eventually — that is, after a couple of generations — led to a broad rise in British living standards. But it’s far from clear whether typical workers reaped any benefits during the early stages of the Industrial Revolution; many workers were clearly hurt. And often the workers hurt most were those who had, with effort, acquired valuable skills — only to find those skills suddenly devalued. So are we living in another such era? And, if we are, what are we going to do about it? Until recently, the conventional wisdom about the effects of technology on workers was, in a way, comforting. Clearly, many workers weren’t sharing fully — or, in many cases, at all — in the benefits of rising productivity; instead, the bulk of the gains were going to a minority of the work force. But this, the story went, was because modern technology was raising the demand for highly educated workers while reducing the demand for less educated workers. And the solution was more education. Now, there were always problems with this story. Notably, while it could account for a rising gap in wages between those with college degrees and those without, it couldn’t explain why a small group — the famous “one percent” — was experiencing much bigger gains than highly educated workers in general. Still, there may have been something to this story a decade ago. Today, however, a much darker picture of the effects of technology on labor is emerging. In this picture, highly educated workers are as likely as less educated workers to find themselves displaced and devalued, and pushing for more education may create as many problems as it solves. I’ve noted before that the nature of rising inequality in America changed around 2000. Until then, it was all about worker versus worker; the distribution of income between labor and capital — between wages and profits, if you like — had been stable for decades. Since then, however, labor’s share of the pie has fallen sharply. As it turns out, this is not a uniquely American phenomenon. A new report from the International Labor Organization points out that the same thing has been happening in many other countries, which is what you’d expect to see if global technological trends were turning against workers. And some of those turns may well be sudden. The McKinsey Global Institute recently released a report on a dozen major new technologies that it considers likely to be “disruptive,” upsetting existing market and social arrangements. Even a quick scan of the report’s list suggests that some of the victims of disruption will be workers who are currently considered highly skilled, and who invested a lot of time and money in

276 acquiring those skills. For example, the report suggests that we’re going to be seeing a lot of “automation of knowledge work,” with software doing things that used to require college graduates. Advanced robotics could further diminish employment in manufacturing, but it could also replace some medical professionals. So should workers simply be prepared to acquire new skills? The woolworkers of 18th- century Leeds addressed this issue back in 1786: “Who will maintain our families, whilst we undertake the arduous task” of learning a new trade? Also, they asked, what will happen if the new trade, in turn, gets devalued by further technological advance? And the modern counterparts of those woolworkers might well ask further, what will happen to us if, like so many students, we go deep into debt to acquire the skills we’re told we need, only to learn that the economy no longer wants those skills? Education, then, is no longer the answer to rising inequality, if it ever was (which I doubt). So what is the answer? If the picture I’ve drawn is at all right, the only way we could have anything resembling a middle-class society — a society in which ordinary citizens have a reasonable assurance of maintaining a decent life as long as they work hard and play by the rules — would be by having a strong social safety net, one that guarantees not just health care but a minimum income, too. And with an ever-rising share of income going to capital rather than labor, that safety net would have to be paid for to an important extent via taxes on profits and/or investment income. I can already hear conservatives shouting about the evils of “redistribution.” But what, exactly, would they propose instead? http://www.nytimes.com/2013/06/14/opinion/krugman-sympathy-for-the- luddites.html?partner=rss&emc=rss&wpisrc=nl_wonk_b&_r=0

277 vox Research-based policy analysis and commentary from leading economists EZ banking union with a sovereign virus Daniel Gros, 14 June 2013 The doom-loop between banks and the national governments played a dominant role in the Eurozone crisis for Ireland and Cyprus. A Eurozone banking union is usually viewed as the solution. This column argues that the doom-loop cannot be undone as long as banks hold oversized amounts of their government’s debt. A simple solution would be to apply the general rule that banks are prohibited from holding more than a quarter of their capital in government bonds of any single sovereign. Related • A banking union for the EurozoneGiovanni Dell'Ariccia, Rishi Goyal, Petya Koeva-Brooks, Thierry Tressel • Banking union for Europe - risks and challengesThorsten Beck • Is Europe ready for banking union?Nicolas Véron The purpose of the proposed banking union is to de-link banks from their sovereigns. • Putting the ECB in charge of supervision and creating a common resolution mechanism should help. But this is not enough. • European banks hold too much government debt of their own governments to really sever the sovereign-bank link. Until the link is broken, the Eurozone will continue to be vulnerable to disruptive, self- reinforcing feedbacks of the type that brought the Eurozone to the brink of collapse in 2011-12. Data on share of own-government debt in bank holdings The concentration of public debt on bank balance sheets is not just a result of the euro crisis (Figure 1). The numbers show that French and Italian banks always held a considerable fraction of total public debt. The data for Germany are surprising. They show that in the not-so-distant past more than one half of the country’s total national debt was held by German banks. The German banking system has diversified its holdings of government debt only since the creation of the euro. Why do banks hold so much government debt? The answer is simple – regulators have made it attractive for them to hold such debt. • Banks do not have to hold any capital against their holdings of government debt. Banks hold capital against their investments only if regulators assign a risk weight to this investment. But the risk weight is zero on sovereign debt. This assumption that government debt is riskless permeates all banking regulation and thus contributes indirectly in many ways to induce banks to hold government debt. It is difficult to understand why this assumption has not been changed after the ‘PSI’ (private-sector

278 involvement) operation in Greece showed that banks can lose money on their holdings of Eurozone sovereign bonds. Moreover, PSI is now also official policy since the ESM Treaty foresees explicitly the possibility of a haircut on public debt if a debt sustainability analysis shows that the country cannot service its debt in full. There is thus no reason to continue with the regulatory fiction that sovereign debt is always riskless.1 Introducing risk weights for government debt will not be enough to prevent a crisis because of the ‘lumpiness’ of sovereign risk. Experience has shown that sovereign defaults are rare events, but the losses are typically very large (above 50%) when default does materialise. In many peripheral countries, banks hold sovereign debt equal to (or greater than) their total capital. Even with a risk weight of 100%, these banks would only have sufficient capital reserves to cover losses of 8%. Figure 1. (National) government debt held by domestic banks in France, Germany, Italy and the US (% of total)

Source: Agence France Trésor, Bundesbank, Bank of Italy and FED. • Large banks are allowed to cherry-pick regulatory approaches. There is an obscure but very important clause: ‘Permanent Partial Exemption’. This term refers to one of the many wrinkles in the way the EU has implemented the Basel agreements on banking regulation in its own capital requirements Directive (CRD). In essence large banks are allowed to use their own models to assess the riskiness of their own assets. But when these models would signal that government debt has become risky (for example because the debt has become unsustainable or CDS spreads signal risk), the normal risk models are put aside in favour of the general presumption that government debt can never be risky. In essence banks can cherry pick. Most large banks use their internal risk models to calculate the riskiness of their lending to households, the corporate sector and their other assets. By doing so they can generally arrive at a lower level of capital requirement than under the so-called standardised approach in which all lending falls in certain risk classes determined by ratings levels. However, these internal risk models are put aside in the case of government debt. Given this, there is little wonder that European banks 279 lack the capital to weather a sovereign debt crisis (which by regulatory definition should not be possible). • Liquidity requirements favour government bonds. Another reason why banks hold large amounts of government debt on their balance sheets is that they have to hold a certain amount of ‘liquid’ and safe assets. Until recently, only government bonds were recognised as liquid. However, experience over the last few years has shown that at times even government bonds can become illiquid. Forcing banks to hold large amounts of government bonds might make sense if it were true that that this is the only class of liquid and safe assets, but this is manifestly no longer true. Fortunately the latest version of the so-called liquidity cover ratio (LCR) allows banks to also hold other assets to satisfy the requirement of the LCR, whose purpose is to ensure that a bank can always offset potential outflows of funds by selling liquid assets. This incentive to hold government debt might thus be somewhat diminished. • There is no limit on the concentration of sovereign risk. The most basic principle of finance is reducing risk through diversification. The need to diversify risk is the reason why all regulated investors (banks, insurance companies, investment funds, pension funds) have to limit their exposure to any single counterparty to a fraction of their total investment or capital (for banks). For banks, the limit on the exposure to any one borrower is 25% of their capital, but this limit does not apply to sovereign debt. The logic of this exemption was simple: since there was thought to be no risk in sovereign debt, there was no reason to put any limits on its concentration. The result of this lack of exposure limits has been that banks in the periphery have too much debt of their own government on their balance sheets which has greatly contributed to the deadly feedback loop between sovereigns and banks. Table 1 below shows the degree of ‘domestic leverage’ of the systemically important banks in major Eurozone countries that were subject to the EBA stress tests (and soon will be supervised by the ECB). It is apparent that in most countries the domestic banking system would not survive a Greek-style ‘haircut’ on public debt. (In the context of the PSI operation of March 2012, holders of Greek bonds had to accept a nominal haircut of over 50%, and on a mark-to-market basis the haircut was over 80%. It is apparent that no bank that has a sovereign exposure worth over 100% of its capital would survive such a loss.) Table 1. Domestic sovereign debt leverage (sovereign exposure/capital) 2010 2011 2012 Q4 Q4 Q2 DE 264% 241% 235% ES 172% 131% 137% FR 73% 53% 61% IT 205% 155% 176% PL 156% 141% 115% PT 117% 102% 100% UK 50% 52% 50% Source: CEPS database. All four elements could and should be changed. 280

Concluding remarks The belief that government debt is riskless is a fundamental assumption in banking regulation. In Europe this has induced banks to hold large amounts of government debt and, even worse, to concentrate their holdings on their own sovereign – thus ensuring that a sovereign-debt crisis also becomes a banking crisis. The key aspect for the stability of the euro and its banking system is the concentration of bank holdings of their own sovereign. If this could be changed, the banking system would become much more resistant to sovereign-debt problems. • A simple solution would be to apply the general rule that banks are prohibited from holding more than 25% of their capital in government bonds of any single sovereign. This rule could be applied only to new investment during a transition period so that it would not force any abrupt selling of the existing holdings. The treatment of government debt in banking regulation is one of those dogs that did not bark. The EU has recently completed a wide-ranging overhaul of its banking regulation framework in the context of the renewal of the capital requirements Directive (CRDIV). The regulatory treatment of sovereign debt was not even discussed in this context. Why? Simply because governments want to maintain a source of demand for their own bonds. But this self-serving treatment of government debt in banking regulation is short-sighted because it leads to a situation in which Eurozone banks hold a large proportion of government debt – much more than in the US. This is dangerous given that banks are highly leveraged and that sovereign debt is inherently subject to default risk within the Eurozone. For financial-stability reasons, it would thus be preferable if a higher proportion of government debt were held by unleveraged investors, e.g. directly by households or via investment funds. But this would of course reduce the income of the banks. The unholy alliance of short-sighted finance ministers and bankers interested in keeping their business will be very costly because it perpetuates the negative feedback loops between banks and sovereigns. References Acharya, Viral V and Sascha Steffen (2012), “The ‘Greatest’ Carry Trade Ever? Understanding Eurozone Bank Risks”, University of Virginia, Charlottesville, VA; 18 November. BIS (2013), “Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools” Bank for International Settlements, January, Basel. De Grauwe, Paul (2011), “Governance of a Fragile Eurozone”, CEPS Working Document No. 346, CEPS, Brussels, May. Kopf, Christian (2011), “Restoring financial stability in the Eurozone”, CEPS Policy Brief, CEPS, Brussels, March. Gros, Daniel (2013), “Banking Union with a Sovereign Virus The self-serving regulatory treatment of sovereign debt in the Eurozone”, CEPS Policy Brief No. 289, CEPS, Brussels, 27 March.

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1 The standard objection to risk weights on sovereign debt is that they contradict fundamental principles on which the Basel capital adequacy regime is based. It is indeed true that all Basel accords stipulated that banks do not necessarily have to hold any capital against claims on their own government (and in their own currency) because government debt is regarded as riskless if it is the national currency. The rationale for zero risk weights under normal conditions (i.e. the country has its own national currency) is clear: when the country has its own currency the government can, in extremis, always order the central bank to print enough money to be able to service its debts. But as emphasised by (Kopf 2011 and de Grauwe 2011), in the Eurozone no individual debtor government has any authority over the creation of money. The ECB is actually forbidden to provide monetary financing to any government, or even the EU authorities. When monetary and fiscal authorities are separate entities as in the Eurozone, default risk on sovereign debt is not zero. This was the intellectual mistake made when the Basel rules were transcribed into EU law (i.e. the capital requirements Directive). http://www.voxeu.org/article/ez-banking-union-sovereign-virus

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Study: The United States has a less open economy than Romania By Howard Schneider, Updated: June 13, 2013 The U.S. may advertise itself as an economy that’s open to the world. But compared to Singapore and Hong Kong we’re practically behind a Berlin Wall of tariffs and trade barriers, according to a new study of economic openness from the International Chamber of Commerce. The ICC’s latest Open Market Index puts the U.S. 38th – just behind Romania – of the 75 countries it ranked on things like the level of imports as a percentage of gross domestic product, the quality of infrastructure and ease of logistics, and openness to foreign direct investment. Singapore and Hong Kong ranked at the top – the only two countries to get near perfect scores. Ethiopia was last, with Sudan and Bangladesh just above it. To be fair, the index is not perfect. It is biased towards small economies that, because of their size, need to import and be open to the world to survive. With its open trade and financial system, Singapore is an important entrepot and entry point to Asia; without them, it is a humid tropic island with a nice hotel and an overly sweet cocktail to its name. Luxembourg, Belgium and Malta round out the top 5, evidence of the types of nations the index favors. Indeed the U.S.’s ranking is dragged down by one particular component of the index related to the share of trade as a percentage of gross domestic product – something that is comparatively low in the U.S. because the economy is so large. But the ICC study does make an interesting point: the major economic powers in the world, on the whole, don’t fare so fell. Combined, the Group of 20 nations come in below average. Several big ones – including Japan and France – fall in the middle of the pack with the U.S. Others – including Brazil and China – earned a below average score for market openness. Of the G20, only Canada and Germany – both nations that thrive on trade – earned an above average composite rank. While the G20 as a group has pledged more trade openness, the recent crisis have pushed some countries the other way – whether it’s Buy America or the more sweeping sorts of measures used in places like Brazil to restrict imports. http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/13/study-the-united- states-has-a-less-open-economy-than-romania/?wpisrc=nl_wnkpm

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Is Abenomics failing? Here’s what you need to know about Japan. By Neil Irwin, Updated: June 13, 2013 There was another gargantuan sell-off in the Japanese stock market overnight. This drop–the Nikkei index fell 6.35 percent–follows an even larger 7.3 percent tumble three weeks ago. Overall, the index has moved more than 3 percent on seven of the last 15 trading sessions, and the yen, Japanese government bonds, and securities in other Asian nations have also shown much higher-than-normal volatility. Here are four reasonable questions to ponder about these wild ups and downs. So what the heck is going on? Japan elected a new government, led by Shinzo Abe, in December, and it is carrying out Keynesian shock therapy on that nation’s long-stagnant economy. Fiscal stimulus, check. Large-scale money-printing by the central bank, check. Pledging to do whatever it takes to get inflation up to 2 percent after two decades of fallng prices, done. Markets have responded just as one might expect (and, if you’re Abe, hope). The stock market is way up, making Japanese citizens wealthier. The yen is way down, making Japanese exporters more competitive. But those trends have reversed quite a bit in the last three weeks. Including the steep decline in Thursday’s trading session, the Nikkei is down 20 percent since May 22–but remains 28 percent above its level in early December. Are the markets being rational or irrational? Here’s the case for rationality: The rally is being driven by changes to policy, and there have been some small hints that the Abe government and Bank of Japan will not be as resolute as they had previously suggested about keeping the foot on the pedal of stimulus. So the gigantic swings could be the result of logically extrapolating small hints out of the government and central bank as meaning big changes in what will happen in the economy. The case for irrationality goes like this: A bunch of hedge funds had all piled into the same trade, riding the steep appreciation in stocks and decline in the yen to unprecedented levels, and momentum effects are happening where they all start to unwind their trades at the same time, creating a self-reinforcing downdraft. This seems to fit the data better, as it’s hard to conclude that the 6 percent overnight drop Thursday or 7 percent drop three weeks ago could be justified by any specific piece of news about the outlook for policy. So is Abenomics failing? It’s way too early to draw that conclusion. Markets seem to be hyperventilating in reaction to the smallest, subtlest signals out of government. But stock prices are still way above their levels of six months ago and the yen is a lot lower, so the fundamental channels through which this new strategy aim to prop up growth are still in place. The referendum on whether Abenomics succeeds or fails comes not from what happens to markets on any one day, but whether those moves in markets translate into growth in the real economy. So Abenomics will count as a failure if, in the months ahead, we see a stagnation or decline in Japanese GDP growth, per capita incomes, or deflation–not because markets have become more wobbly.

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Does it matter to the rest of us? Maybe not. Wednesday evening, as the rout began in Japan, Twitter was full of breathless worrying about a new global panic. But now? Well, the British market is down 0.25 percent, the German market off 0.9 percent, and the Standard & Poor’s 500 down 0.1 percent. Bond and currency prices in Europe and North America are similarly showing only the slightest of moves. Contrast that, for example, with the eurozone crisis, in which all world markets shook on the latest sign of progress or regression on solving that continent’s problems, or the 2008 financial crisis that began in the United States and whipsawed all global markets. In this time of tumult, by contrast, what happens in Japan seems to stay in Japan. © The Washington Post Company http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/13/is-abenomics-failing- heres-what-you-need-to-know-about-japan/?wpisrc=nl_wnkpm

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286 disagreement among analysis and commentators is about whether the sharp rise in yields, and falls in equity markets, is an overreaction especially since the Fed is not about to do anything in the short term. One of the people quoted in the article said the Fed would continue QE for 12-18 months, and then gradually raise rates. The market rout also affected the eurozone. Italy's three-year borrowing costs jumped to their highest level since March at an auction on Thursday, Reuters reports. Italian treasury sold €3.42bn of three-year bonds at 2.38%, up from 1.92% in May. The bid to cover ratio was 1.34. Reuters columnist James Saft noted that this was a great time to worry again about a return of the eurozone crisis (you have to be a bond market investor to think that it has ever gone). His overall point is that with luck, all will be well, but it’s all dependent on luck. He says if luck runs out, southern European sovereigns may find it difficult again to fund themselves at low interest rates. He also makes the explicit point that investors had not yet fully understood Jorg Asmussen’s statement that the OMT is effectively, though not officially, limited. And he also quotes financial commentators as saying that bondholders may grow concerned about where they stand in relation to official creditors. “Why hold a Spanish bond if you will only lose out to the ECB and other officials if the credit goes to the wall? Though much was done to damp down worries last year, the only true example we have is Greece, where private lenders suffered a haircut and euro public sector ones did not.” Greek bond yields rise this week, market return next year unlikely Greek bond yields have seen the biggest rise in the euro zone market, with 10y bond borrowing costs moved above 10% this week, Reuters reports, after a privatisation scheme of the national gas company, considered as crucial to meeting the terms of its bailout, failed to attract binding bids and its bourse was downgraded to emerging market status. The rise in 10-year yields is now more than a percentage point above those on 30-year debt from around flat three weeks ago after Fitch upgraded twice- bailed-out Greece's credit ratings. Some analysts say they could hit 15% near term. Last month there was talk that a partial market return could be possible next year. Analysts say now that this target looks out of reach. Fitch sees continued weakness in Spain’s real estate market Reuters carried a statement by Fitch arguing that Spain’s real estate market is likely to remain depressed for many years, with prices likely to hit bottom after 2014. This is based on sales figures by Spain’s SAREB bad bank, which closed 550 sales in the three months since February, though a further 3,000 sales are reported to be in progress. Fitch argues that the pace of sales needs to speed up if the SAREB is to meet its target of selling 42,500 properties in 5 years, which risks depressing prices further. A complication cited by Fitch is that the SAREB’s majority shareholders are private banks that the SAREB itself is in competition with on liquidating the respective property portfolios. In addition, Cinco Días cites the opinion of Fitch’s Managing Director for Financial Institutions that Spain’s banking system is unlikely to need a second European aid programme. Fitch expects Spanish banks to need additional provisions of €10bn as a result of the new Bank of Spain rules on the treatment of restructured of refinanced loans, but the rating agency said banks are likely t be able to raise that capital in the markets. The story makes no mention of the recent speculation about Spain needing an

287 time extension of last year’s European banking rescue as a result of the upcoming ECB stress test of European banks. IMF warns of high risks for Portugal to miss its targets The IMF begins to doubt its own programme, is the headline in Jornal de Negocios. In its seventh evaluation on Portugal, the IMF is casting doubt that the programme’s core objectives can be reached as economic recovery becoming elusive. "The solid social and political consensus that to date has buttressed strong program implementation has weakened significantly," it said. "With only modest improvement in price- competitiveness indicators, there remains a risk that ongoing reforms—however comprehensive—will be insufficient to boost supply conditions in a time frame and magnitude that prevent a protracted demand slump." Portugal needs policies that lead to a reduction in nominal wages, something that has not happened sufficiently yet, according to the report. The report also warns that "Debt dynamics could become unsustainable under a combined shock scenario." The publication followed the IMF’s approval on Wednesday to ease Portugal’s deficit targets, by 1 and 1½ percentage points of GDP in 2013 and 2014. While the IMF mission chief Abebe Aemro Selassie rejects calls for a debt restructuring he calls on the ECB: "We see more the need for intervention by the ECB, policies by the ECB to help facilitate greater credit access" to small-to-medium-sized firms, the Wall Street Journal reports. For this, the ECB will have to help break the bottleneck on lending to the private sector. Regling says IMF should quit the troika Frankfurter Allgemeine has an interview with Klaus Regling, in which he accuses the IMF of failing to understand the rules of the eurozone. He says it would be best to get rid of the troika in the long run. The paper notes that Jose Manuel Barroso also supports the idea of getting rid of the IMF – though Regling adds the important detail that the IMF was (unfortunately) the only institution with any experience in crisis resolution. Regling was particular furious about the IMF’s paper. “The IMF pokes fun at the stability pact, and declares itself responsible for economic growth,” he said. That shows that it does not understand and respect the rules underpinning the monetary union. Possible further delay in SSM Frankfurter Allgemeine has the story that the single supervisory mechanism may face further delays, as the European Parliament decided it will not vote on the SSM until the German Bundesrat has passed its vote – which is scheduled to take place only after July 5. But that is the last day in which the European Parliament is in session, which makes a final vote likely only after the recess in September. Since the ECB can hire any staff until the EP casts the vote, the delayed vote will set back the SSM timetable by some two months, and would postpone the start of the SSM from July 2014 until September 2014. This is what happens when you are dealing with second-order priority projects. We have long come to the conclusion that the EU is not in a hurry over banking union. The crisis resolution will have to occur without it. It is best to think to banking union as an important long-term institutional change, but not as a crisis tool.

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Previous day Yesterday This Morning

France 0.648 0.646 0.625 Italy 2.828 2.719 2.757 Spain 3.077 3.099 3.023 Portugal 4.896 5.004 4.920 Greece 8.773 8.676 8.57 Ireland 2.576 2.580 2.597 Belgium 0.865 0.871 0.847 Bund Yield 1.552 1.526 1.488 Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.333 1.3337

Yen 125.720 126.44

Pound 0.852 0.8504

Swiss Franc 1.228 1.2304

ZC Inflation Swaps

previous last close

1 yr 1.05 0.93

2 yr 1.13 1.1

5 yr 1.42 1.52

10 yr 1.8 1.9

Euribor-OIS Spread

289

previous last close

1 Week -5.514 -5.614

1 Month -4.171 -4.271

3 Months 1.700 3.8

1 Year 30.943 31.343

Source: Reuters

Barry Eichengreen Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His most recent book is Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. Lessons of a Greek Tragedy 13 June 2013 ATHENS – A visit to Greece leaves many vivid impressions. There are, of course, the country’s rich history, abundance of archeological sites, azure skies, and crystalline seas. But there is also the intense pressure under which Greek society is now functioning – and the extraordinary courage with which ordinary citizens are coping with economic disaster. Inevitably, a visit also leaves questions. In particular, what should policymakers have done differently in confronting the country’s financial crisis? The critical policy mistakes were those committed at the outset of the crisis. It was already clear in the first half of 2010, when Greece lost access to financial markets, that the public debt was unsustainable. The country’s sovereign debt should have been restructured without delay. Had Greece quickly written down its debt burden by two-thirds, it would have been able to shed its crushing debt overhang. It could have used a portion of the interest savings to recapitalize the banks. It could have cut taxes, rather than raising them. It could have jump-started investment and gotten its economy moving again, if not in a matter of months, then, with luck, in no more than a year. In its official post-mortem on the crisis, the International Monetary Fund now agrees that debt restructuring should have been undertaken earlier. But this was not its view at the time. Under the leadership of Dominique Strauss-Kahn, the Fund was in thrall to the French and German governments, which adamantly opposed debt relief. The European Commission, for its part, has rejected the IMF’s mea culpa. Preoccupied by the state of the French and German banks, it continues to argue that delaying

290 debt restructuring was the right thing to do. It has no regrets about throwing Greece to the wolves. Given this opposition, the Greek government would have had to move unilaterally. Hindsight suggests that the authorities should have done just that. Faced with foreign opposition, the government should have announced its decision to restructure as a fait accompli. Clearly, there would have been risks. The “troika” – the IMF, the European Commission, and the European Central Bank – might have refused to provide an aid package, forcing Greece to compress imports even more sharply. The ECB might have cut off emergency liquidity assistance, forcing the government to impose capital controls and even consider abandoning the euro. But, by acting preemptively, Greek leaders could have shaped the dialogue. They could have said to their EU colleagues, “Look, we have no choice but to restructure what is clearly an unsustainable debt. But make no mistake: our preference is to remain in the eurozone. We are committed to reforms. Given this, don’t you agree that we are deserving of your support?” Making a compelling case would have required Greece to get serious about those reforms. The government could have started by bringing together employers and unions to negotiate an equitable burden-sharing agreement, including an across-the-board reduction in wages and pensions, thereby getting a jump on internal devaluation. This could then have been complemented by a simultaneous agreement to restructure private debts. With everyone accepting sacrifices, it might have been possible to reach an accord on liberalizing closed professions and on comprehensive tax reform. But, instead of working together with its social partners, the government, heeding the troika’s advice, dismantled the country’s collective-bargaining system, leaving workers unrepresented. Greece thus lacked a mechanism to negotiate a social compact to cut wages, pensions, and other obligations in an equitable way. With every vested interest fighting for itself, closed professions proved impossible to pry open. Doubting that there would be shared sacrifice, those same interest groups were unable to negotiate meaningful tax reform. With the Greek government thus failing to push through structural reforms, it was unable to earn the trust of its creditors; and, skeptical that the government was committed to reform, the troika demanded a pound of flesh, in the form of front-loaded austerity, as the price of assistance. Those front-loaded tax increases and government- spending cuts plunged the economy deeper into recession, making a farce of claims that the public debt was sustainable – and forcing the inevitable debt restructuring after two more agonizing years. Greece is now seeking to make the best of a difficult situation. It is attempting to breathe life into the campaign for structural reform. It is lobbying the troika for further debt relief. But the damage will not be easily undone. Past mistakes, committed not just by Greece, but also by its international partners, make a difficult short-term future unavoidable. It is important that other countries draw the right lessons. If they do, Greece’s brave, beleaguered citizens can at least take comfort in knowing that many people elsewhere will be spared the same unnecessary sacrifices. This article is available online at: http://www.project-syndicate.org/commentary/what-greece-should-have-done- differently-by-barry-eichengreen

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Economía CRISIS UE La eurozona prevé dar silla al MEDE en los bancos recapitalizados directamente EFE Economía Bruselas 14 JUN 2013 - 18:40 CET

El Mecanismo Europeo de Estabilidad (MEDE) podría tener un representante en el consejo de administración de un banco que haya sido recapitalizado directamente e "influir" en ciertas decisiones, según las directrices que prepara la eurozona, dijeron hoy a Efe fuentes comunitarias. EFE/Archivo / EFE El Mecanismo Europeo de Estabilidad (MEDE) podría tener un representante en el consejo de administración de un banco que haya sido recapitalizado directamente e "influir" en ciertas decisiones, según las directrices que prepara la eurozona, dijeron hoy a Efe fuentes comunitarias. El Eurogrupo, que se reunirá la próxima semana en Luxemburgo, prevé terminar las orientaciones para la recapitalización directa de la banca, en las que está sobre la mesa poner un límite de entre 50.000 y 70.000 millones de euros a la cantidad disponible para este fin, aunque "el debate va hacia un tope de 60.000 millones". La fórmula elegida para recapitalizar directamente a un banco es mediante la compra de acciones de la entidad con problemas, por lo que el fondo de rescate permanente de la eurozona tendría derecho a sentarse en el consejo de administración de dicho banco. El argumento detrás de esa fórmula es que "es lógico que, cuando el MEDE da dinero directamente a un banco, pueda tener también alguna capacidad de intervención directa, alguna forma de influir en el modelo de funcionamiento y en las prácticas de esa entidad", señalaron las fuentes. Aunque en las orientaciones en las que se trabaja no está definida la capacidad de actuación que tendría el MEDE, sí está claro que no entraría en la gestión diaria del negocio bancario. La idea es que se disponga de un margen de actuación similar al que tiene actualmente la Comisión Europea (CE) en casos de ayudas estatales a bancos, por ejemplo, a la hora de limitar las remuneraciones fijas y variables que reciben los directivos.

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En cuanto al límite que probablemente se fijará para la recapitalización directa, otras fuentes indicaron recientemente a Efe que éste no es "estático", dado que podrá ser elevado en función de una cláusula de revisión. En todos los rescates llevados a cabo hasta ahora por la eurozona se han utilizado montos por debajo de este umbral, pero con la concesión de un rescate importante se podría agotar rápidamente la dotación para la recapitalización directa del MEDE. En el caso más reciente de Chipre, de los 10.000 millones de euros de ayuda internacional, 2.500 millones irán a la reestructuración de la banca, mientras que en el de Portugal se trata de 12.000 millones y en el de Irlanda de 35.000 millones. En el caso de Grecia la cantidad asciende a 48.000 millones y en el de España se han utilizado algo más de 41.000 millones. Para no crear un pozo sin fondo, la eurozona ha establecido ya otras condiciones para que un Estado pueda solicitar la recapitalización directa del MEDE. Así, los países de la eurozona tendrán que recapitalizar su banca con problemas hasta situar su ratio de capital al mínimo de solvencia antes de recurrir al fondo europeo de rescate. El umbral de capital mínimo de solvencia para los bancos es del 4,5 %, y, si tras una prueba de resistencia quedan por debajo del porcentaje requerido, el Estado miembro (o los acreedores en su caso) tendrá que poner lo que falte antes de recurrir al MEDE. Para llegar desde los niveles mínimos a los óptimos recomendados tras la prueba de estrés entrará en juego el MEDE con una aportación del 90 % y una coparticipación que se iría convergiendo hacia el 10 % por parte del país. En el debate sobre la retroactividad de la recapitalización directa no se ha definido aún cómo hacerlo, dadas las reticencias de Alemania, Holanda y Finlandia, pero el debate está en poner el riesgo en el lado del país miembro para que "se lo piense dos veces si le merece la pena" cursar la solicitud, indicaron las fuentes. http://economia.elpais.com/economia/2013/06/14/agencias/1371228040_145406.html

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Daily Morning Newsbriefing June 13, 2013 Spain wants to lift ESM cap European foreign ministers will discuss whether to relax the restrictions on the operation of the European Stability Mechanism at a meeting next month, Reuters writes. Spain’s foreign minister, José Manuel García-Margallo, who will host the meeting in Palma de Mallorca, speaking at an event with France’s Laurent Fabius, is quoted as saying that “by definition a backstop must have an unlimited firepower and capacity to act quickly”, while currently the ESM “has limited firepower” and needs unanimity to be used. Reuters lists France and Italy among the Euro member states that have in the past proposed to lift the €500bn cap on the ESM’s size, against the opposition of Germany. Why did they not think of this before? Why did Mariano Rajoy not force Angela Merkel to accept a higher ceiling at the infamous June 2012 summit when they all proclaimed to have scored a victory? The whole German legal position, which is now reaffirmed in the current court case, is based on the fact that Germany’s risk is capped. What García- Margallo is asking for is not just some small-print amendment. An open-ended ESM means that Germany would give up that cap. Does he really believe that Germany, and the other northern European countries, are going to accept this? That the foreign ministers are the right people to discuss this? That the timing is appropriate, three months before the German elections? He is right, of course, that Spain’s survival in the eurozone will ultimately depend on an open-ended fund, needed simply for the recapitalization of the country’s bankrupt banking system. Just why did they not force that point when they set up the ESM? The only way for Spain, and Italy, to get rid of the cap is make a credible threat to depart or default. They have not done so. Coalition partners seek compromise with Samaras over ERT Pasok and Dimar, the two junior coalition parties in the Grand Coalition, submitted to Parliament on Wednesday a proposal for the legislative act permitting ERT’s immediate closure to be scrapped. They said they agreed that reforms are necessary but that it should be done while ERT is still broadcasting. In their remarks the two coalition partners fall short of threatening to pull out of coalition. Kouvelis said “The government can carry on and complete its work if it can secure some common ground.” Sources close to the prime minister insisted he has no intention of triggering early elections. At the same time, though, it is not clear what kind of compromise could be found, writes Kathimerini. Antonis Samaras appears far from willing to compromise. He said yesterday he said that the closing down of ERT was justified because it had become “the symbol of waste and lack of transparency.” In the meantime the government presented a draft law for the new public broadcaster it wants to set up, under the name of NERIT. As opposed to more than 2,600 staff

294 employed by ERT, the new service would have close to 1,000 employees and would cost €100m to run compared to the €300m ERT absorbed. Some ERT journalists occupied the broadcaster's building in defiance of government orders and continued broadcasting over the Internet. Trade unions threaten open end strike actions while thousands of protesters gathered in front of the ERT building. The European Commission said it did not seek ERT's closure under the bailout but did not question the decision, Reuters reports. France's Socialist government voiced outright condemnation, calling it "very worrying and regrettable". Opposition leader Alexis Tsipras called it "a coup, not only against ERT workers but against the Greek people", and accused Samaras of the "historic responsibility of gagging state TV".The far-right Golden Dawn party was the only one that openly welcomed the closure, with lawmaker Ilias Panagiotaros tweeting: "ERT, that Socialist-Communist shack, is finally closing." MSCI lowers Greece to emerging market status The ERT crisis overshadowed MSCI's reclassification of Greece as an emerging market. Equity index provider MSCI said the Athens bourse had been too small for a developed market for two years Reuters reports. Also it is not reflecting the improved practices currently of developed markets for i.e. securities borrowing and lending facilities, short selling and transferability. After the announcement the stock market traded at two- month lows. Although reclassification could mean some more funds are required to sell Greek shares, brokers said the move could also bring inflows by allowing Greece to win a share of funds allocated for emerging markets. "Emerging market funds could not enter since Greece was classified as developed market. Now it will be on their radar," said Theodore Krintas, head of wealth management at Attica Bank. A show trial, now unravelling The case against the OMT was on the verge of collapse yesterday, as Frankfurter Allgemeine sorrowfully notes, as the court signalled a Yes, But type of verdict. The paper noted the court’s president attempt to a “middle way”, as he himself seemed to call it, with a call on the government to render the ECB’s mandate more precise but without touching the OMT. One of the points under discussion yesterday was the difference between primary and secondary markets – how many seconds after the issue of a security is the ECB entitled to buy it? Hans Werner Sinn commented that this was a phony debate. He also put the total volume of risk for the ECB €3 trillion. The main avenue for the court now to get any grip on this programme is through democratic participation over the conditionality of the programme. The finance minister would have to get Bundestag ascent before accepting that conditionality is met. But that is not really a big deal since the Bundestag’s co-decision rights on all ESM-related issue are already established, and since no has proposed to exempt those decisions. The article then goes through the various scenarios of the case, none seem either promising or feasible. The main question after two days of hearings is whether there any case at all, or whether this is just an opportunity for some angry old men to vent their frustration. The Financial Times focuses in its coverage on Jorg Asmussen’s warning against suggestions in the court that Germany should strive for a treaty change to change the

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ECB’s mandate. Jörg Asmussen said one should be careful what one wishes for. Once you open this debate, you may end up with a very different ECB. The comments on this very strange case ranged from the negative to the extreme negative. Suddeutsche Zeitung picked up on the ECB’s conflicting messages about the OMT. It signals to the markets that the programme is uncapped, but signals to the court that there is an effective cap – a strategy very likely to meet its nemesis. Francesco Giavazzi, Richard Portes, Beatrice Weder di Mauro, and Charles Wyplosz write that a break-down of the eurozone would be self-fulfilling in the absence of a large and credible backstop. A German court ruling against the OMT would lead to such a break up. The court would be wise to dismiss the case. Wolfgang Munchau writes in his Spiegel that it is preposterous that the court even allowed this frivolous case. The only ultra vires issue at stake here is the court’s own transgression of its competence. It has no business to rule over EU institutions. Even the German end of the stick is a non-issue. Parliament’s unlimited liability for central bank losses are not related to the OMT. Munchau makes the point that the Bundestag would have had to sanction any losses the Bundesbank occurred during the currency interventions in 1992 and 1993. Munchau concludes that there is simply is no case for anyone to answer. Spain gives itself 6 months to formulate a plan against child poverty As the Spanish parliament debated social policy, the discussion turned to child hunger, reports El País. The ruling PP used its majority to block all amendments to the government’s draft legislation, for instance a proposal by the PSOE to create a €1bn fund to fight against poverty and social exclusion. Opposition parties such as Catalan CiU asked for a plan to offer school meals through the summer, which was rejected by the PP as an “ill-thought patch” and said the opposition parties should do it through the regional governments they control. The PP instead urged the government to introduce, within 6 months, a plan to fight child poverty and social exclusion. Over the past three months, the press has reported that thousands of school children from the Canary Islands or Andalusia to Catalonia are malnourished and only eat school meals. The PP acknowledged that, according to European Union statistics, only Romania and Bulgaria have a higher proportion of children living in households at high risk of poverty. Spain to decide whether to apply for a time extension of its banking rescue in the autumn Earlier this week, we reported on the possibility that Spain would ask for the time available to draw the remaining €60bn from last year’s banking rescue to be extended beyond the end of 2013 when the original plan expires, in anticipation of the ECB’s upcoming stress test the results of which won’t be known until early in 2014. Vozpópuli now writes, citing government sources, that a decision will be made on whether to apply for an extension after the Troika’s next monitoring visit in September. The Spanish government and the central bank estimate that the banking sector would be able to absorb an additional €10bn in loan loss provisions, but there is a worry that banks which have not yet received public aid may need a higher amount because of the added effect of the depressed macroeconomic situation. The Spanish government interprets that not asking for new money but just a time extension of the availability of funds would not require a new Memorandum of Understanding. However, a blog post by Economists Against the Crisis argues that there is no allowance for a time extension in the current

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MoU and a renegotiation would be needed, opening the door to new conditionality which the Spanish government wants to avoid at all costs. It seems a solution might be to draw the remaining rescue moneys before the end of the year, even before knowing the results of the ECB’s stress test. However, the Spanish government has so far wanted to reduce its reliance on the rescue funds to a minimum as a face-saving measure. Five Star Movements in open revolt against Grillo The dissident M5S senator Adele Gambaro who criticized leader Beppe Grillo said she had no intention of leaving the party, as La Repubblica reports, adding that she will stay until someone decides to expel her. After Grillo requested her to leave the party, Gambaro has asked for the support of MPs, finding over 30 lawmakers in disagreement with Grillo’ current conduct. M5S Senator Bartolomeo Pepe told to Il Messaggero that the M5S is too dependent from Grillo and his guru, Gianroberto Casaleggio, adding that the movement was heading towards "self-destruction." EU considering lending scheme to companies Reuters has a not very detailed story about the EU Commission considering three types of lending schemes to improve access to credit for SMEs. The story gives no details of the three schemes, but says it will involve the pooling of resources from various EU lending facilities to give incentives banks to lend to SMEs. The article quotes Jose Manuel Barroso as saying that the Commission will make a proposal soon. Eurozone industrial output up The Wall Street Journal reports that industrial production in the euro zone has risen for the third straight month in April, raising hopes that the recession may be coming to an end. It noted that the increase in output was concentrated in Germany and France, while the trend in the south remains negative. There were also some extreme outliers, like Finland, which post a mom drop in IP of 5.1%. Eurozone IP was by 0.4% mom, and - 0.6 yoy. The article noted that unlike in previous month, the increase in eurozone IP was not driven by energy, suggesting that it might be for real. Hopes of an end to the recession are also corroborated by leading indicators and various business surveys. Markets are now also seeing a reduced probability of a further rate cut by the ECB. Reuters reports that the overnight Eonia money market rates and various Euribor rates have been etching up as those expectations are firming up. Gros on youth unemployment Daniel Gros writes in Project Syndicate that the fight against youth unemployment is part of an unfocused activism by policymakers who must be seen to be “doing something” at their special summit on youth unemployment. He writes that there are several reasons to doubt that youth unemployment merits special treatment. He points to a number of statistical and definitional aspects – the category of 15-24 years olds is ill- defined, and because high non-participation rates, the unemployment rate is meaningless. More important is the unemployment ratio, which is somewhat less alarming. He also makes the point that youth unemployment contributes much less to total unemployment in Spain, than it does in the UK or Sweden. He concludes that the real issue is unemployment, not youth unemployment. Eurozone Financial Data 10-year spreads

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Previous day Yesterday This Morning

France 0.504 0.500 0.500 Italy 2.638 2.689 2.689 Spain 2.885 2.971 2.976 Portugal 4.057 4.150 4.151 Greece 7.616 7.974 7.89 Ireland 2.124 2.260 2.279 Belgium 0.779 0.777 0.781 Bund Yield 1.481 1.471 1.471

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.297 1.3014

Yen 130.810 130.56

Pound 0.854 0.8529

Swiss Franc 1.244 1.2449

ZC Inflation Swaps

previous last close

1 yr 1.21 1.15

2 yr 1.36 1.37

5 yr 1.67 1.54

10 yr 2.02 1.88

Euribor-OIS Spread

previous last close

1 Week -5.757 -5.757

1 Month -3.814 -3.214

3 Months 4.500 3.5

1 Year 29.371 29.271

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-06- 13.html?cHash=a27c6826ffe0871c675474f0a1ead9f3

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06/12/2013 11:40 AM Crisis Course High Court Skeptical of ECB Bond Buys By Stefan Kaiser in Karlsruhe, Germany Germany's high court on Tuesday made clear that it was skeptical of the ECB's program to buy unlimited quantities of sovereign bonds from struggling euro-zone member states. It could strike down the most successful tool in combating the crisis. After an hour of intense questioning, a slight grin breaks out on Jörg Asmussen's face. The justices have been peppering him with questions and Asmussen, a member of the executive board of the European Central Bank, can no longer resist a brief smirk. "Mr. Asmussen, you can still smile," says Andreas Vosskuhle, president of Germany's Constitutional Court. "That comes as a great relief to us." Tuesday was not an easy day for Asmussen, who was called to testify before Germany's highest court in defense of an ECB program which, while having proven to be economically successful, might be in violation of the law. The case focuses on the ECB bond buying program known as Outright Monetary Transactions (OMT). The program, announced last autumn, envisions the ECB buying unlimited quantities of sovereign bonds from ailing euro-zone member states to hold down their borrowing costs. To date, the ECB has not made any bond purchases, but the mere announcement that it might has proven enough to calm the markets and provide European leaders with some to seek agreement on longer-term measures to solve the crisis. Even opponents of the program have acknowledged its success. The OMT "has been the most successful measure taken in saving the euro thus far," says Dietrich Murswiek, who represents co-claimant Peter Gauweiler, a member of parliament with Bavaria's Christian Social Union. But despite its success, the OMT program is illegal, say the plaintiffs. "State financing, whether direct or indirect, is not allowed for the ECB," says one of their attorneys, Karl Albrecht Schachtschneider. And his complaint is far from fanciful -- it is difficult not to see the OMT program as state financing. In essence, the court is being asked to decide whether economic pragmatism trumps a strict interpretation of the law. Skeptical Court Germany's Constitutional Court justices, of course, must follow the letter of the law. As proceedings began Tuesday morning, Court President Vosskuhle made it clear that the bench would be strictly considering questions of constitutionality, and that the possible successes achieved by the OMT would not play a role in the verdict. "Otherwise, the end would justify any means necessary," he said. As such, the court's skepticism was difficult to ignore during testimony by Asmussen, who spent 75 minutes on the stand as an expert witness. He spoke of the irrationally high interest rates that countries like Spain and Italy were forced to pay on sovereign bond issues last summer. The ECB, he said, was forced to realize that monetary policy tools, such as adjusting the prime interest rate, were no longer enough. No matter how low the ECB set the rate, companies in Southern European countries were still forced to 299 pay high rates. There was even a threat of deflation, Asmussen said. That alone was enough to justify the announcement of the OMT program. This is essentially the core of the ECB's defense. As an element of monetary policy, the OMT bond purchases would be legal. They cannot, however, serve the purpose of providing euro-zone member states with liquidity. The justices on Tuesday were full of questions. How is it possible to make an objective decision regarding the number of bonds that must be purchased to re-establish monetary policy functionality? What happens when the strict conditions demanded by the ECB of euro-zone member states are no longer met? First and foremost, however, the justices wanted to know more about what might happen in the case of debt restructuring, a so-called "haircut." Should creditors, such as is expected in the case of Greece, be forced to write-off a portion of their sovereign bond holdings, would the ECB also be forced to forgive some of its debt holdings to the benefit of the state involved? "That would be a case of monetary state financing," said Justice Peter Müller on Tuesday. Asmussen was only able to provide a feeble contradiction. 'Strong Signal' Otherwise, Asmussen did his best to assuage the court's doubts. The unlimited bond- buying program, he said, was in fact limited. The ECB, he added, would only buy bonds with periods up to three years. It was important last year to send a "strong signal" to the markets to calm fears that the currency union was about to break apart. Asmussen also addressed concerns about the ECB's encroachment on democracy: "The ECB cannot, may not and is not interested in displacing the activities of democratically elected governments." Asmussen was followed on the stand on Tuesday afternoon by Jens Weidmann, president of Germany's central bank, the Bundesbank. Asmussen studied together with Weidmann, but on Tuesday the two were opponents. Weidmann was the only member of the 23-member ECB Governing Council who voted against the OMT program last autumn. During the five hours of hearings prior to taking the stand, Weidmann had been busily taking notes. Finally free to hold forth, he said he finds it problematic to communalize debt by way of the ECB balance sheet. Weidmann was also unconvinced by the calculations that Asmussen used to prove the irrationality of the high interest rates Southern European countries were forced to pay, calling them subjective. The follow-up questions posed from the bench seemed to indicate that the court agreed. Overreaching Its Own Mandate The hearings will continue on Wednesday and a decision is not expected for a few months. But already it has become clear just how difficult it will be for the court to reach a verdict. The justices clearly have grave doubts about the legality of the OMT program. But it also won't be easy for the court to determine exactly how to focus their decision. Their task, after all, is to ensure that Germany's constitution is respected. They only have a say about a European institution such as the ECB if they find implications for the German constitution, which are not immediately obvious in the present case. Plaintiff attorney Murswiek has said it will be the "most important verdict in decades and for decades," but experts are skeptical. "The court is wrestling with itself," says Daniel Thym, a professor of law at the University of Constance. He says that the court

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is at risk of doing exactly what critics have accused the ECB of doing: overreaching its own mandate. German Finance Minister Wolfgang Schäuble, who also took the stand, agrees. He said he "simply can't imagine that a German court can pass judgement over measures taken by the ECB." URL: • http://www.spiegel.de/international/europe/german-high-court-skeptical-of-ecb-bond- buying-a-905246.html Related SPIEGEL ONLINE links: • ECB Case at High Court The Bundesbank Is Playing a Dangerous Game (06/10/2013) http://www.spiegel.de/international/europe/0,1518,904888,00.html • Decisive Days for Euro High Court Considers ECB Bond Buys (06/10/2013) http://www.spiegel.de/international/europe/0,1518,904745,00.html

06/10/2013 07:16 PM ECB Case at High Court The Bundesbank Is Playing a Dangerous Game A Guest Commentary by Peter Bofinger With its opposition to the ECB's bond-buying policy, the German central bank is pursuing a risky strategy that may stem in part from a desire to enhance its own power. Germany's Constitutional Court will hold a key hearing on bond buying this week.

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The German central bank, the Bundesbank, will have a central role in this week's Federal Constitutional Court hearing on complaints filed against the permanent European bailout fund known as the European Stability Mechanism (ESM) and the bond purchase program of the European Central Bank (ECB). It makes clear in its written statement that the bond purchases announced by the ECB are "to be judged critically." The Bundesbank concedes that the purchase of bonds by central banks is a common practice, but notes that in the case of the United States, Japan or the United Kingdom, central banks only buy bonds of high creditworthiness. The ECB, by contrast, plans to buy bonds of "poorly rated member states" in order to reduce their high-risk premiums, writes the Bundesbank. In doing so, Bundesbank officials are deliberately ignoring the fact that the budget deficits and debt levels of the aforementioned three countries are in some cases considerably higher than in the crisis-hit nations of the euro zone. The "high creditworthiness" doesn't reflect budgetary discipline there. Rather, it stems purely from the fact that the central banks in question opted for large-scale bond buying to give a clear signal to market participants: the US, Japan and the UK will never suffer a liquidity problem in the bond markets. The Bundesbank also questioned the central line of argument of the ECB, which mainly justifies its bond purchase program by saying that the monetary transmission process in the euro zone has been interrupted. The Bundesbank gives a very good description of how such a disruption can be diagnosed. It depends, the Bundesbank writes, on whether the financing conditions in the real economy move in harmony with the ECB's leading interest rates. Which would mean in practice that companies throughout the entire euro zone could obtain bank credit at comparable interest rates. Rate Cuts Haven't Arrived in Crisis-Hit Countries But since the crisis broke out, this has no longer been guaranteed in the debt-plagued member states, where the ECB's interest rate cuts haven't arrived. Instead, interest rates have even increased in some cases, or at least have not fallen, despite the bad economic situation and the restrictive fiscal policies. As the Bundesbank refrained from citing any empirical evidence in its statement, it appears to have missed the fact that the disruption it defined in no uncertain terms clearly exists. The Bundesbank also made the astonishing argument that it's not the task of central banks to remove such a disruption when it occurs. This, it argued, even applies when market participants speculate on the collapse of the monetary union. The necessary support measures must be decided and shouldered by national governments and parliaments, it said. Has the Bundesbank forgotten that the national governments surrendered all their monetary policy powers to the ECB when they joined the currency union? No country would be able on its own to effectively stop capital flight triggered by speculation that it's going to exit the monetary union. Asymmetric Interpretation Overall the Bundesbank's statement gives an impression that it's relatively relaxed about the risks of the monetary union falling apart. While the Bundesbank devoted many pages to the inflationary risks of purchasing government bonds, you don't find a single world about the dangers that would arise if the ECB were to cancel its purchasing program.

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If the monetary union were to break up in an uncontrolled way, the dangers for Germany in particular would be enormous. In addition to the economic downturn that would result from such an event, there would almost certainly be a massive appreciation of the new deutsche mark or whatever the German currency would be called. On the whole, reading the Bundesbank's statement leaves the impression that the authors' line of argument may not be entirely free of self-interest. Amid all the uncertainty about monetary policy transmission mechanisms, there can be no doubt that no institution would benefit more from the break-up of the monetary union than the Bundesbank. It would revert from being a simple member of the Euro System, formally as powerful as the central bank of Malta with just one of 23 votes in the ECB's Governing Council, to Europe's mightiest central bank by far. URL: • http://www.spiegel.de/international/europe/top-economist-attacks-bundesbank- opposition-to-bond-buying-a-904888.html Related SPIEGEL ONLINE links: • Ceding Power Ruling Shows Court's Weakness in EU Matters (09/12/2012) http://www.spiegel.de/international/germany/0,1518,855441,00.html • Merkel Maligned IMF Board Attacks Euro Crisis Management (06/03/2013) http://www.spiegel.de/international/europe/0,1518,903426,00.html • Draghi vs. Germany ECB President Surrounded by Critics (05/29/2013) http://www.spiegel.de/international/europe/0,1518,901952,00.html • Triumph in Defeat Euro Ruling Not as Simple as It Seems (09/13/2012) http://www.spiegel.de/international/germany/0,1518,855692,00.html • Decisive Days for Euro High Court Considers ECB Bond Buys (06/10/2013) http://www.spiegel.de/international/europe/0,1518,904745,00.html

About Peter Bofinger DPA Peter Bofinger is a member of the German Council of Economic Experts, a body advising the German government on economic policy. He joined the council in March 2004. He studied economics at the Saarland University in Saarbrücken and has been a professor at the University of Würzburg since 1991. His focus is on monetary policy and international economic relations. He has left-wing leanings and is a critic of the German government's focus on austerity in tackling the euro crisis.

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Daily Morning Newsbriefing June 12, 2013 The show trial has started Some hailed it as the most important court case in human history– but the first day of hearings has left no doubt that this is a highly irrelevant show trial – which is not about the ECB, but about a the psychological struggle by German constitutional lawyers to grasp the EU fully through the distorted perspective on German constitutional law. Since all the depositions were known before (here for the Bundesbank’s and the ECB’s) yesterday’s hearing in Karlsruhe did not produce any factual new evidence. And there was no showdown between Jens Weidmann and Jorg Asmussen either. They read out statements. What we did find notable was Wolfgang Schauble’s assertion that it was “hard to imagine” that courts pass judgement on the ECB. He said the German position at the Maatricht Treaty was to grant independence to the central bank, implying that he expected the court to respect this position. The statement gives an indication of what kind of debate to expect, should the court come out with a negative ruling on the OMT. Schauble was essentially telling the court that the government believes that court – not the ECB – is overstepping the mandate. This also raises the stakes for the court. If it declared the OMT unconstitutional, not only would it provoke a wider crisis in the eurozone, it would also provoke a constitutional crisis in Germany. It is not clear, for example, that the German government would even accept such a ruling. In a sober analysis, different in tone and quality from partisan coverage elsewhere in the paper, Frankfurter Allgemeine writes that it was obvious that the justices are having their difficulties trying to grasp the ECB with the instruments of German constitutional law. That article was on the front of the home page yesterday – but has disappeared since, giving way to more orthodox coverage. The author spoke to various constitutional lawyers who expect a “yes, but” kind of verdict, where the court issues some critical comments but without any substance. The article also quotes the economist Roland Vaubel, who said the court made clear that economic arguments will be irrelevant in this case, which is only about the constitutionality. He said the only real issue are the risks for the federal budget stemming from the OMT, which would occur if the ECB had to take a haircut. Those risks are theoretically unlimited. He said that the court may well decide to impose a cap on bond purchases. We doubt that very much. The court has no jurisdiction over the ECB – not even over the Bundesbank in its role as a member of the ESCB. The argument about the budget risk is, in our view, quite uninformed because there is nothing new here, since states, including the pre-euro federal republic, have always been liable for central bank losses. The idea to subject such a liability to a democratic vote is absurd, because it would negate the entire legal basis on which modern central banks operate. Have they not got anything more substantive than this?

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Antonis Samaras has ordered shutdown of state broadcaster It came out of the blue: Antonis Samaras ordered the immediate closure of its state broadcaster ERT as of Tuesday, 11 June, to be reopened later with fewer staff. At midnight, the three channels produced by Greek Radio and Television, known as ERT, were to go off the air and remain dark during the overhaul. “We cannot accept refuges of poor transparency and public waste," said government spokesman Simos Kedikoglou. The ERT employees learned at noon that they will be out of job at midnight. The blog Keep talking Greece called it an “information coup d’ etat”. Journalists unions declared a strike for all private TV and radio stations starting today, some even proposed a total media blackout. ERT employees occupied the building and want to keep on broadcasting on 24-hour basis. The two junior partners in the coalition protested that they had not been consulted. PASOK linked ERT's closure with a demand by the troika for 2,000 layoffs in the state sector by August, and called for an immediate meeting of party leaders, Reuters reports. The decision was made by ministerial decree, meaning that it could be implemented without reference to parliament. ERT currently employees 2800 people. It is not clear how many employees will be but sources indicated it would be a fraction of those in work at the moment, Kathimerini reports. Jean Claude Juncker, meanwhile, shows sympathy to Greece telling an audience in Athens that “It was our (eurogroup) mistake to listen to the market gurus”. The prime minister of Luxembourg expressed his respect for Greece but also his discomfort to the “arrogance exhibited by Northern Europeans towards” the debt-ridden country, according to to Keep Talking Greece. EP wants mortgages to be non-recourse This is an interesting legal and political debate, relating to the legal status of mortgage holders who have evicted from their homes. The European Parliament made a non- binding recommendation, in a report on social housing, which if adopted would effective introduce the concept of a non-recourse mortgage to Europe – where mortgage holders are no longer liable for the mortgage, once evicted: The European People’s Party voted against the report, writes El País. Earlier this year in the Spanish parliament, the Spanish People’s Party defeated a people’s legislative initiative along these lines introduced by the Association of Mortgage Victims. Germany open to extending credit to SMEs all over the euro periphery Last week, Spain and Germany announced a plan for the German government to provide credit to Spanish SMEs. Expanding on a report by Wirtschaftswoche on the weekend, EurActiv writes that a German finance minister spokeswoman confirmed that the Portuguese and Greek governments have expressed interest in taking advantage of this king of funding, which Wolfgang Schäuble said they can have. EurActiv writes that Germany is keen to improve its image in the Southern countries after being blamed for the imposition of austerity policies. The funding will be structured as a loan from Germany’s state development bank KfW to Spain’s official credit institution ICO, which will then lend to SMEs.

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In a story by German journalist Thilo Schäfer, Spanish paper La Marea calls the plan “phony generosity on Merkel’s part” as the German government provides only liquidity and it is the Spanish government that takes on the credit risk for the loans. La Marea quotes documents submitted by the German Government to the Bundestag’s Budget committee that “due to Spain’s state guarantee of ICO, there is a low likelihood that the German federal government will have to intervene”. Thus “the risk to the German taxpayer is reduced”. Merkel portrays herself as truly anti-cyclical Angela Merkel said during a speech to the Federation of German Industry that it was Germany’s responsibility to sustain the eurozone through strengthening domestic demand. She criticises opposition proposals for tax increase tax, which would hurt domestic spending, and have a negative impact on the eurozone. There is not much to report on this story, except to note that Germany’s opposition have no eurozone-dimension whatsoever in their economic policy formulation. Merkel is actually right on this point. It is insane for the Greens to propose across the board tax increase at a time when the eurozone is in the middle of recession. Even worse, the issue never occurred to them in their policy meetings, and has not been discussed in German newspapers. We have been, and still are critical of Merkel’s eurozone rescue policies, but in terms of German politics, this is as good as it gets. Letta to introduce decree outlining fully economic relief – but fully funded Enrico Letta decided to pass a decree featuring urgent measures before the next EU summit, as Il Corriere della Sera reports. According to Minister Dario Franceschini, the decree would include measures for the simplication of bureaucracy, lower taxes, and measures to help SMEs. In addition, there would be a "bonus" for firms who put young people on long-term contracts, he said. The PdL Lower House Whip and former finance minister Renato Brunetta said tax breaks and lower contributions for new hires were aimed at recovering the 500,000 jobs lost because of the economic crisis over the last two years. Brunetta also said the funding will be provided through public spending cuts. A government decree becomes law as soon as it is passed by the cabinet although it has to be ratified by Parliament within two months or it stops being valid. Grillo on a rampage to clean the party of internal critics La Repubblica reports that Beppe Grillo asked a senator to leave the party on the grounds that she criticised him. Senator Adele Gambaro had said the biggest problem with the movement is Beppe Grillo and his poor political proposals. According to Gambaro the majority of Italians are beginning to lose confidence in M5S. Grillo should spend less time blogging and instead get a sence of what Italians want from the M5S. Grillo’s tone and communications are unsustainable, Gambaro said. Grillo retorted on his blog that Gambaro has made false and damaging statements about him and M5S. Marco Sarti writes on Linkiesta that the outcome of the latest local election, especially in Sicily, is dramatic for Grillo. The M5S continues to fall in the polls and risks an implosion. In addition, Grillo’s dispute with Gambaro could prove to be the trigger. The M5S was largely absent from the ballots after suffering a big fall in support in the first round of voting two weeks earlier. In addition to Gambaro, other M5S members have also complained about Grillo’s leadership style. During the last months, Grillo expelled seven dissidents from the movement, after they accused him of running affairs in an undemocratic manner, Sarti writes. Now the major risk for M5S is an implosion due the internal fights, Sarti writes.

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Bank of Italy warns a strong rise of indebtedness of Italian households A study released by the Bank of Italy shows that the ratio of debt to disposable income for households rose from 30.8% in 2003 to 53.2% in 2011, and has gone up further in the last couple of years due to the financial crisis. Debts have increased especially for families in the south, the study said. Home mortgages, high taxation rates and the increase in energy bills are the leading cause of rising indebtedness. The Bank of Italy also warned that another increase in direct or indirect taxation would hurt the Italian families’ finances. Montebourg desperate attempt to get companies to return to France Arnaud Montebourg wants companies to return to France. He will announce this Friday a row of measures to ‘help’ the decision to return, Les Echos reports. But how many companies actually departed, what were actually consequences for employment? A new INSEE study sheds some light on these questions, showing that between 2009 and 2011 4.2% of all companies left, most of those to other EU countries (55% of which 38% to the EU15) with 20,000 jobs effectively lost in France as a result of it, mostly in the manufacturing and IT service sectors The usual suspect China only follows with 18% even behind Africa (27%). Portugal’s government says not enough money to pay full holiday allowances; The Portuguese government ordered the public services not to pay holiday allowance in full for June, and to proceed "as established at the beginning of the year" in the state budget 2013, Diario Economico reports. This decision made ??by the Council of Ministers last Thursday ignores the constitutional ruling and the effects of a pending law that has not yet been published. The government argues that the State Budget 2013 does not provide the necessary and sufficient resources to ensure that payment, so there is an “inconsistency between the legal obligation to pay subsidies and budgetary limits imposed by the law," according to the resolution. Wren-Lewis wonders whether the Dutch central bank employ any macroeconomists? Simon Wren Lewis has a go at the Dutch central bank for suggesting that the Dutch government should step up austerity despite the projected fall in GDP by 0.8% this year. He contrast the advice of the central bank with the Dutch bureau for economic policy analysis (which does employ economists, as Wren Lewis notes), “What is just so depressing is that the central bank seems oblivious to the increasingly overwhelming evidence that austerity during a recession is the complete opposite of what you should be doing in a country without its own monetary policy. Unlike some other Eurozone countries, there is no market pressure forcing policymakers’ hands in the Netherlands.” Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.629 0.659 0.664 Italy 2.756 2.842 2.843 Spain 3.051 3.096 3.133 Portugal 4.714 4.921 4.932 Greece 8.054 8.462 8.53 Ireland 2.532 2.659 2.671

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Belgium 0.828 0.871 0.876 Bund Yield 1.546 1.562 1.561

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.328 1.3305

Yen 129.630 128.41

Pound 0.854 0.8493

Swiss Franc 1.236 1.2315

ZC Inflation Swaps

previous last close

1 yr 1.07 1.01

2 yr 1.16 1.11

5 yr 1.46 1.54

10 yr 1.83 1.79

Euribor-OIS Spread

previous last close

1 Week -5.243 -5.543

1 Month -4.314 -3.714

3 Months 3.243 3.143

1 Year 28.929 28.229

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-06- 12.html?cHash=8432e93453ebe0017f5596a2ec02e79c

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ft.com World Europe Last updated: June 12, 2013 9:18 pm ECB warns against opening debate on its mandate By Michael Steen in Karlsruhe

©AFP Bundesbank chief Jens Weidmann, left, and ECB executive board member Jörg Asmussen at the court in Karlsruhe The European Central Bank has hit back at suggestions that its mandate should be up for discussion, after Germany's Bundesbank chief said he would welcome a clarification of its room for manoeuvre. The debate was sparked by two days of legal scrutiny of the ECB's bond-buying plan known as outright monetary transactions (OMT) – its plan to save the euro – by Germany's constitutional court in Karlsruhe. More ON THIS STORY/ German heavyweights clash over euro/ Q&A Why is a German court probing the ECB?/ Drama grips court and gnaws at psyche/ Editorial In defence of OMT and Draghi’s ECB/ Marcell Fratzscher The ECB must open itself up ON THIS TOPIC/ Drop in ECB deposits seen as positive/ Dollar hit hard by heavy selling/ ECB action calmed markets, Draghi says/ Money Supply Draghi’s press conference IN EUROPE/ Turkish PM steps back from confrontation/ Germany seeks to halt EU talks with Turkey/ Erdogan meets main protest group/ Putin orders spending pledges implemented Any move to change the ECB's mandate, enshrined in EU law, would almost certainly involve treaty change – a tortuous process likely to provoke alarm in European capitals. The court was specifically looking into the question of whether the ECB has enough powers to undertake OMT under article 123 of the EU treaty. It is not expected to issue a judgment for some months. “One should be careful what you wish for,” Jörg Asmussen, the ECB executive board member who represented the bank in court, told the Financial Times. “Wishes for a change to article 123 can open a Pandora’s box, as there will surely be many wishes regarding the ECB.” He added that the ECB’s mandate was “defined in the EU treaty through democratically elected politicians, we only carry it out”.

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Speaking in court, Jens Weidmann, Bundesbank president, did not directly call for treaty change but said his own definition of the mandate was narrow. Asked by presiding judge Andreas Vosskuhle if he thought it would be sensible for the court to demand that the ECB’s mandate were changed to curb its scope of action in policy areas such as OMT, Mr Weidmann indicated that he would. “The fact that I’ve taken this position on OMT signals that I am ready to limit this free room because I worry that the use of this free room eventually leads to credibility problems and stability risks,” he said. The OMT plan was announced by Mario Draghi in September after the ECB president pledged to do “whatever it takes” to save the euro. The Bundesbank chief, who sits on the ECB’s governing council, also said he questioned whether the ECB’s pledge to use the theoretically “unlimited firepower” that a central bank can summon was compatible with its mandate. The court has no direct jurisdiction over the ECB, but it could issue a judgment demanding that the German government seek changes to the ECB’s mandate. An attempt to revise the mandate could trigger more demands to change the way that the ECB operates, especially from other eurozone countries less wedded to the Bundesbank orthodoxy that was used as a model for the ECB when it was established. In depth Central banks How the world’s central banks are addressing global economic uncertainty The court hearings have highlighted the deep concern in Germany that taxpayers may eventually be forced to pay for policies designed to ease the eurozone’s sovereign debt crisis. The Bundesbank believes that OMT comes too close to illegal monetary financing, an EU prohibition on countries using the ECB to finance themselves contained in article 123. Unlike the US Federal Reserve’s “dual mandate” of controlling inflation and promoting low unemployment, the ECB’s sole task is promoting price stability by keeping inflation below, but close to, 2 per cent over the medium term. Mr Asmussen said he believed the primacy of price stability was “the right mandate”, a position that would be shared by Mr Weidmann. Although the presiding judge said at the start of proceedings that the court could not take into account the success of a policy in deciding whether it was constitutional, Mr Asmussen tried to explain in court why the ECB had turned to a series of unorthodox monetary policy measures, noting the extreme environment in the first half of 2012. “There was evidence that companies were preparing for a break-up of the eurozone, banks had started to build up liquidity buffers in individual member states, which does not make economic sense, and travel companies were specifying in contracts in which currencies they would be paid,” he said. “We are in a situation of one size fits none, that is why we have extended these non-standard instruments.” http://www.ft.com/cms/s/0/8e6e2600-d366-11e2-b3ff- 00144feab7de.html#axzz2WBats9W0

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Research-based policy analysis and commentary from leading economists The wisdom of Karlsruhe: The OMT Court case should be dismissed Francesco Giavazzi, Richard Portes, Beatrice Weder di Mauro, Charles Wyplosz, 12 June 2013 An ongoing German Constitutional Court case threatens to make the Eurozone Crisis much worse. This column argues that a Eurozone breakup could well be self-fulfilling given the absence of large-scale fiscal backstopping. The ECB’s Outright Monetary Transactions (OMT) programme has so far blocked speculation that could lead to such a breakup. A German court ruling against the OMT would destroy the programme’s credibility. The court would be wise to dismiss the case, if it does not want to risk becoming a threat to Eurozone stability and to taxpayers in Germany and beyond. Related • Time for the Eurozone to shift gear: Issuing euros to finance new spending Biagio Bossone • Outright Monetary Transactions sterilised? Michael McMahon, Udara Peiris, Herakles Polemarchakis This week the German Constitutional Court in Karlsruhe is considering a case in which the plaintiffs oppose the Outright Monetary Transactions (OMT) programme announced last September by the ECB. The court will consider whether the ECB overstepped its mandate and thus imposed undue risks on German taxpayers. The court would be wise to dismiss the case, if it does not want to risk becoming a threat to Eurozone stability and to taxpayers in Germany and beyond. Since the court itself has invited economists to testify in the case, in this column we consider only economic reasoning. OMT logic The OMT was intended to stop a vicious spiral in spreads on sovereign bonds, which was translating into ever higher borrowing rates for the real economy in EZ countries with problems. This falls squarely within the mandate of the ECB. The ECB is supposed to ensure that monetary conditions are appropriate for the real economy to maintain price stability. In a detailed deposition to the court, the Bundesbank discusses the intricacies of the transmission mechanism and concludes that differences in the level of interest rates across different countries of the Eurozone reflect economic fundamentals rather than a broken transmission mechanism. OMT is thus, the Bundesbank argues, outside the ECB’s mandate. But the Bundesbank fails to acknowledge that during the escalating crisis period of 2010-12, the ECB was no longer able to control monetary conditions – not even the direction of change. Despite continuous efforts to loosen monetary conditions,

311 conditions steadily tightened in some countries. The ECB was losing control over the very first stage of the transmission process. • The German Constitutional Court need not discuss the role of models for the transmission mechanism (fundamentals versus expectations in forming risk premiums, or multiple equilibria with creditor runs). These issues are difficult enough for economists to assess and certainly cannot be decided by courts. • A legal view on these issues would seriously endanger the independence of the ECB. This independence has rightly been in very high regard – particularly in Germany. It would be ironic if the highest German court were to undermine it. We can well imagine what The German Court would say if high courts in other countries started interfering with ECB decisions. The magic of OMT OMT works through the successful communication of a commitment “to do everything it takes …”. And the OMT had immediate success in stopping the viscous circle of spiralling sovereign bond spreads and it has started to affect lending rates. It has done this without the ECB having to buy a single bond so far. This is a free lunch, where a credible commitment alone is sufficient to eliminate the speculative equilibrium. The OMT success is based on a mechanism just like the one for bank deposit insurance. Deposit insurance eliminates the possibility of a self-fulfilling bank run (Diamond and Dybvig 1983). Namely the situation where a solvent bank becomes illiquid and fails simply because depositors fear that the bank would become insolvent were a run to occur. Fear of the run can cause the run. To eliminate such bank runs fully, deposit insurance should be unlimited. Any person who wishes to withdraw his or her short-term deposits must be able to do so. Whether the withdrawal is motivated by a need for liquidity or simply by a panic makes no difference. This is exactly what was done in Europe in 2008 at the height of the financial crisis and, indeed, we have not observed any panic movement. The mere announcement was sufficient without any need for actual intervention.1 As in the case of deposit insurance, the OMT programme could work even if the ECB never buys assets. It is sufficient that it announce its intention to buy were a run to occur. • No wise economist would suggest dropping deposit insurance, nor should one suggest preventing OMT. After the ECB announced the OMT programme, markets have been stabilised without the ECB having to buy a single Spanish or Italian bond. But for this to work, it is necessary that the commitment be unlimited in size. The intervention of the Swiss National Bank capping the exchange rate of the Swiss franc is another example of a credible commitment that works. Except in times of extraordinary stress, the Swiss National Bank has not had to intervene. The central bank is on the right side of the trade – selling francs – so it has unlimited buying power to keep the exchange rate at or below the peg of 1.2 Swiss francs per euro. The markets know this, and there are no speculative attacks. How a ruling could ruin the OMT magic 312

A ruling by the German Court in Karlsruhe that there must be financial limits on the commitment would destroy the credibility of OMT. A requirement that any specific use of the scheme would have to be approved by the Bundestag would do the same. Markets would again drive up spreads to unsustainable levels, this time with no way of stopping them. It would be self-defeating if the German Constitutional Court were to undo the magic of the OMT and thus force the ECB to start buying bonds. Sovereign insolvencies would entail such massive costs to creditors that the ECB would not knowingly take on such a liability. It should not commit to purchase bonds of a country likely to default – hence the need for a European Stability Mechanism programme with conditionality as a prerequisite for OMT. Conclusions The Eurozone is still fragile. Both at the country level and at the supranational level, much remains to be done to build a robust framework. In the meantime, in the absence of large-scale fiscal backstopping, speculations about a Eurozone breakup could be self- fulfilling. Fear of a breakup could cause a breakup. At the moment, these speculations have been successfully blocked by the OMT programme. The integrity of the Eurozone is at the very core of the ECB mandate, because a breakup would be extremely disruptive and costly, for creditor as well as debtor countries, including German taxpayers. We must hope that the Court will see that damaging the ECB’s credibility would not be wise. Editor’s note: A version of the column appeared in German in Handelsblatt earlier this week. References Gertler, Mark and Nobuhiro Kiyotaki (2013). “Banking, Liquidity and Bank Runs in an Infinite Horizon Economy”, Princeton manuscript. Diamond, Douglas and Philip Dybvig (1983). “Bank Runs, Deposit Insurance, and Liquidity”, Journal of Political Economy, Vol. 91, No. 3, Jun., 1983.

1 The analogy between deposit insurance for commercial banks and central bank interventions such as the OMT has recently been analysed by Mark Gertler and Nobuhiro Kiyotaki in “Banking, Liquidity and Bank Runs in an Infinite Horizon Economy” (2013) which extends the time-honoured Diamond and Dybvig (1983) model to show that a central bank commitment to use lender of last resort policies to support liquidation prices might be effective in keeping liquidation prices sufficiently high to rule out the possibility of runs. http://www.voxeu.org/article/wisdom-karlsruhe-omt-court-case-should-be-dismissed

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How Austerity Has Failed July 11, 2013 Martin Wolf

Lionel Bonaventure/AFP/Getty Images British Prime Minister David Cameron and European Commission President José Manuel Barroso, Brussels, May 2012 Austerity has failed. It turned a nascent recovery into stagnation. That imposes huge and unnecessary costs, not just in the short run, but also in the long term: the costs of investments unmade, of businesses not started, of skills atrophied, and of hopes destroyed. What is being done here in the UK and also in much of the eurozone is worse than a crime, it is a blunder. If policymakers listened to the arguments put forward by our opponents, the picture, already dark, would become still darker. How Austerity Aborted Recovery Austerity came to Europe in the first half of 2010, with the Greek crisis, the coalition government in the UK, and above all, in June of that year, the Toronto summit of the group of twenty leading countries. This meeting prematurely reversed the successful stimulus launched at the previous summits and declared, roundly, that “advanced economies have committed to fiscal plans that will at least halve deficits by 2013.” This was clearly an attempt at austerity, which I define as a reduction in the structural, or cyclically adjusted, fiscal balance—i.e., the budget deficit or surplus that would exist after adjustments are made for the ups and downs of the business cycle. It was an attempt prematurely and unwisely made. The cuts in these structural deficits, a mix of tax increases and government spending cuts between 2010 and 2013, will be around 11.8 percent of potential GDP in Greece, 6.1 percent in Portugal, 3.5 percent in Spain,

314 and 3.4 percent in Italy. One might argue that these countries have had little choice. But the UK did, yet its cut in the structural deficit over these three years will be 4.3 percent of GDP. What was the consequence? In a word, “dire.” In 2010, as a result of heroic interventions by the monetary and fiscal authorities, many countries hit by the crisis enjoyed surprisingly good recoveries from the “great recession” of 2008–2009. This then stopped (see figure 1). The International Monetary Fund now thinks, perhaps optimistically, that the British economy will expand by 1.8 percent between 2010 and 2013. But it expanded by 1.8 percent between 2009 and 2010 alone. The economy has now stagnated for almost three years. Even if the IMF is right about a recovery this year, it will be 2015 before the economy reaches the size it was before the crisis began. The picture in the eurozone is worse: its economy expanded by 2 percent between 2009 and 2010. It is now forecast to expand by a mere 0.4 percent between 2010 and 2013. Austerity has put the crisis-hit countries through a wringer, with huge and ongoing recessions. Rates of unemployment are more than a quarter of the labor force in Greece and Spain (see figure 2). When the economies of many neighboring countries contract simultaneously, the impact is far worse since one country’s reduced spending on imports is another country’s reduced export demand. This is why the concerted decision to retrench was a huge mistake. It aborted the recovery, undermining confidence in our economy and causing long-term damage.

Why Fiscal Policy Why is strong fiscal support needed after a financial crisis? The answer for the crisis of recent years is that, with the credit system damaged and asset prices falling, short-term interest rates quickly fell to the lower boundary—that is, they were cut to nearly zero. Today, the highest interest rate offered by any of the four most important central banks

315 is half a percent. Used in conjunction with monetary policy, aggressive and well- designed fiscal stimulus is the most effective response to the huge decrease in spending by individuals as they try to save money in order to pay down debt. This desire for higher savings is the salient characteristic of the post–financial crisis economy, which now characterizes the US, Europe, and Japan. Together these three still make up more than 50 percent of the world economy. Of course, some think that neither monetary nor fiscal policy should be used. Instead, they argue, we should “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” In other words, sell everything until they reach a rock-bottom price at which point, supposedly, the economy will readjust and spending and investing will resume. That, according to Herbert Hoover, was the advice he received from Andrew Mellon, the Treasury secretary, as America plunged into the Great Depression. Mellon thought government should do nothing. This advice manages to be both stupid and wicked. Stupid, because following it would almost certainly lead to a depression across the advanced world. Wicked, because of the misery that would follow.

Austerity in the Eurozone Some will insist that the eurozone countries had no alternative: they had to retrench. This is true in the sense that members have limited sovereignty, wed as they are to a single currency, and had to adapt to the dysfunctional eurozone policy regime. Yet it did not have to be this way. 1. The creditor countries, particularly Germany, could have recognized that they were enjoying incredibly low interest rates on their own public debt partly because of the crises in the vulnerable countries. They could have shared some of this windfall they enjoyed with those under pressure. 2. The needed adjustment could have been made far more symmetrical, with strong action in creditor countries to expand demand.

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3. The European Central Bank could have offered two years earlier the kind of open- ended support for debt of hard-pressed countries that it made available in the summer of 2012. 4. The funds made available to cushion the crisis could have been substantially larger. 5. The emphasis could then have been more on structural reforms, such as easing labor regulations and union protections that restrain hiring and firing and raise labor costs, and less on fiscal retrenchment in the form of reduced spending. Reduced labor costs could have made these nations’ export industries more competitive and encouraged domestic hiring. It is possible to admit all this and yet argue that without deep slumps, the necessary pressure for adjustment in labor costs that is inherent in the adoption of a single currency (which is a modern version of the gold-standard-type mechanism that once ruled the advanced nations and helped bring on the Great Depression) would not have existed. This, too, is in general not true. 1. In Greece, Ireland, Portugal, and Spain, at least, the private sector was in such a deep crisis that additional downward pressure as a result of rapid fiscal retrenchment simply added insult—and more unemployment—to deep injury. 2. In Italy, the pressure from years of semi-stagnation, with many more to come, would probably have been sufficient to restructure the labor markets, to bring about lower labor costs, provided structural reforms of the labor market were carried out, measures allowing companies to reduce their workforces and adjust wages more easily. In short, the scale of the austerity was unnecessary and ill-timed. This is now widely admitted. Austerity in the UK The UK certainly did have alternatives—a host of them. It could have chosen from a wide range of different fiscal policies. The government could, for example, have: 1. Increased public investment, rather than halving it (initially decided by Labour), when it enjoyed zero real interest rates on long-term borrowing. 2. It could have cut taxes. 3. It could have slowed the pace of reduction in current spending. It could, in brief, have preserved more freedom to respond to the exceptional circumstances it confronted. Why did the government not do so? 1. It believed, and was advised to believe, that monetary policy alone could do the job. But monetary policy is hard to calibrate when interest rates are already so low (at or close to zero) and potentially damaging particularly in the form of asset bubbles. Fiscal policy is not only more direct, but it can also be more easily calibrated and, when the time comes, more easily reversed. 2. The government believed that its fiscal plans gave it credibility and so would deliver lower long-term interest rates. But what determines long-term interest rates for a sovereign country with a floating exchange rate is the expected future short-term interest rates. These rates are determined by the state of the economy, not that of the

317 public finances. In the emergency budget of June 2010, the cumulative net borrowing of the public sector between 2011 and 2015–2016 had been forecast to be £322 billion; in the June 2013 budget, this borrowing is forecast at £539.4 billion, that is, 68 percent more. Has this failure destroyed confidence and so raised long-term interest rates on government bonds? No. 3. It believed that high government deficits would crowd out private spending—that is, the need of the government to borrow would leave less room for private borrowing. But after a huge financial crisis, there is no such crowding out because private firms are reluctant to invest, and consumers are reluctant to spend, in a weak economic environment. 4. It argued that the UK had too much debt. But the UK government started the crisis with close to its lowest net public debt relative to gross domestic product in three hundred years. It still has a debt ratio much lower than its long-term historical average (which is about 110 percent of GDP). 5. The government argued that the UK could not afford additional debt. But that, of course, depends on the cost of debt. When debt is as cheap as it is today, the UK can hardly afford not to borrow. It is impossible to believe that the country cannot find public investments—the cautious IMF itself urges more spending on infrastructure— that will generate positive real returns. Indeed, with real interest rates negative, borrowing is close to a “free lunch.” 6. The government now believes that the UK has very little excess capacity. But even the most pessimistic analysts believe it has some. Of course, the right policy would address both demand and supply, together. But I, for one, cannot accept that the UK is fated to produce 16 percent less than its pre-crisis trend of growth suggested. Yes, some of that output was exaggerated. There is no reason to believe so much was. Assessment of Austerity We, on this side of the argument, are certainly not stating that premature austerity is the only reason for weak economies: the financial crisis, the subsequent end of the era of easy credit, and the adverse shocks are crucial. But austerity has made it far more difficult than it needed to be to deal with these shocks. The right approach to a crisis of this kind is to use everything: policies that strengthen the banking system; policies that increase private sector incentives to invest; expansionary monetary policies; and, last but not least, the government’s capacity to borrow and spend. Failing to do this, in the UK, or failing to make this possible, in the eurozone, has helped cause a lamentably weak recovery that is very likely to leave long-lasting scars. It was a huge mistake. It is not too late to change course. http://www.nybooks.com/articles/archives/2013/jul/11/how-austerity-has-failed/

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Daily Morning Newsbriefing

June 11, 2013 Europe’ s supreme authority is holding an audience today This is the Karl Marx moment of the eurozone crisis with history is repeating itself as a farce. It is another of those constitutional court moments, with public hearings today and tomorrow. For added drama, it pitches the two German representatives in the ECB’s governing council at opposite ends. A shootout is expected. The anti-climax is guaranteed. It is clear already that the court will not strike down the OMT. What is less clear is what else the court might say, what conditions it might attach. Already, in the run-up to those hearing, the ECB itself created some confusion as to whether the OMT was open-ended. Its lawyer said it was capped. The ECB then corrected its lawyer, saying it was not capped, while Mario Draghi emphasised that it was conditional. We would have thought that they could have stuck to the line “conditional but not capped” – which should have been easy enough to remember. We might get further such “clarifications” during those hearings today and tomorrow. For Frankfurter Allgemeine this is appears to be the most important event in all of economic history. The hearings relate to the OMT, as part of a wider case against the EMS, brought by various eurosceptic MPs and professors, plus a further 37,000 citizens, who have joined a class action suit. FAZ writes that today’s hearing is unusual because the court only rarely operates publically. It said the court’s president, Andreas Voßkuhle, will emphasise the government’s autonomy in matters of economic policy, and the court’s self-restraint. This will be followed by the statement from various plaintiffs, following by statements from Jens Weidmann and Jorg Asmussen, who apparently agreed to refrain from personal attacks. This is followed by statement from various, mostly Eurosceptic, German economics professors. Wolfgang Schauble is also there. There will be no verdict before the elections. No one really expects a radical decision, but Frankfurter Allgemeine says the justices may impose red lines on the German government to force it to subject any vote in the ESM to certain criteria. It may also pass the buck to the ECJ – but that would be unusual, since the German courtiers do not easily tolerate courtiers above them. [WM1] In a front page editorial, the paper’s economics editor and arch-eurosceptic Holger Stelzner, calls it one of the most important court cases in history. The issue is whether Draghi is allowed to buy unlimited amounts of national debt, he writes, and whether this constitutes debt monetisation. He says that passing the buck to the ECJ would invariably give Draghi a green light for his OMT. He recalls the case of the Dublin supreme court that passed a decision on the ESM to the ECJ, which waved it through without blinking, thus turning the no-bailout rule into a bailout rule. His own view is

319 that the ECB is overreaching its mandate. It is not its principal job to guarantee the survival of the eurozone. Spain may be allowed to tap the bank rescue fund next year; El Economista reports that the EU has offered to extend the availability of funds for Spain's bank bailout beyond the end of this year, in case the Spanish government needs to inject more capital into the banking sector as a result of the upcoming stress tests to be conducted by the ECB. Spain was granted a credit line of €100k last summer, of which only €40bn were tapped for the banking rescue so far. Europa Press quotes unnamed Commission officials on the ideas, and according to El País the Spanish government would welcome the extension provided that it does not generate a stigma in the markets and that it does not come with additional policy conditionality imposed by the creditor states. Pressure for EU-wide bank resolution authority is growing The debate on banking union is producing some odd alliances. While the German government is now rowing back, and favours a loser bank resolution board with a strong representation of national supervisors, the Bundesbank has now come out in favour of a strong central bank resolution authority, on lines similar to those proposed by the European Commission. Reuters quotes Sabine Lautenschlaeger, Bundesbank vice- president, as saying that such an authority would be able to take a global view of the financial sector and implement a coherent concept for winding up failed banks more easily than national resolution authorities. She said it does not make sense to supervise banks at the EU-level and then push ahead with resolution at national level. But she also agreed with Wolfgang Schauble’s position that a treaty change is needed. The article also quoted Germany’s deputy finance minister as saying that the big risk is that resolution decision could be challenged in national courts, unless the legal basis is watertight. In another story Reuters reports that Finnish PM Jyrki Katainen is also in favour of a central bank resolution authority, with the power to overrule national supervisors, while criticising the recent Franco-German proposal as not going far enough. PD wins local elections The PD has won the local elections in all 11 major cities, including Rome, boosting its position at national level, after the disappointing general elections in February. Ignazio Marino won in Rome beating the mayor Gianni Alemanno, a high-ranking member of Silvio Berlusconi’ PdL. Another Berlusconi’ top candidate, Giancarlo Gentilini, who ruled the northern-east city of Treviso for 20 years, said the PdL was finished, it lost everywhere in Italy. He also added he felt the party did not give him enough support to win, Il Corriere della Sera reports According to La Repubblica, the surprising strength of the PD at the municipal level should boost Enrico Letta and his alliance. Berlusconi has acknowledged the defeat of the PdL, and all ofa his candidates also conceded victory. However, the results are marred by an extremely low turnout, of 48.5% on a national level, down from 59.7% turnout in the first round, and way down previous local elections. In the meanwhile, Letta said that he is quite alarmed by the high rate of abstention in ballots’ votes in local elections. As La Repubblica reports, Letta is worried about the disaffection of Italians in active politics, and he calls for a new way for Italian parties.

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Italian GDP down 2.4% in first quarter ISTAT said Italy still has a long way to go before emerging from the worst crisis since World War II, as La Stampa reports. In the first quarter of 2013 Italy’ GDP fell 2.4%, compared to the same period last year, while GDP was down 0.6% qoq, ISTAT said. It also revised down the forecast for the current year, to minus 2.4%. In addition, Italian exports fell 1.9% qoq, marking the worst contraction since 2009. Industrial production shrank by 4.6% in April versus the same month in 2012, with the 20th consecutive year- on-year contraction in a row, according to ISTAT. However, there is a ray of optimism from the OECD, whose June index of leading indicators signalled an easing of the recession in Italy and moderate improvements in other big economies. Confindustria chief Giorgio Squinzi seized on those figures with an attack on Mario Monti’s fiscal consolidation, and he warned that more austerity will not provide the answer to the country’ current economic crisis. As Il Sole 24 Ore reports, Squinzi said austerity destroyed the country’s social fabric as well as the ownership structure of Italian companies, to the foreigners are pick up the pieces on the cheap. Squinzi also noted that EU/IMF policy has even failed to achieve its narrow aim – to bring down the debt-to-GDP ratio - he added. It is not surprising that Italy’s economy contracts – this is the consequence of excessive austerity and a credit crunch. What is disturbing about those data is the export performance. As Italy goes through a recession, one would normally expect the export sector to become relatively more competitive. That does not seem to be happening in Greek privatisation programme suffered blow Greece’s privatization programme suffered a heavy blow on Monday after an anticipated bid for Public Gas Corporation (DEPA) by Russian energy giant Gazprom did not happen after all, Kathimerini reports. The Russian side attributed the failure to unsatisfactory terms while Greek government sources pointed to objections by the European Commission, currently investigating Gazprom. Gazprom executive Alexander Medvedev attributed to concerns about inadequate guarantees regarding the company’s financial state. EC sources in Brussels told Kathimerini that there was no truth in reports that Brussels had intervened to discourage Gazprom from bidding for DEPA. Officials close to Samaras indicated that the fundraising target relating to DEPA could be put off until next year. Portugal’s president says Portugal would be worse off if government dissolved Portugal’s president Cavaco Silva said that Portugal would be worse off if he used his powers as president and dissolve the government, Jornal de Negocios picked up on an interview with RTP. He said look at Greece Cyprus and Italy, where a political crisis made everything worse. The power to dissolve the government is like an atomic bomb, it should rarely be used, He also said that Portugal has to prepare to return to the markets and that it will be crucial that the sacrifices are better distributed, he admits. "The challenge that lies ahead is the post-troika. And if we want to prepare it well, we must start now." Silva also criticised European policymakers for failures to revive growth and said the ECB should do more so that companies, in particular SMEs, obtain credit on more favourable terms.” France proposes carbon tax and tax alignment for diesel In France, a parliamentary committee decided on a proposal for ecological taxation for the 2014 budget, a new carbon tax and a reduction of the tax differential between diesel

321 and gasoline, Les Echos reports. The scenarios outlined assume the introduction of a carbon tax in 2014 with a rate that would gradually increase until 2020, while the tax differential between gasoline and diesel are to be reduced by 1 cent per litre per year. This will be compensated by tax credits for low income earners and for companies using the “competitiveness” tax credit. But in a Les Echos editorial Jean-Francis Pecresse warns that increasing the price for diesel would destroy the advantage of the French car industry and be detrimental for innovation and growth from this sector. The incredible shrinking single market for finance The FT has the story that cross-border holdings by eurozone banks of government and corporate bonds have falling dramatically, to the extent that one can no longer talk about a single market. The FT has calculated that bank holdings of other eurozone country’s government and corporate bonds have fallen from a peak of 40% of total holdings to 21.5% in the second quarter of 2012. They have risen since marginally to 22.1 – which is roughly the level they were at when the euro started. The article says this trend explained why Italian and Spanish borrowing costs have fallen – even despite the political turmoil in Italy. This is also why the banking union is now so difficult to implement because banking is becoming more domestic. The re-domestication of finance allows financial repression to take place at national level, which may not be possible at EU-level. It also raises the hurdle in bank resolution as indebted governments have no interest in a clean-up of the financial sector, and the closure of banks. You can’t financially repress a bank that is no longer there. Eurozone Financial Data 10-year spreads

Previous day Yesterday This Morning

France 0.628 0.629 0.627 Italy 2.685 2.786 2.760 Spain 3.042 3.051 3.053 Portugal 4.662 4.714 4.696 Greece 7.948 8.054 8.05 Ireland 2.482 2.532 2.513 Belgium 0.830 0.828 0.826 Bund Yield 1.509 1.546 1.572

Euro Bilateral Exchange Rate

Previous This morning

Dollar 1.322 1.3265

Yen 130.450 130.57

Pound 0.851 0.8512

Swiss Franc 1.238 1.2378

ZC Inflation Swaps

previous last close

322

1 yr 1.07 1.07

2 yr 1.16 1.16

5 yr 1.46 1.46

10 yr 1.83 1.83

Euribor-OIS Spread

previous last close

1 Week -5.643 -6.243

1 Month -5.900 -3.6

3 Months 0.486 0.586

1 Year 27.757 27.557

Source: Reuters http://www.eurointelligence.com/professional/briefings/2013-06- 11.html?cHash=53e622092061ae411241e83bdc2875bc

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Bundesbank calls for EU-wide bank resolution authority

Mon, Jun 10 2013 BERLIN (Reuters) - The vice president of Germany's Bundesbank on Monday called for an effective Europe-wide bank resolution authority, a position at odds with the German government which has been resistant to such a move. The creation of a banking union in Europe, including a structure to wind-up failed banks, is widely seen as a missing link in efforts to bring the region's debt crisis to an end. Sabine Lautenschlaeger said an EU-wide authority would be able to take a "bird's eye view" of financial institutions and implement a coherent concept for winding up failed banks more easily than national resolution authorities. "It doesn't make sense to supervise banks at the EU-level but then to push ahead with resolution at a national level," Lautenschlaeger said at a conference held by the Free Democrats (FDP), junior partner in Chancellor Angela Merkel's centre-right government, in Berlin. She said an EU-wide mechanism would also be able to make decisions more quickly in crisis situations as fewer people would take part in negotiations. EU treaties would, however, need to be changed for it to be possible to set up an EU- wide resolution authority, she said. The German government has been wary of any scheme that could empower an external agency to force the closure of one of its banks, or compel it to pick up part of the bill if a foreign bank ran aground. Chancellor Angela Merkel did, however, recently propose a "resolution board" involving national authorities to take decisions on winding up failed banks. German Deputy Finance Minister Thomas Steffen, speaking at the same conference as Lautenschlaeger, said the EU Commission would soon propose a centralised resolution authority that could make decisions at a European level. "We'll see if we can come to an agreement on the legal side of things. We should not run the risk of this mechanism getting stopped by court action," he said.

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German Finance Minister Wolfgang Schaeuble has said that a central authority should only be implemented in the long-term and that this would only be possible after changing EU treaties. A supranational resolution mechanism is part of Europe's planned banking union which intends to make the continent's financial system more resistant to crises and includes setting up a common banking supervisor at the European Central Bank. (Reporting by Reinhard Becker; Writing by Michelle Martin; Editing by Toby Chopra) http://uk.reuters.com/article/2013/06/10/uk-germany-buba-idUKBRE9590VZ20130610

Euro zone mustn’t flunk bank cleanup June 10, 2013 @ 8:31 am By Hugo Dixon One reason the euro zone is in such a mess is that it hasn’t had the courage to clean up its banks. The United States gave its lenders a proper scrubbing, followed by recapitalisation, in 2009. By contrast, the euro zone engaged in a series of half-hearted stress tests that missed many of the biggest banking problems such as those in Ireland, Spain and Cyprus. In recent years, the zone has started to address these problems on a piecemeal basis. But it is still haunted by zombie banks, which are not strong enough to support an economic recovery. The European Central Bank now has a golden opportunity to press the reset button in advance of taking on the job of supervisor in mid-2014. It mustn’t flunk the cleanup. Mario Draghi, the ECB president, is alive to the opportunity and the threat. His fear is that, even if the supervisor does its job properly, there won’t be a safety net for troubled banks that can’t recapitalise themselves. This is why he called on governments last week to make an explicit commitment to provide such a “backstop”. Draghi highlighted the contrast between the U.S. stress test, in which Washington committed to plug any balance-sheet holes, and the last European stress test conducted by the European Banking Authority in 2011 which lacked such a commitment by governments. The U.S. test launched its economy on the road to recovery; the EBA one triggered a new phase in the crisis. The moral is obvious: without a safety net, making a clean breast of problems can provoke panic. The supervisor may as a result be tempted to continue sweeping problems under the carpet. The euro zone’s recovery would then be further delayed and the ECB’s credibility destroyed. So far, governments have not responded to Draghi’s request for a backstop. In the meantime, the ECB and the EBA – which are working on different aspects of the cleanup – have many issues to clarify themselves. First, who exactly will review the banks’ assets? The ECB does not yet have the manpower to do it. So it has to rely on national supervisors. The snag is that these

325 national supervisors could have an incentive to hide problems in their banks so the cost of bailing them out is ultimately borne by the euro zone as a whole. Draghi’s answer is to get supervisors to cross-check the balance sheets of banks in other countries – and to reinforce the audit’s independence by involving private-sector assessors. The latter suggestion originally provoked unhappiness in France. But at a recent dinner with central bank governors, Draghi pushed his solution through. That still leaves the question of whether the ECB can conduct a sufficiently in-depth review given that it wants to finish the whole process by next spring. It needs to figure out how likely loans are to turn sour and whether banks have taken adequate provisions against that possibility. Around 140 of the euro zone’s top banks will be reviewed. The ECB should also look into whether lenders have used appropriate “risk weights” for their assets. A risk weight determines the size of capital buffer a bank is required to hold. There is a widespread suspicion that many lenders are using artificially low weights to give the misleading impression that they are well capitalised. After the ECB completes its review, the EBA will conduct a stress test to check whether banks can survive a shock. This raises many other questions including: how big a shock it will test; how much capital banks will need to have in this stressed scenario; and how long they will get to restock their capital if they fail the test. If the EBA is too soft, the test will be exposed to ridicule in financial markets. Yet another issue is whether capital shortfalls will be expressed as an absolute number – such as 1 billion euros – or as a percentage of risk-weighted assets. The last EBA test plumped for the percentage method, with the disastrous consequence that many banks solved their capital problem by selling assets and stopping lending – so further crushing the economy. Ewald Nowotny, an ECB council member, suggested to Reuters last month that this error would not be repeated. Once all this is dealt with, the question then becomes who will provide a backstop if the bank has a capital shortfall that it can’t fill itself and its government has too much debt to help out. One option would be for the European Stability Mechanism (ESM), the zone’s bailout fund, to inject capital directly into banks. But Germany seems to have rejected this. The main alternative is that the ESM should lend money to national governments, which could then pop it into their banks. That’s what happened last year when Spain’s lenders got into trouble. The snag is that this would add to the government’s deficit and debt. A partial workaround could be for the European Commission to ignore any capital injections when it determines whether governments are doing enough to cut their deficits. Without such forbearance, they could be forced into another round of growth-pummelling austerity measures. With so many issues to resolve, there is a risk that Europe’s mega bank cleanup will either be another damp squib or even create more damage. Having wasted five years failing to address the problem properly, the euro zone must make sure this does not happen. http://blogs.reuters.com/hugo-dixon/2013/06/10/euro-zone-mustnt-flunk-bank-cleanup/

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vox

Research-based policy analysis and commentary from leading economists Exit strategies: Time to think ahead Charles Wyplosz, 8 June 2013 Central banks on both sides of the Atlantic are pondering ways of unwinding their bloated balance sheets and easing out of extraordinary post-crisis monetary policy interventions. This column discusses the recent Geneva Conference on the World Economy that focused on ‘exit strategies’. Where exactly do central banks exit? And how? This column also introduces a new Vox feature, ‘Vox Views’, which are short video interviews with world-renown economists. The first two of these feature Alan Blinder and Don Kohn. Related • Helicopter money as a policy option Lucrezia Reichlin, Adair Turner, Michael Woodford • Escaping liquidity traps: Lessons from the UK’s 1930s escapeNicholas Crafts • Did the euro kill governance in the periphery? Jesús Fernández-Villaverde, Luis Garicano, Tano Santos • Why is this global recovery different? M Ayhan Kose, Prakash Loungani, Marco E Terrones • Augmented inflation targeting: Le roi est mort, vive le roi Richard Baldwin, Daniel Gros Right now, most central banks in developed countries are deeply focused on finding ways to support a lackluster economic recovery from the 2009’s Great Recession. In some cases, these banks are struggling to exit from a double dip. With interest rates at the zero lower bound, these efforts are taking the form of a massive expansion of liquidity. Behind this unprecedented effort lies a seldom-discussed question: how do we revert to normality when it’s all over? It is certainly not yet time to act but it is never too early to think carefully about such a complex and untested process. ‘Exit strategies’, as this process is often called, were the topic of the 15th Geneva Conference on the World Economy, which took place in Geneva on 3 May 2013. The debates were structured around two main questions: Where to exit to? How to exit? Alan Blinder introduced the first issue, his key message being that the new, ‘normal’ monetary policies would differ from the pre-crisis consensus that a central bank should pursue inflation targeting and ignore financial stability. The future relevance of inflation targeting was heavily debated, focusing partly on how it should be defined. However, there was widespread agreement on three main points: • Financial stability is now recognised as an implicit responsibility of central banks; • Many new instruments have been experimented with since 2008 – including central-bank purchases on long-term assets – and they will not be abandoned;

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• Central banks are now involved in macroprudential financial supervision, which is not completely separate from microprudential supervision. The expanded role of central banks – often in areas that are unavoidably political – led to many conference participants expressing their concern about central-bank independence: Don Kohn introduced the second issue: the first question is ‘when to do it’? • Some conference participants were of the view that it is better to act early rather than too late, avoiding the risk of rekindling inflation; Others were of the opposite view, fearing another recession; • Do we raise interest rates or, first, re-absorb liquidity? It may seem natural to first raise the interest rate, but who will bear the ensuing capital losses on long-term bonds: central banks that now hold substantial amounts, or the private sector? • The third question is which assets central banks should dispose of, and in which order; Here the discussions revealed how intriguing is the newly discovered ability of central banks to shape the yield curve. Should this ability be used as part of the exit strategy? Should it be exercised in the ‘new normal’? A common theme running through these questions was, again, that the exit strategy was bound to be highly political. Withdrawing policy support is always delicate, but the scope for capital losses and the impact on fiscal policy of large-scale bond sales stand to make exit highly controversial. Overall, it’s clear that central banks need to prepare the public and the politicians.

Editor’s note: This was the 15th conference organised by the International Center for Monetary and Banking Studies (ICMB). These conferences bring together academics, policymakers and financiers to discuss key policy issues. ICMB and CEPR will jointly publish in July a full Geneva Report on exit strategies. References Alan Blinder’s Geneva presentation Donald Kohn’s Geneva presentation Previous GENEVA reports on the World Economy (http://www.cepr.org/pubs/books/geneva/geneva.asp) http://www.voxeu.org/article/exit-strategies-time-think-ahead

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Sustainability vs. Credibility. Why ‘Austerity’ May Not (Did Not) Work Author: Roberto Tamborini · June 4th, 2013 · The “shock therapy” of front-loaded, “ambitious” fiscal consolidation plans, also known in Europe as “austerity”, hinges on the credibility approach. In this approach, governments are urged to announce and implement large fiscal adjustments that are rewarded with lower interest rate (e.g. Corsetti et al. (2010)). This is crucial. Even though austerity may have short-run negative effects on aggregate demand, these may be compensated by a permanent cut of the risk premium that prompts long-term private expenditure. This view has now become highly controversial well beyond the circles of traditional opponents (see among others the Forum organized by the website Vox (www.voxeu.org) and Corsetti (ed., 2012)). The punishment, or lack of reward, in terms of spreads of hard austerity plans implemented by countries like Italy and Spain, or the self-defeating effect of conditionality plans in Greece and Portugal (and partly in Ireland), raise the thorny issue of whether such plans were too small (non credible) or too large (non sustainable). Sustainability is indeed another approach which is partly analogous to, but partly different from, the celebrated one of credibility. In simple words, sustainability is the chance that at any point in time the government is willing or able to sustain the level of fiscal effort (say the primary surplus/GDP ratio) required by the solvency condition of its outstanding debt. Hence sustainability is a key variable in the investors’ assement of default risk, and in the determination of sovereign risk premia. The essential difficulty in assessing sustainability lies in its political dimension, which is a source of peculiar, extra-economic, uncertainty not amenable to “objective” analysis of the so-called “fundamentals”. The current generation of sovereign debt models is in fact concerned with institutional setups where the government’s ability to tax or monetize is constrained (for instance, euro-governments have no access to monetization) and therefore the government can in fact opt for default as a result of a cost-benefit analysis (e.g. Cooper (2012), Corsetti and Dedola (2011), Gros (2012), De Grauwe (2011)). Against this background, I have shown in a recent study (Tamborini (2012)) that, contrary to the credibility approach, sustainability indeed predicts that governments engaged in larger and larger fiscal efforts will pay a higher interest rate. This happens because, as the fiscal effort increases, a larger share of investors believe that the government will opt for default, and the risk premium increases. As a consequence, one possible equilibrium is typically a “self-fulfilling default prophecy” due to the positive feedback mechanism among market beliefs of default, higher spread, higher fiscal effort, reinforcement of market beliefs. Here I present some data of EMU12 countries [1] that show the evolution of spreads of their sovereign debts vis-à-vis their fiscal effort. I identify fiscal consolidation with a positive change in the primary-surplus/GDP ratio over the previous year. The data cover the three years 2010-2012 in which almost all countries engaged in fiscal consolidation.

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In the first place, figure 1 plots fiscal consolidation against spreads. The non-linear fit of the second order suggests that spreads in the EMU as a whole are poorly, and wrongly, related with fiscal consolidation. Larger fiscal efforts have not been rewarded with smaller spreads, and /or higher spreads require larger fiscal efforts in a vicious circle. Figure 1. Fiscal consolidation spreads. EMU12 countries 2010-12

(1) Year average of monthly spreads over ten-year German bonds (ECB definition). Source: Eurostat, AMECO database; ECB, Interest-rate statistics. A more precise interpretation of sustainability is that investors asses not so much actual primary balances as the gap with the target primary balance that would be necessary for the government to stay solvent (see figure 2). Figure 2. Gap between realized and target primary-surplus GDP/ratio. EMU12 countries, 2010-12

Source: Eurostat, AMECO database, and personal calculations The latter is by itself a difficult and controversial measurement (e.g. IMF (2012)). As a point of reference, for each country and each year I have computed the primary- surplus/GDP ratio necessary to keep the debt/GDP ratio constant. This is somewhat arbitrary, because each country might have a specific target either self-imposed or imposed by external agencies. However, my measure of the target represents a minimal

330 requirement, whereas some countries under debt distress may have even “more ambitious” programmes of debt reduction implying higher targets. Indeed, as shown by figure 2, all countries, except Germany-2012, have systematically failed to achieve their targets, though improving over time. Combining the previous evidence, figure 3 suggests a better explanatory variable for spreads, namely the deviations from target. In fact, the evolution of spreads seems to track such deviations rather closely. On the one hand, it may be argued that investors have not rewarded fiscal adjustments mostly because the latter were too small. On the other hand, along with more formal tests such as those of De Grauwe and Ji (2012), these data denote a scenario of “consolidation fatigue” which is consistent with the sustainability view in that the required adjustments were deemed excessive by the investors. Setting ambitious fiscal targets is likely to produce deviations from target; the market does not look at the realized part of consolidation but at the missing part, and it responds with higher interest rates, which require even more ambitious targets and so on with the positive feedback mechanism described above. Figure 3. Gaps from target and average monthly spreads. EMU12 countries 2010-12

Source: Eurostat, AMECO database; ECB, Interest-rate statistics. The shift from a credibility to a sustainability pradigm by investors is probably playing a role in making the euro-sovereign debt crisis so difficult to manage. This shift of paradigm may have caught policy makers brought up in the credibility doctrine by surprise. The latter, in the different market context focused on sustainability, may in fact provide misleading policy prescriptions. The point of the sustainability approach is that when a government is caught in the self-fulfilling prophecy trap, announcing and implementing harder fiscal plans is not the right move because, as explained above, it will boost the risk premium even though the plans are initially sustainable. Consequently, EMU reforms that hinge exclusively on the hardening of the Maastricht doctrine of “rules + punishment”, like the Fiscal Compact, are also disputable on the same grounds (e.g. De Grauwe (2011), Wyplosz (2011), Roubini (2012)). References Cooper R. (2012), “Fragile Debt and the Credible Sharing of Strategic Uncertainty”, NBER Working Paper, n. 18377.

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Corsetti G. (ed., 2012), Two Much of a Good Thing?, London, Centre for Economic Policy Research. Corsetti G., Dedola L. (2011), “Fiscal Crises, Confidence and Default. A Bare-bones Model with Lessons for the Euro Area”, mimeo. Corsetti G., Kuester K., Meier A., Mueller G. (2010), “Debt Consolidation and Fiscal Stabilization in Deep Recessions”, American Economic Review, 100, pp.41-45. De Grauwe P. (2011), “The Governance of a Fragile Eurozone”, CEPS Working Document, n.346. De Grauwe P., Ji Y. (2012), “Mispricing of Sovereign Risk and Multiple Equilibria in Sovereign Risk”, CEPS Working Document, n. 361. Gros D. (2012), “A Simple Model of Multiple Equilibria and Default”, CEPS Working Document, n. 366. IMF (2012), “A Toolkit to Assessing Fiscal Vulnerabilities and Risjs in Advanced Economies”, Working Paper, n.11. Roubini N. (2012), “A Balance-Sheet Recession Calls for Monetized Fiscal Deficits, Not Fiscal Austerity”, Roubini Global Economics, April, www.rge.com. Tamborini (2012), “Market opinions, fundamentals, and euro-sovereign debt crisis”, Discussion Paper, Dipartimento di Economia, Università di Trento, n.9, Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2172474. Wyplosz C. (2011), “A Failsafe Way to End the Eurozone Crisis”, Vox, September, www.voxeu.info.

[1] Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain. http://www.economonitor.com/blog/2013/06/sustainability-vs-credibility-why-austerity- may-not-did-not- work/?utm_source=contactology&utm_medium=email&utm_campaign=EconoMonitor %20Highlights%3A%20Play%20Nice

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Research-based policy analysis and commentary from leading economists Escaping liquidity traps: Lessons from the UK’s 1930s escape Nicholas Crafts, 12 May 2013 The UK escaped a liquidity trap in the 1930s and enjoyed a strong economic recovery. This column argues that what drove this recovery was ‘unconventional’ monetary policy implemented not by the Bank of England but by the Treasury. Thus, Neville Chamberlain was an early proponent of ‘Abenomics’. This raises the question: is inflation targeting by an independent central bank appropriate at a time of very low nominal-interest rates? Related • Rapid current-account rebalancing in the southern Eurozone Raphael Auer • The economic legacy of Mrs Thatcher Nicholas Crafts • On the causes and consequences of land use regulations Frédéric Robert-Nicoud, Christian Hilber In mid-1932, the UK had experienced a recession of a similar magnitude to that of 2008-09, was engaged in fiscal consolidation that reduced the structural budget deficit by about 4% of GDP, had short-term interest rates that were close to zero, and was in a double-dip recession (Crafts and Fearon 2013). The years from 1933 through 1936 saw a very strong recovery with growth of over 4% in every year. The Chancellor of the Exchequer, Neville Chamberlain (in office from November 1931 to May 1937) was the architect of this recovery. Given the similarities with the situation now facing George Osborne, is there anything he could learn from the policies adopted by his predecessor? Insofar as policy stimulated recovery in the 1930s, up until 1935 monetary stimulus was the main instrument. Rearmament did act as a de facto Keynesian policy and may have added about 4% to GDP by 1938 but this had little impact on economic activity in 1933 to 1936. The government-expenditure multiplier was probably below one, even in the depressed economy of the 1930s. This may be a consequence of the massive public debt to GDP ratio (a legacy from World War I) which was central to the context of fiscal policy. 1930s policy framework The policy framework adopted from mid-1932 has a strong resemblance to the so-called ‘foolproof way’ of escaping from the liquidity trap (Svensson, 2003) and to ‘Abenomics’ in today’s Japan: • After the forced exit from the gold standard in September 1931, by the middle of 1932 the Treasury had devised the so-called ‘cheap-money policy’. Initially, short-term interest rates were cut to around 0.6% – and stayed there throughout the rest of the decade (see Table 1).

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• Second, a price-level target was announced by Chamberlain in July 1932 which aimed to end price deflation and return prices to the 1929 level. • Third, the Treasury adopted a policy of exchange-rate targets that entailed a large devaluation first pegging the pound against the dollar at 3.40 and then against the French franc at 77 (Howson 1980), intervening in the market through the Exchange Equalisation Account set up in the summer of 1932 (see Table 2). Real interest rates fell quite dramatically and very quickly and gold reserves almost doubled within a year. By the end of 1936, the money supply had grown by 34% compared with early 1932 (Howson 1975). The cheap-money policy followed the textbook approach for operating at the zero lower bound of seeking to reduce the real interest rate by raising inflationary expectations. A key aspect was that the Treasury under Chamberlain, rather than the Bank of England under Montagu Norman, ran monetary policy after the exit from the gold standard. The classic problem with the ‘foolproof way’, especially for central banks, is whether they can credibly commit to maintaining inflation once recovery appears to be under way. Because of its problems with fiscal sustainability, the Treasury was in a good position to persuade markets that it wanted sustained moderate inflation as part of a strategy to reduce the real interest rate below the growth rate of real GDP and to benefit from this differential in reducing the public-debt-to-GDP ratio. This reliance, based on ‘financial repression’, allowed more tolerance for lower primary budget surpluses and eased worries about ‘self-defeating austerity’ without a Keynesian approach to the public finances. Table 3 reports on the budgetary arithmetic that made the Treasury’s position credible. Under conditions of price deflation in the early 1930s, the required surplus to prevent the debt-to-GDP ratio from exploding was disastrously high. By 1934/5, growth was above the real interest rate on government debt and a modest primary budget deficit was consistent with fiscal sustainability. House building Obviously, for the cheap-money policy to work it needed to stimulate demand – a transmission mechanism into the real economy was needed. One specific aspect of this is worth exploring, namely, the impact that cheap money had on house-building. The number of houses built by the private sector rose from 133,000 in 1931/2 to 293,000 in 1934/5 and 279,000 in 1935/6 – many of these dwellings being the famous 1930s semi- detached houses which proliferated around London and more generally across southern England. The construction of these houses directly contributed an additional £55 million to economic activity by 1934 and multiplier effects from increased employment probably raised the total impact to £80 million or about a third of the increase in GDP between 1932 and 1934. House building reacted to the reduction in interest rates and also to the recognition by developers that construction costs had bottomed out; both of these stimuli resulted from the cheap-money policy (Howson 1975). Why was house-building so responsive in the 1930s? Two factors stand out. • First, the supply of mortgage finance grew rapidly and became more affordable in an economy in which there had been no financial crisis that curtailed lending. Building society mortgage debt rose from £316 million with 720,000 borrowers in 1930 to £636 million with 1,392,000 borrowers in 1937 when about 18% of non-agricultural working-class households were buying or owned their own homes. In these years,

334 deposits fell in some cases to 5% and repayment terms were extended from around 20 to 25 or even 30 years reducing weekly outgoings by 15% (Scott 2008). • Second, houses were affordable to an increasing number of potential buyers. 85% of new houses sold for less than £750 (£45,000 in today’s money). Terraced houses in the London area could be bought for £395 in the mid-1930s when average earnings were about £165 per year. Houses were cheap because the supply of land for housing was very elastic which in turn meant that there was no incentive for developers to sit on large land banks. Underpinning the availability of land for house-building was an almost complete absence of land-use planning restrictions which applied to only about 75,000 acres in 1932 – the draconian provisions of the 1947 Town and Country Planning Act were still to come. Lessons for George Osborne So what lessons might George Osborne take from this experience? • First, and most obvious is that when at the zero-lower-bound, conventional inflation-targeting by an independent central bank may not be the appropriate framework for monetary policy. The issue goes beyond the current discourse, which is focused on whether the target should be revised either to a higher rate of inflation or something based on nominal GDP. Britain in the 1930s benefited from not having an independent central bank. The lesson seems to be that central-bank independence is not always, and may not be today, the best way to implement monetary policy. • Second, it would be nice in present circumstances to repeat the house-building boom of the 1930s. Table 1. Interest Rates (%)

Clearly, this is unlikely since both mortgage availability and land-use planning rules are very different. This seems to point, in particular, to the desirability of liberalising planning laws. As recent research has shown, this legislation imposes big distortions on the housing market and if some of these were removed, then a large number of houses might be built as the economy adjusted to a new equilibrium (Hilber and Vermeulen

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2012). Policy changes of this kind are, however, politically challenging and most unlikely to happen. Note: Real rates of interest are calculated on an ex-post basis. Real long rates are based on the yield of consols minus a three-year backward-looking weighted average of actual inflation rates; for further details, see Chadha and Dimsdale (1999). I am grateful to Jagjit Chadha for providing me with the data. Sources: Bank Rate, Treasury Bill Rate and Yield on Consols: Dimsdale (1981) Real interest rates: Chadha and Dimsdale (1999). Table 2. Exchange Rates (1929 = 100)

Notes: Average exchange rate is weighted by shares of world trade in manufactures. Source: Dimsdale (1981). References Chadha, J S and Dimsdale, N H (1999), “A Long View of Real Rates”, Oxford Review of Economic Policy 15(2), 17-45. Crafts, N and Fearon, P (2013), “The 1930s: Understanding the Lessons”, in N Crafts and P Fearon (eds.) The Great Depression of the 1930s: Lessons for Today, Oxford, Oxford University Press, 45-73. Dimsdale, N H (1981), “British Monetary Policy and the Exchange Rate, 1920-1938”, Oxford Economic Papers 33(2), supplement, 306-349. Feinstein, C H (1972), National Income, Expenditure and Output of the United Kingdom, 1855-1965, Cambridge, Cambridge University Press. Hilber, C A L and Vermeulen, W (2012), “The Impact of Supply Constraints on House Prices in England”, London School of Economics Spatial Economics Research Centre Discussion Paper No. 119. Howson, S (1975), Domestic Monetary Management in Britain, 1919-1938, Cambridge, Cambridge University Press.

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Howson, S (1980), “The Management of Sterling, 1932-1939”, Journal of Economic History 40, 53-60. Middleton, R (2010), “British Monetary and Fiscal Policy in the 1930s”, Oxford Review of Economic Policy 26, 414-441. Mitchell, J, Solomou, S and Weale, M (2012), “Monthly GDP Estimates for Interwar Britain”, Explorations in Economic History 49, 543-556. Scott, P (2008), “Marketing Mass Home Ownership and the Creation of the Modern Working-Class Consumer in Interwar Britain”, Business History 50, 4-25. Svensson, L E O (2003), “Escaping from a Liquidity Trap and Deflation: the Foolproof Way and Others”, Journal of Economic Perspectives 17(4), 145-166. Annex Table 3. Fiscal Sustainability Data, 1925-1938

Note: b* is the required primary budget surplus to GDP ratio to satisfy the condition that (change in d) = 0, where (change in d) = -b +d(i – π - g) and b is the primary budget surplus to GDP ratio, I is the average nominal-interest rate paid on government debt, and d is public debt to GDP ratio from Middleton (2010) database; π is the rate of inflation based on GDP deflator from Feinstein (1972); g is the 4th quarter real GDP growth rate, from Mitchell et al. (2012). http://www.voxeu.org/article/escaping-liquidity-traps-lessons-uk-s-1930s-escape

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Research-based policy analysis and commentary from leading economists Did the euro kill governance in the periphery? Jesús Fernández-Villaverde, Luis Garicano, Tano Santos, 30 April 2013 By the end of the 1990s, under the incentive of Eurozone entry, most peripheral European countries were busy undertaking structural reforms and putting their fiscal houses in order. This column argues that the arrival of the euro, and the subsequent interest-rate convergence, loosened a tide of cheap money that reversed the incentives for further reforms. As a result, by the end of the euro’s first decade, the institutions and governance in the Eurozone periphery were in worse shape than they were at the start of the decade. The conventional wisdom before the creation of the euro was that the monetary union would force its least productive members to undertake the structural reforms needed to modernise their economies. In the past, the peripheral European countries had used devaluations to recover from adverse business-cycle shocks, but without correcting the underlying imbalances of their economies. The euro was expected to eliminate the bias of their monetary policy toward inflation, force sound fiscal policy and encourage widespread liberalisation. Figure 1. Government bonds, ten-year yields

Source: Eurostat. By the end of the 1990s, under the incentive of Eurozone-entry, most peripheral European countries were busy undertaking structural reforms and putting their fiscal houses in order. However, the arrival of the euro, and the subsequent interest-rate 338 convergence (see Figure 1), loosened a tide of cheap money that reversed the incentives for further reforms. As a result, by the end of the euro’s first decade, the institutions and governance in the Eurozone periphery were in worse shape than they were at the start of the decade. The credit bubbles unleashed by the euro not only undermined competitiveness and increased indebtedness, but they also undermined the institutional basis of these economies. There were two main channels through which these large inflows of capital led to the abandonment of economic reforms. First, they relaxed the constraints under which agents were acting, thus reducing the pressure for reforms. Second, they made it harder for principals in both the public and private sectors to extract signals about who was performing well or poorly. When banks are delivering great profits, all managers look competent; when countries are delivering the public goods demanded by voters, all governments look efficient. As a consequence, bad agents were not fired, incompetent managers kept their jobs and inefficient governments were re-elected. The efforts to reform key institutions that burden long-run growth, such as rigid labour markets, monopolised product markets, failed educational systems, or hugely distortionary tax systems plagued by tax evasion, were abandoned and often revoked. New research In Fernández-Villaverde, Garicano and Santos (2013) we examine this mechanism, develop a framework to understand it and apply it to the experience of Spain, Ireland, Greece and Portugal. We then argue that the same circumstances that allowed delays in the periphery actually forced reform on a reluctant Germany. Spain In Spain, the years before the euro were auspicious for reform. In particular, Spain’s fiscal position was consolidated and several strong multinationals appeared as a result of a wave of privatisations. But Spain’s real-estate bubble turned the clock backward. Meagre attempts at reforming the malfunctioning labour market in 2002 were not completed, the educational system suffered an increase in the dropout rate, and local governments and a large segment of the financial system were infected by the pervasive corruption engendered by the real estate boom. Ireland Similarly, Ireland had introduced important economic-policy reforms since the second half of the 1980s, including labour-market reforms, and had liberalised strategic sectors of the economy such as air transport and the telecommunication system. These reforms helped to deliver real annual output growth that averaged more than 6% from 1987 to 2000. However, as real interest rates dropped, Ireland became the country with the highest share of housing investment in gross capital formation in the EU. Rather than seeking to counterbalance the bubble, governmental policy accentuated it through regulatory and tax changes – such as reductions in stamp duties or increases in the ceiling on income-tax deductibility of mortgage interest - that made real-estate development even more attractive. Moreover, several major legislative changes worsened financial supervision. Probably not unrelatedly, from 1997 to 2007, 49% of disclosed donations to Fianna Fáil - the party in government- were from property developers and the construction industry (Byrne 2012). Thus, Ireland, instead of transitioning toward a lower, more sustainable rate of growth based on productivity gains, went from growth based on increases in the employment ratio to a speculative cycle.

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Greece Greece is the poster child for postponed adjustment. Greece's curse, more than any of the other peripheral countries, was an unreformed economy. Although the examples of arrested reforms are many, one of the clearest is the pension system, where reform has been considered imminent at least since 1990 as the system faced both a dramatically rising dependency ratio and an overly generous replacement ratio (OECD 2009). Furthermore, the system was extremely fragmented, with 236 separate funds in 2003 (O'Donnell and Tinios 2003) that caused inefficiencies and duplications and yet left many pensioners at risk of poverty. There had been sporadic attempts at reforming this defective system. Some changes had taken place in 1992 when the budget was under serious strain, but they did not tackle the long-term imbalances. The year 2001 saw the defeat of a reform package of the pension system that had first been proposed in 1958 and was already considered extremely urgent (Borsh-Supan and Tinios 2001). A new reform package, characterised by creative accounting and little real reform, sailed through parliament in 2002. The government of Greece had been under some pressure during the negotiations about joining the Eurozone. But once Greece had entered the Eurozone, the pressure was off, pension and other economic reforms were abandoned and not taken up again until Greece was already in the midst of the worst of the economic crisis. Portugal Finally, after 15 years of economic growth that followed its accession to the EU, Portugal's economy stagnated around 2000. Shockingly, in 2012, Portugal's output was lower than in 2001. The headline government budget deficit never fell below 2.9% of GDP and the primary balance was constantly in deficit, even after controlling for the effects of the business cycle and one-off and temporary adjustments (Marinheiro 2006, updated 2011). The parade of deficits led public debt to accumulate from 51.2% of output in 2001 to 92.4% in 2010. The private sector responded to the stagnant economic outlook by reducing its saving rate and heavily borrowing from abroad to finance current consumption, while investment fell as a percentage of national demand. In short, the behaviour of both the public and the private sector was unsustainable in the medium run. However, accession to the euro allowed both the public and the private sector to postpone the day of reckoning by taking advantage of the historically low interest rates. For example, while government debt as a share of GDP rose by 41 percentage points, interest paid on the debt barely budged; it was 2.9% of GDP in 2000 and 3% of GDP in 2010. Thus, the euro allowed Portugal’s political-economic equilibrium to be sustained in the medium run by the large capital inflows from the rest of the world, even if a correction was eventually unavoidable. Germany On the other hand, in the years after the introduction of the euro, Germany undertook painful reforms of its welfare state and labour market (particularly those known as Hartz IV). Germany’s poor economic performance in the late 1990s, the accumulated costs of reunification and the adverse demographic trends had placed the welfare system under severe strain. Why did the euro not have the same effect in Germany as in the peripheral countries like Spain, Ireland, Greece and Portugal – namely, to postpone reforms? In our view, and consistent with our hypothesis, the answer lies in the paths of interest rates shown in Figure 1. For Germany, the euro meant tighter budgetary and fiscal constraints but not looser financial conditions. Absent the leeway provided by a financial boom, politicians had no choice but to act.

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In summary, while observers had expected the arrival of the euro to lead to a modernisation of the peripheral European economies, the steep financial boom derived from the drop in exchange-rate risk and from the Eurozone-wide financial bubble meant that the budget constraints that these countries faced were loosened, rather than tightened. Countries that could cheaply borrow delayed painful reforms. Moreover, accountability was lost during the bubble as bad decisions had no negative short-run consequences, since rising asset prices hid all mistakes. Avenues for future research Our work suggests several avenues for future research. First, while case studies are ideal for providing a careful analysis of the mechanisms at play, a more systematic empirical analysis of public and private governance in bubbles is necessary to test our theory. Second, as our work is currently in progress, our hypothesis on signal extraction in bubbles needs to be formalised. Third, our theory suggests that there may be differences between how damaging private and public bubbles are. Private bubbles appear to be more damaging, since they not only affect the sustainability of public finances but also damage governance in the private sector. A final issue concerns the broader applicability of our analysis. Are all situations in which financing is plentiful and cheap conducive to the deterioration of governance and the abandonment of economic reforms? If so, this situation is currently the one the US, at the zero lower bound, is facing, in which case our analysis suggests that a similar deterioration of public and private governance may occur. References Borsh-Supan, A and P Tinios (2001), "The Greek Pension System: A Strategic Framework for Reform." in Bryant R, N Garganas, and G Tavlas (eds), Greece's Economic Performance and Prospects, Bank of Greece and Brookings Institution, Athens. Byrne, Elaine A (2012), Political Corruption in Ireland, 1922-2012: A Crooked Harp? Manchester University Press, Manchester. Fernández-Villaverde J, L Garicano and T Santos (2013), "Political Credit Cycles: The Case of the Euro Zone", CEPR Discussion Paper 9404, March. Marinheiro, Carlos (2006). "The Sustainability of Portuguese Fiscal Policy from a Historical Perspective." Empirica 33(2), 155-179 (updated in 2011: http://www4.fe.uc.pt/carlosm/research/pdf/Data-CMarinheiro2006-Update2011.xlsx). O'Donnell, O and P Tinios (2003). "The Politics of Pension Reform: Lessons from Public Attitudes in Greece." Political Studies 51(2), 262--81. OECD (2009), Pensions at a Glance 2009: Retirement-Income Systems in OECD Countries, OECD Publishing. doi: 10.1787/pension_glance-2009-en http://www.voxeu.org/article/did-euro-kill-governance-periphery

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Research-based policy analysis and commentary from leading economists Why is this global recovery different? M Ayhan Kose, Prakash Loungani, Marco E Terrones, 18 April 2013 The Great Recession has been followed by a ‘Not-So-Great Recovery’. Why the recovery has been weak and protracted remains a matter of debate. This column argues that one specific aspect of the current global recovery makes it different from previous ones. Over the course of past recoveries, both monetary and fiscal policies maintained an accommodative stance. In this global recovery, fiscal and monetary policies in advanced economies are pushing in opposite directions. • Economic recovery and policy uncertainty in the US Scott Baker, Nicholas Bloom, Steven J. Davis, John Van Reenen • The collapse of global trade: Update on the role of vertical linkages Rudolfs Bems, Robert Johnson, Kei-Mu Yi There is an intensive discussion about the weak and protracted nature of the ongoing recovery. • Some argue that this is not surprising since recessions associated with financial crises are often followed by sluggish recoveries (Reinhart and Rogoff 2012). • Others claim that policy uncertainty has been a major impediment to growth in the US (Baker et al. 2012). • Yet others emphasise additional elements, including problems in the design of the Eurozone and the highly synchronised nature of the 2009 recession (Bems, Johnson, and Yi 2009; Weil 2012; Reichlin et al. 2013). In the latest World Economic Outlook, we analyse the evolution of fiscal and monetary policies during the ongoing global recovery and show that they have been following rather distinct trajectories compared with those during the previous episodes. We argue that, along with other factors as highlighted in the literature, it is important to consider the role of policies in determining the growth outcomes during recoveries. Understanding global recessions and recoveries The world has experienced four global recessions over the past 50 years - 1975, 1982, 1991, and 2009. A global recession is a decline in world GDP per capita accompanied by a broad decline in other indicators of the global economic activity such as industrial production and employment (see Kose et al. 2013b). These global recessions were followed by global recoveries, whereby economic activity rebounded generally accompanied by a synchronised pickup in worldwide consumption, investment and trade. Divergence of activity

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At first blush, the current global recovery is following a path strikingly similar to the average of the three past recoveries (Figure 1). The world economy has been able to return to the pre-recession level of world output within a year. Figure 1 Real GDP per capita (index, PPP weighted)

Notes: Dashed lines denote WEO forecasts. Indexed to 100 in the year before global recession.Zero is the time of the global recession year. Each line show the PPP-weighted average of the countries in the sample. But this masks a sharp divergence of activity across advanced and emerging market economies (Figure 2). This recovery has been the weakest for advanced economies and the strongest for emerging markets. The IMF’s forecasts suggest that this divergence will persist in the near term. Figure 2 Real GDP per capita: Advanced countries and emerging markets (index, PPP weighted)

Notes: Dashed lines denote WEO forecasts. Indexed to 100 in the year before global recession. Zero is the time of the global recession year. Each line show the PPP-weighted average of the countries in the respective group. Divergence of policies What accounts for this divergence in fortunes? As we noted above, there are several factors that could explain this, including the severity of the financial crisis, problems in 343 the design of the Eurozone, the highly synchronised nature of this recession, uncertainty associated with policies, and so on. Another factor at play could be the substantially different paths of fiscal and monetary policies in advanced economies. In particular, whereas the directions of fiscal and monetary policies were aligned in previous episodes, during the current recovery these policies have marched in opposite directions. The current and projected paths of government expenditures in the advanced economies are quite different than during past recoveries (Figure 3). During the past recoveries, fiscal policy was decisively expansionary, with increases in real primary government expenditures. This time is different. It is true that in some advanced economies, especially in the US, the fiscal stimulus introduced at the outset of the Great Recession was far larger than during earlier recessions. However, the stimulus was unwound early in the ensuing recovery. Specifically, expenditures fell during the first two years of this global recovery and are projected to continue to decline modestly in the coming years. This pattern also holds across the major advanced economies, with the Eurozone and the UK showing sharp departures from the typical paths of government expenditures in the past. Figure 3 Real primary expenditure (index, PPP weighted)

Notes: Dashed lines denote WEO forecasts. Indexed to 100 in the year before global recession. Zero is the time of the global recession year. Each line show the PPP- weighted average of the countries in the respective group. In contrast, in the emerging market economies the ongoing recovery has been accompanied by a more expansionary fiscal policy stance than during past episodes. This was possible because these economies had stronger fiscal positions this time around than in the past. Monetary policies in the advanced economies have been exceptionally accommodative during the latest recovery compared with earlier episodes (Figure 4). Policy rates have been reduced to record-low levels and central bank balance sheets in the major advanced economies have been dramatically expanded compared with earlier episodes. Monetary policy in emerging market economies has also been more supportive of economic activity than in the past. Figure 4 Short-term interest rate during global recessions and recoveries (percent)

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Notes: Aggregates are market weighted by GDP in US dollars; observations are dropped for countries experiencing inflation 50 percent greater than in the previous year. Policy rate used as the principle series. Three-or four-month treasury bill data used as a proxy if data series was longer. Zero is the time of the global recession year. What explains the divergence of policies? Caution about fiscal stimulus and the pace of consolidation in this recession and recovery are likely explained by high ratios of public debt to GDP and large deficits (Figure 5). Advanced economies entered the Great Recession with much higher levels of debt than in past recessions. These high debt levels reflect a combination of factors including expansionary fiscal policies in the run-up to the recession, financial sector support measures, and substantial revenue losses resulting from the severity of the Great Recession. The deficit levels in some advanced economies are currently large in part because of the collapse in revenues. Figure 5 Public-debt-to-GDP ratios during global recessions and recoveries (percent of real GDP of year before global recession)

Notes: Aggregates are market weighted by GDP in US dollars. Dashed lines denote WEO forecasts. Zero is the time of the global recession year. Moreover, sovereign debt crises in some Eurozone periphery countries and challenges associated with market access put pressure on these economies to accelerate their fiscal consolidation plans. At the same time, there was more room for monetary policy

345 manoeuvring because inflation rates were much lower at the beginning of the recession than in the past. What policy mix? The evidence presented here does not in itself permit an assessment of whether the different policy mix in this recession and recovery was appropriate. The response of policies may have been reasonable given the respective room available for fiscal and monetary policies in advanced economies. However, there are also concerns. Even though monetary policy has been effective, policymakers had to resort to unconventional measures and even with these measures, the zero bound on interest rates and the extent of financial disruption during the crisis have lowered the traction of monetary policy (Werning 2012; Krishnamurthy and Vissing-Jorgensen 2011; D’Amico et al. 2012; Swanson and Williams 2013). This, together with the extent of slack in these economies, may have amplified the impact of contractionary fiscal policies (Blanchard and Leigh 2013; Christiano, Eichenbaum and Rebelo 2011; Auerbach and Gorodnichenko 2012). Four years into a weak recovery, policymakers may need to worry about the risk of overburdening monetary policy as it is now being relied upon to deliver far more than it has ever needed to in the past. Authors’ note: The views expressed here are those of the authors and do not necessarily represent those of the institutions with which they are affiliated. References Auerbach, A and Y Gorodnichenko (2012), “Measuring the Output Responses to Fiscal Policy”, American Economic Journal – Economic Policy 4, 1–27. Baker, S, N Bloom, S J Davis and J Van Reenen (2012), “Economic Recovery and Policy Uncertainty in the US”, VoxEU.org, 29 October. Barth III, M J and V A Ramey (2001), “The Cost Channel of Monetary Transmission”, in Bernanke, Ben and Kenneth Rogoff (eds.), NBER Macroeconomics Annual 2001. Bems, R, R Johnson and K-M Yi (2009), “The Collapse of Global Trade: Update on the Role of Vertical Linkages”, VoxEU.org, 27 November. Blanchard, O and D Leigh (2013), “Growth Forecast Errors and Fiscal Multipliers”, IMF Working Paper, No. 13/1. Christiano, L, M Eichenbaum and S Rebelo (2011), “When Is the Government Spending Multiplier Large?”, Journal of Political Economy 119, 78–121. D’Amico, S, W English, D Lopez-Salido and E Nelson (2012), “The Federal Reserve’s Large-Scale Asset Purchase Programs: Rationale and Effects”, Working Paper, 2012- 85, Finance and Discussion Series. Weil, P (2012), “Eurozone in recession since 3rd quarter 2011', a Vox Talks interview, 19 November. Kose, M A, P Loungani and M E Terrones (2013a), “The Great Diversion of Policies,” World Economic Outlook, April, International Monetary Fund. Kose, M A, P Loungani and M E Terrones (2013b), Global Recessions and Global Recoveries, forthcoming.

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Krishnamurthy, A and A Vissing-Jorgensen (2011), “The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy”, Brookings Papers on Economic Activity, Fall, 215-265. Reichlin, L, D Giannone, J McMahon and S Simonelli (2013), “The decoupling of the US and European economies: Evidence from nowcasting”, VoxEU.org. 29 March. Reinhart, C M and K Rogoff (2012), “This time is different, again? The US five years after the onset of subprime”, VoxEU.org, 22 October. Swanson, E and J C Williams (2013), “Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates”, Federal Reserve Bank of San Francisco. Werning, I (2012), “Managing a Liquidity Trap: Monetary and Fiscal Policy”, mimeo, MIT. http://www.voxeu.org/article/why-global-recovery-different

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The year ahead in the euro zone: Lower risks, same problems January 14, 2013 @ 9:50 am By Nouriel Roubini

[1] Financial conditions in the euro zone have significantly improved since the summer, when euro zone risks peaked because of German policymakers’ open consideration of a Greek exit, and the sovereign spreads of Italy and Spain reached new heights. The day before European Central Bank President Mario Draghi’s famous speech in London in which he announced that the ECB would do “whatever it takes” to save the euro, bond yields in Spain and Italy were at 7.75 percent and 6.75 percent, respectively, and rising. When the ECB announced its outright monetary transactions (OMT) bond-buying program, the euro zone was at risk of a collapse. Since then, risks have abated significantly, thanks to a number of factors: • The ECB’s OMT has been incredibly successful in reducing the risks of breakup, redenomination and a liquidity/rollover crisis in the public debt markets of Spain and Italy. Although the ECB has yet to spend a single additional euro to buy the bonds of Spain and Italy, both short-term and longer- term sovereign spreads against German bonds have fallen substantially. • Following a number of political and legal hurdles, the successful operational start of the European Stability Mechanism (ESM) rescue fund provides the euro zone with another €500 billion of official resources to backstop banks and sovereigns in the euro zone periphery, on top of the leftover funds of its predecessor, the European Financial Stability Facility (EFSF).

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• Realizing that a monetary union is not viable without deeper integration, euro zone leaders have proposed a banking union, a fiscal union, an economic union and, eventually, a political union. The last is necessary to resolve any issue of democratic legitimacy that might result from national states transferring power from national governments to EU- or euro zone-wide institutions. This transfer of power also would have to involve the creation of such institutions to ensure solidarity and risk-sharing are developed in the banking, fiscal and economic unions. • The open talk in the summer by some German authorities about an exit option for Greece has turned into a tentative willingness to prevent and postpone such an exit. There are several reasons for this. First, Greece has done some austerity and reforms in spite of a deepening recession, and the current coalition is holding up. Second, an orderly exit of Greece is impossible until Spain and Italy are successfully isolated. Such an exit would lead to massive contagion, which would hurt not only the euro zone periphery but also the core, given extensive trade and financial links. Third, an economic disaster in Greece would be damaging to the CDU Party’s chances of winning the German elections. Thus, even when Greece inevitably underperforms on its policy commitments, Germany and the troika (the IMF, EU and ECB) will hold their noses and keep the funds flowing as long as the current coalition holds up. Given these developments, the risk of a Greek exit in 2013 has been significantly reduced, even if the risk of an eventual Greek exit from the euro zone is still high, close to 50 percent by my estimation. Meanwhile, the narrowing of Spanish and Italian sovereign spreads has significantly diminished the risk that either country will fully lose market access and be forced to undergo a full troika bailout like Greece, Portugal and Ireland. Both Spain and Italy may in 2013 opt for a memorandum of understanding (MoU) that opens the taps of ESM and OMT support, but such official financing would inspire confidence as it would not be associated with rising, unsustainable spreads and a loss of market access. While there is a much lower likelihood of disorderly events in the euro zone, there are still significant obstacles to deeper integration, as well as country-specific economic and political vulnerabilities. The biggest obstacle to the formation of a banking, fiscal, economic and political union is that Germany is pushing back against the time line for action, with the initial skirmish on ECB supervision of euro zone banks. This backpedaling reflects deep German skepticism on whether the resolution of the euro zone crisis requires a move toward greater union. Without a more credible commitment to austerity and reforms from euro zone periphery countries, lurching forward would imply that risk-sharing will turn into a large, long-term transfer union, which is unacceptable to Germany and the core. Thus, Germany will do whatever is necessary to delay the integration process, at least until after elections in fall 2013. Meanwhile, there is a deep recession in the euro zone periphery that is spreading even to parts of the core: France will experience a recession in 2013, and even Germany is sharply decelerating as two of its main export markets, the euro zone periphery and China, contract and slow, respectively. The balkanization of economic activity between the euro zone core and the periphery persists. The balkanization of banking is ongoing as cross-border flows, interbank flows and smart money have left the periphery banks and found shelter in the core; in the case of public debt markets, balkanization and domestication continue as cross-border investors have left the periphery public debt

349 markets, in spite of reduced yields, on top of abandoning periphery banks and corporates. The euro zone periphery recession will continue in 2013: Fiscal austerity is ongoing; the euro is still too strong; periphery banks have capital shortages and liquidity concerns, and thus are achieving required capital ratios by contracting credit and selling assets; and consumer and business confidence is still depressed given falling output and employment. Moreover, private and/or public debts are still very high and possibly unsustainable over the medium term in a number of periphery countries, while the lack of growth adds to the debt sustainability risks. Potential growth is still very low in most of the periphery as demographic aging is ongoing, while structural reforms are occurring too slowly and only affect productivity growth after long lags. Underlying all this is the issue of the loss of external competitiveness associated with external current account deficits that private foreign investors are unwilling to finance. Some internal devaluation is ongoing, leading to a reduction in unit labor costs, but that process is recessionary and occurring too slowly. Thus, though financial conditions have improved and tail risks have lessened, the fundamental problems of the euro zone remain. PHOTO: A journalist compares the new 5 euro note with an old one (top) during a ceremony with Mario Draghi, President of the European Central Bank (ECB), in Frankfurt, January 10, 2013. REUTERS/Kai Pfaffenbach [1] Image: http://blogs.reuters.com/great-debate/files/2013/01/RTR3CAB5.jpg http://blogs.reuters.com/great-debate/2013/01/14/the-year-ahead-in-the-euro-zone- lower-risks-same-problems/

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