Summary
The regular monthly meetings of the Eurogroup (starting 16.00 today) and ECOFIN (tomorrow from 08.00 GMT) come at a time when Germany is exerting a strong push to achieve a regime of much tougher fiscal discipline, decisions on Greece, discussion of the new government plans for Italy, alongside the prospective confirmation of the detailed plans for the EFSF, a presentation by the Commission on the joint issuance of stability bonds (‘euro bonds’) and a debate on how to guarantee bank liquidity. As well, there will be informal dialogue between representatives of the ECOFIN Council and European Parliament on crisis management and economic governance (12.15 – 13.45 GMT).
Greece: EU likely to authorise the release of the 6th tranche
Following the submission of the “letters of support” to 26 October EU summit by the leaders of PASOK, New Democracy and LAOS, we consider very likely that the euro area countries will agree to authorise the disbursement of the EU contribution of the sixth tranche (EUR5.5bn out of the EUR8bn total in the tranche). If the IMF were to follow suit and also releases its tranche (EUR2.5bn – see below), Greece would then have sufficient cash until heavy redemptions due on 20 March, 2012 (EUR14.4bn). If not, then it would run out of cash by around 12 December.
However, the second important item for discussion on Greece is the private sector involvement (PSI), which is a critical precondition to negotiate a second IMF programme for Greece (and probably also for IMF participation in disbursing the sixth tranche of the current (first) programme). In our view, both the PSI and the subsequent second programme must be completed by mid- March 2012. Under IMF internal regulations, if either solvency or financing gaps emerge, those gaps need to be addressed before the IMF programme can continue.
At this stage, Greece faces a large solvency gap, which requires a large reduction in the stock of debt. The 26 October (“PSI 2.0”) proposal, which envisaged a 50% notional haircut, in our view is insufficient to fully address insolvency concerns and remove default risk from the horizon, since under troika’s own calculations, still the public debt/GDP would be 120% in 2020. Such a debt path would not be considered re-assuring by the markets, especially given the poor policy implementation track-record so far by the Greek government.
Additionally, in our view there are still some outstanding 2011 critical fiscal policy decisions that need to be addressed, most prominently the implementation of substantial cuts in the public sector wage bill, including through dismissals of public employees (ie, the intention to cut 30k public sector jobs by year-end) and further cuts in public sector wages.
New Italian government: possible discussion of plans
Another area of discussion for the eurogroup would be the fiscal and structural reform agenda of Italian PM Monti’s technocratic government, which is planning to release the detailed policy agenda to the Italian Parliament next Monday (5 December 2011). We expect that discussions and agreements on the contents will take place today with all the euro area finance ministers, though the details may not be revealed until next week.
Meanwhile, the new Spanish government will only take over on 13 December, so we would not expect the exiting government to provide future policy commitments out of today’s Eurogroup. Any discussion by the Eurogroup on Spain, therefore, is likely to centre on the fiscal performance of the central government and the regions, and the planned measures to meet the 2011 deficit target of 6% of GDP. While the central government is well on course to meet the year-end target, some slippages are likely from the regions. The central government is building some buffers to limit the slippages emerging from sub-central government budgets (BarCap overall 2011 deficit 6.5% of GDP).
Discussion about greater enforcement of fiscal discipline by European Commission, a precursor towards further movement to a fiscal union
On the agenda for tomorrow’s ECOFIN meeting is a discussion about a second package of proposals for strengthening economic governance, including enhanced fiscal surveillance and considering the Commission’s ‘green paper’ on stability bonds (‘euro bonds’). This discussion should be seen in terms of the currently evolving framework (see Figure 1, below).
Moreover, we would expect that the Eurogroup discussions will also in part be preparing the path for discussions on treaty revisions, which Paris and Berlin are seeking to be the focal point for the 9 December EU leaders’ summit (with a possible additional eurogroup summit on 8 December). In this context, please see also our discussion about the new push by Berlin and Paris to achieve greater fiscal integration (what German Finance Minister Schaeuble refers to as a “stability union”). In our view, the outcome of the 9 December summit, together with decisions to implement fiscal and structural economic reforms in Italy and Spain, could be critical for determining the degree of future extension of ECB intervention (its meeting is on 8 December: we continue to look for a 25bp rate cut then alongside a significant expansion of measures to aid the ability of banks to obtain ECB financing).
As well, we note that both Le Monde and Liberation carry articles on their websites which argue that the type of increase in fiscal discipline currently sought by Berlin would entail giving the Commission much tougher enforcement powers, either by increasing automatic penalties or by referring countries to the European Court of Justice. Both papers observed that there was no question of giving any power to the European Parliament, with Liberation citing a source at the Berlin Chancellery as saying, “This is not about arranging new transfers of competences, but to strengthen the powers of EU institutions to ensure that member states respect their commitments”. Liberation also cited the source as saying that “There is no question of changing the system at the risk of producing new construction errors” but that “the fiscal rights of national parliaments have their limits in European commitments”. Meanwhile, Le Monde observed that any new transfer of sovereignty would require a German referendum, as determined by the constitutional court in Karlsruhe.
Figure 1. Strengthening economic governance in the euro area
source: Barclays Capital based on EU Council documents
Detailed plans for the EFSF
A draft version of a document containing details specifying the operation and guidelines of the EFSF will be discussed by the Eurogroup. The guidelines address intervention on the primary and secondary markets, precautionary credit lines, insurance (“leverage”) and investment and funding strategies.
Liquidity support for banks: set to procedure along national lines at tomorrow’s ECOFIN
At the ECOFIN meeting tomorrow EU finance ministers are set to discuss a plan (according to the FT and Bloomberg) which would involve national governments continuing to underwrite bank bonds, while having greater coordination of the exact terms and levels of fees (including greater consideration by the European Commission of state aid rules to allow for the deterioration in sovereign debt financing costs). This comes in the context of significant redemptions of guaranteed bank bonds which had been issued under the previous guarantees in Q1 09 (with around EUR140bn of such debt maturing next year, according to Dealogic: see Figure 2 for total bank debt redemptions). Bloomberg claimed to have seen a copy of the draft EU document (dated yesterday), which argued that national efforts to support banks were the only option that “could be activated swiftly” and that “a majority of member states affirmed their preference for the setting-up of national but closely coordinated guarantee schemes”. The FT observed that despite urging by a panel of experts advising the EBA for the adoption of a European approach to bank guarantees, Germany had led opposition to “joint syndicates” to underwrite bank debt.
Additionally the Council is to “take note of progress” on a proposal for a fourth amendment of the EU’s capital requirements directive (CRD IV), which would be aimed at translating into EU law the G20’s Basel III agreement, to strengthen bank capital and introduce new regulatory requirements for bank liquidity and leverage, including introducing a capital conservation ratio buffer of 2.5pp, and of a countercyclical capital buffer (determined at the national level).
Other business in tomorrow’s ECOFIN: focus on the annual growth study, on EU statistics, on business taxation
Other topics on the agenda for tomorrow’s ECOFIN meeting (of all EU finance ministers) are: (i) a presentation by the Commission on the annual growth survey; (ii) conclusions concerning the requirement for an assessment of economic and financial impact of any new EU legislation; (iii) conclusions on EU statistics; (iv) conclusions on the code of conduct on business taxation.
BARCLAYS CAPITAL
ECONOMICS RESEARCH INSTANT INSIGHTS