Tuesday, November 30, 2010

Open Europe press summary: 30 November 2010


Markets unconvinced by Irish bailout as contagion fears increase;
EU Commissioner admits two-speed eurozone is emerging
The bond markets remain unconvinced by attempts to halt the eurozone's sovereign debt crisis, despite the Irish bailout announced on Sunday. The amount of interest Spain's government must pay on its bonds climbed from 5.43% to a record 5.63% yesterday while Portugal's yield edged up from 7.03% to 7.07%. The yield on Ireland's bonds also rose. Attention is increasingly turning to Italy, whose bond yields increased from 4.66% to 4.77%. Belgium also saw a rise in borrowing costs.

The Independent quotes US economist Nouriel Roubini saying, "Like it or not, Portugal is reaching the critical point. Perhaps it could be a good idea to ask for a bailout in a preventative fashion." The Telegraph quotes Charles Dumas, from Lombard Street Research, saying, "The EU rescue fund cannot handle Spain, let alone Italy."

FAZ quotes French Budget Minister François Baroin saying, "It is important the whole world - and the investors - hear the message from Europe: We will save the euro". Les Echos quotes Benoît Hamon - a spokesman for the French Socialist Party - saying that "Europe and France should not have accepted to unblock €85bn" without asking Ireland to raise its corporate tax rate.

The FT reports that Irish central bank governor Patrick Honohan has confirmed that Ireland did not enforce haircuts on private investors in its banks in exchange for the ECB continuing "a liberal attitude" to supporting its financial system. The Irish Independent notes that opposition leaders have sharply criticised the Irish government for failing to force bondholders to take a share of the pain. Fine Gael, the main opposition party, said it has not yet decided whether to back next week's crucial austerity budget, the Guardian reports.

The WSJ notes that eurozone leaders' plans for a permanent rescue mechanism for the euro also contributed to market concerns. The plan is due to come into operation post-2013, with bonds issued after that date containing a clause requiring bondholders to take a haircut in the case of debt restructuring or default. However, analysts remain doubtful whether it is credible to assume that all bonds issued before 2013 are irrevocably safe from future haircuts. If a country runs into trouble in, for example, 2015, forcing losses on the small number of haircut-eligible bonds issued after the changeover wouldn't make much of a dent in the country's overall debt.

Meanwhile, the IHT reports that, after publication of new growth forecasts yesterday, EU Economic Affairs Commissioner Olli Rehn admitted that a two-speed eurozone might now be developing. "It has to be admitted, there is a certain dualism in Europe," he said.

The Times notes that Greece has negotiated an extra six years to pay back its €110bn bailout loan but only in return for increasing its interest rate to the same level as Ireland. Both will now pay 5.8% interest on the loans from the EU and IMF, above the 5.2% rate first agreed by Greece.

Eurozone comment round-up
In the IHT, Roger Cohen questions whether "the euro to the early 21st century is what the League of Nations was to the early 20th: a fine idea that became a political orphan and was condemned to unravel?"

In the FT, José-Ignacio Torreblanca outlines Spain's financial concerns and says that "the prevailing feeling is one of frustration with Germany" as "now, sadly, Ms Merkel's decisions are damaging Spain, turning Germany into a rival." Paul Krugman comments in the IHT that Spain would be "better off now if it had never adopted the euro - but trying to leave would create a huge banking crisis, as depositors raced to move their money elsewhere."

On his BBC blog, Robert Peston looks at the plans unveiled yesterday for a eurozone permanent crisis resolution mechanism and notes: "European finance ministers have in effect announced that the risks of lending to financially stretched eurozone countries would increase in two and a half year's time - which is no time at all for many investors. In practice this means that the eurozone has set itself a deadline of two and a half years to persuade investors that its finances are in order. If it fails to do so, a whole host of weaker eurozone states could find they are confronted with punitive borrowing terms or even a strike by lenders."

In Le Monde, Martin Wolf writes that Germany's insistence on budgetary discipline could not be enough to solve the debt crisis in the eurozone, since in countries like Ireland and Spain "it's the private sector, not the public sector, which has gone mad." He argues: "The Irish case shows that Germany's view of the way the eurozone should work is wrong: budgetary mindlessness is not the essential problem; budgetary discipline and debt restructuring are not the only solutions. One cannot draw any lessons from history if one fails to understand it." 

In the WSJ, Patience Wheatcroft agrees that "the essence of the problem is that the bailout in itself is not a solution. The heavy interest rate it carries is an almost built in guarantee of failure. The market does not believe that Ireland will be able to afford its new funds. That Greece has extended the terms of its rescue loans over a further six years, taking it to 2021, but only on condition that it too agrees to the same high level of interest payment as Ireland only exacerbates its own prospects of default."

MEP wants to tighten up Commission proposals on short-selling of sovereign debt
The FT reports that a key European Parliamentary report is seeking to toughen up the proposed curbs on short-selling and the use of credit default swaps (CDS) proposed by the European Commission in September. Pascal Canfin, a French Green Party MEP who is acting as 'rapporteur' on the legislation has proposed an amendment suggesting that traders should only be allowed to enter CDS transactions related to the sovereign debt of a member state of the EU if the entity has a long position in the sovereign debt of that issuer. The report also calls for more disclosure of short positions to regulators.

FT investigation reveals flaws in EU structural funds
An investigation by the FT and the Bureau of Investigative Journalism has revealed several flaws in the way the EU structural funds are administered. Internal documents from the European Commission seen by the paper show that the EU has so far paid out only 10% of the €347bn allocated for structural funds for the period 2007-2013. In addition, some of the world's biggest multinationals appear to have received money under this funding programme, which is supposed to provide support for small and medium-sized enterprises. EU structural funds are sometimes also used by companies to relocate part of their activities to other countries with lower labour costs, although this practice is explicitly forbidden.

In a separate comment piece in the paper, Tony Barber argues: "Too often the impression arises that those who know the EU's mysterious procedures from the inside are those who gain the most from its largesse. Like other areas of EU policymaking, regional aid needs accountability as well as a generous spirit."

Open Europe is quoted by Italian daily Il Fatto Quotidiano responding to last week's ECJ ruling clearing a 3.7% pay rise for EU officials and arguing: "At a time when all member states are cutting their budgets, European taxpayers can only consider an increase in EU salaries incongruous."

New EU member states oppose ceiling for direct farm subsidies
Negotiations on the future of the EU's Common Agricultural Policy after 2013 kicked off yesterday with a meeting of EU agriculture ministers in Brussels. AFP reports that three member states - Romania, Czech Republic and Slovakia - voiced their opposition to the introduction of an upper ceiling for direct aid to big individual farms proposed by the Commission.

Meanwhile, Euractiv notes that, at yesterday's meeting, France claimed a victory in its bid to defend the CAP budget from deep cuts after 2013. French Agriculture Minister Bruno Le Maire is quoted saying: "A year ago, the Commission's proposal was to cut the CAP budget by 30% to 40%, and to abolish all tools for intervention in agricultural markets. The work done on France's initiative has allowed us to reverse things, and today we have a Commission proposal [on post-2013 CAP] that is much more balanced."

European Voice reports that yesterday EU Commissioner for Transport Siim Kallas said he would propose legislation next year to strengthen security controls for cargo from outside the EU following last month's discovery of explosives in the UK on a flight from Yemen.

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