MacroScope

Germany back in business

Germany’s Social Democrats voted overwhelmingly to join a “grand coalition” with Chancellor Angela Merkel’s conservatives. The government will offer broad continuity with some tweaks, the reappointment of Wolfgang Schaeuble as finance minister testifies to that. But could it unlock some euro zone policy doors after three months of limbo?

The big item on the agenda of an EU summit late this week is banking union. What results will dictate whether the seeds of a future financial crisis have been sown. Thanks to our exclusive at the weekend, we know that the latest proposal will see the cost of closing down a euro zone bank borne almost fully by its home country while a euro zone fund is built up over 10 years.

Key euro zone finance ministers will meet in Berlin today (as they did without success 10 days ago) to try and reach agreement in time for the summit. A full meeting of euro zone finance ministers is slated for Wednesday but it could take a bilateral meeting with the newly anointed Merkel and French President Francois Hollande to break the logjam.

Critics say the plan is a pale shadow of what was proposed in 2012 which, lest we forget, included a commonly funded backstop for failing banks and a mutual deposit guarantee which has long since bitten the dust.

Under this plan, the costs of closing a bank in year one would be fully covered by a fund set up by the home country where the bank resides. Such funds in every euro zone country would be paid for by the banks. The funds will reach a full size of 1 percent of all covered deposits after 10 years and at that point would be merged into a Single Resolution Fund which would finance all bank closures.

ECB in court

The major euro zone event of the week starts on Tuesday when Germany’s top court – the Constitutional Court in Karlrsuhe – holds a two-day hearing to study complaints about the ESM euro zone bailout fund and the European Central Bank’s still-unused mechanism to buy euro zone government bonds.

The case against the latter was lodged by more than 35,000 plaintiffs. Feelings clearly run high about this despite the extraordinary calming effect the mere threat of the programme has had on the euro debt crisis. Some in Germany, including the Bundesbank, are worried that the so-called OMT could compromise the ECB’s independence and would be hard to stop once launched.

A verdict won’t be delivered until later in the year but already there is already jockeying for position. Germany’s Spiegel reported that a limit had been set on the amount of bonds the ECB could buy – directly contradicting what Mario Draghi has said. That was swiftly and categorically denied by the ECB, then Executive Board Member Joerg Asmussen warned there would be “significant consequences” if Germany’s constitutional court rules the bond-buying programme was illegal.

The Greek “cliff”

Some key positions were staked out on Greece over the weekend – ECB power-behind-the throne Joerg Asmussen became the first euro policymaker to say on the record that euro zone finance ministers meeting on Tuesday would be intent only on finding a deal to tide Greece over the next two years. But IMF chief Christine Lagarde told us in an interview that she would push for a permanent solution to Greece’s debts to avoid prolonged uncertainty and further damage to the Greek economy.
  
Sounds like those two positions could be mutually exclusive. However, it may be that something like a behind-the-scenes pledge from the German government that it will act decisively after next year’s election will keep the IMF on board.

Eurogroup chief Jean-Claude Juncker said at the weekend that intensive work was being done on a compromise with the IMF and progress was being made, after the euro zone sherpas put their heads together on Friday. And even hardline German Finance Minister Wolfgang Schaeuble said a deal had to be struck on Tuesday and would be. Juncker and Lagarde clashed last week over his suggestion that Greece should be given an extra two years, to 2022, to get its debt/GDP ratio down to 120 percent, the level the IMF has decreed is the maximum sustainable. Lagarde looked surprised and firmly rejected the idea.

IMF officials have argued that some writedown for euro zone governments is necessary to make Greece solvent but Germany has repeatedly rejected the idea of taking a loss on holdings of Greek debt, saying it would be illegal. 
Among ideas under consideration to plug the funding gap are further reducing the interest rate and extending the maturity of euro zone loans to Greece, a possible interest payment holiday and bringing forward loan tranches due at the end of the programme, according to euro zone sources.

Disquiet at the ECB

A day for central bankers and maybe the hint of a row brewing within the ECB. After days of jitters, euro zone bond markets were calmed a little this week when ECB policymaker Benoit Coure said the central bank’s government bond-buying programme could be revived if Spain started teetering.

That is decidedly not what the orthodoxists in Frankfurt would have wanted to hear. They are already worried that the creation of more than a trillion euros of three-year money could be stoking future inflation and creating addicted banks and feel that the bond-buying programme crosses a red line — that the ECB should not fund governments.

We know Bundesbank chief Jens Weidmann has been leading the charge to at least talk about an exit strategy from the ECB’s extraordinary policy stance – something the top man, Mario Draghi, slapped down pretty bluntly last week — and Orphanides, the ECB man from Cyprus, was out last night saying individual central bankers should not be making any commitments about bond-buying, a clear swipe at Coure.