Recap 6-6-12

Main Items:

  • ECB kept policy rates unchanged as expected. It is extending full allotment refinancing through Jan 15 2013. 3m MRO’s at full allotment through year end.
    The baseline scenario didn’t change, (forecasts reflect this) and is based on an abating of tensions. Draghi also said the soft data came in after projections were finalized. Decision was by ‘very broad consensus,’ and a few members voted for a cut. Regarding more LTRO’s, the “Issue is whether more LTROS would be effective.”
  • Reuters: Germany finalizing face-saving aid deal for Spain
  1. officials said that if Madrid put in a formal aid request, funds could flow without it submitting to the kind of strict reform program agreed for Greece, Portugal and Ireland. Instead, Spain would only have to agree to new conditions tied to the reform of its banking sector.
  2. A series of audits being conducted on Spain’s banking sector are expected to reveal an additional hole of between 30 to 70 billion euros, over and above the 80 billion euros already provisioned.
  3. Multiple sources said the German finance ministry was exploring the possibility of channeling EU aid directly to Spain’s Fund for Orderly Bank Restructuring (FROB), but that this would only work under the ESM, which is due to come into force next month.
  4. "Nobody wants the EFSF for Spain. It’s too restrictive," a second senior official said, pointing to the added flexibility contained in Article 19 of the bloc’s permanent rescue mechanism.
  5. Another source with knowledge of the discussions said Spanish politicians were pushing for a broad political agreement on rescuing the country’s banks and wanted conditionality limited to the financial sector to make the rescue more politically manageable at home.

WSJ: “Fed considers more actions amid new recovery doubts … The Fed’s June meeting may be too soon for incremental policy measures as officials are still considering the economy’s growth outlook. However, the Fed may decide to take a small precautionary measure, such as extending Operation Twist.”

EU Commission released details of a bank wind-down proposal. Highlights:

  1. supervisors will have the power to appoint a special manager at a bank for a limited period when there is a significant deterioration in its financial situation
  2. The bail-in tool whereby the bank would be recapitalised with shareholders wiped out or diluted, and creditors would have their claims reduced or converted to shares.
  3. Resolution colleges are established under the leadership of the group resolution authority and with the participation of the European Banking Authority (EBA). This lays the foundations for an increasingly integrated EU-level oversight of cross-border entities, to be explored further in the coming years in the context of the review of Europe’s supervisory architecture.
  4. If market funding is not available and in order to avoid resolution actions from being funded by the state, supplementary funding will be provided by resolution funds which will raise contributions from banks proportionate to their liabilities and risk profiles. The funds will have to build up sufficient capacity to reach 1% of covered deposits in 10 years.
  5. the resolution Directive also takes advantage of the funding already available in the 27 Deposit Guarantee Schemes (DGS). The DGS will provide funding, alongside the resolution fund, for the protection of retail depositors. For maximum synergy, Member States will even be allowed to merge the DGS and the resolution fund,

Moody’s lowered its ratings for Commerzbank and five other German banks as well as the three largest Austrian banking groups – FT

The IMF said Portugal’s economic program was broadly on track. The disbursement of another loan tranche of EUR4.1bn could take place in July subject to the approval of the IMF Executive Board and ECOFIN and EUROGROUP. The next review is expected to take place in September 2012.


  • EU 1Q GDP was flat QoQ as exp. Capital Expenditures were especially weak, which offset the strength in the trade balance.
  • UK PMI Construction declined to 54.4 in May vs 54.5 exp and 55.8 prev
  • Australia GDP improved to 4.3% YoY in 1Q vs 3.3% exp and 2.3% prev. Unexpectedly strong household consumption and business investment were the big surprises

Upcoming Data:

  • Thurs: French Unemployment, Swiss Unemployment, Swiss CPI, UK PMI Services, BoE, US initial jobless Claims, Japan Trade Balance
  • Fri: Japan Eco Watchers Outlook Survey, UK PPI, Canada Employment, China CPI, PPI
  • Weekend: China IP, Retail Sales, Trade balance, money supply


The biggest news today is probably the articles suggesting that the Germans are open to a bank recap for Spain without the rigidities of an EFSF program. The sequence now appears to be the completion of an IMF audit of the country’s finances later this month, (possibly as early as June 11th) a full Spanish audit of its banking system by month end, negotiation for a pre-packaged activation of the ESM along with a Memorandum of Understanding for Spain at the EU summit on June 28/29, and a disbursement of cash in early July.

The ECB is clearly delaying action in an effort to put more pressure on EU politicians. Draghi said that ‘soft data came in after projections were finalized,’ probably in reference to the PMI prints, since there has been no important EU data releases since then. But the finalized PMI was released last Friday, and the flash print was released on 5/24, over a week ago. There has been PLENTY of time to incorporate the data into projections. In any case, Draghi’s comments suggest a rate cut is likely this summer.

Also important is the release of the EU bank recovery and resolution proposal today. It is likely that the proposal will be thoroughly discussed at the June 28th summit, and will set the groundwork for an EU wide bank supervisor. The creation of such an agency is likely a prerequisite demanded by Germany prior to direct EU bank recaps by the ESM. The problem is that the proposal requires that national governments cede banking supervisory powers, which likely necessitates parliamentary approval, which adds additional uncertainty and takes additional time.

Separately, given the WSJ article, (which has served as something of a mouthpiece for the Fed in recent times) it appears likely that Operation Twist is extended through July at the June 20th FOMC meeting. The subsequent FOMC meeting isn’t until August 1st, so the FOMC is likely to want to buy some ‘insurance’ until then.