Greece take II - it's official

Reuters has just released the latest EU/IMF/ECB troika report – the first to fully account for the bond swap and its impact on Greek debt. We’ll provide a fuller run down once we’ve had more time to trawl through the 195 page report (we have to give the troika some kudos for the turnaround on this one), but for now we’ll just flag up a few headline figures. We also couldn't resist comparing the new Troika estimates to our previous estimates of how Greece's debt will change following the bailout, which we published a couple of weeks ago. We would lie if we said we weren't pretty much spot on.

Greece's debt-to-GDP after PSI

Open Europe's estimates: 161%
New Troika report: 160%

Amount of money needed to recapitlise Greek banks

Open Europe estimates: €50bn
New Troika report: €48.8bn

Cost of private sector involvement (PSI)

Open Europe estimates: €86bn
New Troika report: €78bn

(The discrepancy between the OE and Troika estimates primarily seems to be a consequence of the Troika report not including the near €6bn to pay off accrued interest, which doesn’t get lumped into the ‘cost of PSI’ but may fall into other funding costs). In any case still doesn’t seem like great value for money.

Other interesting figures include:

• Total EU/IMF assistance in 2012: €112bn (most yet for a single year)

• Average revenue from privatisation: €4.4bn (despite the plan barely getting going)

• Amount Greece needs to raise on the market in 2015: €7.6bn (despite new Greek bonds trading with the highest yields in the eurozone)

In addition, the graph below is pretty revealing. Given the optimistic privatisation targets and the optimistic growth projections the bold turquoise and dotted orange line give us some significant cause for concern to say the least.

The Fiscal compact in action....?

The eurozone chokes Spain....the fiscal compact in action?

An unfortunate picture has been doing the rounds this morning of Jean-Claude Juncker (Head of the Eurogroup of eurozone finance ministers) jokingly throttling the Spanish Finance Minister Luis de Guindos (don't worry they were all hugs after).

Nevertheless, this as an apt metaphor for the potential which the new fiscal compact has to choke economies such as Spain, with strict budget targets and massive austerity.

(More captions welcome in comments)

Is Sarkozy's tough talk on EU open borders hot air?

EU relations have become a pretty substantial source of contention in the French Presidential race. Socialist candidate Francois Hollande has been calling for a renegotiation of the fiscal treaty, recently signed by EU leaders, since January. Nicolas Sarkozy accused Hollande of playing politics with a sensitive treaty, as the renegotiation, he argued, amounted to rewriting the treaty in favour of the French Left, rather than taking into account the national interests of France. Meanwhile, EU leaders have waded into the debate, publicly endorsing Sarkozy in a move to protect the treaty from a further round of negotiations.

In a sudden turn of events, Sarkozy has replicated Hollande’s tactics, calling for a withdrawal from the Schengen treaty on open borders, if no serious reforms are undertaken. This follows complaints issued by six Schengen states, which have claimed that Greece's porous borders allow people to pass into Europe, legally or otherwise, unchecked. The Austrian Interior Minister compared Greece’s border policy to an “open barn door”.

Sarkozy argued that the reform of the agreement is “the only way to avoid the implosion of Europe” and added that

"It's urgent because we cannot accept being subjected to the shortcomings of Europe's external borders...But if I note within the next 12 months that no serious progress has been made in this direction, then France will suspend its participation in the Schengen accords until these negotiations are completed."

For good measure, Sarkozy also called for a "Buy European Act", under which European governments would be obliged to prefer European goods in their purchases, arguing, “that way companies which produce in Europe will benefit from European state money”.

Unsurprisingly, Hollande's camp was quick to fire back, with Pierre Moscovici, Hollande’s campaign manager, pointing out sarcastically that

"Conservative leaders [read: Merkel], who have been so quick to unite to defend the president, will appreciate his threat to pull unilaterally out of the Schengen zone at the same time that he calls for the signature of the austerity treaty in the name of European cohesion."

Electoral mud-slinging aside, is Sarkozy genuinely going for an overhaul of the Schengen Treaty and a fresh slew of trade measures to protect European firms? It's doubtful.

A mechanism to temporarily re-introduce internal border controls already exists within Schengen, bit its precise meaning is vague and limited to “a serious threat to public policy or internal security.” In addition, the European Commission has proposed a clearer, beefed up procedure, currently subject to negotiations between member states. So in theory, it's possible to 'suspend' Schengen (i.e. introduce border controls). This was a discussion that flared up last year in Denmark (which did actually re-introduce some additional controls) and in a border row between France and Italy. But in practice, this would be hugely complicated, as the mechanism only allows a country to keep the checks in place for 30 days, which must be justified on grounds of "internal security." If Sarkozy did in fact go down that road, he would have an almighty political row with EU partners on his hands, akin to De Gaulle's "empty chair" episode.

A more likely outcome - in the event that Sarkozy does get re-elected - is some minor reform, such as boosting the budget of Frontex (the EU's border agency), more money to Greece and other border states and perhaps clearer rules on member states' ability to take action (as per the Commission's proposal minus, we suspect, the strong role the Commission sees for itself), which will then allow Sarkozy to claim a political victory. As ever, EU politics is a great avenue for politicians to promise all kinds of stuff, only to let it get lost in the often tedious details of EU law/politics.

On his second 'ultimatum' to Brussels, Sarkozy has actually promised different versions of 'Buy European' rules for some time. In 2007, he floated the idea of "European champions" to be promoted over global competitors. As ever, it's unclear exactly what a "Buy European" act would involve, how it would be agreed, and how it would fit with existing WTO and EU state aid laws.

Today, EU Internal Market and Services Commissioner Michel Barnier said that the Commission was working on a proposal to introduce "non-protectionist" measures to favour European enterprises in the allocation of public sector contracts. The measures will allow member states to block non-EU businesses from bidding for public sector contracts if their country of origin does not have open public procurement markets. This is the case in China, for example. This will please Sarkozy, who called for "reciprocity" in commercial negotations between the EU and other states. British permanent representative in Brussels Aled Williams voiced fears that the new regulation could give rise to "tit-for-tat" responses from other countries, fuelling a trade war.

Sarkozy’s pledges were vague and perhaps disingenuous - this is an election campaign after all - but they are significant because they could represent part of a wider shift towards a more assertive French European policy (or perhaps a reaction to recent German leadership). Tellingly, Hollande's campaign manager accused Sarkozy of giving the impression of someone who “is not a French president…but almost a Conservative British Prime Minister.”

When Sarkozy introduced a Financial Transaction Tax earlier this year, he showed he was willing to flout EU opinion, and, in his view at least, lead the way. This time, Sarkozy has gone one step further, and, in rhetoric at least, suggested that he is willing to actually violate EU law to unilaterally impose his own border and government purchase policy. Other EU leaders have so far ignored his speech yesterday, but it will be interesting to see how they decide to react.

One this is clear, viewed from capitals around Europe, the French Presidential campaign just got a whole lot more interesting.

Open Europe has today published a new report looking at the impact of EU free movement and external immigration policies on the UK. We argue that, while free movement comes with benefits, reform is needed to avoid losing all public confidence in the concept - much of which applies beyond the UK.

A small step forward, but the Greek restructuring deal could prove to be a pyrrhic victory

Open Europe has responded to the agreement between the Greek government and its private creditors which laid out how much and under what format the country’s massive €360bn debt burden should be written down. The deal involved private sector bondholders agreeing to a 53.5% nominal write-down, while so-called Collective Action Clauses (CACs) will be used meaning that Greece is now technically in a state of default – precisely what EU leaders have spent two years trying to avoid. While marking a small step forward, Open Europe notes that the deal is unlikely to save Greece, and that the country is still on course for a full default in three years’ time, if not sooner.

In our response we note:

“With the use of CACs Greece has entered a coercive restructuring or default – something which Greece and the eurozone have spent two years trying to avoid. While the financial markets can handle the triggering of CDS that this will entail, at some point serious questions need to be asked over the amount of time and money which policymakers have wasted on what has ultimately amounted to a failed policy. Instead, Greece should have undergone a full restructuring combined with a series of pro-growth measures.”

“There will be plenty of optimism in the corridors of power around the eurozone today, some of it justified – Greece has avoided a chaotic and unpredictable meltdown. However, this deal could end up being a Pyrrhic victory: the debt relief for Greece is far too small which means that another default could be around the corner, while the austerity targets are wholly unrealistic and kill off growth prospects. Furthermore, Greece’s debt will end up being almost completely owned by eurozone taxpayers and by exempting official taxpayer-backed institutions from the write-down, the deal has created a distorted, two-tier bond market.”

See here for the full response.

Update 17:00: Based on our figures and projections, the Telegraph has produced a handy graphic showing the break-down of the restructuring, the details of the write-down and where the money from the second bailout will end up. View it here.

Will Poland become the new North Korea of Europe?

This question can of course be filed under John Rentoul’s ‘Questions to which the answer is No’ category, but there is a significant chance that Poland will be the only EU member state to veto a new EU deal on climate change later today, meaning that at the very least we can expect Europe-wide condemnation and statements along the lines of Poland risking becoming permanently “isolated” right? After all, this was largely the immediate reaction in the European and UK press to David Cameron’s veto over embedding rules on budgetary discipline for eurozone members within the EU Treaties (see our response here), after he claimed such a move was not in the UK's national interest.

We doubt it though.

Some quick background: at today’s meeting of EU environmental ministers, it will be decided whether to adopt the EU’s 2050 low-carbon roadmap which seeks to set out a series of ‘milestones’ in terms of emissions reductions up to 2050. According to the roadmap, the most cost-efficient way of moving to a low-carbon economy is to achieve a 25% reduction by 2020, a 40% reduction by 2030, and finally a 80-95% reduction by 2050 (compared with 1990 levels). Agreeing on the roadmap is a first step to set legally binding emissions targets for the years beyond 2020.

The plan is backed by the Commission, the European Parliament and many member states (including the UK). However Poland has expressed strong concerns, indeed it already vetoed the 25% target once, back in June last year. Given that over 90% of Poland’s energy is generated from coal, this position is not surprising. Polish Environment Minister Marcin Korolec wrote to his counterparts warned against going beyond the agreed 20%, arguing that:

“There is no point whatsoever in gambling with the European economy’s future, introducing policies that might put our industries in jeopardy versus our competitors”

Ultimately is possible some sort of a deal could yet be thrashed out, but as yesterday’s Gazeta Wyborcza reported, Polish Government sources have made it clear they will not hesitate to block the deal unilaterally if is feels it is against its national interest. Unsurprisingly, many other member states and EU officials have not hidden their frustration with Poland's position.

There probably won't be any Auf Wiedersehen Polen headlines in the press, but this episode serves as a useful reminder to those who interpret UK-EU relations as a case of the latter being in permanent isolation. The truth is, as ever, far more complex.

Various EU member states maintain a special interest over economic sectors, industries and/or EU policy areas where they feel these are vital to their wider national interest. For example, the French have a dominant position in agriculture, the Spanish in fishing, the Germans in car manufacture and the UK in financial services, while Poland’s equivalent, naturally, is energy and environmental legislation.

Rather than trading in hyperboles, we should seek to establish a practical and intellectually consistent model for European cooperation, which can comfortably harbour such diverging interests.

The pitfalls of holding an EU referendum on election day

Amid the last-minute efforts to finalise the details on the Greek debt swap, just a couple of thoughts on UK domestic politics vis-a-vis the 'EU referendum question'.

Earlier this week, the excellent Tim Montgomerie of Conservative Home, had a piece asking whether an EU-related referendum should be held on the same day as the General Election (for now, we'll leave aside the tiny detail of what a successful outcome from an EU referendum would be and indeed what the question should be).

Tim notes,

"One of the reasons why the Conservative Party had such good results in last year's local elections was that many extra Tory voters came out to vote in order to defeat AV. Additionally we had the centre right press all united in campaigning hard against a change to the electoral system. This has led some Tory strategists to wonder if a referendum on the same day as the next general election might produce similar dividends."

He goes on,

"Could a referendum on Britain's relationship with Europe, for example, ensure high energy levels among Tory leaflet deliverers and also high turnout amongst Tory-inclined voters? The extra advantage of a vote on Europe would be that it would reduce the incentive to vote for UKIP (ConHQ are increasingly concerned that a strong UKIP vote might again make the difference in many marginal seats). People could use the Europe referendum to register their scepticism about Brussels and at the same time vote Conservative to ensure Labour wasn't elected by the backdoor."

This is an interesting discussion, and Tim makes some very good points. But for what it's worth, we believe that this strategy, no matter what the question might be, would be a mistake. The reason is simple: most successful referendum campaigns have managed to take party politics out of the equation. By decoupling the referendum question from party politics, there's a far greater chance of building political momentum, and a majority 'national position', as the preferred answer would cut across party political divides.

For any Europe-related referendum this is particularly important, as Labour and Lib Dem voters would have a proportionally greater propensity to vote against European integration than their respective party leaderships and MPs. For example, 34% of Labour voters would vote to leave the EU if a referendum was held today (national average is 43%), according to a December poll. At the same time, 36% of Labour voters and 30% of Lib Dem voters are in favour of "less EU integration" according to another recent poll.

This inclination to vote against "more Europe" would be seriously undermined if a referendum was linked to the General Election, where voters would be more likely to vote 'under orders' along party political lines rather than on the issue at hand. (Incidentally, in the past, the dominant school of thought inside the Conservative Campaign Headqaurters has been that the more Europe is raised as an issue, the more likely people are to vote for UKIP. We're sceptical of that line of thinking).

Such a move could therefore prove an own-goal for those in favour of changing the UK-EU relationship. Better then to keep the two separate. Without taking a position on which question should be asked, that is.

A credible Greek threat?

The Greek Public Debt Management Agency put out an interesting press release (PR) yesterday. We won’t go over all of it, since it’s been heavily covered in the press, but it did raise one interesting point:

“The Republic’s representative noted that Greece’s economic programme does not contemplate the availability of funds to make payments to private sector creditors that decline to participate in PSI.”

This is widely being seen as a warning to those who hold Greek bonds governed by foreign law and who therefore may be more inclined to hold out due to the extra protection offered under foreign law (they are also subject to higher CAC threshold, meaning CACs are harder to use). Greece essentially says that any bondholder who doesn’t take write downs will be defaulted on (except the ECB).

So, is this a credible threat?

Well, firstly we won’t find out until 11 April since that is the settlement date for foreign law bonds under the restructuring plan.

But more importantly it raises the question of whether Greece could be setting itself up for a second default, at least in technical terms. Let us explain:

Greece will certainly be judged to be in default by the rating agencies after CACs are triggered, but once the bond swap is completed and new bonds are issued it should come out of this rating fairly quickly. Yet, a month later it could again trigger CACs on foreign law bonds. Even worse, it could just leave these bonds and default on them through non-payment as and when payments are due (this could run long into the future). If this constituted another default it would have a negative impact on funding for Greek banks and the stability of the economy - so would be something to avoid.

Ultimately, it comes down to whether the new Greek bonds have ‘cross-default clauses’ in them – which means if Greece defaults on other bonds it will default on these too. From what we can see, the new bonds do not have general cross-default clauses (despite earlier versions of the plan including them), only ones which apply to the new group of bonds which exist after the restructuring.

This makes the threat to default on the remaining foreign law bonds much more credible. It would still be an extreme course of action, but one which looks increasingly attractive given the extra debt relief it could deliver (which Greece will need).

This is something which bondholders would do well to keep in mind if they are planning to try and get paid out in full.

Will Merkel's fiscal treaty become a hostage of the FTT?

As we reported in yesterday's press summary, given that the recently signed 'fiscal treaty' will impact on the budgetary autonomy of the Bundestag, it will have to be ratified in both houses of the German Parliament by a two-thirds majority.

Here are some basic Bundestag mathematics: out of a total of 622 MPs, Merkel's coalition has 331 (195 from CDU + 43 from CSU + 93 from the FDP), far from the 415 MPs necessary for the two-thirds majority. So Merkel will definitely need to have some of the SPD's 146 MPs on side, and would also like to be able to count on the Greens' 68 MPs just in case. The remaining opposition party, Die Linke rejects the very premise of the treaty so all its 76 MPs are highly likely to vote against.

However, the SPD and Greens have already said their consent is conditional on a number of concessions from Merkel, most notably: a 'growth programme' to balance out the budgetary discipline element of the treaty and the introduction of a financial transaction tax (FTT - its not clear if they want it in just the eurozone or the EU as a whole, although the latter looks impossible). The SPD’s leader, Sigmar Gabriel told German radio that:

"Whether we vote in favour or not depends on whether Mrs. Merkel makes substantial offers to improve the fiscal pact. I can only urge Merkel to finally take care to ensure that her government ceases to oppose the taxation of financial markets.”

This has not gone down with the FDP, who have long been opposed to a FTT unless imposed across the whole EU as minimum. The party’s General-secretary Patrick Döring described the prospect of tying the ratification of the treaty to the introduction of an FTT as “inconceivable” and “irresponsible”, while parliamentary faction leader Rainer Brüderle criticised Gabriel, arguing that:

"This is no place for ideological battles for the purpose of winning future elections. The situation demands statesman-like responsibility from all concerned."

As things stand there is a classic stand-off over the issue, with significant risks for all parties concerned:

Giving in to demands for a FTT or weakening the budgetary discipline in the treaty further, would undermine Merkel's support within her own party and threatens to split the coalition - which could trigger early elections. That said, the threat of early elections may be just enough to keep the FDP in check given their dismal recent poll results. It would also cause huge problems for Merkel in Europe given that she has expended so much political capital on pushing this treaty through.

The SPD and the Greens are far from cohesive on all issues either and getting embroiled in a full debate on this issue could expose flaws in this fledgling partnership. Furthermore, the German public seem to be losing patience with politicians inability to tackle the eurozone crisis - further posturing on the issue for political gain could easily backfire.

In the end then consideration of these risks and the trend for orderly consensual politics in Germany means that the approval of treaty still looks highly likely, posturing aside. Nonetheless it looks as if Merkel will have to offer the opposition some concessions (e.g. the FDP have indicated they could stomach a watered-down FTT along the lines of the UK’s stamp duty). The extent of these could have a big impact on the power base of the current government and the outcome of the next election.

The vote itself is not scheduled until the 25th May, so there is 'plenty' of time for the party leaderships to hammer out a deal between themselves and present it to their MPs to be rubber-stamped...

IIF on a disorderly Greek default

A leaked document from the Institute of International Finance (IIF) has been doing the rounds recently and has some rather alarming statistics regarding the cost of a disorderly Greek default in it (see here for full doc). The document is well worth a read if not just because it sheds some valuable light on the thinking inside an institution which, up until the few months ago, very few people had any knowledge of.

As far as we’re aware the doc was first released by Athens News (we’ve done an interview with them presenting our thoughts which we will post in due course), but for now see our initial thoughts on the claims that a disorderly Greek default could cost as much as €1 trillion:

- The IIF does have a vested interest in seeing the current plan succeed and has played a substantial role in negotiating it, which should be kept in mind when reading their analysis of the ‘alternative’ of a disorderly default.

- As our latest report on Greece highlights, the current plan for Greece does not actually decrease the prospect of a disorderly default. It offers little real debt reduction and simply transfers the debt from private to public sector (making any future default more costly for taxpayers). If anything then, the warnings in the IIF report could also be a read as the potential consequences of the current path of action which risks shifting the cost of a disorderly default further onto taxpayers – the consequences of which could be hugely problematic for Europe and the global economy.

- A disorderly default is the worst case and would be incredibly painful for Greece and the eurozone, however, to present it as the only alternative to the current plan is misleading. This is a diametric choice engineered by the EU/IMF/ECB and even the IIF. There is still the option of a managed restructuring offering a greater write down with a simpler process and therefore better value for money than the current plan.

- The document mentions the social cost of a disorderly default, which would be very high, but the IIF and the troika continue to ignore or just accept the social costs of the current plan. The massive austerity threatens to create a downward spiral in the economy, while the riots show a glimpse of the tensions simmering underneath the surface in Greek society.

- There is much discussion of contagion but there has been little thought given to the potential knock on effects of the current plan, from aspects such as the legal gymnastics to protect the ECB to the lack of a comprehensive solution.

Does this document, then, simply constitute scaremongering on the part of the IIF?

That may be going a bit far, but as we point out above there are certainly caveats to consider when examining their estimates. The key point is that the current plan simply kicks the chances of disorderly default further down the road, beyond the end of this year at best. However, at that point, the potential for dire consequences of a disorderly default set out in the IIF report, will not have gone away.

Germany is gearing up for a major debate on the future of Europe, so must Britain

A few weeks ago Lord Owen, the former Foreign Minister, gave a speech, reworked for the Spectator here, in which he very eloquently set out the future challenges for Britain in an EU that is rapidly changing as a result of the euro crisis.

Owen noted that:

On 7 February 2012 the German Chancellor Angela Merkel indicated very clearly her direction of travel. The eurozone crisis for her is to be the springboard to another Treaty to replace the Lisbon Treaty. She said ‘Step-by-step, European politics is merging with domestic politics.’ She called for ‘comprehensive structural reform’ of the EU with closer integration to overcome what she called ‘major shortcomings’.

She had some months earlier, barely recognised in the UK, signed up to campaigning with fellow Christian Democrats across Europe for direct elections for the posts of President of the Commission and much more surprisingly and far-reachingly for the President of the European Council.

All this might seem some way off, but in an interview with Welt am Sonntag at the weekend, German Foreign Minister Guido Westerwelle repeated that it was “important to open the next chapter of European integration”. He argued,

“I regret that it has not been possible to adopt a truly European Constitution. We’ve noted that the Lisbon Treaty has design flaws. Many decision-making mechanisms are too complicated, and there is still a lack of transparency and clarity. Europe needs a common constitution, which the citizens should decide over in a referendum.”

Westerwelle also argued in favour of a directly elected European President, and a bicameral parliamentary system, with the European Council, where EU leaders meet, becoming an upper chamber alongside the European Parliament.

What does this mean for the UK?

Well, this debate about 'political union' is likely be the next stage of the plan to salvage the euro, after the debates over the fiscal treaty have ended. Whether it can ever work is the glaring question, especially if Westerwelle is good to his word about putting it to a referendum, but, clearly, significant elements of the German political machine are thinking that this is what Europe will need to discuss in the long-term.

Here are some more of Lord Owen's thoughts:

How should Britain react? We should firstly not react! This is our EU by Treaty; it can only be changed by unanimity and we must have a credible but different design and the determination to stay at the negotiating table until there is unanimity. No walk outs, just quiet persistence. We must have the confidence to set out a new design for two Europes — a wider and an inner — that will live alongside, in harmony with each other...

...I think a dividing line along these lines in Europe will soon become fairly clear cut. It will become an inescapable choice with the pace forced by the urgent needs of the eurozone. Probably a decision in principle will need to be taken in the UK before the fixed term date for a General Election in 2015. There will, if the past is anything to go by, be for some months the usual British reluctance to face up to the reality of this German-French plan. It, incidentally, will not change much if Sarkozy loses in France in May or Merkel loses to the Social Democrats in 2013....

...Any UK political party that ignores the rapidly emerging challenge in Europe is putting its head in the sand.

Westerwelle's comments illustrate how some important people are thinking around Europe and that the UK needs to prepare itself for this hugely important conversation sooner rather than later.

Today, the Fresh Start Project, the group of MPs calling for a new approach to UK relations with the EU, will launch its first Green Paper chapter, covering EU social and employment law.

Co-leader of the group, Andrea Leadsom MP will appear on BBC 2’s Daily Politics show at lunchtime to explain that the Project is looking at the impact of the EU on the UK, and evaluating and proposing options for change. With the help of ideas supplied by Open Europe and other think tanks, this will culminate in the publication of a draft Green Paper on European Reform by July 2012 and a draft White Paper by Dec 2012.

Europe and the City

A write up from our event from earlier today is now online, featuring a highly interesting panel of speakers including Jonathan Faull, Director General for Internal Market and Services at the European Commission and Hannes Swoboda MEP, President of the European Socialists in the EP. The panellists were seeking to answer the question what impact the euro crisis will have on the UK financial services industry. Read the summary here.

We'll also upload a recording of the event shortly.

And while we're at it, a reminder of the report that we published in December, Continental Shift: Safeguarding the UK's financial trade in a changing Europe, which can be found here. The report certainly hasn't become any less relevant with the conclusion of today's EU summit...

Despite a mundane EU summit, plenty of challenges remain in Greece

Just a quick post on the developments at what must be seen as the most mundane (if not pointless) EU summit on eurozone issues for some time. Reports today suggest that the eurozone will withhold part of the bailout funds for Greece, only paying out the part required to ensure that the voluntary Greek restructuring can go ahead.

This was mostly expected and as we have noted previously, as well as in our report released yesterday, the amount that needs to be paid out is sizeable. The eurozone estimates it at €58.5bn, while we have suggested it could be closer to €86bn.

The main reason for this difference arises from the expected level of recapitalisation for Greek banks. The eurozone returns to previous estimates of around €23bn to aid the banks, despite widespread reports that this could reach €40bn - €50bn as admitted by the leaked EU/IMF/ECB debt sustainability analysis. For our part, we estimate that the bank capital needs could fall between €36bn - €46bn (depending on how they incorporated the write downs onto their balance sheets) to meet the European Banking Authority’s 9% capital requirements.

It is likely that Greek banks will need at least €50bn in the longer term, so it may be that the eurozone is keen to limit the immediate capital pay-out to the minimum necessary to stabilise the banks. This may be prudent on one hand, since it reduces the amount which needs to be raised to push the restructuring through and is less politically divisive. However, running the banks so close to the edge in an economy as uncertain as Greece’s could be asking for trouble.

The final point worth considering on the Greek banks is the issue of collective action clauses (CACs – see here for background). It looks increasingly likely that they will need to be used to get the necessary participation in the Greek restructuring (notice at this point we finally drop the ‘voluntary’ qualifier, as in no way could that still be claimed to be the case). This would leave Greek banks in a tricky situation. Under this scenario the rating agencies would likely leave Greece in a ‘default’ rating longer than expected, meaning that Greek banks will be locked out of borrowing from the ECB for some time (funds which they need to survive). The main way to keep Greek banks alive would be to transfer their funding to the Greek Central Banks Emergency Liquidity Assistance (ELA) as we discussed here.

This is far from ideal, since the ELA is opaque and secretive, but ultimately it may be necessary and unavoidable. Triggering CACs at this stage may be one of the few ways to actually deliver the debt relief which Greece needs. It presents many challenges and unknowns but it still seems better than pursuing a path which seems to be fundamentally flawed.

What will the next Conservative manifesto say on Europe?

Over on Conservativehome we have an article highlighting the importance of and looking at potential senarios for the next Conservative election manifesto:

The discussions at the EU summit will inevitably focus on Greece and the eurozone and so mercifully the UK will again largely be a spectator. However, EU leaders are also seeking to further advance the “fiscal compact”, which Cameron refused to sign up to back in December, again highlighting how the end point for the UK is inevitably different to that of the eurozone. It is now settled that the UK will never join the Euro, and neither can it subscribe to further integration - yet the eurozone is speeding towards fiscal union and all EU states bar the UK and Denmark are legally obliged to join. It is therefore clear that, at some point new membership terms will need to be defined, but how? Crucial to this will be what becomes policy in the Conservative Party’s next manifesto.

David Cameron on 4 November 2009

We have a precedent to follow as we have been here before, (in November 2009) - the last time the Conservatives set out detailed proposals on the UK’s relationship with the EU. The Czech President had just bowed to the inevitable and signed the Lisbon Treaty, creating a strategic problem for the party leadership that it could no longer ignore. On the one hand Conservative MPs, (and more importantly candidates) were viscerally hostile to the Treaty, generally believed the EU had gone too far and wanted powers back. On the other the Conservative leadership did not to wish promise anything it knew would be difficult to deliver and (rightly or wrongly) to say anything that could lead to a hostile reaction from Sarkozy and Merkel. What came out of the frantic internal discussions was set out in a speech by David Cameron’s on 4 November 2009.

The speech committed the Conservatives to an attempt to undo some effects of the Lisbon Treaty but not to full scale renegotiation and definitely not a referendum, apart from on future transfers of power to Brussels. But David Cameron also stated “of course we can return to this subject in a manifesto for the parliament after the next one…” and, in the event he failed to achieve his ends:

“we would not rule out a referendum on a wider package of guarantees to protect our democratic decision-making, while remaining, of course, a member of the European Union.”

So it is Conservative policy (Coalition excuses aside) to consider a referendum if it proves impossible to achieve anything this Parliament – which is looking increasingly likely. And the million dollar question: a referendum on what, exactly?

7 manifesto options

Well, here are the options that could go in a manifesto:

In/out, binary referendum: This would commit the Conservatives to a public vote on EU membership, with the options being the status quo versus full withdrawal from the EU.

Pros: It would post a clear, binary question in a referendum and satisfy a fraction of the parliamentary party.

Cons: Both answers would be wrong. A "stay in" would kill off efforts to radically reform the EU (which an overwhelming majority of the British electorate wants), while an "out" vote would trigger more questions than it answers (e.g. alternatives to membership – EEA, Swiss-style bilateral deals, Customs Union, WTO rules). The referendum campaign would also fundamentally split the Conservatives while uniting everyone else (Lib Dems, Labour, Business and Media).

No referendum – a manifesto commitment to renegotiate: A commitment to seek to renegotiate its membership terms and so gain a popular mandate via the general election.

Pros: It gives an incoming government flexibility to negotiate when the time is right.

Cons: It does not answer the desire for a referendum or give an explicit and provide the forceful show of opinion that might be needed to aid negotiations.

A mandating referendum: This seems to be what David Cameron was hinting at in 2009. A referendum would grant the government a mandate to renegotiate the treaties with the other EU states.

Pros: It could give a clear expression of the British people’s desire to repatriate powers.

Cons: It would immediately bog an incoming government down in a referendum campaign many people would not understand. What happens if nothing is achieved in the negotiations? What happens if the referendum fails to attract a good turnout or people vote no? It would be a bit like holding a referendum on who we want to win the Euro 2012.

A confirmatory referendum: An alternative to the above is to promise to renegotiate the UK’s EU membership and put the outcome of the negotiations to a referendum.

Pros: It is clear what the electorate are giving their approval to.

Cons: If nothing much is achieved people in favour of a wider negotiation may not vote, feel let down or potentially vote No. What happens if they vote no?

A mandatory and confirmatory referendum: This option would allow for two referenda - one before renegotiation and one after.

Pros: It is the purest option democratically and it’s clear what the vote would be on.

Cons: It could involve voter fatigue and shares some of the pitfalls of 2 and 3 above.

A reserved referendum: In this case the manifesto would commit the Government to renegotiation, but with the ‘nuclear option’ of a far wider referendum if the negotiations fail to achieve a significant repatriation of power.

Pros: This would give the incoming Government some bargaining power, would show it meant business and give it some flexibility.

Cons: It would be up to the government to decide if its negotiating mandate had been met so potentially avoiding a more in-depth examination of the UK’s membership of the EU.

A multi-stage, multi-option referendum: A final option, which is gaining traction, is to combine some of the above scenarios. This could involve French-style rounds of referenda, i.e. a first round would involve in, out or renegotiate, with a second round involving a vote on the two runner-ups.

Pros: It would fairly capture the options on the table and potentially give a UK government a very strong mandate.

Cons: Again, some of the same problems re-emerge, for example, when will the electorate vote, ahead of the re-negotiation or afterwards? The whole process could also become prohibitively complex.

There’s then the question of what would actually be entailed in a re-negotiation package with respect to what powers a government would actually wish to ask back. Working with an All Party Parliamentary Group on EU reform, Open Europe is currently setting out a number of areas where powers, in various forms, could flow back to the UK, putting its relationship with Europe on a sustainable footing (see here, here, here and here ).

The ground is moving under our feet - the status quo is no longer an option.

Which one will they chose and why?

We still have a long way to go, and more so than in any other area, the Conservatives may be overtaken by events, as it’s still anyone’s guess exactly where the eurozone – and therefore the EU – is heading. But it’s absolutely clear that Conservatives, of all ranks, need to start to seriously think this through. Which way will the Conservative leadership jump?

The second Greek bailout: bad for Greece, bad for eurozone taxpayers

Ahead of today’s EU summit, Open Europe has published a new briefing arguing that the second Greek bailout is bad for Greece and bad for eurozone taxpayers. The briefing notes that of the total amount (€282.2bn) that is entailed in the various measures now on the table to save Greece – through the bailouts and the ECB – only €159.5bn, or 57% will actually go to Greece itself. The rest will go to banks and other bondholders. Furthermore, immediately following the restructuring, Greece’s debt to GDP will still be 161%, a reduction of only 2% compared to where it is now. On top of this Greece has to undertake extensive budget cuts amounting to 20% of GDP in total – a level which no other country has even attempted in recent history.

By 2015, once the first and second Greek bailouts have been completed, as much as 85% will be owned by taxpayer-backed institutions (EU/IMF/ECB).This means that in the event of a likely default, a huge chunk of the losses will fall on European taxpayers, potentially leading to significant political fallout in countries such as Finland, the Netherlands and Germany. The briefing concludes that, given the sizeable debt relief needed in Greece, a fuller coercive restructuring would have been a simpler and more effective option from the start and should still be pursued.

To read the full briefing click here.

Hollande takes on London

“I am not dangerous” said a grinning Francois Hollande as he arrived in London yesterday.

The Socialist frontrunner to the presidency is on a damage-control trip following a series of statements on markets and wealth creation. The self-described “Mr Normal” has sought to win over the French electorate by presenting himself as the humble antidote to flashy Nicolas Sarkozy.

Trouble is, Sarkozy is playing the same game. Two weeks ago the incumbent President proclaimed himself the “candidate of the people” and vowed to defend French interests against markets by introducing a Financial Transaction Tax.Hollande, perhaps sensing that Sarkozy is treading on his home turf, has upped his rhetoric.

On Monday night, he denounced the “indecent wealth” of French CEOs, and proposed the introduction of an eye-watering 75% tax rate on annual salaries above €1million. The announcement came in the middle of an unrelated debate on unemployment, prompting accusations of improvisation. Sarkozy claimed that the statement smacked of “amateurism”, while Budget Minister Valerie Pecresse denounced Hollande’s “fiscal inflation”, pointing out that “he invents a new tax every week, without proposing any budget savings”. Hollande has a record of market and wealth-bashing. The Correze deputy stated, twice, that he “didn’t like rich people” in 2007, and announced at his official campaign rally two months ago that his “real enemy was finance”.

On Wednesday, he sought to make amends and soothe market and City of London fears. At a meeting with Ed Miliband he pointed out that “the Left was in power for 15 years [under Mitterrand] during which we liberalised the economy and opened markets to finance and privatisation. There is nothing to fear”.

Is that true?

Well, tellingly, Hollande did not meet one City representative during his time in London.

The 75% tax rate is just the latest in a string a proposals designed to hit the richest hardest. Le Monde estimates that under Hollande’s programme, wealthy citizens would pay almost €12bn in tax. Alongside the 75% rate, which will hit between 15,000 and 20,000 households, Hollande calls for a €10,000 limit on tax relief, a hike in inheritance tax, and a 45% tax rate on incomes above €150,000. The 75% rate outstrips current EU tax levels, the highest of which is 56.5% in Sweden. Frightening French CEOs is unlikely to encourage investment, and fuels fears of an exodus of wealthy French nationals. As Nicolas Sarkozy warned this morning on French radio, “the rich will have no reason left to stay”.

Aside from the domestic political considerations, the move also raises serious questions about the viability of tax harmonisation within the eurozone, something the current French and German governments are pushing for in an effort to improve competitiveness through economic policy convergence. Although the initial proposals focus on corporation rather than personal tax, it is difficult to see how such disparate rates of top personal tax rates would not affect countries' competitiveness within the eurozone.

Hollande’s shift to the Left puts him at odds with other European leaders. Cameron and Merkel have snubbed him, while Miliband’s endorsement was lukewarm. Although Hollande stated that “we need Great Britain to take part in Europe and the adventure of construction”, and argued that “European progressives need to secure the success of the next generation”, Miliband stressed that he would not seek to increase tax rates on the highest earners, or introduce a financial transaction tax. Meanwhile, German Social Democrats have distanced themselves from the 75% tax rate. More than 500 UK business leaders called on George Osborne to cut the "damaging" top tax rate today.

European heads of government will hardly be reassured by the Socialist Party’s recent prevarication over the ratification of the EU’s permanent bailout fund, the European Stability Mechanism. The party’s refusal to endorse the fund (20 deputies voted against, many others abstained) is seen in Europe as illustrative of the Socialists’ unpredictable policy-making. Hollande’s oft-repeated pledge to renegotiate the fiscal treaty does not inspire much confidence in Brussels either. As a high-ranking Brussels official told Le Monde two days ago “nobody really knows what Hollande stands for”.

Either way, Hollande's off the cuff announcement marks another twist and turn in what is becoming a fascinating contest with significant repercussions not only for France, but Europe as a whole.

Spain's deficit: "Brussels, We Have A Problem"

That was the headline of an editorial in Tuesday's edition of Spanish business daily Cinco Días. The problem - slightly overlooked due to news coming out of Athens, Berlin and Dublin - is that Spain's public deficit at the end of 2011 was 8.51% of GDP. This is 2.5% higher than the target agreed with the European Commission.

In effect, this means that in order to meet the agreed deficit target (4.4% of GDP) by the end of the year, Spain needs to find total savings of €44 billion. The new centre-right government slashed some €15 billion of spending last December, meaning that an additional €29 billion now needs to be found somewhere, through public spending cuts and/or tax hikes. That won't be easy.

As in other parts of Southern Europe, the question is how much austerity the population is willing to take. With austerity measures starting to bite, widespread protests are continuing across Spain in the wake of last year's indignados movement. Thousands of students have been taking to the streets in all the main Spanish cities over recent weeks to protest against education cuts, with the demonstrations sometimes turning violent. Civil servants in the debt-laden Castilla-La Mancha region yesterday went on strike over the local government's plans to cut salaries by 3% and extend the working week by two-and-a-half hours.

In a sign of how much power unelected officials now have in the eurozone, the Spanish government is hostage to decisions made by the European Commission on whether to soften Spain's targets, and give the country a bit of breathing space. Economic and Monetary Affairs Commissioner Olli Rehn and his Spanish colleague Joaquín Almunia, in charge of competition, have said that a decision on whether to revise the targets can't be taken until Spain submits its draft budget and fiscal consolidation plans for 2012, which is unlikely to happen before the Andalucía and Asturias regional elections on March 25.

The Commission has two options. It can play hardball and tell the Spanish government that deficit reduction targets are not negotiable, risking more rage from the masses. Or it can loosen the targets, risking requests from other eurozone countries for the same treatment and hostile market reactions.

For the moment, Rajoy insists that "we will lower the deficit as much as we can." However, Spanish government sources quoted by El País have suggested that the budgetary plans to be submitted to the Commission are already based on a deficit for 2012 higher than the previously agreed 4.4% of GDP. If you ask us, there's no way that Spain can reach the original target.

As the Spaniards say: un hecho cumplido.

What is cheap ECB liquidity actually solving?

The ECB held its second three year long term refinancing operation (LTRO) this morning. Overall 800 banks requested €529bn in funding. The market and wider reaction has been mixed – the amount was well within expectations although the number of banks was much higher (up from 523 last time). The larger number of banks is widely being seen as positive since it suggest smaller banks took part this time - and they are more likely to lend directly to businesses - while on average banks asked for less liquidity.

The more important figure though, is how much of this is new liquidity. Of the previous €489bn LTRO only around €200bn was new lending, since banks rolled over their previous loans from shorter ECB lending operations. In this instance (since many loans have been rolled over) the new injection of liquidity is likely to be much higher. We expect that the new liquidity totalled between €300bn and €400bn.

Short term loans issued by the ECB earlier this week totalled €134bn, while €150bn of short/medium term lending is also due to expire this week - both can be seen to give an indication of the amount of lending which will be rolled over. Much of the new lending will have come from the loosened collateral requirements (€200bn or so) as well as the decreased ‘stigma’ associated with banks which borrow from the LTRO.

We’re yet to see a full list of who borrowed what (and probably won’t for some time) but there are some details (we’ll update as more come through):

Intesa Sanpaolo (IT) - €24bn
Lloyds (UK) - €11.4bn
Allied Irish (IR) - Unknown
Banco Popolare (ES) - €3.5bn
KBC (BE) - €5bn
Unicredit (IT) - <€12.5bn (not that this helps pin down the figure much)
BBVA - Similar to first LTRO (around €11bn)

Italian banks are reported to have tapped the LTRO for around €100bn in total, while banks such as ING (NL) and ABN Amro (NL) have stated that they did not tap the operation at all. Clearly 'stigma' is not an issue in Italy but alive and well in the Netherlands, presenting an interesting microcosm of the problems facing these countries.

One point we’d note is that the first LTRO was not tapped heavily by banks from the bailed out countries. There is no evidence that banks from Portugal or Greece took any ‘new’ lending from the first LTRO while Irish banks only took an additional €5bn (% of their current borrowing from the ECB and Irish central bank). This could be for one of two reasons: the banks are more or less blocked from taking on massive amounts of extra liquidity since they should be leveraging and meeting stringent capital requirements under the bailout programmes. Or, the banks in these countries had run short of collateral to post with the ECB in exchange for loans. It will be interesting to see if this problem held true in the second LTRO, given the loosened collateral requirements – early indications with the Portuguese borrowing costs jumping suggest it will.

This shows how the LTRO will not solve any of the eurozone problems. In fact it may not even help sentiment or lending in the worst hit countries. The Italian and Spanish banks look likely to increase their purchases of their domestic government debt, further intertwining eurozone states with their banking sectors. The question now is, how many more LTROs will there be?

Given the lack of a credible solution to the problems in Greece and Portugal we fear more may be on the horizon.

Ps. For you German speakers, it's well worth reading this piece from Die Welt's Holger Zschäpitz on why the LTRO is turning the ECB into a lender of first instance rather than one of last resort

UK banks and the ECB – part 2

We'll get back with a take on today's €529 bn of loans by the ECB to 800 banks, via the so-called LTRO, soon.

But first, something different. Remember, we've long been critical of the ECB's backhanded QE, which has created a range of zombie banks in weaker euro economies (reliant on ECB funding to survive). See here, here, here, here, here and countless other examples of when we're looked at this issue. So it's odd that we're now literally taking the 'oh it's not so bad' view in a discussion about whether the ECB is 'bailing out' banks. Well, at least UK banks.

This after the Left Foot Forward blog claimed, and then re-stated, that "the EU" is bailing out UK banks, after Loyd's (now confirmed) and possibly RBS (unconfirmed) accessed funding from the LTRO 2 (see here for background on this issue). We still do not see how this constitutes a 'bailout'. Again, these UK banks are merely saving cash through avoiding an extra exchange rate charge and borrowing at cheaper rates, rather than relying on more expensive (but still available) sources of funding. While the money will only be used to fund their European operations. This just isn't a 'bailout' in any sense of the word.

The Left Foot Forward provides a politically interesting interpretation, but, we believe, also misunderstands some crucial points:

- If it amounts to a bailout, it's a contender for the smallest one in history. €15bn (if that's the final amount) is equivalent to a tiny amount of the UK's banking sector, the assets of which amount to numerous times the size of UK GDP (around £1.5 trn). €15bn is hardly the difference between life or death for UK banks and surely not enough to signal the need for a complete change in approach.

- Lower collateral requirements are not directly tied in with the LTRO, as the Left Foot Forward blog suggests. It's a separate policy (just announced at the same time), but was not in place for the first LTRO, so to claim this is the whole motivation for the LTRO is a misnomer. It may allow UK banks to use assets which may not be accepted elsewhere, but is that enough for it to be considered a bailout? The only instance where this association would work is if UK banks had already used all other collateral worthy assets to gain liquidity - this simply is not the case. In fact the main choice for UK banks is whether the reduced cost is enough to offset the negative 'stigma' of using the LTRO.

On the wider point about QE style interventions, the blog is also confused. Does it want a UK LTRO or lower collateral requirements or both and would this be instead of QE or on top of it?

- Here we would say that the BoE already did its (more direct) version of the LTRO with the Special Liquidity Scheme and its ‘Quantitative Easing’ (QE) programme. It's still overshooting its inflation target by some way, throwing more liquidity into the system seems impractical and risky.

- Furthermore, money in the system has increased steadily in both Europe and the UK but lending has not, which is a problem. But increasing liquidity will not solve this. As results from January show, lending in the eurozone still fell despite the December LTRO. It fell by less than the previous month but still not a resounding victory for the theory that the LTRO is a clear cure to all the lending problems in the wider economy.

We could go round and round discussing the intricacies of the problems facing banks in Europe but ultimately there are endemic structural problems which cannot be solved by simply throwing more liquidity at the problem - in either the UK or the Eurozone.

Markets vs. Democracy - Round 278

The Irish government has just announced that it will hold a referendum on the euro fiscal compact. The Irish Taoiseach Enda Kenny said he had taken advice from the country’s Attorney General, and made the decision to call a public vote. He also said he would sign the fiscal compact treaty at the meeting of EU leaders on Friday, and the details and arrangements for the referendum will be sorted and announced in the coming weeks, with a vote to be held before the summer.

The Irish government had previously said that the chances (or risks if you ask the markets and EU elite) of a referendum were always 50-50, so this was far from a foregone conclusion. And, as Zerohedge put it, markets have reacted badly to the news of democracy, with the euro weakening significantly. But what is the precise significance of this announcement?

• The vote will essentially determine whether Ireland has access to future bailout funds or not. For a country to access the ESM, the eurozone's permanent bailout fund, it must have ratified and fully adhered to the treaty, according to the terms attached to the deal. The Irish government has already given indications that it will tie its approach closely in with the prospect of further bailout funding, with Deputy PM Eamon Gilmore pointing out the link between emergency funds and the fiscal pact approval. These scare tactics are likely to grow throughout the referendum campaign, with the flip-side of rejecting the treaty being seen as tantamount to a vote for eurozone exit. In other words, the Irish will vote with a gun to their head.

• It provides yet another illustration of the clash between different parliamentary/constitutional democracies (in this case the German vs the Irish constitutions) that time and again have served as an ‘obstacle’ to perceived crisis solutions.

• Irrespective of the outcome, the vote will not derail the euro fiscal compact as it only requires 12 member state ratifications before entering into force, though it could well limit the impact of the pact.

• Those that thought that the complicated political situation in Europe could be reduced to a simple 26 vs 1 narrative, following Cameron’s ‘veto’ to an EU27 Treaty back in December, have received another reminder as to why that isn't the case.

In sum, it would have been difficult to avoid this referendum and we're glad the Irish government did not engage in the legal gymnastics that have been going on elsewhere in the eurozone (*cough* Frankfurt). If further fiscal integration is ever going to succeed (leaving aside whether it's desirable), it will have to happen with a clear and strong mandate from the people. This is also a practical point which market players should ponder. Changes built on a clear mandate from the people (particularly when wrapped in pretty heavy austerity) have a far greater chance of standing the test of time.

But the likely approach of tying a Yes vote to access to more bailout funds and greater security and a No vote to a eurozone exit is already worryingly over-simplistic. Finally injecting some democracy into the eurozone crisis should not be watered down by pigeonholing it into tightly defined categories.

That said, as we've noted, the fiscal pact has already been watered down itself and signing up to it would not be the end of the world for Ireland - but only if that's what the people decide after a full discussion of the issue.

A 'selective' Greek default and some emergency liquidity

A few interesting developments overnight and this morning in the eurozone. Specifically, S&P’s decision to put Greece into ‘selective default’ and the ECB’s reaction.

‘Selective default’ is essentially a partial default rating (in this case validly applied due to the current restructuring which Greece is undergoing and the fact that some bonds held by the ECB have been exempted). Under the ECB’s rules, when a country (and therefore its debt/bonds) is classified in any form of default its bonds cannot be used as collateral for the ECB’s lending operations. The ECB released a statement confirming as much this morning.

The kicker here is that Greek banks are completely reliant on ECB lending for their liquidity needs – they could not survive without it. Unfortunately, a huge majority of the assets which Greek banks use as collateral with the ECB are tied up with the Greek state (Greek government bonds or bonds backed by a Greek state guarantee). The plan to deal with this issue is for the majority of lending to Greek banks which currently takes place under the ECB to move to the Greek Central Bank’s Emergency Liquidity Assistance (ELA) programme. The ELA has lower collateral requirements and therefore will presumably continue to accept the 'defaulted' Greek bonds as collateral.

This is an unprecedented move and should stop Greek banks collapsing. That said the opacity and secrecy of the ELA means it will be even harder to figure out what is going on within the massive sovereign banking loop in Greece.

As a refresher, we present an article we wrote last September on the ELA for the World Commerce Review. It provides a comprehensive run down of how the ELA works and what implications its use could have for eurozone.

To read the article see here.

Burying parliamentary scrutiny?

The picture on the left is not some random shot to illustrate excessive bureaucracy, it's literally the document setting out the details of the second Greek bailout package, which German MPs just voted on.

Not exactly bed time reading.

As expected, the Bundestag voted to approve the package, by 496 votes in favour compared with 90 against and 5 abstentions. We'll provide a breakdown of the votes alongside some further analysis in due course.

While approving the deal, many MPs were unhappy (Die Linke's Kathrin Vogler specifically raised the issue) about having had only a few days to read through, digest and then analyse a document which came to no less than 726 pages, including hugely complicated issues such as explaining different options for bond swaps, how the swap would work and the impact on Greece's debt sustainability (and therefore the risk to German taxpayers).

The agreement was only reached in the early hours of Tuesday morning, and the Bundestag's budgetary committee only looked into the details on Friday, meaning ordinary MPs only got hold of the documentation over the weekend.

This begs the question, how in the world are MPs supposed to fulfil their role scrutinising the decisions reached by governments. The bailout took eight months to organise, now MPs were expected to approve it with a weekend's notice (at least with respect to the details). Given the number of unanswered questions and heroic assumptions on which the agreement shakily rests, this is a pretty scary situation.

In fact, if this is the future of parliamentary/constitutional democracy in the eurozone, you'd forgive national parliaments for believing that is a price not worth paying for keeping the eurozone intact.

The grass is always greener: UK banks, the ECB and the LTRO

We'd figured this one would cause confusion once a paper reported on it.

This morning’s FT noted that RBS and Lloyd’s are considering borrowing from the ECB’s long term refinancing operation (LTRO). Remember, the LTRO is the ECB's 'bazooka' response to the eurozone crisis, giving banks across the eurozone access to very cheap long term credit (aimed at avoiding a deep freeze in the banking system, e.g. banks stop lending to each other, which in turn could cause sovereign debt market drying up = Bye Italy).

That banks in Britain - a country that has refused to participate in euro bailouts - now ask for cash from the ECB looks pretty bad on the surface. At least for those not familiar with the ins and outs of central bank financing. And sure enough, the Left Foot Forward blog suggests that the ECB is now “bailing out” UK banks.

Hmmm, not quite.

First, this is actually not new. RBS (€5bn) and possibly HSBC accessed the first LTRO back in December when there was little furore over the process and there has been little fallout since.

But more importantly these banks are providing collateral and borrowing under standard repurchase agreement (repo) terms. Their reason for doing this is not because they cannot borrow this money from the Bank of England or because they could not survive without it - which the Left Foot Forward blog and some others seem to believe - but simply because it is a cheap source of euros. These banks have extensive operations and exposure to the eurozone and therefore it makes practical and economic sense for them to tap the ECB’s lending operations if possible.

All the ECB is doing is taking on the exchange rate risk for these banks (similar to the US dollar swap line – see here for our analysis of this). These banks could obtain this money in pounds and then change it to euros, but then they would have to incur the cost of the transaction and hedge against the risk that the exchange rate could shift significantly over the period of the loan. The UK government or the Bank of England (BoE) could’t really fulfil this role, unless it set up a direct swap line with the ECB (which is redundant since these UK banks can borrow from the ECB directly through their subsidiaries – as they are doing).

In other words, this does not represent any extra risk for the UK or eurozone governments (since collateral is posted) or any failing on the BoE’s part, but simply the subsidiaries of the banks making a practical decision about how to help fund their exposure to the eurozone. Now, there certainly are problems with the LTRO and the risks it poses for Europe's taxpayers in the eurozone long-term. If anything, it would be more concerning if taxpayer-backed banks did not seek to obtain funding at a lower comparative cost and cover their exposure to the eurozone crisis, given that the move is risk-neutral.

We would note the irony in that some in the UK are calling for ECB style unlimited three year lending to banks, while many in the eurozone are calling for UK style ‘Quantitative Easing’ – we guess the central banking grass is always greener…

STOP! Bild pumps up pressure on German MPs ahead of vote on second Greek bailout

With the debate ahead of the Bundestag vote on approving the second bailout package for Greece due to get underway in 30 min or so (as ever we will be covering the event live on our twitter page @openeurope), Germany's biggest selling tabloid, Bild Zeitung, has upped the ante calling on MPs to vote against the package.

Under the brilliantly simple headline "STOP" (see picture above), Bild writes:

"Once again, it's payday in the Bundestag. €130 billion are meant to save Greece from ruin. Bild appeals to all MPs, do not proceed with this folly!"

The entire page 2 of the paper then features a range of interviews with economists, such as the German Guru Hans-Werner Sinn, explaining why Greece is a "bottomless pit" and why it "can't stand on its own two feet even with this bailout". The Chief Economist of Deutsche Bank, Thomas Mayer, says that a euro exit should not be "taboo" anymore.

It's pretty strong stuff.

Remember, as we've pointed out before, Bild is a huge paper - by far the best selling paper in Germany (far bigger than the Sun for example) and according to some measures, the paper with the widest circulation outside Japan.

In other words, it has a lot of political clout and serves as an important barometer of public opinion, which you mess with it at your peril. A poll in Bild Am Sonntag also showed that 62% of Germans are against the second Greek bailout (up from 53% in September).

But how many MPs, not including those who were already going to vote against, will be swayed? Given that the opposition SDP and Green party will back the government there is virtually no chance of the bailout being rejected, so the issue is how many coalition MPs will rebel, and whether it will be more than the 15 who voted against the expansion of the EFSF back in September.

If Merkel is unable to rely solely on her MPs to pass through the bailout, it will have serious repercussions for the continued viability of the government...