As I noted recently the new IMF chief is having a bit of trouble communicating exactly what her strategy is for Europe. Last night we saw her struggling again:
A fresh round of capitalisation for European banks was firmly ruled out by EU officials and bankers when they appeared before an emergency meeting of the European Parliament’s economic committee.
The officials poured cold water on calls from Christine Lagarde, head of the International Monetary Fund for “mandatory” recapitalisation to avoid another financial crisis but acknowledged that the EU economy was continuing to weaken.
Jean-Claude Trichet, president of the European Central Bank, said there was no shortage of liquidity in the European banking system. EU economic commissioner Olli Rehn insisted that the health of EU banks had improved over the last year.
Mr Trichet declared: “There is no liquidity or collateral shortage for the European banking system.”
Both urged eurozone Governments to move faster to implement the July 21 heads of agreements which makes provision for a second bail out for the weaker states.
Although Trichet was trying to talk up the European banking situation all three men provided a pretty grim view of the economic situation in Europe. They were also very limited in their explanations of exactly how Europe is going to solve its existing issues:
ECB president Jean-Claude Trichet, Eurogroup chairman Jean-Claude Juncker and EU monetary affairs commissioner Olli Rehn testified in front of the European parliament’s economic affairs committee today on the euro area debt crisis.
At the meeting, Rehn warned that the rout in global financial markets posed a threat to the economic recovery in the European Union.
“The financial markets and the real economy move now more in synchrony, which makes me seriously concerned about continued financial turbulence spilling over to and potentially harming the recovery of the real economy.”
Trichet echoed his sentiments and warned that economic recovery in the Euro region was slowing
“Looking ahead, we continue to see the euro area economy growing at a modest pace in a context of overall relatively sound economic fundamentals for the euro area as a whole,” Trichet said.
At the same time, not least because of the recently re-emerged tensions in financial markets, uncertainty remains particularly high.
This mainly relates to ongoing fiscal and economic adjustment in a number of euro area countries and most other advanced economies, as well as the overall outlook for the global economy.”
Rehn also said investors shouldn’t expected Eurobonds any time soon since they would have to be accompanied with major fiscal and policy reforms.
From all of that it would seem that the current path is the only path, which means that the current problems with the Greek bailout need to be sorted out. At a separate press conference Mr Juncker was adamant that the current collateral dispute is under control:
There has been no agreement yet on how to address Finland’s demand for Greek collateral yet but the dispute won’t prevent Eurozone leaders from implementing decisions taken on July 21, Eurogroup head Jean-Claude Juncker said Monday.
Juncker said he did not like bilateral agreements like the one between Finland and Greece and predicted they would not work.
However, he indicated that Finland’s demand for collateral would be met in a compromise deal. “We are looking for another solution,” Juncker told European parliamentarians. “The Eurogroup is working on a proposal.”
Previously, the Finnish government had warned it would drop out of the second Greek bailout if its collateral demands were not met.
Juncker said that the dispute between governments would “not stop us from implementing the various elements of the July 21 decisions.”
In a later press briefing, he said he expected a deal to be concluded by mid-September at the latest.
I will believe it when I see it. Mr Juncker has a history of telling the markets what they want to hear. He admits this himself in the following interview:
On top of the on-going issues with Greece it looks as if Italy is trying to back pedal a little on its own Austerity plans:
The Italian government backtracked on parts of its widely criticised austerity package on Monday, scrapping a tax on high earners and scaling back cuts to local authority funding.
In a statement after seven hours of talks at Prime Minister Silvio Berlusconi’s home at Arcore outside Milan, the government said ministers had reached unanimous decisions on the package which has caused serious tension in the centre-right coalition.
As well as the tax and local authority changes, it announced a measure that would delay retirement for some workers by excluding years spent at university and military service from retirement age calculations.
The statement contained little detail on how the government would make up for revenue lost from the 45.5 billion euro ($66 billion) austerity package now making its way through parliament which is aimed at balancing the budget by 2013.
An interesting test for tomorrow’s 10 year Italian note sale. I am guessing the ECB is about to expand its balance sheet a little more.