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Europe

Size of second Greek bailout may need to be increased;
Handelsblatt: German government has begun preparing for the return of the Drachma
The front page of Handelsblatt claims that, despite its public position, the German government has been planning for a Greek exit from the eurozone, even engaging in discussions with business leaders over its potential impact on the German economy.

Meanwhile, the negotiations on the voluntary Greek restructuring started up in Athens again last night, with reports of progress being made. Greek bondholders may accept a lower starting interest rate with the possibility of an increase based on Greek economic growth, although even this will not be enough to allow Greece to reach the target of 120% debt-to-GDP ratio in 2020. Therefore a larger second Greek bailout may be needed. EU Economics Commissioner Olli Rehn said yesterday, “There is likely to be some increased need of official sector funding…[But] not anything dramatic.” FTD reports that the additional funds could total €15bn.

Dow Jones reports that eurozone governments are also discussing the possibility of asking the ECB to take losses on its holdings of Greek debt to aid the situation. Reuters reports that the ECB has ruled out taking losses voluntarily but is split over how to deal with forced losses. On his Telegraph blog, Mats Persson argues that an alternative to accepting outright losses, is for “ECB-held bonds to be bought by the euro bailout fund, the EFSF (at cost price), and then submitted by the EFSF to the voluntary restructuring. The EFSF could absorb the losses, though it too may have to deal with some very uncomfortable questions from taxpayers who will have lost money. But arguably it’s better than sacrificing the credibility of the ECB.”

Rehn also called for an increase in the total size of the eurozone bailout funds, possibly by allowing the temporary fund, the EFSF, and the permanent bailout fund, the ESM, to run in parallel. Finnish Prime Minister Jyrki Katainen said in Davos yesterday, “I don’t believe fresh money on the table is the only possible solution”. Italian ten year bond yields briefly dropped below 6% yesterday for the first time since early December, most likely due to the impact of the massive increase in long term liquidity from the ECB. Italy also managed to sell €11bn in short term debt this morning.

Dow Jones reports that the US Republican party is preparing to shoot down any request from the IMF for an increase in funds from the US. The FT reports that across Europe left leaning parties are coming out to criticise the austerity focus of the new European fiscal pact, led by French Presidential candidate Francois Hollande.
FT WSJ CityAM Reuters WSJ 2 Irish Independent Irish Times IHT Guardian Dow Jones FT 2 WSJ 3 FT 3 FT 4 Irish Times Telegraph Dow Jones 2 WSJ 4EurActiv European Voice Telegraph Irish Independent Irish Independent BBC El País Handelsblatt Handelsblatt 2 Handelsblatt 3 Business Week Spiegel ReutersHandelsblatt 4 Welt FAZ Spiegel FTD FTD 2 Tagesschau Der Standard Handelsblatt 5 Telegraph blogs: Persson

In a speech at Davos yesterday, David Cameron called on eurozone leaders, and Germany in particular, to safeguard the single currency by recapitalising banks, increasing the bailout fund and resolving the issue of the write-down of Greek debt. He also strongly criticised the proposed Financial Transaction Tax – describing it as “madness”.
CityAM Independent IHT Le Figaro Cameron's Speech FT WSJ Times Mail Guardian Telegraph Express Conservative Home Sun Les Echos Nouvel ObservateurNouvel Observateur 2 Welt

The Swedish minority government and main opposition party Social Democrats have agreed that Sweden should join the euro fiscal pact subject to several conditions, including that none of the budget rules apply to Sweden and that the pact makes clear that the labour market model in individual EU member states is respected.
SVD Europaportalen

Hahn: No spare money in EU’s structural funds to support struggling eurozone states
In an interview with Süddeutsche, EU Commissioner for regional policy, Johannes Hahn, has described Angela Merkel and Nicolas Sarkozy’s suggestion that spare money from the EU’s structural funds could be used to promote growth policies in struggling eurozone states as “unrealistic”, claiming that the total value of funds unused in 2010 and 2011 only amounted to €30m.

However, Expansión reports that Spanish Europe Minister, Íñigo Méndez de Vigo, has claimed that there were over €100bn of EU funds available to subsidise programmes aimed at boosting employment and growth across Europe, although he said it was up to the Commission to provide the exact figure.

Meanwhile, EurActiv reports that the Danish EU presidency has been criticised by MEPs for paying too little attention to regional policy in the EU’s upcoming long term budget for 2014-2020. The article cites Open Europe’s recent briefing on EU regional policy which found that the UK contributed roughly £29.5 billion to the EU’s structural and cohesion funds and received only £8.7bn in return. The report was also covered by WalesOnline, which noted that although West Wales was only one of two UK regions that was a net beneficiary from the funds, Wales overall paid £1.65 for every £1 it received back from the funds.
Open Europe Research Süddeutsche Expansión EurActiv WalesOnline

EU Internal Market Commissioner Michel Barnier has said he will delay plans to introduce rules forcing creditors to share some of the pain if a large financial institution fails until after the eurozone is “past the worst” of the fiscal crisis.
Bloomberg

Socialist presidential favourite Francois Hollande called for a crackdown on the financial sector, pledging a 15% tax increase on banks, and threatened to upset relations with Berlin by pledging to renegotiate the fiscal compact in favour of a greater emphasis on growth. A leader in FAZargues that “If the polls are confirmed the road between Berlin and Paris looks set to be bumpy… Hollande has presented a programme that is heavily influenced by redistribution and by the firm belief in the supremacy of the state.”
FT WSJ Times Times 2 FTD FAZ

Carlos Moedas, Portuguese Secretary of State, writes in today’s WSJ that Portugal is undergoing a rigorous program of reforms to boost competiveness and growth. He argues, “Last week, the government and social partners reached a comprehensive agreement for labour-market reform, an area previously marked by considerable rigidities.”
WSJ: Moedas

EU Internal Market Commissioner Michel Barnier will raise objections with US Treasury Secretary regarding the potential effects of the incoming ‘Volcker’ Rule, which could hamper the ability of US firms to trade European sovereign bonds, WSJ reports.
WSJ

Barclays has criticised the EU’s new Capital Requirements draft legislation, which would place a single capital charge on trade finance loans, arguing that it will considerably harm the ability of SMEs to export their goods and services.
Telegraph

Romania and Bulgaria’s accession to the Schengen area will be delayed as the EU is set to publish a negative report on the issue in February, following Dutch opposition to their membership.
Liberation

European Voice reports that 13 member states have failed to implement recent EU legislation concerning the welfare of caged hens.
European Voice

New on the Open Europe blog

What keeps central bankers in Frankfurt awake at night – and why should Britain care?
Open Europe Blog