German idea of an escrow account likely to prevail

 

• A news report says that German idea of an escrow account for Greece is supported by France;
• the idea is now actively considered and discussed in the eurogroup;
• the hope that this would keep permanent pressure on the Greek government to implement reforms, and to fight corruption;
• a final decision is expected early November;
• Antonis Samaras issued a statement that the negotiations on the budget are completed, but his junior coalition partner immediately contradicted the statement and threw the process into confusion;
• three Pasok MPs also said they would vote No, but the measures are likely to pass the parliamentary hurdle;
• George Soros is setting up shelters and soup kitchens in Greece;
• the Spanish government said Spain was on course to meet the 2012 deficit target – with a better performance of the central government neutralising a worse performance of the regions;
• but Spain still generates above average inflation, partly because of a recent VAT increase;
• a power company in Valencia yesterday cut off electricity in protest over unpaid bills;
• Valencian pharmacists will go on an indefinite strike on Monday;
• Spanish doctors protest against health care cuts and warn of a deterioration of health care;
• Fiat is cutting down production and says it will not start to invest until there are signs that the recession is ending;
• Guido Gentili says Italy is on the brink, and it is hard to a see a solution without another Monti administration;
• Francois Baroin describes the political death of George Papandreou in his memoires;
• Finnish eurosceptics are losing votes in the municipal elections;
• Ralph Atkins, meanwhile, says the OMT would be ideally suited as a Trojan horse for a programme of quantitative easing, but unfortunately, this is not going to happen anytime soon.

Due to a rather slow news day, swamped by bigger events elsewhere, this briefing is a little shorter than usual.

The eurozone finance ministers are considering the German idea of an escrow account for Greece in earnest, Fabrizio Goria of Linkiesta writes, citing German and French diplomatic sources. An escrow account would be managed outside Greece, with most of the funds earmarked for the repayment of debt, with pre-agreed caps used for domestic spending. The two countries hope that this would help the troika influence the implementation of reforms and fight against corruption. After two bailouts and one debt restructuring, EU Commission sources confirm that there will be a programme extension of two years for Greece, but with a stronger vigilance on budget targets. The final decision is expected by early November, according diplomatic sources.

Greek coalition partner wants labour reforms decided by Eurozone leaders not troika

The raft in the coalition government was taken to the next level when Antonis Samaras issued a statement declaring that the “negotiations on the measures and the budget have been completed.” The Democratic Left issued a rejection within minutes, saying it does not agree with the outcome of negotiations with the troika and repeating its objection to labor reforms, Kathimerini reports. Earlier, party spokesman Dimitris Hatzisocratis told Skai Radio that Democratic Left was trying to “force the situation” so that the decision on labor reforms is taken by eurozone leaders rather than the troika. Venizelos, for his part, described Samaras’s statement as “unfortunate to say the least” but stressed the need for his party to back the new austerity package though three of his MPs said they would vote No.  The developments came before the scheduled submission in Parliament on Wednesday of the budget for 2013. The €13.5bn austerity package and the structural reforms will not come to Parliament until next week, according to the finance minister.

A sign of solidarity

Greek media including Skai and Kathimerini reports on George Soros’ plans to set up “solidarity houses” in Greece to offer food and shelter to Greeks and immigrants. Soros said yesterday the aim of his initiative would be for “the Europeans to show solidarity to the Greeks and for the Greeks to show solidarity to migrants.” The Open Society Initiative for Europe (OSIFE), an organization he helped establish, would be sent to Athens to make an initial assessment of people’s needs.

Spain on track to meet deficit target, but still generates above-average inflation

According to El Economista, Spain’s Secretary of State for Budget and Expenses predicted that the deficit of the central government in 2012 would be under 4%, well below the target of 4.5%. This will allow the consolidated deficit of all the public administrations to meet the target of 6.3% agreed with the European Union earlier in the year.

A month ago, the improved prospects of meeting the deficit target were attributed to the VAT rise at the start of September, reports Expansion. However, this has an impact on inflation, which has 3.5% year-on-year according to provisional October figures. The year-on-year inflation rate has risen from 2.2% three months prior, especially in September when the VAT rise accounted for a 0.7% yearly inflation rise. It appears inflation may be peaking, though. Expansion quotes a professor at a prominent Madrid business school, predicting that the price rise is ‘abnormal as consumption is low’ and that the trend will have a negative impact on sales in the Christmas season.

Valencia regional government’s providers hit back over unpaid bills

The news from the Spanish regions is getting darker, literally. The electrical utility Fenosa on Tuesday cut electrical power to several of the Valencian regional government’s departments for a few hours, before restoring it, reports El Mundo. The utility appears to have been pressuring the region over bill payment as it said in a statement that it was acting “within the law on public administration purchases” and that power was being restored “once the situation was resolved”. The regional government, for its part, protested claiming to have paid all the arrears between July and October.

La Vanguardia reports that the pharmacies in the Spanish region of Valencia will be on an indefinite strike starting next Monday, to protest the fact that the regional government owes the pharmacists 5 1/2 months of bills. The region has paid 1 1/2 months out of the money requested from Spain’s Regional Liquidity Fund (FLA). At any given time only 1/3 of the pharmacies will remain open.

President of Spanish medical doctors criticizes health care cuts

The president of Spain’s Medical Colleges Organization Juan José Rodríguez Sendín criticized the cuts in health care budgets at an event attended by the health minister Ana Mato and other national and regional health officials, reports El Pais. Sendín contradicted claims by politicians and managers that budget cuts do not affect service quality. He also said his organization had been unable to monitor the impact of cuts on waiting lists for treatments because not all administrations are willing to disclose the relevant data. Sendín claimed budget cuts had been decided without taking into account the number of doctors, and that this makes “pronouncements about productivity or efficiency” meaningless.

Fiat says it will invest less due to recession

The Italian carmaker Fiat sees signs of deeper recession in Europe, as La Stampa reports. Fiat announced its third-quarter results and lowered the production targets for 2014 to 4.6 – 4.8m cars from original estimates of 6m. The recession in the eurozone and emerging Europe is stronger than forecast, Sergio Marchionne said. According to Marchionne, Fiat would not invest in new plants or products without an improving of automotive demand.

Guido Gentili says Italy is on the edge

Italy remains under strict surveillance, Guido Gentili argues on Il Sole 24 Ore. The unpredictable result of Beppe Grillo’s Movimento 5 Stelle in Sicily elections  – it’s the first party by votes, but not part of the next regional coalition government – could start a derailment of Italian politics, Gentili wrotes. The disaffection of Italians means uncertainty, and uncertainty means more pressure on Italy by international investors. Italy may not be under the surveillance of the Troika, but it is under the surveillance of markets, thanks to Silvio Berlusconi’ menaces and Grillo’ performance. According to Gentili, a second term for Mario Monti could be a safe haven for Italy. It is hard to see a solution without Monti.

Baroin memories about a crucial moment in the Greek crisis

Former French finance minister Francois Baroin revealed in his forthcoming biography, in extracts published by L’Express magazine and reproduced by Kathimerini, how in November 2011 Nicolas Sarkozy and Angela Merkel told George Papandreou that the Greek bailout would be scrapped if he were to go ahead with his plans to hold a referendum on the austerity package demanded by Greece’s lenders. Baroin describes how Papandreou gave in to their demands and announced that the referendum would be on euro membership, not the bailout terms. ”I witnessed his political death,” he writes.

Finnish eurosceptics gain local seats but lose momentum in municipal elections

This story escaped our attention, still worthwhile reporting: Last Sunday, the anti-euro True Finns Party won only 12.3%  of votes in Finnish municipal polls, showing its popularity down from last year’s national election while still strong enough to pressure the pro-Europe government. Jyrki Katainen’s conservative National Coalition party won the most seats with 21.9% of votes, Social Democrats 19.6%. The Finns Party was fourth, behind the traditionally agrarian Centre Party with 18.7%. Commentators say racist and homophobic remarks by some Finns Party members may have turned some voters away, while others conclude the government’s insistence on collateral for loans may have appeased some eurosceptic voters, according to Reuters.

Ralph Atkins on OMT and QE

Writing in the Financial Times, Ralph Atkins says the danger for the eurozone now is an economic downward spiral, for which the current policy instruments are not suited. But he notes that the so far unused OMT programme  could be used in a much broader setting. A little noticed feature of the OMT is that the bonds are held on the trading – not to maturity as was the case with the old SMP. That opens the possibility of a QE-style programme. But then comes the downer: He writes do not expect QE any time soon. The OMT will have to be triggered first for this to happen, and Spain has not yet acted. And the way the programme is designed, it is supposed to be economically neutral – with full sterlisation, the opposite of what a QE programme would do.

 10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

Spreads are creeping up, but remain in the previous range.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.674	0.656	0.790
Italy	3.566	3.672	3.664
Spain	4.216	4.204	4.296
Portugal	6.647	6.645	6.641
Greece	15.969	16.137	-1.48
Ireland	3.290	3.263	3.278
Belgium	0.980	0.963	0.954
Bund Yield	1.453	1.47	1.478
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.294	1.2947
Yen	102.750	103.11
Pound	0.806	0.8051
Swiss Franc	1.208	1.2082
ZC Inflation Swaps
	previous	last close
1 yr	1.79	1.78
2 yr	1.65	1.64
5 yr	1.78	1.77
10 yr	2.01	2
Euribor-OIS Spread
	previous	last close
1 Week	-7.029	-8.029
1 Month	-3.743	-4.743
3 Months	1.886	3.586
1 Year	46.814	46.214
Source: Reuters