Eurointelligence – 29Julho2011. Obrigado a Domenico Mario Nuti

Dear Readers

We will take our annual two-week summer holiday starting Monday. The Daily Morning Briefing will resume August 15.


Eurointelligence Daily Briefing 

Italy says it may default on Greek commitment

  • An Italian official is quoted as saying that Italy may have to “step out” of its commitment vis-a-vis Greece, which would leave other eurozone countries to pick up the costs of its 18% share;
  • an Italian ten-year auction produce a yield of 5.77%, following which the markets reacted with a sell-off;
  • this morning, Italian spreads were at 3.264%, the second highest level we ever recorded;
  • the tensions increased further by what appears to be a minor political scandal involving Giulio Tremonti;
  • according to a news report, the IMF is reconsidering whether it can continue to support Greece;
  • Belgium is heading towards a government deal, but uncertainty prevails;
  • the Portuguese government approves a 10% cut in primary expenditure ceilings;
  • the Greek government is having second thoughts about privatising a betting company, as had been agreed with the EU;
  • Samuel Brittan reviews “The End of the Euro” – and largely agrees;
  • Robert Perotti and Luigi Zingales, meanwhile, argued that last week’s agreement would give rise to two types of transfers, and would destroy European integration for at least a generation.


If you want to know how the EFSF could implode all of a sudden, you got a glimpse yesterday. Reuters quoted unnamed eurozone officials as saying that Italy may not be able to participate in the next Greek tranche in September, due to the rise in its own borrowing costs, which are now close to the peak last week ahead of the summit. The German-Italian spreads are now at the second highest level we have ever recorded. During a conference call of euro zone finance officials on Thursday, the Italian official said Italy might have to use the “step-out” option, which you can trigger if your own financing costs exceed those of the Greek loans. When a country steps out of the arrangement, other countries will have to make up its share, which in the case of Italy is a whopping 18%.



Sentiment about Italy was not helped by a minor scandal involving Giulio Tremonti over the use of an apartment, owned by a former adviser, who is now himself under police investigation. Tremonti said yesterday that he had resigned “from the apartment”. Corriere della Sera has more on this story.


(The danger of the construction of the EFSF consists of a domino effect: Spain’s and Italy’s guarantees are not worth anything, which leaves the German and French guarantees as the economic core of the EFSF. But with the rise in France’s effective share come doubts about the country’s own triple-A rating. The entire system is as stable as the quality of the next country’s guarantee. This is why we believe that the EFSF/ESM is unsustainable. The only way out of this domino effect will be a joint and several guarantee, in other words a eurozone bond.)


Italy’s 10-year auction proceeded smoothly but yielded an interest rate of 5.77%. After the auction, investors sold off Italian bonds, raising their yields to close to 6%. This morning, the spreads to German bunds were 3.264% – a level not consistent with Italy’s long term membership of the eurozone.



IMF is reconsidering its role in European rescues

Reuters quotes an IMF source as saying that there was growing concern among non-European members about the Fund’s exposure to Greece. “There is a feeling on the board that we are in the same boat as the Europeans but we don’t have much power to take decisions. We are linked to the errors of the Europeans.” He said the issue was not just Greece, but the eurozone as a whole.



Portuguese government approved 10% cut in expenditure ceiling

In Portugal, the council of ministers approved a 10% cut in the primary expenditure ceilings for 2012, Jornal de Negocios reports. This corresponds to a fall of 5% in effective public expenditure, because the interest burden will “substantial increase”. Finance minister Vitor Gaspar said that the ceiling means a “reconsideration of the areas of state intervention”, which will require a “drastic reduction of the number of public entities.”



Greece does not want to sell its stake in betting company

Greece may not sell its 34% stake in gaming monopoly OPAP, the key asset on the 2011 privatisation list, but it still plans to meet revenue targets set by the EU and the IMF, Reuters quotes the finance minister. Contrary to what is stipulated in the EU and IMF reports, Venizelos said Greece might not sell the stake because there could be alternative ways to raise money from the company.  Unlike most of the assets in privatisation plan, OPAP is debt-free and profitable.



Towards a Belgian government – after the holiday break

It was a big step out of the crisis for Belgium, when eight parties agreed to go back to the negotiation table without the strongest Flemish party, the seperatist N-VA. Last week, the eight parties agreed to negotiate with the aim of building a government, after the two week’s holiday break in August. It is not yet clear whether this really means a government any time soon; Wouter Beke, the leader of  the conservative CD&V, the party which paved the ground for a breakthrough by accepting to enter the negotiations without the N-VA, cautioned that being at the negotiation table does not necessarily mean that his party is ready to enter the government  according to Le Soir. Another aspect is picked up by Jean Quartremer, who warns that if all eight parties were part of the  new government, the only parties in opposition would be two separatist parties, the N-VA and Vlaams Belang, a dangerous situation in a democracy.



The end of the euro

Samuel Brittan has an interesting review of Christian Saint Etienne’s book’s, now in its second edition, entitled in the English translation as “The End of the Euro”. Saint-Etienne is pro-euro, but concludes that the eurozone has no future without a political union. Brittan summarises the five main points as: 1. The eurozone is not an optimal currency areas. 2. It requires the framework of a state: economic government, single budget, and a common competition policy 3. There is an increasing divergence between surplus and deficit countries, with France about to switch positions (towards the deficit countries). 4 the deficit countries will be penalised through lower growth. 5. The eurozone will break-up, either in a controlled many, or in chaos.



Zingales and Perotti on the dangers of last week’s agreement

Writing for Bloomberg (hat tip Irish economy blog), Roberto Perotti and Luigi Zingales write the agreement by the European Council gave rise to two types of transfers. The first is from the North to the South, which will kill the idea of further European integration for a generation. They reminded us that even after 150 years of its creation and a relatively small fiscal transfer from the north to the south, a separatist political movement came to power in Italy. The second transfer is from the tax payer to the banks. In 2007/2008 this gave rise to protests. This time it will give rise to a revolt.  



Spreads, Forex, and ZC Swaps

Those Italian and Spanish spreads are getting worse. Note the overnight rise in the Spanish spreads, and note also how low 10-year German yields have become, which is not a sign of German strength but of investors’ risk aversion.



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