Eurointelligence Daily Briefing

Greek fiscal council warns “debt is out of control”




• The State Budget Execution Monitoring Office warned that the country was suffering from a toxic debt dynamic, which has offset the impact of the first bailout loan;


• Greek finance minister Evangelos Venizelos says the reports lacks credibility;


• the total of Greek debt now stands at €350bn, with the cumulated 2011 deficit at €15.5bn, against a total-year target of €16.7bn;


• Holger Stelzner argues that Greece is a lost cause;


 • Spain’s bond auction disappoints, sending 10-year spread again above 3%;


• France is ready to accept a tougher stability pact;


• Wolfgang Schäuble tells fellow CDU parliamentarians that a big Treaty revision was necessary, involving a significant transfer of sovereignty to EU level;


• the True Finns claim that the rules governing the EFSF and the future ESM violated the Finnish constitution;


• Portugal’s prime minister Pedro Passos Coelho says Eurobond required an unacceptable transfer of national sovereignty;


• Jens Weidmann claims the bond purchase programme had undermined the credibility of the ECB;


• Reuters writes Italy is courting disaster with its incoherent budget deficit reduction programme;


• Reuters Breakingviews says that Christine Lagarde is more right on the question of European bank recapitalisation than eurozone politicians;


• Kermal Dervis, meanwhile, argues that the fiscal room for manoeuvre is severely limited, and advocates a strategy based on the quality of public spending.


Eurointeligence Comment and Analysis


France, a reality check The French AAA-rating is not in danger for now, but the economic dynamism is eroding slowly with less investment in physical and human capital, and falling R&D growth. A newly-formed State Budget Execution Monitoring Office, staffed by independent analysts, warned in a report that ”a significant debt increase, a high primary deficit and the deep recession have boosted to the extreme the debt dynamic, which is now out of control”, offsetting the impact of the first €159bn bailout loan, Kathimerini reports.

Finance minister Evangelos Venizelos says the report lacks validity of equivalent international reports.


Greek deficit reached €15.5bn in July, with economy contracting 4.5%


The Greek economy is shrinking at an alarming rate. Venizelos last week admitted that Greece is likely to contract by more than 4.5% this year, worse than an earlier 3.5% forecast. Greece’s debt, meanwhile, has ballooned to over €350bn. The deficit has climbed to €15.5bn by July, compared to a target of €16.68bn for the entire year. To make up for revenue shortfall, Greece raises VAT by 10pp on food and restaurants Parts of state revenue included in this year’s calculations will not be collected until early 2012.


To make up the shortfall, the authorities on Thursday raised VAT for food at restaurants and hotels by ten points to 23%. The restaurant sector has described the measure as ruinous and some operators have threatened to withhold the tax to avoid closing down altogether. Separately, the Finance Ministry said it would publicize the names of taxpayers who owed the state more than 150,000 euros for over a year, according to another article in Kathimerini. Holger Steltzner asks the eurozone to wake up to the fact that Greece is a lost cause After the Greek parliament’s admission that the Greek debt has spinned “out of control”, Frankfurter Allgemeine Zeitung’s economics editor Holger Steltzner asks the eurozone in a front page editorial to wake up to the fact that Greece is a lost cause. “The public service and the private sector have ballooned as a consequence of living on debt and they are not competitive and that is why the ‘rescue billions’ will disappear”, Steltzner asserts. “What does the EU do with a country that is unwilling to undergo change and structural reform, because there is a lack of political will, of functioning administration and of support of the population?”


Spain’s latest debt auction disappoints


 Spanish 10-year spreads rose beyond 3% yesterday on the news of a disappointing bond auction. The FT reports that the latest auction of 5 year bonds raised €3.6bn, close to the midpoint of the indicated range. The average yield was 4.489%, a little less than at the July auction. But this time, the bid-to-cover ratio was only 1.8, signalling weak demand from investors.


France caves in to quicker stability pact sanctions on deficits


France is apparently ready to cave in on the demands of the ECB, the European parliament and the Commission to accelerate sanctions against countries that violate the 3% deficit rule of the stability and growth pact. Süddeutsche Zeitung reports that France has submitted a compromise proposal seen by the paper in which it accepts that sanctions can be voted by the EU finance ministers with a simple majority that a country does not comply with the rules. That would pave the way for a rapid application of sanctions against a deficit country. If this is confirmed, it could lead to the conclusion of the legislative proposal to toughen the SGP, which has been blocked for months because of divergent views between France, supported by Germany and most other country and the parliament on the decision procedure for sanctions.


Schäuble wants a new EU treaty


According to mass circulation daily Bild Wolfgang Schäuble aims at far reaching reforms within the eurozone that would call for a new EU treaty. The paper reports that the finance minister said in a confidential meeting of leading members of CDU’s and CSU’s parliamentary groups that further transfers of sovereignty in fiscal and economic policy where necessary. That is so “even if we know, how difficult treaty changes are”, he said, referring to referenda and difficult parliamentary votes. According to Bild, Schäuble’s plan also implies that there will be much further integration of the 17 euro states leaving opt-out countries such as the UK on the sidelines.


True Fins MPs claim bailout decision process violates Finnish constitution


True Finns members of the Finnish Parliament’s constitutional committee said in a minority report Thursday that the current decision-making process regarding temporary and permanent eurozone bailout funds ran against the constitution, writes Newsroom Finland. The populist MPs said it could not established in a clear-cut way whether bailout fund decisions were the responsibility of Parliament or the president. They added that the constitution would have to be amended before any such decisions were taken. Recent polls meanwhile suggest that a majority of 49% of the Finns do not accept Finland’s participation in Greek bailout package, Helsingin Sanomat reports. Only 47% consider that participation of the eurozone was good for Finland (compared to 71% in the EU survey a year ago).


Portuguese PM says Eurobonds are no solution to the current problems


Talking to Handelsblatt, the Portuguese prime minister Pedro Passos Coelho said Eurobonds “cannot be a solution for the current problems, with which we are confronted today”. A requirement for their introduction would political reform in Europe that is much more far reaching than everything we are doing at the moment, he said. “We would need a European finance ministry. And that would be a political revolution against the sovereignty as we know it in Europe today.”


Weidmann sees ECB’s credibility damaged by bond purchasing program


Bundesbank president Jens Weidmann warned in a speech yesterday that the ECB’s credibility was damaged as a result of the diverse unconventional crisis policies such as the bond purchasing program, Financial Times Deutschland reports. The program had “noticeably strained” the limits between monetary and fiscal policy, Weidmann said. “In the long run this pollutes the trust in central banks and the imperative for monetary policy must therefore be that it reduces the additional risks that it has taken on”. With the context of the bond purchasing program the Eurosystem has bought bonds in the magnitude of about €115bn, most recently especially bonds from Italy and Spain.


Reuters says Italy was courting disaster with its austerity plan chaos


In a news analysis, Reuters writes that Italy’s plan to balance its budget by 2013 lacks detail, does not add up and changes from one day to the next. This makes it more likely that Italy will remained trapped in the crisis. The article quotes market analysts as saying that the Italian government had dragged things out so far that their programme now lacks credibility. ECB support is only seen as a stopgap. One factor that seems have undermined confidence outside Italy was the decision to scrap the wealth tax, and to plug the gaps with a fight against tax evasion – which, of course, never happens. The forecasts for 2012 points towards a recession, or a stagnation at best.


Breakingviews says Lagarde is more right on bank capital than the EU governments


Reuters Breakingsviews has done some quick calculations on the recapitalisation requirements. The stress tests, which the Europeans are clinging to, proposed a 5% core Tier 1 ratio, while investors were looking at a 7% minimum. And the stress tests asked banks to make provisions of a 15% loss on Greek debt, while market prices suggest a discount of 50%. So under the assumption of a proper haircut, European banks would need some €19.2bn in new capital to get to a 5% Tier 1, but to get to 8% they need €140bn, which is closer to the IMF’s figures. The IMF’s estimate, however, is an exaggeration, as it fails to take into account gains on German bunds and UK gilts.


Kermal Dervis says more debt now, less debt later lacks credibility


Kermal Dervis was considered a top candidate for the IMF’s job and is now criticising the woman who got the jobs instead. Writing in the FT, he disputes her call for another fiscal stimulus, arguing that in a debt crisis, the room for manoeuvre is severely limited. There is no way for the US to stimulate itself out of the current impasse, as consumers who know they face higher taxes down the road will not spend an unexpected tax windfall on consumption. He proposes a structural adjustment of budget spending, in the US for example, through a greater emphasis on infrastructure investments.


Spreads, Forex and ZC Coupon Swaps


Now Spanish spreads move over 3%, as bund yields fall, and euro weakens. 10-year spreads Previous day Yesterday This Morning


France 0.729 0.763 0.766

Italy 2.951 3.102 3.116

Spain 2.866 2.945 3.056

Portugal 9.291 9.228 9.130

Greece 16.136 16.315 16.41

Ireland 6.492 6.565 6.705

Belgium 1.847 1.939 1.948


Bund Yield 2.193 2.123 2.109 Euro Bilateral Exchange Rate Previous This morning Dollar 1.436 1.4265 Yen 110.380 109.61 Pound 0.884 0.8811 Swiss Franc 1.158 1.131 ZC Inflation Swaps previous last close 1 yr 1.37 1.5 2 yr 1.45 1.64 5 yr 1.75 1.91 10 yr 1.99 2.09 — Website: Blog “Transition”:




Domenico Mario Nutinasceu em Arezzo, Itália, em  16 de Agosto de1937.

Catedrático de Economia Política na Universidade de Roma  “La Sapienza”, licenciou-se em Direito pela Universidade de Roma e fez o doutoramento em Economia por Cambridge, sob a orientação de Mauri e Dobb e Nicholas Kaldor. Trabalhou com Michel Kalecki e Oscar Lange. Foi professor de Economia no European University Institute de Florença, foi director do Centro para os estudos russos e do Leste europeu da Universidade de Birmingham, presidente da European Association for Comparative Economic Studies e correspondente da Academia Polaca das Ciências. Desempenhou  ainda os cargos de  Conselheiro económico da Comissão Europeia e de consultor do Banco Mundial.


É autor de numerosas publicações, na sua maior parte sobre sistemas económicos comparados, particularmente sobre a participação dos trabalhadores na Economia. Entre essas edições, salientamos: Privatisation of socialist economies: general issues and the Polish case, OECD, Paris, 1991; Stabilisation and reform sequencing in the reform of socialist economies, EDI-World Bank, 1991; Sequencing and credibility in economic reform; in A.B. Atkinson and R. Brunetta (Eds.), Economics for the New Europe, MacMillan, 1991; Lessons from stabilisation and reform in central and eastern Europe, Economic Papers n. 92, CEC-DGII, Bruxelas, 1992; The role of the banking sector in the process of privatisation, Economic Papers n. 98, CEC-DGII, Bruxelas, 1992; (com Richard Portes), Central Europe: the way forward, Bruxelas e Londres,1993; Economic inertia in the transitional economies of central eastern Europe, in: M. Uvalic et al. (Eds), Impediments to the Transition in Eastern Europe,EUI-EPU, Florença 1993; The impact of systemic transition on the European Community, in S. Martin (Ed.), The Construction of Europe, Dortrecht, 1994; Mass privatisation: costs and benefits of instant capitalism, in R. Daviddi (Ed.) Property rights and privatization, EIPA, Maastricht 1995; Inflation, interest and exchange rates Community response to the Transition: Aid, Trade Access, Enlargement, The Economics of Transition, vol. 4(2), 1996; com G. W. Kolodko, The Polish Alternative, UN-WIDER Research in Action n. 33, Helsinquia, 1997. Making sense of the Third Way, Business Strategy Review, Vol. 10, n.3, Autumn 1999. The Polish Zloty, 1990-99: Success and Under-Performance, American Economic Review, May 2000, Papers and Proceedings.

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