Eurointelligence Daily Briefing, 7 de Setembro de 2011. Enviado por Domenico Mario Nuti.



Berlusconi caves in to Draghi

  • The Italian cabinet decides further austerity measures, most notably an increase in VAT from 20% to 21%, and a surcharge on high incomes;
  • Silvio Berlusconi agreed to those measures under intense pressure from Mario Draghi;
  • ECB intervenes to buy Italian and Spanish debt;
  • the European Commission welcomes the measures, but Italian employers say what Italy now needed measures to boost growth;
  • Jose Luis Zapatero told a trade unionist that Spain came dangerously close to a bailout last month;
  • the Swiss National Bank yesterday pegged the franc to the euro, setting a lower ceiling of SFr1.20;
  • Philipp Hildebrand argues the decision was necessary to prevent deflation and financial instability;
  • Neue Zürcher Zeitung welcomes the decision, but says the peg also carried big risks;
  • Evangelos Venizelos promises a faster pace of Greek reforms;
  • Wolfgang Schäuble says Greece would only get the next aid tranche if they fulfilled the conditions;
  • Harvinder Sian of RBS predicts that Greece will default in December;
  • the chairman of the Bavarian CSU says a Greek euro exit was possible;
  • Hans-Dietrich Genscher launches an emotional appeal to the FDP to support the EFSF;
  • the German plaintiffs in the constitutional court case against the EFSF hope to achieve a stop of all “automaticity”;
  • Nicolas Sarkozy, meanwhile, abandons the debt brake.

The appalling process of Italy’s budget negotiations, which have triggered the latest phase in the eurozone’s debt crisis, is now coming to a conclusion with the introduction of two new austerity measures, an increase in VAT from 20% to 21%, and a 3% levy on incomes over €500,000. The new measures, in conjunction with ECB intervention, managed to stabilise the 10-year spreads, which narrowed to 3.65% yesterday, but rose again to over 3.7% overnight (see below). The measures were decided in a cabinet meeting yesterday, and will be voted on by the Senate on Wednesday.

Il sole 24 ore notes that the European Commission has given a positive signal about the latest measures. In its comprehensive coverage of the story, Il Sole writes that Pierluigi Bersani, the opposition leader, criticised the measures as insufficient and unjust, while Confindustria, the employers’ association, welcomed them as a good step, but warned that the government would now have to take convincing measures to boost economic growth.

In another background article, the paper revealed that Silivo Berlusconi had finally yielded to pressure from Giorgio Napolitano, the Italian president, and especially from Mario Draghi, who had called Berlusconi and made it absolutely clear that Italy needed to take unambiguous measures. Reuters reports that the Giulio Tremonti has long resisted a rise in VAT, fearing it would hit consumer demand.


ECB buys Italian and Spanish bonds, both countries promises more reforms

Jornal de Negocios quotes Bloomberg reports according to which the ECB started yesterday buying Spanish bonds as well as Italian bonds. This was also reported by Il Sole 24 ore. Spreads came down slightly. The ECB intervention came in tandem with new austerity measures presented by both Italy and Spain, a precondition called for by the ECB in  the now famous “secret letters” to both governments.

Jose Luis Zapatero announced yesterday a further liberalisation of the labour market and reconfirmed  his endorsement of a constitutional debt brake.  According to the FT Zapatero told trade unionists that Spain was dangerously close to be rescued by an EU bailout in August, much to the annoyance of trade unionists.  Trade unionists have called a protest march for Thursday afternoon.


Swiss National Bank pegs franc to euro

This story is an important reminder of the externalities of our eurozone crisis. The Swiss National Bank yesterday pegged the franc to a lower ceiling of SFr1.20. It is an act of sheer desperation, but without alternative. The decision led to an immediate fall in the Swiss Franc from to SFr 1.119 to SFr 1.2038. Here is the statement by SNP governor Philipp Hildebrand, explaining the decision:

“The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below one Swiss franc twenty. The SNB will enforce this minimum rate with the utmost determination. It is prepared to purchase foreign exchange in unlimited quantities. Even at a rate of one Swiss franc twenty per euro, our currency is still at a high level. It should continue to weaken over time. If the economic outlook and deflationary risks demand it, the SNB will take further measures.”

He defended the decision on the grounds that Switzerland was a small open economy, and an extreme overvaluation of the franc would risk deflation.


Neue Zürcher Zeitung calls decision necessary, but risky

In a comment in Neue Zürcher Zeitung, business editor Peter Fischer  says the decision was brave, but the promise of unlimited intervention carries big risks. In particular, any further panic attack in the euro area will lead to renewed money flows into the Swiss Franc, and the market may soon test the SNB’s commitment to maintain the SFr 1.20 lower ceiling.


Pressure on Greece to accelerate reform pace

In response to rising pressure from the troika the Greek finance minister Evangelos Venizelos announces faster privatisations and reforms.  In a televised address, Venizelos said the first batch of state assets would be transferred into a privatization fund on Wednesday, Kathimerini reports. Venizelos also said that an agreement between Greece and its creditors to put surplus staff in the civil service on labour standby status for 12 months, receiving just 60% of their basic salary, would apply to the broader public sector. Earlier that day Venizelos told cabinet ministers that the troika “have accepted the shortfall in revenue but not the delays in reforms.”


Schäuble warns Greece to deliver if they want the next rescue trance

Wolfgang Schäuble bluntly warned the Greek to deliver on their consolidation and reform obligation if they want the pay-out on the next EU/IMF trance. Only if the troika of EU, ECB and IMF “jointly confirm, that the conditions are met, can the next tranche be paid”, he said In the Bundestag’s debate about the enhanced EFSF, according to Frankfurter Allgemeine Zeitung. “There is no margin of decision.”


Greece to default in December

FT Alphaville dug up an interesting piece of research by Harvinder Siam of RBS, who has done the maths of Greek default probabilities, and recovery rates. Here is the nut graph.

“Net/net, our base case that the default of Greece will centre around the Dec-11 review is still plausible and our arguments on why it can not come around the Sep-11 review are only tactical. In any case, a Greek default is coming and is a pivotal factor is our assessment that all EGBs ex-Germany at this stage are still speculative investments.”


Merkel’s coalition partner Seehofer does not exclude a Greek euro exit

Talking to Bild, Angela Merkel’s coalition partner Horst Seehofer, Bavarian prime minister and chairman of the CSU, explicitly refused to rule out a Greek exit from the eurozone. “I don’t think it is excluded”, he asserts. He goes on to veto all further integration in Europe – no to more competences for Brussels, no to a European finance minister and no to the United States of Europe. “The German constitution does not allow us to dissolve Germany in a creeping manner”, he says. However Seehofer thinks that Merkel will have her own majority for the law to enhance the EFSF – despite the fact that in a test vote on Monday night she was short of several votes.


Genscher appeals to parliamentarians of Merkel’s coalition to vote for enhanced EFSF

Writing an Op-ed in mass circulation daily Bild FDP’s honorary chairman Hans-Dietrich Genscher launches an emotional appeal to the Angela Merkel’s coalition to vote for the German law enhancing the EFSF. “Whenever Europe was confronted with a crisis in the past the answer was: with more Europe out of the crisis”, the former foreign minister writes. Confronting the eurosceptics whom Genscher calls the “paymaster-agitators” he writes: “As Europeans we have been able to reach a so far unknown wealth in a common internal market with a stable currency”, he goes on. He reminds them that because of Europe, Western Europeans were able to overcome the cold war divisions and invite in the Eastern neighbours. “All parliamentarians in Bundestag should be aware of the decision’s significance for future generations”, he concludes.


Plaintiff hopes for ruling against any automaticity in euro rescues

Before the ruling by the German constitutional court on ruling on the legality of the EFSF, Sü has an interview with Joachim Starbatty, one of the plaintiffs. The former economics professor refuses to be labelled as an undertaker of the euro, saying the real undertakers are “Mr Trichet and the politicians” because they “always spend money to save countries that are impossible to save”. Starbatty hopes that today’s ruling will erect a wall against all “financial automaticity”. But he says he does not have any illusions about his chances to see the judges declare the EFSF as unconstitutional because the Karlsruhe judges, in his opinion, “are no heroes”.


Sarkozy abandons debt break

Nicolas Sarkozy scored some points yesterday when his majority voted for the law to save an additional €12bn in this year’s budget so that France will reach its deficit aim of 5,7% of GDP, according to Les Echos. However the French president had to abandon plans to introduce the constitutional debt break, dubbed the golden rule, before the presidential elections in 2012, Le Monde writes. The reason is that the Socialists continue to resist and without their assent the president does not have the required three fifths majority of the special vote for constitutional changes of the national assembly and the senate combined. For Sarkozy this a credibility blow because after Germany Spain, Portugal and Italy have started procedures to introduce debt breaks in their constitutions. Meanwhile a poll by Ipsos-Logica Business Consulting shows the French think that Francois Hollande and Martine Aubry, the two Socialist top contenders to challenge Sarkozy, are more credible when it comes to deficit reduction than the president, Le Monde writes.


Spreads, Forex and ZC Swaps

The big main change is the fall in the Swiss Franc from to SFr 1.119 to SFr 1.2038. Also note that the overall market effect of yesterday’s Italian budget measures was relatively small – considering that the ECB was also intervening.

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