Eurointelligence Daily Briefing, 20 de Setembro de 2011. Enviado pelo Domenico Mario Nuti.

 

S&P cuts Italian rating, citing lack of credibility of deficit programme

  • Rating cut from A+ to A, with negative outlook, takes market by surprise, and leads to a fall in euro and rise in Italian spreads;
  • S&P cites growth outlook and political uncertainty as the reason for its decision;
  • says deficit targets will be difficult to achieve with the latest deficit programme;
  • the failure to reach agreement with Greece over the weekend contributed to yesterday’s broad-based fall in European stock markets;
  • another troika phone conference ended last night with no result;
  • troika is pushing for Drakonian increases in fuel taxes, and job cuts in the public sector;
  • Angela Merkel said she wants to continue to govern with the FDP despite the party’s demolition in recent regional elections;
  • Günther Nonnenmacher says FDP is a lost cause, and its political leaders are out of their depth;
  • Jens Weidmann tells Bundestag that the July 21 decision to extend the scope of the EFSF was a really bad idea;
  • Bundesbank chief also raises questions about whether the decision was consistent with the ruling of the German constitutional court;
  • DSK’s revelation that he had a deal with Martine Aubry is now damaging her prospects;
  • Le Monde says that Sarko is politically stuck in the, as he is now totally dependent on the German electoral timetable;
  • the Irish Times, meanwhile has the answer to the most pressing question of our time: how many eurozone finance ministers does it take to change a light bulb?

Standard and Poor’s cut its Italian sovereign rating from A+/A-1+ to A/A-1 with a negative outlook, due to a negative growth prospects and political uncertainty (note: the second number refers to the short-term credit rating). While investors anticipated that rating agencies would eventually react, the news nevertheless took the markets by surprise, and triggered an immediate half cent fall against the dollar. The decision is invariably related to Italy’s budget consolidation package, which in its final version included no growth measures, only tax increases. Its most likely consequence is a recession, and a further increase in the deficit. S&P said: “We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve. Furthermore, what we view as the Italian government’s tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy’s economic challenges.” Reuters reports, quoting unnamed sources, that the Italian government was preparing to cut its growth forecast from 1.1% to 0.7% for 2011. By this morning, the Italian 10-year spreads widened to 3.803% – edging back to its eurozone peak of 4%.

 

 

Greece in limbo

The absence of a deal over Greece after the weekend summit in Poland contributed to broad based fall in European stock markets on Monday. Ministers from Germany, the Netherlands and Austria had hardened their stance, saying they would insist on seeing troika experts’ technical analysis of the new Greek proposals before deciding on how to proceed, the FT reports. The Greeks are under pressure do more.

 

 

Troika presses Greece for public sector crackdown

The conference call between the Greek Finance Minister Evangelos Venizelos and officials from the troika ended inconclusively on Monday night but talks are due to continue on Tuesday, as the troika presses Greece to take more measures to improve its public finances, Kathimerini reports. Sources said that the troika is pushing for a range of new measures and for public sector reforms to be speeded up. Among the measures is the equalization of tax on heating fuel and gasoline, which means that the cost of the former will rise by 40 cents per litre. The property values set for tax purposes are due to rise and top-range pensions are likely to be limited to between 1,500 and 1,800 euros per month. Athens is also under pressure to reduce civil servants’ pay, which could lead to cuts of about 50%. There was also speculation that the government has been asked to speed up the process of placing public sector workers on labour reserve and to increase to 150,000 the number of civil servants that will be included in this program, at reduced wages for several years before being sacked.

 

 

Merkel wants to govern until the bitter end

Angela Merkel yesterday said she wanted to continue to govern with the FDP, her confused and demoralized liberal coalition partner, according to Frankfurter Allgemeine Zeitung. In the state elections of Berlin the FDP scored 1.8% and was ejected for the fifth time this year from a state parliament. Spiegel Online reports that the new party chairman Philipp Rösler, who is severely damaged by this result, wants to make it clear that there will be no anti-European experiments under his stewardship. But even if he is only a few months into his job as party boss, his authority is weakened and the opponents the current euro rescue policy will continue to push for a party referendum to make it impossible for the FDP’s Bundestag deputies to vote in favour of the ESM.

 

 

Günther Nonnenmacher sees no perspectives for the FDP

In a damning front page editorial Frankfurter Allgemeine Zeitung’s political editor Günther Nonnenmacher argues the liberal FDP is a lost cause. The young successors of former party chairman Guido Westerwelle have never shown that they are any better than Westerwelle. “Philipp Rösler appears unable to cope in both his roles as minister and as party chairman”, Nonnenmacher writes. The young wunderkind and party general secretary Christian Lindner has produced nothing but “rhetorical bubbles in talk shows”. And the euroscepticism is a dead end road, argues Nonnenmacher. If Rösler continues down this path there will be split in the party and the FDP will disappear in total irrelevance.

 

 

Weidmann tells Bundestags budget committee the extended EFSF is a horrible idea

Jens Weidmann yesterday told the Bundestag’s budget committee that plans to enhance the EFSF were half baked and would lead to the worst of all worlds between inter-governmentalism and a fiscal union, Süddeutsche Zeitung reports. “Those decisions are another step towards a common liability and to less discipline via the capital markets without any means of control or influence over the national fiscal policies”, he warned the deputies yesterday. Weidmann was especially critical of the proposal backed by Merkel that the EFSF should be able to buy government bonds of crisis countries so that the ECB can be relieved of that task. Weidmann said it was entirely unclear what conditions would be attached to this buying programme and how it could be in line with the constitutional court’s requirement that this kind of help can only be granted as an “ultima ratio” to guarantee the stability of the euro.

 

 

DSK’s TV confessional creates problems for Martine Aubry

Dominique Strauss-Kahn’s first media appearance since his release from house arrest and his return to France is creating considerable problems for Martine Aubry, the principal opponent of Francois Hollande in the Socialist’s primaries, Le Figaro reports. DSK confirmed that there had been a pact between Aubry and himself that she would not have been a candidate in case he would have been. Francois Hollande was quick to underline that there was no pact between him and DSK and that Aubry was nothing but a “substitute candidate” because she would not have run had DSK been a candidate.

 

 

The most important date for French domestic politics is the Bundestag’s EFSF vote

In a long analysis on how Nicolas Sarkozy tries to regain popularity in France Le Monde quotes an anonymous presidential aide:  “The real dates of French domestic politics is the German parliamentary calendar.” The paper continues to underline that Sarkozy is unable to do or say anything on the issue because it might either provoke panic on the markets or become a problem for Angela Merkel in the Bundestag’s EFSF vote of September 29. But the paper quotes another anonymous Paris source who says that “it is the Greek irresponsibility that reinforces those in Germany who think that radical solutions need to be adopted now”.  In order to avoid that scenario, Sarkozy was particularly tough on the Greek prime minister George Papandreou during their teleconference and asked him to undertake “real effort”, Le Monde writes.

 

 

Roubini calls on Greece to leave the euro

Writing in the Financial Times, Nouriel Roubini called the Greek debt exchange a “rip-off” that would result in a net debt reduction of close to zero, counting in all the sweeteners for banks. He said the best option for Greece would be to default on the debt and leave the eurozone. Even a large debt forgiveness would not help Greece, as the country urgently needed to restore competitiveness. The said the two within-eurozone competitiveness improvements are unlikely to happen – a sharp depreciation of the euro, and structural reforms to boost growth.

 

 

How many euro area finance ministers does it take to change a light bulb?

None, according to the Irish Times. There is nothing wrong with the light bulb.

 

 

Spreads, Forex, and ZC Bonds

Some realism returns to the markets as they remember that the problems in Greece and Italy are all but solved. The inflation swaps are also now clearly pointing towards a severe undershoot of ECB targets.

 

 

10-year spreads

 

 

 

 

 

 

 

Previous day

Yesterday

This Morning

France

0.752

0.821

0.818

Italy

3.660

3.791

3.803

Spain

3.446

3.557

3.619

Portugal

10.429

10.464

10.444

Greece

20.150

21.751

20.93

Ireland

6.797

6.889

7.033

Belgium

1.868

1.977

1.974

Bund Yield

1.863

1.803

1.791

 

 

 

 

 

 

 

 

Euro Bilateral Exchange Rate

 

 

 

 

 

 

 

Previous

This morning

 

Dollar

1.369

1.3617

 

Yen

105.070

104.2

 

Pound

0.870

0.8684

 

Swiss Franc

1.206

1.2057

 

 

 

 

 

 

 

 

 

ZC Inflation Swaps

 

 

 

 

 

 

 

previous

last close

 

1 yr

1.48

1.38

 

2 yr

1.57

1.4

 

5 yr

1.78

1.78

 

10 yr

1.97

1.88

 

 

 

 

 

Source: Reuters

 

 

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