Austerity programmes are now the main driver of the crisis – as S&P cuts Spain’s rating
The poisonous interaction between austerity programmes and economic growth has become one of the main engines of the continued eurozone crisis, as evidenced by the yesterday’s downgrading of Spain through S&P. The rating agency cites a weakened economic outlook with the presence of bad debt for its decision to cut the rating from AA to AA-, retaining a negative outlook. El Pais writes that it expects only 0.8% of growth in 2011, followed by 1% in 2012. Another factor has been the recent slide in share prices of Spanish banks. For good measure, S&P warned that if the vicious spiral were to continue, the rating would drop further. (There is no reason why it should not continue well into next year, as it will take the EU a very long to revert the irresponsible monetary and fiscal policies, which have now become the main engines of this crisis.) Earlier yesterday, the FT carried an informative story from Madrid, according to which Spain is very likely to miss its 6% deficit target for this year, and 4.4% for next year, quoting unnamed government officials.
Portugal to cut wages by a cumulative 20% Journal de Negocios reports that workers in Portuguese state enterprises and pensioners are facing cumulative losses of 20% of their income between 2010 and 2013. This is composed of average wage cuts of 5% in each 2011, 2012, 2013, for those earning more than €1500, plus retention of Christmas bonuses. The paper also reports that the threshold may be lowered to €1000, which would widen the scope of those measures. PM Passos Coehlo said that he would respect the minimum wage, but that there would a sliding scale of cuts for those under €1000 as well. He said the deterioration of public accounts had been stronger than he expected.
Massive strikes in Greece sabotage implementation of agreed policies Strike actions continue with practically no public transport or services on Friday, Kathimerini reports. Angry civil servants occupied seven ministries while municipal employees continued sit-ins at offices around the country. Customs officials are to launch a 10-day strike on Friday, which is expected to lead to food and fuel shortages, and tax collectors are to start a four-day strike on Monday. One of the most vehement protests has been that of Genop, the union representing the Public Power Corporation (PPC), whose members took over the company’s billing department on Wednesday to stop it from sending bills containing a new emergency property tax to homeowners. They are to continue their occupation, as the PPC announced that they would find another printing location.
At least two Pasok MPs opposes the latest reforms At least two of Pasok 154 MPs will be voting against one article in the bill submitted to Parliament this week, Kathimerini reports. The bill contains a range of legislation introducing tax increases and public sector reforms. Former Labour Minister Louka Katseli and deputy Sofia Giannaka have made it clear that they will not approve Article 37, which suspends collective wage bargaining in specific sectors of the economy until 2014. Other lawmakers have also expressed concern that this could be the first step to abolishing national collective contracts and the minimum wage.
Juncker says forced bank recapitalisation is needed Jean-Claude Juncker told Deutschland Funk radio this morning (hat tip Reuters) that the eurogroup would start intensive discussions about a forced bank recapitalisation on Monday. “Private banks must know that if the current voluntary creditor participation is not sufficient… then we must realize that we will need compulsory participation by creditors.” He talked about a “tailored solution” for each bank. (We see a real mess coming.)
Ackermann and German banks against forced recapitalization Deutsche Bank CEO Josef Ackermann attacked plans to temporarily impose a higher tier 1 core capital ratio of 9% and to force banks to recapitalize if they are under this threshold. “Deutsche Bank will do everything to avoid a forced capitalization”, he said according to Frankfurter Allgemeine Zeitung. The bank would prefer to separate itself from strategic core business rather than accept public money. Ackermann’s stance is representative for the German banking industry which yesterday heavily criticized the recapitalization plans. “It cannot be in the interest of the stabilization of financial markets to bring about an alleged weakness of the European banking sector by imposing artificially tougher capital requirements”, the five German banking associations wrote in a letter to Wolfgang Schäuble.
Slovakia approves EFSF It has been the European experience that the outcome of second votes or referendums is often different. And so it was in Bratislava yesterday, where Slovakia’s parliament last night approved the EFSF, after Social Democrats under Robert Fico now supported the measures. This came after the Slovakian parliament earlier yesterday voted to hold early elections in March. For more on this story see Austria’s Der Standard. With the vote in the Slovakian parliament, the EFSF treaty is now formally ratified.
Jean-Claude Trichet says ECB cannot go further In his final interview to the Financial Times, Jean-Claude Trichet made one important statement. He said the ECB has done all it can, and it would not jump in if governments fail to solve the problem. “The ECB has done all it could to be up to its responsibilities in exceptional circumstances… The ultimate backstop is, of course, the governments. To do anything that would let governments off their responsibilities would be a recipe for failure,” he said. (The statement is important in the context of the decision October 23 to leverage the EFSF. All proposals so far assumed that the ECB would backstop whatever is agreed. Trichet’s statement tells us that it will not be easy to reach such an agreement.)
The Dutch want a special EU commissioner for deficit sinners The Dutch finance minister Jan Kees de Jager ties his country’s approval for EU capital injections for banks and the EFSF’s possible enhancement to the EU’s right to direct intervention into the budgets of deficit countries. “The economically strong countries of the north have broken taboos by bailing out the debt of other countries or by allowing the EFSF to by government bonds”, he told Financial Times Deutschland. “Now it is time to break the taboo that Europe must not intervene in national budgets. We will allow a banking recapitalization of banks by the EFSF or it enhancement only if our demand for more controlled is fulfilled at the next summit”. De Jager thinks of a special EU commissioner who would oversee national budgets and who can dictate budgetary decisions if necessary. The heads of state and government will have to “irreversibly” agree to that. “We will not back away from this condition”, de Jager warned.
German economic institutes criticize the ECB for the SMP In their autumn report the majority of the leading German economic institutes criticizes the ECB for having re-embarked on their bond purchasing program, the SMP, Börsenzeitung reports. According to the institutes the ECB has “stretched its mandate”, jeopardized its independence and credibility and it risks future price shocks by buying the bonds. Additionally it reduces incentives for the concerned states to get their public finances in order. However, two of the five institutes – the Institut für Wirtschaftsforschung Halle and Kiel Economics – have given a dissenting view by saying that without the ECB’s intervention the eurozone might well have unravelled. The five institutes were united however in advising the ECB to lower its key policy rates from 1.5% to 1.0%.
Hollande continues to be the frontrunner – with a reduced margin Francois Hollande continues to be the frontrunner for Sunday’s second round of the Socialist’s primaries, Le Figaro writes. According to a poll done by Opinionway Fiducial for Le Figaro and LCI after Wednesday’s final TV debate Hollande comes in at 53% while his competitor Martine Aubry has 47%. That means that the race is still quite open because Arnaud Montebourg, the anti-globalization protectionst who scored more than 17% in the primary’s first round has not given any endorsement yet.
Spreads, Forex, and ZC Bonds Getting worse again after the Spanish ratings cut, and in anticipation of today’s confidence vote in Rome.
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