 The numbers are looking a little better for Berlusconi this morning
Eurointeligence Comment and AnalysisOnce the Italians lose confidence in their political leadership, then the state’s finances will collapse in the flight to safety. Italy’s huge stockpiles of household wealth would quickly transform into a capital flight that would draw down on deposits in the domestic banking system and so send sovereign debt markets into a rout.
It is close. Corriere della Sera has done the math on how the chamber of deputies in the Italian parliament lines up, and concludes that the outcome is too close to call. (Today’s vote is not a vote of confidence, but a vote related to the ex-post approval of the 2010 national accounts.) Adding up committed votes, plus some intelligent guesswork comes to a headcount in a confidence vote of 312 for the non-Berlusconi camp, and 311 for the prime minister. There are three additional votes that could go with the opposition and bring their number to 315, but these MPs indicated that they might abstain if this budgetary turned into a vote of confidence. Berlusconi spent last night making phone calls to a number of rebels, and it is no surprise that Italian papers lead with exclamation of “Et tu, Brutus?”
In another article, the paper quotes him as saying that he would not resign simply because of defections. If necessary he would go down in parliament, but then that would mean new elections, not his resignation. Reuters writes this morning that the chances of a No vote today are receding, but there is a possibility of a No confidence vote in a few days’ time.
Italian sovereign bonds continued to slide. 10-year yields are marching rapidly towards 7%, a level at which Italy cannot sustain its membership of the eurozone. The Italian 10-year spread was 4.832% this morning, another record. We are at the levels at Portugal and Ireland entered into EFSF programmes. The markets were extremely volatile yesterday, fuelled by resignation rumours spread by various Italian journalists, including that appear close to him. Berlusconi himself denied those rumours on his Facebook page.
In an editorial in Corriere della Sera, Sergio Romano says Berlusconi has been causing much damage to the country. He said the best course of action would have been for him to announce elections next spring with a statement that he would not seek re-election. He is calling on the opposition to support today’s budget vote, but seek a separate vote of confidence, and to bring some clarity into their own programmes, including on pensions, labour market, and privatisation, and to explain how they will address the concerns expressed by the European Commission, the eurogroup and the IMF.
(We agree with Sergio Romano’s scepticism. It would be a huge mistake to reduce Italy’s problems to those of its prime minister. If he lose the vote today, and goes, Italy is still a long way away from even beginning on a programme that would allow the country to sustain itself inside the eurozone. Please also note today’s comment by Erik Jones in our comment section, who argues that it would be a mistake to focus on Berlusconi alone.)
Talks over interim premier in Greece stalled
Greece’s party leaders’ failed to appoint a premier and cabinet for the interim government by Monday night, after talks with Lucas Papademos, former ECB vice president and front runner for the job, had stalled. Dow Jones Newswires reports that Papademos was asking to push the time frame for the next elections to allow for a term of several months–longer than either the ruling Socialist government or the opposition New Democracy Party has envisioned. The two parties have agreed, in principle, to hold elections Feb. 19. EU Ombudsman Nikiforos Diamantouros is now being actively considered for the position of prime minister, as well as former Economy Minister and Greece’s current representative at the IMF Panagiotis Roumeliotis, Kathimerini reports.
The delay caused concern at the eurogroup meeting in Brussels. Jean-Claude Juncker said both PASOK and New Democracy would have to provide written commitments to carry out the reforms demanded by Greece’s lenders. Juncker expected no immediate decision on whether Greece would receive its next instalment of €8bn.
Eurozone sliding into a severe recession
It was always our rule of thumb that once ECB officials talk about recession probabilities, the recession must already have started. After yesterday’s release of Germany’s industrial production figures, that conclusions is once again confirmed. Industrial production fell by 2.7% during the month of September. The FT writes that the debt crisis has bitter the eurozone on course for a bitter winter. The article contains forecasts of a contraction in GDP both in Q4 and Q1 2012, and concludes that the pace of decline could precipitate the disaster scenario for the eurozone.
Fillon announces an austerity plan to save France’s AAA
Francois Fillon yesterday announced an austerity plan that is destined to safeguard France’s current status as one of the six eurozone’s AAA countries, according to Les Echos. The measures are supposed to save €65bn until 2016 and to compensate the lack of tax revenues due to the downward revision of the French growth in 2012 from 1.75% to just 1.0%. The word “bankruptcy” is “no more an abstract word”, Fillon said. The measures are broadly in line with the ones leaked already in the French press yesterday: the new retirement age of 62 instead of 60 years will be advanced from 2018 to 2017, reduced VAT rates of currently 5.5% will be raised to 7.0% on all services including restaurants and certain social handouts such as family and living assistance will no longer be indexed to the inflation rate. This austerity plan comes on top of a previous plan announced in August in the magnitude of €11bn for 2012. France wants to get its current budget deficit of 5.7% down to 3.0% in 2013.
Henri Gibier critisises the lack of real expenditure cuts in Fillon’s plan
Henri Gibier of Les Echos criticised the lack of real expenditure cuts in Francois Fillon’s austerity package. “Out of the €7bn that will be saved for 2012 in this evidently courageous series of decisions only €2bn will come from spending cuts, be it government spending or social security spending”, Gibier writes. “For the second country of the OECD in terms of public expenditure, behind Denmark, that still is too little.”
The Social Democrats want to block Merkel’s tax cuts in Bundesrat
According to Süddeutsche Zeitung, the SPD announced its intention to block the tax cuts in the magnitude of €6bn the coalition announced on Sunday. The coalition parties do not command a majority in the second chamber of Parliament. In addition to the opposition Social Democrats, there are even some länder prime ministers of the CDU who are not too keen on having the tax cuts implemented because they fear losses in their state level tax revenues. The SPD thinks that Wolfgang Schäuble secretely supports the opposition’s resistance to the tax cuts because they believe the finance minister would also rather keep the money to further consolidate the budget.
Germany places bonds with a 0.08% yield
While the risk premium for Italian bonds yesterday went through the roof, Germany paid a record lows for its bonds yesterday. According to Frankfurter Allgemeine Zeitung, bonds with a 6-months maturity were issued with the historically low yield of 0.08%. The government placed €3.8bn and had offers of €8.3bn.
Spreads, Forex, and ZC Bonds Italy’s spread is heading for 5%, Spain’s for 4%. The French spread is also slowly creeping upwards.
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