Eurointelligence Daily Briefing, 25 de Abril de 2012. Enviado por Domenico Mario Nuti

This will be interesting. The eurozone’s most self-righteous political class is discussing whether or not to modify the deficit target. The Dutch government maintains that it is still sticking to the 3% target for 2013, and is hoping to secure a majority in the next few days to be able to send a submission to the European Commission to explain how this can be done. But, as Reuters reports, the leader of the Dutch opposition labour party, Diederik Samsom, says the country should aim for a deficit of 3.6%, which it says is justified if one takes recourse to the rule of exceptional circumstances. (We agree that the 2013 is crazy, not just for the Netherlands, but we find it hard to see how the use of an exceptional circumstance can apply here. The craziness lies in the inflexibility of the target itself.)

 

Not clear yet whether Dutch government can flesh out budget cuts in budget submission to European Commission

 

 

It is not clear whether the Dutch government will be able to present a workable deficit reduction plan to the European Commission ahead of the April 30 deadline. The FT reports that the outgoing government is trying to scramble a small majority behind its 2012 budget proposal, to include three small central parties. The article quotes Alexander Pechthold of the Liberal D66 party, who said there will be a majority of 78-80 votes, out of a total of 150. But the FT noted it was extremely unlikely that the agreement would come ahead of the April 30 deadline.

 

Why the Netherlands should not opt for austerity right now (in other words: why Wilders is right)

 

 

In an editorial, the FT writes that markets have been rattled by the inability of the Netherlands to do what it demands from others. Worse, austerity at this moment makes no economic sense either:

 

 

“The Dutch case is a horrific display of Europe’s self-harming. In pressurised states with no fiscal space, deficit cuts are of course imperative, but countries that can should let deficits widen to buoy aggregate demand in the eurozone until the recovery is firm. There is no reason for the Netherlands, whose 65 per cent debt to output ratio puts it among the eurozone’s most solvent, to fear moderate deficits in a recession. But Europe’s policy of austerity for all is dragging one economy after another back into recession – and the effect is not limited to the periphery.”

 

Le Pen wants to capitalize on her success for the parliamentary elections in June

 

 

Marine Le Pen intends to capitalize her 18% score in the presidential elections first round in order to score another success at the parliamentary elections due to be held on June 10 and 17, Le Mondereports. Le Pen’s ultimate aim is to „let (Sarkozy’s) UMP explode“ because she will put up Front National candidates in as many as 335 electoral districts which will diminish the chances of the conservative deputies to be elected. Le Pen wants to continue to de-diabolize her party and is even considering changing the party’s name which is strongly opposed by her fater Jean-Marie Le Pen, the party’s founder. Marine Le Pen’s success in making the extreme right party part of the French mainstream is confirmed by a poll done by OpinionWay – Fiducial for Les Echos according to which 64% of the French favour electoral agreements between the UMP with the Front National.

 

IG Metall decides warning strikes for higher salaries

 

 

Germany’s 3.6m members of IG Metall decided on warning strikes in several states because the union considers the employer’s offer to raise salaries for 3.0% over the next 14 months as „inacceptably low“, Frankfurter Allgemeine Zeitung reports. IG Metall is asking for 6.5% over 12 months, more co-decision power over the use of temporary workers and permanent work contracts for all current trainees. The warning strikes will take from May 3 to 9. In parallel, data released yesterday by Eurostat showed that average work cost in Germany is at €34.40 while the EU average is €23.40, FAZ reports in a separate article. However, the average German work cost is 12% lower than that of France. Also wage rises in Germany since 2001 were only 19.4% while the European average wage rise in the same period was 39%.

 

Financial crisis has added more debt in Germany than anywhere else in the EU

 

 

Eurostat figures show that the financial crisis has added more debt to public finances in Germany than in any other EU country, Handelsblatt reports. According to the data, the financial crisis has added public debt in the EU in the magnitude of €603bn of which roughly the half was in Germany. The countries equally heavily affected – albeit considerably less than Germany – are the UK, Ireland and the Netherlands. The main reason is the bad banks that had to be put up for Hypo Real Estate and WestLB. According to Bundesbank data, Germany had to put aside roughly €300bn for „financial market support measures“. According to Handelsblatt the WestLB is planning to outsource another €100bn of bad debt which will have to be added to that sum.

 

EBA increases pressure on addicted banks

 

 

According to Financial Times Deutschland, EBA has started to question eurozone banks how they intend to refinance themselves once cheap ECB liquidity from 3y LTRO is no longer available. „We ask the banks how they intend to get out of this. We want them to think about their return to normal and what sources of refinancing they will use“, FTD quotes an unnamed source familiar with the matter. The paper stresses that EBA’s pressure is not yet systematic and only certain banks are being asked. But according to FTD EBA is getting increasingly worried that banks from the euro crisis countries rely heavily on cheap central bank money and fail to restructure their business in order to ensure viability in normal times.

 

German government expects 0.7% growth this year

 

The German government is today expected to issue a 0.7% growth forecast for 2012, Süddeutsche Zeitung reports. That is a little more than the IMF projection (0.6%) and a little less than the German economic institute’s spring forecast (0.9%). The shadow council of Financial Times Deutschland expects 0.8% growth, the paper reports. According to the government’s economic forecast the number of unemployed will fall further by another 130.000 this year.

 

Yves Mersch says IMF too pessimistic about economic growth

 

 

We are not reporting this because we have any confidence in the judgement of Yves Mersch, but because his thinking reflects that of others, including that of the Bundesbank and parts of the ECB itself, whose directorate he may join soon. The Luxembourg central bank president said, according to Reuters, that the IMF was too pessimistic about growth, and too optimistic about inflation, in other words: he favours a harder policy than the IMF. (We expect the ECB to follow this line.

 

Greek economy to shrink by more than expected

 

 

The news is familiar. Greece undershoots whatever target is set – which is not at all a statement about Greece, but the lack of realism of the targets themselves. Kathimerini reports that George Provopoulos, head of the Greek central bank, said the country will contract by more than envisaged – 5% against a 4.5% forecast. This is early in the year, so expect further downward revisions as the year goes on. He also said the current account deficit would sink to 7.5% from 9.8% last year. He also said the country’s future in the eurozone was at stake if the new government failed to follow through the pledge of reform. He expressed optimism about the improvement in Greek competitiveness. ”The expected drop in unit labour costs in 2012-13, coupled with the projected price trends will lead to a marked improvement in competitiveness, contributing to a rise in exports and import substitution,” he said. But the country suffers from continued savings outflows. He put the fall at private sector bank deposits at €70bn since the beginning of the crisis, about one third of GDP.

 

Spanish taxes fall 2.5%

 

 

El Pais has a large technical article on the difficulty Spain is facing reversing the trend of falling tax revenues, which have dropped by 2.5% in the year to March. The article says the Spanish treasury still hopes to meet the gap between the trajectory set by the first quarter trend and the year-end target, as most of the recently announced revenue measures have yet to be activated.

 

Interest rates at Spanish auction shoot up

 

 

Spanish auctions continued to be successful, but this success comes at a cost of higher interest rates. Reuters reports that the average yield on the 3-month bill was 0.63%, up from 0.381% last time, while it was 1.580% on the 6-month bill compared with 0.836% a month ago.

 

John Plender on the danger of disorderly deleveraging

 

 

In his FT column, John Plender gets to the heart of the problem in the eurozone. Looking at the IMF’s stability report, he says the eurozone is trapped in a vicious circle out of which there is no escape.

 

 

“The risk is of a vicious circle whereby eurozone economic conditions deteriorate, so depressing bank earnings and weakening asset quality, which in turn requires increased provisions. That erodes bank capital, creating more pressure for yet more deleveraging. A further risk is that deleveraging becomes disorderly if synchronised sales of bank assets cause a downward spiral in prices, which leads not only to capital shrinkage but funding shortages as interbank lending is cut back.”

 

 

He concludes that more central bank action will be needed, but it will have a dwindling impact. And it does not address the underlying solvency issues.

 

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

Spreads narrow in France, but remain above 4% in Spain and Italy, as bund yields rise again. As we pointed out before, the Euribor-Ois spread is stuck at around 100bp at the one year end (having reached a peak of 150bp in November). There seems to be resistance to a further decline.

10-year spreads
	Previous day	Yesterday	This Morning
France	1.545	1.420	1.429
Italy	4.190	4.178	4.162
Spain	4.472	4.256	4.318
Portugal	10.112	10.043	10.141
Greece	20.336	19.927	#VALUE!
Ireland	5.343	5.274	5.429
Belgium	2.065	1.933	1.966
Bund Yield	1.558	1.62	1.636
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.317	1.3195
Yen	106.620	107.43
Pound	0.816	0.8174
Swiss Franc	1.202	1.2016
ZC Inflation Swaps
	previous	last close
1 yr	1.93	2.02
2 yr	1.88	1.96
5 yr	1.94	1.83
10 yr	2.18	2.06
Euribor-OIS Spread
	previous	last close
1 Week	-7.129	-7.129
1 Month	0.214	0.714
3 Months	29.671	31.571
1 Year	100.336	99.736
Source: Reuters