Eurointelligence Daily Briefing, 10 de Maio de 2012. Enviado por Domenico Mario Nuti.

Yesterday began a new phase in the crisis with the Spanish nationalisation of Bankia, the large caja that emerged from the merger of Caja Madrid and the Valencia-based Bancaja. The Spanish State nationalised the holding company BFA, and thus becomes a 45% shareholder in Bankia. El Pais said the dismissal of Rodrigo Rato as head of Bankia was an attempt to recover the credibility of the system, as Spain has acted far too late in cleaning up the real estate mess. The new chief is Jose Ignacio Goirigolzarri, a former CEO of BBVA. Spain will hold the share through the Frob, the bank recapitalisation fund. Technically, this has been accomplished by converting state aid into equity capital. The holding company BFA is a bad bank, which means that the taxpayer is left to cover its losses. The group has €31.8bn in troubled real estate assets, while Bankia contains the clean parts of the business.

 

As we reported yesterday, Deloitte has refused to sign off on the account. The El Pais article contains more details. Deloitte believes that BFA overvalued its assets by €3.5bn. If that loss had been realised, the banks equity capital would have been wiped out.  The article said another state capital injection may occur once the government proceeds with its plan to force banks to write off a small part of the country’s real estate losses. El Pais also makes the point that the restructuring of BFA effectively eliminates the seven cajas that make up BFA. Their capital has now been wiped out.

 

 

And Bankia’s depositors are getting nervous. In another article, El Pais has talked to some, with views splits between those who say Bankia is too big to fail, and those who will move their savings to other institutions.

Even though the nationalisation of Bankia was well flagged, the Spanish stock markets yesterday react with steep losses for the entire Spanish banking sector. Spanish bond spreads rose sharply.

 

European Commission believes Spain will not meet the deficit targets

 

 

Of course, Spain is not going to meet the deficit targets. To achieve a correction of 5.5% net, you have to aim for a correction of some 8-10% in order to meet this moving target, because of the negative growth dynamic. Spain could abolish its armed forces, or the welfare state. As this is not going to happen, a slow process of public realisation is setting in that the speed of deficit reduction has to be slower than planned.

El Pais reports that the latest official estimates of the European Commission suggest that current policies will set Spain on a trajectory of a 6% this year, and 4% next year, as opposed to official targets of 5.3% and 3% respectively. (We think even this is too optimistic).

 

Nouriel Roubini on Spain

 

 

Writing in the FT, Nouriel Roubini says the recapitalisation of Bankia was the beginning of a process to raise the capital stocks of Spanish banks by what he estimates €100bn-€250bn. The Spanish government cannot conceivable meet that challenge alone, and will require a bailout

“A bailout package would buy some time for Spain, but time will only help if it is used to generate economic growth. By making private claims on the sovereign junior to the claims of the troika … even a bailout risks reducing the chances of it regaining market access. Moreover, with economic indicators showing Spain sinking further into recession, a turnround in the country’s economic performance would require a significant shift in policy: monetary easing by the ECB, a weaker euro, fiscal stimulus in the core, less front-loaded austerity in the periphery, more international firewalls and debt mutualisation.

 

 

The only way for there to be a happy ending in Spain is if action is taken swiftly in Brussels, Frankfurt and other European capitals. But that is not likely to happen. The eurozone periphery and Spanish crisis look like a slow-motion train wreck.”

 

Confident SYRIZA could emerge even stronger in new elections

 

 

As expected, Alexis Tsipras hit the wall trying to forge a coalition with other left parties, saying that he would hand in his mandate. “We cannot make true our dream of a left-wing government”, Kathimerini reports him as saying. Despite this failure, Tsipras said his party had succeeded in bringing fundamental change to the political scene with foreign creditors now more open to renegotiate the bailout’s onerous terms. “We have forced all of Europe to speak about the great change brought about by the Greek vote,” he said.  It looks like SYRIZA might win even more votes in the next elections.

 

 

As for the procedure: It is now up to Evangelos Venizelos to try and form a government. He said “We can’t reach a solution now but we will keep trying.” Should Venizelos also fail, then President Carolos Papoulias would call in leaders to form a “unity” government. If this is not achieved by May 17, new elections will be called.

 

Germany threatens end of rescue payments for Greece

 

 

Germany became the first euro member to explicitly threaten Greece with an end of rescue payments should the country not stick to the reforms agreed in the program with the EU and the IMF, Frankfurter Allgemeine Zeitung writes. “Should Greece stop its reforms, then I don’t see that remaining tranches (of EU/IMF credits) will be paid”, Guido Westerwelle said. “We want Greece to remain in the eurozone but the agreed reforms have to be implemented.” Wolfgang Schäuble went along the same lines. “The majority of the Greek people wants to remain part of the euro”, he said. “We must clarify that the precondition for this is the implementation of the aid program’s reforms. One cannot have one without the other.” Neither minister wanted to elaborate on the risks of a Greek state insolvency for the eurozone. But according to FAZ the German government thinks those risks have diminished significantly compared with 2010 or 2011. 

 

Bundesbank signals acceptance of higher inflation in Germany

 

 

For the first time the Bundesbank signalled that it was ready to accept higher inflation in Germany than in the eurozone as a result of the good domestic economy and the rebalancing efforts in the eurozone, Financial Times Deutschland reports. “In this scenario Germany could in the future have an inflation rate somewhat above the average within EMU”, the German central bank wrote in comment to a hearing in Bundestag. The Bundesbank stressed however that monetary policy would have to ensure that inflation overall in the EMU remained consistent with the gaol of price stability and the inflation expectations must remain firmly anchored. With this position the Bundesbank accepts that a rebalancing of the eurozone economies will not be possible without temporarily accepting higher inflation in Germany while peripheral countries undergo severe reforms that entail deflationary tendencies. In a recommendation to Germany, the IMF wrote that the country should accept “a pick up of salaries and some asset prices”. The new position of the Bundesbank on inflation is a further indication of a change in mentality among the German leadership after Angela Merkel’s recent willingness to do more to enhance growth in the eurozone and Wolfgang Schäuble’s appeal to social partners to bring about significant wage increases.

 

Mark Schieritz applauds the Bundesbank’s flexibility

 

 

Writing in Herdentrieb, Mark Schieritz applauds the flexibility of the Bundesbank and the German government. “As a fundamental principle I observe that many Anglo-Saxon analysts underestimate the flexibility of German politics”, Schieritz explains. “German finance politicians have to be seen as tough guys in domestic political debates. That is what the population expects. And most certainly the political mainstream is more dogmatic in Germany than in France or the USA – from my point of view often too dogmatic. But the Germans are not stupid. Another fitting example of this are Wolfgang Schäuble’s comments according to whom salaries in this country must rise more significantly once again after years of wage moderation in order to decrease the imbalances.”

 

The Irish ‘Yes’ campaign is gathering pace

 

 

Another three weeks until the next landmark event for the Eurozone, the Irish referendum on the fiscal treaty on May 31^st.  The editorial in the Irish Times writes that while the government coalition did leave the platform to campaigners for a No vote to make much of the initial running, there is a good chance of a yes vote to succeed. A majority of Irish consumers believe their employment and financial prospects will improve during the coming year and they are unlikely to jeopardise those expectations. Within the EU Commission, attitudes are changing with a greater emphasis being placed on growth. These positive strands can create a narrative that will appeal to the electorate on May 31st. 

 

No relaxation of fiscal rules for the Netherlands

 

 

Netherlands gets no exception from the European Union in respect of its 3% target. ‘Rumours about a relaxation [of the rules] are unfounded,’ Commissioner Olli Rehn said. The Dutch economy is not in such trouble that an exception would be possible, ANP quoted Rehn as saying. The Volkskrant says Rehn’s comments are significant because there have been signs that Brussels may be more relaxed about the Dutch deficit, which threatens to reach 4.6% this year.

 

 

Radio Netherlands cites the outgoing minority government coalition emphasizing that great steps have been made fleshing out the 2013-budget-deficit deal struck with opposition parties a fortnight ago.  The deal – ensuring the Dutch 2013 budget deficit stays within the 3% of GDP limit and was agreed by coalition members, the conservative VVD and the Christian Democrats, and opposition parties, the D66 democrats, Green Left and the Christian Union.   The parties reached the deal just in time to deliver the outline accord to the European Commission before the 30 April deadline.

 

Kauder tells Hollande to check if markets want to borrow him money for debt financed programs

 

 

Angela Merkel’s chief whip in Bundestag Volker Kauder told Francois Hollande not to count on Germany to agree to European project bonds or any other stimulus programs that would be financed with debt. “If Hollande wants to initiate a debt financed stimulus programme, then he should look where he can get the money from on the markets”, Kauder told Handelsblatt. “The chancellor’s close ally warned that France’s competitiveness will not be strengthened by increasing taxes and by unwinding past structural reforms. The markets would severely punish France, Kauder warned. He said France cannot afford another downgrade.

 

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

 

 

Getting much worse again, across the board. At these levels, neither Spain nor Italy are solvent. Euro down at $1.2946.

10-year spreads
	Previous day	Yesterday	This Morning
France	1.268	1.339	1.363
Italy	4.091	4.406	4.393
Spain	4.324	4.582	4.636
Portugal	9.799	9.948	10.153
Greece	21.883	22.308	#VALUE!
Ireland	5.341	5.402	5.545
Belgium	1.728	1.860	1.899
Bund Yield	1.542	1.522	1.535
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.299	1.2946
Yen	103.670	103.14
Pound	0.804	0.802
Swiss Franc	1.201	1.201
ZC Inflation Swaps
	previous	last close
1 yr	1.78	1.78
2 yr	1.72	1.62
5 yr	1.78	1.73
10 yr	2.05	2.15
Euribor-OIS Spread
	previous	last close
1 Week	-6.759	-8.559
1 Month	-0.514	-1.414
3 Months	27.743	28.743
1 Year	97.164	97.064
Source: Reuters