Eurointelligence Daily Briefing, 5 de Julho de 2012. Enviado por Domenico Mario Nuti.

It is getting worse again. Spanish 10-year spreads are back to over 5%, with bund yields below 1.5%, as risk aversion returns to the eurozone. Investors are spooked by the economic downturn, and have now digested in some detail the result of last week’s summit, which to them were not what they appeared to be at first sight. They understand now that it is not clear at all that the ESM will ever inject equity into the Spanish banking system. The agreement is premised on further agreements that are at least as controversial as the one last week.

 

Spain is on course for a massive deficit overshoot deficit, which the government wants to nib in the bud with an additional austerity programme of up to €30bn, or 3% of GDP, a package of spending cuts and tax increases, as Reuters reports from Madrid, citing sources with knowledge of the matter. The programme would run over several years, and would involve VAT, “a new energy levy, reforms to the pension system, pay cuts for civil servants, new motorway tolls and another drastic reduction in ministry and regional spending.” Some of the measures may be announced as early as next week. Cuts to unemployment benefit are also considered. The article says the new austerity drive aims to put Spain back on track to meet the 2012 deficit target.

 

(Dream on. Austerity in the current economic climate has the exact opposite effect. Spain’s recession will get worse, and the deficit may thus end up even higher. Also consider that Italy also currently has a spending review, so the effect of austerity of those two large countries is likely to be mutually reinforcing.)

 

More survey evidence that the recession is deepening

 

All of Europe’s biggest economies are in recession or heading there and there is little sign that things will improve soon, several surveys showed yesterday, according to Reuters. It quoted an analyst as saying that the PMIs are bottoming at a level consistent with a further weakening of activity in Q2. Markit’s Eurozone Composite PMI was 46.4 in June, and has remained below the 50 mark for ten consecutive months. Markit said the surveys were consistent with a 0.6% contraction for the euro zone economy in the second quarter. Germany is also entering a downturn. Its services sector stagnated in June.

 

Insee, Istat and Ifo also say that the eurozone is in recession

 

Les Echos reports that the three economic institutes Insee of France, Istat of Italy and Ifo of Germany predict that the eurozone is heading for a recession. According to their work the industrial production in the currency union has declined by 1.0% in Q2 after a decline of 0.3% in Q1 and it will decline by 0.7% in Q3 and by 0.5% in Q4. According to Eurostat the eurozone GDP declined marginally by 0.2% in Q2 and it will decline slightly further by 0.1% in Q3. These figures confirm the Commissions projections according to which the eurozone’s GDP will this year decline by 0.3%, the paper explains. Against this pessimistic backdrop markets today expect the ECB to cut its policy rate by at least 25bn, perhaps by even 50bn to a historic low of either 0.75% or 0.50%, Financial Times Deutschland writes. The Governing Council will also discuss a further loosening of the collateral framework by dropping a minimum rating requirement for government bonds, the paper writes. Some in the Council may be tempted to push for a decision already today in order to favourably impress markets which have already priced in a rate 25bp rate cut.

 

Finland contests last week’s agreement , insists on taxpayers’ seniority

 

Finland is contesting the wording of an agreement struck last week in Brussels, arguing it doesn’t adequately address the possibility that loans to Spain from Europe’s permanent rescue fund can give taxpayers seniority, Bloomberg reports. The Finnish finance ministry considers it “technically possible” that some part of Spain’s rescue would be paid directly from the permanent bailout fund and that taxpayers would have seniority in such an event. Euro-area leaders sought to ease the terms of Spain’s bank bailout by assuring bondholders their claims won’t be junior to those of taxpayers. European Union President Herman Van Rompuy also addressed the point in his post-summit press briefing. “Financial assistance to Spain will be provided without seniority status for the financing provided by the EFSF/ESM.” Euro-area finance ministers may decide on July 9 whether the entire Spanish bailout will come from the EFSF, for which Finland will demand collateral.

  

De Jager tunes down Dutch opposition to secondary bond purchases

 

Dutch Finance Minister Jan Kees de Jager said Wednesday he was in principle not against buying bonds from struggling eurozone countries, but that the practice should “critically be looked at”. “We are reluctant, but unlike Finland we are not opposed to every single case. That you can’t do,” the Dutch news agency ANP quoted de Jager as saying during a debate in the Dutch lower house of parliament.  De Volkskrant cites him saying “”Sometimes it helps in Europe sometimes by threatening nuclear options. Without really wanting to use it. “

 

Extraordinary eurogroup meeting may decide on Spain and Greece on July 20

 

The Eurogroup may hold an extraordinary meeting on July 20 to decide on Greece and Spain, several news agencies report. The audit of the four Spanish banks isn’t finished yet, sources toldAFP and the Greek bailout programme’s evaluation  won’t be ready for the scheduled meeting on Monday, according to Kathimerini.

 

The new round of talks with the Greek side will begin on July 24. Sources from Luxembourg confirm that until the revised bailout agreement is signed, there will be no further disbursements to Greece beyond the €1bn that had been withheld from the May tranche. Among the issues to be discussed at Monday’s Eurogroup is the bond maturing on August 20, which Greece will not be able to repay unless funds from the ESM are disbursed. A month’s extension could be granted, although several European governments will likely voice disagreement.

 

Bundestag will hold special session on first tranche of bank rescue for Spain

 

According to Frankfurter Allgemeine Zeitung, Bundestag will interrupt its summer break the week after next in order to vote on the first tranche from the ESM for the bank rescue in Spain. The first tranche will most likely be in the magnitude of €30bn, details will be worked out be the euro finance ministers in their meeting on Monday. Bild reports that the German government will also agree to pay a further €4bn to Portugal in the framework of its EU/IMF rescue program. The mass market daily quotes from a confidential letter of finance ministry state secretary Steffen Kampeter who says that the reforms in the country were proceeding “broadly according to the plan”.

 

Greece to negotiate milder austerity conditions

 

The Greek government will meet with Troika representatives today. Sources told Kathimerini that the four key “axes” of the Greek proposal to the troika will be: restricting hiring in the civil service to 1 for every 10 departures (which translates into 15.000 fewer civil servants this year;the target agreed with the troika was  150.000 by 2015), the transfer of civil servants to other parts of the public sector instead of their inclusion in a labor reserve scheme;an ambitious program for privatizing state assets;and the adoption of certain measures to relieve austerity-weary citizens such as allowing them to pay taxes in installments (this would mean that €2.5bn would not be collected until next year).

 

Merkel and Hollande want to create the post of a „Super Mr. Euro”, Le Figaro writes

 

According to Le Figaro Angela Merkel and Francois Hollande agree to upgrade the eurogroup chairman post to a “Super Mr. Euro” who would be eye to eye with Mario Draghi and Christine Lagarde. The post should be more visible than it has been since the current holder Jean-Claude Juncker took it over in 2005. The aim would be to have someone who would represent the eurozone politically at international meetings like the G20. The chancellor will talk with the president about the idea this Sunday when both will meet in Reims. According to the paper, which says it drew on high ranking German and French sources, both would want Juncker to continue on an interim basis until the end of the year when Herman Van Rompuy will present the detailed proposals how to strengthen EMU. There appears to no agreement yet about who should be this “Super Mr. Euro” afterwards. According to Le Figaro Wolfgang Schäuble still is interested while the French also consider that a Frenchman should occupy one of the high profile euro posts. According to Bloomberg a German government spolkesman angrily denied the report calling it a “fabricated story”.

 

Hans-Werner Sinn organises a public platform against the banking union

 

The idea of a banking union has so far been less ideologically loaded in Germany, compared with the eurobond. But according to Spiegel Online, Hans-Werner Sinn and a few other German anti-euro economists now want to change this. They have created a joint platform of protests against the banking union, on the grounds that the outstanding of the eurozone’s banking sector is almost three times the size of sovereign debt, and that a joint liability for this debt would implicate savers and taxpayers for generations to come.

 

Wolfgang Munchau says summit may have increased probability of a eurozone collapse

 

 

In his column in Spiegel Online, Wolfgang Munchau says none of the two elements of the deal struck at the European Council add up. Bond purchases are unrealistic, and potentially counterproductive, if undertaken by a budget-constrained vehicle. And he says he says he does not think that Mario Monti could repeat his diplomatic trick, and force Angela Merkel to raise the ceiling of the ESM, or give it a banking licence. On direct equity injections, he said this was dependent on supervision, which itself will take at least a year. And he also suspects that Merkel has a different view of what that means that her southern European colleagues. His conclusion is that the probability of a collapse of the eurozone has actually increased with the summit.

  

Spanish prosecutor goes after Rodrigo Rato and other prominent PP members

 

El Pais has the full coverage yesterday’s decision by a high court to investigate a complaint against Rodrigo Rato and 32 other top officials at Bankia, many of whom with links to the governing PP party. The paper said the party was deeply concerned by this decision. The judge advised them that they needed legal assistance. This follows a criminal complaint by an anti-corruption prosecutor. The judge said he wanted detailed information on credit transactions or guarantees made after 2008 for directors and other senior officials and their families, and for the political groups with which they are affiliated. He also wants information about early retirement, pension, life insurance, salaries and allowances paid to directors and senior managers. Among witnesses, the former Bank of Spain governor Miguel Angel Fernandez Ordonez will be invited, as well as the president of the National Securities Market Commission and an auditor. The judge has called for a hearing on July 23. The complaint against Bankia relates to the crimes of fraud, embezzlement, falsification of financial statements and mismanagement, punishable by between two and six months to 15 years in prison. The prosecution, however, clarifies that at this early time of the investigation, no individual is assumed to have engaged in criminal conduct.

 

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

Spanish spreads back above 5% as risk aversion returns.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	1.011	1.084	1.102
Italy	4.106	4.433	4.424
Spain	4.735	5.016	5.003
Portugal	8.593	9.088	9.075
Greece	24.522	24.600	#VALUE!
Ireland	4.681	4.784	5.197
Belgium	1.419	1.498	1.568
Bund Yield	1.537	1.454	1.463
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.258	1.2524
Yen	100.360	99.94
Pound	0.803	0.803
Swiss Franc	1.201	1.201
ZC Inflation Swaps
	previous	last close
1 yr	1.32	1.32
2 yr	1.31	1.31
5 yr	1.49	1.57
10 yr	1.83	1.82
Euribor-OIS Spread
	previous	last close
1 Week	-4.957	0.243
1 Month	4.871	5.971
3 Months	32.493	32.493
1 Year	96.021	97.221
Source: Reuters