Rajoy takes Austerianism to its logical conclusion
Spain’s conservative prime minister yesterday took Austerianism to its logical conclusion with a programme of €65bn in savings and higher taxes until 2014. As El Pais points out in its front page lead story, this is the most Draconian economic package during Democracy, in fact since General Franco’s stabilisation plan of 1959. The measures include:
on the revenue side:
on the expenditure side:
The measures will be adopted by the parliament this Friday, when they become immediately effective. Rajoy himself admitted in parliament that the measures will prolong the recession in 2013. (We assumed that this would have happened even under the previous regime. We think this plan will prolong the downturn until 2014/15. We also think that the budgetary impact will be much lower due to the strong consumption effect that results from higher consumption taxes; wage cuts, and other public expenditure cuts; Spain is likely to miss even the revised 6.4% deficit target because of this dynamics.)
El Pais reports of a poll according to which 76% think the measures will end the crisis – even though a majority of Spaniards are opposed to them.
Reuters reports that anti-austerity protests in Madrid turned violent yesterday with police firing rubber bullets at protesters who pelted them with stones, fruit, bottles and firecrackers outside the industry ministry. Tens of thousands or demonstrators joined hundreds of coal miners who had staged a long march from northern Spain in protest at cuts in mining subsidies they say will put them out of work, as public discontent over austerity measures grows.
Paul Krugman calls the austerity programme pointless
In his NYT blog, Paul Krugman says Spain faces a three-tier problem: a highly indebted banking sector, an increasingly indebted public sector, and a loss of competitiveness. To end the depression, the country needs an export-led recovery, which absorbs some of the employment lost in the housing crash. But it now confronts a multi-annual depression. The programme will cut Spain’s debt by a cumulated 4% of GDP – which is not much. He has constructed a flat-tailed Phillips-curve to show that even the competitiveness effect is likely to be small. He says it is not clear why anybody would want to impose such harshness for so little benefit?
Xavier Vidal Folch on why the ESM programme for Spain is not different in principal from that of Greece It was politically important for Mariano Rajoy that Spain is not subjected to the same type of conditionality as Greece was when it received its programme. The MoU, which El Pais published yesterday (and form which we quoted at length) is a very invasive programme, say Xavier Vidal Folch, El Pais’ main economics commentator. The EU and the IMF act like a bank. They impose conditions to insure that the money is repaid. In this case, these conditions relate to the banking sector. The conditions may be softer than they were for Greece, but this is still an intervention. And there is still troika control.
Capital flight out of Spain intensifies This is from FT Alphaville. Credit Suisse has compiled numbers on capital flight out of Spain. Since the middle of last year, capital has been flowing out, with virtually no inflows. Yiagos Alexopoulos at CS reckons outlflows are currently running at an annualised rate of 50% of GDP. Important, he says domestic investors are now joining foreign investors in moving assets abroad. And if that trend accelerates, things will get ugly.
Monti gets gloomy
Mario Monti warns Italian political leaders over future economic challenges, Il Sole 24 Ore reports. “We are in a war, a very difficult war,” Monti said at the Italian Banking Association’s annual meeting. Recession, lack of market confidence, high yields on bond markets: Italy remains on the brink, also after the latest fiscal package, that will save over €26bn. “At G20 in Cannes, my predecessor Silvio Berlusconi underwent extremely unpleasant pressure that I imagine was close to humiliation,” Monti said. Now, according Monti’s view, Italy must fight “a battle against widespread prejudice.” But the investors question remains only one: Will Italy be able to pay its huge public debt of over €1,900bn? No, according to Citigroup Chief Economist Willem Buiter.
Ignazio Visco says ECB must do more as eurozone break-up remains a possibility
The Bank of Italy Governor Ignazio Visco said the ECB must guarantee enough liquidity for Eurozone lenders, AGI News Agency reports. “The ECB has no choice but to pursue these goals,” Visco said during a speech in Rome. In June ECB funding to Italian banks rose to €281.44bn from €272.7bn in May. According to Visco, the ECB should ensure banking stability using new actions such as intervention in secondary markets with Securities Markets Programme (SMP). “Every measure must be considered because a Eurozone break-up is a possibility. Remote, but a possibility,” Visco said. Talking about Italian current situation, Visco said the spread between BTP and Bund is a “lot higher than what is justified by the fundamentals of our economy.”. At the end of the day, the Italy 10 year government bond yield was at 5.813%.
The Bank of Italy wants to invest in corporate bonds
According to La Stampa, the Bank of Italy will hire two fund managers before the end of the year to revamp its treasury operations. With a portfolio of €125.6bn at the end of 2011, the Bank of Italy invests primarily in Italian government bonds and US Treasury bonds. Over $1bn will be managed by two US fund managers for a new investment strategy: corporate bonds. “It’s a very interesting choice, we will act like an investment bank,” a Bank of Italy official said to La Stampa. ETF, corporate bond, stocks: the only condition is a BBB- rating, a step under investment grade.
Schäuble things taking compulsory loans from the rich is an “interesting” idea for euro crisis countries
Wolfgang Schäuble’s spokesman endorsed the idea of DIW, an economic research institute, to impose a compulsory loan on the rich in order to balance public finances. According to Frankfurter Allgemeine Zeitung he said the idea of applying a rate of 10% on individuals owning more than €250,000 was an “interesting” idea for euro crisis countries where the relationship between tax revenues and private wealth was out of balance. In Italy, for example, public debt is 120% of GDP while according to calculations of Commerzbank private wealth represents 175% of GDP. According to Boston Consulting the relation of millionaires to the total of the population is even higher in Italy than in Germany. The situation is similar in other highly indebted countries such as Greece and Portugal. DIW argues with its proposal €230bn could be raised in Germany. Schäuble’s spokesman dismissed the idea for Germany because according to him the country’s public finances were in order. Also the constitutional court had prevented the government to institute a compulsory loan in 1984. (So Germany makes proposals for others, but not for itself. We suspect that principle will prevail in the German approach to the banking union. It will be a banking union mostly for non-German banks.)
Mark Schieritz gives 10 reasons why a compulsory loan is a good idea In his Herdentrieb blog Mark Schieritz gives 10 reasons why he thinks the DIW’s proposal to impose a compulsory loan on people owning more than €250,000 is a good idea. Among them are that the wealthy are particularly benefitting from the costly euro rescue measures, because private wealth in many euro countries surpasses by far the public debt in many euro area countries and because it avoids debt restructuring. If the German constitution is an obstacle, Schieritz argues it must be changed. “Laws are there to serve the people and not the other way around.”
Ratification of the fiscal pact will be risky for Hollande According to Le Monde, the ratification of the fiscal pact could be politically risky. The paper points out that socialist deputies have noted with interest that in Germany 23 SPD parliamentarians voted against the pact when it was recently ratified. So there is no fear at the Elysée and the prime minister’s office that there may be dissidents within the government’s parliamentary majority and that the government may need the votes of the conservative opposition to get the pact adopted. Also there is uncertainty as to whether or not the inclusion of the golden rule on deficit reduction and a balanced budget will require a change of the constitution. Francois Hollande decided to submit the fiscal treaty to parliament after having campaigned against it and after having promised a “renegotiation” in case of his victory. Hollande considers that the recent EU council decisions on growth measures, banking supervision and the financial transaction tax amount to a renegotiation of the pact. In order to gain favours within his own parliamentary majority he wants to let the deputies vote on these items at the same time as they vote on the fiscal pact.
Greece to ask for renegotiation in eurogroup meeting end of July The three leaders of the Greek coalition government agreed that Greece should adopt a more proactive stance, after Finance Minister Yannis Stournaras’s did not ask for any changes of the memorandum at the Eurogroup meeting in Brussels on Monday, Kathimerini reports. It is now likely that Stournaras will be asked to bring up the renegotiation of the memorandum at a Eurogroup meeting end of July. The three leaders also intend to form the key negotiating team involving officials at other levels. The meeting was called after Evangelos Venizelos appeared concerned that the government was giving the impression it was not making any effort to renegotiate the terms of Greece’s bailout. Powerful opposition leader Alexis Tsipras used the opportunity to accuse the coalition of surrendering to lenders over bailout terms and of failing to act in the interests of its people.
Revise or not revise
Portugal is still looking at the arguments. A growing number of analysts and investors believe that a revision of the austerity targets could have a positive effect on the risk perception of Portugal, Jornal de Negocios reports, which contradicts the view expressed by Mario Draghi, who said that that such a decision “would be seen by markets as a step backwards” in regaining credibility among investors in Portugal.
Q1 Contraction in Ireland worse than expected The latest forecast from the Central Statistical Office in Ireland shows that the contraction in the first quarter of 2012 was worse than most forecasters expected, the Irish Independent reports. Output of goods and services (GDP) slumped by 1.1% and national income fell 1.3%. The figures are due to be published today, and had been accidentally posted online for 15 min yesterday. The Irish Independent writes that the downward revision casts doubt about how realistic the government’s budget targets will be for this year, as a weak start into this year makes it harder to meet the official forecasts, on which the budget targets depend. Last year’s forecast, meanwhile, was revised upwards, doubling the annual growth rate to 1.4%.
27 banks fulfill EBA requirements raising €94.4bn capital, €9.5bn through state aid
European banks had until the end of June, to meet the requirements of European Banking Authority (EBA), a core Tier 1 ratio of 9%. In a preliminary report, the EBA said that the 27 banks it sampled managed to raise €94.4bn, more than making up for the €76bn shortfall in capital that the authority had identified in December. The four banks – Bankia, Dexia, Oesterreichische Volksbank AG and Germany’s WestLB – undergo “deep restructuring”;
Greek banks were excluded from the analysis.
Seven of the 27 banks, which fulfill the requirements, depended on state aid to achieve this. Three of them were Portuguese. The €6.15bn for the Portuguese banks represents nearly two thirds of the €9.5bn injected by member countries to banks, Jornal de Negocios reports.
The euro’s reserve currency status is coming under pressure as a result of the euro crisis
According to the ECB’s annual report on the international role of the euro, there are first signs that its status as the world’s second most important reserve currency is coming under pressure, FTD writes. While the euro’s share in world currency reserves has declined slightly by 0.4pp to 25.0% there are additional signs of decline. According to a survey quoted by the ECB report out 78% of the 54 currency reserve managers of central banks said that the euro crisis is affecting the way how they manage their currency reserves. Additional anecdotal evidence like the decision of the Swedish central bank to reduce the share of euro denominated securities from 50% to 37% points to the same direction. The report also points out that there is evidence that the Renminbi may gain the status of a major reserve currency much faster than commonly thought.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois A marginal improvement in Spanish spreads, but the austerity package has hardly affected fundamental expectations.
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