 Moody’s cuts Italy by two notches, as loss of market access looms large
Moody’s Investors Service has today downgraded Italy’s government bond rating to Baa2 from A3, with negative outlook. “Italy is more likely to experience a further sharp increase in its funding costs or the loss of market access,” Moody’s said in a statement. The rating agency has also lowered the Country Ceiling to A2 from Aaa. “The lower ceiling reflects the increased risk of economic and financial dislocations,” Moody’s said. The political risks and the contagion from Eurozone crisis are the main driver of decision. In plus, Moody’s is now expecting real GDP growth to contract by 2% in 2012. Today the Italian Treasury will sell some tranche of BTPs, from a minimum of €3.5bn to a maximum of €5.25bn.
Berlusconi will run alone in next election
Silvio Berlusconi is the only candidate of centre-right party PDL for next Italian elections, Repubblica reports. “Yes, Berlusconi is the prime minster candidate,” lower house PDL leader Fabrizio Cicchitto said at the end of the party’s meeting in Rome. According to last polls, the PDL party is close to 25%. The second party is Movimento 5 Stelle, leaded by Beppe Grillo, a popular Italian comedian. The Democratic Party, divided by internal struggles, is close to Movimento 5 Stelle. According to PDL secretary Angelino Alfano, Berlusconi will be the only frontman of the party. In last days Berlusconi has said he’s ready to run. “Since Berlusconi stands as a candidate, the primaries are no longer an issue. They might be considered to select other party roles,” Chicchitto said.
(Just savour, for a moment, the idea of a Berlusconi-Grillo coalition.)
Italy will face a deep recession
Italian GDP in 2012 will fall by 2.4% at least, according to Confindustria’s head Giorgio Squinzi, La Stampa reports. “Probably it will drop even more because in the second half of the year I have some difficulty seeing improvements,” Squinzi said. The IMF also lowered its economic perspective on Italy. In addition, the Italian banks are facing huge problems. Foreign deposits at Italian banks down 20.4% year on year in April, meanwhile net foreign funding down €94bn in 12 months to April according to Italian banking association (ABI). “Despite the main refinancing interest rate cut by ECB, the Italian banking system is facing huge difficulties”, ABI said in a statement.
The next Spanish caja needs cash
After Bankia, now comes Novagalicia Bank, which needs to plug the Frob, with a shortage of about €6bn in capital, El Pais reports. The bank had apologised to customers for selling toxic products and for the multi-million compensation to its former directors. The final figure will depend on the September audit of the Spanish banking sector, which may well trigger the sale of the bank. The new chief executive expressed hope that he can sort out the mess, despite evidence, as El Pais put it, that the bank is a little monster that keeps gobbling up capital. The bank has lost thousands of customers as a result of various scandals.
De Guindos says Spain will follow the German example
In an interview with Frankfurter Allgemeine Zeitung Luis de Guindos says the Spanish government inspired itself from the reforms Germany underwent under Gerhard Schröder. “The Spanish economy needs the medicine that Germany had to take 10 years ago”, Spains economy minister explained. “The German reforms of the labour market, the social security as well as the great moderation with the salaries are examples. Spain is doing all that now even faster and more intensively.” Yet de Guindos said he was optimistic for the Spanish economy. “Spain has a trade surplus with the eurozone. Spain is one of the few countries that has maintained its international export quota.” Also the minister tried to reassure the European creditors of the Spanish banking rescue that their loans would be repaid. “I am convinced that there will not be even the slightest loss for the creditors.”
Spain takes further steps to centralise fiscal policy
Reuters reports that the Spanish government will soon start a procedure to back the debt repayments of the 17 autonomous regions through the creation of a fund. It will help them to repay debt in exchange for new and binding commitment to clean up the deficit. Butdget minister Cristobal Montoro also said the deficit path for the autonomous communities would be relaxed in 2013 before being tightened again in 2014.
Klaas Knot says there is no “religious belief” that 0.75% constitutes a rate floor for the ECB
Talking to Financial Times Deutschland Klaas Knot hinted at further rate cuts by saying that there was no “religious belief” within the ECB that the current policy rate of 0.75% should constitute a floor. “Should the situation deteriorate further there is no religious belief that would keep us from going below 0.75%”, the Dutch central bank president said. Also the ECB governing council member hinted at the possibility of introducing negative deposit rates by saying that the ECB would keep an eye on Denmark that cut its overnight deposit rate to minus 0.2%. “We should learn from the experience of other countries with negative interest rates before we decide whether that is an option for us”, he told FTD. Turning to the debate about the ECB’s supervisory role and its scope the central banker said the banking crisis in Ireland and Spain showed that it should not be limited to the currency union’s global systemic banks. “In both countries the problems originated from smaller regional banks, one could also say, from strongly politicized banks. Therefore we would miss the problem if we limited supervision to the large banks only.”
Where did the money go after the ECB cut the deposit rate to zero?
The use of the ECB’s deposit facility dropped by almost 60%, but the money was merely diverted to the banks’ current account – which also yields zero interest rates, the FT reports. Funds kept at the overnight deposit facility were down Wednesday night, from €808.5bn to €324.9bn
SPD will vote for Spanish bank rescue
The SPD will most likely vote for the rescue measures for the Spanish banking sector, Thomas Oppermann, a leading parliamentarian among the social democrats, told Spiegel Online. Oppermann applauded the tough conditions in the MoU for the Spanish banking sector. But the parliamentarian also said that he thought it was crucial that Angela Merkel manages to get her own majority in her coalition which she did not manage to do in the recent vote on the ESM. The Bundestag will convene for a special session on July 19 to vote on the Spanish banking rescue.
German youth has a negative image of the euro
A study done by the German banking association shows that Germans between 14 and 24 years have a negative image of the euro and its future, Die Welt reports. Asked about the euro’s long term chances of success 56% responded the euro would not be successful against 42% who thought it would be successful. 51% think that the euro has proven itself with the remainder thinking the opposite. But the study also showed a huge ignorance in this age group regarding important basic economic concepts. 95% of the respondents did not even have a vague idea how high the inflation rate currently is.
Is this the end of the downturn?
These data look encouraging. Eurozone industrial production increased by 0.6% in May, according to Eurostat, but fell in France and the Netherlands. Reuters reports that a poll had given a consensus of a 0% change in the data. But Eurostat revised downwards the April figure from an 0.8% drop to a 1.1% drop. The question is whether the May figures are a freak, or whether there is a change in the trend. The article quoted an analyst as saying that weakening business surveys are pointing to a more rapid rate of decline.
Who has the most incentive to leave the euro area?
Italy and Ireland have more incentive to quit the euro than Greece, while Germany would benefit the least from quitting, according a game theoretical cost-benefit analysis of Bank of America Merrill Lynch. Foreign exchange strategists David Woo and Athanasios Vamvakidis concluded in a July 10 report that investors “may be underpricing the voluntary exit of one or more countries” from the Eurozone. The report was widely quoted by the financial press, including Bloomberg. Italy would enjoy a higher chance of achieving an orderly exit than others and would stand to benefit from improvements in competitiveness, economic growth and balance sheets while Germany has the least incentive of any country to quit because it would face weaker growth, possibly higher borrowing costs and a negative hit to its balance sheets. (This is a pure economic cost-benefit analysis, which ignores completely the political dimension of such a breakup process. What it shows once more again is that the eurozone is now considered by investors more like an exchange rate mechanism which you can join and leave rather than a single currency area.)
Ministers to find new savings ahead of troika meeting
Yannis Stournaras gave ministers a week to come up with cost-cutting measures, including reductions in military procurement and further cuts to health and local government spending, the FT reports. If sufficient savings could be identified it might be possible to avert a 12% wage cut agreed with the creditors, which would save €205m.
For the next two years Greece is looking to save €11.5bn. Sources told Kathimerini that savings about €7.5bn would have to come from the state budget, €3bn from social transfers and €2bn from changes to the structure of the central administration. The biggest savings, more than €1bn, are due to come from cost-cutting at local authorities and central government spending. There are also plans to cut all pensions above €1500 by 10%. This will save €600m a year. Auxiliary pensions will also be limited so retirees can earn no more than €2400per month from the basic and supplementary packages they receive. This will save roughly €1bn.
According to the FT, European officials have given assurances that in spite of delays in making transfers to the budget, funds will be available to cover a €3.2bn sovereign bond repayment due in August.
10 reasons why the eurozone will be in perish this summer
Les Echos enumerates 10 reasons why there will be no summer respite for the currency union:
The German constitutional court decision may be closer than you think
FT Alphaville did a good job digging up an excellent analysis by Martin Lueck at UBS, who has argued that the decision of the German constitutional court should not be taken for granted. He said the commentary had taken the upcoming decision too lightly. He cites for reasons why the court may just say No: First, there is less pressure on them to say Yes in order to avoid a crisis. The EFSF is, and remains, in place. Second, the court has already ruled that the transfer of budgetary sovereignty had reached its limits. The ESM extends those limits further. Third, the court wants to predict its own position, and lose power to the ECJ. Fourth, one of the justices had been on the board of the “Mehr Democracy” movement, one of the plaintiffs. In his conclusion Lueck says: the most important justices have previously complained about a perceived lack of democratic legitimacy at the supranational level. “All this does not look like a straightforward call to us.”
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Spreads are rising again. Euro keeps on falling.
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