 The euro crisis turns violent
Demonstrations in Spain, which have been going on for a week, have turned violent in the early hours this morning. This is promises to be a hot summer. Here is a picture from El Pais.
In its front page report, El Pais writes that what started out as spontaneous demonstrations against the €65bn package has turned into a much broader series of demonstrations, with left 26 people injured last night, and seven arrests. The demonstration escalated after midnight, and El Pais reports that demonstrators fired shots and threw burned containers thrown. The demo started off in front of the parliament, with estimated 100,000 protesters, according to the paper. There were other protests in 80 cities in Spain. Demonstrators are outraged by the cuts in Christmas bonuses, the rise in VAT, and cuts in social services. The trade unions are now considering whether to call a general strike.
Italy’s largest union CGIL is calling for a general strike in protest over Monti’s austerity programme
The demonstrations and protests are very likely now to spread to Italy. The country’s largest union, CGIL, said there would be a public-sector strike in September to oppose the Italian government latest austerity plan, Il Fatto Quotidiano reports. According to Susanna Camusso, CGIL head, its union will launch “a general strike of the public sector against the umpteenth measure.” The cuts, to avert a 2% increase in VAT scheduled for September, include a 10% reduction of staff and 20% reduction of managers of public-sector. The complete package, result of the spending review conducted by Mario Monti, will save over €26bn until 2014. The measure, which will go before the Parliament at the end of July, was approved by the cabinet two weeks ago.
Bundestag votes for Spanish bank rescue program
The Bundestag yesterday voted for the Spanish bank rescue program with an overwhelming majority of 473 yes-votes against 97 no-votes and 13 abstentions, Süddeutsche Zeitung reports. With only 301 votes from her coalition, Angela Merkel, however, missed the absolute majority of 311 out of the total 620 Bundestag votes. This is the third euro vote where Merkel does not pass this symbolically important threshold. But the opposition SPD and Greens overwhelmingly voted for the rescue program. In order to close the ranks behind the government, Wolfgang Schäuble had to insist heavily that it was the Spanish government that remained liable for the rescue program of potentially up to €100bn. “Spain has made the request, Spain gets the money for the bank recapitalization and Spain as a state is liable for the EFSF’s credits”, the finance minister said. Michael Fuchs, deputy parliamentary leader of Merkel’s Christian Democratic Union party, said in an interview with Bloomberg “Schaeuble reassured us today that there will be no possibility to sidestep the liability issue in the process of transferring Spanish bank rescue aid. We want to make sure there are no tricks,” that there is no “circumventing state liability,” he said. “The German parliament will be involved all the way.”
Handelsblatt reports that markets were disappointed at Schäuble’s assertion and sent the euro down to $1.22. Spain also had a disappoint bond auction yesterday, with 10-year yields up to over 7%, and spreads at 5.9%.
Spanish EFSF loan will have variable interest rates
This is a small, but important detail in the Spanish EFSF programme. El Pais reports that the EFSF loan to Spain will carry a floating interest rate, to be revised each six months – in contrast to the loans to Greece, Ireland and Portugal, which came at fixed rates. The variable rates are very low at the moment, and are calculated from the EFSF’s own refinancing costs, plus margin. The average duration is between 12.5 and 15 years, though Spain is committed to early repayment after the recapitalisation of the banks. The first tranche is due July 31. (It looks the eurogroup wants to protect itself an increase in the umbrella’s own interest rate. Does not seem they have great confidence in the system.)
Claus Hulverscheidt says Spain is likely to require another programme
In a comment in Suddeutsche Zeitung, Claus Hulverscheidt writes that market participants had misjudged the agreement of the summit, as Germany’s remains unrelenting on the notion that Spain, not the banks themselves, are responsible for the loans. He says there will be no effective relief for Spain as a result of this programme. He writes that it is possible that the Bundestag may have to re-assemble for another emergency session in August to vote on a package for the country as whole, this time much larger.
Angela Wefers argues that Bundestag insisted on tough conditions and controls
Börsenzeitung’s Angela Wefers concludes that the Bundestag has sent a strong signal that liability and conditions for the government in Madrid, a reform program for the banking sector and the solution of non-viable banks with aid restrictions during their restructuring constitute clear preconditions for future aid. “The granting of direct aid for banks from the euro rescue funds will not be possible as long as there is no functioning cross border bank supervision in the Eurozone and the EU”, Wefers argues. “When this is the case, will be the Bundestag’s decision. The margin of manoeuvre of government and chancellor Angela Merkel is therefore shrinking. But this also reinforces her against all attempts to get draw Germany into a debt community without control.”
Next vote will be on Italy, Heike Göbel says
Frankfurter Allgemeine Zeitung’s Heike Göbel points out that many speakers in yesterday’s Bundestag debate on the Spanish bank rescue pointed out how strict the program’s conditions were on banks and on getting the public finances in Spain back in order. “But all of that is a side show”, Göbel continues. “It is a fact that Spain is getting the assistance on eased conditions. Soon Italy will submit a request. And it is also a fact that instead of the creditors … (mostly German) taxpayers will be liable for misguided speculations of banks.”
After Spain, Italy
“Italy risks to be the next,” Marcello Sorgi wrote in a column on La Stampa. The Italian PM Mario Monti should act “right here right now” to avoid a Greek or Spanish scenario, Sorgi wrote. “This crisis is not a Germany’s fault, but the situation can get worse by Germany’s fault,” the column said. After Spain, the next market focus will be Italy. Low growth, huge debt, political instability, lack of structural reforms: Monti has done so much. “But not enough,” Sorgi argued. In addition, Italian lobby and unions continue to attack Monti’s government, delaying reforms.
Italy suffers excessively high taxes
The Italian tax burden rose to 55% of GDP in 2012, Repubblica reports. According to Confcommercio, an Italian business lobby, Italy’s tax pressure hits a world record in effective taxes, between direct and indirect taxes. The Italian grey economy amounts to an estimated 17.5% of GDP, while tax evasion accounts for €154bn. The tax burden amounts to 45.2% in 2012. Meanwhile, Italy thus ranks 5th among the 35 countries considered, behind Denmark (47.4%), France (46.3%), Sweden (45.8%) and Belgium (45.8%). “It’s crazy, we cannot have a concrete growth with these taxes,” Giorgio Squinzi, head of the main Italian business lobby Confindustria, said. Italy ranks above the European average and is 5 percentage points above Germany, 7 points above the UK, 12 points above Spain, 15 points above Japan and almost 20 points above the United States.
A wealth tax solution for Italy
The Italian government mulls to set an extraordinary wealth tax on income, also called Patrimoniale, several sources have told ANSA. As in 1992, when Italy left the ERM, the Monti administration will launch this solution to raise over €6bn. “Italy risks to lose capital markets access,” Citigroup warns. The Italian public debt rose by €17.1bn in May over April, setting a new record of €1,966.3bn, according to Bank of Italy.
Fitch affirms Italy, but political risks remain
Fitch has affirmed Italy’s rating at A- with a negative outlook, Il Sole 24 Ore reports. Despite the latest sovereign debt rating downgrade by Moody’s, just one week ago, Fitch argued that the Italian economic fundamentals are strong. “Fitch has sought to look beyond current economic and financial conditions and take into account recent and prospective structural reforms that would enhance the growth potential of the economy as well as its assessment that debt stabilisation and reduction is within reach,” Fitch said in a statement. By the way, there will be some risks of political instability. The affirmation of long-term rating reflects the “demonstrated commitment of the government to reducing the budget deficit and public debt, as well as Parliament’s adoption of a balanced budget amendment to the Constitution and the ratification of the Fiscal Compact.” Fitch expects Italy’s GDP to drop 1.9% in 2012 and to stagnate in 2013, before rising by 1% in 2014, in line with IMF forecasts.
No-confidence vote over Spanish collateral deal in Finland
The opposition in Finland demanded a no-confidence vote against the government over a collateral deal with Spain made in exchange for Finland’s support of an EU bailout for ailing Spanish banks, due to be voted today, according to AFP. Earlier this week, the Finnish government said Madrid had agreed to provide collateral to Finland in exchange for its participation in the Spanish bank rescue. Finland’s share of the bailout amounts to about €1.9bn, with collateral put at €763m, which will be paid in cash progressively. With a comfortable majority of the broad coalition government means that both the collateral deal and Finland’s participation in the bailout are likely to pass.
Parliamentary opposition is also rising against Irish deal
This German vote on the Spanish bank bailout will have knock-on effects for Ireland. The Irish Timesquotes EU sources warning of rising opposition among German, Finnish or Dutch MPs disputing a new debt deal for Ireland. Although EU leaders have given the go-ahead for a fundamental revision of the rescue scheme in the autumn, parliamentary approval will be needed in many countries. On the table is the provision of about €30bn in bonds from a European bailout fund to the former Anglo Irish Bank to replace expensive State-funded promissory notes. They also discussed the possibility of the ESM taking a direct equity stake in Allied Irish Banks, the Bank of Ireland and Permanent TSB. Michael Noonan said any deal for European rescue funds to take over the bailed-out banks would have to offer a price “significantly in advance” of market valuation, the Irish Independent reports.
Greek government plans 200 state organization mergers and 22.6% auxiliary pension cut
The Greek coalition government aims to merge or scrap 200 public organizations by the end of August and to relax rules for private investors interested in buying stakes in “strategic” state enterprises, Kathimerini reports. Sources said that it was agreed the government would announce the closure or merger of 60 public organizations within the next few days, with the rest coming by the end of next month. Administrative Reform Minister Antonis Manitakis said the merger of public bodies would not lead to sackings and that the reduction would be achieved through retirements as well as a strict hiring process. One difficulty with this is that currently a transfer of a civil servant from a redundant organization to another part of the public sector is considered a new hiring and Greece has committed to only taking on one new bureaucrat for every five that leave.
There will be also cuts in auxiliary social security funds, Kathimerini reports, with lump sum payments civil servants receive upon retirement to be cut by 22.6%. Some €1.2bn from the next bailout loan tranche will go toward those lump sum payments. The state workers’ union branded a “casus belli”, strike actions are to be expected.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
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