Since Friday, the situation has deteriorated dramatically. After a stressed bond auction, Spain’s 10-year yields are approaching 10.4%, with spreads now at 6.2%. Italian spreads, too, have climbed up beyond 5%, and the euro decline continued, and is now at $1.2121. The market is now expected a fully fledge EFSF/ESM programme for Spain.

 

Two autonomous regions are apply for help, more to follow

 

On Friday it was Valencia. It was joined by Murcia over the weekend. Both autonomous regions have now requested to receive support from the  Autonomous Liquidity Fund. Vacencia is asking for about €2bn, Murcia for €200-300m. El Pais writes that apart from those two, Catalonia, Castilla-La Mancha, Baleares, the Canary Island, and possibly Andalusia might also ask for help, as the autonomous regions have to roll over debt of almost €16bn this year. Even though most of the autonomous regions have drastically cut back on staff and on other spending programmes, their revenues have come down over 6% during the first quarter this year. Catalonia had to get a loan for €500m, merely to be able to pay the summer bonus for public sector employees.

 

Mr Guindos goes to Berlin

 

The probability of a future bailout increases with the number of official denials. So when we read that the Spanish has once again denied that it needs a full bailout (beyond the €100bn or so, earmarked for the banking), we know that a full programme is now only a matter of time. El Paisreports that Luis de Guindos will be visiting Wolfgang Schauble in Berlin tomorrow, officially to explain how Spain is planning to implement the programme. The articles also give a sense of panic in the Spanish government, as the situation is extremely instable, economically and politically. 

 

Economists say a full Spanish bailout programme is now a certainty

 

Claudi Perez of El Pais has done a survey among influential economists and commentators, and found that there is an overwhelming majority who believe that a full Spanish bailout is foregone conclusion. The harshest comment came from an unnamed senior EU official, who said that Mariano Rajoy had wasted his political victory, and messed up completely. Spain’s credibility in the international markets was now zero. Ken Rogoff predicts a decade of anaemic growth and high unemployment.

 

Greece far off course from bailout targets, troika visits this week

 

Finance Minister Yannis Stournaras has identified about €8bn of spending cuts and savings for the next two years out of €11.5bn in additional cuts required, Bloomberg reports. The Greek government is also behind on state asset sales, having so far brought in €1.8bn. The state is unlikely to generate more than €300m this year, short of the about €3bn targeted for 2012, according to the outgoing chief of the state’s asset-sales fund, Costas Mitropoulos. Mitropoulos announced his resignation from the Hellenic Republic Asset Development Fund (TAIPED) last week, citing a lack of support from Samaras’s government. The troika of international creditors will arrive in Athens tomorrow.

 

Kathimerini lists the problems of why TAIPED failed so far. Even if this year’s target is mircaleously achieved, experts are predicting that the 2013 (€7.5bn) and 2014 (€12.2bn) targets are even more unrealistic as  “there were no sellable assets available”.

 

ECB stopped accepting Greek collateral, at least until after troika review

 

The ECB turned up the heat on Greece on Friday, saying it would stop accepting Greek bonds and other collateral used by Greek banks to tap ECB funding, at least until after the review.

   

The ECB move, which analysts said was aimed at stepping up pressure on Athens to adhere to the commitments of its EU/IMF bailout, will force Greek banks to turn to their national central bank for Emergency Liquidity Assistance (ELA) funds. Those funds will be more expensive than funds available in the ECB’s regular liquidity operations.  

  

The ECB said the collateral exclusion was due to the expiration of a temporary 35 billion euro scheme agreed with Greece and euro zone leaders.

 

Der Spiegel reports that Greece may leave eurozone as early as September

 

The sources are senior officials in the European Commission, who told Der Spiegel that the IMF is no longer willing to fund the Greek programme. The article also said that it would be virtually impossible to extend the programme, as several member states, including presumably Germany, would not be willing to provide the extra funds of between €10bn and €50bn, which an extension would require. The article says the member states want to wait until the ESM is fully operational before pulling the plug. For August, the troika will allow the Greek government to issue T-bills to repay a central bank loan. The T-bills will be bought by Greek banks, and will be eligble as central bank collateral.

 

German politicians are preparing for a eurozone breakup

 

It seems to us that Germany is preparing for a Greek exit. Peer Steinbrück, a former SPD finance minister and potential SPD candidate for chancellor, told Bild am Sonntag that he no longer believes that the eurozone can hold together, and that several members are likely to leave. He did not mention any names, but it was clear, that he was not just talking about Greece, but other countries as well. He said a rump euro was very likely to survive, but he declines to predict which countries would be left. He also said the manner in which the Bundestag is forced to make decisions, at short notice, about massive risks, was pushing the democracy to its limits.

 

Spiegel Online has the report that Philipp Rosler, Germany’s economics minister and FDP chief, saying Greece is now very likely to leave the eurozone. He said he was “more than sceptical” about Athen’s chances of remaining a eurozone member, adding that an exit had lost its scare potential. He said if Greece does not fulfil the conditions of the troika, the fund flows will stop.

 

In its coverage of the story, Die Welt says that there is now a widespread consensus among all factions in German political opinion that the consequences of a Greek exit would be manageable (“beherrschbar”). The article also quotes German foreign minister Guido Westerwelle as saying that Germany was not prepared to renegotiate the Greek package.

 

Italian cities in financial trouble

 

Over 10 Italian big cities are on the verge of financial collapse, La Stampa claims. Debts, derivatives and mistakes: the Italian municipalities are in crisis. After the default of Alessandria, a big city in Piedmont (North-Western Italy), there are several risks for Turin, Milan, Napoli, Palermo, Reggio Calabria and other cities with over 50,000 inhabitants. “Too much debts, over 10 metropolitan cities should ask to Corte dei Conti (the Italian Court of Auditors) for an orderly default,” Graziano Del Rio, chairman of Italian Association of Commons, said to La Stampa. In last week the Sicily has asked for a financial support and has claimed over €1bn of credits to Italian government.

 

Berlusconi’s plans to rerun – and for a new Italian monetary system

 

“Italy should have a double currency system”, former Italian PM Silvio Berlusconi said according to Il Giornale. In an informal meeting with his PDL party officials, Berlusconi has said Italy must improve its competitiveness with reforms and a national currency system to boost consumer confidence and growth. One week ago, Berlusconi told to Bild magazine that “with the euro, Germany’s balance of trade has improved, while Italy’s has worsened. However, I think a return to the lira is unlikely.” Berlusconi wants to run for prime minister by Spring 2013 and came to the decision to run after concluding he has enough popular support to win, according to several polls. One month ago Berlusconi has said that it would not be bad for Italy to leave the Eurozone.

 

Antonio Martino says Berlusconi will run on a pro-euro liberal platform

 

The FT quotes former Italian foreign and justice minister Antonio Martino as saying that Silvio Berlusconi is planning to return to his liberal returns, and will not run on an anti-euro platform. He said Berlusconi had been cured of his-anti euro ideas, and realised that he could only win on a liberal platform. The article says that Berlusconi stands no chance of winning, as the Italians have become wary of him, but he could still tilt the political landscape towards a Grand Coalition government in support of a liberal agenda, and possibly with Mario Monti as prime minister (despite his recent statement that he would not be available beyond the end of his current mandate).

 

Ferdinando Giugliano says Monti should tell the truth

 

Writing in the FT, Ferdinando Giuliano said it always dangerous to declare victory over Angela Merkel. Look at what happened to Mariano Rajoy, whose victory has come in the form of another austerity package. To avoid the same fate, Mario Monti must now go on the offensive, and confront the Italian parliament with a relaunch of his reform programme, and a much wider spending review, than the one he is currently conducting, to allow tax cuts. It is time for Monti to explain to the Italians what is at stake now.

 

(There is, in our view, very little Italy can do on its own to escape from the debt trap. A resumption of the reform would be welcome, but is not going to make the difference between future solvency and insolvency. Italy needs a mechanism now to reduce the market interest rate, and such a mechanism is not on the horizon.)

 

Italy looks to Russia for help

 

Italian PM Mario Monti has started talks with Russia, Il Sole 24 Ore reports. “We are here for new investors, we want to help the real economy,” Monti said. The Italian PM will meet Russia’s President Vladimir Putin for new business partnerships and joint-ventures. Automotive, aerospatial, finance are three sectors in which Italy and Russia will improve collaborations. According to sources, there will be several meeting between Gazprom and ENI and Finmeccanica. Talking to Russia’s Pravda, Monti said that if Italians begin to lose heart, it could embolden “political parties which say ‘Let European integration, let the euro, let this or that large country go to hell’.”

 

 

Tito Boeri on what it would take to make a No Bailout rule credible

 

Writing in Vox, Tito Boeri writes about what it would take for a generallised No Bailout rule to be credible. The first is that the ECB must be in charge of all banks, not just the largest. The second is that the eurozone must set up and finance minimum income schemes at eurozone level. This would imply a transfer if the country goes bankrupt; the third is the removal of all legal barriers to the mobility of labour. This would include a common immigration policy. And fourth, a common system for the administration and enforcement of VAT.

 

Eurozone is not fixed, Alesina and Giavazzi said

 

Italy (and Eurozone too) is not out of crisis, Alberto Alesina and Francesco Giavazzi argued in a column on Il Corriere della Sera. “The ESM is not a market changer”, the two economists wrote. With a €500bn cap, the permanent EU bailout fund will be effective since next September, after vote of the German Constitutional Court. But, also in that case, the Italian and Spanish refinancing needs for 2013 and 2014 are too big to be bailed out by ESM: over €670bn (Bloomberg data). In addition, the political instability in Italy will be one of the main issues in the next months. After Spain, Italy risks to ask for a bailout. “There’s a lack of confidence in Italy” Giavazzi and Alesina said. The Eurozone should have a political unity, but according to the two economists, the road to a complete European Union is too long and there might not enough to avoid to unavoidable.

 

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

 

Getting worse, and worse. The euro at $1.2121 as the euro is now favourite among carry-traders according to Bloomberg, against other currencies the euro reached new record low, falling against the yen  to 94.45, the lowest level since 2000.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.854	0.909	0.929
Italy	4.773	5.121	5.122
Spain	5.798	6.107	6.206
Portugal	9.256	9.344	9.820
Greece	23.935	24.385	#VALUE!
Ireland	4.978	4.990	5.638
Belgium	1.243	1.314	1.342
Bund Yield	1.221	1.168	1.167
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.226	1.2121
Yen	96.400	94.89
Pound	0.780	0.7776
Swiss Franc	1.201	1.2008
ZC Inflation Swaps
	previous	last close
1 yr	1.31	1.31
2 yr	1.5	1.44
5 yr	1.49	1.59
10 yr	1.81	1.92
Euribor-OIS Spread
	previous	last close
1 Week	-6.500	-6.2
1 Month	-0.471	0.329
3 Months	22.679	22.979
1 Year	88.350	91.15
Source: Reuters