 How long can this go on?
When things get really bad, we were told, the authorities would step in, and save the day. Financial investors have since learnt that when things get really bad one day, they are very likely to get worse the next.
Yesterday was such a day. 10-year yield touched 7.5% yesterday, but what was really shocking was the 90 point spike in two-year yields to over 6.6%. El Pais says investors are now demanding interest rates that are unsustainable for Spain. The newspaper quotes government officials who have admitted that Spain cannot finance itself indefinitely at those levels. The paper noted that the tone had become more desperate over the last few weeks. Spain’s finance minister Luis de Guindos denounced yesterday’s move as irrational.
Moody’s places Germany’s ratings on a downgrade watch
Moody’s has reaffirmed Germany’s AAA-rating, but attached a negative outlook due to the contingent debt Germany has built up as part of the European rescue operations. Moody’s cited not only the rescue framework but also the high probability of “event risk”, the FT reports. Along with Germany, the Netherlands and Luxembourg have also been put on a watch list, while Finland maintained its stable outlook. Germany’s Dax index fell by 3 percentage points yesterday.
Frankfurter Allgemeine said the downward bias did not necessitate a downgrading, but the decision nevertheless indicates that the room for manoeuvre is very limited. Moody’s has six European countries with an AAA-rating, but only Finland with a stable bias. The German finance ministry criticised the decision as one-sided.
Merkel will not grant Greek extension, according to newspaper report
Sueddeutsche Zeitung reports that Angela Merkel will not grant an extension to Greece. To do so she would have to invest a large amount of political capital, which she is reluctant to do. The article said it was unthinkable that Merkel would to go the Bundestag for a third time to ask to for Greek package. As a result a Greek bankruptcy is becoming increasingly likely.
Deja vu: Spain and Italy to install short-sale ban
Have we not been there before? Spain and Italy yesterday installed a short-sale ban to fend off the army investors officials believe to be at the heart of the speculative attack against the Italian and Spanish bond markets. El Pais writes the Spanish short sale bank will be in force until October 23. While the Italian ban only affects financial companies, Spain imposed the ban on all listed companies. The announcement had an immediate negative effect on the markets.
As Reuters reports, the two countries had both banned short-selling last year, but they had lifted the bans in February. Italian and Spanish banks are under heavy selling pressure, as the markets are losing confidence in the rescue programme. Reuters quotes a London-based derivatives broker as saying: “(The ban) implies that regulators want to protect their shares, and particularly banking shares, and the speculation will therefore be they see things or have information that is not currently in the market.”
Reuters quotes Ferdinando Rastoy, head of the securities market regulator, as saying: “We need to continue further along the same line. We need more cuts, more reforms which will restore market confidence and mechanisms which will strengthen the monetary union.”
Greece’s last minute efforts to demonstrate savings determination
In a bid to show it is serious about pushing through delayed reforms, the Greek government is to make public a list with the first 20 state organizations from around 250 that are to be merged and abolished as part of a drive to raise much-needed revenue, Kathimerini reports. The first 20 organizations on the list are to be merged with some 200 regional bodies across the country in coming days and weeks while the full list of organizations to come under the ax is to expected to be made public by the end of August.
A troika team arrived in Athens late on Monday and will begin meetings at ministries early on Tuesday, while the heads of the mission arrive later in the week and are scheduled to see Finance Minister Yannis Stournaras on Thursday. Stournaras, alternate minister Christos Staikouras and deputy Giorgos Mavraganis had a long meeting on Monday in a bid to drum up another €2.5bn in savings.
Portugal cut its deficit due to one off measures
Portugal cut its core public sector budget deficit to a cumulative deficit of €4,138m in the first half of the year, €200m below the targets set by its international lenders, Jornal de Negocios reports. The reduction was mainly due to lower spending thanks to cuts in civil servants’ benefits (16.8% less) and a one-off revenue gain. Reuters writes that revenues jumped by 13.2% boosted by a one-off gain from the transfer last year of banks’ pension assets into state coffers. Tax revenues continue to fall, but at a lower pace. Jornal de Negócios writes that while there was improvement on the revenue side, is not yet sufficient to meet the targets.
Italian provinces hit back at Monti’s plan to dissolve 60% of them The leader of Italy’s provincial government association (UPI) warns that schools may not be able to open after the summer holidays, La Repubblica reports. “We cannot guarantee that the school year will start,” Giuseppe Castiglione said talking about latest government spending review. Italian PM Mario Monti’s emergency plan is to cut government expenditure by €26bn over the next three years. Monti said on Friday that they will also dissolve 64 of Italy’s 107 provincial governments, assigning their functions to Regions to save more money. Meanwhile, in the first quarter of 2012, Italy’s public debt rose to 123.3% of GDP from 120.1% reported at the end of 2011, second only to Greece, where levels reached 132.4% in the same time.
Majority of the French for budget discipline An opinion poll in France showed that a majority (53%) would vote for the fiscal pact if a referendum were hold, Les Echos reports. It looks like targeting public debt and deficit is becoming popular among the French. While they would prefer a referendum (52%) over parliamentary approval (38%) such a referendum seems unlikely in France. Also, a positive reception might not persevere in a referendum as it happened in 2005, when the French were in favour of the European constitution just to vote it down in a referendum a couple of months later.
Fubini on the ECB and quantitative easing
The ECB could adopt a monetary policy like the Federal Reserve, Federico Fubini notes on Il Corriere della Sera. According to Fubini, a European QE is not against the EU Treaties, if the ECB would buy governments bonds from every Eurozone countries. In addition, there will be another main refinancing interest rate cut, Fubini argued. Bank of America-Merrill Lynch also said yesterday that the ECB should start a QE as soon as possible. “It’s a way to change that situation, to break the European stalemate,” analysts said.
Giavazzi and Alesina – a clarification
Francesco Giavezzi and Alberto Alesina have asked us to clarify their position regarding of our summary of their commentary in Corriere della Sera yesterday. They say that their position is more optimistic than we suggested, that they see room for an agreement on political union, and that it was possible for the ESM and the ECB to help make the transition work. In particular they expressed hope that the system could restore a separation between banks and politics. They argue that the crisis won’t be solved by Eurobonds or EU bailout funds. The Eurozone will be saved only by a coherent medium-term plan, focusing on the integration of politics, fiscal policy and banking. In addition, Giavazzi and Alesina said the European Union could decide that eurozone member’s fiscal packages could be discussed (and approved) by EU Commission and EU Parliament. Plus, an ESM with banking license could be a game changer, like a EU bank deposit guarantee schemes backed by ESM. Talking about Italy, Giavazzi and Alesina argued that the country needed welfare state reform to boost growth and to restore confidence.
Lorenzo Bini-Smaghi says the survival of the euro is now more important than the narrow goal of price stability
Writing in the FT, Lorenzo Bini-Smaghi says a key assumption underlying the ECB’s analytical framework is the efficiency of financial markets, which is no longer given.
“The euro area financial market, in all segments and maturities – including the very short term money markets – does not function properly, as banks deposit their excess liquidity with the central bank instead of lending to other banks. Cross-border banking flows have dried up.”
He writes there are two ways out: either the central bank addresses directly the disruption in the system, or member states repair it. His conclusion is that what is in danger right now is not price stability, but the euro itself.
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A Liberdade, a cultura, a democracia e a justiça social são as nossas paixões.