Eurointelligence Daily Briefing, 25 de Julho de 2012. Enviado por Domenico Mario Nuti

Spain’s stock market lost 3.58% yesterday, and as El Pais reports, it is in nominal terms the same level now as in 2003. Spanish 10-year yields continued to climb yesterday reaching a level of 7.636%. Spain had another bad auction, with a three-month T-bill at 2.434% and a six-month T-bill for 3.691%. Italy’s markets also had a bad day with the Milan index down 2.5%.

 

Reuters made the point that Spain yesterday paid the second highest yield on short-term debt since the start of the euro, reflecting a growing belief that the country will need a full sovereign bailout that the euro zone can barely afford. Five-year yields have risen above ten-year yields for the first time since June 2001. The article remarks that such a yield inversion is usually a sign that markets think the risk of a default or debt restructuring has increased. 

 

As the probability of a full-blown Spanish programme increases, French Foreign Minister Laurent Fabius raised the prospect of an increase in the ceiling of the ESM – which currently just accomodates a fully-fledged Spanish programme, but nothing else.

 

Luis de Guindos met Wolfgang Schäuble in Berlin, but the result was only a bland statement in which the two ministers call for a speedy implementation of the summit decisions. (Yeah right. Merkel and Schauble have been telling everybody that the banking union will take a long time.)

 

Catalonia is next

 

El Pais writes that Catalonia has been the next autonomous region – after Valencia and Murcia – to consider tapping Spain’s regional support fund, as the financial situation of the country’s autonomous regions has deteriorated sharply. Catalonia has €42bn in debts, more than any other region, is now incapable of paying its providers. The paper quotes the Catalan government spokesman as saying that the financial situation was forcing them to consider all types of liquidity credit lines to facilitate its situation. The article notes that the spokesman has avoided the word financial assistance, preferring to speak about liquidity only.

 

DBRS says Spain was on the verge of a tipping over the brink

 

Rating agency DBRS said Spain was near a tipping point and may soon have to ask for a bailout. The agency warned that four factors could push Spain and the euro zone deeper into crisis: a sharper recession, an insufficient backstop of capital, external shocks, and setbacks to fiscal and structural adjustment.

 

Why Moody’s downgrade threat will play into Merkel’s hands

 

Suddeutsche Zeitung has a comment, which says a downgrade threat normally increases a country’s refinancing costs. But this one plays into Angela Merkel’s hands because it cements her austerity policies.

 

Die Welt says Moody’s wants to push Germany into a debt union

 

Die Welt has a commentary saying that Moody’s was part of an Anglo-Saxon conspiracy to push Germany into debt mutualisation. The rating agency’s comment that Germany’s own position deteriorated due to the reactive and hesitant approach to crisis management was a clear indication that Moody’s supports the Big Bazzoka approach, which would invariably lead to a debt union. The comment, however, concludes that the downgrade is more likely to have the opposite effect, of cementing the German public’s unease about the bailouts.

 

(These are both very strange comments, and we are listing them only to show the confused crisis narratives.)

  

Reactions to the anti-Greek outburst of Germany’s economic minister

 

Der Spiegel reports that the Greek prime minister, Antonis Samaras, criticised the German economics minister’s comment that Greece is likely to leave the eurozone, as undermining his government’s efforts. “We do what we can to ensure that the country can stay on its own two feet. And they do everything in their power to ensure that we fail.” Samaras said he was not sure whether they do it consciously or out of stupidity.

 

In another article, Spiegel Online reported of criticism inside Germany. The normally compliant SPD called for Rosler’s dismissal as he is putting taxpayers’ money at risk by creating a self-fulfilling spiral. The Greens even blamed him for Moody’s downgrade.

 

More FDP politicians seek Greek exit

Rosler’s statement did not seem an isolated outburst, but part of an orchestrated campaign by his party to position itself on the eurosceptic end of the political spectrum ahead of next year’s elections. Patrick Doring, FDP general secretary, said in a newspaper interview: “If Greece was no longer a part of the euro zone, it could create trust on markets.” Reuters reports that the CSU, the Bavarian wing of Merkel’s party, is also crowding in with a similar position. It quotes Alexander Dobrindt, CSU general secretary, that Greece should start paying half of its pensions and state salaries in drachmas as part of a gradual exit.

  

Greece “hugely off track”

 

“Greece is hugely off track,” one official told Reuters, speaking on condition of anonymity. “The debt-sustainability analysis will be pretty terrible.” “Nothing has been done in Greece for the past three or four months,” referring to the delays caused by the two elections held since May. One of the three officials Reuters talked to estimated that the overshoot could be up to 10 percentage points, equivalent to around €30bn. In this case the IMF is expected to pull out. Then the only way to keep Greece afloat and in the euro zone would be for the ECB and member states to write off some of the Greek debt they own or change the terms. “This has not been explored yet politically because no one wants to launch that discussion,” the first official said. “The political feasibility of carrying out an official-sector restructuring is becoming more and more complicated.” This exclusive story from Reuters was taken up by newspapers  throughout Europe.

 

Italian cities to write down €580m in lost revenues

 

We already reported about the financial difficulties of 10 Italian cities on Monday. Il Sole now reports that Italian cities are facing another blow as they might need to write down around €580m in lost revenues. Under a new rule introduced this month as part of the government’s austerity measures, a city must write down at least 25% of revenues that have been on its balance sheet for more than five years but which it has yet to cash in, according to Reuters.

Uncollected revenues, mainly due to non-payment of taxes, were estimated to total around €5bn 2010-2011 by Fitch rating agency estimated in December 2010.

 

Italian foreign minister calls for more unity in Europe

 

Italian Foreign Minister Giulio Terzi di Sant’Agata told  Il Messaggero that “Germany does not want an Euro collapse”. According to Terzi, Europe should show more unity to fight against uncertainty. Italy and Spain are paying more than expected on bond markets and borrowing costs begin to be less sustainable. Both countries adopted austerity measures but the lack of confidence is too high, he told to Il Messaggero. Yesterday, the spread between BTP and Bund has reached 537bps, close to its record, 553bps. Italian GDP is expected to fall by over 2.0% this year, according to the Bank of Italy, but Terzi gives himself confident “Italy is a strong country,”.

  

Portuguese PM ready to lose for austerity

In Portugal Prime Minister  Passos Coelho pushed his tough pro-austerity line a step further, telling his party he would rather lose at the ballot box than abandon his policy of strict adherence to the terms of an EU/IMF bailout, Reuters reports. “The path we are following now is not right or wrong, it’s the only possible path,” Coelho said, “”If one day we have to lose elections in Portugal in order to save the country, then, as they say, the hell with elections.”

 

Moody’s lowered outlook for EFSF

 

Ratings agency Moody’s on Tuesday lowered the outlook on the EFSF from stable to negative, AFP reports. Moody’s said its decision to lower the outlook reflected the changes in outlooks on Germany, the Netherlands and Luxembourg. But it maintained the EFSF’s triple-A rating for now, with an increased likelihood of a downgrade over the next 12-18 months.

  

Cerretelli warns Eurozone has only 8 days to survive

 

Italy returns to danger zone, Il Sole 24 Ore claims in a column written by Adriana Cerretelli. “Eurozone has only 8 days to survive”, Cerretelli said. The ECB should do more to support the Eurozone, including extraordinary measures. Greece, Ireland, Portugal, Spain: the number of bailed-out countries are rising. And there is no time to wait again. There is a room for a new main refinancing rate cut, but not only. According to Cerretelli, the ECB should tell to markets that there is a plan, or something to restore confidence and avoid the worst case scenario.

 

Alan Beattie says IMF should be wary about Spanish programme

 

Writing in the FT, Alan Beattie talks about the politics inside the IMF following the outburst of former IMF staffer Peter Doyle. Beattie gives the IMF some credit for having spoken out on the need for direct bank recapitalisation, but says the IMF’s own capital cannot be used for that purpose. Moreover, the IMF should be wary in participating in a full-blown Spanish bailout, given its private misgivings.

  

Martin Feldstein says a lower euro could rescue Spain

The interesting thing about this FT article is not Martin Feldstein’s claim about the importance of a further devaluation, which he has made before, but his assertion that this view is shared by senior officials. He says the ECB must continue to losen monetary policy with the goal of driving the euro down to about parity with the dollar. He says the lower euro would produce an increase in the south’s net export, which would be sufficient to get them out of recession. It would also have the benefit of raising German wages, a contribution of reducing the persistent imbalances.

 

(We believe he overestimates the effect on net exports even if the euro were to devalue to such an extreme degree. And we are not sure the US would allow that to happen given its own slowdown.)

 

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

 

Spreads continue to worsen, euro depreciates further

10-year spreads
	Previous day	Yesterday	This Morning
France	0.967	1.036	1.044
Italy	5.167	5.450	5.460
Spain	6.323	6.404	6.483
Portugal	9.561	9.489	9.600
Greece	26.474	26.770	26.96
Ireland	5.030	5.052	5.063
Belgium	1.427	1.573	1.583
Bund Yield	1.173	1.235	1.225
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.211	1.2064
Yen	94.730	94.33
Pound	0.781	0.7779
Swiss Franc	1.201	1.2008
ZC Inflation Swaps
	previous	last close
1 yr	1.49	1.52
2 yr	1.5	1.48
5 yr	1.48	1.47
10 yr	1.82	1.81
Euribor-OIS Spread
	previous	last close
1 Week	-6.829	-7.929
1 Month	-0.271	-2.171
3 Months	21.993	20.193
1 Year	88.621	88.421
Source: Reuters