Eurointelligence Daily Briefing, 13 de Agosto de 2012. Enviado por Domenico Mario Nuti.







Italy to miss budget targets

  • Vittorio Grilli says Italy will overshoot 2012 deficit target because of “worse than expected” economic growth;
  • says structural deficit target remains on track;
  • Fabrizio Viola, head of Monte dei Paschi di Siena, says Italian companies face credit crunch unless spreads were brought under control before the end of the year;
  • a large number of German political leaders have come out in favour of a referendum on a European fiscal union;
  • but defence minister Lothar de Maiziere says it is not wise to call a referendum one might not win;
  • labour minister Ursula von der Leyen said the German constitution still has room for manoeuvre on European integration;
  • Jacques Schuster says Germany should not rush into dumping the principle of a representative democracy;
  • the French constitutional court rules that the new budget rules do not require a change in the French constitution;
  • decision paves the way for a fast-track implementation of the fiscal pact in France;
  • the Greek coalition government is internally divided over spending cuts and labour reforms;
  • a Greek finance ministry official says the fight against tax evasion could reap greater benefits than further spending cuts;
  • Greece hopes to raise €3.125bn in a T-bill auction tomorrow;
  • Jyrki Katainen recommends that Italy and Spain back their bond issues by state property assets;
  • Belgium’s central bank governor says that Dexia may need to be recapitalised;
  • El Pais has collected a list of companies and  banks that have actively prepared for a euro exit;
  • Rainer Hank, meanwhile, argues that European integration was a cultural utopia.

We are back from our vacation only to find that much of Europe is still on leave, or in Italy’s case, about to be so. Most of today’s news is about various pronouncements, the most important being Vitorio Grilli’s non-surprising admission that Italy will overshoot its 2012 budget target, something that has been apparent for many months.

The FT reports this morning that Grilli blames “worse than expected” growth, which confirms that the officially published growth forecasts have been way out of line, and grossly misjudged the effect of austerity. The FT quotes an article by Grilli in La Republica on Sunday, in which he says that his compass was the structural, not the cyclical deficit. The structural deficit remains on target for a surplus in 2013, in line with EU targets for Italy. The nominal deficits are now projected at 1.7% of GDP this year, 0.5% in 2012, and 0.1% in 2013.

Head of Monte dei Paschi di Siena fears credit crunch

In an interview with La Repubblica on Saturday (hat tip Reuters), Fabrizio Viola warns of a credit crunch before the end of the year, unless the spreads are brought under control. He said unless governments and the ECB managed to bring the situation under control “there is the risk of a marked contagion for the economy”. He said the companies most at risk were smaller firms.

German debate about a euro referendum gathers pace

With the approach of the German constitutional court’s verdict on the ESM, scheduled for September 12, the German debate about the constitutional referendum has gathered pace. Various senior politicians have come out in favour of a referendum, including Wolfgang Schauble, Rainer Bruderle, the FDP’s parliamentary spokesman, Horst Seehofer, head of the CSU, and Sigmar Gabriel, head of the SPD. But as Frankfurter Allgemeine reports two prominent cabinet ministers urge caution. They are defence minister Thomas de Maizière, who told Tagesspiegel that politics should focus on what is realistic. There was no point in discussing a referendum before an agreement to change the European Treaties.  He warned that such discussions had negative effects on financial markets. Labour minister Ursula von der Leyen warned against a premature dumping of the German constitution. She says the room for manoeuvre within the constitution was not nearly exhausted.

Jacques Schuster says representative democracy should reign supreme

Writing in Die WeltJacques Schuster warns Germans against dumping the idea of a representative democracy.  He says the proponents of a referendum should first take a look at which neighbouring states actually wanted a political union. There was not a single one among them, he writes. He also recalls that some of the most important historical decisions of democratic Germany – the membership of Nato and of the European Economic Community – were done without referendums. He writes that there is no such thing as a direct will of the people. Only a democratically represented country knows what it wants.

New budget rule does not require constitutional change in France

The French constitutional court ruled last Thursday that there is no need for a constitutional change for the new EU fiscal pact. The new budget rule – a structural budget deficit ceiling of 0.5% of GDP – was considered by the court as “repeating and reinforcing” existing engagements and thus not representing a transfer of powers. The ruling will allow Francois Hollande’s government to pass the budget rule in September using a so-called “loi organique” with his parliamentary majority, Le Monde reports. A constitutional change would have required a three-fifth majority of a special joint session of parliament and a reliance on the conservative opposition.

Greek coalition disagreement over content of spending cut package

Antonis Samaras faces disagreements within his shaky coalition government regarding the content of the €11.5bn package of budget cuts for 2013 and 2014 according to Kathimerini. Socialists and the Democratic Left raised objections against the controversial labour reserve scheme, aimed at cutting state spending by reducing civil servant numbers. The blueprint for the package is currently worked out by Finance Minister Yannis Stournaras and Labor Minister Yiannis Vroutsis – a finalised version is expected to be presented to the party leaders around August 20. The law will be put to parliament in September.

Fighting tax evasion better than spending cuts, they say

Greece can raise more money by fighting rampant tax evasion than piling extra spending cuts to convince international lenders to keep it afloat, a senior Greek official told Reuters. A finance ministry official who declined to be named said, “We decided to simplify and shorten the process of verifying an offence and imposing a fine,” adding this would speed up a process that takes up to nine months by two to three months.   “There is a lot of ‘fat’ in tax evasion and we can’t keep cutting spending,” Deputy Finance Minister George Mavragiannis told reporters after a meeting between ministry officials and the financial crimes squad.

Greece to raise €3.125bn in T-bill auction

Greece will try to raise €3.125bn in an auction of three-month treasury bills tomorrow to try to avoid a looming cash crunch, according to AFP. While Greece has been shut out of the long-term debt markets since 2010, it has regularly issued short-term debt, although the Tuesday auction dwarfs previous placements. In its last three-month treasury bill sale, on July 17, Greece raised €1.625bn euros at a slightly lower rate of 4.28%.

Katainen recommends asset backed bonds, criticises ECB bond purchases

Finland’s Prime Minister Jyrki Katainen recommended Spain and Italy issue a new form of state bonds, backed by state property assets. In an interview with Der Spiegel Katainen said that this was how Finland successfully reduced its interest rates in the 1990s crisis. Katainen said Finland remains critically opposed to the ECB’s readiness to buy Spanish and Italian sovereign bonds as a means to battle the euro zone debt crisis, saying it was only a short-term remedy. He also expressed his opposition to suggestions that a banking license be provided to the euro zone’s permanent bailout fund, the ESM.

Dexia may need recapitalising

Again, this is not a surprising story, except perhaps that people actually admit what has been glaringly obvious for some time. After having denied in April that a recapitalisation of Dexia was not urgent, Belgium’s central bank governor Luc Coene said Dexia now said the bank may have to be recapitalised quickly if financial market conditions worsen. He made the statement in an interview with L’Echo, according to Reuters. In June, Belgium, France and Luxembourg had agreed to increase their guarantees to Dexia from €45bn to €55bn.

The self-fulfilling prophecy of euro exit preparations

El Pais did not put it like this, but this extensive survey of how international companies and banks are preparing for a hypothetical breakup of the eurozone begs the question to which extent this is likely to become a self-fulfilling prophecy. Among the numerous examples quoted in the article, Ernst & Young has a team of 10 consultants dealing exclusively with this issue, while many companies have drawn up contingency plans. The article also quotes law firm Linklater as saying that they are preparing for the imposition of capital controls in the event of a Greek exit.

The voice of a true German eurosceptic

They don’t come any more eurosceptic than Rainer Hank of Frankfurter Allgemeine. He said Europe was in a state of emergency, in which laws no longer applied and in which no solution are likely. He says there are three scenarios out of the euro crisis. The first is a Hobbesian putsch, in which democratic institutions yield power to an unelected and unaccountable European sovereign. The second was an evolutionary process, which produces a legitimate United States of Europe with large-scale fiscal transfers. The third is a strengthening of national sovereignty with a return to the principles of the Maastricht Treaty, including the No bailout rule, and a clear framework for emergencies. There is no doubt which of the options the author favours. He argues that Italy, Spain and Belgium are incapable of managing their own internal disparities. If Belgium cannot hold together, how can we expect Europe to do so? He says pro-Europeans permanently underestimated the costs of unification. He concludes by expressing the hope (from his perspective) that the German people will embrace what he considers to be the historic truth: that Europe has never been more than a cultural crisis phenomenon, a cultural utopia, an invention of poets. He cites numerous references of euroscepticism in German literature, and among German philosophers and sociologists.

(We obviously disagree with almost all of it, but we think the article is worth reading because it is constitutes a perfect example of the intellectual foundations for German anti-Europeanism. The author has clearly done his homework digging up many cultural references and quotation in support of his anti-Europeanism.)

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

Spanish and Italian spreads are lower than they were two weeks ago, but have recently been rising again.


10-year spreads

  Previous day Yesterday This Morning
France 0.669 0.697 0.712
Italy 4.421 4.631 4.625
Spain 5.473 5.593 5.622
Portugal 8.493 8.549 8.870
Greece 22.866 22.909 #VALUE!
Ireland 4.628 4.679 5.041
Belgium 1.091 1.136 1.178
Bund Yield 1.442 1.383 1.389

Euro Bilateral Exchange Rate

  Previous This morning  
Dollar 1.229 1.2291  
Yen 96.560 96.2  
Pound 0.787 0.7842  
Swiss Franc 1.201 1.201  

ZC Inflation Swaps

  previous last close  
1 yr 1.93 1.93  
2 yr 1.78 1.78  
5 yr 1.82 1.81  
10 yr 2.15 2.13  

Euribor-OIS Spread

  previous last close  
1 Week      
1 Month      
3 Months      
1 Year      
Source: Reuters    

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