EUROINTELLIGENCE DAILY BRIEFING, 15 de Agosto de 2012. Enviado por Domenico Mario Nuti.

(Link: http://www.eurointelligence.com/eurointelligence-news/home/singleview-restricted/article/greece-to-seek-two-year-extension-of-latest-austerity-programme.html)

Greece to seek two year extension of latest austerity programme

The FT has obtained a document showing that Greece is now seeking a two-year extension to its austerity programme;

Antonis Samaras is expected to outline the proposal to Angela Merkel and Francois Hollande next week;

spending cuts are to be phased in over four years until 2016, with a slower trajectory of cuts in the budget deficit;

the additional funding requirement would be €20bn;

the Greek government managed to sell over €4bn in T-bills mainly to domestic banks, which obtained the funds through the ELA – in other words through the ECB;

the Greek government has effectively imposed a moratorium on all public payments, except salaries and pensions;

the Dutch Socialists are emerging as the front-runners in the upcoming elections;

the eurozone shrunk by 0.2% in Q2, with Germany doing a little better than expected;

southern Europe is mired in a dismal recession;

indicators show that Germany and the Netherlands are both headed for a downturn later this year;

Olli Rehn underlined Mario Draghi’s message that the ECB will do whatever it takes;

Wolfgang Munchau says the scope for intervention is more limited than investors believe;

Robert Rubin says there is no alternative to the path of conditional help as outlined by Draghi;

Neil Unmack writes the ECB should address the problem of seniority;

Spanish banks increase their ECB borrowings to a new record level;

the Spanish government is negotiating a deal to exempt retail investors of bank preference shares from a wipe-out;

Mariano Rajoy says he is open-minded about a programme, but says the conditions must be reasonable;

the German constitutional court reaffirmed its ESM-ruling timetable;

the Bundesbank warns the IMF against overstretching its resources;

William Cline, meanwhile, finds that Spanish and Italian public debt is likely to be sustainable under reasonable assumptions.

According to a document obtained by the Financial Times (Link: http://www.ft.com/cms/s/0/979cd2f4-e635-11e1-ac5f-00144feab49a.html#ixzz23aOmGPtD), is Greece now actively seeking a two-year extension of its latest austerity programme. Antonis Samaras is expected to outline the proposal during talks next week with Angela Merkel and François Hollande. The extension plan calls for a slower adjustment with cuts spread over four years until 2016, and the budget deficit declining annually by 1.5 pp of national output rather than 2.5 pp under the present arrangement. According to the document, Greece would need additional funding of €20bn. Funds would be raised from an existing IMF loan, issues of treasury bills and, Greece hopes, a postponement in the start of repayments of its first EU-IMF loan from 2016 until 2020, when it is due to begin paying back its second bailout loan.

Greece’s liquidity cliff-hanger

The Greek government sold €4.063bn of 13-week treasury bills, as expected, mainly to domestic banks—its largest debt sale in two years. The banks have used the ELA from the Bank of Greece to buy the bills, and are expected to pledge them immediately at the Bank of Greece as collateral for more, writes the Wall Street Journal (Link: http://online.wsj.com/article/SB10000872396390444772404577588711377486298.html). Most of the money raised will go to redeem €3.1bn in bonds held by the ECB that mature Aug. 20. The remaining funds from the auction will go to the general budget and should ensure that Greece has enough money to last it through the end of September. The government also plans to draw on money from its bank-recapitalization agency, the Hellenic Financial Stability Fund, a Greek government official said.

The government has unofficially imposed an effective moratorium on all outlays other than salaries and pensions, writes Kathimerini (Link: http://ekathimerini.com/4dcgi/_w_articles_wsite2_20112_14/08/2012_456948). Primary spending, the public investment programme and the settlement of outstanding arrears to suppliers have been put on hold. Government spending for this year has been budgeted at €108.5bn. Of this, only €40.9bn has been spent by the end of July.

Far left wing party emerges as frontrunner in Dutch elections

A far left-wing party is emerging as a frontrunner in next month’s elections in the Netherlands according to recent polls. The Socialist Party, headed by the charismatic former school teacher Emile Roemer, could win 37 seats in the 150-member parliament, seven more than Rutte’s Liberal Party, though De Volkskrant (Link: http://www.volkskrant.nl/vk/nl/10637/VK-Dossier-Verkiezingen-van 2012/article/detail/3301159/2012/08/14/VVD-loopt-in-op-SP-in-peiling TNS-NIPO.dhtml) cites one poll with a more narrow advance, 34 against 33 and also cautioned against the results, as only one third of the polled declared to be sure of their choice. The leading Socialist Party did not sign the government’s austerity programme, instead they call for more time to meet the 3% deficit limit – by 2015 not 2013 as targeted by the present government — and want a broader mandate for the ECB. According to the party’s programme more government spending is needed to help the economy while drastic budget cuts will harm the economy.

That shrinking feeling

The consensus was right. The eurozone shrank by 0.2% in Q2, with pronounced differences across countries. Germany did relatively well – up 0.3% qoq – but as Reuters and other report the outlook is not good, with the latest ZEW sentiment index down by a fourth consecutive month, now at – 25.5. The article quoted Jorg Kramer at Commerzbank as saying that this is probably the last piece of good news in a long time. The consensus is that the eurozone is in the middle of a recession. France hat a third consecutive quarter of zero growth. The overall picture is a classic north-south divide with the Netherlands and Austria also doing well, though the Finnish economy declined. The worst performers were Portugal, with GDP down 1.2%, Cyprus, down 0.8%, Italy, down 0.7% and Spain, down 0.6%. The Netherlands is likely to mirror Germany’s decline. CPB forecasts that the Dutch economy will contract by 0.75% this year.

Verbal intervention – Olli Rehn edition

The thing about verbal intervention is that it has to be followed up by action. After Mario Draghi’s “whatever it takes” promise, it was Olli Rehn who yesterday told CNBC television, hat tip Reuters, that the EU and the ECB were both ready to take the necessary actions, provided the member states agree to meet certain conditions. He also said he had the full confidence that Germany was committed to the euro.

Wolfgang Münchau on the limits of intervention

In his FTD column Wolfgang Munchau writes that the ECB promise of intervention could run into credibility problems. Unconditional help will ultimately fall foul of the same political problems that we are limiting the scope of the ESM. The problem with conditional help is a lack of  credibility, and potential conflicts of interests. If the country ceases to meet the conditions, which is likely to happen after an election, would the ECB really pull the trigger and cut the country off the support operation, given that this is likely to trigger a break-up of the euro – the very event this action was supposed to avoid? Once the ECB goes down the road of conditional help, it will find itself bankrolling the periphery’s entire debt. Munchau says if bailouts of such scale are unacceptable politically, then the ECB will ultimately not succeed either. He concludes that the ECB will ultimately come up with something disappointing.

Robert Rubin on the opportunities of intervention

Robert Rubin (Link: http://www.ft.com/cms/s/0/de5b786a-e538-11e1-8ac0-00144feab49a.html#ixzz23aSCY2k0) writes in the FT that ECB bond purchases could buy time. If the time was wasted, it would contribute nothing to addressing the eurozone crisis and would pose risks. He recalled the LTRO, which was also intended to buy time, but wasted by policy makers. The crisis duly returned with full force. He dismisses the argument that ECB action could solve the crisis on its own, recalling his own experience with Mexico in the 1990s. Central bank action only helped when accompanied with the appropriate policies. That is why conditionality is essential. With conditionality, any attempt by the ECB to stem capital flight would, over time, lead to ruinous inflation. He says the only effective way forward is exactly what the ECB is suggesting: a combination of supportive funding combined with policies to address the eurozone’s deeply threatening crises.

Reuters Breakingviews on the mechanics of intervention

Neil Unmack of Reuters Breakingviews makes the point that the ECB must urgently address the question of senior if it wants its recently flagged bond purchase programme to work. Investors want to be reassured that the central bank won’t rank above them in a restructuring, as was the case in Greece. But solving that problem would raise another one – the ECB could accumulate losses on its bonds portfolio, which could amount to massive transfers within the euro zone. Mario Draghi has not yet said he will tackle this problem. A simple statement from the ECB waiving its preferred creditor status might not be enough. One radical way of addressing seniority would be for the euro zone bailout funds to guarantee the ECB against potential losses. But this raises another problem – of moral hazard. One way out of the problem is focus on shorter maturities, but this would then not be the bazooka the markets have been hoping for.

Spanish banks increase ECB borrowing by 10% in July

Spanish banks borrowed €402bn from the ECB in July, according to data from the Bank of Spain, the highest ever monthly lending total. Reuters reports this further cemented the banks’ dependence on the ECB and made a return to full market access less likely. ECB borrowings have risen gradually this year, from €161bn in January. The article said the pattern was similar, though less acute, in Italy, where the borrowing was €283bn. In Spain, only heavyweights like Santander and BBVA were in a position to fund themselves on the markets. The article said one possible factor in July had been the higher charges that some clearing houses were levying on the use of Spanish bonds.

A bailout deal for Spanish savers

The FT (Link: http://www.ft.com/cms/s/0/4dcab54c-e626-11e1-ac5f-00144feab49a.html#ixzz23aRJ13sD) has the story that the Spanish government was in talks with Joaquin Almunia to allow tens of thousands Spanish retail investors to be exempt from the losses imposed on bank bondholders. Many Spanish savers purchased high-interest preference shares– which were marketed aggressively in the run-up to the crisis – but these now face a complete wipe-out, as the banks receive official funding. The Spanish government is seeking a deal whereby retail savers face an immediate haircut of 50-70%, but would later be compensated with high interest payment over four to six years. A decision is not expected until September. A total of €30bn of such products were sold to retail investors, who hold about 60% of the entire stock of the Spanish banking sector’s preference shares.

Rajoy says he is open about a rescue

El Pais (Link: http://economia.elpais.com/economia/2012/08/14/actualidad/1344946466_973889.html) writes that Mariano Rajoy, said he would consider a programme if the conditions are right, thus underling investor hopes that Spain will ultimately end up with a fully-fledge EFSF programme. Spanish spreads have been improving since July, and yesterday improved further, with the yield on the benchmark ten-year bond now at 6.8%. Bankia’s shares also reverted part of the recent slump.

German constitutional court reaffirms time-table

The German constitutional court yesterday affirmed its timetable for the ruling on the ESM, effectively rejecting a claim that it should refer the issue to the European Court of Justice (as media reported yesterday). The verdict is still due September 12. In a separate case from Ireland, the ECJ is still considering its own timetable.

Bundesbank warns IMF against overextending itself

Frankfurter Allgemeine (Link: http://www.faz.net/aktuell/wirtschaft/aerger-zum-jubilaeum-bundesbank-warnt-vor-immer-groesseren-iwf-krediten-11855315.html) reports that Andreas Dombret of the Bundesbank warned the IMF against overstretching itself. In the past, he said, the IMF had acted as a catalyst that would trigger private capital flows. But with the increase in credit volumes the opposite result is now likely – that IMF would crowd out private investors due to its own seniority status. He said the Bundesbank would only be able to count its contributions to the IMF as reserves if the IMF’s engagements are risk-free. The article says this was a hidden warning that the Bundesbank’s readiness to support “credit adventures” was limited.

William Cline on why Spanish and Italian debts are likely to be sustainable

We have this from Gabriele Steinhauser (Link: http://blogs.wsj.com/brussels/2012/08/14/spain-and-italy-are-probably-fine/?mod=WSJBlog) at the Wall Street Journal’s Real Time Brussels blog. She reports on a new working paper by William R. Cline of the Peterson Institute, who has calculated different trajectories for the debt loads of Italy and Spain. He uses five variables – growth, primary surplus, interest rates, bank recapitalizations, and privatization receipts, assuming various scenarios for each of them. His conclusion is that the most likely outcome is that “both Spain and Italy remain solvent” and that they won’t need a debt restructuring á la Greece or, even worse, leave the euro zone.

Thomas Mayer on Italy’s depressing political economy

In his column in Frankfurter Allgemeine, written from Tuscany, Thomas Mayer (Link: http://www.faz.net/aktuell/wirtschaft/mayers-weltwirtschaft/mayers-weltwirtschaft-erster-akt-verpatzt 11855665.html) paints a depressing picture. He said Mario Monti was greeted as the saviour, but he proved a bitter disappointment. The liberalisation of the professions has stalled, the labour market reforms were so diluted and will show no positive employment effect. Worse still, the consolidation of public finances was done mostly through the revenue side, which has left the economy in a recession. Euroscepticism is now on the rise in Italy. He quoted a survey by the PEW Research Centers according to which only 30% of Italians say the euro had brought benefits, while 44% believe the currency had brought disadvantages. It has the lowest approval ratings in the entire eurozone. Only 52% want to keep it. He said given the lack of political support for reforms and the rise in euroscepticism, it is possible that Italy may find itself cut off from the international capital markets by next year. This will either trigger a break, or a massive bailout through the ECB – no good options.

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

A little better as markets hope for a Spanish ESM programme.

10-year spreads

Previous day   Yesterday   This Morning

France   0.696 0.650   0.656

Italy      4.508   4.490   4.478

Spain    5.497   5.374   5.361

Portugal   8.624   8.837   8.828

Greece   23.034   22.986 #VALUE!

Ireland   4.654   4.567   4.949

Belgium   1.181   1.122  1.165

Bund Yield   1.402   1.462   1.474

Euro Bilateral Exchange Rate

           Previous   This morning

Dollar   1.236   1.2322

Yen    97.050   97.06

Pound   0.788   0.7863

Swiss Franc   1.201 1.2008

ZC Inflation Swaps

     previous    last close

1 yr   1.93   1.91

2 yr   1.79   1.81

5 yr   1.82   1.81

10 yr 2.14   2.14

Euribor – OIS Spread

          previous    last close

1 Week

1 Month

3 Months

1 Year

Source: Reuters