EUROINTELLIGENCE DAILY BRIEFING, 17 de Agosto de 2012. Enviado por Domenico Mario Nuti

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Merkel to reject Samaras’ austerity extension

Berlin government sources say that Merkel will not agree to a Greek proposal to extend the austerity programme by two years;

the issue in Berlin is a realisation that there is no parliamentary majority for a third Greek programme;

Merkel now fells constrained by next year’s elections;

the Finnish foreign ministers says the EU should prepare for the breakup of the eurozone;

says it would be no disaster for the EU, and may even make it work more smoothly;

Spain is about to introduce a decree to bail-in preferential bank stockholders, but negotiations to protect small investors continue;

the Spanish trade deficit dropped 22.5% during the first six months on an annualised basis, with a marked improved in exports and foreign tourism;

the domestic economy remains deep in recession;

the Spanish government’s cuts in healthcare to illegal immigrants are coming under increased criticism;

Mario Monti denies that he wants to cut taxes;

the Italian government has ceased billions worth of Mafia property assets as part of its budget consolidation plans;

the Northern League wants a euro referendum with the goal to keep the north in, and the south out;

Anatole Kaletsky writes the western world is about to face historic decisions – about the role of government in the US and the future of Europe;

there are more signs that the euro crisis has a deeply negative impact on Asia’s economy;

Francesco Garzarelli says the ECB could ask the EFSF/ESM to guarantee its losses from the forthcoming bond purchasing programme;

the Bundesbank, meanwhile, set a precedent for large scale government bond purchases in the 1970s, when it support the German government during a recession.

FT Deutschland (Link: http://www.ftd.de/politik/europa/:euro-poker-samaras-auf-vergeblicher-mission/70077769.html) writes that Angela Merkel is going to be cool on Antonis Samaras’ proposal for an extension of the austerity programme when they meet for lunch today. Her spokesman said that she will listen with interest how Greece will implement what it has agreed to. The paper makes the point that her stance is not only an expression of her conviction that Greece should pull through. It is also about cementing her own domestic power. If she agreed to a softening in the programme, she would lose her centre-right majority. It would constitute, de facto, a third Greek programme. Sources in the German chancellor say Merkel does not rule out that Greece gets another tranche from the second programme in September, as long as the troika recommends this. Her economics minister Philip Rosler says, however, even this is becoming unlikely. (It seems the FDP follows the notion of ringfencing the eurozone, but without Greece.)

Finnish foreign minister says eurozone must prepare for exit

The Daily Telegraph (Link: http://www.telegraph.co.uk/finance/financialcrisis/9480990/Finland-prepares-for-break-up-of-eurozone.html) has been predicted a eurozone break-up for some time, and this morning has a story that squares with its own deep convictions. It quoted Erkki Tuomioja, Finland’s foreign minister, as saying: “We have to face openly the possibility of a euro-break up.” He said nobody was advocating this action, but preparations are necessary nevertheless. He said the cost of a break-up would be higher in the short and medium run than the rescue process, but it would not be a disaster for the European Union. He said it could even make the EU function better. As the interview progressed, he became even more gloomy. He said the only thing that prevents a breakup is that nobody wants to be first. “It is a total catastrophe. We are going to run out of money the way we are going. But nobody in Europe wants to be first to get out of the euro and take all the blame.” Greece, he said, would not be forced out, but lending would simply be suspended. He is deeply sceptical of the notion of a fiscal union. “I don’t trust these people.” he said. The article also quoted the chairman of the Finnish parliament’s grand committee on Europe, who said that bailout fatigue was nearing its limit.

Negotiations continue on Spain Memorandum

Reuters (Link: http://www.reuters.com/article/2012/08/16/us-spain-bankia-funds-idUSBRE87F10520120816) quotes a Spanish Economy Ministry spokeswoman saying that Bankia could receive some emergency funds ‘shortly’, as €30bn have been made available to Spain already, even though Spain is yet to request them or meet all the conditions of the rescue. El Faro de Vigo (Link:http://www.farodevigo.es/galicia/2012/08/17/bruselas-admite-negociaciones-espana-tacha-especulacion-solucion-preferentes/674783.html) further writes that Commission spokesman Oliver Bailly confirmed that negotiations are ongoing between Spain and Brussels on the bail-in of preferred-stock holders in Spanish banks and ‘cajas’. However, he and other Commission spokespeople labelled as ‘speculation’ an FT report from Wednesday on a Spanish government proposal to mitigate the losses of retail banking customers who were sold such preferred stock as safe investments (Link: http://elpais.com/elpais/2012/08/06/inenglish/1344253177_409316.html). The Spanish government is expected to introduce a decree next Friday implementing the bail-in of preferred stock and other subordinated liabilities which the Memorandum on the banks rescue dictated should be in place by the end of August.

Spain’s domestic demand contracts, improves trade deficit, hurts service sector

According to figures released by Spain’s Economy and ministry, Spain’s trade deficit dropped 22.5% year-on-year in the first half of 2012, driven mostly by an energy deficit over 4 times the trade surplus registered in the rest of the sectors, writes El Periodico (Link: http://www.elperiodico.com/es/noticias/economia/deficit-comercial-reduce-225-primer semestre-2185905). Total imports are up by 3.4% and exports down 1.4%. Reporting figures from the National Statistics Institute La Vanguardia (Link: http://www.lavanguardia.com/economia/20120816/54338021611/facturacion-industrial-empeora-servicios-ralentiza.html) writes that industry revenue for the first half of the year is down 3.1% yoy while new orders are down 2.3%; the service sector’s revenue is down 4.7% with employment down 2.7%. At the halfway point of the summer season, foreign tourism into Spain is up roughly 5% but domestic tourism is down 25 to 40% depending on reports, writes El Pais in English (Link: http://elpais.com/elpais/2012/08/16/inenglish/1345137837_930254.html). The minister of tourism José Manuel Soria suggested Spaniards have a penchant for foreign vacations and would do well to vacation in Spain instead.

Health care for undocumented migrants up in the air

Controversy has been raging in Spain over government plans to curtail undocumented immigrants’ access to public health care as a cost-saving measure. In reaction, the Government has suggested charging illegal immigrants over €700 a year for coverage or invoicing their countries of origin. So far, five regions (Link: http://elpais.com/elpais/2012/08/16/inenglish/1345117761_814867.html) accounting for half of Spain’s illegal immigrant population of 150,000, have announced their intention to continue to treat patients regardless of residency status. Among regions governed by the People’s Party, only Galicia (Link: http://elpais.com/elpais/2012/08/14/inenglish/1344943098_516911.html) made some noises questioning the measure earlier this week, El Pais in English reports. Thursday, however, both a national PP spokesman (Link: http://www.europapress.es/epsocial/inmigracion-00329/noticia-pp-considera-irresponsable-cinco-comunidades-sigan-atendiendo-inmigrantes-irregulares-si-no-tienen-recursos-20120816143457.html) and the Madrid Regional Health Councillor (Link: http://www.europapress.es/madrid/noticia-lasquetty-ve-inadecuado-haya-ccaa-opongan-cambios-atencion-sanitaria-inmigrantes-irregulares-20120816145258.html) came out calling the rebel regions “irresponsible” and “inadequate”, Europa Press reports. Europa Press also reports that over 1000 family doctors (Link: http://www.europapress.es/epsocial/politica-social/noticia-total-1035-medicos-familia-acogido-mes-objecion-conciencia-atender inmigrantes-20120810134952.html) have declared themselves “conscientious objectors” against the policy since an appeal was made a month ago. For their part, a Nurses General Council (Link: http://www.europapress.es/epsocial/politica-social/noticia-consejo-enfermeria-avisa-enfermeros-objetar-tratar-inmigrante-irregular-inviable-juridicamente-20120809144443.html) has legally advised its members against conscientious objection, while proposing to set up practices where nurses can asset the immigrant population “altruistically and outside their working hours”

Monti denies plan to cut taxes

Mario Monti has issued a statement denying a story in La Repubblica that he plans to lower taxation, La Stampa reports. In the statement, Monti reiterates that the current tax burden, over 55%, is excessive and that Italy needs lower taxes. Unfortunately, Monti said it’s “premature” to start cutting because the first government goal is a complete rebalancing of state’s budget. Monti said, it’s pointless to make unrealistic promises to Italians without concrete goals. “My government has faced a serious emergency” by introducing structural reforms, Monti argued. “At present the focus on rebalancing public finances cannot be loosened.”

Italy sees Mafia property assets

Italy seized more than €4bln in property from Mafia, according to ANSA. The Italian Interior Minister Annamaria Cancellieri said that a total of 2,041 suspected Mafia members were held for questioning by Italian police in 2011. Italy carried out, according to Minister Cancellieri, over 12,000 seizures of suspected properties, for a total of €4.124bln worth. In the list, Interior Ministry has found 723 companies, several luxury cars and yachts. The biggest number of confiscations has occured in Sicily, over 5,000 seizures for EUR1.6bln. “We are ready to fight again and again against the Italian organised crime,”, Cancellieri said.

Northern Leagues considers referendum on euro with the goal to keep northern Italy and southern Italy out

The Italian separatist party Northern League reiterates that is mulling to propose a referendum on Euro in 2013, according to Il Messaggero. On Wednesday the Secretary of Northern League and former Interior Minister Roberto Maroni told La Repubblica that he will propose an Euro-referendum in attachment to 2013 general election “in which Italians can have their say on the Euro currency.” And today, from Northern League annual rally, the founder of the party, Umberto Bossi, also argued that Europe has failed and Italy should follow the UK, which “is so strong outside the Eurozone.” According to Maroni and Bossi, Northern Italy should be inside the EU single currency, meanwhile the Mezzogiorno, which is called Southern Italy, should introduce a new currency. In May a poll conducted by IPSOS revealed almost half of Italians in favour of the Euro, with 38% opposed. Later on Monday, the comedian-politician Beppe Grillo, founder of Movimento 5 Stelle party, wrote on his blog that “A referendum on the euro and the restructuring of Italy’s debt is ever more necessary.”

Anatole Kaletsky forsees an autumn of historic significance

In his Reuters column Anatole Kaletsky says the western world is about to make a number of historic decisions. In the US, voters are facing are straight choice between two opposing visions of the role of government and markets. In Europe, he writes, the choice is even starker, “It is not just about the role of government, but about the very existence of the nation-state.” He warns against simplistic choices, and says it would be tragic if such complex issues as the role of government or the future Europe were reduced to oversimplified choices between polarized alternatives. He says contrary to the claims by the fiscal conservatives in the US, the country does not face bankruptcy. As far as the eurozone is concerned, he is cautiously optimistic, on the grounds that a compromise may be possible that balance German demands for fiscal rectitude with a joint responsibility for debt, and a more assertive role of the ECB. Such a more balanced approach would allow the euro to survive without the risk of a decade of depression.

The impact on Asia

Frankfurter Allgemeine (Link: http://www.faz.net/aktuell/wirtschaft/konjunktursorgen-die-euro-krise-trifft-jetzt-asien-11856852.html) has the story that the eurozone crisis is now affecting Asia and the global economy. The statistics have been showing a slowdown for some time. The article quotes an email from Jimmy Wilson, head of the iron ore division of BHP Billiton, who announced that he would suspend all investments – a cool $50bn. The main signficance is the signal. The world’s largest mining group is becoming more sceptical about the economic outlook, and expects a fall in demand in Asia, its most important market. The article also quotes from HSBC, which said foreign orders have fallen to the lowest level since 2009, the direct consequence of what the bank calls “the financial chaos from Europe.” The YPO Gobal Pulse Index, a widely watched confidence metric, fall to 60,1 Punkte in Asia during the last quarter, still higher than in Europe, where it is 52, or the US, where it is 59,7. In China it fell by seven points to 50. The article contains several examples of companies failing to meet their profit targets – and paints a broad and consistent picture of a slowing economy.

How to finance the ECB’s losses

FT Alphaville (Link: http://ftalphaville.ft.com/blog/2012/08/16/1122301/spreads-and-that-damn-seniority/) discusses an article by Francesco Garzarelli of Goldman Sachs, who has been doing some calculations on the losses the ECB might incur as a result of its bond purchase plans. The results are relatively benign. He writes: “The ECB could explicitly declare that the EFSF/ESM would make up any losses incurred its balance sheet. Let’s assume that the ECB were to announce it intends to buy over a given time horizon a set quantity of bonds with maturity up to 3-years (corresponding to the two full-allotment LTROs) and allow market forces determine the price. Focusing on Spain and Italy, the portion maturing between now and end-2015 amounts to €500bn for Italy (excluding T–bills but including CCTs and CTZs) and €200bn for Spain. Assuming (conservatively) that the same proportion of bonds maturing within the next three years held by domestics as for the overall debt (i.e., 65-70%), this entails that ECB purchases worth €250bn could result in foreign ownership in this maturity bucket going to zero, and the overall private domestic ownership of total public debt would rise to 80% – the second highest in advanced economies after Japan. On a recovery assumption of around 50c of par, the EFSF/ESM would need to cover up to €125bn. This falls well within existing available resource, although the costs of recapitalizing domestic banks would need to be added. Even if the financial support was granted on a pari passu basis with existing creditors, however, the amount of central bank purchases would be tied to the recovery value of the bonds, and would remove the deterrent element of the interventions.”

A German precedent for ECB bond purchases

Die Welt (Link: http://www.welt.de/wall-street-journal/article108657695/Der-historische-Suendenfall-der-Bundesbank.html) reprints a very interesting article from the Wall Street Journal, according to which there is a precedented to ECB bond purchases – when the Bundesbank bought German bonds in the 1970s. During the recession of the mid-1970s, after the first oil price shock, the German government seriously concerned about the economy, and ask the Bundesbank for support. Between July and October 1975, the Bundesbank bought debts of the government and government-owned companies in the value of DM7.7bn. The bond purchases programme was agreed after the Bundesbank recognised that the monetary impulse of drastic interest rate cuts did not help. The transmission mechanisms were broken at the time, just as they are today. The author points to the duplicity by the current leadership of the Bundesbank and its criticism of the ECB. The author spoke to Hans Friderichs, German economics minister at the time, who called that the demand came clearly from the government. The Bundesbank was clearly opposed, but ultimately fell in line. The article also points out one important distinction. The Bundesbank was the central bank of the state, and the government’s own bank. There were no redistributive issues involved. That is clearly different now.

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

Sideways mostly, but euro is stronger.

10-year spreads

           Previous day   Yesterday         This Morning

France         0.643     0.605         0.618

Italy         4.367         4.346       4.317

Spain        5.290         5.134         5.189

Portugal        8.453         8.439         8.715

Greece        22.979         22.926         #VALUE!

Ireland         4.604         4.529         4.859

Belgium        1.115       1.060         1.105

Bund Yield         1.469         1.56     1.589

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Link: http://www.eurointelligence.com/eurointelligence-news/home/singleview-restricted/article/merkel-to-reject-samaras-austerity-extension.html