Catalonia to tap Spain’s own rescue fund

• Autonomous region will apply for €5bn in help without conditionality attached;
• Catalan government says the money was paid for by Catalan taxes;
• Mariano Rajoy has writen a letter to the Catalan regional president Artur Mas, in which Rajoy promised to consider a fiscal pact to give Catalonia greater autonomy;
• with Catalonia, three regions will apply to the Spanish domestic rescue fund, tapping a joint total of €8.8bn out €18bn;
• there is still a possibility of early elections in Catalonia, to coincide with elections in Galicia and the Basque region;
• Herman van Rompuy said on a visit to Spain that the eurozone’s deficient architecture is partly responsible for the Spanish crisis;
• Rajoy remains equivocal on the rescue umbrella as one report says he was encouraged by the latest reports from the rating agencies;
• the Spanish economy contracted by 0.4% during Q2, as recession accelerates;
• Spanish savings deposits fell by almost 5% during July, the highest value ever recorded;
• the French government has reached a deal with fuel suppliers to cut the price of petrol by 6 cents, resulting in a revenue loss of €300m;
• Belgium calls on France to take over the public lending arm of Dexia as soon as possible without which there is no hope for a recapitalisation;
• Antonis Samaras is starting discussions with reluctant coalition partners over the €11.5bn austerity package;
• July saw a small increase in Greek bank deposits after large outflows in May and June;
• Greece is negotiations with the Commission over special economic zones to attract investors;
• fixing voting weights in the ECB is not going to increase Germany’s influence, FAZ writes;
• German savings banks, public sector banks, and mutual banks have joined forces to protest against a common European bank regulator;
• they fear that German savers would have to cross-subsidized other deposit insurance schemes;
• Reuters Breakingviews, meanwhile, says that the split in German position between Jens Weidmann and Jorg Asmussen is greatly helping Mario Draghi to push through this bond purchasing programme.

Noting that the Spanish region of Catalonia has an economy the size of Portugal, the Financial Times reports that Catalonia will apply for €5bn in assistance from Spain’s central government, and that Catalan government spokesman Francesc Homs said they would not accept any political conditions for the aid because (as quoted by El Pais, English edition)“To seek a bailout from Europe and to tap the Spanish state are two different things, because the money we are asking for is what was paid by Catalans themselves [in taxes], and what the Spanish government manages,” Homs said. “In the case of Europe, the money does not belong to Spaniards but to other countries.”According to El Confidencial (English edition) the Catalan vice-Premier Joana Ortega had already indicated on August 19 that the Catalan government would make the request at their first cabinet meeting after the summer break, which took place yesterday. Also, Homs and the regional Economy councillor Andreu Mas-Colell had already said in July that Catalonia would need to tap the fund.Just on Monday, Europa Press had reported on an August 10 letter from Rajoy to Catalan regional president Artur Mas, in which Rajoy promised to study a Catalan Parliament resolution from end-July proposing a “fiscal pact” giving Catalonia more control over taxes as the Basque Country and Navarra already enjoy, and asking Mas for “support for Spain’s position in Europe”. In another story, Europa Press notes that, the three regions to have tapped the regional liquidity fund (Valencia, Murcia and Catalonia) will ask the fund for €8.8bn out of the €18bn it was initially allocated. The fund was approved in mid-July and, as mentioned in the El Confidencial story, won’t be operational before the autumn.Last week, a leader of CDC (Artur Mas’ party) floated the possibility of early regional elections should the proposed “fiscal pact” be rejected or the regional treasury encounter “trouble”, as reported by La Vanguardia.(There is still a narrow window for Mas to call early elections coinciding with the Basque and Galician elections next October 21, which would be “interesting”.)

Eurozone flaws partly responsible for Spain’s crisis, says van Rompuy

Catalonia upstaged what was supposed to be the big event of the day in the Spanish rescue saga: van Rompuy’s visit to Rajoy. After the meeting, van Rompuy said (European Council press release) that the cause of the Spanish crisis is private sector over-indebtedness associated with a housing boom which “was also made possible by deficiencies in the Euro area’s architecture”. After commending Rajoy for his “ambitious” reform programme, van Rompuy said the EU is “ready to act on short notice to safeguard financial stability”. Van Rompuy “fully endorsed” the framework presented by the ECB on August 2 in case “financial market defiance persists”. Van Rompuy ended by stressing that “the Euro is irreversible” and “Greece’s future is undoubtedly in the Euro area”.For his part, as reported by EUObserver, Rajoy said that Spain has still not decided on applying for a rescue, which would wait at least until after the ECB Council meeting next week, and once again denied any negotiations on the terms of a possible rescue. According to Expansion, Rajoy was “comforted” by the attitude of Standard and Poor’s last week and Fitch yesterday (Fitch press release) that a Spanish rescue application would not lower Spain’s rating.Also yesterday, Rajoy’s PP used its majority in the Spanish Parliament’s permanent deputation (as the full parliament is not in session) to deny requests for Rajoy to appear before Parliament to explain any dealings with the ECB to improve Spain’s financial market access, reports Europa Press.Expansion also reported on a statement by Spain’s secretary of State for European Affairs that “investors believe the Euro ‘can blow up'” and it’s necessary to guarantee that won’t happen.

Spanish recession get worse as savers withdraw cash

Reuters has the news of the final Q2 GDP numbers for Spain, showing a 0.4% fall, and 1.3% yoy. The main support came from exports, which grew by 3.3% yoy, in contrast to a fall of 3.9% of national demand. Tourism, which makes up 10% of GDP, showed an increase of 6% in the Jan-Jun period compared with the same period last year.In another story, Reuterssays private sector deposits had fallen by almost 5% during July, the biggest monthly drop ever recorded. The Bank of Spain dismissed these figures, saying this was due to the holiday season “because families take out money for their summer vacation and businesses have to pay taxes.” But the article noted that in July 2011 deposits fell 1.5%, while a year earlier they rose 1.3%. One explanation is, of course, mistrust in the banking system, but also the recession, as people draw on their savings.

France cuts petrol prices by 6 cents

France’s socialist government has struck a deal with fuel suppliers to cut petrol and diesel prices by up to 6 euro cents a litre for the next three months in a new effort to shore up flagging economic activity, the FT reports. Finance minister Pierre Moscovici, the finance minister, said the government had agreed to split the cost with fuel producers and distributors pending further talks on more permanent measures to curb fuel prices. Moscovici said the government’s half share of the fuel measure would cost taxpayers €300m in lost revenues – at a time when it is facing the task of finding more than €30bn in budget savings next year to meet its deficit target. Le Monde calculated that for a typical household with an annual consumption of 1000 litres this means savings of €72 per year.

Dexia: Belgium wants France to act

Belgium’s Finance Minister Steven Vanackere urged France to take over the French public lending arm (DMA) of Franco-Belgian-Luxembourgian lender Dexia as soon as possible, adding that the French finance minister had promised to do so by the end of the year. Vanackere said it did not make sense to talk of a possible capital increase until the DMA chapter had closed, a step that would cut Dexia’s liquidity requirements by €12bn. In the first half of 2012 Dexia reported a hefty loss, it has significant exposure to Spain and Italy and its Tier one capital ratio on June 30 was a fairly low, 6.6%. If Dexia needed fresh money, it would call upon the three states guaranteeing up to €55bn of its borrowings, with Belgium underwriting 60.5%, France 36.5% and Luxembourg 3%. Those guarantees could rise to as much as €90bn, according to Reuters. The Wall Street Journalblog quoted from a Credit Suisse report, according to which for Belgium alone the maximum total contingent liability could sum up to €72.5bn, an equivalent of 20% of Belgium’s economic output.

Greek coalition partners to discuss  €11.5bn austerity measures

Antonio Samaras is expected to meet the leaders of the Socialist PASOK and the Democratic Left party of his coalition today to discuss austerity measures before a scheduled visit of the troika. Talks on some €11.5bn in cuts for 2013 and 2014 – plus an extra €2bn in cuts to cover an expected shortfall from reduced tax revenues and social security contributions — are reportedly stalled. Coalition partners object to some of the proposed measures, including a proposed labour reserve scheme for civil servants. FT Alphaville lists the risk the coalition partners might not agree on the package among six immanent risks in the process towards a deal.Very slow return of deposits to Greek banksDeposits in Greek banks rose by €3.2bn in July, up from €156.2bn at the end of June to €159.4bn at end-July, according to figures released by the ECB, which is a rather small recovery considering the outflow of €15.3bn in May and June.  The total flight of deposits since July 2010 amounts to €58bn, and almost €80bn since 2009, which is equal to a third of the deposits that Greek banks held at the time, according to Kathimerini.

Greece in talks over tax breaks for investors from abroad

Greece is in talks with the European Commission to establish several special economic zones offering tax breaks to attract investors and help reinvigorate its economy after five years of recession, the FT quotes development minister Kostis Hatzidakis.  Analysts said investors could benefit from being able to operate in a special zone without having to go through time-consuming bureaucratic procedures to get more than a dozen permits and licences required to establish a business.   Greece still has to overcome objections by some EU partners on grounds of unfair competition, “because the creation of such zones would give the country a comparative advantage”.  Despite steadily improving wage competitiveness over the past three years (a fall of about 30% in private sector salaries), investors shy away from Greece and will continue to do so unless it is clear that Greece stays in the eurozone.

Fixing the voting weights is not going to help Germany

One of the most frequent criticisms heard from Germany is that the Bundesbank president only has a single vote in the ECB’s governing council, the same as his colleagues from Malta and Luxembourg. German economists and politicians have thus been calling for voting weights to reflect the country’s capital in the ECB. FAZ has done the math, and concluded it is not to go to help much, and may even be counter-productive. With voting weights based on capital, France, Italy and Spain would hold 50%. While Germany’s vote would be strengthened, those of its staunchest allies – Luxembourg, Finland, Estonia, Austria – would be weakened. If one included the votes of the ECB’s directorate, the total “advantage” would be eliminated.

German banks revolt against banking union

We have been warning for some time not to take Germany’s ascent to a European banking union for granted, or at least not to a banking union that has any meaning in terms of the financial crisis. We find it hard to believe that Angela Merkel would agree to hand over power over Sparkassen and Landesbanken, or other excentric types of German banks, to a non-German regulator. Suddeutsche Zeitung this morning has the story that the savings banks (Sparkassen), the public sector banks, and the mutual banks have joined forced to protest against the Europeanisation of bank regulation and resolution. They want the European regulation restricted only to the large banks, fearing a host of bureaucratic regulations if the system was Europeanised. They are particularly concerned about the joined deposit insurance, as that would discriminate against national savers. The three types of banks account for 70% of German private sector savings.

Draghi plays one German off against another

Jorg Asmussen has become a hate figure among German monetary conservatives. FAZ recently had a profile of him with the titel “The Assistant”. Reuters Breakingviews has the comment that Mario Draghi can go ahead with his sovereign bond purchase programme because the German position is split – Asmussen loyally supports his boss, while Jens Weidmann represents the German conservative view. Merkel is behind Draghi in this debate. “Asmussen’s support for the plan is important because it dilutes Weidmann’s opposition to just another opinion – rather than the stance of the euro zone’s most important member.”

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

Going up and up. Half of the Draghi announcement rally has now been reversed.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.712	0.727	0.747
Italy	4.348	4.592	4.582
Spain	5.040	5.163	5.227
Portugal	7.908	8.215	8.268
Greece	22.774	22.452	-1.36
Ireland	4.577	4.590	4.987
Belgium	1.168	1.171	1.172
Bund Yield	1.354	1.349	1.359
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.251	1.2557
Yen	98.250	98.66
Pound	0.792	0.7939
Swiss Franc	1.201	1.2007
ZC Inflation Swaps
	previous	last close
1 yr	1.75	1.77
2 yr	1.69	1.71
5 yr	1.73	1.76
10 yr	2.04	2.07
Euribor-OIS Spread
	previous	last close
1 Week	-7.500	0
1 Month	-2.343	-2.543
3 Months	9.929	10.029
1 Year	67.743	69.643
Source: Reuters