El Pais (English Edition) reports on Mario Draghi’s closed-door appearance before the European Parliament’s committee on Economic and Monetary Affairs. Several MEPs quoted Draghi as saying that buying bonds of maturities up to 3 years would not constitute monetary financing. Highlighting Draghi’s willingness to buy Spanish and Italian debt, though subject to “strict conditionality”.

Expansion also reports Draghi discussed the plans for ECB banking regulation and advocated dividing tasks between the ECB and the National Central Banks based not on bank size but on the “activity or sector” that the bank operates in.

With an obligatory reference to central bank independence, Spain’s vice-president Soraya Sáenz de Santamaría said today that “it’s the ECB’s task to ensure that the single currency is truly a common currency” and that the ECB should be “very aware” of the difficulties for certain member stated caused by uncertainty, writes Europa Press.

(The statement by Mario Draghi is important as it reflects the ECB’s legal understanding of where monetary policy ends and where debt monetisation begins. This is what he said according to Reuters: “If we are in the short term part of the market where bonds have a length of time maturity of up to one year, two years, or even three years, these bonds will easily expire…So there is very little monetary financing effect at all in what we are doing.”  As we and other commentators have suggested, the ECB will buy short-dated paper only.)

Draghi also strengthened the monetary transmissions argument, by saying that the ECB is precluded from pursuing a goal of price stability if the monetary transmission mechanisms are broken.

ECB data show interest rates in private sector are diverging

The FT has a story of ECB data showing that interest rates paid by companies in the eurozone’s weaker economies have increased. The purpose of this information is clearly to provide ammunition for Thursday’s bond purchasing programme, as Draghi will justify it on the grounds of broken transmission mechanism of ECB policy. The rate for one-to-five year corporates loans of under €1m was 6.5% in Spain in July, the highest since late 2008. In Italy, the comparable figure was 6.24%, but in Germany it was only 4.04%. The article quotes Huw van Steenis of Morgan Stanley as saying about the banks: “They are saying ‘we have to match loans and deposits more along geographic lines.’ I don’t see that being reversed. The genie is out of the bottle.”

Nowotny says don’t worry about inflation

We always read Ewald Nowotny’s comments with interest as he is often a good indicator of changes in the ECB’s thinking, as he straddles the worlds of the northern hawks and the southern doves. Reuters reports that he warned that the eurozone may be following a Japanese-style path, with low growth and low inflation. He said there was no danger of money-supply driven inflation in the eurozone. He said, if anything, credit demand is too low.

PMI is revised downwards

The FT reports that the August Markit manufacturing PMI for the eurozone was revised from 45.3 to 45.1. While there are some signs of a manufacturing recovery in the UK, the eurozone economy remains on a downward trend. The data are pointing towards a decline in Q3 GDP for the eurozone as a whole. Markit said that the eurozone product and labour markets would not show any sustained improvedment until the crisis is over, and the global economy recovers.

Barnier also plans proposals for bank recapitalisation and deposit insurance funds

Frankfurter Allgemeine has the story that the European Commission’s proposal for a banking unino on September 12 will go further than previously thought. In addition to given the ECB supervisory responsibility over all banks, Michel Barnier also plans common bank recapitalisation and deposit insurance funds. The article says the Commission may even be considering to merge the two funds into a single one (which makes sense, as you can achieve the same result with both). The proposal includes a directive about the new role of the ECB, a proposal for a change in the competences of the European Banking Authority, and a political paper outlining the next steps towards a banking union. Wolfgang Schauble signalled willingness to comprise when he said that European authorities should have rights if national systems malfunction, but he demanded that the Commission reworked its plans. But Schauble repeated his central claim that the ECB cannot effectively supervise 6000 banks.

Andalusia joins growing list of troubled Spanish regions

According to El Pais (English edition) both Andalusia (which still insists it hasn’t yet decided whether to resort to Spain’s regional liquidity fund) and Catalonia (which has announced it will request €5bn just to cover maturing debt) said on Monday that they would ask for an advance of funds from the Spanish government to tide them over until the Fund is operational later this Autumn. Andalusia will ask for a €1bn bridging loan. Meanwhile, El Confidencial reports that the Valencian Government (which will be requesting €4.5bn from the liquidity fund) has corrected its estimated 2011 deficit up by €3bn to over €6.6bn. Sources in the Finance and Public Administration ministry assured the fund would be operational “shortly”, writes Europa Press. At the end of last week, El Confidencial (English Edition) wrote that at least seven Spanish regions would “clearly have difficulties” meeting their payments this year.

De Guindos doesn’t exclude a rescue

In an interview with Handelsblatt, Luis de Guindos admits a rescue is being considered “if the conditions are right”, and that a decision could come in the next couple of weeks, with the ECB council meeting this Thursday and the informal meeting of the Eurogroup. He envisions the ESM coming into force in the coming months, but without a banking licence, thus he “will work with the available tools”. On banking regulation, he accepts that in the beginning the scpe of ECB supervision may be limited to the largest banks, but ultimately all banks should be covered.

Italian car sales fall to 1964 levels

Italy’s car sales fall to 1964 levels in August, Corriere della Sera reports. Official data confirm an overall market drop in August, down 20.23%, the Transport Ministry said 56,447 automobiles were sold in August compared to 70,764 in August 2011. Fiat reported a slump, down 20.53% to 16,689 vehicles compared to 21,000 during the same period in 2011. Roberto Vavassori, head of Italian Association of the Automotive Industries ANFIA, said. “This is the national automobile market’s ninth dip in a row;
more or less we are at 1964 levels, when in the month of August 57,847 sales were recorded,” he said. Sergio Marchionne, CEO of Fiat-Chrysler, says he never seen a drop like that before.

Share of foreign investors in Italian bond market falls to 30%

Fabrizio Goria writes in Linkiesta that foreign investors hold only 30% of Italian debt, hitting a record low. Research from Morgan Stanley, published by the Italian online newspaper, reveals a significant drop in foreign confidence in Italian debt obligations, valued €1.648bn. From 38% at the end of 2011 to 30% at the end of August: the foreign debt-holdings are now at €492bn. Foreign banks hold €161bn, meanwhile others financial institution possess €330bn. The ECB’ SMP holdings remain stable to €110bn, 7% of total. Italian banks hold €336bn, MFIs €304bn and others €406bn, 63% of total.

Dutch Elections: Labour closes the gap to Socialists after television debates

Dutch Prime Minister Mark Rutte of the Liberal Party has widened his lead over Socialist Party leader Emile Roemer in the run up to an election on September 12 that has been dominated by the euro zone crisis, two surveys showed on Monday. The latest Maurice de Hond and Ipsos Synovate opinion polls showed the Liberal Party in the lead, while the Labour Party has made gains at the expense of the Socialists, largely reflecting the stronger performance of Rutte and the new leader of the Labour Party, Diederik Samsom, in televised election debates.  According to both polls Rutte’s party would win 35 seats in the 150-seat parliament, while the Socialist Party is either on second place (29 seats) according to the de Hond poll or third place (24 seats)  in the other poll. Labour gained and closed the gap to Socialists in the first poll and even outperformed them (30 seats)  in the Ipsos Synovate poll. With no single party set to win more than about a quarter of the seats in parliament, the Netherlands faces the prospect of months of coalition talks and political uncertainty, writes Reuters.

Troika likely suggested more minimum wage cuts for Greece

While the Greek finance minister is about to meet Wolfgang Schauble in Germany, government officials continue talks about the austerity package. Troika officials are expected to reject planned cuts to defence and public administration, Kathimerini quotes unnamed sources, possibly calling for further pension cuts. Government officials are said to have expressed concern about the social impact of too much austerity. But an e-mail sent by the troika to Athens last week reportedly suggested further reductions to the minimum wage and to compensation given by employers in the private sector. As for proposed cuts to the so-called special salaries of certain categories of civil servants, these are to range from 6% to 35%, Kathimerini understands, with police getting the smallest cuts and judges the largest. Troika officials are expected to start talks on Friday.

Majority of Austrians are against more aid for Greece

Two out of three Austrians oppose more European Union aid to debt-strapped Greece, a poll published today showed. The Karmasin poll of 500 people for the Heute newspaper found 39% were entirely against more aid while 26% tended to oppose the idea. Only 12% were absolutely in favour and 19% tended to support more EU help. A separate poll showed only a quarter of Germans think Greece should stay in the eurozone or get more help from other countries. In Austria, Billionaire Auto parts magnate Frank Stronach has burst into politics with a call to abandon the euro, turning parliamentary elections due next year into a de facto referendum on the country’s role in Europe, writes Reuters.

De Backer: Where would Germany be, if Europeans had imposed Greek conditions?

In Le Monde Paul de Backer has a sharp comment on Germany shamelessly ignorant of the past while judging Greece. He helps to remember: In 1951 Germany successfully negotiated reparation payments to the Allies to be paid over a period of 30 years, allowing Germany to get its economy up and running again. The last payment was 1980. Germany’s reparation to Greece, about €80bn including interest, was never paid.  Also, after reunification when Helmut Kohl decreed a 1:1 Deutschmark and Ostmark, although the real exchange rate was more likely to be 1:400. A perfect occasion to speculate, but European banks put all their weight against it, in an act of solidarity. Finally, the military budget in Greece was less affected by austerity, there are two contracts of over €20m paid to German companies.

A global response to Eurozone crisis

It’s time for an international coordination against the Eurozone crisis, Paolo Manasse argues on Vox. “The ECB was the only European institution up to the task of avoiding a breakup of the euro,” Manasse said. As in late Seventies or in October 2008, Europe needs a global response to its crisis to boost growth, fiscal consolidation and restore markets confidence in the eurozone. Unfortunately, today the situation is more complicated. “The scope for international fiscal cooperation is more limited,” Manasse said. That’s why he calls for monetary policy coordination. “The ECB (or the EFSF) should commit to keeping sovereign debt yields within ‘reasonable’ bands, possibly with joint interventions of other central bank,” he writes.

Hulverscheidt on the German government’s duplicity

In a comment in Suddeutsche, Claus Hulverscheidt writes that Wolfgang Schauble talks with two tongues on the issue of ECB bond purchases. He has both condemned and welcomed the plan on different occasions. His duplicity reflects the governments general attitude. Publicly, Angela Merkel supports Jens Weidmann, but the government is nevertheless glad that Draghi is effectively doing the job for them, obviating the need for expensive programmes, for which there would be no majorities.

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

Euro rise on Draghi’s comments.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.815	0.828	0.843
Italy	4.514	4.509	4.501
Spain	5.523	5.500	5.558
Portugal	7.869	7.843	8.060
Greece	21.946	21.451	-1.38
Ireland	4.555	4.511	4.777
Belgium	1.223	1.257	1.260
Bund Yield	1.344	1.376	1.384
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.257	1.2608
Yen	98.500	98.79
Pound	0.791	0.7935
Swiss Franc	1.201	1.2006
ZC Inflation Swaps
	previous	last close
1 yr	1.75	1.88
2 yr	1.66	1.7
5 yr	1.72	1.74
10 yr	1.99	2
Euribor-OIS Spread
	previous	last close
1 Week	-8.200	-8.1
1 Month	-3.000	-4.5
3 Months	8.957	8.857
1 Year	68.443	67.543
Source: Reuters