The biggest news today is that something that was never going to happen is not going to happen. The FT reports this morning that the ECB will after all not publish a formal cap on bond yields – that bit seems to have been decided, and leaked, firmly. The FT also has the news the new programme is being referred in internal papers as “monetary outright transactions”. One of the open issues, raised by the central banks of the Netherlands, Belgium, Luxembourg and Finland is the exit strategy. (Why not the Bundesbank? We suspect that the Bundesbank is opposing it completely, not even making constructive suggestions, for fear of diluting the message.) The article says it is still unclear how the ECB will enforce conditionality.

Reuters says in its story that the ECB will give up seniority states on the government bonds it purchased, but that there would be no reference to unlimited purchases, quoting a senior central bank source. There would be no discussion over interest rates at this meeting. There is also a debate about whether the ECB would sterilise the operation, but this is meaningless given that banks have unlimited access to ECB anyways.

Writing in Frankfurter Allgemeine, Bavaria’s economics minister Martin Zeil, a member of the FDP, argues, literally, that the Bazooka will backfire. He said the underlying problem of the eurozone was a deep-seated balance of payments crisis. A bond purchase programme will get investors back into those countries, unless the price level adjusts first – the figures he puts are 35% for Portugal, 30% for Greece, 20% for Spain and 10-15% for Italy. The more help the ECB and the ESM provide, the smaller the pressure is for the countries to adjust.

In his Spiegel column, Wolfgang Munchau argues that the programme is not going to be inflationary – something he regrets. He says that the eurozone has embarked on adjustment that has some similarities with Japan in the 1990s, and which required a central bank policy with the specific mandate to create minimum levels of inflation. He said his favourite way to achieve this would be a nominal income target.

Tremonti sets up his own political movement

Giulio Tremonti has split off from Silvio Berlusconi’s PdL and is setting up his own political movement, with an agenda to regulate financial markets more strictly and save Italy from losing sovereignty and being colonised, Reuters reports. Tremonti did not say what his movement would be called. He said it would not be a traditional party and would aim recruit “above all, young people.” The article quoted a pollster as saying that Tremonti would draw support from political active centrist and centre right voters.

Spain’s big day

Thursday is an important day for Spain with the ECB’s bond purchasing programme, and Angela Merkel’s visit to Madrid, El Pais (English edition) reports. In addition, Spain’s Treasury will attempt to raise €3.5bn in an auction of 2, 3, and 4-year bonds on Thursday morning, as reported byExpansion on Monday.

Merkel to visit Spain on Thursday

Rajoy has said that he would wait until Mario Draghi lays out the conditionality attached to the ECB bond purchases before deciding whether to ask for a rescue, but according to El Pais he is expected to try to obtain a commitment from Merkel that no further conditions will be attached in any case, given that Spain is already committed to a stringent deficit reduction plan. According to Reuters last Tuesday, France is pressuring Spain to apply for a bailout but Spain won’t do it without German support. In an interview Monday with radio station Onda Cero, Luis de Guindos “explained that Merkel’s visit is not to decide what measures Spain must take, but to support those already taken”.

Merkel will not only meet Rajoy, but also Spanish trade union leaders. On Tuesday, Europa Pressreported that the largest Spanish unions UGT and CCOO would be present at a forum on “vocational training, and research and development”. UGT leader Cándido Méndez will demand increased public investment in R&D given the retrenchment of the private sector, while CCOO leader Ignacio Fernández Toxo intends to communicate to Rajoy and Merkel the need for a change in Europe’s policies and to shift the discussion away from whether or not there will be a rescue.

(Apparently the German trade unions intervened to help secure a place for the Spanish unions in Merkel’s agenda. This recalls the fact that Merkel met Mendez and Toxo secretly in Germany this summer, weeks before Rajoy’s first meeting with the unions after nearly 8 months in office, on which see the interview with Mendez in El Pais, English edition from two weeks ago)

Legal delays to Spain’s regional liquidity fund

El Pais writes that one reason why the Spanish government is delaying the so-called Regional Liquidity Fund is that the Budget Stability Law must be reformed to remove the clause forbidding the central government form guaranteeing the debts of regional governments. Over the objections of the entire parliamentary opposition, the PP is attempting to pass the necessary legal changes urgently, but still that won’t happen before at least three weeks. Rajoy is also hoping that his meeting with Merkel today and the ECB council meeting will help lower Spain’s funding costs.

(Though El Pais says that the prohibition of state guarantees is “in the new Budget Stability Law approved in February” the fact is that such a clause, forbidding the assumption by the State of regional or local government obligations, was introduced in the 2006 reform of the first Budget Stability Law of 2001. It is hard to fathom that this legal ‘problem’ has been allowed to linger through a legal reform this Spring, especially given that the Spanish government already had to advance hundreds of millions of euros to Valencia twice last December and January, as reported at the time by Levante-EMV)

Luis Garicano is pessimistic

ABC carries an interview by its affiliate radio station Punto Radio of Luis Garicano. In it, Garicano says the situation is “extremely disquieting” and “this is a now-or-never quarter”. Garicano expects markets to be disappointed by the ECB council which, he predicts, will “kick the can down the road” because the legal conditions for anything else are not in place. Garicano says the capital flight out of Spain is unsustainable and eventually there will be losses for Dutch and German banks and pension funds which have invested in Spain in the past. He also criticized Spain’s communication policy as “Spain has done more than Italy but continually shot itself in the foot”. Garicano favors that “a troika” be sent down to Spain to make sure that whatever conditions are actually implemented

Samaras refuses another coalition meeting ahead of troika visit

Prime Minister Antonis Samaras is taking a firm line with his coalition partners, not granting another discussion round before troika arrives, Kathimerini reports. Samaras reportedly rejected Evangelos Venizelos’ call for a meeting  to discuss the package ahead of the scheduled arrival  of troika officials in Athens on Friday. Sources told Kathimerini that Venizelos was annoyed that he and Fotis Kouvelis of the Democratic Left, the third party in the coalition, had not been debriefed by Finance Minister Yannis Stournaras on the latter’s talks with his German counterpart in Berlin on Tuesday. Venizelos and Kouvelis are said to be pressing for alternatives to some onerous proposals for the €11.5bn-euro package. Sources close to Samaras said there would be no reason for a meeting between party leaders about the measures until these are endorsed by troika.

In other European capitals, politicians have finetuned their messages about Greece. Wolfgang Schaeuble told reporters that there will be no third bailout for Greece but that he expects Greece to remain in the eurozone.  Francois Hollande confirmed that Greece “should get more time if Troika approves efforts” but, “Greece must be allowed to remain in Euro Zone”, while the Dutch Prime Minister Mark Rutte said his country would not contribute any further loans to Greece.

IMF cleared next tranche for Ireland but wants more clarity on next years’ measures

The IMF told Ireland to map out its medium-term austerity plans when it announces its budget for next year in three months time, something the government has so far been reluctant to do, Reuters reports. The IMF cleared the next disbursement of funds for Ireland but demanded for “greater clarity” on future budgetary plans. This will put further pressure on Ireland’s ruling coalition, which this week showed its first signs of creaking since coming to power 18 months ago after unpopular emergency health cuts upset some among its ranks. Ireland’s government has laid out how much it plans to raise in taxes and cut in spending for each of the next three years but will not detail where the savings will be found for next year until December’s budget.

Ireland’s 2011 deficit at 12.7%

With new internationally comparable data available, the Statistics office finds that the government 2011 deficit was  €20.2bn, or 12.7% of GDP, €360m lower than the previous estimate, but “higher than the Greek deficit of 9.1%”, according to a headline in the Irish Times. Excluding the €5.8bn used to recapitalise the banks, the deficit reaches €14.4bn or 9% of GDP. Under the terms of its €85bn bailout, Ireland has to reduce its deficit to 8.6% of GDP by the end of 2012 and 7.5% of GDP in 2013.

Will a breakup cost the same as muddling through?

The importance of this article, from Reuters, is not the statement itself, but the fact that senior people are beginning to make such calculations – or rather miscalculations. The chief executive of HVB, Theodor Weimer, is quoted as saying that the cost of breakup up the eurozone would be between €1.3bn and €3.3bn – a wide but oddly precise range. But to keep the euro together would cost just as much.

(The danger with all these calculation is the notion of “cost”. What he calls a cost is some book entry, but he ignores the overall economic costs, which are incalculable in advance. A breakup of the eurozone brings all sorts of uncertainties that cannot be quantified, while the costs of rescuing the eurozone are transparent and precise.)

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

Markets hopeful

10-year spreads
	Previous day	Yesterday	This Morning
France	0.835	0.804	0.830
Italy	4.277	4.198	4.189
Spain	5.195	4.989	5.075
Portugal	7.499	7.535	7.675
Greece	20.399	20.539	-1.45
Ireland	4.547	4.420	4.863
Belgium	1.258	1.224	1.265
Bund Yield	1.398	1.437	1.446
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.253	1.2608
Yen	98.180	98.85
Pound	0.790	0.7927
Swiss Franc	1.201	1.2054
ZC Inflation Swaps
	previous	last close
1 yr	1.94	1.9
2 yr	1.85	1.73
5 yr	1.9	1.81
10 yr	2.07	2.08
Euribor-OIS Spread
	previous	last close
1 Week	-7.800	0
1 Month	-2.900	-2.8
3 Months	6.643	8.543
1 Year	67.214	68.114
Source: Reuters