The German papers are full of reports about tomorrow’s expected decision by the Constitutional Court on the ESM and the fiscal pact. Today’s coverage is about the options, and this has brought some interesting commentary, including a consensus that the much favour Yes-But option is a lot trickier than is generally assumed.

Suddeutsche Zeitung writes that the otherwise much favoured option of a Yes-But is tricky because there is not much the Constitutional Court can demand that the German government has not already conceded. The German government has already strengthened the rights of parliament. What it could, the paper writes, is insist on an exit clause for the fiscal pact. While Germany’s own constitutional debt brake is reversible, that is not currently the case with the fiscal pact. However, the Germans believe that the credibility of the ESM would be greatly weakened if countries can simply opt of the fiscal pact, so the Court would hardly strengthen the German position if it insisted on an exit clause, as some of the plaintiffs had demanded. The paper also made the point that this would be a devastating defeat for Merkel.

Frankfurter Allgemeine writes that hardly anybody believes the court will block the fiscal pact and the ESM, or demands a re-negotiation because the court always emphasised the need for a room for manoeuvre by elected politicians and because the pre-amble of Germany’s constitution has a pro-European bias. The article said that it is hardly possible to give the Bundestag even more competences. The members are already weighed down by the workload. What is imaginable is the setting of a maximum liability. (This would cast in stone that Germany cannot conceivably rescue Italy, or Spain beyond an initial limited programme.)

In another article Suddeutsche writes that Mario Draghi’s OMT can proceed even if the court votes No, because it initially relies on the EFSF. The ESM is ultimately bigger, but the EFSF is allowed to undertake primary market purchases – a condition for the activation of the OMT. If the court votes No, the ECB would ultimately end up with a higher risk.

(So in other words, a No vote is not going to reduce Germany’s risk at all. That calculation may well have born on the justices minds.)

The Dutch election is no longer expected to bring any really nasty surprises

The other big event tomorrow is the Dutch general elections. In the early part of the campaign, Geert Wilder’s Freedom Party did well. Then it was the Socialists. On the eve of the actual elections it appears that the two main governing parties are going to pull through. De Volkskrant has done the math and finds the two main governing parties, PM Marc Rutte’s Liberals (VVD) and the Labour Party (PvdA) will govern together, as there are no alternative options. The question is, as it was last time, of which of the smaller parties to draft into the coalition, in order to obtain a stable absolute majority. The latest polls has the VVW and PvdA neck and neck. Volkskrant shows them at 33 seats each. This is a spectacular turnaround for the PvdA, which has been trailing badly a few weeks ago.

The Dutch papers lead with last night’s TV debate Rutte and Labour leader Diederik Samsom, who according to the lead story in Volkskrant produced an evenly matched performance. They disagreed on the multicultural society, and they both pretended that they can govern without each other.

(For as long as the government is stable, the precise outcome of the election does not have a huge bearing on the eurozone crisis. There is a broad consensus in the middle of the Dutch political spectrum in favour of limiting transfers. We thus do not expect a coalition led by Samsom to make a big difference.)

Portugal to announce bailout review results today

Reuters reports that Portugal’s government will today announce the results of the fifth review of its bailout programme. The inspectors have approved Portugal’s economic performance in all previous quarterly reviews, but the country is now expected not to meet this year’s and next year’s fiscal goals due to the recession. This has recently prompted the government to pile further austerity measures on top, but the government has yet to say whether this will be sufficient to meet next year’s target of a 3% deficit. (Of course it won’t, the question is only how they can pretend to maintain such silly goals given the present policies.)

Vitor Constancio tipped to head the ECB’s supervisory agency

You always know that something becomes really series in the EU when they start talking about jobs. Handelsblatt has the story this morning that ECB vice president Vítor Constâncio is the frontrunner for the job to head the new banking supervision unit in the ECB. The paper cited sources inside the European Commission. One of the conditions would be that Constancio would have to withdraw from all aspects of monetary policy (that would imply that he cannot vote in the governing council, or possibly even resign the vice presidency).

IMF warns of impact of eurozone crisis on the world economy

Reuters quotes IMF deputy MD Zhu Min as saying that the eurozone crisis was far from over, and that we are still in the middle of it. He said IMF models predicted that a further deterioration of the crisis could cut as much as 1.5-2.0% from economic activity in the US and Japan and 1% in China. The wider impact on Asian trade would be dramatic, given Europe’s imports of Asian-made good. He said when the eurozone growth drops to zero, so does export growth in Asia.

EBRD says policymakers did not pay enough attention to eastern Europe

Suma Chakrabarti, president of the EBRD, is quoted by Reuters as saying global policymakers had paid not enough attention to the impact of the eurozone crisis on eastern Europe. He called for a much more co-ordinated action plan for the region. In July, the EBRD cut its 2012 and 2013 growth forecasts for emerging Europe and North Africa to 2.7% and 3.2% respectively, mainly due to Russia. A further deterioration of the euro zone crisis was the biggest downside risk. Chakrabarti said yesterday that the numbers look “pretty frightening”. The EBRD is now preparing a new Vienna initiative to prevent a disorderly deleveraging.

Rajoy goes on TV as support for PP takes austerity toll

El Confidencial (English Edition) reports on a survey by Metroscopia published by El Pais on Saturday. Five in six spaniards “don’t have confidence” in Mariano Rajoy and 70% think he’s improvising. If elections were held today, the PP would lose 1/3 of the vote it obtained 10 months ago (down to 30%), and only 1/2 of its voters would vote for them again. However, the main opposition party PSOE would not increase its vote share and would still come second at 24%. The Spanish-language story in El Pais has a chart of monthly voter intent estimates showing that the PP vote share has taken two discrete drops: one between March and April and another between July and August. Presumably the first is related to Rajoy delaying his budget for 2012 until after the Andalusian regional elections which the PP went on to lose anyway, while the second is tied to the banking sector rescue application.

El Pais ran a story on Saturday (summarized in the English edition on Monday) on PP worries about unrest among their base, and regional “barons” starting to act rebelliously or more independently of the national party. The coming elections in Galicia, Rajoy’s home region, will be a test and regional president Alberto Núñez Feijóo is beginning to distance himself from Rajoy in his pre-election rhetoric.

Rajoy’s first TV interview

In this context, Rajoy gave his first TV interview since the election on Monday evening and, characteristically, clarified little. Online newspapers live-blogged the 45-minute prime-time interview. For two versions spanning the political spectrum see ABC and Publico. Rajoy mostly avoided direct answers resorting to talking points and metaphors familiar to viewers, such as likening a rescue application to a loan application which also has conditions attached; he spoke repeatedly of “spending what one doesn’t have”. Rajoy said he “would not like or accept conditions on concrete policies to adopt” in case of a rescue, that he won’t ask for a rescue if he “deemed it unnecessary or inconvenient”, and that no conditions have been suggested. Rajoy insisted that he “won’t touch pensions” and announced tax reforms on capital gains and the introduction of “green taxes”.

Spain’s large firms benefit from Draghi effect

Spain’s largest firms have been taking advantage of Draghi-induced lower yields to finance themselves. Banks BBVA, Santander, Banesto, Sabadell; utility Iberdrola; telecom Telefonica and the ICO public credit institution have all issued debt or covered bonds in the last week, most after Thursday.

However, just on Sunday El Pais ran a piece on how Spain’s risk premium was “asphyxiating” Spanish small and medium enterprises, which “pay nearly 50% more than their German counterparts”, hurting Spain’s competitiveness, and that alternatives to traditional bank loans are proving elusive.

Also on Sunday, Cinco Dias had a story on how banks are compensating for rock-bottom Euribor rates by adding spreads of up to 3% to new mortgages.

The decline of Italian economy continues

The Italian recession continues, La Stampa reports. In a note released on Monday morning, the Italian statistics agency ISTAT said that second quarter results for 2012 showed that the GDP decreased by 0.8% compared to the previous quarter and by 2,6% compared to the same period for 2011. “It’s the lowest data since 2009 for quarter by quarter,” Istat President Enrico Giovannini said. The 2013 GDP forecasts are revised to -0.8% from -0.6%. The 2012 GDP data was revised and lowered compared to the preliminary estimates released in August, which indicated an economic downturn of 0.7% and 2.5% on an annual basis. The Italian Treasury remarks that the recovery in Italy could begin next year.

Italian media are debating a presidential mandate for Monti

Mario Monti reiterates he won’t stay in office for a another term, La Repubblica reports. But there’s a possibility for Monti to be the next Italian President after Giorgio Napolitano. “My personal horizon for my current and ‘strange’ job ends at April of 2013.” However, he told CNBC-Class (the Italian branch of CNBC), “my horizon is a long-term one with regards to the reforms that we ‘implanted’ into the Italian economy to generate benefits in the years to come.” And on Silvio Berlusconi, he added: “If he decides to run for office, I would view it as quite normal.” But, to ensure public finances and reforms, Monti could be the next Italian President, La Repubblica argues.

Risks of social unrests in Italy

Il Messaggero wrote in an editorial that the austerity imposed by the government could rise social unrests. The next big event will be on September 28. The government body that guarantees the legality of strikes in essential public services has confirmed the legality of the national strike by the unions UGL and the Sindacati Confederali for September 28. A statement says the strike that involves the health workers in local and regional governments, in the ministries, of public bodies, of environmental health, of fiscal agencies, of the prime minister’s office, of  ministerial responsibility, of regional and local government, of administrative management. That massive rally “could derail and begin to be a rally against austerity,” Il Messaggero said.

Monacelli says ECB action not sufficiently targeted enough

Writing in Lavoce, Tommaso Monacelli says that the new OMT programme is insufficiently targeted. He says the OMT is targeted at countries in dire difficulties. But the OMT does not provide insurance to those countries for which it would be more effective and less expensive, who are in difficulty, but not yet on the brink of the abyss, like Italy. Thus, the ECB is not going to get the full economic returns on the programme, while the country that stays outside a programme is unlikely to make all the necessary reforms.

Gideon Rachman warns that Draghi’s programme might increase the risks

In his Financial Times column, Gideon Rachman writes about his concern that the eurozone rescue occurs at the expense of democracy. He says that in return for help, Spain and Italy will have to enter a programme, which sounds as though they were drug addicts. (which is precisely the way the German establishment sees them). Rachman concludes that a lot of things have to go rights from Draghi’s plan to work. It is not a good omen for the German representative on the ECB’s governing council to be outvoted. “Since 1945, the central idea of the European project was never again to leave a powerful and aggrieved Germany isolated at the centre of Europe. We are now dangerously close to that point.“

Commerzbank in devasting criticism of the OMT

The commentary on the OMT is getting more negative. The most negative comment we have read so far is from the chief economist of Commerzbank, one of Germany’s largest banks, who predicted that Draghi’s OMT will trigger the collapse of the eurozone within five to ten years, die Welt reports. The mechanism would be a boom-bust phase in Germany. The ultra-loose monetary conditions would first lead to stronger growth in Germany, possibly to the effect that unemployment would fall to below 2m. Wages would explode, pensions would increase, and property price would skyrocket. Germany’s competitiveness gains of the last decade would be reversed. The phase of overheating would be followed by a collapse on a scale similar to that of Spain.

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
10-year spreads
	Previous day	Yesterday	This Morning
France	0.719	0.740	0.743
Italy	3.576	3.702	3.715
Spain	4.154	4.208	4.258
Portugal	6.585	6.819	6.973
Greece	20.088	20.314	-1.50
Ireland	4.155	4.117	4.336
Belgium	1.143	1.164	1.172
Bund Yield	1.492	1.515	1.502
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.279	1.2771
Yen	100.040	99.86
Pound	0.799	0.7978
Swiss Franc	1.209	1.2081
ZC Inflation Swaps
	previous	last close
1 yr	1.66	2
2 yr	1.78	1.78
5 yr	1.91	1.9
10 yr	2.18	2.18
Euribor-OIS Spread
	previous	last close
1 Week	-8.143	0
1 Month	-4.143	-3.643
3 Months	7.000	5.3
1 Year	63.414	65.514
Source: Reuters