EUROINTELLIGENCE DAILY BRIEFING, 12 de Setembro de 2012. Enviado por Domenico Mario Nuti.

A Finnish newspaper reports that Spain is on the verge of a programme


  • Mariano Rajoy admits for the first time that he is now considering tapping the ECB’s OMT facility;
  • rejects a full bailout programme with troika supervision;
  • wording suggests that Spain is likely to apply for an enhanced conditions credit line, which would not require any new austerity measures for now;
  • the interviews came on the occasion of Jyrki Katainen’s visit, who said that Spain’s interest rates were unfairly high;
  • Germany’s constitutional court rejects the emergency case brought by German MP Peter Gauweiler, raising expectations of a Yes vote today;
  • German newspapers report overwhelmingly that the court will approve the ESM;
  • Kurt Kister writes that the political needs stemming from Germany’s participation in international organisation has made German constitutional law more flexible;
  • an estimated 1.5m people took to the streets in Barcelona on Catalonia’s national day, in an insurrectional and separatist mood;
  • the independence movement has been fuelled by Catalonia’s fiscal crisis, and central government imposed austerity;
  • Catalonia’s leader Arthur Mas yesterday demanded fiscal sovereignty;
  • the polls ahead of today’s Dutch elections show that the contest between the liberal VVD and the labour party PdvA is too close to call;
  • Francois Hollande imposes taxes on capital gains, and removes  tax privileges for dividends;
  • the measures affect the richest 10% of the population;
  • Le Monde questions whether the government should pursue a 3% deficit target in the middle of a recession, and advocates the use of structural deficits, as demanded by the fiscal compact;
  • the troika has rejected €2.2bn of the cuts proposed by the Greek government;
  • Antonis Samaras will hold another meeting with coalition today to reach an agreements;
  • Samaras will also meet with Mario Draghi to discuss a restructuring of ECB-held bonds to provide the necessary relief that would allow Greece to stretch its austerity programme over a longer period;
  • Mario Monti warns Italian unions that they have to accept lower wages for the country to become more competitive;
  • admits that his policies reduced growth in the short-term but that this was necessary to improve growth in the long-term;
  • a small business organisation warns that Italian small and medium sized companies cannot withstand the tax burden, and are in danger of cutting 200,000 jobs during the recession;
  • Beppe Grillo’s five star movement has firmly entrenched itself as Italy’s third largest party;
  • Martin Wolf, meanwhile, says the ECB cannot solve the eurozone crisis on its own, and against Germany.

The Finnish newspaper Helsingin Sanomat has quoted Mariano Rajoy as saying that “I am considering using the central bank’s announced mechanism,” while the business daily Kauppalehti quotes him as saying: “It is completely outruled that we would ask for a bailout for the whole country.” (hat tip Reuters). The wording suggest that Spain is considering an application under the ESM’s enhanced conditions credit line, ECCL, which is sufficient to trigger an ECB bond purchasing operation, for as long as the ECCL includes the possibility of primary market purchases through the ESM. The advantage for Spain is that the ECCL requires no troika, and the conditions hardly exceed what has already been agreed. The problem is that the ECCL itself is limited to 10% of GDP, in Spain’s case around €100bn.

The interviews with the Finnish newspapers occurred on the occasion of Jyrki Katainen’s visit to Madrid yesterday. Quoted by AFP (via the Economic Times), Katainen said he did not intend to give Rajoy policy advice and that the high interest Spain is paying was “unfair” given the reforms it has undertaken. Katainen advocated greater European integration and joint bank supervision. Rajoy added nothing of note to his previous statements that he wouldn’t accept policy dictates on how to cut the deficit.

German constitutional court rejects Gauweiler case, and raises expectations that it will approve the ESM and fiscal pact

Spiegel Online says bluntly this morning that nobody believes that the justices will come out with a flat No. The ruling is due at 10am CET. Frankfurter Allgemeine says Berlin expects a “Yes, But” vote. Some of the plaintiffs seemed to be resigned to accept that the most they will get is some indication about the limits of the ECB’s bond purchasing programme. Reuters writes that the constitutional court “is expected to give its approval”, a reflection of what the financial markets expect to happen today. In another story, Spiegel Online mocks the court, calling them the “Yes, but Justices”.

In a comment in Suddeutsche Zeitung, which implicitly seems to accept a Yes vote today, Kurt Kister writes that the narrow view of national constitutional law has jarred with the political reality of supranational institutions, such as the EU and Nato. As a result, a lot of the judgements taken by the court have been political in nature.

The court yesterday rejected the case brought by Peter Gauweiler, which German constitutional lawyers have taken as a signal that the court would approve the ESM and the fiscal pact.

(The reports are not based on actual leaks, but on analysis and interviews with constitutional lawyers. If the argument by Kurt Kister, see above, is correct  the court will have implicitly overruled its own Lisbon verdict. That would in our view be the real significance of a Yes, But vote. As we pointed out in yesterday’s coverage, the court will find it hard to put real substance to the “But“. Giving more powers to the Bundestag is not really a meaningful option.)

Catalan independence sentiment in reaction to the crisis.

Tuesday was Catalonia’s national day (the Diada) which is usually an event of popular nationalist affirmation. This year, the tone of the gathering was distinctly separationist and the turnout was astonishing. BBC World reports the local police estimate that 1.5m took part in the marches, though as ABC reports, the regional delegation of the national government estimated turnout at 600,000. AReuters story makes the most explicit link between the economic crisis and the stronger independence sentiment. Catalonia is the second most populous Spanish region and one of the wealthiest, and thus a net contributor to Spain’s inter-regional fiscal transfers. It is also the most indebted of all the regions and has recently applied for a large Spanish government bailout.

In a speech on Monday, as reported by Publico, regional president Artur Mas said “there is no more urgent battle than fiscal sovereignty”. Catalonia has been demanding the ability to collect taxes directly as the Basque Country and Navarra do on account of their special historic rights. At the end of Tuesday’s rally, the rally organizers met regional parliamentarians and asked the regional government to “initiate the process of secession”, reports Publico in another story. According toEuropa Press, Mas will receive the rally organizers “in a day or two”.

(The fiscal crisis has been taken by opponents of Spain’s quasi-federal model as an opportunity to roll back Spain’s decentralization, while at the same time regional governments have been reacting rebelliously to some of the most controversial austerity measures dictated by Rajoy’s government, such as medical co-payments, restricted access to health case for undocumented immigrants or education cuts. The close political ties between Spain’s Cajas and regional governments have been a major factor in the banking crisis. This all means that Spain’s fiscal crisis is more likely to result in territorial tensions rather than a rise of the extreme parties as elsewhere.)

Dutch Liberals and Labour neck-and-neck before vote on today

Two pro-European Dutch political parties were neck-and-neck in the latest opinion polls before a parliamentary election dominated by the euro zone crisis started on Wednesday. Prime Minister Mark Rutte’s pro-austerity Liberal Party and Diederik Samsom’s opposition Labour Party would each win 36 seats in the 150-seat parliament, according to a Maurice de Hond poll on Tuesday that said the result was “too close to call,” Reuters reports.  Even though they are rivals, some politicians and analysts predict the two parties will be partners in a broadly pro-European coalition delivering the necessary budgetary discipline to meet European Union deficit targets as well as measures to stimulate growth

Hollande’s capital tax plans 

More details emerge on how the French government is to raise €20bn from the private sector. Presented as an element of fiscal justice, the main principle of Francois Hollande’s tax plan is to tax capital  similar to income. Currently households with dividend payments benefit from several tax advantages. Les Echos writes that the preferential treatment of dividend payments, such as a rebate households receive on declaring their dividends with the income (€1525 per person or €3050 per couple), will be scrapped.   The 40% tax allowances on dividend payments will be reduced, to 20% , as Le Figaro reports. Tax advantages on the main home residence and on life insurance are kept. Les Echos notes that half of these tax measures will hit the richest 10% of the society.

Le Monde: 3% deficit yes. But why in 2013?

In its first page editorial Le Monde questions the timing of Francois Hollande’s efforts to reduce the deficit to the 3% target in 2013.  Why 2013, when the economy is weak? Why not apply the logic of the future fiscal pact,  to adjust the deficit objective for the business cycle? What about the notion of a structural deficit? It is clear that France has to return to a balanced budget,  what is less clear is the timing. France with its notoriously high deficits might not have the best reputation to defend the idea of structural deficits; but this is a risk Hollande should be taking.

Samaras forced to rethink cuts

Antonis Samaras is due to meet his coalition partners on Wednesday night in a bid to move closer to an agreement on a new round of spending cuts as the troika has rejected about €2.2bn of the cuts and raised doubts about another €3bn,  Kathimerini reports.

On Tuesday Samaras  met with Mario Draghi. Newspapers speculated that Samaras’ purpose of this meeting was to persuade the ECB to re-profile the Greek bonds the ECB holds. In particular, bonds that are due to mature between next year and 2016, worth €20.6bn, and to put back their repayment date until 2020 or later. Athens hopes this would allow a two-year extension to its fiscal adjustment period, to the end of 2016, which would imply a funding shortfall of €20bn according to the Greek finance ministry,  The German Finance Ministry says it is more likely to be between €30-€40bn, while Nomura puts it at €43bn, Kathimerini reports..

In terms of reducing Greece’s debt, the ECB is expected to make a profit of some €10bn from the Greek bonds bought on the secondary market. The central banks of eurozone member states are also expecting €3.4bn windfall from the purchase of Greek bonds. It is yet to be decided if this will be passed on to Greece.

Monti warns Italian unions

Mario Monti warned Italian labour unions during a meeting in Rome that time was running out for action, government sources told ANSA. “Greece, Spain, Ireland and Portugal have boosted productivity and lowered labour costs, turning around a negative trend, while Italy has not improved productivity and has increased labour costs,” Monti said. An effort for concrete results is urgently needed from talks between business leaders and unions, Monti told to the union leaders. But the biggest Italian union CGIL said “growth cannot come on backs of workers alone.” Monti reminded unions that only a few weeks remained before the eurogroup and EU summits in October. The premier called for concrete signals within a month.

… and admits that his policies have reduced growth in the short-term

Monti also said that his policies have contributed to the worsening economic situation, Il Sole 24 Ore reports. The recession was worse than forecast due to new taxes introduced by Monti’s technical government in 2012. Monti defends the measures in terms of a trade-off – less growth now, more growth later. According to Italian statistical agency ISTAT, the 2013 GDP is expected to be weak until the third quarter. The Italian Treasury will sell over 100,000 state owned assets to reduce its debt, now over 124% of GDP.

Over 200,000 jobs at risk in Italy

Italy’s main small business association found that Italian SMEs may be cutting 172,000 jobs, the lionshare of all jobs at risk in Italy from the recession,  La Repubblica reports. A week ago, the head of the Italian business lobby Giorgio Squinzi warned that a hot autumn would lie ahead. Yesterday, the CGIA reiterated that idea. Italy risks having an additional 202,000 people unemployed in the second half of this year, relative to the same period in 2011, CGIA data shows. The association says the tax burden was the main problem – at over 60% for SMEs, and over 55% on average for Italian companies.

The Five Star Movement established itself as Italy’s third party

The Movimento 5 Stelle (M5S) has entrenched its position as the third Italian Party, according to several polls appear on Il Fatto Quotidiano. The last poll (Ipsos) shows that the Silvio Berlusconi’s party PDL is the second one in Italy, with 21.9%. The first is PD (Partito Democratico) with 25.4%. Beppe Grillo’s Movimento 5 Stelle comes in at 17.9%. Italian analysts compare the M5S to the Greek Syriza. It is opposed to the euro, to austerity, to the ECB, and wants to regain sovereignty on monetary policy, and favours a default (Icelandic way), followed by devaluation.

Martin Wolf on the ECB’s dilemma

In his FT column, Martin Wolf offers an elegant explanation of why a conditional programme of bond purchases, one that is opposed by the Bundesbank, cannot save the euro on its own. He pointed out that conditionality is not credible because the ECB is unlikely to cause a financial crisis the moment a country fails to meet conditions. He writes that the only way to save the eurozone would be for everybody to recognise that the eurozone is in everybody’s best interest. This would require more growth and jobs in the periphery. But Germany is unlikely to accept the more aggressive monetary policy, and will see its fears confirmed that the ECB is turning into a Banca d’Italia. He concludes the ECB has won some time, but that’s all.

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

The euro is rallying.


10-year spreads
Previous day Yesterday This Morning
France 0.740 0.662 0.646
Italy 3.671 3.539 3.503
Spain 4.208 4.199 4.159
Portugal 6.819 6.822 6.914
Greece 20.314 20.114 19.78
Ireland 4.117 4.140 4.144
Belgium 1.164 1.081 1.054
Bund Yield 1.515 1.511 1.547
Euro Bilateral Exchange Rate  
  Previous This morning
Dollar 1.280 1.2871
Yen 99.960 100.26
Pound 0.799 0.8004
Swiss Franc 1.207 1.2087
ZC Inflation Swaps
  previous last close
1 yr 2 1.99
2 yr 1.78 1.77
5 yr 1.9 1.9
10 yr 2.18 2.18
Euribor-OIS Spread
previous last close
1 Week -8.643 -8.343
1 Month -3.743 -4.043
3 Months 6.757 6.957
1 Year 64.357 62.957
Source: Reuters

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