Among the many narratives from the informal Ecofin over the weekend, the one that struck us the most has been the active discouragement by Wolfgang Schäuble of  a Spanish aid application, while France has been reported to be pressuring Spain to make an application. Last week, on his visit to Madrid Jyrki Katainen made the same point. Germany appears to be siding with Finland and other small countries, according to Bloomberg, which writes that France exerts pressure in the opposite direction.

(We think this is quite remarkable, and a certain way to end the current phase of optimism. Schauble does not want a Spanish EFSF/ESM vote in the Bundestag, but by encouraging a delay, or worse an attempt to forego an application indefinitely, the entire OMT programme by the ECB will soon be exposed to be fraud, as it is premised on the idea of an aid application.)

More foot dragging on banking union

The other big theme from Cyprus is the sharpening dispute over a banking union.

The FT reports on the disputes about the banking union, both the timetable and the content, over which France and Germany are disagreeing openly. At the informal Ecofin in Cyprus, Germany, Sweden, Poland and the Netherlands pressed for a “realistic” timetable – meaning a delay. The FT quotes Anders Borg of Sweden as saying it was “undecidable and not acceptable” to aim for a deal by the end of the year. Cinco Dias quotes Borg as saying “we cannot accept banking supervision centered on an ECB we cannot belong to without joining the Euro”. El Confidencial arrives at the logical conclusion that Spain is failing to secure its objective to extract a commitment to bank recapitalization on the timetable agreed in June.

As reported by EUObserver last Tuesday, the 10 EU countries outside the Euro have strong misgivings about the banking union and might withhold the necessary unanimity, though not only  over being forced to submit to ECB supervision but for instance out of concern that being backed by the ESM would give Eurozone banks a competitive advantage over non-Euro banks in the eyes of depositors.

The Wall Street Journal writes that Jörg Asmussen presented the ECB’s proposals for a banking union to the Ecofin, which he said must include common supervision, resolution regime, and deposit insurance. Wolfgang Schäuble is opposing joint supervision of all banks, advocating instead ECB supervision of “systemic” institutions. The German savings bank association is said to oppose plans for joint resolution and deposit insurance on the grounds that this would “raid Germany’s financial safety net to bail out shaky foreign banks”. The Sparkassen and Volksbanken have, in fact run ads in the German press last week in the form of an open letter to Angela Merkel, as reported byHandelsblatt on Thursday.

European Parliament wants a say on banking union

The banking union is also subject to the usual inter-institutional dispute in Brussels. EUObserverwrites that ECB banking supervision is likely to be held up at the European Parliament, which wants to tie the necessary reform of the EBA, over which the EP has co-decision with the Council, with the reorganization of the ECB which is supposed to be a unanimous decision of the Council with the EP involved only in consultation. EU Commission spokesman Olivier Bailly denied the EP had co-decision on ECB reform, while other unnamed “EU officials” appear to be quite impatient with the EP taking too long to review anti-crisis legislation.

Guindos’ homework assignment from the Ecofin

Reporting on the Ecofin informal meeting in Cyprus Friday and Saturday, Cinco Dias wrote that the Spanish government committed to detail, by the end of the month, the timetable to carry out the reforms announced so far, “a calendar that is not demanded of other EU partners”. In addition, Spain is obliged to meet the 6.3% deficit target for this year, by adopting new adjustment measures if necessary. Two weeks ago, we reported on a story in El Pais (English edition) according to which rising unemployment benefits had led Spain’s central government deficit for the first 7 months of the year to exceed the target set of 4.5% set for the whole year (the balance to 6.3% is the deficit allowance of the regional governments).  Expansion had more detailed figures: on a year-to-year basis, affiliations to the Social Security dropped by 3.45%, unemployment benefit claimants are up 6%m and benefit spending is up by 8%.

In a story published Thursday anticipating the Ecofin, El Pais quoted unnamed sources that the preview of the 2013 budget would “include some surprises (in the form of cuts) that will please the ECB”. Also on Thursday, El Pais (English edition) reported that the ECB’s monthly bulletin estimates that Spain’s debt/GDP ratio might rise over 100% should Rajoy not deliver the promised deficit reduction. The €100bn bank bailout will be a major contributor to this. The ECB advocates “growth-enhancing structural reforms”.

The reform plan to be approved by Spain’s cabinet meeting on September 28 is expected to include service sector liberalization, easing of exports and measures to combat unemployment benefit fraud, but no budgetary measures. Reuters on Friday added that September 28 will also see the publication of banking stress test results and a first draft of Spain’s 2013 budget. Guindos denied that these new reforms are linked to “conditionality” for ECB bond purchases, while unnamed “Senior European sources” linked the strict timetable to the aid program. Bloomberg, for its part focuses on the “mixed messages” sent by Guindos promising no more cuts while Wolfgang Schäuble, Jean-Claude Juncker and Olli Rehn all said Spain was prepared to make cuts to avoid missing the deficit target.

Mass demonstrations in Portugal and Spain

In response to the rise in social security contributions we reported last Thursday there was a protest in Lisbon on Saturday afternoon. Reuters reported that over 150,000 demonstrated “mostly without incident”, though one young man was hospitalized after attempting to burn himself alive, and there was an earlier report that protesters broke through a police cordon and surrounded the Parliament.

On Saturday morning there was a demonstration at Colón square in the center of Madrid, requiring the nearby PP headquarters to be cordoned off by riot police. The controversy in the Spanish press on the number of participants was unusually strong. According to El Pais (English edition) The Government delegate in Madrid estimated 65,000 participants, and the organizers over 500,000 while El Pais estimated the demonstration covered 70,000 square metres. The so-called “social summit” of some 200 organizations and unions demanded a referendum on the austerity policies. The BBC has footage.

In an editorial El Pais writes that the cuts are “inevitable” but are not being communicated well which contributes to detachment between the government and the citizenry. Also, while recognizing the popular suspicion that the PP knew before the election the reforms it would carry out but ran on a different program, El Pais says a referendum is the wrong approach and advocates waiting for the general election (to be held before the end of 2015).

Transport strikes in Madrid and Barcelona

Today, Monday, is the start of an indefinite public education strike in the Madrid region, to protest against cuts. (See English language background coverage on US National Public Radio and theorganizers‘ manifesto, also in English.) On Monday there is also a one-day strike in the public transportation systems of Madrid and Barcelona, ABC reports. In the case of the Madrid Metro, this is the first of 4 strike days over the next 2 weeks.

A few more weeks for Greece

Greece will get “a few weeks” more time to meet terms of its bailout programme but will not get more money, Austrian Finance Minister Maria Fekter said in an interview with Der Standard after the eurogroup meeting.  Giving Greece one or two more years to fulfil terms of its bailout programme was clearly rejected in the summer,  with the result that the Greek government intensified its consolidation efforts for 2013 to make up for the efforts lost in 2012. There will be no extra money nor a third bailout programme Fekter said.  Asked about the situation in Spain, Fekter said stress tests of Spanish banks would determine how much money each Spanish bank would need to recapitalise. “We hear the requirement is far below the €100bn,” she said. Pressed on how far below that level, she said: “Roughly around €60bn.” Fekter’s comments on Greece were echoed throughout the European press.

Noyer says German worries about ECB are exaggerated

In an interview with Les Echos, Christian Noyer considered the German concerns about the ECB’s OMT as excessive. Inflation risks will be limited as the ECB is sterilising the liquidity it pumps in the market through its bond purchases. There will be also limited risk of a moral hazard problem of those countries benefiting from the purchases as the programme is strictly conditional. With respect to banking supervision Noyer remarks that the implied transfer of sovereignity towards the ECB was something Germany always wanted, but that supervision has to cover all banks, not only the large ones, to be credible to the markets, as the problems in the past often started with small banks.

France needs to address it’s social security deficit, says state audit office

France must make politically painful cuts to its social security deficit to keep it from spiralling out of control, the state audit office said on Thursday, warning that a gap of billions of euros was unique among euro zone countries, Reuters reports. While Francois Hollande is focusing on raising taxes and keeping state spending in check, the Cour des Comptes audit office said that it was vital to also cut the deficit of France’s welfare system to zero over the coming years. Didier Migaud, head of the audit office, said that the overall deficit of French social security stood at 0.6% of GDP in 2011 compared with a euro zone average of zero. France’s generous social security system, whose financing shortfall accounts for about 12 % of the overall annual public deficit, is mostly financed by taxes on both employers and employees paid directly into an array of social security funds. The blog in Le Monde polemically asks whether Didier Migaud is the real finance minister behind the scenes.

An in-depth poll show growing euroscepticism in Germany

Die Welt reports on a very detailed poll by Emnid about the perceptions of the EU on respondent’s own lives in Germany, France and Poland. The widening gap became most apparent in the question about respondents saw their chances in the labour market would be affected by an exit from the EU (note: EU, not eurozone). While 28% of Germans said they would be worse off, the number for France is 40%, and for Poland 43%. (The problem with these polling data is that gaps are not entirely due to attitudes. The EU has had a much more direct impact on the Polish labour market than the German. But the combination of all the finding clearly shows evidence of a rise in German eurosceptism over the years.)

Matteo Renzi, the new name of Italy’s politics

Il Corriere della Sera reports on the PD primary, and its most flamboyant challegner, the 37-year-old Matteo Renzi, mayor of Florence, who has launched his campaign to lead the Italian centre-left to 2013 elections. Renzi says he is ready to take on the PD’s secretary Pier Luigi Bersani in November’s primaries. Renzi wants an element of continuity with Mario Monti government, with a strong pro-European message. “We want more Europe, we are ready for a more integrated Union, now it’s the moment to act,”said Renzi from his first convention. The latest IPSOS poll showed Renzi is at 30% versus 46% of Bersani among PD voters. If you include all Italians, Renzi is at 37% and Bersani at 27%.

The Italian SMEs are facing an huge credit-crunch

The credit-crunch is much stronger for Italian SMEs than for big companies, according to Carlo Milaniin Lavoce. He writes that the borrowing costs for Italian SMEs are 0.5% higher for Italian SMEs compared with German SMEs. The gap versus France is 0.7%, Netherlands 0.7%, Finland 0.8% and Austria 1.1%. Italians SMEs are competitive only in a comparison with Spain and Ireland (-0.2%) and Portugal (-2.0%). According to Milani, Italian banks should contain internal costs, applying a structural downsizing to be more agile. With the credit-crunch, Italy will face huge banking problems if ECB decisions fail to restore the monetary policy transmission mechanism. A recent poll by SWG showed  that 54.3% of SMEs thought the results achieved by Mario Monti government are “unsatisfactory”, while 5.4% actually deemed it “totally negative.” A 3.1% SMEs considered the technical government to have been “very positive” and 37.2% found it “positive.”

From Italy’s vote depends most of the Eurozone future, Scalfari wrote

The biggest risk for Italy (and Europe) is the next elections, Eugenio Scalfari wrote on La Repubblica. After the ECB decisions, the German Court ruling on ESM, the EU banking union proposal, Italy could be the next problem for Eurozone, the founder of La Repubblica argues. Scalfari says one danger is a return of Berlusconi. Berlusconi wants to be next President, after Napolitano, but is unfit for the role. In the next Spring, the Italians will be called to choose three things, Scalfari wrote. First, a Europe that is strong enough to compete globally. Second, a choice between a liberal or socialist Europe. And finally a choice between a Europe that is suppressed by lobbies, or not.

Berlusconi says ECB should print money “like the Fed”

Silvio Berlusconi has begun his electoral campaign, Il Giornale reports. The former PM, speaking on a cruise organized by the family newspaper Il Giornale, said he wants a new mandate. He reiterated his scepticism of the ESM, says the impedes growth, and pledged to lower taxes, and to reverse Mario Monti’s unpopular property taxes. He also said the ECB should “print money like the Federal Reserve”. At the same time, Berlusconi has not yet announced if he will run in Spring elections.

In Italy, the politics goes online with Grillo

The Italian populists Movimento 5 Stelle (M5S) has introduced a form of direct democracy via the internet, Il Fatto Quotidiano reports. For parliamentary elections, M5S candidates and the agenda will be chosen through an online platform, according to party leader Beppe Grillo. According to the last SWG poll, the M5S is over 14%, but still far from centre-right Popolo della Libertà, leaded by Silvio Berlusconi, and centre-left Partito Democratico, leaded by Pier Luigi Bersani, 21.9% and 24.6% respectively.

Wolfgang Munchau on QE vs OMT

In his FT column, Wolfgang Munchau argues that a programme of quantitative easing, directed at a wider group of private and public sector owned assets, would have been more effective than the OMT, given the inevitable application delays, and focus on a very specific type of asset class. He says the biggest danger to the eurozone in the short term stems from a deteriorating economy, and with a combination of continued global weakness, a rising exchange rate, tight fiscal policies, the only stimulus can be monetary. He said the Fed’s decision to go for QE3, the asymmetry in the transatlantic policy response remains. He says the OMT is either a phantom, i.e. never triggered, or if triggered, the ECB will not be able to impose conditionality.

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

Spanish spreads are inching up again.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.625	0.594	0.592
Italy	3.452	3.486	3.458
Spain	4.087	4.145	4.222
Portugal	6.626	6.425	7.282
Greece	19.257	19.138	-1.70
Ireland	3.726	3.574	4.285
Belgium	1.011	0.963	1.061
Bund Yield	1.567	1.674	1.702
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.309	1.3129
Yen	102.160	102.82
Pound	0.808	0.8092
Swiss Franc	1.215	1.2154
ZC Inflation Swaps
	previous	last close
1 yr	1.97	2.03
2 yr	1.75	1.8
5 yr	1.89	1.94
10 yr	2.17	2.23
Euribor-OIS Spread
	previous	last close
1 Week	-8.286	0
1 Month	-5.643	-5.643
3 Months	4.900	4.9
1 Year	61.229	60.329
Source: Reuters