La Vanguardia attributes the upshoot in the risk premium to “strong unknowns around the Spanish economy” (left unspecified) and explicitly to the doubts on a European aid request. El Pais (English edition) writes that EU Competition Commissioner Joaquín Almunia “urged Rajoy to make up his mind” as “uncertainty is a risk”. According to the story, Luis de Guindos favours “a second intervention as soon as possible to ease market pressures” through the OMT, while Rajoy has “asked to prepare the groundwork” while wanting to delay the decision in hopes of avoiding “the political stigma involved”.

The ball is on Spain’s court, says everybody

Bloomberg reports on Monday’s interview of Austrian Central Bank chief Ewald Nowotny by Austrian magazine Profil. In it, Nowotny reiterated the ECB’s position that Spain needs to come under a rescue program (Bloomberg literally translates Rettungsschirm as ‘safety umbrella’). He did this in reply to a question about the OMT program, not specifically about Spain, to stress the fact that politics must play along in order for the OMT to fulfill its potential to mitigate the crisis and “stabilize expectations”.

CNBC also reported that Dutch finance minister Jan Kees de Jager told journalists at the margins of the Ecofin meeting that “it’s up to Spain whether or not to ask for a further program”. De Jager said he was not pressuring Spain as “there is a lot to gain without asking for a full program”. He also denied the ECB was setting a political agenda as it was leaving the conditionality to others.

Portugal may be nearing breaking point on austerity

On Sunday, a day after massive anti-austerity protests in Portugal, the leader of the junior coalition partner and foreign minister Paulo Portas said the government must re-evaluate the policy with the social partners and the country’s institutions, reports AFP (via France24). Portas is said to oppose last week’s raise in social security contributions, though he “did not want to break the coalition and plunge the country into political chaos”

After this weekend’s Ecofin, Jean Claude Juncker said Portugal would be given an additional year to reduce its deficit to 3% on account of the decline in revenues and the increase in social security outlays as a result of the worsening economic situation, writes Bulgarian portal EUInside. Juncker explained that the decision had been agreed but not actually adopted yet for technical reasons. Christine Lagarde said Portugal and Ireland were both “success stories”.

Spain pays attention to Portugal

The Spanish press is paying perhaps more attention than usual to Portugal’s economy lately. El Pais, in cooperation with Jornal de Negócios, dedicated its whole salmon-pages business supplement to Sunday’s print edition to Portugal, under the title “austerity asphyxiates Portugal”. The supplement included an editorial by the director of Jornal, which compared Rajoy’s decision to declare victory and go watch the Eurocup last June with Passos Coelho going to a concert after announcing the rise in social security contributions last week. The editorial is a scathing criticism of Troika policy and subservient governments, but it also says Spain is largely in denial and that Portugal provides “a time machine for Spain”. In addition to the Sunday supplement, El Pais (English edition) had a story on Monday on the background to the protests, which is mostly the dawning of a conviction that the austerity policies won’t work as advertised, and will reverse in the next two years the prosperity gained in the last thirty.

Monti holds bilateral meetings with Greece, Ireland and Spain

Mario Monti is meeting the leaders of three of the countries struggling with the European debt crisis — Greece, Ireland and Spain — for one-on-one meetings this week, according to ANSA. Local analysts believe the leaders will take the opportunity to discuss the debt crisis in the eurozone before next European Council’s conference on Oct. 18 and 19.

Merkel backs Draghi

While the German press focuses on the looming battle with her SPD challengers, Quentin Peel focuses on her statements on crisis resolution, which she gave at a press conference yesterday, an occasion during which she exuded confidence. She not only defended Mario Draghi’s OMT programme, but also his legal argument, which is very important in view of the German constitutional court’s recent statements on the ECB. She said: “If the ECB comes to the conclusion that money supply is difficult . . . then the central bank must take corresponding measures to ensure monetary stability. We don’t lay down limits for that.”

(Well, the money supply is not exactly difficult, but we think we know what she means.)

IMF finds troika decision making complex

An IMF report released yesterday finds that the cooperation with European institutions over bailouts often delayed decision making and at times excluded measures from the discussion,Bloomberg reports. “Institutional constraints in the euro area occasionally limited alternative policy options that could otherwise have been considered — notably, debt restructuring to strengthen debt sustainability,” according to the report, “particularly for bank debt in Ireland and sovereign debt in Greece.” According to the report, the size and duration of the ECB’s liquidity support was among “sensitive items” that resulted in “lengthy discussions.” The staff also said that the number and the nature of the measures required for the loans in the euro region go against its recent efforts to keep conditions few and targeted. The commission tried to induce sweeping changes in some countries, including in public administration, the judicial system and the labour market, according to the report.

Samaras hopes to reach deal with coalition before Friday

Plans to wrap up by the end of the week negotiations with the troika on the €11.5bn austerity package are still on course, Kathimerini quotes government sources on Monday. Greece’s coalition leaders are due to meet Wednesday or on Thursday to finalize the cuts. The government is hoping that after that Yannis Stournaras will conclude talks with the troika and the coalition can draw the relevant bills, possibly as an appendix to the 2013 national budget and submit it to Parliament before the meeting of eurozone finance minister on October 8 and the EU summit on October 18 and 19. There had been some progress in the talks with the troika, the paper reports, but Stouraras remained evasive on the issue of whether a rise in the retirement age from 65 to 67 would be one of the measures adopted by the coalition.

 Nico Fried and Berthold Kohler on the desolate state of the  SPD

In a damning commentary in Suddeutsche Zeitung, Nico Fried takes on the SPD, whose three leaders – Sigmar Gabriel, Frank Walter Steinmeier and Peer Steinbruck – have been unable to agree on who will be running for chancellor. Angela Merkel does in front of the Berlin press pack, and says that the sas had no time yet to think about the 2013 elections, while the SPD is unable to mount a powerful challemger. He said the idea of a leadership troika was to present three men as a counterparty to Merkel, all of who were supposedly better than her. Now the country sees that she is better than all three combined.

Writing in Frankfurter Allgemeine, Berthold Kohler says that Merkel gives the Germans a sense that she is navigating wisely through the complexity of the crisis. As the SPD does not even come close, the leadership question is not all that relevant.

Monti has the approval of Italians, but not his government

Mario Monti’s approval rating rose from 49% in July to 52% in August, the IPR Marketing research agency reported in a poll for La Repubblica. Despite the good results, his technical government lost popularity, down three points from 40% to 37%, its worst score since replacing former premier Silvio Berlusconi in November 16, 2011. The number of respondents who had “little or no confidence” in the executive rose 4pp to 55%. They find that the austerity package is driving Italy in the abyss of economic depression similar to Greece and that reforms are not enough. Asked about the next elections in spring 2013, when asked about next PM over 35% responded “nobody” given the choices between Berlusconi (Popolo della Libertà, centre-right), Pier Luigi Bersani (Partito Democratico, centre-left) and Beppe Grillo (Movimento 5 Stelle).

More anti-euro polling evidence from Germany

The polls are not looking good for the euro. The latest Emnid poll shows that 65% of Germans believe that their own situation would be better without the euro. We have noticed that the polls show a persistent trend towards more euroscepticism.

More anti-austerity polling evidence from Greece

A new Public Issue poll for Skai and Kathimerini suggested that only 20% of Greeks are satisfied with the government and 68% are against the terms of the loan deal. Of those questioned, 85% say they will probably be affected by the latest cuts. Still, 67% of Greeks view the euro positively.

Italians drive cars in austerity mode

Italians are cutting their consumption of petrol and diesel fuel, says a study published by Il Sole 24 Ore. High prices, including higher taxes, at the pumps are driving this trend, says the Centro Studi Promotor GL events, a research centre that specializes in the automobile market. In Italy the consumption of petrol and diesel drops by 9.3% in the first eight months of this year.   Taxes rose an average of 22.4% on petrol and 33% on diesel during the same period and prices rose by an average of 9.5% for petrol and 8.4% for diesel.

Fiat, the recession and competitiveness

Linkiesta reveals Fiat production plans for European plants in 2013. According to operative plans obtained by Fabrizio Goria, the volume for 2012 is lowered to 734,000 cars from a forecast (January 2012) of 1,027,900 cars. In the last two decades, the decline of production in the biggest Fiat’s plant is incredible. The latest data unveils a decline of 94% in Fiat car production at Mirafiori plant in hometown Turin from 1991 to 2011. Due the weak demand, the CEO Sergio Marchionne cancels the Fabbrica Italia project, a €20bn investment plan launched in 2010. “We cannot maintain our promises, due to the recession,” Marchionne said last week. There are rumors that predict the stop of Mirafiori plant in 2016. “What future for Fiat?” ask Linkiesta. No new models, recession, lack of competitiveness: Fiat survives thanks to engine technology, joint-venture and domestic market, the article argued.

France: 50% more industrial plant closures than last year

A study for Le Monde finds that there had been a net loss of industrial plants this year, 208 closures, 50% more than last year, and only 130 new plants.  The study cites a difficult European market, high production costs and a trend of de-industrialisation since the first oil shock. The trend is expected to continue with the prolonged crisis in Europe.

A contrarian view from George Magnus

There are few voices out there, daring to criticise the OMT in quite such drastic terms (in terms of its effectiveness) as George Magnus did in the FT. He says the programme is economically and politically unsound. Conditionality is, in fact, the very problem. He said the single-minded emphasis on fiscal restraint is the problem. The underlying philosophy is that the austerity programmes need strengthening further. “This makes no economic sense because it aggravates fiscal and economic instability, and no political sense because it is highly divisive within and between countries.”

Charles Wyplosz on a minimally sufficient solution

Writing in Vox, Charles Wyplosz says that the European Commission’s plan on banking union was a good start, but it avoids the hard truth: the Eurozone needs a lender of last resort and the ECB is the only one that can play the role. Admitting this truth makes it clear that the Eurozone also needs an arrangement with member governments on bank-bailouts cost sharing and institutions to minimise the ultimate costs.

 

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

Bond spreads are on the rise again.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.594	0.648	0.651
Italy	3.344	3.546	3.541
Spain	4.145	4.346	4.420
Portugal	6.425	6.717	6.946
Greece	19.138	19.191
Ireland	3.574	3.643	3.823
Belgium	0.963	1.036	1.028
Bund Yield	1.674	1.648	1.653
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.310	1.3094
Yen	102.650	103.02
Pound	0.808	0.8059
Swiss Franc	1.216	1.2149
ZC Inflation Swaps
	previous	last close
1 yr	2.03	2.05
2 yr	1.8	1.83
5 yr	1.94	1.96
10 yr	2.23	2.23
Euribor-OIS Spread
	previous	last close
1 Week	-7.886	-8.186
1 Month	-3.543	-3.843
3 Months	4.700	4.7
1 Year	60.943	61.443
Source: Reuters