EUROINTELLIGENCE DAILY BRIEFING, 20 de Setembro de 2012. Enviado por Domenico Mario Nuti.


A looming showdown between Spain and Catalonia

  • Mariano Rajoy will meet with Catalan leader Artur Mas to discuss Catalan demands for autonomy over tax policy;
  • Mas may announce early elections for November ahead of the meeting, according to one press report – something Rajoy does not want to happen;
  • Rajoy opposes autonomy but may be open to a compromise, and has warned the Catalans that he will not accept any attempt of a secession;
  • the King posts an open letter in defence of Spanish unity – which went down like a lead balloon in Catalonia;
  • Catalonia’s economy minister Andreu Mas-Collel says Catalonia’s businesses would be better off if Catalonia had the instruments of a state;
  • he blames the lack of liquidity on the lack of a fiscal authority;
  • Christian Noyer says the OMT may not need to be in place for a long, as it already has an effect even if it is never used;
  • coalition MPs in the Bundestag are ready to sabotage banking union, with a proposal that leaves all powers in the member states;
  • the French prime minister cools down expectations of a turnaround in unemployment as promised by Francois Hollande during the election campaign;
  • the Greek coalition is moving to a High Noon moment to agree a package of cuts demanded by the troika;
  • Moody’s says one in five Irish mortgages will end up defaulting;
  • the Netherlands, too, has to tackle a hidden, but massive mortgage crisis;
  • Portugal’s Social Democratic want to mend relations with small their coalition partner;
  • James Mackintosh says a sense of normality has returned to Europe’s money and capital markets;
  • the crisis has reinforced the trend among Italians to live with their mothers;
  • Italian parties are now facing the prospect of subjecting their party accounts to an external audit;
  • Silvio Berlusconi’s party is most opposed to this measure;
  • FT Alphaville has dug up a Merrill Lynch report warning about how the rise in the euro is self-defeating;
  • Anatole Kaletsky says QE3 and OMT mark the official end of the monetarist era;
  • Richard Koo, meanwhile, is less impressed, and says none of this can end a balance-sheet recession.

Mariano Rajoy will receive Catalan regional President Artur Mas in Madrid on Thursday, ostensibly to discuss Catalan demands for a “fiscal pact”, meaning a higher degree of autonomy in tax policy similar to the one enjoyed by the Basque Country and Navarra for historical reasons. In a highly unusual move, Artur Mas will not appear at a joint press conference at Rajoy’s residence of Moncloa, but he will meet the press at the delegation of the Catalan government in Madrid, writes Europa Press. It is also rather unusual that the Spanish government, not the Catalan government, was the first to tell the press about this arrangement. Speaking at the weekly government control session in Parliament, Rajoy anticipated that he will oppose the fiscal pact proposal though he is “willing to discuss alternative ways of funding”, El Pais (English Edition) reports. Rajoy also asserted that he would “uphold the Constitution and see it upheld”, as a warning against secession for which there are no provisions in the Spanish Constitution.

The Spanish government has been using the crisis and the need to “avoid instability” as an argument (needless to say, unsuccessfully) to put a lid on Catalan independence demands. In his parliamentary intervention Rajoy said he would ask Mas “not to generate more instability by taking mistaken decisions” which according to another Europa Press story is a veiled reference to rumors that Mas might call early elections. El Plural writes that Mas may announce early elections on November 25 tomorrow – to follow the Basque and Galician elections to take place on October 21. The only other region with the autonomy to call its own elections is Andalusia which had elections last March 25.

King of Spain posts open letter in defence of Spanish unity

In another move unusual enough to be picked up by the Financial Times, the King of Spain posted a short open letter on the internet saying “We are at a decisive moment for Europe and Spain that can either save or ruin the welfare which has cost us so much to accomplish,” and cautioning against “chasing rainbows” or “dividing forces”, writes El Pais (English Edition). The King’s letter went down like a lead balloon among Catalan politicians, who  pretended the letter did not refer to Catalonia’s recent independence rally.

Mas-Colell says Catolonia’s lack of liquidity is due to a lack of its own fiscal authority

For their part, the Catalan authorities have been arguing that their ability to respond to the crisis is being hamstrung by the fiscal arrangements Spanish regions (“Autonomous Communities”) operate under. Speaking at an event at the ‘Economy Circle’ in Barcelona, Artur Mas claimed that Catalan industry would be faring better in the crisis had Catalonia had “the instruments of a state”, reported Europa Press on Monday. Speaking Tuesday before the Catalan Parliament on the recent request of €5bn to Spain’s “Regional Liquidity Fund”, economy councillor Andreu Mas-Colell said that Catalonia’s lack liquidity is due to the lack of its own fiscal authority, writes El Pais. Mas-Colell also denounced an “absurd campaign” to blame Spain’s economic and fiscal problems on the regions.

(In a way Spain is a microcosm of the wider Euro crisis: just as the European authorities’ chosen solution to the Euro crisis includes striping member states of fiscal policy autonomy, so is the Spanish government arguing that the Autonomous Communities need to be reined in. Finance minister Cristobal Montoro promises that there will be no Troika “men in black” in Spain while he seems to enjoy the opportunity to send his own “men in black” to the Regions. The phrase seems to have struck a chord, since Mas-Colell also said yesterday that there would be no “men in black” in Catalonia. The whole political circus would be comical if it didn’t relate to a dire economic situation for real people and if nationalistic tensions hadn’t been so problematic in the past century: at one point last week the issue of the day was whether FC Barcelona would continue to play in Spain’s La Liga in the event of independence.)

Noyer says ECB bond programme might not last long

Christian Noyer said the OMT might be phased out in a few years’ time, as it already shows signs of working, Reuters writings, quoting an interview in Frankfurter Allgemeine. “This is a weapon to deter. It might be tested and we will not hesitate to deploy it to demonstrate our determination,” Noyer was quoted as saying. “Markets understand very quickly that they can’t win against the ECB.

“I hope that the programme will have an impact very quickly. I would be surprised if such a programme was still in place in several years’ time, even if it was not used,” Noyer said.

(We think it is interesting that more and more policymakers are taking about the possibility that the programme may not be used. That’s a dangerous complacency, not untypical for Noyer. If as an investors you think that the ECB, or governments, or both, are disingenuous about their policies, then, yes, it does make sense to bet against the central bank. It has been done before, with great success.)

Bundestag ready to sabotage banking union

This proposal by coalition MPs essentially tells us that Germany does not want a banking union, and if it has to agree one, then it must be so insignificant as to have no effect whatsoever. Coalition MPs draw up a proposal that rejects any notion of cross-borders bank deposit guarantees, any idea of central supervision beyond a small number of systemically relevant banks, and preferably not by the ECB. And they want all this implemented with a delay.

French prime minister cools down expectations about Hollande’s promise

Not a turnaround but a change of tone. Ten days ago Francois Hollande announced to reverse the unemployment trend within one year. Yesterday, prime minister Jean Marc Ayrault cautioned: “ I don’t know if we succeed, but we have to do everything to get there,” according to Les Echos. A majority of the French are also sceptical, a recent poll showed that 78% of the French don’t believe the government to succeed in bringing down unemployment within a year. Some also warned Hollande not to repeat too often his “austerity cure without precedence” and his promise to return to a deficit of 3% of GDP within the next two years. Officially, there is no doubt to stand by this. But behind the scenes, some close to the president are not convinced. What about economic stimulus?  Another is contemplating that “Once the deficit is below 3%, we (the French) might not be obliged to have a balanced budget in 2017.”

Greek coalition under stress to agree on final cuts

Greece’s three coalition leaders are unlikely to arrive at an agreement on Thursday about the entire package of cuts requested by the troika, Kathimerini reports. The three parties of the coalition government appear to be facing the most severe strain since they came to office, as they try to find the remaining €2bn-€3bn in the €11.5bn savings package. ND sources expressed anger with PASOK and its leader Evangelos Venizelos, accusing him of trying to disassociate himself from further unpopular cuts while PASOK sources expressed frustration at the course of negotiations, arguing that some of the measures agreed were too onerous. A third Democratic Left MP expressed opposition to the measures on Wednesday, as party leader Fotis Kouvelis put off a decision to call a meeting of his lawmakers until the package is finalized. The cuts are now expected to be rubber-stamped on Sunday, when the coalition chiefs are due to meet again.

Moody’s: One in five mortgages in Ireland may default

The mortgage crisis in Ireland will peak next year with one in five home loans in default, the Irish Independent quotes a report on the mortgage market from rating agency Moody’s, published yesterday . And as mortgage losses surge, debt write-offs for homeowners might to be the only way to eventually fix the market. Desperate borrowers may now be less likely to keep up with their mortgage payments, knowing that the new personal insolvency rules come into force next year — because they explicitly allow for debt write-offs. Also, Irish courts have proven extremely slow to seize family homes, leaving banks in a bind when it comes to sorting out their mortgage crisis.  Moody’s says writing off debt is the best alternative.

Tackling the Dutch mortgage crisis

This is an interesting story from the Netherlands in the FT, which describes a country at the core of the eurozone with a periphery-style housing market. The two parties likely to form the next coalition disagree on how to tackle the problem of excessive mortgage debt, the highest in proportional GDP terms in the eurozone, as the Netherlands has given ludicrous incentives to lure households to take on debt. As the mortgage bubble is being deflated, house prices will come under pressure, forcing banks to write off assets. This is process is only just starting.

Portugal’s Social Democrats want to mend relationship with coalition partner

In Portugal, the ruling Social Democrats have called a meeting with its junior coalition partner, the liberal CDS-PP suggest a  meeting as soon as possible, to “prevent a deterioration of the relationship between the parties” and to reconfirm “their support for the coalition agreement”, Jornal de Negocios reports. There had been rising tensions between the parties, when the CDS-PP turned publicly against the tax increases promoted by prime minister Passos Coehlo.

Normality returns to the capital markets

James Mackintosh comments in the FT’s Short View column, about the improvement in the European capital markets, where a sense of normality has returned. Money markets are back to normal, he writes, and bond markets have reopened to the periphery’s better banks. And BNP Paribas has become the first French bank in a year to issue a dollar bond. Capital flight should stabilise too. The credit default swap markets suggest eurozone-bank creditworthiness is virtually back in line with non-bank investment grade companies. He writes there are dangers ahead:

Spain has yet to accept terms for help, and Moody’s may yet downgrade Spain to junk. Another Greek crisis could blow up any time. It ain’t over yet.

Italians prefer to live with parents during crisis

Among the social effects of the eurozone crisis in Italy, one is the strengthening of family ties. As La Stampa reports, there’s a new trend: an increase in the already prominent tendency for adults to live at home with their parents after their 20s, says a report published by Coldiretti and Censis. The study “Crisis: Live Together, Live Better,” reveals that 31% of all Italians live with their mothers and 42.3% live no further than 30 minutes away. For the 18-to-29-year-old age group, 60.7% of live with their mothers. The crisis unveils that Italians prefer to come back at home with close relatives: a huge problem for housing market,” President of Coldiretti Sergio Marini said in the report.

Italian political parties to face external auditors certify by law

An obligation for Italian political parties to have external auditors certify their budgets was reinstated into a new lower house draft on financial transparency, according to Il Messaggero. A furore exploded two days ago when it emerged that it was taken out during the parliamentary process. The measure was reportedly removed because lawmakers feared it would impeach on the principle that constitutional bodies such the houses of Parliament should be self-regulating. Critics said its removal would have fed public disaffection with the nation’s political class following a series of scandals hitting various parts of the party spectrum. Two parties, the centre-left Partito Democratico and the catholic UDC, said they would have their party budgets scrutinized by external auditors even if this was not obligatory. Not so Silvio Berlusconi’s Popolo della Libertà. We wonder why.

The impact of a stronger euro

FT Alphaville has picked up on a paper by Merrill Lynch according to which the strong euro may be self-defeating. This is from the paper written by Athanasios Vamvakidis:

“Equilibrium estimates for the Eurozone as a whole suggest that the Euro should be about 1.25 with respect to the USD. This means that a euro stronger by about 10 percent that level could start affecting negatively the Eurozone as a whole. However, the periphery needs a much weaker Euro. Equilibrium estimates for the periphery countries suggest that, from their point of view, the Euro should be below 1.1 with respect to the USD. To be really competitive, our estimates suggest that the periphery needs the Euro below parity with respect to the USD.”

Anatole Kaletsky is impressed…

In his Reuters column, Anatole Kaletsky celebrates the coincides of QE3 and OMT as a new era of central banking, the final overthrow of a monetarist-influenced era in central banking that began in the early 1970s.

“In making these announcements, the Fed and the ECB were not just demoting their previously inviolable inflation targets to near-irrelevance. They were breaking intellectual and political taboos that had dominated central banking for four decades. This iconoclasm has prompted an extreme reaction from the one remaining bastion of traditional monetarism in central banking, Germany’s Bundesbank. On Tuesday the Bundesbank’s president, Jens Weidmann, described the new central banking quite literally as the work of the devil;

Mephistopheles, he recalled, had used just such policies to create chaos and hyperinflation in Goethe’s Faust.”

While Richard Koo is not…

This is a summary from Business Insider about a note written by Richard Koo, the inventor of the concept of a balance sheet recession. The note seemed to be mostly about the US housing market, but this is the stuff of interest to us. We quote from the summary (not the note which we have not see ourselves):

“He’s skeptical that QE3 will accomplish anything (he’s a big skeptic of monetary policy in a balance sheet recession).

He says that in private, German leadership is realizing that austerity is self-defeating.

The China-Japan row could go on for awhile and even get worse, with the leadership transition that’s going on.

Spain is getting worse rapidly.

Draghi’s scheme to buy bonds of peripheral countries is mostly good, but a little shakey. And if the ECB insists on imposing austerity on the countries it buys from, it will fail.”

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

Getting a little better again – though absolute levels are still high.

10-year spreads
Previous day Yesterday This Morning
France 0.656 0.675 0.684
Italy 3.446 3.384 3.390
Spain 4.314 4.127 4.176
Portugal 7.109 7.114 7.262
Greece 19.216 18.794 -1.60
Ireland 3.665 3.499 3.700
Belgium 1.040 1.063 1.076
Bund Yield 1.612 1.603 1.597
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.306 1.3006
Yen 103.250 101.79
Pound 0.803 0.8026
Swiss Franc 1.212 1.2094
ZC Inflation Swaps
previous last close
1 yr 1.99 1.95
2 yr 1.77 1.75
5 yr 1.92 1.92
10 yr 2.21 2.2
Euribor-OIS Spread
previous last close
1 Week -7.586 0
1 Month -4.543 -2.543
3 Months 5.214 7.014
1 Year 60.571 60.771
Source: Reuters

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