We have already treated the idea of a fast and comprehensive banking union with some scepticism. This was now confirmed by a front-page article in Sueddeutsche this morning, according to which Angela Merkel and Francois Hollande had agreed at their meeting on Saturday to delay the banking union beyond January 2013, the date favoured by the European Commission and by Spain. Merkel is quoted as saying that she is in no hurry over this, and that quality is more important than speed. The article said that Hollande no longer insisted on this date either. The immediate implication is that the risk for the Spanish bank recapitalisation programme will remain in Spain for much longer than what the interpretation of the June summit suggested.

Greece denies Spiegel reports of €20bn shortfall

Greece rebuffed reports in Der Spiegel magazine, on Sunday claiming Greece’s budget shortfall to be about €20bn, rather than the €13.5bn, citing the preliminary report of the troika. The Finance Ministry said that the budget shortfall as it stands will be covered by the €11.5bn in cuts and €2bn in new tax measures. About a third of the €13.5bn in measures remained to be agreed between the two sides. The troika ended talks with the coalition government in Athens on Friday and are due back in Athens by next Tuesday at the latest. There had been tense exchanges between Yannis Stournaras and Poul Thomsen, the IMF official is said to have been unmoved by the finance minister’s concerns about the survival of the three-party government. Kathimerini writes the Greek government believes that by either endangering a deal or by getting Greece to agree to measures it will not be able to implement, the IMF hopes that it will be able to highlight in the troika report on the Greek adjustment programme the need for a second debt restructuring.

Now for the next great idea: Levering the ESM

Der Spiegel has the story that technical discussions have been underway to lever the ESM – following the disastrous attempt to do likewise with the EFSF. The article gave few details of how that should be attained, but says the headline total could rise to €2 trillion. The idea is for governments to take the first-loss tranches. Germany is supportive of the idea, but Finland blocks – for now.

(We assume, but do not know, that the OMT, and the pari passu status of the ESM could make leverage a more attractive proposition for investors, but it is still not clear where the payoff for investors would lie as they can replicate the risk/reward profile of a levered structure through direct bond purchases.)

And goodbye to last week’s great idea: diverting the old Spanish programme to the PCCL

The stories are always much bigger than the denials. We found this denial in Frankfurter Allgemeine, according to which Luis de Guindos confirmed that Spain is after all not planning to divert the unused funds of the bank recapitalisation programme to a new programme, which would have had numerous advantages, including no further involvement by the Bundestag. The Spanish still insist (implausibly in our view) that the bank recapitalisation programme costs only €60bn (which in our view is based on unrealistically optimistic assumptions about the economic impact of the crisis management). De Guindos said it was not possible to divert the sums to other purposes.

Contradictory estimates of Spains’s banks’ capital needs

However, all of this (the possible second Spanish rescue, the structure of the ‘bad bank’, and whether any of the pledged bank rescue money will be left over) hinge on the estimate of the banks’ capital shortfall that Oliver Wyman is expected to release next Friday. Reuters has a story that the estimate will be in line with the €60bn figure given in July. On the other hand, theTelegraph quotes a note by Nomura doubting the €60bn and expecting a figure more in line with “market expectations, which start at around €100bn”. The Telegraph headlines Nomura’s expectation that Spain will indeed need a full second rescue.

Schaeuble discourges a second Spanish bailout

Reuters reports Wolfgang Schaeuble’s statements to the foreign press, that Spain does not need a second bailout “because it is doing the right thing and will be successful”, and what it needs “is the confidence of the markets”. This came on the heels of a strongly negative German reaction to suggestions on Thursday that Spain might try to tap unused funds from the €100bn allocated to the banking rescue for EFSF bond purchases.

Rajoy hints at pensions increase (yes, really)

Speaking with the press in Rome on Friday, Mariano Rajoy said he would raise pensions in next year’s budget, reported El Mundo. This contradicted a Reuters ‘exclusive’, quoting unnamed ‘eurozone sources’, that it was ‘a done deal’ that the retirement age will be raised from 65 to 67 on an accelerated schedule as part of the negotiations for an aid package. According to Reuter’s sources, Spain is considering severing the link between pensions and inflation, though Rajoy’s deputy Soraya Saenz de Santamaria denied this at the press conference after the weekly cabinet meeting on Friday. The Guardian went further on Friday, claiming the information was a deliberate leak from Spain’s government, and part of a plan to include as many of the Eurogroup’s known demands in the 2013 budget to be released this week, so that there will be fewer conditions imposed when the actual rescue application is made later. This would allow an easier ‘sell’ of the ‘rescue without conditions’ to Spain’s public opinion.

Preparations for Spanish ‘bad bank’

The Spanish government’s intention to have the ‘bad bank’ running as soon as possible means that the banks whose assets will be transferred to the ‘bad bank’ will probably manage the assets themselves on an interim basis for at least a year, writes Cinco Dias. This is partly because the banks have already been managing the impaired assets for some time and continuity is needed, for real estate sales and loan service. The government’s ultimate goal is to have an independent team in charge, though.

Another story by Cinco Dias explains that the Government’s decree on banking reform dictates that the state cannot have more than half of the capital of the bad bank, and details the issues the Spanish government faces trying to attract private investors. These include asset valuation (private investors would prefer low valuations while the Government is mindful that higher valuations are needed in order not to cause further losses to the banks which would raise the overall cost of the banking rescue), some sort of capital protection (which the government would be reluctant to give, but investors might demand), and a dividend policy and guaranteeing some liquidity to the investment given that the ‘bad bank’ is expected to operate for 15 years.

According to another story by El Confidencial, the foreseeable lack of interest on the part of international investors is leading Luis de Guindos to pressure the three largest banks in Spain, Santander, BBVA and Caixabank, to take 30% of the capital in the bad bank. The three banks are said to be resisting the pressure by negotiating together. One interesting point in the article is that the 50% limit to public capital is intended so that the bad bank doesn’t count as public debt for accounting purposes. This recalls a story by Europa Press that we reported on last week, according to which the planned restructuring of the railroad track operator was also intended to reduce the public debt by ensuring that less than 50% of the capital was public.

French Greens decided to vote against fiscal pact – Cohn Bendit suspends membership

Daniel Cohn-Bendit revoked his membership of the French Greens on Sunday in protest at the party’s decision to oppose the ratification of the European Union’s budget discipline pact, Reuters reports. The French Greens voted overwhelmingly against the terms of the pact at a grassroots assembly on Saturday, concluding that it would not provide long-term answers to the EU crisis nor help foster environmentally friendly policies. The move threatens to rob the Europe-Ecologie Party of one of its most recognizable deputies – and may exacerbate tensions within the group, which supports France’s Socialist-led government and has two ministerial posts.

... and Ayrault warned about fatal consequences, also advocates more time for Greece

French prime minister Jean-Marc Ayrault warned in an interview with Médiapart those who plan to vote against the fiscal pact, saying that the logical consequence of their action is the euro exit.

In this interview Ayrault also says he is in favour to give Greece more time to get back on track  “on the condition that Greece is sincere in its commitment to reform, especially tax reform.”

Belgian minister rules out wealth tax

Belgian Finance Minister Steven Vanackere on Sunday ruled out the idea of creating a wealth tax despite mounting criticism in the country that wage-earners are hardest hit by the current tax system, AFP reports. “A wealth tax is a door we must leave shut during this legislature,” Vanackere said about the 30 months left until the next elections. The head of the Socialist Party, Thierry Get, recently complained that fiscal revenues were 75% linked to wages and 25% to capital gains. Talk of taxing the wealthy has grown following a move this month by French billionaire and LVMH boss Bernard Arnault to acquire Belgian nationality. Jean Quatremer in his blog says the pressure is growing on Belgium, acting in a monetary union like a tax heaven to attract the capital from other member countries.

Grillo wants an Eurozone referendum

Beppe Grillo, head of Movimento 5 Stelle (M5S), reiterates he wants a referendum on Italian membership of the eurozone, La Stampa reports. In an event in Parma, Northern Italy, he said he never wanted to leave the eurozone, but said he cannot accept Italy in that situation. HIs purpose is to link a euro referendum to the vote. Citing an internal poll, Grillo claims that a majority of Italians are against the euro: for 66% of interviewed the eurozone is the main cause of Italian pain. According to latest polls, M5S is the third Italian party, with over 12%.

Italian government says it will reach budget targets

Italian Cabinet undersecretary Antonio Catricalà said that Italy will reach its budget targets, Il Sole 24 Ore reports. In a meeting organized by LUISS University in Rome, Mr. Catricala went on to say that some of the government’s measures have failed to support growth, but “all these measures were necessary to assure the status quo was not maintained.” Catricalà said the recession will finish before the Q3 of 2013, and then there will be the first results of Mario Monti’s government. In the meantime, Italy will seek a balanced budget with public assets sales, with estimates revenues of €200bln in the next five years.

Italian Regions expenditures over budget for €89bln

Over the past 10 years, Italian Regions have spent €89bn over the budget allotted to them, Il Messaggero reports. The CGIA of Mestre, one of the most reliable Italian research centres, said that more than half of the money went into the healthcare sector. With inflation rising by 23.9% in the same period, spending grew 74.6%. CGIA Secretary Giuseppe Bortolussi said that after the reform of Title VI of the Italian Constitution in 2001, Italy had become decentralized. Previously, the powers of the regions were explicitly defined in the Constitution, while the State government had jurisdiction over all other matters. The 2001 reform reversed the situation. The State now governs areas that are specifically itemized in the Constitution, such as justice, defense, foreign policy, while the regions have been given powers for all the other functions not expressly assigned to the State government.

The technical government leaded by Mario Monti wants a spending review also on Regions.

Wolfgang Munchau on the meaning of Faust II

In his FT column, Wolfgang Munchau takes a swipe at Jens Weidmann’s reference to Mephisto’s money printing idea in Faust II. He said this was an obvious and intended comparison with Mario Draghi, whom the president of the Bundesbank effectively accuses of fraud. Munchau says the real danger with Weidmann’s position is not that it has any legal force, or that he has any influence over Angela Merkel, but that he is now turning himself into the leader of the anti-euro movement in Germany, a country that is still struggling with the notion of a fiat money system in general, and the euro in particular.

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

going sideways, but 10-year spreads of 4.26% for Spain are far from good.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.730	0.721	0.726
Italy	3.444	3.549	3.551
Spain	4.231	4.214	4.256
Portugal	7.148	7.177	7.307
Greece	19.055	18.504	-1.56
Ireland	3.477	3.461	3.554
Belgium	1.118	1.091	1.091
Bund Yield	1.547	1.559	1.557
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.302	1.295
Yen	101.800	101.16
Pound	0.800	0.7985
Swiss Franc	1.211	1.2102
ZC Inflation Swaps
	previous	last close
1 yr	1.91	1.9
2 yr	1.7	1.7
5 yr	1.9	1.9
10 yr	2.06	2.06
Euribor-OIS Spread
	previous	last close
1 Week	-7.386	0
1 Month	-2.786	-2.486
3 Months	5.186	7.386
1 Year	59.686	61.586
Source: Reuters