Spiegel Online and Suddeutsche Zeitung have updates on the Greek budget gap, which is even bigger than previously assumed – around €30bn. This is the accumulated short-fall the troika is expected to identify in its forthcoming report – the amount Greece has to raise, save, restructure, default on, if it wants to make it through the second loan programme. Spiegel writes that the troika will say that the recession has totally counteracted the budgetary savings, while the government has failed to introduce structural reforms. Greece is now left with three scenarios: more time for reforms, while the payment of the next €31bn tranche goes ahead;
a new debt restructuring;
or a forced exit. The article says the last option is essentially ruled out for political reasons. This would also trigger a fracture in the Franco-German relationship. This would leave us with a combination of the first two.
Suddeutsche has further details. The troika will also state that Greece will not meet the long-term goals of funding the budget without external help from 2015 and a complete return to financial markets in 2020. Suddeutsche says the EU does not want Greece to fail, but it does not want to pay the €30bn either. There was thus a danger that they would shift the responsibility to the ECB.
In an editorial in Suddeutsche, Cerstin Gammelin writes that there exists a fourth option – for Antonis Samaras to raise the money by taxing the country’s rich shipowners, the orthodox church, and the multitude of tax evaders. (This is a bit naive in our view. Greece will no doubt have to modernise its tax base, but the government cannot plug such a gigantic budget hole through wealth taxes, or through fights against tax evasion. One should also remember that this particular gap has arisen not because of tax evasion but because the EU miscalculated the effect of austerity on growth and fiscal revenues. The second programme was always unrealistic so that the news of a budgetary shortfall is hardly surprising.)
Bundesbank attacks IMF
Having pummelled the ECB, the Bundesbank’s rampage continues with a full frontal attack on the IMF, as reported by Die Welt. In its latest monthly report, the Bundesbank writes that the IMF is on the verge of turning itself into a bank by taking on excessive risks. This was not in line with the legal and institutional foundations of the IMF treaty. The programmes had become less efficient, as the IMF has become much less forceful on conditionality, which is the reason behind the increase in the risk profile. The Bundesbank wants the IMF to return to its core task of crisis prevention and the resolution of temporary balance of payments imbalances.
German finance ministry denies the ESM leverage story
Here comes the next denial. The German finance ministry said reports of €2 trillion to which the ESM could be leveraged were “totally illusory”, according to Frankfurter Allgemeine, citing ministry spokesman Martin Kotthaus. He said it was wide open how private investors would participate, and in any case none of this would impact Germany’s maximum liability of €190bn.
(We should remember what happened to the daft idea of leveraging the EFSF. One gets the idea that the people who running this operation, or who are leaking such rumours, or both, have no idea what they are doing here. The point has always been that if private investors – who wanted the risk/reward profile offered by a hypothetical senior tranche in an EFSF/ESM programme – could always obtain this – and much more – through a combination of paper that already exist in the market. )
Mark Schieritz has listed other reasons why leveraging cannot work, including a lack of a guarantee that governments will honour any external ESM pledges if the system collapses.
French government resists pressures to fire Green ministers
The Greens’ move against the EU fiscal pact prompted Le Monde to call on Francois Hollande to dismiss the two ministers, Housing Minister Cecile Duflot and Development Minister Pascal Canfin, arguing that in voting against the fiscal pact the Green party effectively proved that they are unfit to govern. A no-vote is incompatible with Hollande’s decision to respect the European engagements and with his commitment to save the euro, the article says. The Greens acted irresponsibly and Hollande should – for the sake of political coherence and the voters – draw the consequences. The French government denied any dismissal plans, Journal de Dimanche reports, ending speculations about a rift in the coalition– at least for now. Les Echos, meanwhile, reports that a majority of the French (52%) would support the fiscal pact if a referendum were hold.
Popularity of Hollande and Ayrault suffers in the polls
The latest IFOP polls show that Francois Hollande and his prime minister Jean-Marc Ayrault lost drastically, the popularity of the president is down 11pp to 43% and for his prime minister it fell 7pp to 50% compared to last month. The director of the polling institute IFOP Frédéric Dabi said that it one of the worst ever recorded in the history of this barometer since 1958.
Italy should apply for ECB’s OMTs, according to the OECD
Italy should ask for help from the ECB’s new bond-buying programme OMT if markets are underwhelmed by its reforms, OECD Secretary Angel Gurria said on Monday, as Il Sole 24 Ore reports. According to the OECD, the Monti government has made huge efforts. But that is not enough if financial markets remain sceptic. Monti told Gurria that thanks to the reforms Italy’s GDP will record an additional cumulated 4% growth in the upcoming 10 years – which Gurria internalised by quantifying the reforms as “0.4% per year”.
Italy’s interest payments on public debt to rise €8bn in 2012
According to La Stampa, Italy’s sovereign interest payments will rise more than 10% to €86.1bn this year. Citing the latest economic forecasts published by the Monti’s government, the newspaper reports that Italy is projected to spend €89.2bn in 2013, rising further to €105.4bn in 2015. Meanwhile, the latest Morgan Stanley report on Italy showed that, in 2013, debt redemptions will be €355bn in 2013, rising to €407bn in 2015.
Region of Lazio in turmoil after massive political fraud
The Italian Region of Lazio is in turmoil, as Il Messaggero claims. Yesterday evening the Lazio governor Renata Polverini, an ally of Silvio Berlusconi, handed in her resignations, before speaking at the regional council. This is part of another scandal about the alleged abuse of party funds by members of the regional council after €6m had disappeared over the past two years. New elections are expected in next few months.
Italy liberalisation index rises to 52% in 2012
The level of openness of the Italian economy compared to the most liberalised EU nations is 52% in 2012, up 3% on 2011, according to the Chicago-Blog. The figures were relayed by the Bruno Leoni Institute, a libertarian think-tank, according to which the electricity market was the most liberalised (with an index of 77% relative to the UK), followed by the financial markets and air transport. The least liberalised sectors are water services, railways and motorways. The Monti government had improved Italy’s position in the eurozone, but the road map was still long, due a lack of confidence in Italian politics, Bruno Leoni Institute remarks.
With accounts finally approved, Bankia may need up to €26bn from rescue fund
Bankia’s accounts for the first half of the year were approved by Deloitte, reports Expansion, after having filed reservations on the 2011 annual accounts earlier this year which led to the nationalization of the bank and its parent company BFA. The auditor’s report filed with Spain’s market regulator CNMV notes that the impact of the ‘bad bank’ to be set up before the end of the year is ‘unknown’, as are any eventual decisions the bank restructuring fund FROB might take. The FROB is committed to finalizing Bankia’s recapitalization plan in October, which “will allow the European authorities to approve it in November allowing the capital injection deemed necessary”.
El Confidencial reports that the European Commission is negotiating with Bankia on the conditions for the bank to receive rescue funds. According to unnamed ‘sources close to the negotiations’, the Commission is demanding 3,000 layoffs and 500 branch closures, which doubles the proposal made by CEO José Ignacio Goirigolzarri in June. Bankia had already shed 4,000 employees and 800 branches under Rodrigo Rato’s management. The new layoffs will be with far less favorable conditions for the employees.
Over the weekend, El Pais reported on a preliminary analysis from Oliver Wyman according to which Bankia and BFA would need €26bn in new capital, €7bn more than Goirigolzarri had estimated in June. Apparently the difference stems mostly from €6bn in tax credits Goirigolzarri brought forward from future tax years, as allowed by accounting practise, but which Oliver Wyman is not computing for Bankia or any of the other nationalized institutions because it is not clear to what extent they are viable and can obtain sufficient profits. Oliver Wyman’s figures, to be released on Wednesday the 26th, are not final since they will be affected by the sale of assets to the ‘bad bank’ to be set up by the end of the year.
Protesters to surround the Spanish parliament today
Tuesday afternoon will see a large demonstration converging on Spain’s parliament building with the intention to surround it during its plenary session. Europa Press reports that over 1,300 riot police will guard a perimeter around the building, which has been fenced and guarded by a smaller contingent for over two months. The protesters intend to “rescue” the Parliament from the “hijacking by the Troika and financial markets carried out with the cooperation of most political parties”. The organizers have stated that they don’t intend to “occupy” the congress nor block access by members of parliament or interrupt the session, all of which carry prison sentences. At least 80 organizations, including minor political parties, back the protest, and well over 45,000 people have said on Facebook that they would attend.
In the past couple of weeks the police has been identifying people taking part in public assemblies where preparations for the protest were being made. Eight people have been indicted for possible “crimes against high institutions” of the State, El Pais reported on Friday. Diario Progresistareported Sunday that one of the professional judges’ associations, Jueces para la Democracia, had publicly criticized the decision to press charges and criticized the “criminalization of protest” on the part of the authorities.
Protesters have been emboldened by the success of two weeks of Portuguese protests against the hike in social security contributions, as reported by Reuters, which culminated with the government withdrawing the policy.
Portugal’s PM made a U-turn on social charge rise for workers
Pedro Passos Coelho dropped a controversial plan to increase social-security contributions from workers after days of protest, saying the government will instead raise income taxes for higher income earners, with eventually a capitals gains tax on top – and cut wages of public-sector employees to meet budget targets in 2013, the Wall Street Journal reports. Coelho’s revised proposal failed to tame public anger, with labour unions vowing further action to protest the measures. The growing tensions are also threatening Coehlo’s center-right coalition. Members of his own Social Democratic Party and junior coalition partners had criticized the social-security plan, raising doubts over his government’s ability to secure enough votes in Parliament to pursue further austerity measures. His plan was to increase employees’ social-security contributions to 18% of their salaries from 11%, and allowing companies to cut their contributions to 18% from 23.75%. In its defence Coehlo had said cutting labour costs would allow companies to hire more workers and make their products more competitive abroad.
Hunger in Spain
The New York Times has a story about hunger in Spain brought about by the economic crisis and austerity policies. The Caritas recently said it was feeding a million people in 2010.
Food banks and food wastage have been in the news a lot in Spain recently. On Monday 20minutos ran a story on supermarkets discarding 50,000 tons of food each year because health regulations don’t allow them to donate food. At the start of September, El Pais wrote that the European Union was considering the removal of funding from food banks from the new budget framework currently being negotiated and which will come into force in 2014 at the behest of Northern European countries. Such funding has existed since 1987, and 20-odd EU member states benefit from it. According to El Pais, food banks feed two million people in Spain alone, twice as many as in 2007 before the crisis.
Hildebrand says the eurozone needs to sort out the banks before the crisis can be resolved
Writing in the Financial Times, Philipp Hildebrand and Lee Sachs argue that a recapitalisation of the banking system is a necessary condition for an end to the recession. They are calling for an early adoption of the Basel III capital adequacy standards:
“Banks will begin to lend only when they have sufficient capital and liquidity. The conventional wisdom that more robust capital standards constrain lending is borne out by neither economic theory nor the facts. In the US, where the largest banks were compelled to raise capital in 2009, business loans at commercial banks have increased significantly since. The Basel III global regulatory framework will require banks to meet enhanced capital adequacy standards gradually by 2019. Europe cannot wait that long. Waiting seven years to address the banking system’s weaknesses runs the risk of seven more years of weak growth.We propose that the biggest eurozone banks should be required to meet Basel III capital standards by the end of 2013, following a rigorous and credible validation of their balance sheets. To ensure credibility, the ECB should lead this validation.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
The fall in the German Ifo index to 2009 levels has led to a fall in the euro. Spreads move sideways.
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| 10-year spreads |
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Previous day |
Yesterday |
This Morning |
| France |
0.721 |
0.745 |
0.747 |
| Italy |
3.508 |
3.597 |
3.586 |
| Spain |
4.214 |
4.172 |
4.215 |
| Portugal |
7.177 |
7.178 |
7.335 |
| Greece |
18.504 |
17.903 |
-1.54 |
| Ireland |
3.461 |
3.447 |
3.614 |
| Belgium |
1.091 |
1.104 |
1.091 |
| Bund Yield |
1.559 |
1.528 |
1.539 |
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| Euro Bilateral Exchange Rate |
|
|
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|
|
| |
Previous |
This morning |
|
| Dollar |
1.293 |
1.2934 |
|
| Yen |
100.970 |
100.66 |
|
| Pound |
0.798 |
0.7968 |
|
| Swiss Franc |
1.210 |
1.2096 |
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| ZC Inflation Swaps |
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| |
previous |
last close |
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| 1 yr |
1.9 |
1.76 |
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| 2 yr |
1.7 |
1.61 |
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| 5 yr |
1.9 |
1.78 |
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| 10 yr |
2.06 |
2.05 |
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| Euribor-OIS Spread |
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previous |
last close |
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| 1 Week |
-7.886 |
0 |
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| 1 Month |
-3.186 |
0 |
|
| 3 Months |
6.186 |
4.486 |
|
| 1 Year |
57.729 |
59.529 |
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Source: Reuters
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