This is becoming a familiar headline at Eurointelligence, a reflection of the unique ability by Europe’s leaders to muck things up. The markets have finally caught on to the idea that the OMT is useless unless countries actually apply for a programme, and unless it is accompanied by a full banking union. Mariano Rajoy is clearly dragging his feet over an application, and Germany opposes a meaningful banking union.

Spain’s main stock market index IBEX35 dropped nearly 4% and the risk premium rose to 460bp, as “markets demand that Spain ask for a rescue now”, Expansion headlines. Among the reasons for this, the paper lists the government’s indecision, the Catalan challenge, the demonstrations in front of the Parliament, and lastly as an external factor the apparent hardening of Germany’s stance on the banking union “a specialist in half-opening doors to close them again”.

While the position of the German, Dutch and Finnish finance ministers should come as no surprise given this Reuters story from July 8, the European Commission appears to disagree with them. El Pais reports that Commission spokesman Olivier Bailly said Wednesday that the banking union “should be approved by the end of the year, as the heads of state and government agreed at the latest summit”, while avoiding commenting on Germany’s reluctance to have the ESM take risk from “legacy assets”.

Irish take on EU commitment to cut of links between bank and sovereign debt

The Irish government today insisted that the June 29th EU summit agreement to break the links between bank and sovereign debt stands despite demands from Germany, Finland and The Netherlands that national bodies remain liable for most bank losses, the Irish Times reports. There might be differences of interpretations but the principle stands, assured finance minister Michael Noonan in parliament.  The conservative opposition party had raised the issue saying that the summit statement will not be implemented without the support of the Germans, the Dutch and the Finns. “We are engaged in a diplomatic offensive to implement the decision of June 29” Noonan said.

Mark Schieritz on why the crisis is getting worse again

In his blog Herdentrieb, Mark Schieritz got it spot on: The German government is not in the least bit interested in resolving the crisis, and the ECB’s programme may have actually slowed down the political process. The markets have finally understood that, first, that there will be no more programme for Italy or Spain – hence no OMT; second, that the ESM would only deal with future banking problems, not legacy issues, which have to be dealt with nationally;

Germany will not agree on the essential elements of a banking union – a common resolution fund and deposit insurance – until after the elections. He concludes that Angela Merkel may soon have to come clean on what she really wants.

Doubts over Oliver Wyman’s assessment of Spanish banks

The FT had an unusally critical article about bank valuations, which essentially says that this is a state-managed exercise that is unlikely to reveal anything. This Friday, Oliver Wyman and the Big Four will reveal their results, which will almost certainly be close to what the government has been forecasts – around €60bn in new capital for the banking system. The article quotes analysts as saying that the problem with this exercise is not the assumptions made about growth and further declines in house prices, but the conclusions.  The article also quotes Charles Dallara of the IIF, who said that the agreed bail-in of subordinated debtors would could upset the recovery. A credit analyst is quoted as saying that a large participation of retail investors could lead to a deposit flight.

Klaus Regling says bank recapitalisation might be done without parliament’s approval

FT Alphaville picked up on a comment by Klaus Regling on the seniority status of ESM bond purchases and direct investments into the banks. This is what he said:

“Seniority for ESM loans is a mutual understanding between ESM members and is mentioned in recital (13) of the ESM treaty. Reference is made to the decision of Heads of State and Government in that regard. A repeal or amendment of their earlier statement would therefore also require a decision by the Heads of State or Government. In several Member States it would require support by the national parliament.

With regards to direct bank recapitalisation, it is our opinion (based on Article 19 of the Treaty) that it would be possible without a treaty change, by a unanimous decision of the Board of Governors. We know that the Governors would not do this without support from their parliaments. Some lawyers even argue that a treaty change would be required. “

Second day of protests in Spain

El Pais (English Edition) reports that on Wednesday evening protesters gathered on Neptuno square near the Spanish Parliament, where police clashed with protesters on Tuesday night. To the economic and political complaints, protesters now add criticism of the police’s handling of the demonstration on Tuesday. The left-of-centre opposition criticised the security forces, and PSOE leader Alfredo Pérez Rubalcaba claimed “the country is getting out of hand” for Mariano Rajoy.

Most of the Spanish press’ focus Wednesday has been on the clashes around the Parliament on Tuesday night. Business Insider picked up a story from El Pais about an incident, part of a linked 9-minute video, in which a bartender who faced off with riot police. The political significance of the incidence is that “this was a supporter of Mariano Rajoy, and even he thought that the police response was too much”.

Mariano Rajoy was not in the Parliament on Tuesday as he was on his way to New York City to speak at the UN General Assembly.

(On social networking sites, a larger demonstration is being organized next Saturday, but protesters aim to continue gathering at Neptuno daily in smaller numbers.)

Catalan premier to foster referendum

The 3-day ‘state of the region’/general policy debate continues in the Catalan Parliament, though after regional premier Artur Mas opened it by calling new elections, the focus of the debate largely shifted from past and current policy to the post-elections prospects of a secession movement. La Vanguardia reports that Artur Mas’ party (the centre-right CiU) has agreed with the other ‘Catalanist’ parties ERC and ICV (both on the left) to vote a resolution on Thursday committing to a ‘consultation’ during the regional parliament’s next term “with or without Spanish government authorization”. No date or format for the consultation will be attached to the resolution.

Record unemployment in France

The number of unemployed in France topped the 3 million mark in August for the first time in 13 years, official figures showed on Wednesday. Marking its 16th consecutive monthly rise, the number of registered jobseekers in mainland France increased by 23900 last month,  a 9% increase year-on-year and  reaching the highest unemployment figure since June 1999, according to Reuters. Earlier this month, Hollande staked his political reputation on reversing the upward trend in unemployment by the end of next year. Les Echos writes that this will be difficult. The latest job creating programme will not be enough, with 100000 new jobs, it only reverses the trend for two thirds  of the 155000 newly registered unemployed in June-August.

Violent Greek protests challenge the government

Some estimated 70000 Greeks marched through central Athens in protest against austerity, Reuters reports, the largest demonstrations since May 2011. The protest in front of the Parliament brought together public and private labour union members during a 24-hour general strike. Judges, teachers, police and uniformed military officers had engaged in demonstrations and work slowdowns while doctors and pharmacists refused to accept state insurance because they had not been paid for months, according to Greek Reporter. Bitter resentment against the uneasy coalition government and international lenders cascaded over into street clashes between some 3,000 police and protesters, primarily hooded anarchists. It is the first popular challenge for the coalition government. Antonio Samaras is scheduled to meet today with his coalition partners to find a common line over the austerity package.

Portugal: One third of new austerity measures in 2013 are due to recession

In Portugal, the downward revision of the economic outlook for next year has forced the government to find a further €1.5bn of extra austerity measures, Jornal de Negocios reports, adding to a total of €4.9bn in austerity measures for 2013. Government and troika had revised their growth forecast downward, predicting the Portuguese economy to contract by 1% in 2013.

Monti takes on the Italian regions

Italian Regions have proposed to curtail the number of regional councillors, Il Messaggero reports, in response to a number of regional corruption scandals, including in Lazio, which we reported on. According to President of the Lombardy Region, Roberto Formigoni, there will be over 300 fewer councillors, a reduction by one third. The Monti government’s spending review slashed the Regional funds by over 15%, but more is to come. President Giorgio Napolitano suggested the government implement the cost reductions immediately in all regions. In addition, the Italian Court of Auditors will scrutinize political expenses quarter by quarter.

The Italian grey market of fake products rises in 2011

The economic crisis is pushing up the fake products market in Italy. The market for counterfeit products has gone up from an estimated rang of €3.6bn and €6.1bn in 2010 to €4bn and €7.5bn last year, according to a report by Indicam Research, as published by La Stampa. 60% of the good were in the clothing and fashion sectors, 40% in other consumer products, especially smartphones, especially Apple products.

Europe and investment on networks: how to stabilize economy

Alberto Quadrio Curzio, writing in Il Sole 24 ore, proposes an ambitious infrastructure plan to focus economic integration in the EU, and fight the crisis. His plan would accelerate investments in Trans-European Networks, of which the biggest are €1 trillion for energy by 2020, and €1.5 trillion for transportation.

(The problem with infrastructure investments projects as he proposed, very little is shovel-ready, thus likely to come after the end of the crisis. This is not a crisis resolution policy. For Italy, we would have thought, a reduction in corporate and income taxes may have a much bigger effect on economic growth in the short-run than the marginal infrastructure project, given that many such projects are already in the pipeline – if not quite on this scale.)

Wolfgang Munchau on why German unification was a historical mistake

In his Spiegel Online column, Wolfgang Münchau writes about the tragedy of Helmut Kohl, who this week celebrated his 30^th anniversary of his first day in office as German chancellor. Munchau says his true tragedy consists of the fact that his biggest political coup, German unification, ultimately destroyed his biggest political dream, European unification. He always invoked the “the two sides of the same medal” metaphor but this is wrong. Germany unification did three things that impeded European unity: it create a political and economic imbalances in the EU; the economic mismangement of unity reduce Germans’ willingness to accept transfers within the eurozone; and it also ensured that Germany entered the euro at an overvalued exchange rate, as a result of which the country focused mostly on its own competitiveness during the euro’s first decade. Munchau asserts that the eurozone crisis would already be over if Germany had opted for a confederation in 1990, which was one of the options Kohl had favoured initially.

If Germany and Greece were a married couple…..

It is not a secret that the relationship between Germany and Greece is troubled. If the two countries were a married couple, they would have to seek professional counselling to save their marriage. Bob Denham, a young British director, describes with humour not only the troubled Greek-German relation but also the economic and ‘national’ stereotypes within the European Union. Keep Talking Greece has the plot and the film…

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

Getting worse again.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.719	0.747	0.773
Italy	3.542	3.845	3.842
Spain	4.187	4.602	4.690
Portugal	7.160	7.442	7.758
Greece	17.880	18.330	-1.47
Ireland	3.459	3.660	3.995
Belgium	1.054	1.112	1.136
Bund Yield	1.57	1.462	1.465
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.286	1.289
Yen	99.800	100.2
Pound	0.796	0.796
Swiss Franc	1.209	1.2092
ZC Inflation Swaps
	previous	last close
1 yr	1.74	1.79
2 yr	1.59	1.64
5 yr	1.75	1.81
10 yr	2.03	1.99
Euribor-OIS Spread
	previous	last close
1 Week	-8.586	-7.886
1 Month	-5.200	-4
3 Months	4.286	4.586
1 Year	56.557	56.457
Source: Reuters