Frankfurter Allgemeine and Reuters have the story that Jens Weidmann has stepped up his fight against both the ECB and the proposed banking union.

Reuters quotes Weidmann as saying that only those risks that come to exist under common supervision may be supported by shared liability. Legacy problems should need to remain the liability of national regulatory regimes. “Anything else would be a financial transfer and those should be made transparent and not hidden under the cloak of a banking union.” he said. “The primary goal of a banking union cannot be the sharing of risks.”

The Frankfurter Allgemeine story focused on Weidmann’s criticism that the ECB takes over the role of banking supervisor, supported by MPs have argued that the proposed structure violated the German constitution. Weidmann said the combination of banking supervision and monetary policy in a single institution would trigger potential conflicts of interests, which could impede the central bank’s goal to achieve price stability, as well as its independence.

The view that the banking union must not include legacy risks was also underlined by the Bundestag’s majority groups, who passed a motion yesterday, asking the government to exclude any such risks. They also want to limit the banking union to large cross-border banks.

Spain’s new austerity budget

On Thursday the Spanish government (with Mariano Rajoy on leave in New York City for the UN General Assembly) approved the 2013 budget, El Pais (English edition) reports. The budget is based on an optimistic 0.5% GDP contraction next year (the same forecast given by the government months ago). Only pensions, school grants and interest on debt will increase. Government ministries will reduce their budget by an average 9%, which will save less money than the increase in debt service. There will be a €2,000 cash-for-clunkers program to encourage replacement of cars older than 12 years, and a 20% tax on large lottery prizes, a raise of capital gains tax and a repeal of the tax deduction on home mortgage payments.

Rajoy took advantage of his trip to the US to give an interview with the Wall Street Journal, published on Wednesday. In it, he said he would apply for a bailout if borrowing costs were “too high for too long”. There’s also the hair-raising paragraph:

The 57-year-old Spanish leader appeared relaxed and animated as he discussed Spain’s financial woes during a three-day visit to New York. “This is a fascinating situation I’m dealing with.”

Financial Times: bailout or bust

A Financial Times editorial on “the many crises confronting Spain” argues that Spain’s “democratic settlement” of the past 35 years “is at risk” unless the government takes “decisive action” (codeword for a bailout application). The editorial criticizes “persisting with the excessive austerity favored in the Eurozone” and wonders, in view of the anti-austerity protests and the ascendant Catalan independence movement, “whether the political imperatives of EMU are compatible with the political pressures” boiling over in Spain.

Ambrose Evans-Pritchard calls it betrayal

As a counterpoint to the FT’s call for a bailout, Ambrose Evans-Pritchard blogs about “Europe’s betrayal of Spain” in the Daily Telegraph. Evans-Pritchard writes that Rajoy “bit the bullet” on the banking rescue “on a specific understanding that the ESM” would eventually recapitalise the banks. He quotes the Euro Area Summit Statement of June 29, which begins with “We affirm that it is imperative to break the vicious circle between banks and sovereigns”. The Germans, Dutch and Finns say they were bounced into this deal. It would not surprise if they were outmanoeuvred by Italy’s Mario Monti, and if too-clever-by-half Council officials tweaked the language at the last minute.

(Rajoy has always counted that his ideological affinity with Merkel and the fact that he would “do his homework” religiously would ensure German support. This was clear at the time of his election in November 2011. He is also clearly assuming that front-loading all conceivable EU austerity and reform demands to today’s budget will mean no new ‘conditionality’ will be attached to a full rescue application. And he assumed he and Monti had managed to extract a meaningful concession from the June Summit.)

Capital flight from Spain intensified in August

The FT had the story that capital flight from the Spanish banking sector continued in August, according to ECB data. Private sector deposits fell more than 1% €1.49tn at the end of August from €1.51tn in the previous month, hitting their lowest point since April 2008. The rate of flight slowed slightly compared with July, however.

Euro zone economic outlook darkens

Reuters reports that the European Commission’s monthly economic sentiment falling from 86.1 in August to 85 points in September, as the downturn is beginning to hit the core of the eurozone. The strong fall is in line with the recently published purchasing managers’ index, which showed that services and manufacturing output declined at the fastest rate for 39 months in September. The Commission’s business climate indicator fell to -1.34 points in September from -1.18 in August, the lowest since October 2009. More evidence of the downturn came from ECB data, showing that loans to the private sector fell 0.6%. That number was made up of a very sharp fall of loans to households, compensated only partially by an increase in loans to companies.

The ESM guidelines on margins

Reuters obtained the ESM guidelines, a document that setup the margins the ESM will charge to programme countries. There will be discrimination between countries, only between programmes.

The margins are:

• 10 points for a full ESM programme
• 30 points for a bank recapitalisation programme
• 35 points for primary market purchases under a PCCL programme
• 10 points for primary market purchases under a full programm
• 5 points for secondary market purchases

Three quarters of excess profits would be redistributed to the beneficiary country at the end of the programme.

Is it time for a Monti-bis?

Italian PM Mario Monti would consider a second term as premier “in special circumstances,” Il Corriere della Sera reports. During his speech at the Council on Foreign Relations in New York, the former EU Commissioner said he is ready for a second mandate in extraordinary cases, “which I hope there are not,” he added. Also during his speech in NYC, Monti reiterates he will not run in elections next year, adding he would continue to serve his country as a Life Senator. The probability of a Monti-bis is rising with the lack of confidence of Italians in political parties, as showed in an IPSOS poll, according to which 56% of Italians are deeply tired by current Italian politics. As Eugenio Scalfari, the founder of La Repubblica, noted three weeks ago, Monti could be the leader of a “grand coalition” government.

Over 46% of Italian young people are inactive

Among young Italians between 18 and 29 years of age, only 40.3% have a job, 13% seek one and 46.7% are inactive, according to ISTAT, as published on Il Sole 24 Ore. In six cases out of ten, the last group comprises students and about a fifth falls within the scope of inactivity that can be classified as unemployment, ISTAT President Enrico Giovannini was quoted in a hearing before the Parliamentary Joint Budget Committee. In the first half of 2012, the rate of unemployment of the 18-29 age group was 24.4%, with a peak of 39.7% among young women in southern Italy. The latest ISTAT figures showed that in Q2 2012 GDP was down 3.5% annual in southern Italy, compared to a fall of 2.4% in the rest. In several parts of South of Italy, young unemployment is over 56%.

Berlusconi attacks the Euro again

Silvio Berlusconi has called the Euro a “con,” Il Fatto Quotidiano reports. He called the converion rate of 1,927 lire to the euro suicide. Due to its past, Germany is blocking every plan to save Eurozone with a monetary base increase. “The Bundesbank and Merkel have their roots in the terror of inflation,” and because of this the only mandate of the ECB is that of fighting inflation. According to Berlusconi, Eurozone has two ways: the first is to start the money printing machine, the second is consider a German exit from Eurozone if Berlin continues to oppose the ECB as lender of last resort. “Germany is killing Italy, but also Eurozone,” he added.

Greek coalition gave green light for austerity measures, pending troika approval

A number of tweaks to the €13.5bn package of spending cuts and tax hikes were enough to obtain the initial approval of coalition leaders yesterday, Kathimerini reports, but the government still needs to convince the Troika, especially after changing the balance of the measures. The government decreased the savings from expenditure cuts by €1bn to €10.5bn and raised revenues from €2bn to €3bn from tax increases over the next two years or four if Greece’s lenders agree to an extension to the adjustment period. Coalition leaders discussed the package yesterday and gave it the green light, although Evangelos Venizelos and Foutis Kouvelis expressed some reservations. The Democratic Left wants the troika to accept a clause that will allow Greece to ease up on spending cuts if it beats its targets. The troika, however, has indicated that if Greece were ahead of its targets, any extra savings would simply go towards building a bigger primary deficit.

Of the €10.5bn in spending cuts, €6.5bn is coming from cuts to wages, pensions and benefits. The rest is due from savings produced by structural reforms. Up to €8bn of measures are due to be implemented next year. Kathimerini lists the measures in more details:

·         Retirees will lose roughly a month’s worth of payments. Any pensions between €1000 and €1500 will be cut by 2%.  Those between €1500 and €2000 will be reduced by 5% and any above €2000 reduced by 10%.

·         Extra holiday payments for pensioners and for civil servants will be abolished.

·         The increase in the retirement age from 65 to 67 is due to be implemented from next year.

·         Civil servants salaries will be cut by up to 10%, those working at public enterprises will see reductions of between 20% and 30%.

·         Self-employed will lose their tax-free threshold of €5000 (although it will remain in place for salaried) and be taxed on the whole of their income at a rate of 30% or 35%.

·         Some 300,000 farmers who are currently not obliged to keep records of what they sell will have to do so and will be taxed at a similar rate to other self-employed Greeks.

Ayrault stands by deficit target, 0.8% growth forecast 

Appearing on public television ahead of the presentation of France’s 2013 budget today, French prime minister Jean-Marc Ayrault stood by the government’s growth forecast of 0.8% for 2013 and vowed France would achieve its deficit target of 3% of GDP, AFP reports. Officials have said about €30bn in savings are needed to reach the deficit target, with two-thirds coming from tax rises on the rich and businesses and a third from spending cuts. Ayrault said the increases would affect only the top 10% of French taxpayers and that the new 75% tax rate on incomes over €1m  would affect only a “small minority” of 2,000 to 3,000 taxpayers. He reiterated there would be no increase in the value-added tax or the CSG social welfare tax in 2013.

Eurosceptic billionaire starts Austrian election campaign

Eurosceptic auto parts magnate Frank Stronach launched his Austrian election campaign on Thursday, presenting himself as an honest man of the people to a public tired of corrupt politicians and hungry for change, Reuters reports. Despite a lack of clear policies and confusion over his attitude to the crisis-hit euro, 40% of Austrians already want to see Stronach’s party – Team Stronach – in the next coalition government, according to a survey published in Der Standard. Recent polls show that Stronach would be the first choice of around 10% of Austrian voters, mainly at the expense of former supporters of the far-right Freedom Party and the alternative Pirate Party, which attracts a protest vote. Stronach reiterated his call for giving each member of the euro zone its “own” currency whose value would fluctuate in line with its fiscal and financial strength. He emphasised that as a child of war he was in favour of a united Europe to maintain peace on the continent, but would resist being dictated to by Brussels, Washington, Beijing, Moscow or anyone else.

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

Sideways yesterday.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.747	0.754	0.773
Italy	3.754	3.755	3.745
Spain	4.602	4.498	4.555
Portugal	7.442	7.613	7.735
Greece	18.330	18.533	-1.47
Ireland	3.660	3.698	3.887
Belgium	1.112	1.114	1.128
Bund Yield	1.462	1.461	1.471
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.289	1.2933
Yen	100.140	100.29
Pound	0.796	0.7955
Swiss Franc	1.209	1.2099
ZC Inflation Swaps
	previous	last close
1 yr	1.79	1.81
2 yr	1.64	1.65
5 yr	1.81	1.82
10 yr	1.99	1.99
Euribor-OIS Spread
	previous	last close
1 Week	-7.286	0
1 Month	-5.043	-3.043
3 Months	5.929	6.429
1 Year	56.171	56.471
Source: Reuters