The most important political development over the weekend was the sudden decision by the SPD to let Peer Steinbruck become the challenger of Angela Merkel. Frank-Walter Steinmeier, the SPD parliamentary leader, withdrew from the race, while SPD chief Sigmar Gabriel was never a serious contender – which left the former finance minister as a default choice.

Outside Germany, Steinbruck is best remembered as the guy who pushed for the chacun-pour-soisolution to the banking crisis in October 2008 after the Lehman collapse, for his failure to see the 2009 recession, and for his decision not to attend an important G7 meeting that year as he had to go off to a safari. A fierce critic of eurobonds while he was finance minister, Steinbruck has since modified his position, and is now portraying himself as more pro-European than Merkel. See, for example, this FAZ article which quotes Steinbruck as saying that he supports a third Greek aid package. The distinction on euro issues will be hard to maintain in an election campaign where Merkel can claim with credibility that Steinbruck was the co-architect of many of her financial crises policies. In other words, the SPD has chosen the candidate who can least credibly differentiate himself from the chancellor.

There are loads of comments in the German press this morning. We liked that of Kurt Kister, politics chief of Suddeutsche Zeitung, who said Steinbruck was the only available SPD candidate left, but he is very unlikely to become chancellor. In particular, Kister dismisses the strategic option most frequently mentioned these days – a coalition of SPD, Greens, and FDP – given the desolate state of the FDP. He says the most likely outcome is a Grand Coalition, which is what we had 2005-2009, with Merkel as chancellor and Steinbruck as finance minister.

Spanish banks need €60bn in new capital, says Oliver Wyman

On Friday, the Bank of Spain released the results of the banking stress by Oliver Wyman, reports El Pais (English Edition). Seven of fourteen banking groups, accounting for 62% of the credit portfolios under analysis, would not need additional capital under an adverse scenario, while the additional capital needs of the rest would add up to just under €60bn, the guesstimate given by Luis de Guindos in an interview with the IHT at the end of August, as reported by El Pais (English Edition) at the time. As advanced last week, Bankia will need €25bn, which matches the estimate given by the new CEO last June except for an additional €6bn in deferred tax assets. The other nationalised institutions account for most of the remaining capital needs: €10bn for Catalunya Caixa, €7bn for Nova Caixa Galicia, and €3bn for Banco de Valencia. The base scenario included a GDP drop of 1.7% to 2014, and capital requirements of 9%; and the adverse scenario included a -6.5% GDP drop and 6% capital requirements.

See the Bank of Spain restructuring page, in particular the press release, and Oliver Wyman’s report.

The Financial Times writes that doubts remain among international investors, for instance on the assumed property price drops in the adverse scenario, and the scope of the test being limited to the credit portfolio (excluding the occasionally sizable equity portfolios). Quoting the deputy governor of the Bank of Spain, Fernando Restoy, Reuters reports that, after institutions attempt to raise private capital to meet the stress test requirements, the Spanish government expects to tap the European rescue fund for only €40bn. Banco Popular, in particular, is already said to be considering a rights issue and a suspension of dividends to avoid having to ask for public money to raise its required €3bn, writes AFP.

(One cannot but be impressed by the accuracy of the capital shortfall estimate by the incoming Bankia CEO last June, as well as by the guesstimate given by de Guindos a full month before the report was released. Also, some of the institutions appear to have a better capital position in the adverse than in the baseline scenario, though that might be down to the 6% vs. 9% capital adequacy threshold used.)

An Italian political movement to support Mario Monti…

Luca Cordero Di Montezemolo, the Ferrari chairman, will support a second mandate of Mario Monti through his political movement “Italia Futura”, he announced in an interview with Il Corriere della Sera. Montezemolo will run in elections with the explicit intent to sustain Monti because the country needed a credible government. According to Montezemolo, there’s a direct relation between political instability and Italian borrowing costs. Montezemolo is not the only one businessman to support Monti. Fiat/Chrysler CEO Sergio Marchionne also supports Monti for a second term office. According to latest IPSOS poll, Italia Futura is at 3%.

… so does Scalfari

Italy’s most venerable political commentator, Eugenio Scalfari, writes in La Repubblica, that Italy’s future depended on the next three months. He said Italian political parties are unable to restore the market confidence. The centre-left Partito Democratico is preoccupied with internal fights between General Secretary Pier Luigi Bersani and Matteo Renzi, the mayor of Florence. Scalfari says Renzi is not the right man: “He has a good image but not ideas.” In the meanwhile, Scalfari remarks that a second mandate for Monti could help Italy to reform. Scalfari, Italy needs a new electoral law, an anti-corruption law, a federal reform of the division of powers between the regions and the central government, tax cuts, a new social security system. Without these measures, when Spain will ask for a full bailout, the “international speculators” will attack Italy, Scalfari said. And that’s why Italy needs a reliable figure to solve its problems.

Confindustria is zooming on taxes

“Italian fiscal policy is killing us,” according to Giorgio Squinzi, head of Confindustria, as reported by La Stampa. According to Squinzi, the current tax hikes are choking off Italian enterprises. He criticised the Irap, a regional tax on productive activities, as an “evil tax which hits those who succeed in what they do.”

Italy no longer in a crisis, industry minister Passera claims

We are reporting this story only to show the crass complacency with which some policymakers are confronting the crisis. Speaking on an Italian TV, industry minister Corrado Passera said Italy will come out of recession already next year. He said thanks to the Monti government, Italy was already out of the worst of the crisis. Italy was very close to losing sovereignty, which is now no longer the case. Italy won’t ask for a bailout, he said, because Monti’s measures are enough to boost competitiveness and growth in 2013 and 2014.

Troika returns to Athens to resume talk over austerity measures

The troika is back in Athens to inspect the latest version of the austerity programme, as agreed in principle by the coalition partners. According to Kathimerini, there is a sense of unease within the government due to a lack of insight into the intentions of troika envoys and mixed messages from Greece’s foreign lenders. There are fears, for instance, that the troika may draw out negotiations to give Greece’s EU partners and the IMF more time to decide how to tackle the Greek problem. A final agreement on the austerity package is unlikely before the end of this week, the article goes, putting back the whole process. Apart from some €4.5bn in cuts to pensions, €2.3bn in cuts to civil servants’ salaries and benefits and €3.8bn in cuts to state spending, the package also foresees the suspension of 15000 civil servants up to the end of 2016 and €3bn in new taxes.

Kontogiannis: 30% of GDP austerity measures over four years has hurt the Greek economy

In his comment for Kathimerini Dimitris Kontogiannis reminds readers that Greece’s austerity measures under the two bailout programmes sum up to a bit more than €65bn for the 2010-14 period 30% of GDP. This “is unprecedented by any standard in such a relatively short period of time, and is almost double the 2009 record budget deficit gap of €36bn and was aimed at bring the deficit down to €6bn in 2014. Of course, it would be ironic if Greece gives up the effort now while only measures equal to about €16bn, including the carry-over, remain to be implemented in 2013 and 2014 under the current fiscal program. ” the article goes,  “the unprecedented size and poor mix of the Greek austerity package since the program started has hurt the economy. In so doing, it has made fiscal consolidation harder and dug Greece deeper into the debt trap of rising debt-to-GDP ratio as the economy continues to contract.”

Eurozone Protest Watch

More protests over the weekend in Paris, Madrid, Lisbon and Rome, according to Reuters.

Paris

In Paris, “thousands” organized by the Front de Gauche marched against Hollande’s intention to incorporate the ‘fiscal pact’ into French law, starting with a debate of the proposed legislation in the parliament next Tuesday. It is expected that the fiscal pact will pass with the support of Hollande’s Socialist and the opposition right-wing coalition, but that the governing coalition will vote divided as the French Greens will vote against the pact.

Madrid

Protests in Madrid were the third in a week gathering at Neptuno square in the vicinity of the Parliament. The focus of protests has shifted to the parliament as protesters’ demands range from a referendum on austerity measures to asking the government to step down. El Pais (English Edition)reports that to the political demands, is now added outrage over perceived police brutality at the first protests on Tuesday. The government is construing the protests as a coup-like threat to the institutions of the state. Contrary to popular accusations of disproportionate violence by the police, the government has praised their “extraordinary, splendid, brilliant and exemplary” actions, and two police commanders have been decorated. Speaking from New York City where he was to speak at the UN, Mariano Rajoy praised “the majority of Spaniards who don’t protest”. Some people joined the protest on Saturday specifically “insulted” by Rajoy’s suggestion that respectable people were not protesting.

Lisbon

In Lisbon, PM Passos Coelho’s U–turn on a raise of employee social security contributions after two weeks of protests failed to quell discontent as thousands of protesters marched carrying “banners reading ‘Go to hell Troika, we want our lives back'”. The public perception is that Portugal is following the same path as Greece as Passos Coelho’s promise that the Troika’s austerity program would solve the problems with Portugal’s economy has failed to materialize.

Rome

In Rome, “up to 30,000” people protested against Mario Monti’s public spending cuts, in a demonstration organized by striking workers in Rome’s tourism industry joined by “professors, public administration employees, garbage collectors and health workers”.

Wolfgang Munchau on the June 29  misunderstandings and its implications

In his FT column, Wolfgang Munchau says that Germans always interpreted the June 29 eurozone summit statement differently than the Spanish. He says the fact is that Germany is not ready for a banking union. They want to limit it, delay it, ringfence it – so that it won’t hurt the German taxpayer and thus won’t resolve the crisis. He says a true banking union constitutes a fiscal union – or at least it does if it has any positive bearing on crisis resolution. The banking union is thus much more important than a eurobond – because the latter is not necessarily a transfer mechanism. But without a banking union, the OMT cannot work, as a result of which the eurozone is back to the position where it was before Mario Draghi’s announcement – in a spot where stated policy is inconsistent with survival.

The rise in intra-eurozone imbalances

This is an IMF working paper by Ruo Chen, Gian-Maria Milesi-Ferretti, and Thierry Tressel

(hat tip Philip Lane of the Irish economy blog). We did not have the time to read it ourselves this morning, but the paper contains a useful abstract. It looks at the role of asymmetric trade flows and export competitiveness as explanations of imbalances.

“We argue that the traditional explanations for the rising imbalances are correct, but are incomplete. We uncover a large impact of declines in export competitiveness and asymmetric trade developments vis-à-vis the rest of the world –in particular vis-à-vis China, Central and Eastern Europe, and oil exporters—on the external balance of euro area debtor countries. While current account imbalances of euro area deficit countries vis-à-vis the rest of the world increased, they were financed mostly by intra-euro area capital inflows (in particular by the purchase of government and financial institutions’ securities, and cross-border interbank lending) which permitted external imbalances to grow over time.”

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

That old sinking feeling is back.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.754	0.734	0.751
Italy	3.656	3.720	3.727
Spain	4.498	4.505	4.576
Portugal	7.613	7.518	7.713
Greece	18.533	18.029	-1.45
Ireland	3.698	3.662	3.877
Belgium	1.114	1.089	1.102
Bund Yield	1.461	1.46	1.453
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.292	1.2819
Yen	100.330	99.81
Pound	0.798	0.7948
Swiss Franc	1.210	1.2084
ZC Inflation Swaps
	previous	last close
1 yr	1.81	1.96
2 yr	1.65	1.78
5 yr	1.82	1.87
10 yr	1.99	2.14
Euribor-OIS Spread
	previous	last close
1 Week	-7.386	0
1 Month	-3.786	-3.086
3 Months	4.229	6.429
1 Year	56.929	57.629
Source: Reuters