Reuters has the story, quoting a number of anonymous diplomats and EU officials, that Spain is now ready to apply for a bailout as early as next weekend, but that “it was German discouragement, not Spanish pride, that was now holding back a request”.  A “senior European diplomat” said “the German U-turns have convinced the Spanish they could end up in the not too distant future in the same position as Greece, Portugal or Ireland – shut out of the markets and with a very harsh adjustment program”.

According to Reuters the European Commission would “not impose onerous conditions beyond” those already announced by Spain. The goal appears to be avoiding another flare-up of the crisis which might imply “contagion spreading to Italy and other Eurozone states”.

Olli Rehn met Rajoy in Madrid on Monday, to convey the message that Spain would have the European Commission’s support in case of a rescue application.

An earlier Reuters story also on Monday quotes Rehn at his joint press conference with Luis de Guindos, saying “it can be expected that this kind of element of increase in the fiscal deficit related to bank capitalization will be treated as a one-off and will not affect the structural deficit”, in other words Spain would be allowed to miss its deficit targets by the amount tapped from the banking rescue.

Rehn also said the Commission will release its analysis of Spain’s draft budget in the “autumn economic forecasts, which will be published on 7 November”.

(Spanish commentators have been quick to observe that November 7 is conveniently after the 21 October regional elections in Spain, and are expecting that vote-getters such as the promise to raise pensions with inflation will not survive the Commission’s review. El Pais reports that the Secretary of State for Social Security has already indicated that it’s too early to know if the budget will be able to accommodate inflation indexing next year.)

Rajoy wants unanimous support in the Council before rescue application

The Wall Street Journal continues to milk for quotes their interview with Mariano Rajoy in New York City last week. Where last Wednesday they quoted him as saying “I can assure you 100% that I would ask for this bailout” if borrowing costs stayed “too high for too long”, yesterday he was quoted on three conditions that must be met for him to ask for a rescue: “There are three conditions: first, we must really need it;

second, that we know for certain that everyone will approve it, and I mean everyone;

and third, that the conditions attached are reasonable”. The new element is the insistence on unanimity. Germany, the Netherlands and Finland are known to oppose an immediate rescue application while France and Italy are for it. Italy, writes the WSJ, wants the ECB’s OMT “tested”. Italy’s position is spelt out more fully in Sunday’s column by Simon Nixon also in the WSJ:  the Italian perspective is that its current risk premium is “a distortion of economic reality”, and so “it is essential that Spain asks for aid, if only to prove the bazooka works”.

Germany’s carrot-and-stick approach to banking union

Less than a week after Germany, alongside the Netherlands and Finland, poured cold water on Spanish (and Italian) hopes for a quick and meaningful banking union, Reuters reports that Germany’s Europe minister Michael Link, meeting his French and Polish counterparts in Warsaw, issued a joint statement that “they were determined to act swiftly to implement the joint supervision”. However, this was tempered by a prediction from Link that joint bank supervision won’t happen by January 2013 because of “many expert issues that need to be clarified”.

The outs have a problem with banking union

A banking union is a politically, economically and legal highly complex undertaking. The FT reports on one important element – the rising scepticism of the eurozone-outs, who are angry about be confronted with what the FT describes as poor terms, including weak safeguards against if they choose to stay outside. None of the 10 EU members outside the euro object in principle, and all, apart from Britain, want to join. But Fredrik Reinfeldt expressed scepticism about how this would work. “If we are without influence . . . that will never fly. I don’t think any of the outs will accept that.” The articles also makes the point that the UK may find it hard to protect the City of London if it is the only country outside the common supervisory structure. Among the disputed issue are whether the outs should participate in deposit insurance and bank recap funds.

More leaks from the Liikanen Group

Suddeutsche Zeitung has more leaks from the Liikanen Group. This is one of the articles where the actual news is hidden deep down – with lots of background– ostensibly to help readers understand what is happening. As far we can make it out, the Liikanen plan, as reported in this article, foresees a strict separation between retail and investment banking, but allows the two remain under a single holding. Even then, there is a trigger, not specified in the article, where a separation is only necessary for banks where the risky bits constitute a certain proportion of the balance sheet. This legal structure apparently ring-fences the retail bank. The article also makes a big spiel of the fact that this structure is similar to what Peer Steinbrück, SPD challenger to Merkel, has said.

Monti  «whatever it takes» moment

Italy risks a stalemate if miss the opportunity to take advantage of the calm in Eurozone, the Il Sole 24 Ore top commentator Stefano Folli argues. The Eurozone is living in a sort of “Dark Tranquillity,” according to Folli. The ECB’s OMTs scheme is clear and Mario Draghi is ready to help Spain when Madrid will ask for a full bailout. That’s why Italy, Folli writes, should adopt the crucial reforms for its future: the new electoral law, a full comprehensive plan to reduce public debt and a programme to boost growth with untapped EU structural funds, especially in Southern Italy. “Italy has enough power to avoid an aid request, but the actions must begin now,” Folli remarks. In this scenario, Mario Monti could be the most important figure if he wants. With his speech at the Council on Foreign Relations, Monti reassures international investors about Italy’s future. “Monti’s ‘I will be there’ is like Draghi’s ‘whatever it takes’: a game changer,” Folli argues.

The dynamics of the Italian crisis

A paper published by Banca d’Italia has tried to do the math on the inter-linkages of sovereign debt tensions on private interest rates. The study finds: “If we consider a permanent 100bp increase in the spread, we estimate that the rise in the loan rate after one year would be of the same magnitude for new loans to firms and of 80bp for household mortgages.” Fortunately, the level of indebtedness of Italian households and firms is low in the international comparison, as Banca d’Italia datas showed.

Italy borrowing needs fell for the first time since 2009

For the first time since 2009, the Italian government’s borrowing needs fell in the first nine months of this year compared with the same period of the previous year, Il Corriere della Sera reports. Citing a report on public finances of the Finance ministry, Corriere reveals that the borrowing demands by the Treasury totaled €45.5bn as of the end of September, about €13.5bn less than the €59bn required during the same period in 2011. The paper attributes the improvement to Monti’s reforms. In fact, on a monthly measure, borrowing last month totalled €11.4bn, down slightly from €11.9bln in September 2011. In the meantime, the major government unions are protesting against austerity in a recession.

The plunge of Italian automobile market continues

La Stampa reports that Italy’s car market, and Fiat, face further contraction. In September the market contracted by 25.74% over the same time last year. It is the worst September result since 1984, when there were 107,000 (vehicle) registrations, said Fiat in a statement. “I’ve never seen figures like these,” the Fiat/Chrysler CEO Sergio Marchionne said. Only in September 2009, Fiat has sold over 250,000 cars. “We’re scraping along at the bottom of the barrel now, like a submarine,” Marchionne added.

Fiscal pact to be submitted to French parliament today

Francois Hollande’s government will submit the fiscal pact to parliament today. The main issue here is not whether it will pass but politically as Hollande might have to rely on conservatives.  Latest polls show that the fiscal pact is supported by the public: Some 64% of French voters would approve the EU’s new fiscal pact if it was put to a referendum, according to Reuters . On Sunday thousands of protestors marched through Paris in protest at the pact, the first real anti-Hollande protest according to Les Echos. But as for the fiscal treaty, Monday’s survey in Le Parisien newspaper showed that 54% of those respondents who had voted for Hollande in May approved of the fiscal pact. Some 75% of supporters of conservative former president Nicolas Sarkozy would back it. Le Monde argues in its editorial that for the left it is now too late to oppose.

Troika considers €2bn in austerity package as too uncertain

Officially their lips are sealed but after the meeting between the troika and the Greek finance minsiter Kathimerini reports that the troika has queried the enforceability of some €2bn in proposed measures — chiefly cuts to the health, defence and local authority funding. Wall Street Journal goes further saying the measures have been rejected by the troika as they are too uncertain to be counted towards deficit targets. Several other sticking points remain in talks with the troika, including over the proposed suspension of 15,000 civil servants which the two junior partners in the coalition vehemently oppose, suggests that a deal within the next few days is unlikely, putting the whole process back. This sends the coalition partners back to the drawing board at a time of heightened tensions.

For the Slovak Prime Minister the eurozone in its current form is unlikely to survive

Slovak Prime Minister Robert Fico had clear words about the future on the eurozone:  “I think the time will come when it will be clear that some countries are not able to deliver when it comes to fiscal consolidation and commitments and that one or maybe two countries will not be part of the euro zone in its current form,” he told Slovak TV channel Markiza as reported by Reuters.  “If Greece is unable to meet its obligations there should be a coordinated exit.”

Barroso supports Portugal’s policy change

Speaking in Lisbon, José Manuel Barroso said the Commission had already approved the “the alternative measures presented by the government” to make up for the withdrawal of a planned hike in employee social security contributions in response to widespread protests and tensions with the junior partner in the government coalition. Rating agency Moody’s said the policy change was “credit negative, because it could encourage opposition to the reform program and create the expectation that protests will be successful again”, reports El Pais (English Edition).

Coeure hints that ECB might accept non-liquid assets

This is from FT Alphaville, which quotes from a speech by Benoît Cœuré about the scarcity of collateral. He wondered aloud whether central banks should consider a category of assets that are high in quality, but not necessarily liquid. The article says that under Basel III banks will face simultaneous demands to reserve liquid assets for regulatory reasons and as a collateral for derivates clearing houses. Coure also wondered whether central banks should accept foreign currency assets as collateral.

Ben Bernanke on fiscal policy independence

Fed Chairman Ben Bernanke gave a speech on Monday on “Five Questions about the Federal Reserve and Monetary Policy” – a speech that how much US thinking has evolved during the crisis.

Business Insider has the text of the speech, as well as commented highlights. An important paragraph setting the Fed apart from the ECB is part of the answer to the second question:

“At the Federal Reserve, we implement policy to promote maximum employment and price stability, as the law under which we operate requires. Using monetary policy to try to influence the political debate on the budget would be highly inappropriate. For what it’s worth, I think the strategy would also likely be ineffective: …”

As Joe Weisenthal comments, this goes to the heart of the difference between the Fed and the ECB: “the ECB is explicitly using monetary policy (the promise of bond purchase) to influence the political debate and fiscal policy … the ECB is trying to backstop governments, but can only do so if the governments make commitments to “good behavior.”

Jakob Augstein sees Steinbruck as a loser

In his Spiegel Online, Jakob Augstein says Steinbruck is a depressing example of the SPD’s inability to oppose. By appointing this civil-servant type, he writes, the SPD continues to support the government, as it has done throughout the present parliament. The CDU only ever got into trouble through problems it created itself, or from the Left Party. Augstein reminds his readers that Steinbruck’s electoral record has been a disaster – as PM of North-Rhine Westphalia he landed the party’s worst-ever election result. He may make a good finance minister. Maybe he will be as good at re-regulation as he was a de-regulation. But this is not enough for a chancellor.

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
10-year spreads
	Previous day	Yesterday	This Morning
France	0.734	0.752	0.739
Italy	3.629	3.747	3.718
Spain	4.505	4.443	4.508
Portugal	7.518	7.468	7.755
Greece	18.029	17.890	-1.48
Ireland	3.662	3.668	3.834
Belgium	1.089	1.109	1.069
Bund Yield	1.46	1.45	1.479
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.290	1.2909
Yen	100.560	100.73
Pound	0.798	0.7988
Swiss Franc	1.209	1.2097
ZC Inflation Swaps
	previous	last close
1 yr	1.88	1.88
2 yr	1.78	1.7
5 yr	1.8	1.8
10 yr	2.14	2.04
Euribor-OIS Spread
	previous	last close
1 Week	-7.771	-7.771
1 Month	-5.186	-3.686
3 Months	4.186	5.786
1 Year	55.029	57.029
Source: Reuters