The IMF’s global financial stability report did not mince words. It said that failure to act will trigger an acceleration of deleveraging, with the risk of a credit crunch and ensuing recession. Previous delays in resolving the crisis have already increased the amount of deleveraging by banks, which in turn constrains the supply of bank credit, and which reinforces financial fragmentation. The IMF is predicting a total banking asset sector shrinkage in the EU of between $2.8 trillion to $4.5 trillion through the end of 2013, with the largest burden of credit supply contraction falling on the euro area periphery. The IMF’s own digest quotes José Viñals, head of the IMF’s monetary and capital markets department, as saying: “Commitment to a clear roadmap on a banking union and fiscal integration are needed to restore confidence, reverse the capital flight, and reintegrate the euro area.”
The IMF said the eurozone needs to consolidate fiscal policy in a growth-friendly way; implement structural reforms to promote growth; and clean up the banking sector. In addition, the IMF wants policymakers to complement this with action to be taken at the eurozone level itself. It said the goal of the banking union is to break the pernicious link between sovereigns and domestic banks. It said that a successful banking union will eventually need a fiscal dimension to be credible, in the form of a resolution fund and deposit insurance.
(This is hard to disagree with. The reality on the ground is different though. The eurozone pursues the most growth unfriendly form of austerity imaginable, with most of it delivered in tax increases and cuts in social spending;
the banking sector remains undercapitalised – four years after Lehman – and Germany is foot-dragging on the banking union. Policy advice and policy on the ground are clearly drifting apart.)
Peter Orszag warns Europeans against frontloading austerity
Parts of this briefing are written from Tokyo this morning, where one of us attended a debate on fiscal sustainability, in which Peter Orszag, a former director of the Congressional budget office, now a banker, warned the Europeans against underestimating the hysteresis effect of their austerity policy, in terms of output and employment. He advocated a policy of delayed fiscal consolidations. The European panellists by and large disagreed with Orszag. Iganzio Visco said there was no choice but to pursue austerity now, the way forward was to cushion it with monetary policy support and with policies that address inequality. Jean Pisani-Ferry made the point that the eurozone should immediate adopt the spirit of the fiscal pact and target structural fiscal indicators, rather than chase nominal targets, especially the (totally unrealistic) 3% deficit target for 2013.
Guindos: IMF statements ‘not cast in bronze’
Speaking on the sidelines of the EcoFin, de Guindos dismissed IMF forecasts of a deeper recession in Spain next year, denying that the forecast by Spain’s government was optimistic, reports ABC.
The new Italian austerity package revealed
The Italian cabinet has approved the new Stability Law, an austerity package for the next year. According to Il Sole 24 Ore, Italian ministers outlined the government bill to regional and local government representatives late last night at a meeting in Mario Monti’ office in Rome. The bill would reallocate funds of between €10bn to €12bn, €6.5bn of which are required to avoid the VAT increase, foreseen in the last budget, according to Finance Minister Vittorio Grilli. At the same time, the stability law aims to provide financial support for people without pensions – resulting from the recently proposed pension reforms – the so called “Esodati.” According to the Italian Treasury, the funds will come from spending cuts outlined in the last Spending Review, which aimed at slashing €26bn from the budget. The government also wants to find funds to cover Stability Law’ funding through the financial transactions tax and income derived from Italian laws scuppered by the EU. The draft of the Stability Law also cuts €1.5bn from the 2013 health budget. In addition, it freezes public workers’ contracts through 2013 and 2014, and forces them to forgo paid vacations outlined in their contracts. It bans government acquisition of new residential properties, halts its purchase or leasing of new vehicles, restricts computer consulting and furniture expenses. It also doubles the sacrifices expected of Italy’s five autonomous regions, slashing state funds to those regions by €2bn instead of €1bn as previously planned. Late last night, Grilli reiterated that in the new bill there will be no new net budget adjustment.
Merkel’s conciliatory tone in support of Samaras coalition
“I hope and I wish that Greece remains as part of the euro,” Angela Merkel said in Athens. “We really can see light at the end of the tunnel.” Merkel’s remarks, delivered alongside Greek Prime Minister Antonis Samaras, came as violent clashes erupted at a march through the capital by tens of thousands of Greeks to protest the tough austerity measures. No one in Merkel’s circle believes the visit will change Greeks’ perception of her, writes the Wall Street Journal, but she is betting that her increasingly conciliatory tone and acknowledgment of the hardships suffered by the Greek people could stabilize Samaras’ government. The other purpose of her visit, according to the paper, was to outflank Merkel’s opponent, Social Democrat Peer Steinbrück, who has said she hasn’t fully disclosed to German voters how much support Greece will need. Merkel said “I have not come as a taskmaster…And nor have I come as a teacher to give grades…I have come as a friend to listen and be informed,” away from angry chants and hoarse slogans of the thousands of protesters in the streets of Athens.
Kathimerini reports that Merkel assured Samaras that Greece’s next tranche of bailout funding should be secured in November if the government agrees on its latest austerity package with the troika and pushes ahead with 89 structural reforms that form part of its bailout commitments. In another sign of encouragement, Finance Minister Yannis Stournaras, who attended a Eurogroup meeting on Monday, confirmed last night that the request for an extension is “on the table” and that eurozone finance ministers have asked the government to find ways of plugging the financing gap that this could create.
EU fiscal pact approved by majority, though opposition remains significant
France’s lower house of parliament approved ratification of the EU fiscal pact by a large majority on Tuesday, by 477 votes in favour, 70 against and 21 abstained. 45 among the 314 deputies of Hollande’s left-wing parliamentary coalition either voted against the law or abstained, ignoring pleas from prime minister Jean-Marc Ayrault in recent days to fall into line. Yet Mr Hollande still rallied 282 left-wing votes (264 Socialists, 14 radical leftists, 3 Greens and one ultramarine in favour), Les Echos reports, above the 274 required for a majority, so in the end Hollande did not have to rely on votes from opposition conservatives for ratification. Still, 20 Socialists voted against and 9 abstained, on their website Le Monde names the 29 “dissidents”. The ratification law passes to the Senate on Wednesday and should be finally adopted before the end of the week.
Portugal to replace tax measures with spending cuts in 2013 budget
Portugal will adjust its 2013 budget as to replace tax increase measures with spending cuts under advice from the Troika of EU/IMF lenders, Reuters quotes Finance Minister Vitor Gaspar. The general lines of the budget included tax rises across the board for 2013, including income and property taxes, plus a new tax on financial transactions. The average income tax rate was expected to rise to 11.8% from 9.8% currently, with an additional 4% tax surcharge to be levied on 2013 incomes. The Portuguese press wrote on Tuesday that next year’s budget may include additional austerity measures for civil servants, including a change in the formula to calculate pensions (Jornal de Negocios this morning), a rise in next year’s minimum retirement age from 64to 65, and firing half of public workers on a temporary contract, around 40,000. Next year’s draft budget will be presented to parliament next Monday.
German economic advisor says Germany is using bailouts to rescue its own banks
On Sunday Salvados, a TV program from Spanish station La Sexta, aired a reportage (video) on the relationship between Germany and Spain in the crisis, under the title Viva Spanien. The program culminated in an 18-minute interview (see clip with supporting text from La Sexta) with Spanish-born German economist Jürgen Donges, which has had a great impact in Spanish media. Donges is a former German government economic advisor to the Kohl and Schröder administrators, mischaracterised in some current press reports as an advisor to Merkel. There is an English-language summary at Forex Crunch.
Some of the key moments of the interview are as follows:
Donges points to household debt as a key indicator that ‘Spain had been living above its means’, for instance buying high-end German cars. This leads to a discussion of the mutual responsibility of Spanish borrowers and German lenders, which Donges resolves by pointing out that a car buyer informs himself about the car much more than he cares to do about taking a loan. Conversely, on lender responsibility Donges says he never advocated rescues of other countries “if the issue is to save our banks we should give the money to our banks” which is not done for political reasons. He concludes “it is true that, when we talk about ‘rescuing Greece or Spain’, and we economists say so, we’re rescuing our banks exposed to those countries. It is clear to us.”
EcoFin agrees financial transaction tax
The EcoFin meeting reached an agreement on Tuesday to institute a financial transaction tax, with the support of 11 member states, including Spain and Italy which were said to be blocking the measure at the Eurogroup on Monday to extract concessions from France and Germany elsewhere on the agenda. According to Cinco Dias, Spain’s finance minister Luis de Guindos admitted that a veto threat was used in negotiations, but without revealing what concessions if any were gained by it. The financial transaction tax will take the form of enhanced cooperation at the EU level. The Commission’s proposal is of a 0.1% tax on shares and bonds and 0.01% on derivatives, of which 2/3 would go to the EU budget and the remaining 1/3 to the national budgets.
Finland has not yet reached a final decision on the matter. Those opposed to the tax say that Finland should not implement it unless Sweden does too, YLE reports.
Sueddeutsche asks: can someone explain what this tax should achieve?
In an editorial, Sueddeutsche Zeitung asks an important question. Can someone please explain how this tax can prevent future financial crisis? The answer to this question is, of course, implicit in the question itself. Even if the tax succeeded in reducing the number of risky transactions, it is not clear that it can reduce the total financial risks. The article says that the only purpose of this tax is to raise money. And this will only happen if the banks do not shift their transactions off shore.
Berlusconi is ready to step back. Or not?
Silvio Berlusconi confirmed his intention to step back, adding that he does not exclude that he could endorse Mario Monti as the next prime minister, La Stampa reports. According to Berlusconi, the former EU Commissioner has always been a liberal and moderate. The country needs stability, he said. That’s why the possibility of a “Monti II” administration is rising. But according to an editorial published on Il Foglio, a well-informed centre-right newspaper, Berlusconi is playing with fire. He knew the people could not accept his own candidature for a new mandate, so he is toying with the idea of another term for Monti. During a TV show, Silvio Berlusconi repeated five times over that he intends to step back and make room for someone else to represent the center-right. A farce? Probably yes, according to Il Foglio.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Spreads are rising again, and euro falls.
| |
| |
|
|
|
|
|
|
|
| 10-year spreads |
|
|
|
|
|
|
|
Previous day |
Yesterday |
This Morning |
| France |
0.693 |
0.650 |
0.666 |
| Italy |
3.601 |
3.717 |
3.700 |
| Spain |
4.259 |
4.387 |
4.428 |
| Portugal |
6.626 |
6.687 |
7.055 |
| Greece |
16.810 |
16.761 |
-1.49 |
| Ireland |
3.558 |
3.516 |
3.644 |
| Belgium |
0.987 |
0.960 |
0.975 |
| Bund Yield |
1.476 |
1.472 |
1.489 |
|
|
|
|
|
|
|
|
| Euro Bilateral Exchange Rate |
|
|
|
|
|
|
| |
Previous |
This morning |
|
| Dollar |
1.292 |
1.2856 |
|
| Yen |
101.170 |
100.54 |
|
| Pound |
0.807 |
0.8039 |
|
| Swiss Franc |
1.211 |
1.2109 |
|
|
|
|
|
|
|
|
|
| ZC Inflation Swaps |
|
|
|
|
|
|
| |
previous |
last close |
|
| 1 yr |
2 |
2.01 |
|
| 2 yr |
1.79 |
1.82 |
|
| 5 yr |
1.92 |
1.92 |
|
| 10 yr |
2.16 |
2.05 |
|
|
|
|
|
|
|
|
|
| Euribor-OIS Spread |
|
|
|
|
|
|
|
previous |
last close |
|
| 1 Week |
-7.957 |
0 |
|
| 1 Month |
-4.357 |
-5.757 |
|
| 3 Months |
3.457 |
4.457 |
|
| 1 Year |
52.229 |
53.429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Source: Reuters |
|
|
