EUROINTELLIGENCE DAILY BRIEFING, 11 de Outubro de 2012. Enviado por Domenico Mario Nuti.


“On the edge of junk…”

  • Standard & Poor’s cuts Spanish sovereign rating by two notches to BBB-, citing weakening Spanish economy, rising social tensions, and the dispute between the central and the regional governments  as the main reason;
  • also says that reluctance to apply for a bailout compounds is a factor;
  • Bild reports that the Bundesbank is looking at the legality of the OMT;
  • Ewald Nowotny says the ECB acted fully in line with its mandate;
  •  the Bild article said that lawyers were also checking the precise extent to which the programme can go;
  • Bild said the issue might be brought to the ECJ;
  • Christine Lagarde says it would be better to give Greece two more years than to frontload the programme;
  • German economic institutes see no solution to the eurozone crisis;
  • they also express criticism of the OMT, saying it will not solve the problem, which is a lack of political will;
  • a member of the Lombardy regional government was arrested for paying the Mafia to deliver votes for him;
  • latest corruption scandal is playing into the hands of Beppe Grillo, leader of separatist, anti-euro, 5-Star Movement;
  • there is more anecdotal evidence that Italy’s recession is beginning to hit the rich;
  • the eurozone;
  • the funding situation for eurozone banks has normalised;
  • a Bundestag delegation is visiting Catalonia on a fact-finding mission;
  • Spain’s general prosecutor says he won’t bring criminal charges against banks for selling their own preference shares to their clients;
  • economists Tito Boeri and Agar Brugiavini applaud the proposed Italian pension and urge the government not to give in to their critics;
  • Le Monde says Europe is facing a straight choice between integration and disintegration;
  • Lee C. Buchheit  and G. Mitu Gulati, meanwhile, list five policy options that are now left as a result an incompetent crisis management, with a debt re-profiling most likely of all.

“On the edge of junk” is how El Pais described the cut in the Spanish sovereign rating from BBB+ to BBB-, with a negative outlook. In other words, S&P is already looking into the junkyard. S&P said the new rating reflected the increase risk for Spanish public finances, the inter-linkages between a severe recession and social unrest, and the rising tensions between the central government and the autonomous regions. S&P is forecasting a contraction of 1.4% of the Spanish economy next year; it acknowledges that export growth has been encouraging, but it is too small to offset the negative effects of the fall in domestic demand.

What the El Pais story did not mention is the following line in S&P’s statement: “We view the Spanish government’s hesitation to agree to a formal assistance program … as potentially raising the downside risks to Spain’s rating,” (Reuters)

Bild: Legality of ECB’s bond purchasing programme under scrutiny

Ewald Nowotny defended the ECB’s new bond-buy programme on Tuesday after German tabloid Bild reported the German central bank was looking at the legal basis for the plan, according to Reuters. “From the ECB’s and my own point of view, the ECB acts fully in line with its mandate,” Nowotny wrote in an online chat with the Austrian newspaper Die Presse. “I assume that the bond purchase programme does not breach EU law.” Senior ECB sources, meanwhile, have said the bank’s legal department studied the legality of bond-buying carefully before the Sept. 6 decision to launch the programme.  Bild did not give details of its sources, but said ECB and Bundesbank in-house lawyers were checking what scale and duration the programme could reach before breaching EU treaties. Bild said there was a possibility that the issue could soon be referred to the European Court of Justice and added that the ECB and the Bundesbank wanted to legally “arm” themselves for this scenario. The report alarmed financial markets.

Lagarde advocates more time for Greece austerity

Christine Lagarde said Greece should be given an extra two years to meet its budget targets, publicly wading into the politically-sensitive bailout discussions currently underway with euro zone officials, writes Wall Street Journal.  The managing director told the press conference on Thursday the IMF can be involved in new euro bailout programs without contributing its own loans. Instead of front-loading budget cuts and structural changes “it is sometimes better, given the circumstances…to have a bit more time.” Extending the targets would broaden the gap in financing that Greece needs from creditors to avoid defaulting on its debt. Some officials close to the matter say a two-year extension could add up to EUR20 billion to the new financing bill.

German economic institutes see no solution to the eurozone crisis

FT Deutschland reports on the autumn report of Germany’s leading economics institutes, which gave a particularly gloomy outlook for the eurozone. They argued that the ECB’s OMT will not help produce a solution to the crisis, while bringing with it its own stability risks. They are also warning against further cuts in interest rates, which would not help the periphery, yet damage Germany, where a property bubble could develop.  Their forecast for the eurozone is a contraction 0.5% this year, and an expansion of 0.1% in 2013.

(As one can see, the Bundesbank is not alone.)

Mafia, politicians and money: welcome to Lombardy

More turmoil in Italian politics, this time in Lombardy. Domenico Zambetti, an executive councillor in the Lombardy regional government, was arrested for allegedly buying votes from the ’Ndrangheta mafia syndicate, Il Corriere della Sera reports. Zambetti, a member of Silvio Berlusconi’s People of Freedom (Pdl) party, is accused of paying two mobsters €200,000 for 4,000 votes (at 50 euros each) in the 2010 elections for the Lombardi assembly. Lombardy Governor Roberto Formigoni, a crucial ally of Silvio Berlusconi, said via Twitter that he had relieved Zambetti of his duties because of the gravity of the allegations. The latest events take the number of councillors in the Lombardy regional executive and assembly who are under investigation up to 14. They include Formigoni of the Pdl who is accused of corruption related to health contracts. Formigoni is expected to resign later on today.

Grillo’ party is rising amid political scandals

The rise of anti-political movement, Movimento 5 Stelle (Five Star Movement), leaded by comedian Beppe Grillo seems unstoppable, Il Fatto Quotidiano claims in an editorial. The latest corruption scandals have strengthened widespread public disaffection with the nation’s political class and contributed to the rise of Grillo’s grassroots movement, which is opposed to the present party system. According to several surveys, the Movimento 5 Stelle is vying with the PdL for second place in the polls, after the Democratic Party. Anti-euro, anti-Europe, anti-Mario Monti’ goverment: the movement has been inspired by the German Pirates, Grillo said. In a TV show, the most political scientist Giovanni Sartori attacked the comedian, remarking Italians should be worried by him: the Eurozone will survive only with cooperation and more integration. Grillo also said the new ESM is like a guillotine for Italy and wants to stop that pact if elected as PM.

Italy’s crisis hits the rich

The Italian depression has hit the market for luxury goods, La Stampa reports. The latest victim is the World Truffle Auction at Alba. Organizers have decided they no longer have the resources to organize such an undertaking annually. Due to the economic crisis, the revenues from white truffles will drop by over 51%, according to Piedmont Region estimates.

Eurozone bank funding market back to normal

An important aspect of the eurozone crisis is receding, the FT reports. Yields on bank bonds are normalising. The FT says that funding costs are below corporate bond market interest rates paid by the continent’s strongest companies for the first time since late 2009, as European Central Bank action to ease financial tensions takes effect. Bank bond spreads reached a peak spread of 115bp over average investment grade corporate bonds. This spread is now negative, according to Morgan Stanley. This improvement could reduce instability as banks delever their loan books.

German parliamentarians on fact-finding missions in Spain

A delegation of the Bundestag’s German-Spanish Parliamentary Friendship Group is in Barcelona to gather first-hand information about the recent pro-independence political events in Catalonia. The six-strong group will meet Catalan premier Artur Mas alongside the German Consul in Barcelona, reports La Vanguardia.

A second delegation, from the Bundestag’s Committee on Labour and Social Affairs is meeting representatives of various groups associated with the ‘indignant’ movement, reports El Diario. The meeting was arranged by the German embassy over a period of weeks. The paper quotes an activist that while the Spanish government treats them “as terrorist” and “refuses to talk”, foreign politicians lend them legitimacy as social interlocutors.

Spain’s chief prosecutor sees no generalized fraud in Spain’s preferred shares

Europa Press Eduardo Torres-Dulce, Spain’s chief prosecutor, said on Wednesday that the fact that preferred share sales (from banks to their customers) were based on actual contracts makes it hard to establish fraud, except in specific situations where it can be ascertained that the client was retarded, illiterate or was nor properly informed. Torres-Dulce said criminal law is not the only recourse, advocating civil law remedies such as arbitration; and also that he will defend “any element for investors to get their money back”.

The Italian pension reform must go on, Boeri and Brugiavini said

The Italian government must go on with the Pension reform without hesitation, the economists Tito Boeri and Agar Brugiavini argue on Lavoce.  The reforms of Labour Minister Elsa Fornero is one of the masterpiece of Mario Monti’s government, they argue. The main goal should be a labour market more flexible and proactive. The treatment of so called “Esodati’, people over 55 years left without pensions once the reforms take effect, is no doubt important. According to the two economists, there is much to do to improve these reforms, but it would be a huge mistake for the government to turn its back on those reforms.

Le Monde: We move towards a Europe of two different directions

Le Monde editorial writes that the eurozone is slowly transforming into a real monetary union, completed by a fiscal and banking union, financial solidarity and a democratic complement. This requires harmonisation of policies and institutions, which can be painful, at least in the short term, and as witnessed in Greece or Spain. Also the Germans resist supervision of ‘their’ banks, while the French are traditionally reluctant to the idea of a balanced budget. A country can say no to more harmonisation, but then it also says ‘no’  to the euro. The inevitable consequence is a Europe of two directions: a eurozone with ever more integration and another wider Europe where integration is undone.

Buchheit and Gulati on the options available now

This is from the lawyers (one of them) who brought us the great Greek debt restructuring.

Lee C. Buchheit  and G. Mitu Gulati (hat tip Philip Lane) have a written a clear-sighted article on the options available to the eurozone now. They begin with the assertion that the policy so far has been a failure: “Exactly why it failed depends on your point of view. Some would argue that the measures adopted to ensure containment were inept, inconsistent and insufficient.” The more charitable view is that the problem is essentially insoluble. This leaves policymakers with exactly five options in the following order:

1.       try to “jolly the markets”. This is the option currently pursued. Pretending that there is a backstop in the hope that market confidence is quietly re-established. Once this fails…

2.       “Massage the yields”. That’s the ESM plus OMT options. Once this fails….

3.       “Full bailout” Once this fails

4.       Reprofiling. Mildest form is extending maturities (something we will soon in the case of Greece).

The authors make the following hilarious comment about option 4:

“Local politicians can claim that investors will be paid back every euro they lent together with interest calculated at the original rate. Post-ESM, this could be accomplished by having the ESM buy new debt issuances directly in the primary market. This would at least preserve, in a Potemkin Village setting to be sure, the appearance of normal market operations.”

5.       Finally: Full restructuring

 They conclude that option 4 is the most likely.

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

Spanish spreads rising again.

10-year spreads
Previous day Yesterday This Morning
France 0.650 0.607 0.610
Italy 3.633 3.695 3.697
Spain 4.387 4.345 4.405
Portugal 6.687 6.516 6.813
Greece 16.761 16.874 -1.48
Ireland 3.516 3.488 3.610
Belgium 0.960 0.942 0.945
Bund Yield 1.472 1.48 1.478
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.287 1.2872
Yen 100.740 100.43
Pound 0.804 0.8032
Swiss Franc 1.211 1.2087
ZC Inflation Swaps
previous last close
1 yr 2.01 2.01
2 yr 1.82 1.83
5 yr 1.92 1.93
10 yr 2.05 2.05
Euribor-OIS Spread
previous last close
1 Week -7.857 -7.857
1 Month -5.800 -4.1
3 Months 3.457 3.657
1 Year 53.486 51.286
Source: Reuters

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