EUROINTELLIGENCE DAILY BRIEFING, 12 de Outubro de 2012. Enviado por Domenico Mario Nuti.


European are fuming about Oliver Blanchard

  • Europeans react with dismay at IMF chief economist’s ruminations about the fiscal multiplier;
  •  Schauble says debate not helpful;
  • privately, the Europeans are fuming even louder in Tokyo, angry that they have to be confronted with this debate at this time;
  • Jacob Funk Kierkegaard says multiplier debate a sign of the IMF’s intellectual independence, but will have no policy impact;
  • Christine Lagarde favours a two-year extension to the Greek programme, but meets with stiff opposition from Schauble;
  • Germans says an extension costs €30bn, and there is no way that the Bundestag would approve a third Greek programme;
  • back in Athens, the troika and the Greek government edged further towards a deal;
  • the Greek government is exploring a number of possibilities to fund a two-year extension;
  • the Greek budget deficit is better than the target this year, but unemployment is now at 25.1%;
  • the EU said to consider delaying Basel bank rules for up to a year;
  • Spain’s foreign minister blames Catalonia for the downgrade;
  • Fitch says an orderly resolution of NovaCaixaGalicia is now the most likely outcome;
  • the Spanish banking sector now constitutes 60% of all property transactions;
  • Spanish households have lost 18% of their aggregate net assets in one year;
  • Croatia is now being subjected to the eurozone governance rules, as the country faces demonstrations against austerity;
  • German economic institutes believe that current policy will invariably lead to a rise in inflation;
  • the Italian constitutional court strikes down an important austerity measure;
  • Paolo Manasse says it is wrong to combine income tax cuts with a VAT increase;
  • Claus Hulverscheidt says Merkel’s crisis management is better than widely claimed, but she is making a mistake by not coming clean on the cost of the euro rescue;
  • Le Monde, meanwhile, criticises Merkel’s provincial attitude over her refusal to accept the EADS/BAE merger.

We thought as much. Oliver Blanchard’s little box in the World Economic Outlook, in which he said policymakers had underestimated the multiplier, led to a furious reaction of European policymakers – behind the scenes in Tokyo even more so than what is publically reported. The FT leads with the story that Christine Lagarde and Wolfgang Schauble disagreed on this issue. In a clear display that he has understood the multiplier argument, Schauble is quoted as saying: “When there is a certain medium-term goal, it doesn’t build confidence when one starts by going in a different direction…When you want to climb a big mountain and you start climbing down the mountain, then the mountain will get even higher.”

Lagarde recommended that policy should shift towards allowing fiscal stabilisers to work. Writing from Washington, Alan Beattie quotes commentators expressing the view that the IMF’s change of heart will not make the tiniest bit of difference. Jacob Funk Kierkegaard from the Peterson Institute is quoted as saying that the article on multipliers should that the IMF was a research driven organisation. “But it is likely to make only a marginal difference in forward-looking changes to [rescue lending] programmes”. (We agree with that assessment.)

Schauble and Lagarde also clash over Greece

A corresponding row erupted over whether to extend the Greek programme. Lagarde came out in favour of a two year extension. Schauble is quoted by Frankfurter Allgemeine as referring to this as “not very helpful speculation”.  In Tokyo European officials were hammered by Americans and Asians over their policy response to the crisis, but showed no signs of changing.

Suddeutsche Zeitung has more details on the German position on a programme extension. The calculation is that a two-year extension would cost €20bn, in addition to a further €10bn to cover the existing fiscal gap. The paper quotes FDP parliamentary leaders Reiner Bruderle as saying there is no way the Bundestag would accept a third Greek programme now. The paper also reported Germany’s nervousness about the ongoing discussions.

Moving towards a Greek deal

Talks between Greece and the troika move towards a deal, Greece appeared close to agreeing Thursday to frontload most of the measures demanded by the troika, taking a combined €9bn in spending cuts and tax measures for next year, with the balance to come in 2014, according to Dow Jones Wires. In the 2013 draft budget submitted last week to parliament, the Greek government had pencilled in only €7.8bn worth of austerity measures for next year. The official said the two sides had also largely agreed on most of the new tax measures that Greece would take.

Greek government explores ways of funding a two-year extension

After the IMF’s move to publically support a two-year extension for Greece, the Greek government is now eager to examine ways it could cover the resulting funding gap. Government estimates a financing gap of up to €12bn in its budget if it extends austerity measures over four years rather than two which could reach up to €25bn amid shortfalls in the privatization programme, potentially more capital for Greek banks, a deeper-than-expected recession and any deviation from the budget. According to Kathimerini the government considers six ways in which this gap can be covered:

the ESCB to return to Athens the profit they will make on Greek bonds bought on the secondary market;

a reduction in the interest rates on the bilateral loans agreed as part of the first bailout; an extension to the maturities of Greek bonds the ECB holds in its investment portfolio (about €10bn;

of which €6.5bn is due in 2016);

rolling over the debts the state owes itself (such as a €5.2bn loan from the Bank of Greece);

the sale or renting out of public property (which could raise €1bn-€2bn) and an increase in the issuance of T-bills by €9bn.

Greek’s budget deficit better than target this year, unemployment now at 25.1%

According to the latest data Thursday, Greece’s budget deficit for January to September narrowed sharply to €12.6bn, down from €20.1bn during the corresponding period a year earlier and below the target of €13.5bn. The decline came despite revenues falling short of expectations after strike action by tax collectors last month disrupted collections. Data from Greece’s statistics office showed Thursday that unemployment in July rose to a record high of 25.1% in July, increasing from 24.8% in June and 17.8% a year ago.

EU said to consider delaying Basel bank rules for up to a year

The European Union may consider pushing back when lenders need to start phasing in tougher Basel bank-capital rules by as much as a year after warnings that pressing ahead with the original timetable may drive up costs, Bloomberg quotes three people familiar with the talks. EU lawmakers and officials, facing a Jan. 1 international deadline for incorporating the rules, held the latest in a series of meetings yesterday on how the bloc should implement the Basel measures, and whether the start date for phasing in the measures within the bloc could be delayed beyond the beginning of next year. Possible alternative dates might include July 1, 2013, or Jan. 1, 2014 according to one source. Othmar Karas, the lawmaker leading work on the draft rules in the European Parliament, denied that such discussions took place, saying any discussions about the time schedule will be part of the last round of negotiations, not a moment before.

Catalonia blamed for downgrade 

Spain’s foreign minister José Manuel García-Margallo blamed Catalonia’s secessionist movement for Spain’s downgrade, reports El Pais, just as defence minister Pedro Morenés, speaking at the European Parliament, did damage limitation saying that “those who send messages to the Catalan government by appealing to the Military are ‘disrespecting’ the institution”, after being asked about earlier statements by European Parliament vice-president Alejo Vidal-Quadras last week. El Paisinterviews the Defence Chief of Staff on the occasion of the National Holiday today, and he says that there is ‘no activity and no disquiet’ in over Catalonia.

Apart from the usual parade in Madrid to celebrate the National Holiday, there will be a demonstration for Catalan independence in Barcelona. El Plural reports that neo-nazi groups on the internet have been circulating a call to ‘go hunting catalan dogs’ to Barcelona today in order to ‘defend Spain’.

Spanish bank denies Fitch likely liquidation warning

Fitch issued a report calling ‘an orderly resolution’ of nationalized NovaCaixaGalicia the most likely outcome, and giving the already junk-rated bank a negative outlook. NovaCaixaGalicia reacted with a statement defending its recapitalization plan, reports El Faro de Vigo.

Banks dominate Spain’s property market

In other banking news, Cinco Dias reports that the Spanish banking sector is now participating in 60% of real estate transactions, as banks have become large real-estate management companies while controlling access to credit. Before the crisis, real estate developers had a share of just over 40% of all sales, most of the rest involving individuals. Real estate prices have dropped by 1/3 since the crisis began.

Spanish household wealth erodes amid global slump

According to a report on global household wealth issued by Credit Suisse, Spanish households lost 18% of their aggregate net assets in a year, writes Expansion. Amid a global 5% drop in global household wealth of which Europe is responsible for 80%, one would think the world has never had it so good to go by Reuters‘ summary of the report, which highlighted a forecast 50% increase of global wealth in 5 years, with millionaires increasing by 60% and doubling in China which the report said could overtake Japan in aggregate household wealth.

Anti-austerity demonstration in Zagreb as EU states ratify Croatia’s accession treaty

Between 5,000 and 10,000 people demonstrated in Zagreb’s main St. Mark’s square on Thursday against the government’s austerity policies, with an estimated 1,500 going on to march towards the government building, reports Croatian tPortal (English Edition). The NY Times on Thursday reported on the European Parliament appearance of EU Commissioner for Enlargement Stefan Fule, who said that the Commission would “associate enlargement countries” to the enhanced economic governance of the eurozone as this would ‘boost economic resilience’ and foster job creation and growth ‘before they join’.

(Croatia is slated to join the EU in July 2013, but has been maintaining a dirty Euro peg which puts it in a similar macroeconomic and political situation to mediterranean Euro countries. Krugman and Fule obviously disagree on the benefits of Eurozone macroeconomic policy for accession countries.)

German economic institutes fear inflation

There is more on the autumn report of the German economic institutes. Suddeutsche dug the following from the 80 page report: if the EU rejects the notion of insolvency of sovereign debt and if the ECB remains in the role of buyer of last resort, a rise in inflation would then become inevitable. In view of the existing crisis management, the institutes write, governments are ultimately more likely to accept a rise in inflation because it is the simplest solution.  They also make the point that the probable rise inflation is unlikely to have a lasting impact on debt reduction, as this increase is mostly anticipated.

Court rules Italian austerity measure to be unconstitutional

Italy’s Constitutional Court struck down a government plan to cut salaries to top civil servants and judges, Il Corriere della Sera reports. After several discussions, the Court said the decree to trim salaries in the 2011-2012 budget was unconstitutional. In its decision, the Court points to an “unreasonable discriminatory effect”. The ruling means that the government won’t be able to trim the pay packages for employees as planned. It government had intended to cut salaries that exceeded €90,000. A 5% cut would have been applied to the salaries of employees earning more than €90,000 and up to €150,000. In the meanwhile, the civil servants earning more than €150,000 would have taken a 10% hit.

Tax cut with VAT increase? It does not work, Manasse remarks

A personal income tax cut with a VAT increase is not a good combination, Paolo Manasse argues on Linkiesta. The last draft of Italian budget law sees the possibility of a 1% cut in the two lowest income tax brackets. The tax rate will drop to 22% from 23% for those earning less than €15,000 per year, and to 26% from 27% for salaries between €15,001 and €28,000. The top three income tax bands will remain unchanged, according to the draft. The expected cost is €5bn, according to Treasury. But, in addition, there is a VAT increase, by 1%. Manasse remarks that this increase will hit consumption, especially of food, the most sensible good to VAT. This renders the income tax cut unsustainable for Italian families. The best solution would be to cut expenditures from the fiscal system, according to Manasse. Referring to the IMF Technical Assistance Report on tax reform, there are over €167.3bn, or 10.7% of Italian GDP, of missing revenues from taxes due deductions, exclusions, exemptions, deferrals, preferential tax rates.

Claus Hulverscheidt about Angela Merkel’s lack of courage

In a comment in Suddeutsche Zeitung, Claus Hulverscheidt says Angela Merkel’s record in the eurozone crisis management is better than her reputation, but it is tainted by her unwillingness to tell the German people how much the operation is likely to cost. Large parts of Germany are under the illusion that European integration can be hard for zero cost, which is clear not true.

Le Monde: EADS-BAE and Merkel’s provincialism 

In its front page editorial Le Monde accuses Angela Merkel of being politically provincial and imperial with her “Nein” to a merger between EADS and the British defense group BAerospace. Yes, there is unease in Germany to become a world leader in the military industry. But the article concludes that it is due to Germany’s imperial attitude, refusing any alliance when it is dominant and wanting at least parity when it is the less performing part in the alliance. In 1999, Gerhard Schroeder obtained the better deal with EADS, which France accepted for the sake of the merger. With the British now on board, Germany’s strategic advantage would be lost. The article goes on saying Merkel lectures others to become competitive while at the same time calling for the suspension of the rule when it is less favourable for Germany.

An overlooked currency war in Europe

Writing in VoxDaniel Gros has go at the Swiss, who have pegged the franc to the euro at a level that helps it sustain a 12% current-account surplus and one of the lowest unemployment rates in Europe. He argues that the Swiss peg involves currency manipulation that is, as far as Europe is concerned, the same order of magnitude as China’s intervention. It has had a significant impact on the euro exchange rate and a non-negligible effect on the EZ economy.

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

10-year spreads
Previous day Yesterday This Morning
France 0.607 0.578 0.576
Italy 3.626 3.600 3.575
Spain 4.345 4.278 4.347
Portugal 6.516 6.504 6.737
Greece 16.874 16.836 -1.52
Ireland 3.488 3.413 3.615
Belgium 0.942 0.908 0.882
Bund Yield 1.48 1.495 1.52
Euro Bilateral Exchange Rate  
Previous This morning
Dollar 1.288 1.2936
Yen 100.530 101.33
Pound 0.804 0.8068
Swiss Franc 1.208 1.209
ZC Inflation Swaps
previous last close
1 yr 2.01 2.02
2 yr 1.83 1.82
5 yr 1.93 1.93
10 yr 2.05 2.15
Euribor-OIS Spread
previous last close
1 Week -7.957 -7.357
1 Month -4.300 -6
3 Months 3.071 3.371
1 Year 52.643 50.843
Source: Reuters

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