The German newspapers are reporting that Wolfgang Schauble has effectively ruled out a Greek exit. Suddeutsche Zeitung writes that Schauble, speaking from Singapore, has provided a de facto guarantee to the Greeks. He also marked a departure from the government’s previous position according to which a decision would depend on the troika’s report.

There are now frantic effort under way no to plug the gaps in the Greek budget, and to reduce the Greek debt. One of them was a proposal by Jorg Asmussen that the Greeks should buy back their own bonds, which German newspaper quoted over the weekend.

(For us, this type of proposal is a metric of how desperate policymakers are. If you repurchases debt, hoping to benefit from a discounted price of existing debt, would that price not rise immediately when you start making the purchases, and would that not defy the exercise? Did we not have that discussion before? Do we really want to go over this again and again?)

Frankfurter Allgemeine reports Schauble as saying he had “a few questions” about bond repurchases, which have hitherto remained unanswered. Suddeutsche reports that the debt repurchases are among a series of options being discussed. Others include the issue of T-bills, and a two-year postponement of the primary surplus target to 2016.

Greece and troika to agree cuts and prior reform actions before Thursday’s EU summit

The Greek government and the troika meet over the weekend to in a bid to hammer out an agreement on a €13.5bn austerity package and ‘prior actions’ in structural reforms before Thursday’s EU summit. Kathimerini writes the troika is expected to insist on €9bn in measures being implemented next year, as opposed to the €7.8bn foreseen in the draft budget. These changes will need to be included in the final budget for 2013, and submitted in Parliament in early November. According to sources, the troika will seek the signature not only of Stournaras and the coalition leaders but also of the governor of the Bank of Greece, Giorgos Provopoulos.

Heike Goebel says policymakers are playing tricks to keep Greece in the eurozone

While Greece played the tricks before, it is now the euro policy makers who are playing tricks all for the purpose of preventing a Grexit, FAZ’s commentator Heike Goebel argues.  With a debt-to-GDP ratio of 170%, Greece will need another debt default to return to a sustainable position. She writes that policymakers like Schauble have completely lost their credibility. She concludes that the award of the Nobel peace prize to the EU may have induced policy-makers to ignore economic logic even further.

Willem Buiter says Grexit is only postponed

Willem Buiter (hat tip FT Alphaville) is sticking to his view that Greece will ultimately have to leave the eurozone – though later than he originally envisaged.

“We still believe that increasing austerity fatigue in Greece, continuous missing of deficit targets and the ensuing stalemate in the negotiations between the Greek government and its official lenders will ultimately lead to a suspension of EFSF/IMF funding which, in our view, will eventually lead to Greek banks being cut off from Eurosystem funding. Without virtually any domestic resources available, we believe the only way out for Greece would be to leave EMU and start printing a new currency to fill its funding gaps.”

Spain wants ECB guarantee of 200bp risk-premium cap before bailout application

According to El Pais (English edition), the Spanish government is seeking an ECB guarantee that the risk premium of 10-year Spanish bonds over Bunds would be capped at 200bp before applying for an EU rescue, as Spain could otherwise find itself under a bailout it doesn’t want without reducing its financing costs to manageable levels (this is spelled out in the corresponding Spanish language story in El Pais). The same government sources deny that the delay is due to the regional elections next Sunday October 21, or that Germany is pressuring for a delay in order to present the Spanish bailout to the Bundestag together with packages for Cyprus or Greece.

At the IMF general meeting in Tokyo, Spain’s economy minister Luis de Guindos told reporters that Spain’s government is open to delaying the deficit reduction targets if the recession proves deeper than forecast, writes El Pais (English Edition). Attempting to downplay the S&P rating downgrade of Spain, de Guindos also said that “rating agencies are always behind the markets”.

Spain’s national holiday dominated by Catalan independence

Friday was Spain’s national holiday and there was a celebration in Madrid including an ‘austere’ military parade and an anti-independence demonstration in Barcelona. The demonstration in Barcelona, under the motto ‘d’Espanya i Catalans’ (of Spain, and Catalan) gathered between 6,000 and 100,000 people, depending on the sources, reports El Pais (English edition). In Madrid, the most noteworthy incident involved a private conversation between King Juan Carlos and Prime Minister Mariano Rajoy. As reported by El Pais (English edition), TV footage allowed lip-reading of some of the King’s words, which appeared to refer to a statement by the Education minister José Ignacio Wert earlier last week that he intended to ‘hispanicize’ Catalan students. A brief story by El Mundo describing the exchange in some detail also reports that the Royal House later denied that the King was chastising Rajoy over Wert’s words.

Separatist De Wever party wins municipal elections prompting fresh calls for a breakup

Flemish separatists scored mayor victory in local elections on Sunday. Bart De Wever, leader of the New Flemish Alliance (NVA), is set to become mayor of Antwerp, after his party emerged as the largest one (37.7% according to De Morgen) ending about 90 years of socialist rule. Shortly after results emerged, De Wever was quick to demand that the Belgian prime minister give greater independence to the Dutch-speaking north, calling on French-speaking socialist Prime Minister Elio Di Rupo and the French-speaking parties to “take responsibility” and negotiate another state overhaul to give more independence to the regions. “We’ve reached a point in history where there’s no going back.” The NVA is largest party in Flanders coming in first in about 49 municipalities, yielding 30.1% on average, De Tijd reports.  The immediate implications are not a breakup but difficult discussions to settle the budget for 2013. De Wever is quoted by Reuters saying “I call on Elio Di Rupo. Take your responsibility and prepare for confederalist reform. Your tax-government without a majority in Flanders is not supported in Flanders.”

Troika dissatisfied with Irish savings strategy

Troika officials are becoming increasingly frustrated with how the Irish government is implementing the bailout by cutting services to the public rather than tackling vested interests in the public service and professions, the Irish Times reports. While the troika is satisfied that overall targets for deficit reduction are being met, there is concern at the way they are being achieved. Signs of growing discontent have also emerged on the Fine Gael backbenches, with several MPs becoming increasing critical of the Government’s approach to making savings in the public service pay bill.

Irish goods exports, meanwhile, have hit an all-time monthly record of €9bn, up 18% on the same period last year, led by a surge in the chemical sector and a 20% increase in exports to China, the Irish Independent reports.

Olivier Blanchard says German position lacks logic

In an interview with Frankfurter Allgemeine, Olivier Blanchard attacks the German “inflation fears” as lacking logic. He says if Germany was serious about its commitment to eurozone-wide price stability, and to an improvement in the competitiveness of the south, then it will logically have to accept a higher inflation rate for the north. He said 0% in the south plus 4% in the North would give 2% overall. He also says it would therefore make no sense to have a current account surplus, based on wage moderation, as a policy objective. He says the right policy for Germany is to stimulate domestic investment. That would lead to an increase in German wages, which is not inflation, but an adjustment of relative prices.

Banks issue tier-two debt

The FT has the story that banks have been taking advantage of the increase in demand for higher yielding assets by issue tier-two debt. Last month $7.9bn were issued by banks like Erste Bank, Danske and Rabobank, the busiest month since May 2008, according to data from Dealogic. So far this year, European banks have issued more than $25bn. The boom in tier two capital is driven in part by Basel III, which requests that banks hold an additional 2% of assets in the form of either tier 1 or tier 2 debt. The article said rich Asian investors and European institutions were among those who are buying the tier 2 securities. Another reason for the boom in tier 2 is banking seeking to beat the January 2013 Basel III deadline, when new two tier debt must include loss-absorbing features.

Italian commercial real-estate in crisis

The commerical real estate market is under severe strain in Italy. Even the market for offices, which had so far withstood the crisis, took a hit this month, according to Il Messaggero. Sales in office real estate meant, in the medium-to-low-quality range, have suffered the most – down 25% from January to September. High debt, political instability and economic recession, and a withdrawal of foreign buyers are cited as the reasons. The prognosis for the future is bleak, according to Il Messaggero. The article quotes an expert as saying that transaction volumes had fallen to the lowest level in 10 years. Foreign investors are shunning the country because they perceive it as lacking transparency.

Scalfari says Napolitano is now the vital player in Italy

Eugenio Scalfari writes in La Repubblica that President Giorgio Napolitano is now the only guardian of the country. Without Napolitano, Italy is lost: political parties are not ready for elections, and there is no leader who could take on the task. Next Spring, the Napolitano’ mandate will be over and he does not want run for a second term. But he has put his agenda on the table: new electoral law, continuity with Mario Monti’s reforms and a fight against corruption. If political parties recognize that agenda, Italy should be safe by the end of 2013, Scalfari said.

Monti’s inequitable budget

Luca Ricolfi wrotes in La Stampa that the Italian budget draft is inequitable. He says VAT increase coupled with the 1% cut in the two lowest income tax brackets is the worst solution. Despite the recession, the Italian government is planning to raise over €6bn with a 1% VAT increase. That will hit consumers, and especially poor families, Ricolfi writes. The budget draft also has no measures for stimulate growth. The Monti government finally reveals its political face: they increase taxes, but send out the pre-election message of a tax cut. According to Ricolfi, Monti’ package full of illusions, in line with the policies of the last century.

Portugal to deliver its budget today including massive tax increases

Portugal’s centre-right government presents its 2013 budget today, which will outline the harshest measures yet under Lisbon’s €78bn bailout, Reuters reports. The 2013 budget is set to introduce sharp income tax hikes, which could amount to up to two or three months’ wages for middle income workers, to ensure the country meets its budget goals under the bailout. Finance Minister Vitor Gaspar has described the planned tax increases as “enormous.” There is the fear that the tough measures, which will also include pension cuts, a financial transaction tax and higher property taxes, could push Portugal into a recessive spiral like Greece. Even Portugal’s conservative president, Anibal Cavaco Silva, criticised the budget measure.

The case against austerity

Wolfgang Munchau writes in his FT column that austerity is having a much bigger impact on growth than previously thought. He picked up on the IMF’s multiplier analysis and the DeLong/Summers research, saying that the multipliers in the eurozone are quite high. If one adds very probable hystersis effects, and makes a number of conservative assumptions about growth and interest rates, the eurozone may be at, or close to a point where austerity does not even achieve its narrow of debt reduction, but may lead to imploding debt ratio. He sides with DeLong/Summers, arguing that the best policy would be for the eurozone to switch from austerity directly to stimulus. But at the very least, it should abandon the nominal deficit targets.

 

 

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
10-year spreads
	Previous day	Yesterday	This Morning
France	0.578	0.595	0.587
Italy	3.531	3.527	3.509
Spain	4.278	4.196	4.203
Portugal	6.504	6.541	6.534
Greece	16.836	16.547	16.51
Ireland	3.413	3.306	3.322
Belgium	0.908	0.918	0.909
Bund Yield	1.495	1.453	1.471
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.297	1.293
Yen	101.630	101.62
Pound	0.807	0.8061
Swiss Franc	1.209	1.209
ZC Inflation Swaps
	previous	last close
1 yr	2.01	2.03
2 yr	1.81	1.82
5 yr	1.92	1.93
10 yr	2.15	2.04
Euribor-OIS Spread
	previous	last close
1 Week	-7.357	-8.057
1 Month	-3.871	-4.371
3 Months	3.071	4.271
1 Year	50.143	50.143
Source: Reuters