Spain had two regional elections on Sunday, in the Northwestern region of Galicia, and in the Basque country. (El Pais English edition) reports on the election results. In both regions the Socialist Party loses one third of its vote, conceding a comfortable absolute majority to the PP in Galicia, and going from second to third place in the Basque country (where it had formed a coalition government with the local PP, 3rd in 2009 and 4th now). The PP victory in Galicia is a significant relief to Spanish PM Mariano Rajoy, but is also seen as establishing Galician premier Alberto Núñez Feijóo as a contender to succeed Rajoy himself.

In Galicia, where immigrants make one eight of the electorate but vote at one third of the rate of the domestic population, turnout may drop below 60% when the immigrant vote is counted, against 64% in 2009. Official election results are here.

Left Basque independentist party EH-Bildu took second place with 25% of the vote. 1/3 of this vote correlates with the 8% of the electorate which used to cast null votes during the past decade as ETA-aligned separatist parties were successively banned. Another third corresponds to voters of legal separatists parties in 2009. Official election results (in English) are here.

(Both regions have their own language and enjoy greater autonomy than most other regions of Spain, which includes the prerogative to have early elections. With Andalusia last March and Catalonia next month, all regions that have control of their own electoral cycle will have had elections in 2012.)

Two more regions tap nearly exhausted Spanish liquidity fund

Last Friday, two more regions applied for aid from Spain’s regional liquidity fund reported El Pais (English Edition). This brings the total to 8 regions out of 17, and €17bn in request out of an allocated €18bn. In addition, the region of Valencia which had already applied for €4.5bn support, announced 40% of public sector workers would be laid off, not including the already announced layoff of 2/3 of the employees at the regional TV station.

Recession worsens Spanish credit portfolios

El Pais (English edition) reported last week that nonperforming loans of Spanish banks topped 10% in August, on a 17-month rising streak. Year-on-year, the volume of nonperforming loans rose by 40% to nearly €180 billion. According to “analysts”, El Pais writes, banks may have reclassified some loans as non-performing in anticipation of the ‘Bad Bank’ which might then take over these loans.

In a sign of the depth of the crisis in the Spanish construction sector, El Pais (English edition) on Sunday carried a report by the cement manufacturing industry association claiming that cement consumption in the first 3 quarters  of the year was down 1/3 from the same period a year earlier, and was down to a level not seen since 1967. Cement consumption at the peak of the housing bubble in 2006-7 was 4 times higher.

Merkel says explicitly that there will be no direct recapitalization of Spain’s banks

Last Friday we reported on the language of the European Summit conclusions delaying the banking union until at least 2014. Later in the day, El Pais (English edition) quoted Angela Merkel explicitly denying any prospect of direct recapitalization of Spain’s banks:

“There will not be any retroactive direct recapitalization,” Merkel told a news conference at the end of a European Union summit in Brussels. “If recapitalization is possible, it will only be possible in the future, so I think that when the banking supervisor is in place we won’t have any more problems with the Spanish banks; at least I hope not.”

This was also interpreted as a ‘major blow’ against Ireland by Irish Central on Saturday. But on Sunday, there seemed to have been some movement on this front.

Germany backs special approach for Ireland’s bank deal

Angela Merkel and Enda Kenny issued a joint statement on Sunday agreeing the “unique circumstances” of Ireland’s economic crisis require a special approach and reaffirming the June eurozone commitment to examine ways of improving Ireland’s bank rescue, Reuters reports. Kenny has come under intense pressure at home after Merkel said on Friday that euro zone banks could not be retrospectively recapitalised via the bloc’s bailout fund, appearing to dash Irish hopes of getting a deal on its banking debt.  Ireland, which has been in talks for almost 18 months to ease the burden placed on it by its failed banks,  argued in June when EU leaders cleared the way for rescue funds to be pumped into viable banks, that this could be back-dated for Ireland’s already recapitalised lenders. The Kenny-Merkel statement made no mention of how European banks should be recapitalised but the reference to Ireland as unique will be a boost for Kenny.  The commitment made in June to look at easing the terms of Ireland’s bank bailout has helped push Irish bond yields down significantly, allowing Dublin to borrow on long-term debt markets for the first time since signing an EU/IMF bailout in November 2010.  Kenny will travel to Paris on Monday for his first bilateral meeting with French President Francois Hollande since he came to power last May.

Greece is pushing for a deal before Thursday, negotiates for €5bn on top of the €31.5bn

The Greek coalition government resumes talks with the troika on Monday. In an interview with the business newspaper Imerissia, Yannis Stournaras said Greece has covered 90% of the ground it needs to in order to secure the disbursement of its next bailout tranche and he said he would push to reach agreement on the last disputed segments of the plan  by Thursday when the Euro Working Group meets. Sources told Sunday’s Kathimerini that during the next few weeks, the government hopes to convince the eurozone to release another €5bn on top of the €31.5bn tranche. Greece’s September tranche was supposed to be €5bn and Athens would like to have these funds to begin reducing government arrears, which have almost reached €8bn.  Of the €31.5bn, €23bn is would be for the completion of the bank recapitalization program and €5.5bn to cover maturing bonds. The remaining €3bn would be kept as a cushion in case of delays in the disbursement of future tranches.

Germany “reflecting” on Greek bond buyback scheme

Spiegel reports that the Troika “savings Kommissars” are “convinced” that Greece needs foreign expertise, and worries that there are “simply not enough experts with reasonable knowledge of Greek”. The same story reports that the German finance ministry is “preparing” an ESM-funded debt buyback program for Greece. Given that Greek bonds are trading at 25% of face value, the plan expects to reduce Greece’s debt by 4 euros for each Euro of ESM money. The buyback story is quoted in English by Reuters.

Merkel to visit Portugal

Merkel appears to be on a diplomatic tour of the Euro periphery. After visits to Spain and Greece, a visit to Portugal has been announced for November 12, reports Portugal Daily View quoting newspaper Expresso and Lusa news agency. Merkel is expected to “recognize Portugal’s sacrifices” and express her confidence in the Euro.

And in an apparent contradiction of the IMF’s stance at last week’s general meeting in Tokyo, the IMF mission chief to Portugal Abebe Selassie insisted that Portugal must continue with the “imperative” of budget adjustment, Portugal Daily View writes. The official statement praises the “sacrifice and determination” of the “authorities and the people of Portugal”.

Hans Werner Sinn is now in favour of eurobonds

Reuters reports on an article written by Hans-Werner Sinn in the German magazine Wirtschaftswoche, according to which Sinn said eurobonds were the lesser evil. He wrote “The way things are going, political action will not stop at the European Stability Mechanism (ESM) … if we had mutual bonds then we would have peace and quiet for a time.” He said eurobonds were not a permanent solution, as heavily-indebted states would take advantage of lower borrowing costs and stall reforms.

French parliament approved government’s tax rise

French MPs are to vote tomorrow on the first part of the budget, the revenue side. The parliamentary majority hardly changed the tax increases in the 2013 budget.  It approved the 75% tax on the super-rich and most of the tax adjustments on capital gains, including the U-turn to preserve the current regime of 19% tax realised on capital gains through business termination after a successful online campaign of small business owners. Les Echos has details on the measures approved.

Commission says Italy on track for 2013 deficit target

Italy is on track to reach every budget targets with current programmes, the EU Commission said in a draft note, obtained by La Stampa. The categorical obligation is to implement the decisions quickly and effectively, it said, confirming the structural primary surplus in order to reduce the debt to GDP in 2013. The total consolidation measures will have reached 7% of GDP from May 2010. Further action on the expenditure side may have to be considered in 2013, the EU draft statement said: it is a suggestion to avoid drifting from current way, Zatterin notes. The objectives for the coming year should be respected, according the draft.

The 2013 will be the year of Italy’s aid request, Goria said

In an op-ed on El Mundo, Fabrizio Goria says that if 2011 was the year of Greece, 2012 the year of Spain, in 2013 it may be Italy’s turn. Despite the Council progress on the SSM, the road map for the Eurozone crisis remains long. Goria quotes Morgan Stanley figures according to which in 2013 Italy will have gross debt issuance of €401bn, with a redemption of €355bn. The actual yields seems sustainable, but the elections in 2013 are a threat of market confidence. The Movimento 5 Stelle is the second in the polls, after the centre-left Partito Democratico. Grillo wants the Lira back. This is not going to happen, but there is the possibility of a formal request for OMT/ESM programme, if social unrest rises, and if there is pressure on primary markets.

The OMTs maybe are not enough to avoid the worst of the crisis

The OMT is a crucial innovation, but maybe insufficient, according to Giannangelo Marchegiani. In Lavoce.info, Marchegiani remarks that Mario Draghi has maintained its commitment to protect the euro using all the tools available to the ECB. Unfortunately, according to Marchegiani, the ECB medicine has alleviated the symptoms of the disease, but is unable to eliminate it. The problem is that there are not enough tools to effectively help the eurozone to solve the crisis of public debt and then, to preserve the integrity of the euro. This is mainly because the ECB statute prohibited the direct financing of the EU member States in difficulty, in contrast to what is possible for any other central bank worthy of the name. In addition, what if a country under the OMTs programme does not respect the committments? The ECB risks to be, another time, in the Greek situation: bond-buying on, MoU not respected, a lot of  money wasted.

Charles Goodhart on bank resolution in a banking union

VoxEU carries a piece by Charles Goodhart in which he argues that joint banking supervision in a banking union requires joint resolution and recapitalisation. Goodhart writes

“If a banking union is to help in resolving such problems, the ECB must have the ability to close down the operations of a failing bank expeditiously. It must do so in a manner that does not place an excessive fiscal burden on the home state, while allocating any residual burden of loss arising from the failure of a cross-border bank in an agreed distribution amongst the participating countries.”

 

Munchau on banking union

In his FT column, Wolfgang Munchau argues that the EU may after all be serious about creating a banking union but we should not come to regard it as a tool in crisis resolution. This is about the eurozone’s architecture. He says the timetable has commitment EU leaders to the process, and it would be hard to fudge a banking union, as this exercise would make no sense without full coverage of all banks, and become prohibitively expensive without full resolution authority. This is, on its own, one of the biggest institutional reforms ever in proposed in the EU. He says the banking union ends the illusion of a inhabitable biosphere outside the eurozone, but inside the EU. It is a tool through which the eurozone will assert its independence in the EU. But we should be under no illusion about the crisis. It goes on.

Scalfari on the Democratic Party

Eugenio Scalfari writes in his regular column in La Repubblica on the future of the Democratic Party. Italy is not out of the crisis yet, but at least there has been some relief through lower spreads. The situation now resembles the calm before the storm, as the country may face political instability. Scalfari is sceptical about the agenda of Matteo Renzi, the young mayor of Florence, who is challenging Pier Luigi Bersani for the top slot.  Renzi wants to renew the PD using a pro-market vision. Scalfari remarks that the solution is not to get rid of the current leadership, but to propose concrete programmes of reforms. The election is April will be a fateful vote that determines Italy’s  future in Europe. The PD primaries, expected for November 25, will have the same relevance, since the PD is Italy’s largest party.

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

Spreads have been rising a little bit since the summit.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.504	0.517	0.511
Italy	3.133	3.321	3.302
Spain	3.720	3.799	3.891
Portugal	6.058	5.953	6.192
Greece	15.359	14.937	-1.60
Ireland	3.120	3.148	3.336
Belgium	0.782	0.821	0.818
Bund Yield	1.631	1.581	1.60
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.306	1.3054
Yen	103.530	103.87
Pound	0.814	0.814
Swiss Franc	1.209	1.209
ZC Inflation Swaps
	previous	last close
1 yr	2.02	2.02
2 yr	1.84	1.84
5 yr	1.93	1.93
10 yr	2.14	2.14
Euribor-OIS Spread
	previous	last close
1 Week	-7.957	-7.857
1 Month	-5.971	-4.171
3 Months	4.471	3.971
1 Year	45.471	45.571
Source: Reuters