EUROINTELLIGENCE DAILY BRIEFING, 24 de Outubro de 2012. Enviado por Domenico Mario Nuti.


Berlin grants Greece an extra two years


  • Suddeutsche Zeitung has seen the new memorandum for Greece, according to which the programme has been extended from 2014 to 2016;
  • this includes a postponement for the 3% deficit target, and lower privatisation targets;
  • there are stills gaps in the proposals on how to fund the budget deficit;
  • the Greek government has reacted with outrage to reports that Germany wants to place the money into an escrow account;
  • Evangelos Venezelos warns the troika against treating Greece like a protectorate;
  • in Athens there is still no agreement on the austerity and reform plan, as the Democratic Left and Pasok continue to oppose the labour market reform plans;
  • Antonis Samaras now proposes to lump all the reform measures into a single bill, thus forcing his coalition partners to accept, or reject the entire package;
  • a first opinion poll puts a Steinbrück coalition ahead of Merkel;
  • French conservatives say Hollande’s tax increases mostly affect the middle classes;
  • European Commission backs the enhanced cooperation proposals for a financial transaction tax among ten member states;
  • the Portuguese government is now so desperate that it is cutting the minimum income for the unemployed, pensioners and low income families;
  • Portuguese tax revenues fall 4.9% in the January-September period;
  • the Bank of Portugal has made a proposal for the securitisation of mortgages;
  • the Belgian government said it “found” some savings for this year, but needs to find a lot more in 2013;
  • there are further signs of an improvement in the eurozone’s inter-banking market, especially for Italian banks;
  • the Bundesbank expects a German GDP contraction in Q4;
  • the Spanish parliament is reviewing, before rubberstamping, the 2013 budget;
  • Spain expects size social security deficit for this year;
  • a report says crisis has increased inequality in Spain;
  • the Spanish government is also making a number of changes to the bad bank, allowing the possibility for it to be put under administration;
  • Klaus Regling says it will take 2 or 3 years for Italy’s reforms to bear fruit;
  • a draft has surfaced of how to solve the legal mess surrounding the SSM;
  • Wolfgang Munchau says if this a solvency crisis, there is no cause for optimism now, but if it is a liquidity crisis, there was no cause for pessimism during the summer;
  • Barry Eichengreen and Kevin O’Rourke, meanwhile, are shocked, shocked by that multiplication is going on.

Sueddeutsche Zeitung reports that Greece has been granted an extension of two years, 2016 instead of 2014, to reduce the budget deficit below 3% of GDP and an extension of the deadlines for reforms and privatisations. Athens now targets €8.8bn in privatisation receipts by 2015, rather than €19bn, as seen in the draft of the memorandum of Understanding. The paper reports it was not clear on Tuesday how the gap for the 2013 and 2014 budget – €15bn-€18bn – will be financed.   Also open is the question how Greece will be financed after 2014.

In Greece, meanwhile, the rage is high over an apparent proposal by the German Finance Ministry for the creation of an escrow account into which Greece’s loan tranches and tax revenues would be deposited and for which there would be some level of outside control, as revealed by a document leaked by PASOK. There is also a suggestion that the Germans would like there to be an automatic mechanism to limit public spending if the deficit is not within agreed targets. “We are not a protectorate,” said Evangelos Venizelos. “Our partners and the troika have to understand that.” Earlier in the day, German Finance Minister Wolfgang Schaeuble had referred to “mechanisms” and “automatic stabilizers” without being specific.

This issue that cropped up during the talks among the three coalition partners Tuesday, which concluded without success. Greek coalition leaders were unable to agree on labour market reforms demanded by the troika, Kathimerini reports. After the meeting Democratic left leader Fotis Kouvelis said that his party would not vote for the labour reforms demanded by the troika, which include a cap on compensation for sacked workers. After Kouvelis, Venizelos also expressed reluctance to back the measures. As Samaras wants to pass all the fiscal measures as one bill and all the structural reforms as another, the only way PASOK or Democratic Left could display their opposition to changes in labour legislation would be to reject the whole package, so the article.

First poll puts a Steinbruck coalition ahead of Merkel

Bild has a poll according to which a coalition of SPD and Greens would have a numerical majority in the parliament. The SPD is at 32%, the CDU at 35%, the Greens at 13%. In this poll, the FDP and the Pirate Party have only 4%, below the minimum qualification hurdle.

(The arithmetic would change once the FDP is back over 5%, which is ultimately very likely, as the party tends to attract CDU votes on election day to keep it over the hurdle. In that case, it is hard to see how the SPD and the Greens would have a majority of their own, unless the SPD gets at least 35%, a level they have not had since the days of Gerhard Schroder. Nevertheless, this polls tells us that we should not take the election outcome for granted.)

French conservatives say Hollande gets his extra taxes mainly from the middle classes

Are the tax increases in France really concentrated on the rich ones? Laurent Wauquiez and Gilles Carrez from the conservative UMP have calculated the impact of all tax increases under Francois Hollande’s presidency and concluded: Contrary to what the executive says, €6bn are concentrated on 100,000 rich households, while €16bn are demanded from the middle class, that is more than 2/3 of the effort, writes Le Monde.  The calculations include the pension rise to compensate for the partial return to the pension age at 60 and the different measures already voted or under examination.  So the net effort – €10.25bn out of €15.8bn –  comes from the middle class, only €5.5bn comes from the richer households.

EU Commission backs ten eurozone states’ financial transaction tax

The European Commission backed on Tuesday an initiative by 10 euro zone countries to introduce a harmonised financial transaction tax (FTT) to make the financial sector contribute to the costs of the sovereign debt crisis, Reuters reports. The 10 countries are France, Germany, Austria, Belgium, Greece, Italy, Portugal, Slovakia, Slovenia and Spain. They decided to push on with the introduction of the tax after the idea, which was first floated by the Commission in September 2011, failed to win unanimous support among the EU’s 27 member states in June. Under the “enhanced cooperation” process, at least nine countries had to support it.

Portuguese government wants to cut minimum benefits

In an act of sheer desperation, the Portuguese government is preparing a new wave of cuts affecting unemployed, low income families and pensioners, according to Jornal de Negocios. The proposal submitted by the Ministry of Solidarity and Social Security to social partners includes measures such as the 10% reduction in the minimum amount for unemployment benefit or social allowance apply to all beneficiaries, including those who are already receiving support.

Tax revenues fell 4.9% in Jan-Sept period

Latest statistical releases meanwhile show that Portugal’s core state sector budget deficit fell 20% in the first nine months of 2012, benefiting from a one-off transfer of bank pension fund assets, but tax revenues fell 4.9% amid deepest recession since the 1970s, according to Reuters.

Bank of Portugal proposed mortgage securitisation

The Bank of Portugal has formalized a proposal with the troika to create a vehicle for the securitization of mortgages, Jornal de Negocios reports. According to this proposal Portugal’s banks would set up a fund where their shaky real estate loans would be securitised and sold. A central bank statement says such a fund would increase the banking sector’s “capacity to finance the economy, boost the prospects of longer-term profitability in the sector and reduce the levels of borrowing by the banking sector with the European Central Bank”.

Belgian government “found” €811m for 2012, starts talks to find €3.7bn for 2013

The Belgian government has “found” €811m to close the gap for its 2012 budget mainly relying on cutting expenditures, assures the finance minister. The main task is still ahead, finding another €3.7bn for the year 2013 and convincing the regions to support the effort. The council of ministers starts talks this Wednesday.

Interbanking-Market improves

The ECB’s supply of credit to banks has fallen to below €1000bn for the first time since June, FT Deutschland reports, based on its own estimates. At the auction this Tuesday, banks have reduced their demand for new credit by €14.4bn compared to the previous week. One of the reasons quoted in the article is that the banks’ access to the inter-banking market has improved. This is also now the case for banks outside Germany. Italian banks in particular now have regained access to the overnight markets. The Eonia rate is now at 0.09%.

Bundesbank expects recession

In its monthly report, the Bundesbank said the German economy could experience a contraction in Q4, after a significant expansion of GDP during Q3. There are some technical factors that explain this trend, but the Bundesbank also said that a drop in demand for industrial goods was becoming an important factor. That fall in industrial output has been foreshadowed by a large drop in orders. The economy, however, is sustained by a healthy housing market activity and private consumption.

Spanish Parliament starts reviewing 2013 budget

Having cleared the Galician regional election hurdle, the Spanish government brought the draft 2013 budget to the parliament for approval on Tuesday. The draft had been approved by Spain’s council of ministers at the end of September, and the European Commission said it would issue its own review of it on November 7.

Speaking in the parliament, Spain’s finance minister Cristóbal Montoro said the deficit had been reduced in September to the point of putting the country on track to meet its deficit target for the year, reports El Pais (English edition). The optimistic deficit prediction was contested by opposition leader Alfredo Pérez Rubalcaba. Montoro attributed the improved budget execution to increased revenues from the VAT rise at the start of September. He also said this budget is the one with the higher proportion of social spending ever, nearly 2/3, and that 2013 would be the last recession year. Also on Tuesday, the FUNCAS panel, which gathers 19 financial institutions and economic think tanks released a “consensus” estimate of 1.5% GDP reduction in 2013, 3 times that forecast by the government but in line with most other independent forecasts.

Spain expects sizeable Social Security excess deficit in 2012

Reuters reports that the Spanish Treasury has communicated to Eurostat a €10bn forecast Social Security deficit for 2012, when the government had initially forecast a balanced budget. Finance minister Montoro said the government would still be able to raise pensions with inflation for 2013 by reducing spending elsewhere.

Crisis worsens poverty and inequality in Spain

October’s monthly bulletin from the Bank of Spain includes a historical study of wage inequality in Spain, reports Europa Press. Alongside the observation that wage inequality has “increased quickly” since the crisis started, the study finds that inequality has increased during recessions and decreased during expansions over the past 25 years. El Pais (English edition) also reports on the National Statistics Institute (INE) 2012 Survey of Living Conditions, which finds one eighth of households have trouble making ends meet, and one fifth of people are below the poverty line.

Spain contemplates ‘intervening’ the ‘bad bank’ in case of need

The ruling People’s Party will introduce parliamentary amendments to the regulation of the ‘bad bank’ laid out in a decree at the end of august. Among them, Europa Press reports that ‘in case of deviations or ‘extremely serious situations’ a monitoring commission to be established may ‘intervene’ the bad bank and put it under administration by the Bank of Spain or the National Securities Market Commission (CNMV). There will also be a tax exemption on the asset transfers to the ‘bad bank’. The assets will be structured into funds which will enjoy a favorable tax treatment of their profits.

Italy’s reforms will have the real impact in 2-3 years, Regling said

In an interview with Il Sole 24 Ore Klaus Regling says Italy is on the right track to achieve its financial targets without ESM aid. The impact of Mario Monti’s efforts to save Italy is now clear. Italy is well positioned with structural reforms, but it will take two or three years to see the improvements on productivity. Like Germany in 2003, Italy could revitalize its economy, but Monti’s reforms need more time (and patience) to be implemented. However, the main problem for the country remains a lack of growth.

How to solve the legal mess of the SSM – a new proposal

The Wall Street Journal’s Real Time Brussels blog has the latest on the legal framework for the SSM. The problem was that only the governing council of the ECB can take decisions, which leaves non-eurozone countries wishing to participate in the Single Supervisory Mechanism without a say.  The legal service has now come up with a new draft according to which the supervisory board of the SSM would take the decisions, which are considered adopted, unless the governing council objects in writing. (It seems that the legal problem an EU lawyer fails to circumvent has yet to be invented.)

Wolfgang Munchau on the outbreak of optimism

In his column in FT Deutschland, Wolfgang Munchau writes that the outbreak of optimism by investors is based largely on the ECB’s OMT backstop. He says the OMT is indeed an important programme, and, provided it is taken up, will eliminate the tail risk that stems from an a liquidity squeeze in the eurozone’s banking system. With the LTRO the ECB supports the banks. With the OMT, the ECB supports the sovereigns. The problem is only that this is all about liquidity, not solvency. The ECB cannot, and will not, write off its assets, and can thus not participate in any debt restructuring. For those who believe that the eurozone crisis is at least in part a solvency crisis, none of these support mechanisms will make any fundamental difference. He says that those who are optimistic now – since they must see this as a liquidity crisis only – should then ask themselves why they were pessimistic in the summer?

Eichengreen and O’Rourke are not so shocked about the multiplier

In a column in VoxBarry Eichengreen and Kevin O’Rourke are weighing in on the multiplier debate, on the basis of their own research of a dataset of 27 countries during the 1930s, when the media multiplier was 1.6 – very much in line with the IMF’s own estimates of the multiplier in the eurozone today. They compare European officials, who feign surprise at this result, with Captain Renault of Casablanca (shocked, shocked). They also make the point that the monetary policy response by the ECB is insufficient to offset the fiscal tightening. The LTRO is underwhelming, and the OMT does not yet exist (which is why the current round of tightening will have a big impact.)

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

Getting worse again.


10-year spreads
Previous day Yesterday This Morning
France 0.509 0.551 0.562
Italy 3.158 3.438 3.421
Spain 3.895 4.046 4.111
Portugal 5.907 6.204 6.554
Greece 14.951 15.453 -1.59
Ireland 3.148 3.179 3.275
Belgium 0.829 0.887 0.900
Bund Yield 1.613 1.577 1.594
Euro Bilateral Exchange Rate
  Previous This morning
Dollar 1.305 1.2988
Yen 104.200 103.7
Pound 0.815 0.8145
Swiss Franc 1.211 1.21
ZC Inflation Swaps
  previous last close
1 yr 2.01 1.82
2 yr 1.82 1.67
5 yr 1.83 1.8
10 yr 2.03 2.02
Euribor-OIS Spread
previous last close
1 Week -7.929 0
1 Month -4.443 -4.043
3 Months 3.829 3.529
1 Year 45.071 46.671
Source: Reuters

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