EUROINTELLIGENCE DAILY BRIEFING, 25 de Outubro de 2012. Enviado por Domenico Mario Nuti


Germany also wants Greek primary surpluses go to escrow account

  • More details came out from the German draft, which is a lot worse than even we had thought;
  • Germany not only wants the Greek tranches paid into an escrow account, but also wants a dedicated portion of primary surpluses to go in that account;
  • in the absence of primary surpluses, Germany wants a mechanism that automatically reduces expenditures;
  • if that does not work, there shall be “technical assistance” from outside to implement the thumb screws;
  • the Greek finance minister announced that a two-year extension of the programme had been agreed – but the German government denies this;
  • he also said he was upbeat about the state of the negotiations with the troika, while the troika is more cautious;
  • the Greek government has decided to pool the entire package into two separate items – on austerity and on reforms;
  • a draft on EU banking supervision by the Cypriot EU presidency says the ECB should only actively supervise the biggest banks, and those in ESM programmes;
  • but the draft upholds the principle that the ECB is overall in charge, and that powers of bank supervision to national regulators is only delegated;
  • Mario Draghi goes to Berlin, and hardly anybody turns up;
  • we have a rare report of a German bank in some difficulties;
  • Silvio Berlusconi has made a final decision that he will not run in the 2013 elections;
  • Tito Boeri does the math on Italy’s 2013 budget, and says it is worse than useless;
  • Quadrio Curzio says the EU urgently needs a pact for growth, and Mario Monti to deliver it;
  • Moody’s retains its Spanish bank ratings with a negative outlook;
  • Fitch releases a sobering report on the prospects of Spain’s bad bank;
  • total Spanish bad bank guarantees are now over 30% of GDP, rising towards 40% in 2013;
  • there are more signs of a recession in Germany;
  • France guarantees the bonds of Peugeot’s finance arm;
  • Wolfgang Munchau, meanwhile, says the German court of auditors’ demand for a gold audit reflects a generalised state of paranoia in Germany.

There have been more details of the news that Germany wants to pay the next tranche directly into an escrow account – to which Greece has no access. It is a lot worse than you thought. This is from Kathimerini (ht FT Alphaville), which has got hold of the draft proposal from the German finance ministry, in which Berlin suggests an automatic transfer of a “dedicated” part of Greece’s primary surpluses to an escrow account. And if there are no surpluses, Germany wants Greece to be forced to reduce its expenditures and raise revenues. If Greece cannot make the necessary adjustments, there will be some compulsory external ‘technical’ assistance.

It is better to digest this humiliation one piece at a time. This is what the document had to say. The abbreviation GRC stands for Greece (in the spirit of austerity, this saves three letters).

“A dedicated receipt (such as part of VAT income) in the volume of the requested GRC primary budget surplus could be transferred monthly to the trust account (as earmarking of GRC contribution to debt service)…

“The volume of the primary surplus is to be defined in the MoU. The trust account and the earmarking of revenue secure the delivery of the primary surplus and therefore the GRC contribution to the debt service…

 “GRC establishes a simple rule for public expenditure. With the agreement of the Troika, cash deficits (deviations from budget plan) automatically lead to spending cuts equally divided through all spending programs (according to their budget share).”

Greece says two-year extension agreed, Germany cannot confirm

Greece’s finance minister said on Wednesday that his country had been given more time by its international lenders to implement austerity cuts, an assertion played down by leading European Union officials, Reuters reports. Germany said the EU would only decide on the matter after receiving the troika report on Greece’s progress. But Greek Finance Minister Yannis Stournaras said the delay had already been agreed and that a package of austerity measures would be put to parliament next week – even though junior coalition partners have refused to back some of the proposals.

Stournaras upbeat, troika cautious about state of negotiations

Stournaras said Greece had won additional concessions from its lenders and had largely wrapped up talks on the plan. The EU and IMF lenders, however, said some issues were still outstanding, despite progress in recent days. Earlier reports cited a draft agreement between Greece and the troika that specified Athens will have until 2016 rather than until 2014 to hit its budget deficit targets.

Package to enter Greek parliament in two separate bills

The plan is to put two separate bills on austerity cuts and labour reforms to parliament next week. The separation is designed to ensure that the austerity cuts will pass even if Democratic Left votes against the labour reforms, Greek officials said. The party commands only 16 deputies in the 300-seat parliament, meaning the bills could still pass without its support. But if it did vote against, the already fragile coalition’s stability could be undermined, and questions could be raised about the government’s commitment to reform, according to Reuters.

Cypriot presidency proposes limited ECB banking supervision

The Cypriot EU presidency has proposed that the ECB’s operational bank supervision powers should be restricted to the large banks only and those in an ESM programme – while formally maintaining the principle that all 6000 banks fall under the EU supervisory framework, according to FT Deutschland. The article does not mention whether and how the ECB can wrest control back from national regulators. The article contains a revealing comment by Bundesbank vice president Sabine Lautenschläger, who said under an EU-wide regime it was important that many tasks are re-delegated to national supervisors because they understood the national legal systems, national tax rules and incentive structures, as well as regional economic structures. As one of a very small number of female central bankers in Europe, Ms Lautenschläger likely to play a prominent role in the new regime, the paper says.

(But does banking union not imply a legal harmonisation, especially when it comes to resolution powers? Is she saying that the SSM should subject itself to national laws? The test of the new regime is whether the new supervisory power can act independently. Her comments suggest that this is unlikely to be the case.)

Mr Draghi goes to Berlin, and nothing much happened

His visit to Berlin was largely anti-climactic. Only 100 MPs turned up, hardly any of the big shots when Mario Draghi defended  his OMT programme in the Bundestag. As he is not a head of state, he did not speak to the plenary, but had to make do with a smaller room, where a large majority of 450 chairs remained empty. There is not really much to report since his speech contained no news. Both FTD and Suddeutsche did say that the event had the feel of a lecture or a seminar, in which Draghi explained the basic functioning of monetary transmission mechanisms.

A German bank in difficulty

Germany has kept a low profile in the banking crisis, but the situation has been deteriorating at HSH Nordbank, where the supervisory board yesterday fired the third CEO in a row. HSH is the creation of a merger of two Landesbanken, and has fallen into financial difficulties with the global financial crisis. Hilmar Kopper runs this place like a godfather, continously hiring and firing CEOs. FTD reports that the bank may soon face a ratings downgrade, and the necessity to plug more public funds.

Berlusconi will not run in 2013 elections

Silvio Berlusconi said last night he will not run in the 2013 elections, Corriere della Sera reports. He said he took the decision out of love for his country – and despite the fact that his muscles and mind were still strong. In a statement he said that his Popolo della Libertà (PDL) party would hold primaries to decide who will be its candidate by the end of December.  Berlusconi  has criticized the Monti government for its tough austerity packages, but says some of the measures are reversible. Corriere said it appears now that his decision not to run was final.

The latest Italian budget law is useless, Boeri writes

Tito Boeri writes in that after weeks of budget discussions without concrete, he now received the data, but was not impressed. The overall balance is not zero, as claimed by the government. The debt increases by €1.5bn. He writes spending reductions are mostly related to local spending, and make up only €1.5bn. Of those, most are unlikely to be realised. He concludes that this is, overall, a useless budget. It does not improve the overall balance, it may even worsen it, and it does not produce a reallocation of expenditure.

Europe needs a pact for growth, Quadrio Curzio said

A concrete pact-for-growth-and-employment is indispensable for Europe, Alberto Quadrio Curzio argues on Il Sole 24 Ore. The Eurozone must choose its fate after two years of austerity. The growth needs to be stimulated by investments from the European Investment Bank, on infrastructure, on research and innovation, Quadrio Curzio remarks. The current EU plans is not enough: the €80bn invested at a European level between 2014 and 2020 amount to a mere €23 per person. To push for such a pact, Mario Monti should be the right person. The priority is to overcoming the austerity-recession cycle by redirecting fiscal-financial policies toward the real-industrial ones in order to revamp development, innovation and employment.

Moody’s keeps Spanish bank ratings with a negative outlook

A week after reaffirming Spain’s sovereign rating, Moody’s has released a review of its ratings of 31 Spanish banks, reports Expansion. Like the sovereign, banks keep their previous rating with a negative outlook, except for Liberbank which will not be absorbed by Ibercaja as a result of Oliver Wyman’s report, and which therefore is likely to require restructuring or recapitalization with a high likelihood of state support according to Moody’s. Moody’s says rating changes will be associated to the depth of the recession relative to Moody’s forecast of a 1% GDP drop in 2013, the evolution of bank asset quality, and of wholesale funding market pressures.

Fitch releases sobering report on Spanish bad bank prospects

Fitch has released a report on ‘bad bank’ experiences, such as Ireland’s NAMA, writes El Confidencial. Fitch predicts that the Spanish bad bank will begin by selling the least risky assets, and that after two years it will face the ‘challenge’ of selling assets of lower quality in a competitive market crowded by the existence of other ‘bad banks’ form Europe and the USA.

State guarantees of Spanish banking assets mount

In other bad bank news, Europa Press report that the amendments introduced by the ruling PP to the banking reform decree as it goes through its Parliamentary approval process include a provision for €55bn in state guarantees “to back the transfer of assets from state-supported institutions to the bad bank”. According to Europa Press, this brings the total guarantees granted in 2012 to €313bn, with an additional €65bn expected in 2013.

Eurozone economy contracts

There is more evidence of a worsening recession in the eurozone. The FT writes Germany’s purchasing managers’ index fell from 49.2 in September to 48.1 October, driven by a sharp fall in the car sector and exports to southern Europe. The manufacturing component of the index fell from 47.4 in September to 45.7. This sinking feeling was also mirrored by a decline in the Ifo index, which registered a sixth consecutive fall, and now stands at 100.

France’s quiet bailouts

The French government yesterday said it will guarantee €7bn in new bonds by Banque PSA Finance, the consumer-finance unit of Europe’s second-largest carmaker, Bloomberg reports. The aid comes on top of support for Dexia SA (DEXB), the French-Belgian municipal lender, and for home-loans company Credit Immobilier de France, adding up to €60bn in national bank bailouts. In a recession attractive financing conditions are becoming more critical. French buyers currently pay as little as 1.9% annual interest on €10000 in financing from Volkswagen. From Peugeot, the same loan would cost around 11.6% annually.

The IMF approved a €1.5bn loan disbursement to Portugal under the country’s international bailout. This marks the fifth disbursement under the country’s 78-billion-euro bailout, Reuters reports.

Munchau on Gold

In his Spiegel column, Wolfgang Munchau says the demand by the German court of auditors reflects a sick paranoia in Germany and a deep mistrust of foreigners. He says the order to have the gold counted is ultimately a reflection of a deep distrust of a fiat money system in general, and the euro in particular, as the gold bugs are crawling out of the woodwork. The court of auditors did not act because of any concrete suspicion that the gold might have disappeared, but on the basis on unfounded rumours.

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

A sideways kind of day

10-year spreads
Previous day Yesterday This Morning
France 0.551 0.575 0.582
Italy 3.299 3.432 3.407
Spain 4.046 4.028 4.077
Portugal 6.204 6.294 6.469
Greece 15.453 15.427 -1.58
Ireland 3.179 3.205 3.328
Belgium 0.887 0.914 0.921
Bund Yield 1.577 1.557 1.582
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.298 1.2979
Yen 103.600 103.8
Pound 0.812 0.809
Swiss Franc 1.210 1.209
ZC Inflation Swaps
previous last close
1 yr 1.82 1.93
2 yr 1.67 1.68
5 yr 1.8 1.9
10 yr 2.02 2.13
Euribor-OIS Spread
previous last close
1 Week -8.529 0
1 Month -5.843 -3.843
3 Months 1.929 1.929
1 Year 45.171 47.271
Source: Reuters

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