Financial Times Deutschland has the story that Angela Merkel will recommend that the European Council overrule the European Parliament and appoint Yves Mersch to the vacant job in the executive committee of the ECB. Mersch received the support of only 300 MEPs, against 325 No votes. It was the first time ever that the EP had withheld the support for an ECB candidate. The ECB’s vote is legally only a recommendation, which the Council is under no legal obligation to heed, and the indications, at least from Berlin, are that this is exactly what the Council may do. Merkel said that Luxembourg’s central bank chief had been proposed after careful consideration. FTD also quotes unnamed ECB sources as saying that they, too, expected Mersch to be proposed. The EP rejected Mersch on the grounds that his appointment would leave no women in the ECB’s executive committee until 2018, as all the other jobs have only recently been filled.

In its coverage of the new story, Suddeutsche Zeitung quotes liberal MEP Alexander Graf Lambsdorff as saying that Mersch should consider the vote, and withdraw. The Socialists have called for Mersch to be dropped.

(There is a lot of shadow boxing going on here. Mersch is what we would consider a monetary hardliner by temperament, not intellect. He would be largely be side-lined in the ECB’s board, where the better jobs have already been allocated, so we wonder whether the European Council is wise to pick a fight here.)

Preliminary troika report says Greek debt will stay above 120% debt to GDP target

Greek debt will be above the target of 120% of GDP in 2020, a preliminary report by the IMF showed on Thursday, and Athens will need more reforms before emergency credit from international lenders can start flowing again, Reuters reports. It will be rather 136%, and this would be under a positive scenario of a primary budget surplus, a return to economic growth, and privatisation,” a euro zone official, who insisted on anonymity, said.

Germany remains reluctant to fund Greek budget short-fall

Estimates of how much Athens will need if it is given until 2016 rather than 2014 vary from €16bn-€30bn. The critical question is where the additional money would come from. “The IMF is pushing for OSI (Official Sector Involvement) in Greece, Germany is strictly against. And they are not the only ones,” Reuters quotes a euro zone official. The restructuring could take the form of a further reduction of the interest rate on existing loans or to bring forward some payments that the IMF would grant to Greece at a later date, but these would not be enough.  FTD reports while the eurogroup accepts an extension in time, Germany rejects any form of involvement in its financing, insisting that the Greeks have to find the money themselves.

Greece plans to bundle bills to get reform opponents to back whole package

Back in Athens, despite the absence of a final political deal, the government now plan a catch-all multi-bill that will include the €13.5bn austerity package and a raft of reforms including the controversial labour reforms, as a way to pressure wavering lawmakers into backing the full package rather than getting caught up in specific articles, Kathimerini reports.

The Democratic Left still opposes the labour market reforms. In a statement issued late on Thursday, the party appealed to Greece’s eurozone partners to convince the troika to withdraw its demands on labour reforms. It indicated that if further concessions are made by Sunday, its MPs would back the reforms.

Also several PASOK MPs have declared their intention to vote against a legal provision aimed at fast-tracking privatizations through Parliament. The Socialist lawmakers each want proposed privatization to be submitted separately in Parliament.

Ireland plans to get out of the bailout programme next year

Ireland will leave the bailout programme next year, even if they don’t get a deal on bank debt, the Irish Independent quotes Finance Minister Michael Noonan. After its 10-days inspection the troika attested that the economy is on track to hit targets for this year. The European Commission is now to draw up a plan before Christmas on how Ireland can leave the bailout programme. Noonan said Ireland would have to borrow as much as €17bn on the bond markets to create a safety net before exiting the programme.

The IMF official said a deal on Ireland’s debt would “greatly enhance” the nation’s chances of exiting the programme and warned any failure to deliver on a deal risks leaving Ireland reliant on official financing. The IMF cut Ireland’s growth forecast for 2013 to 1.1% from 1.4%. Noonan said the number of homeowners getting into mortgage difficulty was tailing off, while the troika raised concerns about personal and household debt.

IMF warns Portugal heads towards “prolonged recession”

The troika delivered their assessment on the Portuguese austerity programme and it has never been so dark, writes Jornal de Negocios. The IMF warns that with “plentiful” signs of excessive austerity, only few adjustment options and no more growth measures the Portuguese economy is heading towards a “prolonged recession”. The government’s insistence on tax measures also threatens to punish the economy and employment further next year, testing the limits of political and social consensus. The IMF calls for more measures to stimulate growth and employment.

S&P cuts BNP Paribas rating amid economic weakness

Standard & Poor’s cut ratings of three French banks, BNP Paribas among them, on concern that their home market may be hurt by prolonged economic weakness in Europe and a housing slump,Bloomberg reports. BNP, the nation’s biggest bank, had its long-term counterparty credit grade lowered one level to A+ from AA- and revised its outlook to negative from stable for 10 other French banks, including Credit Agricole and Societe Generale. The economic weakness, as well as low interest rates, will put pressure on French banks’ revenue in 2013 and 2014, S&P said.

The situation of the eurozone’s banks continues to improve

The situation of the eurozone’s banks is improving, though not the situation for the banks’ customers. This is largely the effect of the LTRO, which has led to a sustained fall in OIS-Euribor spreads – see also the statistics below. FTD has a big report on the latest ECB data, showing that households and companies are beginning to increase their deposits again, though lending is not improving. The paper reported earlier this week that the dependence on ECB liquidity has been falling steadily – all of which points to a process of normalisation in the inter-banking sector.

… but eurozone’s credit crunch continues

This is from the ECB’s Monetary Develpments in the euro area (ht FT Alphaville)

	July	August	September
M3	3.6	2.8	2.7
Loans to Private Sector adjusted for securitisation	0.1	-0.2	-0.4

Spain reports improved collection from tax evaders

Speaking before representatives of Spain’s Tax Agency (AEAT), Prime Minister Mariano Rajoy boasted that efforts to combat tax evasion resulted in the collection of €8.5bn in the first three quarters of the year, under 20% more than the same period of the previous year, reports news agency EFE. A day earlier the Spanish Senate had ratified the government’s legal reforms to combat tax evasion, which eliminate the statute of limitations on undeclared income, limits cash payments to €2,500 and makes it obligatory to report on foreign assets and accounts.

Spanish regions to need further aid next year

Quoting an anonymous Spanish Economy Ministry official El Pais (English edition) claims Spain’s government will increase its debt issuance in 2013 over the already planned amounts in order to fund any regions, which need further aid. No figures are given for next year, but El Pais says that this state has engaged in a €40bn bailout of its regions in 2012, though it is unclear whether the paper is including the €18bn regional liquidity fund FLA. A UBS report is mentioned estimating an additional €50bn gross bond issuance in 2013 to cover ‘deficit slippage’ and the regions’ needs. Also Thursday, EFE reported that the government approved FLA funding of €2.1bn for Andalusia and €2.5bn for Valencia.

Time for Monti 2

The possibilities of a second mandate for Mario Monti as Italian PM are rising, Il Foglio argues. After Silvio Berlusconi’ departure, Italian politics is looking for a new centre-right leader. According to Il Foglio, Monti could be that person. In a stable coalition between centre-right and centre-left, the former EU Commissioner could lead a political government avoiding a derailment from the reforms agenda. Monti said time and again that he does not want to stay in office for a second mandate, but the political vacuum is so big that he could change his view, Il Foglio says. In addition, the tandem Monti/Draghi has proved that Italy can regain market confidence.

A parallel currency for Finland?

Gillian Tett address the issue whether Finland would benefit from introducing a parallel currency. She writes this is currently not a political issue, but points to a paper by Nordea, which has argued that a parallel currency could come in handy if Finland were to abandon the euro at a later stage. Under this scenario, nothing will be converted automatically. Euro debt remains euro debt. During a transition period, the Bank of Finland would convert euros and markkas at a rate of 1 to 1, and float the markka only much later.

(The problem with all parallel currency scenarios, in our view, even those that could work economically, is that they are consistent with European law, which says that the euro is the currency of the EU. While there are provisions for entry, and opt-outs, none of these apply to existing eurozone member states. This proposal is thus as interesting as it is illegal. You have to change the treaty.)

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

Spreads go sideways, euro weakens. OIS spreads now well below 50bp at 1yr end.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.551	0.575	0.570
Italy	3.299	3.311	3.286
Spain	4.046	4.028	4.038
Portugal	6.204	6.294	6.239
Greece	15.453	15.427	15.52
Ireland	3.179	3.205	3.189
Belgium	0.887	0.914	0.900
Bund Yield	1.577	1.557	1.582
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.301	1.2919
Yen	104.320	103.35
Pound	0.808	0.8022
Swiss Franc	1.210	1.2098
ZC Inflation Swaps
	previous	last close
1 yr	1.82	1.82
2 yr	1.68	1.68
5 yr	1.8	1.8
10 yr	2.03	2.03
Euribor-OIS Spread
	previous	last close
1 Week	-7.629	-7.629
1 Month	-5.843	-4.143
3 Months	2.029	2.129
1 Year	44.571	47.071
Source: Reuters