EUROINTELLIGENCE DAILY BRIEFING, 30 de Outubro de 2012. Enviado por Domenico Mario Nuti.


Austerity government set up in the Netherlands

  • Mark Rutte and Diederik Samsom agree a fiscal correction of 3% of GDP;
  • the Dutch coalition agreement includes a reduction in mortgage tax relief, a material concession from Rutte’s Liberals;
  • other measures includes cuts to the length of unemployment, and cuts in basic scientific research;
  • an offsetting measures has been a small cut in the top tax rate;
  • new government may take office as early as next week;
  • Greek coalition has not yet reached deal on labour reforms;
  • Antonis Samaras aim is now to present structural reform coalition deal next week, and separate from austerity package;
  • Le Monde writes there is no majority for the budget law in the French senate if Communists abstain;
  • il Messagero says Silvio Berlusconi is facing isolation even within his own party, as senior PdL figures are considering a break-away group in support of Mario Monti;
  • the Spanish parliament wants to invite Mario Draghi to explain the euro crisis to them;
  • Stefano Lepri writes that Draghi will become the most important guardian of the euro in 2013, but this is premised on a meaningful banking union;
  • Spain’s bad bank lures private investors with by acquiring assets and loans at steep discounts, ranging from 32.4% for property loans to 79.5% for undeveloped land;
  • Louis de Guindos promises to compensate for the deleveraging by Spain’s four nationalised banks;
  • there are tentative signs of a normalisation of the eurozone’s money markets, as US money market funds have increased their exposures in the eurozone;
  • absolute levels are still low, and they are still not in the periphery;
  • Barack Obama says the eurozone must not allow Spain to become unravelled;
  • Claus Hulverscheidt says Angela Merkel had miscalculated the eurozone crisis, and is now facing the inevitability of an official sector involvement;
  • John McHale, meanwhile, says that even high highly indebted eurozone states can be solvent for as long as there is sufficient official sector support – and banks are separated from sovereigns.

In the Netherlands PM Mark Rutte and labour leader Diederik Samsom agreed a coalition with the objective to cut about 3% of GDP in 2013. The new coalition could be sworn in as early as next week. The fiscal correction of nominal €16bn comes through a mixtures of taxes and savings, the most important being a reduction in mortgage tax relief from 52% to 38%. This is a big concession by the liberal VVW (the party of Rutte who will be reelected PM), as the VVD has styled itself the party of homeowners. There are also cuts in basic scientific research and reduction in the length of unemployment pay. The most notable offset item was a cut in the top tax rate from 52% to 49%. The agreement also includes cuts in local government. The parties also agreed to get tough on immigrants who refuse to learn Dutch. In terms of distribution, the parties claim that the overall package is progressive. See Volkskrant for more details on the package itself, with a link to the full coalition agreement.

(You can do the math on economic growth, assuming the multiplier is 1.5. There is lots of commentary about this agreement in the Dutch press, but the focus seems to be on details – on immigration, on the relaxation of the law on drugs, on local democracy – but not on the fiscal retrenchment as such, over which there seems to be a consensus among the mainstream parties. So they are going full steam ahead with a fiscal retrenchment in the middle of a severe recession.)

Samaras pushes deadlines, still seeking agreement on reform package

Antonis Samaras’s aim had been to win round Democratic Left so that his finance minister could present the eurogroup on Wednesday a deal on both the €13.5bn austerity package and structural reforms that include the controversial labour laws. Late on Monday this goal seemed out of reach. “The negotiations are beyond the level of the troika,” a government source told Kathimerini, suggesting Samaras was involved in talks with other eurozone leaders in a bid to reach a compromise and avert a political crisis. The aim is to submit the budget for 2013 on Wednesday and the package of structural reforms by next Monday though it remains unclear when the votes would take place.

Jean-Claude Juncker said on Monday that a “physical” meeting will probably be held on November 8 to discuss Greece, following Wednesday’s scheduled Eurogroup by teleconference, and ahead of a regularly scheduled November 12 meeting.

The French Senate, politics and the budget bill

Le Monde warns that the senate risks rejecting the first part of the budget law, focussing on the tax revenues, if the Communists vote against or abstain as they did in parliament. The left has a majority in both houses, but while the abstention of Communist MPs did not prevent the adoption of the bill by the majority, it would do so in the Senate, as the majority has only 6 more votes. The deflection of one of the left parties would be sufficient to turn this into a minority.  True, the final say has the parliament, which could still adopt the budget law in its totality, but a battle in the senate is politically sensitive for an already troubled government, so the article, requiring careful diplomacy.

Berlusconi is facing his biggest risks: isolation

Silvio Berlusconi risks becoming increasingly isolated politically after he threatened to bring down Mario Monti’s government, Il Messaggero argues. He said the latest tax fraud conviction had forced him to stay in front-line politics in order to push through justice reforms, although he stressed that he had not changed his mind about not running for a fourth term in 2013 elections. His comments were blasted by the centre-left Partito Democratico but incredibly, they were also given a cool reception from several parts of Berlusconi’s party, Popolo della Libertà. Fabrizio Cicchitto, head of the PDL group in the chamber of deputies, expressed concern that Italy’s borrowing costs would rise if there were moves to bring down the government because the ensuing political instability would hit investor confidence. According to Il Messaggero, there is space for a PDL split if Berlusconi follows through with his threat and tries to bring down the Monti government in the next months. Several senior PdL figures, including party Secretary Angelino Alfano, Cicchitto and former foreign minister Franco Frattini, are said to be willing to break away and support the Monti government in Parliament to stop it falling.

Draghi to be invited before the Spanish parliament

Europa Press reports that, in reaction to Mario Draghi’s appearance in the Bundestag, the Spanish parliament will ask the ECB President to come before the Spanish Parliament to explain the Euro crisis. The proposal was made by the PSOE parliamentary group and supported by all others.

Draghi’s challenge ahead, Lepri wrotes

Mario Draghi has saved the euro, for now, but the biggest challenge is coming, Stefano Lepri wrotes on La Stampa. Draghi is going to celebrate his first year at the helm in an ECB, which is now more Anglo-Saxon and less German. From 2013 the role of Draghi will become more important, Lepri argues. The ECB will monitor the banks as unique supervisor, and Draghi must be even more able to resist political pressure. This will be essential to preserve and enhance public confidence in EU institutions. Following the “whatever it takes” speech of last summer, Draghi will become the real guardian of the euro, but he can do so only with a concrete supervisory mandate, Lepri said.

 Bank of Spain hopes deep asset discounts will make ‘bad bank’ attractive to investors

Reuters reports that Spain’s ‘bad bank’ will attempt to ‘lure’ private investors by acquiring assets and loans at steep discounts, ranging from 32.4% for property loans to 79.5% for undeveloped land. At a press conference Fernando Restoy, deputy Governor of the Bank of Spain also promised good returns for investors: “The business strategy of the asset management company is based on medium-term returns and we believe that the returns will be significant”. In a “conservative scenario” Restoy estimated the bad bank’s return on equity at 15%. As we have highlighted in the past, Reuters points out that it is important for Spain to retain less than 50% of the ownership of the bad bank, in order to avoid the bad bank impacting public debt figures.

ABC also quotes Spain’s economy minister Luis de Guindos that “the bad bank will dispel all doubts about Spain’s banking”, and also that “Spain’s financial system has done an exercise in transparency without peer in Europe”. Speaking in Barcelona, de Guindos said the government would use ‘an IOU market’ and EIB financing to compensate for the reduction of credit expected from the deleveraging of the four nationalized banks, writes El Confidencial. De Guindos decried the ‘injustice” that “responsible” firms are being punished by the deleveraging process. He also called for “solidarity and humility” within the EU to overcome the crisis.

Slow normalisation as money market funds return

There were further signs of normalisation in the eurozone’s capital market as money market funds are once again increasing their exposure to the eurozone, the FT reports. Exposure to eurozone banks of US prime money market funds at the end of September was 16% higher on a dollar basis than in August, the FT writes, quoting Fitch Ratings. But US money market funds exposure to the eurozone remains low in absolute levels, and they still avoid the periphery. The eurozone now accounts for 11% of their total holdings, compared to 30% in 2011. The article quotes a Fitch analyst as saying that he would describe this as small increase, not as a reversion to pre-crisis levels.

Americans worry about Spain and Europe

The Spanish press picked up on a rambling piece by The Wall Street Journal on how the Euro Crisis has heightened separatist tensions in Spain, with brief mentions of other European regions baulking at inter-regional solidarity: “wealthier Northern nations complain out supporting poorer Southern ones” as “economic strains are deepening the fractures within some nations”, notably Belgium, Italy and “even within Germany”. El Pais (English edition) also reports on an interview of Barack Obama by Colombian radio station W Radio, in which he said “We cannot allow Spain to become unraveled”. He added that helping Spain and Europe is in the US’ best interest: “what we have tried to do is to encourage all the countries in the region to get together to make sure that Spain, which is engaged in current reforms, is getting the support from other countries like Germany. Over the long term this would make all of Europe more prosperous.”

Hulverscheidt on Merkel

In a comment in Suddeutsche Zeitung, Claus Hulverscheidt says Angela Merkel was wrong to think that she could maintain the eurozone at zero cost. He says ultimately she will have to accept an OSI because there is no alternative for the Greek debt burden to become sustainable. He writes that Merkel misjudged the dynamics of the crisis, as the recession itself drove up the debt ratios. Merkel must not, and will not, accept a Greek exit, and if that is the position she has no choice but to accept the inevitable.

John McHale on solvency

In response to Wolfgang Munchau’s FT column on Monday, John McHale of the Irish economy blog said his take on solvency is different. He starts off by making the point that Japan is solvent at 200% of GDP, while emerging countries may be insolvent at 30%. Lacking one’s own central bank counts against you, and in the eurozone, solvency thus requires official sector support. He lists four conditions for this to work.

“The requirements for effective official support policies seem to be the following:  (1) Supports must be reliable – countries must be able to rely on the support being there without forced PSI as long as they continue to meet the conditions.  Where PSI is deemed to be unavoidable, this should be recognised early and done decisively so that it can be taken off the table to the maximum extent possible.    (2) The conditions must be reasonable – taking into account underlying growth prospects and the negative impacts of fiscal adjustment on growth, the required adjustments must not push the political capacities of governments to push through large adjustments beyond the breaking point.  (3) The conditionality must be flexible – unanticipated adverse growth outturns should not lead to requirements for ever larger adjustments.   And (4) the link between banking-sector losses and state debt must be broken. “


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

10-year spreads
Previous day Yesterday This Morning
France 0.620 0.674 0.677
Italy 3.383 3.675 3.678
Spain 4.075 4.216 4.319
Portugal 6.540 6.647 6.662
Greece 15.716 15.969 -1.45
Ireland 3.240 3.290 3.397
Belgium 0.936 0.980 0.983
Bund Yield 1.522 1.453 1.45
Euro Bilateral Exchange Rate
  Previous This morning
Dollar 1.289 1.2918
Yen 102.690 102.62
Pound 0.803 0.8052
Swiss Franc 1.209 0
ZC Inflation Swaps
  previous last close
1 yr 1.79 1.78
2 yr 1.65 1.64
5 yr 1.78 1.77
10 yr 2.01 2
Euribor-OIS Spread
previous last close
1 Week -7.429 -7.029
1 Month -4.143 -5.643
3 Months 3.286 2.086
1 Year 46.586 45.086
Source: Reuters


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