IMF and Germany at loggerheads over OSI

 

• At a conference call, Wolfgang Schauble resisted pressure by Christine Lagarde to move towards OSI in Greece;
• Schauble said accepting a haircut would be legally impossible for a large number of eurozone countries;
• Thomas Wieser says there are currently no discussions at working group level about a haircut;
• options include lengthening of maturities, reduced interest rates, an interest rate moratorium, and debt buybacks;
• the deadline for a deal is November 12;
•  the Greek government has released new forecasts showing an increase in debt-to-GDP above the troika’s worst-case scenario;
• the Greek parliament narrowly passes the privatisation law;
• Mohamed El Erian writes that it is high time to find a resolution for Greece, and to decide whether Greece should be in or out;
• Vincenzo Visco warns that Italy’s situation remains precarious, and that the country still faces the threat of a vicious spiral of falling growth and rising debt;
• the Italian cabinet has decided to cut the number of provinces from 86 to 51;
• Grilli warns that a balanced budget in 2013 is necessary, but not sufficient;
• the Italian government has agreed to cancel income tax cuts as a concession to parliament, in exchange for maintaining VAT at present levels;
• Italian unemployment reaches the highest level since 2004, with youth unemployment now over 35%;
• Franco Debenedetti says the Partito Democratico should end its obsession with Silvio Berlusconi, and discuss its ideas of how to renew Italy;
• Four additional Spanish ex-cajas require public funds, Mariano Rajoy is reported to have decided not to make a rescue application during 2012;
• Spain’s labour minister is criticised over a silly prediction of green shoots;
• Luis de Guindos says Spain’s Q3 performance will be better than forecast;
• the Portuguese parliament votes for the austerity budget, but a court case is likely to follow;
• Mark Schieritz, meanwhile, is poking fun at an economically illiterate German banker.

After a two-hour conference call of Eurogroup ministers, Wolfgang Schauble said there was considerable progress, while another participant found there was no progress at all, as Germany and the IMF are still at loggerheads about OSI. Even though IMF and EU officials say privately Greece’s debt is unsustainable and will have to be restructured, Schauble said that for a large majority of euro zone countries accepting a “haircut” was legally impossible.

Thomas Wieser, chairman of the euro working group, said Greece’s lenders were not discussing at present another debt write-off, or “haircut”. EU diplomats said other ways of stretching out official loans were on the table, according to Reuters. The options included lengthening the maturities and reducing the interest rate on existing loans, an interest payment holiday, letting Greece buy back its own debt at a discount with borrowed money and allowing it to issue more short-term T-bills.

The FT reports of the latest fiscal projections by the Greek government, according to which debt-to-GDP would rise to 189% in 2013 and 192% in 2014, much worse than the IMF’s pessimistic scenario. The article quotes an unnamed Greek official as saying that this projection will stir a renewed debate about Greek funding.

Greek parliament narrowly passes privatisation law

Greece’s government scraped through a parliamentary vote on a contentious article in a privatisation law demanded by lenders on Wednesday, Reuters reports. The article, which intends to scrap the government’s obligation to own a minimum stake in a string of former state companies, passed with 148 deputies backing it and 139 deputies against the measure. Support for the measure fell far short of the 176-seat majority Prime Minister Antonis Samaras’s three-party coalition enjoys in parliament. The Democratic Left of the coalition did not back the measure, while several lawmakers from socialist PASOK also failed to support it.

Time to find a resolution for Greece

Mohamed El Erian, meanwhile, is getting very pessimistic. He says another round of policies that lack credibility would lead to a generalised loss of confidence within Greece in the process and the institutions:

“If the underlying objective were for Greece to remain a eurozone member, we would see much greater emphasis on official debt forgiveness, as recommended by the IMF; and ample multi-year long-term funding would be made available at low interest rates to support growth-enhancing measures. If the objective were to safeguard Greece’s wellbeing outside the eurozone, there would be much greater emphasis on how Greece could best return to a national currency, while staying within the European Union (as opposed to the eurozone), and deal with the convertibility and debt challenges that would come with this transition.

Instead, Greece and the troika have opted again for the muddled middle – one that talks about sustainable eurozone membership but does not do enough to make this highly probable.”

BoI’s Visco remarks Italy is still in dangerous waters

Italy risks falling into a vicious circle of economic stagnation, political instability and high unemployment according to Ignazio Visco. As La Stampa reports, Visco said economic reforms in the country will not be able to take full effect if the spread between Italian 10-year bonds and the German Bund benchmark remains high. Visco warned that Monti’ reforms will not be able to deploy their full effects during the next years if doubts and uncertainty about Italy’s future persist. Visco also said Italy may have to move towards even more austerity. Despite the rise in unemployment and public debt in the short-term, Monti’ reforms will have positive long-term effects, Visco argues. In addition, the budgetary measures implemented by the Monti government could not but have a negative impact on short term economic trends, but they avoided scenarios far worse than what we presently see, he said.

Italy cuts its provinces from 86 to 51

The Italian government agreed to cut provinces from 86 to 51, as La Repubblica reports. During the latest cabinet meeting, the Civil Service Minister Filippo Patroni Griffi  proposed the new measure. Griffi said the decision would be implemented from 2014 and will be irrevocable. The expected savings are put at about €4bn. Despite the criticisms of Italian political parties, the measure is expected to be approved by Parliament in the next week, maybe with a confidence vote.

Grilli warns that balanced budget in 2013 may not be enough

Vittorio Grilli warned that hitting the government’s target of balanced budget in 2013 would be necessary to bring Italy out of the crisis, but may not be sufficient, as Il Sole 24 Ore reports. The Italian Economy Minister said Italy had started to cut its huge public debt, estimated to reach 126.1% of GDP by the end of this year. The balanced budget in 2013 is a strong commitment, but the government know it’s not enough to restore market confidence, Grilli said. The government said Italy should balance the budget in structural terms in 2013 after it passed a tough austerity package last year and presented new budget measures in the so-called Stability Law bill, which is currently in Parliament for the final approval.

The Monti’s government to cancel planned income-tax cuts

The Monti’s government agrees with Parliament to substitute the planned income-tax cuts with a cut on labour taxes and no increase of VAT, Il Corriere della Sera reports. The package Stability Law bill will be discussed again on next week. The bill will contain the cuts to the national health system of over €1bn, but apparently not the reductions in income tax in the two lowest bands, and the VAT increase. In the first draft of the bill, the government foresaw the possibility of a 1% cut in the two lowest income tax brackets, or for those earning less than €15,000 per year and for salaries between €15,001 and €28,000. For now, Grilli argues, there is only one certainty: he ruled out that it may be necessary to pass more budget measures early next year to balance the budget.

Italian unemployment continues to rise

The unemployment rate in Italy has reached 10.8% in September, its highest level since January 2004, according to provisional, seasonally adjusted data released by ISTAT. As Il Fatto Quotidiano reports, the September’s unemployment rate was 0.2% higher than previous month and 2% up compared to the same month in 2011. Il Fatto said the youth unemployment – the age group of 15-to-24-year-olds – rose to 35.1%. ISTAT notes that this figure was 1.3% higher than August and 4.7% up on September 2011. Over 608,000 Italians between 15-to-24-year-olds were looking for work, Il Fatto remarks.

Debenedetti sees a political vacuum in Italy after Berlusconi’s outburst

The centre-right party Popolo della Libertà should recognize that Silvio Berlusconi has lost his power, Franco Debenedetti writes on Il Sole 24 Ore. After his rampage last weekend, Silvio Berlusconi seems to have lost influence. Meanwhile, the Partito Democratico should not be worried by Berlusconi, but by internal fights. For example, the young mayor of Florence Matteo Renzi has started a campaign against the veteran PD Secretary Pier Luigi Bersani in primary elections scheduled for November 25. The PD does not seem to want the political renewal claimed by Renzi, but Debenedetti says  the PD should be more united to get Italy the much needed shock.

Four additional Spanish ex-cajas to require public funds

ABC writes that the Bank of Spain and the European Commission have rejected the recapitalization plans of four banks (resulting from a previous round of caja mergers), forcing them to resort to state aid. One of them, Liberbank, intends to resort only to transferring assets to the ‘bad bank’, while Caja España-Duero still hopes to avoid state aid through a merger with Unicaja. The FROB bank restructuring fund, which is to be funded by the European Union monies earmarked for Spain’s  banking rescue, has committed to buying any cocos issued by Spanish banks by the end of 2012. Caja3 and BMN may resort to €800 and €500 million in cocos, respectively. BMN expects to raise the remaining capital by a combination of asset sales, transfers to the ‘bad bank’ and conversion of subordinated debt and ‘preferred shares’ to common equity. Two more mid-sized institutions, Banco Popular and Ibercaja, while in need of capital, are deemed viable by the report released by the Bank of Spain. Ibercaja aborted a planed merger with Liberbank as a result of Oliver Wyman’s bank audit.

Mariano Rajoy, frustrated by EU slowness, delays rescue application

Mariano Rajoy spoke in the Spanish parliament for the first time in 6 weeks, for a Government control session and to report on the recent European Council summit. El Pais writes that Rajoy continued to be ambiguous about a ‘rescue’ application, but unnamed government sources are quoted explaining that it’s not foreseen within 2012 as Spain retains access to the bond markets at much lower risk premia than in the summer. While the government is optimistic about the negotiations on baking union, Rajoy expressed frustration about the ‘exasperatingly slow pace’ of the EU.

Spain’s labour minister criticized for seeing green shoots

On the heels of the reported record unemployment rate in Spain, Labour Minister Fátima Báñez on Monday claimed that Spain is “emerging from the crisis”, writes El Pais (English edition). Her comments have been widely criticized as a repeat of the ‘green shoots’ rhetoric of 2009. Wednesday El Pais ran an editorial wondering whether the Minister is being naive or irresponsible making such statements in the middle of the crisis, when “even the government she belongs to is forecasting a worsening of [economic] figures in the coming months”. The editorial quotes criticisms from her own party, notably the recently re-elected regional president of Galicia.

Spain will beat 2012 economic contraction forecasts, says De Guindos.

For his part, Spain’s Economy and Competitiveness minister Luis de Guindos claimed in the parliament that the third quarter GDP figures point to Spain doing better in 2012 than currently forecast, reports El Economista. De Guindos based himself on a 0.1% difference between Q3 GDP forecasts and the recently published advance by the National Statistics Institute (INE), which is subject to revision in two weeks’ time.

Portuguese parliament approved 2013 budget, court challenge to follow

Portugal’s parliament approved the biggest tax increases in the country’s modern history on Wednesday amid intensifying protests. The two parties of the centre-right ruling coalition, with 132 seats in the 230-seat parliament, voted for the bill at its first reading. All other parties voted against, there were no abstentions. The 2013 budget, which raises tax rates on income, property and financial transactions, was the government’s third attempt in recent months to ensure its budget goals are met. The budget is now expected to be challenged in the constitutional court on the grounds that the tax increases weigh too heavily on the poor, Reuters reports. Portugal’s judges’ union has promised to challenge the budget on the grounds that it goes against the constitutional principle that all should be taxed equally. The Socialists have also said they would challenge it, and the president could submit it to the court himself before signing off on it.

Mersch to get the job after all

Luxembourg’s Yves Mersch is set to be appointed as the sixth member of ECB’s executive board by Monday even though the European Parliament had voted against his appointment to the post a week ago. Reuters reports. “Written procedure was launched today with deadline Monday,” one of the sources said. Written procedure is the final step in an appointment for the executive board, where member states confirm their agreement a last time.

The economic illiteracy of Germany’s savings banks

Mark Schieritz is poking fun at the president of Germany’s Sparkassen, Georg Fahrenschon, was quoted as saying that the ECB had to reduce the high liquidity pretty soon, and that it was high time for the member states of the eurozone to start austerity. When that happens, Fahrenschon explained, the money supply would decrease again, and the interest rates would go up. It is hard to even begin to dissect this nonsense, but Schieritz patiently explains why austerity has already started, why the money supply does not really need to fall – given where it is– etc etc. This is kind of depressing fun.

 

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

 

Still getting worse.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.674	0.656	0.790
Italy	3.566	3.672	3.664
Spain	4.216	4.204	4.296
Portugal	6.647	6.645	6.641
Greece	15.969	16.137	-1.48
Ireland	3.290	3.263	3.278
Belgium	0.980	0.963	0.954
Bund Yield	1.453	1.47	1.478
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.294	1.2952
Yen	102.750	103.18
Pound	0.806	0.8053
Swiss Franc	1.208	1.2078
ZC Inflation Swaps
	previous	last close
1 yr	1.78	1.81
2 yr	1.64	1.66
5 yr	1.77	1.77
10 yr	2	2
Euribor-OIS Spread
	previous	last close
1 Week	-7.029	-8.029
1 Month	-3.743	-4.743
3 Months	1.886	3.586
1 Year	46.814	46.214
Source: Reuters