The latest draft strengthens the role of national supervisors against ECB

• A German newspaper reports on the latest EU presidency draft on banking union, which severely curtails the role of the ECB in banking supervision;
• the aim is to get rid of the concept of a Single Supervisory Mechanism and replace it with a “European System of Banking Supervision”;
• banks with assets of less than half of the country’s total banking assets (i.e. all banks, or all but one banks per country) shall remain under national control;
• the eurozone’s recession has gotten a lot worse in September, with German industrial orders down 3.3% on the month;
• the German Council of Economic Advisers has revised downwards its 2013 growth projection to 0.8%;
• one of the main drivers in the collapse of German – and other eurozone – growth is the car industry;
• Antonis Samaras and his aides optimistic that vote on austerity will pass tonight;
• but there may be a delay in the payout of the next Greek debt tranche until December;
• FT Deutschland has quotes from various German and eurozone officials saying that France is heading for a liquidity crunch and higher spreads;
• they are calling Francois Hollande’s government amateurish, and say the proposed reforms amount to far too little;
• Le Monde applaudes Hollande’s political courage to break with Socialists’ taboos but says more needs to be done;
• S&P threatens a downgrade of Slovenia over a proposed referendum;
• Spain to extend regional liquidity fund as pharmacies go on strike over region’s arrears;
• European Commission about to release a dire forecast for Spain;
• Constitutional challenge of Spain’s labour reform gets underway;
• Italy’s Senate is expected to approve a new electoral law next week;
• the eurozone crisis throws one third of Italian company into a loss;
• Marco Onado says Italy’s savings are falling with unprecedented velocity, as more and more Italians are using the savings of their parents;
• the German Council of Economic Advisors, meanwhile, wants an end to the OMT before it has even started.

The eurozone is clearly not the main story this morning. Nevertheless. Here we go…

The biggest story in our area is the continued attempt to dilute the role of the Single Supervisory Mechanism (SSM) at the expense of national bank supervisors. Borsenzeitung has seen the latest draft of the Cypriot EU presidency paper on banking union. The main point is that they want to leave all banks under national supervision if their assets account for less than half the country’s total banking assets – which basically means that there cannot be more than one systemically relevant bank per country. The paper has obtained a copy of the draft, which includes some specific details about the relationship between the ECB and national supervisors. As we reported already, the ECB will directly supervise a small number of large banks and those that have received funding from the ESM. The article notes that EU lawyers had questioned the lack of a definition of systemically relevant, and have now come up with this “less than half the total banking assets” definition (which is, of course, economically illiterate). The article also notes an additional difference between the European Commission’s proposals and the presidency paper. The former defined the national supervisors as junior to the ECB. The latter defines them as equal partners. A footnote considers the idea to replace the expression “Single Supervisory Mechanism” with “European System of Banking Supervision”, presumably analogous to the ECB itself.

(The Cypriot presidency is essentially killing off the entire idea of an SSM. It confirms our original prognosis that eurozone member states are not willing to accept a proper banking union. This is going to be another institutional fudge. Back to business as usual in Brussels.)

Recession: German economic orders decline by 3.3% in September

We always treat monthly order data with some caution, due to their high noise level, but this number is truly shocking. German industrial orders declined by 3.3% in September, with a fall of 9.6% from the eurozone. FT Deutschland reports that the German Council of Economic Advisers is expected to present a downward revision of its 2013 growth to 0.8%. One of the main drivers of the downturn is the dramatic collapse of the car industry, with stillovers into other sectors.

Greek coalition’s last efforts to ensure the austerity bill squeaks through tonight

With a crucial vote on the austerity and reform package in Parliament tonight, Antonis Samaras and his aides on Tuesday gave a last push to ensure that the fragile coalition manages to pass the painful new measures into law, Kathimerini reports.  Samaras was reportedly focusing on winning round the lawmakers of his conservative New Democracy party who have yet to publicly state their intentions ahead of the vote, expected at around midnight.  Samaras and PASOK leader Evangelos Venizelos reportedly spoke several times on Tuesday in a bid to ensure that the two “no” votes expected from the Socialist camp would not grow to four or five and that the coalition’s majority would not drop below 154 in the 300-seat House. PASOK sources indicated that between 27 and 29 of the party’s MPs would vote against the measures. There was relief that Fotis Kouvelis could convince Justice Minister Antonis Roupakiotis to sign the bill; his reluctance nearly caused a government crisis on Monday, Despite the vehement opposition to the measures, with some 30,000 people joining anti-austerity rallies in Athens on Tuesday and a larger crowd anticipated tonight ahead of the vote, the conservative-led government believes the package will squeak through.

There may be a delay in the payout of the next Greek debt tranche

FT Deutschland reports this morning that negotiations among finance officials over the next Greek debt tranche are proceeding very slowly. Since several countries, including Germany, need parliamentary approval, it may take until December when the next tranche is paid out.  The article also mentioned that EU officials expressed concern about the lack readiness by Cyprus to accept austerity as a condition for aid. The proposals made by Cyprus are considered insufficient.

France plans €20bn in tax credits for companies financed by expenditure cuts and VAT rise

We reported on a leaked version of the response of the French government to the Galois report yesterday morning. Here are more details of this ”National pact for growth, competitiveness and employment” as reported by Reuters: There will be €20bn in annual tax credits to companies as a way of lowering labour costs: €10bn in rebates next year, increasing that amount by €5bn in 2014 and 2015 to a permanent annual level of €20bn, equivalent to a 6% cut in labour costs. To finance that, the main VAT rate will be raised to 20% in 2014 from 19.6% today, and a reduced rate that applies to restaurant bills and property repairs will rise to 10% from 7%, raising a total of €6bn. The government also aims to save €12.5bn from cuts to public spending and health insurance from next year.  In an interview with Les Echos, Jean-Marc Ayrault said the measures would help to create more than 300,000 jobs by 2017 and would boost the economy by 0.5% over the same period.

Le Monde editorial attests Hollande political courage but says it is not enough

Le Monde editorial writes that with this new competitiveness pact Francois Hollande breaks three taboos for the Socialists: the acceptance that labour costs are one cause for the industrial decline in France (though not the main reason); second, the cut in public expenditure to finance the €10bn of the cost reduction for businesses, earlier considered impossible; and third the rise of VAT, always denied during the election campaign. By breaking these taboos Hollande showed political courage, so the article. But the risk is that cherry picking the Galois report will miss the coherence of it and thus is efficiency. It will need to be followed up by more measures.

Eurozone official says France headed for a liquidity crunch, unless governments starts reforms

FT Deutschland has an article quoting unnamed eurozone officials criticising Francois Hollande’s governement as amateurish. They say the reform proposal presented this week were insufficient, and could be at best a first step. A German official, again unnamed, is quoted as saying that the French do not have a problem of implementation, but a problem of recognition as France has lost competitiveness in global markets that needs to be urgently address. The official express concern that the low refinance rates may not last, and that country may head in the same direction of Spain or Italy.

S&P threatens Slovenia downgrade over referendum

The German news agency DPA reports that S&P has put Slovenia on a credit watch negative on the grounds that the government plans a referendum on the solution of its banking crisis. The government plans to create a bad bank and a number of reforms to strengthen the domestic economy. The opposition rejects these measures. If the government fails to win a majority, the rating could go down by several notches, S&P said.

Spain to extend regional liquidity fund as pharmacies go on strike over region’s arrears

As reported a week ago, pharmacies in the Eastern region of Valencia are starting an indefinite rolling strike of 2/3 of all pharmacies on any given day. AFP quotes a spokesman for the regional College of Pharmacists, claiming that due to €450 million in arrears by the regional government “500 pharmacies could go bust this month” out of 2200 region-wide if banks do not roll over their credit. Valencia has already applied for support from Spain’s regional liquidity fund which will be extended for another year as the Spanish finance ministry announced this week. Reuters reports no more details were given by the ministry spokesperson.

European Commission about to release a dire forecast for Spain

Reuters reports, based on this story from El Pais on Tuesday (in Spanish), that the European Commission is about to release a dire 2013 economic forecast for Spain, with figures almost as bad as those for 2012. While the Spanish government based its 2013 budget on a forecast 0.5% GDP contraction, the Commission would forecast a 1.5% drop. Regarding deficit projections, the Spanish government is predicting 7.3% in 2012, 4.5% in 2013 and 2.8% in 2014, while the Commission would forecast 8% in 2012, 6% in 2013 and 5.8% in 2014. Reuters reports neither the Commission nor the Spanish government would confirm El Pais’ story.

Constitutional challenge of Spain’s labour reform gets underway

One of the Spanish government’s flagship economic reforms this year was that of labour regulations, in particular regarding dismissals. The Constitutional court has now accepted to examine complaints against the reform lodged by the left-wing opposition, the main opposition party PSOE and the Plural Left. The complaints affect the extension of probation periods for new workers, employers’ ability to change the terms of a labour contract unilaterally, allowing collective bargaining agreements to be ignored, and the ability to carry out mass dismissals for reasons others than suffering losses.

The new Italian electoral law expected for next week

The Italian Senate appears set to approve the new electoral law, Il Corriere della Sera reports. Under the current law, the so-called Porcellum, the electorate cannot choose candidates directly, voting instead for a fixed list selected by Italian party leaders under a proportional system. President Giorgio Napolitano has repeatedly come out in favour of electoral reform to ensure more representation and governability, and more international credibility too. The Senate Constitutional affairs committee approved an amendment that would provide a pro forma majority if the winning coalition secured at least 42.5% of the vote, a much higher requirement than was previously being proposed. With the new law, if the votes in favour of the leading alliance reach 42.5%, an additional 12.5% would be granted to achieve a 55% majority. According to Il Corriere della Sera, that would be enough to restore market confidence in the Italian electoral system. The final vote on electoral law is expected for the next week.

(Is this whole idea of “winning coalition gets extra seats”, as in Greece, not really a sign that proportional representation is no longer working, and arbitrary rules like these to work?)

The eurozone crisis hits Italian firms, Bank of Italy survey shows

Italy’s firms are facing the worst effects of the Eurozone crisis, with one third expected to post losses at the end of the year, up by nearly 24% on 2011, a Bank of Italy analysis said, according to Il Sole 24 Ore reports. According to the annual survey of the country’s industry and services sectors by the Italian central bank, loss-making firms are also cutting employment. The BoI analysis shows that around 50% of firms expect to close the year with a profit, while the highest margin of loss-making firms are in the services sector, including hotels and restaurants. Half of firms also reported stagnant employment conditions, compared to about one third which said that they had cut back.

Italian private wealth drops as crisis rises, Onado shows

Marco Onado says savings of Italians are falling with an unprecedented velocity. In an analysis on Lavoce.info, Onado shows that the amount of National income saved by Italians is now below the EU average below 17%, about 4% lower than the first half of the last decade, compared to 22% in Germany and 18% in France. According to Onado, Italians are like impoverished ants, citing Aesop’s Fables, forced by the crisis to earn less than in the past and to use the savings of their parents.

German Council of Economic Advisors wants an end to the OMT before it even starts

More leaks from the Council of Economic Advisors forthcoming report: German Presseportal.de has a summary of the preview to be published by Rheinische Post in its Wednesday print edition. According to the summary, while calling the ECB’s proposed purchases of government bonds from crisis-hit countries “an emergency solution”, the annual report will demand a quick end to the bond purchase program, because it risks weakening the separation between monetary and fiscal policy. The report will also advocate a “Maastricht 2.0” European architecture built around fiscal stability, a banking union for private financial stability, and an insolvency regime for member states.

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

Rise in spreads is halted. Euro slightly up.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.793	0.770	0.770
Italy	3.575	3.495	3.512
Spain	4.341	4.215	4.308
Portugal	7.181	7.068	7.310
Greece	16.313	15.780	-1.43
Ireland	3.366	3.360	3.535
Belgium	0.992	0.947	0.967
Bund Yield	1.426	1.45	1.433
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.279	1.282
Yen	102.320	102.38
Pound	0.800	0.8011
Swiss Franc	1.207	1.2083
ZC Inflation Swaps
	previous	last close
1 yr	1.73	1.63
2 yr	1.71	1.63
5 yr	1.74	1.75
10 yr	1.98	1.99
Euribor-OIS Spread
	previous	last close
1 Week	-7.229	0
1 Month	-4.100	-4.1
3 Months	4.071	4.071
1 Year	47.229	45.329
Source: Reuters