Knife-edge majority forebodes ill for Greek coalition

• The Greek parliament voted with a slim majority of 153 out of 300 MPs in favour of the austerity and reform package;
• Pasok ejects six MPs, reducing its number to 27;
• to ensure that the vote could go ahead, the finance minister had to withdraw a plan to cut the number of parliamentary employees;
• the vote was accompanied by mass protests outside the parliament;
• the Greek Supreme Court ruled that the cuts in the pay of judges were unconstitutional;
• Bloomberg reports that the Bundesbank managed to set tough conditions to any OMT programme, which now act as a disincentive for Spain to apply;
• Mario Draghi says there is no need for a European-wide deposit insurance scheme, as national schemes are good enough;
• the European Commission disputes the IMF’s multiplier analysis, arguing that it was a lack of austerity that triggered the panic among investors;
• in its autumn forecast, the Commission says Spain will miss its deficit targets by a wide margin, with a rising deficit in 2014;
• France is also projected to miss its targets in 2013 and 2014;
• the French Senate yesterday rejected the multi-annual budget framework;
• Belgium and France inject €5.5bn into Dexia;
• Ireland seeks more austerity to make up for a fiscal shortfall;
• the Spanish government and opposition are discussing measures to tackle the home repossession crisis;
• MEPs tell Merkel that Spain is about to go down the tube, like Greece;
• there are signs that foreign investment funds are returning to Italy;
• Paolo Manasse, meanwhile, has done the math on Italian politics, and concludes that Mario Monti is most likely to stay.

The Greek parliament passed the multi- bill on austerity measures and structural reforms and shortly after midnight on Wednesday with a slim majority of 153 out of 300 MPs, Kathimerini reports. 128 deputies voted against the package, while 18 abstained. The vote came at a cost for the coalition as it lost several MPs. PASOK leader Evangelos Venizelos ejected six lawmakers from his party for voting against the package. This included former minister Costas Skandalidis, who was rumoured to be mounting a leadership challenge. The move reduces the number of PASOK lawmakers to 27. One MP was ejected from New Democracy, reducing the conservative party’s tally of deputies to 126. The day had some dramatic moments: Yannis Stournaras had to withdraw a cut for parliamentary employees as they threatened to strike, left-wing SYRIZA and right-wing Independent Greeks were calling for a snap vote on whether the austerity package was constitutional while a larger number of coalition MPs had been absent from the House. The vote went ahead despite SYRIZA’s attempt to withdraw it after coalition deputies returned to Parliament to avert a possible challenge. Outside Parliament between 70000 and 100000 people gathered from about 6 pm to protest ahead of the vote. Earlier in the day, the Supreme Court deemed that proposed reductions to judges’ wages were unconstitutional. The Court of Audit had also deemed the measures to be in violation of the Constitution.

Strong conditionality of OMT design might prevent Spain from applying

While the European Central Bank pushed ahead with its bond-purchase plan over the Bundesbank president’s objections, the conditions attached are giving Spain second thoughts about applying for the programme. Economists and central bank officials say those conditions were partly a response to Weidmann’s opposition, according to Bloomberg. Under so-called Outright Monetary Transactions, the ECB will only buy a nation’s bonds on the secondary market if the government requests aid from Europe’s rescue fund and signs a Memorandum of Understanding to meet certain fiscal targets. Even then, there is no guarantee the ECB would intervene. So far the pure announcement effect succeeded in driving down bond yields in Italy and Spain without spending a cent. But the article warns  that investors may grow tired of waiting for Spain to act and start fretting that ECB intervention isn’t a foregone conclusion.

Deconstruction of a banking union: Draghi says no deposit insurance

It is becoming increase improbable that the EU will end up with a banking union that can make even a slight dent to the crisis. The two issues that matter are resolution authority, and deposit insurance. The first is not likely to be proposed for a long. And now the ECB is also giving up on the latter. As Boersenzeitung reports, Mario Draghi says deposit insurance can stay national The article says that the German banks have reacted with enthusiasm to Draghi’s clarification, as they would not have to levy higher deposit insurances fees/taxes on their customers.

(This is really bad news. It seems to us that the debate about banking union is now reduced only who gets to do what – not about content, and especially not about economic incentives. Without joint deposit insurance, Spanish savers continue to have a rational incentive to put their money in German banks, whose deposit insurance is more credible than that of Spain.).

The European Commission against the multiplier

The FT reports that the European Commission disagrees with IMF’s multiplier analysis, arguing that the problems in Spain and Greece were not the result of fiscal contraction, but a lack of fiscal contraction as fiscal slippaged affected confidence by investors, who consequently pushed up interest rates and triggered a credit crunch. The articles quotes Olli Rehn as saying  “It is important not only to look at the quantitative effect but to look at the confidence effect.” The FT’s also included a comment from a former Commission staffer who said that the Commission was often less insistent on nominal fiscal targets than member states themselves. Sensitivity to the economic cycle had been recognised at technical level for some time, but “political realities faced by creditors has forced them to follow an entirely different logic.”

(These comments remind us of Paul Krugman’s “confidence fairy”. One has to be careful to interpret cause and effect correctly. Our view is that markets are panicking largely because of their assessment of growth prospects, which in turn affects fiscal outcomes. If the IMF is right about the size of the fiscal multiplier, then it is austerity that destroys confidence.)

Spain and France to overshoot deficit targets

In its autumn forecast, the European Commission forecast that Spain’s fiscal deficits at 6% in 2013, as opposed to the 4.5% agreed with the Commission. The deficit will increase in 2014 to 6.4%, against a target of 2.8%. On growth, the Commission expects a contraction of 1.4% for this year and the same again for 2013.

For France, the Commission forecasts a deficit of 3.5% in 2013 and 2014 each, with stagnant growth in 2013.

(We find the Spanish forecast implausible, as the nominal fiscal correction is likely to have a much bigger impact on 2013 economic performance. Furthermore, the massive deficit overshoot in 2013 will force Spain to undertake new austerity measures – unless policy is changed – which will have a negative short-term impact on growth in itself.)

French Senate rejected multi-annual budget framework

The French Senate rejected the multi-annual budget framework 2012-2017, Le Monde reports. The act set out a multi annual planning to achieve the deficit targets of 3% of GDP in 2013 and 0.3% in 2017. Conservative, Communist and centrist senators opposed the bill, though for different reasons. UMP said no not to the targeted deficit reduction but to the means, the Centrists wanted a different pace of the measures while the Communists simply refused austerity. The bill now goes to a committee consisting of 7 senators and 7 deputies, before the Assembly gets the last word. There is a threat that Communists will now also vote against the Social Security budget and the 2013 budget.

Belgium and France inject €5.5bn into Dexia

Reuters reports this morning that France and Belgium have agreed to pump €5.5bn into Dexia, on top the €6.4bn the bank received in 2008. The article said the aid threatens to undermine both countries’ efforts to rein in their fiscal deficits. Belgium will inject 53% of the amount. The two states would receive preference shares with voting rights. Under a restructuring plan, Dexia is reduced to a holding of bonds and outstanding loans, propped up by state guarantees.

Ireland seeks more savings to make up for lower growth forecast

The Irish finance ministry wants a tougher 2013 budget to make up for lost tax revenues as a result of lower growth, the Irish Independent reports. The growth forecast has been revised from 2.4% to 1.5%, which still seems optimistic compared to the latest Commission forecast of 1.1%. Economists calculate that a reduction of growth on this scale could reduce revenues by around €200m.

Spanish repossession crisis to be tackled “urgently”

The big story in Spain continues to be the political movements around the foreclosure and eviction crisis. El Pais reports on two meetings on Monday at the government headquarters of La Moncloa: one between the Deputy Prime Minister Soraya Sáenz de Santamaría, and the PSOE deputy secretary general Elena Valenciano;

and the other between Prime Minister Mariano Rajoy and the United Left (IU) General Coordinator Cayo Lara.

The two deputies want to stop the wave of home repossessions estimated at 500 per day. Wednesday’s political meeting will be followed up by a meeting of two teams of three experts from the Government and the PSOE next Monday. The political commitment reached on Wednesday is to modify the current law through a decree or a law passed by an urgent parliamentary procedure. Though details are as yet scant, the main focus of the reform will be families with children.

MEPs tell Merkel that Spain goes down the tube like Greece

Publico writes that Spanish MEPs yesterday warned Angela Merkel that Spain was going the way of Greece. The Greens greeted Merkel with the slogan ‘austerity kills’. They told Merkel that, “the example of Greece shows the consequences of austerity at any cost”. The speaker for the Social Democrats said “Spain must fight public debt coming from private funds” and that the “enormous” debt yield spreads “will not allow Spain, Portugal or Greece to come out of the crisis”.

Some relief for Italy from foreign investment funds

Foreign investment funds are pouring money back into Italy, Il Sole 24 Ore reports. According to the Italian investment promotion authority ICE, there was a 100% increase in foreign capital flow to Italy in the last month, the first time of 2012. According to Il Sole 24 Ore, this is a clear indication that the reforms Mario Monti government’ reforms are creating a positive impression of the country outside.

Monti is likely to remain in office according to Paolo Manasse

The probability of a second term for Mario Monti is rising, Paolo Manasse argues on his blog. He put those probabilies at 54%, versus the 43% of one month ago. His probabilistic model is based on the idea that the outcome will depend by two factors: the electoral law and the leadership of the Italian political coalitions. A proportional system tends to result in a hung parliament and thus increases the chances of a second term for Monti as it produces coalition governments and weak at parliamentary level. Berlusconi has 10% chance of being the candidate of the PDL compared to 90% of Alfano, the PDL secretary, while Pier Luigi Bersani, the PD general secretary, has a 50% chance of being the candidate of the PD, on par with Matteo Renzi, the Mayor of Florence, and the rising star of Italian politics. At the same time, the reform of the electoral law could produce a proportional system with a 90% probability.

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

Euro weakens, spreads are rising.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.770	0.807	0.809
Italy	3.458	3.616	3.612
Spain	4.215	4.337	4.383
Portugal	7.068	7.128	7.294
Greece	15.780	16.012	-1.38
Ireland	3.360	3.444	3.531
Belgium	0.947	0.976	0.996
Bund Yield	1.45	1.378	1.382
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.285	1.2761
Yen	103.120	101.96
Pound	0.802	0
Swiss Franc	1.208	1.206
ZC Inflation Swaps
	previous	last close
1 yr	1.63	1.59
2 yr	1.63	1.62
5 yr	1.75	1.72
10 yr	1.99	1.95
Euribor-OIS Spread
	previous	last close
1 Week	-7.129	0
1 Month	-3.700	-3.7
3 Months	4.971	4.971
1 Year	47.843	48.443
Source: Reuters