The art of pretending that there won’t be OSI

• Spiegel says everybody in Berlin knows that OSI is necessary for Greece, but want to avoid it for domestic reasons;
• A 50% OSI haircut would cost Germany €17.5bn;
• then the German government would miss its target to achieve a structural balance by 2014;Josef Ackermann says finance ministers only delay the inevitable;
• Wolfgang Schaeuble is ready to pool remaining three tranches into a single €45bn tranche;
• which has to be voted through by the Bundestag;
• Kurt Lauk said optimal policy for Greece would be OSI in combination with structural reforms;
• the Greek government sold €4.06bn in one-month and three-month T-bills;
• enough to redeem the €5bn in bills that come due on Friday if one included already accepted €937bn bids;
• Alan Beattie says about the IMF-EU spat that someone will have to give in, weakening themselves and the troika unity;
• Werner Mussler says Schaeuble’s game of smoked mirrors will not solve Greek crisis;
• There are strike actions against austerity throughout Europe today;
• Matthew Dalton points out that Spain is worse off than Greece when it comes to economic recovery;
• Greek government put first 2000 civil servants in redundance scheme;
• Italian  government cuts over 4000 jobs in its administration;
• Italy’s new taxes worth 4% of GDP will lead to economic contraction of 2-2.5%, according to Francesco Giavazzi;
• Fabrizio Goria argues that Italy’s increasing home bias in bond holdings risks a Japanese scenario;
• Michael Pettis says if Germany does not reduce trade surpluses, Spain faces long wage depression inside eurozone;
• Bank of Portugal forecasts 1.6% recession 2013, higher than the 1% forecast of the finance ministry;
• Bank of Ireland first Irish bank to return to capital markets, raising €1bn;
• Francois Hollande, meanwhile, opted for the classic French presidential style  to defend his record.

Der Spiegel has a very good story covering the mendacity of Europe’s political leaders about official sector involvement. Yesterday Wolfgang Schauble and Pierre Moscovici met in Berlin to explain their joint strategy – or rather lack of it. Der Spiegel says everybody in Brussels and Berlin knows that OSI is a necessary condition to allow Greece to meet this target, but Berlin is hell-bent to avoid this for domestic political reasons. A 50% OSI haircut would cost Germany €17.5bn, consisting of a €7.5bn haircut for the KfW credit from the first multilateral loan programme, and a further €10bn in losses through the EFSF. If that were to happen, the German government would miss its target to achieve a structural balance by 2014.

The article also quotes Josef Ackermann, former Deutsche Bank CEO, as saying that everyone involved in those negotiations knows that Greek debt is not sustainable. All they do now is to delay the inevitable. To delay the inevitable, the finance ministers are now scraping the barrel.

The article also says that Schauble is ready to pool the remaining three tranches for this year into a single €45bn tranche, but would do so only in exchange for a control mechanism, such as an escrow account. Oh, and the Bundestag will have to vote on all of this before this agreement becomes effective.

There seems to be at least some political support in Germany for OSI. The article quotes the influential Kurt Lauk, head of the CDU’s business council, as saying that the optimal policy for Greece would be OSI in combination with structural reforms.

(More structural reforms, less austerity and OSI is indeed what it will take to keep Greece in the eurozone. It can be done, but requires a political willingness to accept transfers, which is not yet present. As ever there is no political leadership on this matter either.)

Greece raises funds to avoid default

The FT reports that the Greek government sold €4.06bn in one-month and three-month T-bills, which should be enough to redeem the €5bn in bills that come due on Friday if one included €937bn already accepted from non-competitive bids. The three-month auction’s bid-to-cover ratio was 1.66, down from 1.90 in a similar sale last month. The auction went better than expected, following reports (see yesterday’s briefing) that the ECB is willing to extend the ELA programme later this month. However, the article noted while things got better for Greece, they got worse for Spain, where the ten-year sovereign bond reached a yield of close to 6% again.

Alan Beatie on Lagarde’s red lines?

Alan Beattie has a refreshing commentary, in which he makes the point that the 120% debt-to-GDP target is itself pretty arbitrary anyway, based on the Italian number, “which is a very different country with a more flexible economy and captive domestic investor base for government bonds.” The fund had been bulldozed into supporting the most recent programme, which had zero margin in case of any economic slippage. He writes the only importance of the 2020 vs 2022 spat is, “by publicly drawing a line, it will be more obvious – and more damaging to what remains of the IMF’s reputation as a speaker of truth to power – if it is forced to give way…One of the IMF or the eurogroup is going to have to back down, weakening both themselves and the veneer of troika unity. This is not the way the game is supposed to be played.”

Werner Mussler on Schauble’s pretences

Writing in Frankfurter Allgemeine Zeitung, Werner Mussler writes that the political decision to keep Greece inside the monetary union has already been taken, and all the protestations mean very little. Since the Eurozone said A, they will now have to say B. The absence of a debt sustainability section in the troika reports tells us that the creditors disagree on the numbers. The difference between IMF and Eurozone can be explained as follows: the IMF insists on its own rules, which it cannot, and does not want to, bend. The Eurozone wants to look the other way, and disguise the inevitably coming OSI. Schäuble plays this game of smoke and mirrors more skilfully than others. But he will not achieve a sustainable solution to the Greek tragedy.

Is Spain really better than Greece?

Matthew Dalton, writing in the Wall Street’s Journal Real Times Brussels Blog, picked up an interesting segment from the European Commission’s autumn forecast. While the Greek position is genuinely the worst in the Eurozone, “it enjoys one formidable advantage over Spain: Its economy is running well below capacity, while the Spanish economy, despite an unemployment rate around 25%, is operating relatively close to full steam.” According to the Commission, it means that once the economy recovers, Greek unemployment should fall fast, while that would not be the case in Spain, which would immediately run into problems of labour supply shortages and wage inflation.

Europe-wide strike today

Le Monde calls it a “day of anger against austerity” as there will be strike actions today in France, Spain, Portugal and Greece, expected to affect many other countries including Belgium, Germany or Poland.. The strikes are partial, lasting four hours and are not extending to all economicsectors.

In Spain, Publico reports that the government will deploy 1,300 riot police in Madrid, including substantial reinforcements from other regions. This deployment is similar in size to the one against the more limited ‘surround the Parliament’ protest at the end of September. El Pais (English edition) writes that Prime Minister Mariano Rajoy on Tuesday vowed to resist public pressure in the second general strike in less than a year (something that had never happened before). “There is no room for easy remedies” without referring to the strike directly. PM Rajoy was speaking in Valencia at a business management conference, where he was heckled by 1,500 people expecting him outside the venue, reports Diario Progresista.

Hollande defends his record with presidential gravitas

Francois Hollande defended his government and his own performance in a lengthy news conference on Tuesday, the first of his tenure. Speaking for 2.5 hours over a wide range of issues, Hollande confirmed the three pillars of his politics – reorientation in Europe, debt reduction and competitiveness – and his objectives growth and employment.  He admitted unemployment is likely to rise for another year, rejected calls for “shock” measures and asked to be judged at the end of his five-year mandate.  Held in the vast Elysée ballroom, Hollande, who “values simplicity”, opted for the full  French  presidential  look in midst of presidential decor and red curtains. This made all the difference, one is to believe while reading through the press titles this morning. Hollande finally assumes “hollandism” marvels Francoise Fressoz in her blog for Le Monde.  “President responsable”, title Le Figaro and Les Echos.

Greek government put 2000 civil servants into redundancy scheme

The Greek government started implementing the austerity plans by putting the first 2000 civil servants on a redundancy scheme, Kathimerini reports. Employees are to be put on 75% of their salaries for a year ahead of their redundancy and transferred from redundant or overstaffed organisations to vital or understaffed public services. Department heads at the state organizations affected by the redundancy scheme have been given five days to draft lists of the employees that will be included. If they fail to do so, they will face a fine equal to a quarter of the salaries of the total number of staff intended to be included in the redundancy scheme.

Bank of Ireland raises €1n in bond markets

Bank of Ireland became the first Irish bank to borrow in the public markets for more than two years, the Irish Times reports. It raised €1bn, almost all of which was sourced from overseas lenders. The bank also said it was ready to exit the costly bank guarantee scheme introduced in 2008. The bank initially planned to raise only €500m but it borrowed more on strong interest from lenders offering up to €2.5bn when five global banks tested investor appetite. It is an important step in “decoupling” the State from the banks, said finance minister Michael Noonan.

Bank of Portugal forecasts 1.6% recession next year

The Bank of Portugal distanced itself from the government and troika forecasts for the Portuguese economy next year, Jornal de Negocios reports. In the Fall Economic Bulletin, the institution forecasted a recession of 1.6% for 2013, more pessimistic than the -1% of the finance ministry.

Italy government cuts over 4,000 jobs

The Italian central government plans to cut 4,028 non-management jobs, plus 48 top-level managers and 439 second-level managers, La Repubblica reports. This should generate savings of around €342mn a year. The Italian government are also expected to announce staff reductions for the justice ministry and national insurance agency INPS, which were excluded from this round of cuts. According to La Repubblica estimates, the staff reduction savings will add up to €26bn over the next three years. On Monday, the government said it intends to cut 10% of non-managerial staff and 20% of managers of Italian public administration.

Giavazzi: The tax shock will lead Italy to a deep recession

In the last 18 months the governments of Silvio Berlusconi and Mario Monti have introduced new taxes worth about 4% of GDP, Francesco Giavazzi writes in an analysis on Lavoce.info. According to a multiplier used by Giavazzi, Alberto Alesina and Carlo Favero, the effects of that fiscal shock lead to an economic contraction between 2% and 2,5% over the next two years.

Italy risks the Japanese scenario

Italy public debt is  example of fragmentation of European bond markets, Fabrizio Goria wrotes on Linkiesta. Since mid-2011 foreign investors shunned Italy at Treasury auctions. To raise the funds, the Italian government has launched several instruments, like BTP Italia, an inflation-linked bond for domestic retail investors. As a consequence, foreign investors own about 35% of Italian public debt, less than 51% of mid-2011. The rising home bias risks to end up in a scenario like Japan: stagnation, high debt, low demand from international investors. In 2013 the debt gross issuance is expected to reach over €430bn, including a redemption of €355bn.

Michael Pettis on “the simple arithmetic of economic rebalancing”

Michael Pettis, writing for the Carnegie Endowment for Europe, blames Spain’s predicament on bad Spanish policies but mainly to “aggressive” German attempts to grow by “forcing” a trade surplus on its European partners, because the Euro made it inevitable that European countries with above average inflation would have to choose between unemployment or trade deficits to match German trade surpluses. As these deficits necessarily had to be financed by German loans, the Euro results in large debt burdens, which can only be repaid with a trade surpluses. Pettis concludes that, if Germany doesn’t move to reverse its surplus, as Keynes suggested the US should have done in the late 1920s, then Spain had only two options: wage depression after years of high unemployment, or a devaluation after Euro exit. Pettis says it is delusional to expect, as Madrid, Brussels and Berlin claim, that Spain will be out of the crisis in two years.

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
10-year spreads
	Previous day	Yesterday	This Morning
France	0.761	0.741	0.739
Italy	3.678	3.632	3.626
Spain	4.557	4.543	4.510
Portugal	7.452	7.542	7.542
Greece	16.700	16.529	16.44
Ireland	3.449	3.473	3.456
Belgium	0.938	0.918	0.917
Bund Yield	1.346	1.338	1.344
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.270	1.273
Yen	100.930	101.67
Pound	0.799	0.8012
Swiss Franc	1.205	1.2039
ZC Inflation Swaps
	previous	last close
1 yr	1.68	1.55
2 yr	1.69	1.58
5 yr	1.82	1.7
10 yr	2.06	1.94
Euribor-OIS Spread
	previous	last close
1 Week	-7.729	-7.729
1 Month	-4.000	-4
3 Months	3.357	4.357
1 Year	45.857	46.357
Source: Reuters