Q3 data a little better than expected, but recession confirmed

• Eurostat confirms the eurozone’s double dip recession, but a better performance by France restricts Q3 output contraction to 0.1%;
• France and Germany expand by 0.2%, but the outlook for Q4 is for a contraction in both countries;
• one of the worst performers has been the Netherlands, where GDP contracted by 1.1% during Q3, with extremely large falls in investment;
• the Wall Street Journal’s Real Time Brussels blog says the Dutch government is making the situation worse through its austerity policies;
• Thomas Fricke says it is time for Germany to consider a targeted stimulus to insure against a deteriorating recession;
• there is not much evidence of a property bubble in Germany, with an annual rise of house prices of 2.9% and apartment prices of 4.1%;
• the French government expressed outrage against French bashing in the Anglo-Saxon media, as Pierre Moscovici affirms that France is not the sick man of Europe;
• A German consul has been attacked by protestors in Greece, after Germany’s deputy labour minister made some incredibly stupid remarks about Greek labour productivity;
• academics and investors express doubts about the benefits of a bond buy-back scheme;
• the Wall Street Journal says the protests will ultimately have little effect on the austerity policies;
• Spanish government creates social rental housing from rescued banks’ property portfolios;
• Mariano Rajoy pledges to reform the eviction laws to prevent further suicides;
• the troika says it wants a say in the reforms because it impacts the quality of the banks’ property portfolios;
• Paolo Manasse, meanwhile, says Mario Draghi should tell the truth, about the ineffectiveness of monetary policy, and the insufficiency of the banking union.

The data were a little better than what the market consensus expected – but the overall trend is unchanged. The eurozone has now recorded two consecutive quarters of negative growth – our double-dip recession is now officially confirmed. The Q3 contraction came in at 0.1% – against expectations of 0.2% – largely because of a better than expected performance by France, whose GDP rose 0.2%, the same as Germany’s. The rest of the data is unsurprising. Italy contracted by 0.2%, Spain by 0.3% and Portugal by 0.8%. For Q4 the expectations continued to be for an accelerated decline in growth. Boersenzeitung reports that the majority of German bank economists also expect a fall in German GDP.

The Dutch economy is tanking

The Wall Street Journal’s Real Time Brussels blog has a discussion of the new extraordinary decline in Dutch GDP, which contracted by 1.1% against the third quarter, and 1.6% annually. Consumption down 1.8%, and investment down 6.4%. See also the Dutch statics office website for more details (in English). The WSJ article says that the cause of the decline is the contraction of the overindebted household sector, with its high mortgage debts and fast deflating house prices.

“Is the government helping out? No. In fact, they are arguably making the situation worse. An austerity package proposed by the government of Prime Minister Mark Rutte scales back a tax deduction for interest paid on new mortgages. There are many reasons to dislike the interest-rate mortgage deduction, but scaling it back now is only putting more downward pressure on house prices at a time when Dutch households are in fragile shape.”

Thomas Fricke says it is time to prepare for recession

Writing in FT Deutschland, Thomas Fricke looks at the odds of a deep recession. He records several similarities with the 2009 downturn, especially a dramatic decrease in orders for German industry. The car industry is down 10%. German companies still believe that the downturn is short, and have thus hung on their staff, accepting temporary fall in productivity, and decrease in competitiveness. But that could quickly reverse. He pleads for a stimulus programmes to prevent such a calamity, for example through an increase in the subsidies for short-time workers – which would stabilise the labour market.

So much for a German property bubble

If you read the German media, you get a number of panicked articled about the property bubble that is apparently building up in Germany – after a 20-year period of real declines. The latest data put this into perspective. The prices for apartments have gone up 4.1% against Q3 2011, while the prices for houses have risen only 2.9%. This is at most a modest correction of a downward overshoot.

France against the Economist

Indignation in France, as the Economist called France the ticking time bomb in the heart of Europe its latest issue. The Economist should update its thinking model, government speaker Najat Vallaud-Belkacem countered according to Les Echos. It is just another example of the sort of French bashing the magazine is known for, concludes Le Monde. Finance minister Pierre Moscovici gave an  interview to the FT saying “France is not the sick man of Europe. France remains the world’s fifth largest economic power that has all its resources but which needs to recover its competitiveness.”  On Thursday, official figures showed the economy to grow 0.2% in the third quarter, against expectations of flat or negative growth. Moscovici said the government’s projection of 0.8% growth in 2013 – twice the EU and IMF forecasts – was “not beyond reach”, especially if the eurozone stabilised.

German consul attacked by protesters

An anti-austerity protest on Thursday by local authority workers in Thessaloniki turned ugly when a handful of demonstrators pelted German Consul Wolfgang Hoelsche-Obermaier with cups of coffee and bottles of water, Kathimerini reports. German Deputy Labour Minister Hans Joachim Fuchtel had made unflattering comments on the quality of the Greek labour force the day before:  “Studies show that 3,000 employees are required in Greece for local administration work carried out by 1,000 people in Germany,” the German deputy labour minister stated. Shortly after the assault on the consul, who was escorted away from the angry crowd by Greek police officers, Fuchtel made fresh comments aired on television, claiming to have been misunderstood and emphasizing that he had great respect for Greek workers.

The case against bond buybacks

The FT has gathered some opinions on the question of bond buybacks with most commentators believing it to be a bad idea – or at best an insufficient one. The article looked also looked at some historic evidence, which was mostly negative. The Bulow-Rogoff paper from 1988 dismissed what they called “bondoogles” in respect of Latin American buybacks at the time. Anne Krueger said buybacks don’t cure the problems, even if successful. The conclusion of the article is that OSI is inevitable.

Europe-wide protests unlikely to sway austerity, says WSJ

The Wall Street Journal writes that European governments are unlikely to be swayed by last Wednesday’s protests. For instance, Spanish Economy Minister Luis de Guindos is quoted acknowledging the people’s “difficulties” but stating that there is no alternative to the government’s policies. On the other hand, the WSJ says that European-level policymakers are concerned about the protests, which helps national governments push back on EU pressure to undertake more austerity.

Spanish government creates social rental housing from rescued banks’ property portfolios

Despite a heightened sense of urgency after last weekend’s widely publicized eviction suicide, nearly a week of negotiations with the main opposition party PSOE ended without agreement, reports El Pais (English edition). Nevertheless, the government went ahead and approved a legislative decree (meaning it comes into effect immediately and must be validated by the Parliament within 30 days) at the weekly Council of Ministers, which had been moved forward from Friday to Thursday. Measures announced by Economy Minister Luis de Guindos and Deputy Prime Minister Soraya Sáenz de Santamaría include:

• a pool of foreclosed homes currently on the books of the nationalized banking institutions will be used to provide low-rent housing for evictees.
• evictions will be subject to a two-year moratorium, at least for the most “vulnerable” groups: families with monthly incomes below €1,600, large families, those with children under 3 and those with dependents, the unemployed with no right to unemployment benefits, and domestic violence victims.

(Being slightly cynical about this, the Government’s intention is not to solve the foreclosure crisis, but to limit the potential for politically damaging evictions. On Wednesday, Mariano Rajoy had candidly stated that he’d “do everything possible” to avoid a wave of eviction suicides, as reported by El Confidencial. He said he’d change the mortgage law if necessary, but the proposed reforms indicate it hasn’t been seen as necessary.)

‘Troika’ wants a say on Spain’s foreclosure reforms

Expansion also reports that the European Commission has warned Spain that the Memorandum of Understanding signed in July specifies the Commission and ECB must be consulted on eviction reform. This is because any reform of the foreclosure process, or the repurposing of nationalized banks’ property portfolios, “can have a material impact” on the implementation of the banking rescue.

(If the ‘troika’ rolls back some of the measures to ease evictions, that cannot fail to contribute to popular disaffection for the European institutions.)

Has Merkel really accepted OSI, or fiscal transfers?

Philip Stephens asserts in his column that Angela Merkel has decided “to pay up for the euro”. The argument is that the eurozone crisis has now moved into the stage of a typical old-fashioned debt negotiation with the creditors agreeing to forego profits, whilst setting the terms. He says history will judge that it was Super-Mario who saved the euro, as politics trumps economics.

(If Germany accepted OSI or transfers of sufficient scale that would indeed resolve the acute crisis. So far, we have seen no evidence that this is happening.)

Mario Draghi should tell the truth, says Paolo Manasse

Mario Draghi should talk about the inefficiencies of ECB monetary policy, the economist Paolo Manasse argues on his blog. According to Manasse, the Fiscal Compact has caused a simultaneous fiscal tightening in all EU countries, both those who were put in place austerity measures to stabilize the debt and the deficit, and also those who did not have this need. The result is a deep recession, in which at least the IMF admitted that it underestimated the impulse of its fiscal policies. In addition, Manasse argues, the unconventional monetary policy – near to zero interest rates – has expansionary effects only if it increases the long-term inflation expectations and encourages investment through the reduction of long-term interest rates. That is not the case for the eurozone. That’s why the OMTs are designed to reduce the German fears of inflation at the expense of the real economy. According to Manasse, Draghi should say loud and clear that the banking union project risks to be only an illusion because the Banque de France and the Bundesbank do not want to cede the supervision on their banks to an external institution. Last, but not least, Draghi should remark that the fiscal and political union are only dreams, and that the crisis is still ongoing.

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

Spanish spreads marginally better.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.774	0.754	0.749
Italy	3.636	3.609	3.602
Spain	4.616	4.578	4.652
Portugal	7.536	7.598	7.797
Greece	16.332	16.306	-1.34
Ireland	3.441	3.387	3.536
Belgium	0.947	0.925	0.932
Bund Yield	1.332	1.331	1.338
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.279	1.2766
Yen	103.720	103.41
Pound	0.806	0.8049
Swiss Franc	1.204	1.2042
ZC Inflation Swaps
	previous	last close
1 yr	1.55	1.58
2 yr	1.59	1.61
5 yr	1.7	1.72
10 yr	1.94	1.95
Euribor-OIS Spread
	previous	last close
1 Week	-7.729	0
1 Month	-3.900	-3
3 Months	4.271	5.171
1 Year	45.529	45.729
Source: Reuters