EUROINTELLIGENCE DAILY BRIEFING, 20 de Novembro de 2012. Enviado por Domenico Mario Nuti


Moody’s reads the Economist

  • Rating agency downgrades France to Aa1, citing rigid labour and services markets, and low levels of innovation as the main reason;
  • the decision had no discernible impact on financial markets, which concluded that the decision contained no essential new information;
  • Jean-François Copé was confirmed as new leader of the French conservative party;
  • Copé  won by a margin of only 98 votes over the more moderate Francois Fillon after both had claimed victory on Sunday;
  • French commentators worry that the UMP fractions benefit centrists and Front National;
  • Eurogroup  is likely to give political endorsement on unfreezing loans for Greece today, talks on debt reduction likely to continue;
  • current schedule suggests final approval on December 3;
  • Greece enacted two legislative bills on expenditure supervision, privatisation revenue payments on escrow account, and salary cuts for parliament employees;
  •  Greece’s current account dropped 76% to €3.4bn in the first nine months of this year compared to last year;
  • Belgium reached agreement on austerity budget overnight;
  • Portugal is “broadly on track” according to troika report, though  significant downturn risks remain;
  • Jens Weidmann advocated weighted votes in the board of the Single Supervisory Mechanism to ensure that taxpayers are adequately represented;
  • says bank supervision is ultimately a form of fiscal policy as it includes resolution policies;
  • he also advocates a toughening in capital adequacy rules by proposing risk weights to sovereign debt;
  • in its monthly report, the Bundesbank says Germany is facing a broad-based downturn that is beginning to spread from exports to the domestic economy;
  • Ignazio Visco says Italy’s banking system has weakened in the crisis, and is now facing risks;
  • President Giorgio Napolitano says the government should favour spending cuts over tax increases;
  • eurozone debt securitisation volumes reach a new low;
  • Spain is now so desperate that the government offers residence to Russian and Chinese who invest more than €160000 in Spanish real estate;
  • Spain’s political parties fear a rise in social tensions as austerity measures are kicking in and leave families worse off;
  • there have been several organised mass protests in Madrid following last Wednesday’s general strike;
  • even wealthy Spanish investors in preferred bank stocks are crying foul over rules to bail them in as part of the eurozone rescue programme;
  • Cayetana Alvarez de Toledo says Catalonia has never been independent, and has no right to secede;
  • Stefan Kaiser says that Angela Merkel’s strategy of dragging out the resolution until after the German elections was cowardly and dishonest;
  • Hans Werner Sinn advocates “temporary” Euro exit for Greece and Portugal;
  • Heiner Flassbeck, meanwhile, says the south cannot simultaneously adjust while German wages rise by only 2.5% – something has to give.

Rating agencies have a timing that can be quite exquisite. Last night Moody’s downgraded France from Aaa to Aa1, with negative outlook. The downgrade follows a similar decision by S&P in January, which had a huge political impact, but no market impact whatsoever. Moody’s downgrade now leaves Fitch as the only rating agency to maintain a AAA-rating.

In a statement, Moody’s said:

“The first driver underlying Moody’s one-notch downgrade of France’s sovereign rating is the risk to economic growth, and therefore to the government’s finances, posed by the country’s persistent structural economic challenges These include the rigidities in labour and services markets, and low levels of innovation, which continue to drive France’s gradual but sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base.”

The markets did not move – the French 10-year have recently been falling towards 2%. Pierre Moscovici, the French finance minister, gave a measured response, according Le Monde, saying that France could easily live with this rating. Reuters quoted one analyst as saying that the downgrade did not bring any new information.

(That is precisely how we see it as well. If one looks at Moody’s reasons, there is nothing new in it. They were all present long before Francois Hollande took office. )

French conservatives have new leader after bitter battle 

After a bitter battle and 24 hours of tension it became clear that the new leader of the French conservative party UMP was Jean-François Copé, the party’s current senior administrator, against-the-odds winner over François Fillon by a margin of 98 votes out of 174678 ballot casts. The chaotic scenes on Sunday night, when the two candidates to succeed Nicolas Sarkozy as leader of the UMP both declared victory and exchanged angry claims of ballot-rigging, stunned the watching television audience and left many questioning whether the party was on the point of disintegration, the FT reports. The French democracy needs a solid opposition not a ruined party, the editorial in Le Monde morns. The UMP crisis benefits the Front National and the centrists, worries Le Figaro. The election row has further fuelled speculation of a comeback by Sarkozy, who has told aides he will feel obliged to return if the Socialists fail to revive the sickly economy, Reuters reports.

Eurogroup likely to give tentative approval for Greece, disbursement only in December

Reuters  agency quotes officials familiar with the negotiations expecting a “political endorsement in principle” on unfreezing loans to Athens, after Greece completed almost all the reforms that were required. As for the IMF and eurozone spat on whether to shift the target debt for Greece to reduce its debt level to 120% from 2020 to 2022, the negotiations are ongoing as well as discussions on how to reduce debt. Euro zone officials have asked for a legal analysis of a debt buy-back and a more operational description for the Tuesday talks.  German Deputy Finance Minister Steffen Kampeter said that if a deal on cutting Greek debt eluded euro zone finance ministers on Tuesday, work would continue this week. Once there is agreement, proposals on how to cut Greek debt and provide additional financing can be sent to national parliaments for approval, a step that is expected to be completed by November 30. International lenders will check if the remaining reforms are in place on November 28 and euro zone finance ministers will make the final decision to pay the next tranche to Athens on December 3, Greece and the European Commission would then sign a revised memorandum of understanding on December 4 and Greece would get the money on December 5, according to the timeline.

Stournaras: “We have no outstanding issues on our side”

Finance minister Yannis Stournaras said that the government had fulfilled the “prior actions” demanded by the troika by passing two legislative acts, Kathimerini reports. One decree imposes stricter supervision of ministries and state bodies as well as wage cuts or layoffs for department heads who miss their targets. State bodies who fail to meet targets will be obliged to hike rates and taxes to raise revenue. The first decree also foresees the payment of privatization revenues into an escrow account held at Greece’s central bank. The second legislative act foresees cuts to the salaries and pensions of parliamentary employees bringing them into line with other civil servants.

“We are fully ready for Tuesday,” Stournaras said late on Sunday after marathon talks with Samaras. “There are no outstanding issues on our side.”

Drop in current account deficit for Jan-Sept by 76%

Greece’s current account deficit dropped dramatically from €14.7bn to €3.4bn in the first nine months of this year compared to the same period last year, Kathimerini reports. The difference between exports and imports shrunk from 7% of GDP to just 1.7% This decline in the deficit has been achieved despite the drop in tourism and shipping caused by the crisis

Jens Weidmann wants weighted votes in banking union

Weidmann is piling demand on demand for a banking union. FT Deutschland has two stories this morning, one in which Weidmann demands weighted votes in the board of the single supervisory mechanism, and in which he proposed that eurozone banks attach risk weight to sovereign lending.

On the first issue, he said the question of how the votes are counted is important, since bank supervision deals has ultimately deep fiscal implications. As a result of which, the decisions should be taken by weighted votes – which would reduce the management of the banking union to large countries only. The article says that this proposal is already under discussion at EU level. The discussions are likely to complicate the whole debate about banking union further, and may contribute to a further delay. Weidmann propose voting weights, not on the basis of the national central bank’s capital share in the ECB, but in proportion to taxp ayers responsibilities for bank resolution policies.

(We understand the democratic logic of this proposal, especially as one-man-one-vote system could in theory hold taxpayer to ransom. The trouble is that voting weights will not really help the German position, as Germany would then be confronted by powerful voting block of Italy, Spain and France. Germany is in a minority, no matter how you count this. )

Bundesbank wants to force banks to attach risk weights to sovereign debt

FT Deutschland leads with the story this morning that the Bundesbank want to restrict solvency risk for banks by forcing them to attach risk weight to sovereign debt holdings. He said there should be a cap on the maximum amounts of holding of sovereign debt – to stop banks from funding governments directly – and to back a portion of those holdings with capital. This proposal goes far beyond Basel III, which shied away from this step (as it would have deep negative consequences for countries like Italy, where the banks hold the national debt). Banks would thus need to raise their capital by a significant amount. Weidmann, speaking at a conference in France, said the rationale would be to prevent governments from obtaining funding if their fiscal position deteriorates.

German economy faces prolonged downturn, says Bundesbank

The Bundesbank gives a pessimistic outlook for the German economy in its latest monthly report. It said the optimism that the economy could revive is lost an increases number of industrial sector. The downturn is moving beyond the export sectors to the wider economy. Private consumption and construction are still holding up, but investments, having seen only a mild recovery, are now falling back again. The central bank sees deep uncertainty among business leaders, which in turn is going to lead to a further deterioration.

Iganzio Visco warns about weak Italian banking system

The global crisis has cut deep into the viability of Italian banks, the Bank of Italy warns. As Il Sole 24 Ore reports, Ignazio Visco said Italian banks are being hurt by low demand for credit, high levels of risk and rising taxation. Despite the ECB intensive actions during the last two years, the Italian banks remain vulnerable to external shocks due their obsolete structure. The Italian banking system, Visco remarks, has too many non-performing loans, 12.3% of total loans as of June 2012, up from 11% in 2011 and 4.6% in 2007. In addition, Italian banks are facing a rapid deterioration in asset quality, continued weak profitability and restricted access to market funding. According to Visco, there is the necessity for banks to continue plans for restructuring.

Napolitano advocates spending cuts over tax increases

Weighing in over an intensely political debate, President Giorgio Napolitano warned his government against lop-sided austerity policies: the best way to exit from the debt spiral is to reduce spending rather than increasing taxes, he said during a meeting with the presidents of Germany and Poland.

Eurozone debt securitisation volumes reach new low

The FT reports that debt securitisation in the eurozone has shrunk by €72bn to €1.68tn – the lowest figure since the ECB started compiling these data at the start of 2010 – when they were €2tr. The fall is due to slow economic growth, the bursting of the housing bubble, a decline in investor demand, and reforms. The total securitisation volume includes €957bn in asset-backed securities, much of which would have been used as ECB collateral. The article said that in geographical terms, Spain accounted for most of the decline. The article said other issues associated with the decline in securitisation volumes could have increased reporting requirements, and a move to the issue of covered bonds as an alternative way of funding.

Spain to offer residence to foreigners who buy real estate

The latest proposal by the Spanish government is to offer residence permits to foreigners buying properties worth more than €160,000, writes Reuters. The possible reform of the immigration regulations was, naturally, suggested by the secretary of state for trade (!) who said on Monday that the measure would be aimed at the Russian and Chinese markets. In Spanish, El Pais adds that the government has claimed similar arrangements are in place in Portugal, Ireland, Canada and the US. It’s possible that people who obtain residence in this way are exempted from the obligation to actually reside in Spain for 50% of the year. The General Lawyers’ Council has criticized the idea as open to ‘arbitrariness and cronyism’.

Spanish politics overwhelmed by social tension

On Saturday El Pais wrote that Spain’s major parties PP and PSOE worry that social tensions will increase in the next few months as the number of long-term unemployed citizens without a subsidy soars above the current historical highs. There are forecasts of an unprecedented number of insolvencies and potential evictions in families which, as a result of austerity, also have to pay for medication, have lost aid for school meals, aid for dependent care, and are facing a higher VAT on their purchases. The average family income has fallen by €2000 and the household saving rate has dropped by half. The government is preparing for eventual violent episodes linked to protests, while the PSOE is said to worry most about popular disaffection for institutions and parties.

On Sunday, tens of thousands of health service workers and users marched in Madrid to protest against the planned privatizations of a number of hospitals by the Madrid regional government, reports The West Australian.

There have been other marches in Madrid every day since last Wednesday’s general strike, as well as a three-day garbage collection strike accompanied by a campaign on social media to dump garbage in front of bank branches, as reported by Huffington Post (Spain Edition).

The rich also cry over Spanish cajas

Expansion reports that Mercedes de la Merced, a former deputy mayor of Madrid was on Monday the first board member of BFA (Bankia’s parent holding company) to testify in the judicial inquiry into Bankia’s failure. De la Merced is said to have justified the issue of preferred shares with the argument that she herself invested €80,000 in regular and preferred stock.

At the same time, Galician millionaires who invested a total of €70 million in Novagalicia at the behest of the Galician regional government at the end of 2011, have been in touch with the FROB bank restructuring fund to try to recover their investment, and some are threatening legal action against the now nationalized successor institution NovaCaixaGalicia, writes El Confidencial. The bank has received over €10bn in state aid since 2010.

Why Catalonia has no right to secede

This is the kind of debate we are going to get a lot more of. The Spanish Popular Party MP Cayetana Alvarez de Toledo writes in the FT that Catalonia has no right to secede. The reason is that Catalonia was never independent, never subjugated. It was part of Aragon when it united with Castile. A secession would alter Spain beyond recognition, and would have deep constitutional implications. It is thus for all of Spain to decide. She concludes that Catalonian nationalism “is indeed a bad habit, but also something else: it is the biggest impediment to freedom in Catalonia, the largest obstacle to prosperity in Spain and the most serious threat to European unity.”

Belgium reaches deal on austerity budget

And via Twitter the world has learned from the Belgian Prime minister that there is an agreement on the austerity budget. Le Soir reports that at 7am local time after a “nuit blanche” the special committee reached an agreement over some outstanding issues including capital gains and life-insurance taxes, a salary freeze for 2013 and 2014 , an expenditure cuts of €674m and some €400m to stimulate the economy.

Portugal “broadly on track” according to troika review

Portugal has passed the sixth quarterly review of its performance under an EU/IMF bailout, opening the way for payment of the next €2.5bn loan tranche though the troika report warns that downward risks to growth are significant, Reuters reports. The Portuguese economy is expected to contract 1% next year and then expand by 0.8% in 2014, returning progressively to positive quarterly growth rates during 2013. Next year, the Portuguese will face their largest hike in taxes in modern history to meet the budget goals. Next year, the Portuguese will face their largest hike in taxes in modern history to meet the budget goals.

Spiegel on the German government’s “trouble with truth” on Greece

In a Spiegel commentary, Stefan Kaiser claims Angela Merkel needs to drag out Greece’s crisis for at least another 10 months, when she hopes to be re-elected, before breaking it to the German public that Greece cannot repay its creditor countries. Merkel and her coalition partners are accused of stirring up sentiment against Greece like no other government. The “cowardly and dishonest” strategy of muddling through and delaying the inevitable will only make citizens angrier at their politicians, it is argued.

Hans Werner Sinn advocates “temporary” Euro exit for Greece and Portugal

In an interview with Der Spiegel, German economist Hans-Werner Sinn says that “temporary” Euro exit would allow Greece and Portugal (“the only two countries that consume more than they produce”) to devalue without “excessive austerity measures” which “will drive these countries to the brink of civil war”. Rather than “socializing the debts of Southern banks” through a banking union followed by Eurobonds, Sinn argues that “temporary” Euro exit should be “an orderly process” involving aid for the country’s banks and for purchasing essential imports.

(It is remarkable that Sinn sees nothing wrong with “aid for banks and essential  imports” while rejecting any sort of transfer union. Also that he assumes countries exiting the Euro “temporarily” will want back into what he calls “the yoke of the Euro”, when there is no suggestion of how “the Euro’s defects” are to be corrected.)

Heiner Flassbeck on the effect of eurozone adjustment on German wages

In a commentary in FT Deutschland, Heiner Flassbeck makes an interesting point about the dynamics of eurozone adjustment. He says if the south adjusts, as everybody is demanding, then this raises the question how Germany can generate growth. If the south reduces the current account deficits against Germany, then Germany cannot be in a position to maintain its surplus at current levels, unless the whole of the eurozone goes into a massive surplus. That seems unlikely. The result of adjustment in the south is thus adjustment in the north, but that means that the net exports will shrink, and thus GDP. For Germany to realise any growth at all, it is absolute essential that wages go up to generate domestic demand. He writes that the Council of Economic Advisers’ estimate of a 2.5% wage increase is simply inconsistent with a scenario of continued German growth and southern European adjustment.

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

No movement in French spreads yet, despite downgrade. Spanish spreads edge higher.

10-year spreads
Previous day Yesterday This Morning
France 0.751 0.721 0.726
Italy 3.540 3.595 3.589
Spain 4.553 4.557 4.628
Portugal 7.419 7.139 7.372
Greece 16.139 15.846 -1.36
Ireland 3.340 3.329 3.495
Belgium 0.941 0.910 0.926
Bund Yield 1.324 1.358 1.364
Euro Bilateral Exchange Rate
  Previous This morning
Dollar 1.276 1.2795
Yen 103.730 103.98
Pound 0.802 0.804
Swiss Franc 1.205 1.2042
ZC Inflation Swaps
  previous last close
1 yr 1.7 1.63
2 yr 1.71 1.65
5 yr 1.72 1.75
10 yr 1.96 2.1
Euribor-OIS Spread
previous last close
1 Week -7.700 0
1 Month -3.700 -4.5
3 Months 5.300 5.3
1 Year 44.643 42.843
Source: Reuters

Leave a Reply