Agreement postponed

• Eurozone finance ministers fail to agree a deal on Greece, and adjourn until next Monday;
• agreement would involve crossing several red lines, but there remains strong resistance to a write-down of Greek debt;
• Germany resists strong cuts in interest rates, while the Netherlands resists bond repurchases;
• a document prepared for the meeting says it was impossible for Greece to reach a 120% debt-to-GDP target without debt write-offs;
• in Greece, support for continued eurozone membership is falling, with 63% of Greece supporting continued membership at all costs;
• Syriza seized on last night’s failure, saying that Greece delivers its side of the bargain, but gets nothing in return;
• the French parliament voted in favour of the government’s austerity budget;
• the French government and opposition are blaming each other for the downgrade – while Moody’s blames both;
• the downgrade has implications for the EFSF, which may also be downgraded, or reduce lending volumes further;
•  the Irish government seeks to negotiate €1bn savings in pay and pension bills;
• the European securities and insurance market supervisors says the Libor scandal will lead to an overhaul of Euribor as well;
• Benoit Coeure says he is hopeful that SSM could become operational in early 2013;
• says national taxpayers are first in line to pay for the failure of their banks;
• as part of a wider anti-tax evasion strategy, the Italian government is nearing an agreement with Switzerland;
• 20% of Italian households pay zero income taxes;
• Luis De Guindos claims 600000 families could benefit from new eviction rules;
• two Spanish judges have lodged a request from the ECJ over the new law;
• José Carlos Díez takes a balanced view of Mariano Rajoy’s first year in office, but is sceptical that current economic policies are working;
• Sebastian Mallaby, meanwhile, writes a Spanish debt restructuring beckons.

There is no deal on Greece. After almost 12 hours of intense talks that stretched into the early hours, the eurogroup called a further meeting next week to finally settle differences between themselves and the IMF. The FT writes the delay shows the acute shortage of politically acceptable options. There are still a variety of “red lines” that need to be relaxed before agreement was possible.  While there was strong resistance to any writedown in the face value of existing debt, they were more open to extending its maturity structure, talking of doubling maturities from 15 to 30 years, the FT quotes officials. But there was still resistance to reducing the interest rates on those loans from Germany in particular. On another source of finance, buying back sovereign bonds in private hands Germany seems more supportive but not the Netherlands, which said that those measures won’t be enough to reach the 2020 target. A document prepared for the meeting and seen by Reuters declared that Greece’s debt cannot be cut to 120% of GDP by 2020, the IMF’s target date, unless euro zone member states write off a portion of their loans to Greece.  Without any action, Greek debt will be 144% in 2020.

The FT reports that officials were eyeing a deal that would rapidly cut Greece’s debt mountain in the early part of the next decade, while resetting Athens’ long-term debt target to after 2020 calculating that by 2022 Greece’s debt would fall to significantly less than 120% of GDP – a cut that could potentially address the IMF’s concerns.

Ministers return to the capitals to discuss their negotiating mandates with their governments before reconvening next Monday.

Greeks’ support for staying in the Eurozone at all cost is ebbing

The latest poll showed that the support of the Greek public for staying in the Eurozone at all costs is shrinking:  About 63% want Greece to stay in the single currency bloc at all cost, significantly lower from 81.6% just before a June 17 election, Reuters reports. More than 40% of those polled said they were angry and disappointed with their politicians, the judicial system and labour unions. About 63% of the 1200 Greeks polled on Nov 15-16 said they viewed the government’s handling of the crisis negatively.

SYRIZA: We do troika favours and get humiliated in return

The Greek coalition party SYRIZA, critical of the government’s strategy to agree on the troika’s demands, used the inconclusive results of the eurogroup meeting ysterday to put pressure on the government. One SYRIZA MP tweeted that the government is doing the troika favours and gets humiliated in return (a line that goes down well the populist drain), Kathimerini reports.

French Parliament adopts 2013 budget

France’s National Assembly passed President Francois Hollande’s first budget by 319 votes to 223 votes, Les Echos reports. The 2013 budget includes €20bn of tax increases and €10bn of expenditure efforts.  The UMP did not miss the opportunity to emphasise Moody’s downgrade and voted unsurprisingly against the budget. The bill will be discussed next month in the Senate and returns to the National Assembly in December for the final vote. Hollande’s Socialist Party and its allies hold a majority in both chambers of Parliament.

The blame game is on in France

French Socialists and UMP, meanwhile, blame each other’s government for the downgrade, with finance minister Pierre Moscovci saying that the downgrade was due to a situation inherited from the Sarkozy government,  while François Baroin warns of yet another alarm bell for the government to be taken seriously. But Moody’s report implied effectively both governments as part of the story, notes the Wall Street Journal blog. The downgrade sent the euro 0.30pc lower to $1.2770 late on Monday but the currency recovered later, before falling again on news of the failure to agree a Greek deal. The 10y borrowing costs hardly changed.

French downgrade has implications for EFSF

the downgrade of France has consequences for the EFSF and the ESM. The EFSF is expected to receive a credit rating downgrade within the next week. A downgrade could marginally curb demand for EFSF debt. It would normally make it harder for borrowers to raise funds. But for the EFSF, it would help resume plans to finish its 2012 funding program after it was forced to shelve a three-year bond sale Tuesday due to the rating discrepancy between the EFSF and France, writes the Dow Jones Wires.

Boersenzeitung writes there is still a way to prevent an EFSF downgrade, which is to reduce the lending volumes – but this means that all new programmes will come directly out of the ESM – which is capped at €500bn for new programmes. The French downgrade will not affect the ESM’s rating, as it has a more solid capital structure.

Irish government to negotiate €1bn savings in pay and pension bills

The Irish government is seeking to save €1bn over the next three years in a new deal on reform and productivity with the public service unions, the Irish Times reports. Unions expect one of the main changes the Government will propose is longer working hours for staff with no additional pay. Other issues such as increments, premium pay rates and possibly reforms to existing grade structures could be on the agenda for the discussions. Government sources emphasised that savings of €1bn in the pay and pensions bill were required by the end of 2015 “to meet the fiscal challenges” of the bailout programme.

After the Libor scandal, the Euribor scandal

The problems that were behind the Libor scandal – an organised manipulation of interest rates – have also affected the Euribor, which is in need of urgent reforms, Boersenzeitung reports. It quotes the heads of the European insurance supervisor EOPIA and the head of the securities supervisor ESMA as saying that the results of an investigation are likely to be published in two or three months, with a view to reforming the way the Euribor interest rates are set. There is no suspected fraud, according to the German banking supervisor Bafin, but there is pressure to reform the system, and especially to make it more transparent.

Coeure on banking union

Boersenzeitung quotes Benoit Ceure as saying that he remains hopeful that the SSM could be kicked off in early 2013, with the ECB gaining control over all 6000 banks. It will control about 70 cross-border banks directly, according to the reports, for the rest it will delegate responsibility to national supervisors. However, he said the supervisory principles should be decided centrally, and implemented in member states, to achieve a level-playing field. Reuters quotes Coure as saying that the risk of bank failures should be primarily born by local taxpayer, not European taxpayers.

(In other words they are not planning to separate banking and sovereign risk even in the long-term. One wonders then, what benefits this banking union will bring – other than a few more jobs at the ECB?)

Italy is near to a tax agreement with Switzerland

Italy and Switzerland are close to signing a tax agreement before the end of the year, La Repubblica writes quoting government sources. The Italian cabinet confirms the talks, but some problems persist. According to Vittorio Grilli, there are still problems over transparency, money laundering, and exchange of information. The deal can’t be an amnesty, and before talking about sums we need to have the parameters of the deal, Grilli said. According to government estimates, Italy could raise over €8bn from the agreement. Responding to press report that the Swiss government would be ready to sign an agreement on December 21, Grilli said he does not know if it will be done by the end of the year.

20% of Italian households declare incomes close to zero

Italy’s tax agency Agenzia delle Entrate calculates that 4.3m households, 20% of the total, spend in a way that is inconsistent with their official reported incomes. As La Stampa reports, the Italian tax authorities stressed that these cases of inconsistency do not automatically represent tax evasion. The head of the Italian tax agency Attilio Befera said around one million of those households has declared incomes of close to zero in the last three years. Tax evasion was increasing versus last year (no data provided yet) due the strict austerity measures introduced by Mario Monti’ technical government. During the last year the Italian fiscal authorities have launched a major clampdown on rampant tax evasion, with an increase of €8bn of new tax collected in the first nine months of 2012.

De Guindos claims 600000 families could benefit from new eviction rules

Speaking to the press on his arrival to the Eurogroup meeting in Brussels, Spain’s economy minister Luis de Guindos met the generalised criticism of last Thursday’s decree staying evictions for ‘vulnerable’ demographics by claiming that over 600,000 families could benefit from the measure, reports ABC.

Cadena SER writes that two Spanish judges have lodged a request for an opinion from the European Court of Justice on possible abusive clauses in mortgage contracts. The question regards interest-rate floor clauses preventing borrowers benefitting from the current low interest rates. Submitting a query to the ECJ appears to be one of the few ways in which a Spanish judge can delay an eviction.

Rajoy’s first year in office, in the balance

Tuesday was the first anniversary of Mariano Rajoy’s landslide election victory, and much Spanish commentary is focusing on taking stock of his first year in office. Blogging at Cinco Dias, economist José Carlos Díez enumerates, on the positive side:

• using the window of opportunity provided by the ECB’s 3Y LTROs to raise the cash to pay €30bn owed by public entities to private sector contractors;
• rising income tax on the highest incomes;
• extending (albeit grudgingly under popular pressure) the €400 per month subsidy to the long-term unemployed who exhaust their other entitlements.

And, on the negative side:

• Claiming a higher deficit for 2011 immediately on taking office, only to delay the 2012 budget by 4 months;
• Forcing the banking system to recognize losses of €50,000 in February, delaying recapitalization (again grudgingly and under pressure, this time from Europe) until December;
• Turning the intervention of Bankia into a ‘pantomime’ entangled with PP internal political conflicts;
• Ignoring the capital flight (of 20% of GDP) out of Spain’s financial system in the first 8 months of the year.

Looking forward, Díez is pessimistic on the banking recapitalization, household debt, and fiscal policy;

and he advocates hitching Spain’s wagon to the IMF’s calls to abandon extreme austerity.

Sebastian Mallaby on Spain

In his FT column, Sebastian Mallaby says Spain experiences a debt explosion despite the fact that Spain is undertaking a credible fiscal savings programme. The problem is that the fiscal consolidation is not sufficiently supported by monetary policy in contrast to what happens in the US or the UK.

“To be fair to the European Central Bank, it has tried to be helpful. Spain urgently needs to swallow its pride and accept external monitoring of its economy, freeing the ECB to lower borrowing costs by purchasing short-term Spanish bonds. But even if the ECB activates its promised outright monetary transactions, Spain’s interest rates will still be above the growth rate. The stated goal of these transactions is to eliminate the penalty Spain pays because of fears of exit from the euro. It is not full-blown quantitative easing on the US or British model.”

He concludes that improbably aggressive ECB action may pull Spain out of recession, and may so would a strong global recovery. But realistically, the best action to take would be a debt restructuring.

Eurozone in denial of Germany’s opposition to banking union

In a comment on Bloomberg, Megan Greene argues that the rest of the Eurozone is in denial about Germany’s lack of interest in a meaningful banking union. Greene also cautions against interpreting Angela Merkel’s backtracking on the October summit commitment on banking union as merely marking time until the German elections next autumn, and sees as the ‘best’ scenario one in which the ECB buys time by pretending to believe Germany’s pretended commitment to banking union, while the crisis festers.

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

French spreads are steady despite Moody’s downgrade.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.721	0.737	0.742
Italy	3.555	3.594	3.595
Spain	4.557	4.396	4.552
Portugal	7.139	6.815	7.093
Greece	15.846	15.683	-1.42
Ireland	3.329	3.236	3.500
Belgium	0.910	0.910	0.933
Bund Yield	1.358	1.417	1.416
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.281	1.2757
Yen	104.070	104.42
Pound	0.804	0.8026
Swiss Franc	1.205	1.2049
ZC Inflation Swaps
	previous	last close
1 yr	1.63	1.75
2 yr	1.65	1.77
5 yr	1.75	1.76
10 yr	2.1	2
Euribor-OIS Spread
	previous	last close
1 Week	-7.700	-7.7
1 Month	-4.400	-3.7
3 Months	4.900	4.3
1 Year	42.700	43.4
Source: Reuters