EUROINTELLIGENCE DAILY BRIEFING, 22 de Novembro de 2012. Enviado por Domenico Mario Nuti.

Back to square one

  • More details emerge from the eurogroup meeting;
  • Berlin insists that OSI is “illegal” under German law;
  • one proposal on the table is a €10bn loan from the EFSF, to be backed by collateral from the Greek privatisation programme;
  • the German government says it cannot commit the Bundesbank’s profits to the package;
  • the IMF continues to resist a package that does not fill the financing gap, but appears more flexible on the 2020 debt target;
  •  Zsolt Darvas proposes a plan to cut Greek interest rates to zero, and to index the outstanding debt to GDP;
  • Francois Fillon has launched a legal challenge against the election of Francois Cope, on the grounds that the results from three overseas territories were not included in the count;
  • Peer Steinbruck gave an unconvincing performance in the Bundestag yesterday, as the media commented that his campaign needed rebooting;
  • doctors in Madrid are protesting against hospital privatisation;
  • Spanish lawyers are protesting at the increase in legal fees;
  • Spanish R&D spending falls, while R&D spending in the rest of Europe rises;
  • more details emerge for Spain’s bad bank;
  • Portugal’s money market interest rates spike after yesterday’s auction;
  • the crisis has destroyed 450,000 Italian companies, and 3m jobs, since 2010;
  • the non-performing loans of Italy’s banks continued to rise in September, hitting a new eurozone record;
  • il Foglio says Mario Monti is Italy’s best and last chance;
  • Josep Borrell says European integration is on the verge of a generalised breakdown;
  • Claus Hulverscheid, meanwhile, says Angela Merkel’s management of the crisis has been successful, but she is now making the mistake of failing to see the need for OSI.

More details of the Tuesday night eurogroup meeting emerged. According to the FT the main stumbling block was Berlin’s refusal to back “illegal” cuts to the interest rates on bilateral loans to Greece or return the profits from the ECB’s purchases of Greek bonds. An alternative proposal involves offering €10bn of extra loans to Athens from the EFSF, seen as a leading option for a compromise deal. This extra lending would support purchases of Greek bonds.  To make sure the extra money is backed by parliaments in Germany, Finland and the Netherlands, officials are drawing up options to back the new loans with collaterals from the Greek privatisation programme.

Among the menu of options was also an interest rate cut on loans from the first €55bn-bailout programme, which is controversial for the German government according to the FT Deutschland.  The latest draft included a rate cut to 0.9%, but needs to make sure that the German KfW bank does not make losses on its holdings. If interest rates are reduced for Greece, Germany is required to help Spain and Italy, because according to an agreement of 2010 that no creditor is to make higher losses than others (The government said it may return its profits from its purchases of Greek bonds but cannot commit Bundesbank  profits.)

We are back to Square one: The ministers have failed to get enough money together for the financing gap and realised that they need the IMF on board otherwise it would become even costlier for the Eurozone creditors. Officials told the FT the IMF continued to resist prematurely giving its assent to a package that did not fill the financing gap, though it did not insist on a rigid target of reducing Greek debt to 120% of GDP by 2020.

Zsolt Darvas on how to resolve the Greek crisis

Here is a comment by Zsolt Darvas from Bruegel in the FT on how to solve the Greek crisis. It starts off by a recognition that the current approach is a failure. Then, they should set 100% of GDP as a target of 2020. The official lending rate is cut to 0% – which constitutes a form of hidden OSI. They should also index the outstanding debt to GDP to insure against a further falls in GDP. All that can be funded via the ECB and the IMF. Greece should maintain a stable primary surplus of 3.5% of GDP until the debt ratio is down below 60%. As this is happening, Greece should be repaying debt relief .

(This proposal shows us how desperate we are getting in pretending that Greece is solvent. How credible is a plan that rests on the notion that Greece will be repaying debt relief in the years after 2030?)

Copé or not Copé?

The fiasco continues inside the French conservative party as Francois Fillon contests the election of Jean-François Copé as the new leader. The Fillon camp argues that 1304 votes from overseas federations had not been included in the vote recount and that he would have been the winner if they had, Le Monde reports. Fillon asked Alain Juppé to assume the role of a mediator (which he will accept if he has the support of both sides) and threatened to go to court. Copé resists. He had been confirmed as a winner after a recount with 94 votes ahead.

The fast imploding Peer Steinbruck

The German media rounded on Peer Steinbrück’s performance in the Bundestag’s budget debate yesterday, during which he attacked Angela Merkel, but in a not very effective way. FT Deutschland has the details of the exchange, while Spiegel Online said bluntly that the Steinbruck candidacy had been misfiring from the start and needed a reboot. (It misfired because of outrage over high speaking fees he had charged, and over his decision to hire an adviser who had worked for a hedge fund.) His last chance is the SPD’s party congress in Hannover December 9, Spiegel Online says, where his candidacy is due to be confirmed by the wider party.

Madrid doctors to strike against hospital privatizations

Publico reports growing support for an indefinite doctor’s strike in Madrid, as the largest medical doctors’ union in Madrid has endorsed other unions’ calls for a strike starting next Monday. Madrid doctors are protesting the planned reorganization of the Madrid regional health services, which involves privatizing the management and staffing of a number of hospitals and health centres.

Spanish legal professionals criticize new legal fees

El Confidencial writes that Spain’s General Lawyers’ Council has joined professional associations of judges and prosecutors in their opposition to a government decree raising legal fees or introducing new ones, which will come into force on Thursday. The possibility of lodging an unconstitutionality complaint against the decree is being discussed, as it impinges on the right to access to legal redress.

Spanish R&D spending drops as Europe’s rises

El Pais reports that Spanish R&D expenditure also dropped in 2011 for the first time in the series from the INE National Statistics Institute. The drop was sharper in the public sector than in the private sector, and brought the total to 1.33% of GDP compared with 2% EU average, which is on the rise. The drop in R&D expenditure was 45% since 2008 among firms with less than 50 employees.

More details on Spain’s bad bank

Writing on the blog of Spanish think-tank FEDEA, Tano Santos reviews what is known about Spain’s ‘bad bank’, the SAREB, a vehicle to hold, manage and liquidate the stock of repossessed real state (including from developers’ portfolios) from Spain’s distressed banks. The four already nationalized institutions (called ‘group 1’) will transfer their bad assets to the SAREB during December, when the banks in ‘group 2’ will be identified. Group 2 institutions will also need to contribute assets to the SAREB during 2013. ‘Group 3’ institutions in principle will not need public aid and will only participate in the SAREB voluntarily.

The piece explains that the Spanish government intends to keep less than 50% of the capital of the SAREB, but still exercise control over it, which in addition to the illiquidity of the investment makes the ‘bad bank’ unattractive to private investors. As a result, it’s likely that the SAREB will be highly leveraged, as it will raise relatively little capital compared to its balance sheet. The senior debt is likely to be guaranteed by the State.

Portugal’s money market rates spike after auction

Boersenzeitung has the details on the Portuguese money market auction, where interest rates, which registered the latest increase in interest rates this year. Rates for three month paper increased from 1.366% to 1.936%. For 18-month paper, the rate was 2.99%. The paper said the reason is increased nervousness about Greece.

The crisis has destroyed 450,000 Italian companies since 2010

La Stampa reported that since 2010, 450,000 companies have closed in Italy, with 3m jobs lost, citing figures from the business association Confesercenti. In a report released on Wednesday, Confesercenti claimed as many as 600,000 individuals in Italy are also struggling under usurious loan conditions that threaten to bankrupt them. The inefficiencies in the transmission mechanism of ECB monetary policy have raised retail interest rates and have reduced the credit access to enterprises. High corporate debt levels continue to threaten at least two million of Italian citizens, says the Confesercenti report.

The Italian non-performing loans reach an historical record

As Il Sole 24 Ore reports, the position of Italian banks continued to weaken in September, according to the latest report released by the Italian Banking Association (ABI). In September, non-performing loans in Italian banks rise to €117.6bn, €1.8bn more than previous month, and €15.6bn more than September 2011. According to ABI, the net write-downs of loans at the end of September reached €67.2bn, or €1.5bn more than in August, and almost €12bn more than was reported in September 2011

Italy needs Monti again, Il Foglio argues

The biggest threat for Italy are the elections, as Il Foglio writes in a editorial. The path taken by Monti, the necessary fiscal consolidation, could be destroyed by Beppe Grillo, the comedian who leads the second Italian political party, the Movimento 5 Stelle. Mario Draghi, Il Foglio remarks, should be scared by these threats: in fact, the real sick man of Europe is not France, but Italy. High debt, low growth, increasing social tensions, the risk of political gridlock: that’s why Italy needs of a second term of Mario Monti as PM. Yet, Italian citizens are nervous and angry due to the austerity policies, Il Foglio notes. What will happen? It all depends by Monti, according to the Italian centre-right newspaper. If he decides to run in elections, perhaps international investors may think that Italy is able to overcome the crisis.

Europe on the verge of a generalised breakdown, says Josep Borrell

El Pais has the report on a speech by Josep Borrell, former President of the EP, in which he said Europe was in a “general breakdown process” and much of the rationale for European integration has been lost. He said the five drivers for European integration were WW II, the reconciliation of France and Germany, the Soviet threat, the fall of the Berlin wall and globalization. Only the latter remains. He said it is less clear that the EU still brings the hoped-for economic benefits. He said worst of all, the crisis has led to an “everyone to himself” mentality, including in Spain.

Claus Hulverscheidt on Merkel

In an editorial in Suddeutsche Zeitung, Claus Hulverscheidt said Merkel’s management of the euro crisis is and remains popular in Germany, but she is making mistakes. The first is her refusal to recognise Greek insolvency, and with thus the need for OSI. The second is she is too managerial in her approach to the crisis, and not sufficiently political. She should have insisted on taxes for the rich in Greece, or on capital controls, to reduce the outflows, or now on debt relief in exchange for further reforms. This would have strengthened political support for the measures both in Greece and in Germany.

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

French spreads steady, Spanish spreads down, euro up.


10-year spreads
Previous day Yesterday This Morning
France 0.737 0.753 0.745
Italy 3.438 3.461 3.450
Spain 4.396 4.305 4.366
Portugal 6.815 6.464 6.722
Greece 15.683 15.333 -1.44
Ireland 3.236 3.061 3.238
Belgium 0.910 0.916 0.926
Bund Yield 1.417 1.428 1.439
Euro Bilateral Exchange Rate
  Previous This morning
Dollar 1.276 1.2845
Yen 104.720 105.86
Pound 0.803 0.8047
Swiss Franc 1.204 1.2044
ZC Inflation Swaps
  previous last close
1 yr 1.75 1.64
2 yr 1.77 1.67
5 yr 1.76 1.77
10 yr 2 2
Euribor-OIS Spread
previous last close
1 Week -5.900 0
1 Month -4.200 -2
3 Months 3.700 5.7
1 Year 44.529 43.829
Source: Reuters

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