Ministers misled public with the 124% debt-to-GDP claim

• An official document obtained by the FT shows that the agreement will only lower the Greek-to-GDP to 126.6% of GDP by 2020;
• discussion on further debt relief to plug the gap have been postponed until after Greece reaches a primary surplus – in other words beyond the German elections;
• an official is quoted as saying that the agreement constitutes debt relief, but that Angela Merkel could not be pinned down to it;
• the German opposition says it wants more time, and separate votes;
• SPD parliamentary leader Frank Walter Steinmeier says he cannot rule out a No vote;
• Jens Weidmann says the decision to pass on central bank profits to the rescue programme rests with the German parliament;
• Stefan Kornelius marvels at the cleverness of politicians whose rescue strategy consists of buying time (really, no irony);
• Holger Steltzner is outraged, says we have now crossed the Rubicon to debt structuring and debt monetisation;
• he doubts whether Angela Merkel can keep up the pretence that this is no restructuring;
• the Greek government expressed relief, while Syriza says deal will not solve Greece’s problems;
• the OECD is getting really, really pessimistic about the global economy;
• revised its 2013 forecasts down, including for the eurozone;
• also warns about the impact of higher than normal fiscal multipliers;
• Vittorio Grilli insists that Italy does not need any further fiscal measures;
• OECD also says Germany’s current account surpluses are likely to widen again;
• Antonio Polito says that Pierluigi Bersani is likely to win the PD primary vote – a victory of conservatism over reform;
• Italian household savings reach a new record;
• Bank of Spain approves restructuring measures of four nationalised banks;
• Caixa will buy Bank of Valencia for a nominal amount;
• unions encourage bank workers to be laid off to act as whistleblowers in cases where retail customers were defrauded in preference share sales;
• the European Court of Justice says the ESM complies with the Treaty;
• the General Court, meanwhile, is set to rule on the release of two ECB documents showing how Greece has used derivatives to hide its debt.

A document received by the FT shows that the measures to be implemented immediately as part of the deal will lower Greece’s debt levels to only 126.6% of GDP by 2020, not the 124% announced by eurozone leader. Further debt relief – amounting to 2.7pp of GDP – was postponed to a later stage when Greece starts to make primary surpluses by the end of 2014, pushing the decision after the German elections. “It is there, but it’s there in a way [Angela] Merkel cannot be pinned down that you’ve committed to it” told one official the FT. The document also says that under the Monday deal Greece’s debt load would only come down to 115% by 2022, meaning at least another 5.1pp will have to be found.

German opposition wants more time, otherwise might vote against deal

The German government wants to push the deal through the Bundestag this week. The opposition criticised that there is not enough time to discuss the deal. The leader of the Social Democrats, Frank-Walter Steinmeier, called for a separation of the vote, one on the buyback programme this week and on the remaining measures in December, FTD reports. If there is no more time, Steinmeier cannot exclude a “No”-vote this week, according to the Börsenzeitung. The consequences for the German budget are not yet clear enough, so the opposition. According the finance minister is the effect on the budget 2013 €599m less from foregone EZB profits and €130m from less interest rates on KfW credits to Greece.

The German and Dutch lower houses of parliament and the Grand Committee of the Finnish parliament have to endorse the deal before the next aid tranche can be formally approved on December 13.

The decision to pass on ECB profits is with the parliament, says Weidmann

In comments made to Die Welt (via Reuters) Jens Weidmann stressed it was up to the German parliament to decide on the use of the central bank’s profits and added it was not clear how large these would be. The ECB will distribute the gains it makes from its holdings of Greek government debt, which it bought at a discount in the secondary market under its first bond purchase programme, to the national central banks of the 17 euro zone member states. The Bundesbank’s share would then – just like any other income – go into the German central bank’s profit and loss calculation, Weidmann pointed out, adding that the decision on how much will be transferred to the government will be taken in February.

Time is money according to Kornelius

In a comment for the Süddeutsche Zeitung writes Stefan Kornelius that buying time is the critical element of the deal.  Germany has no interest in a debt write-down right now, but time could prop up other crisis countries enough to help contributing to finance Greece over years to come.

Steltzner says Germany has crossed the Rubicon to a debt write-off

In a characteristically outraged comment, Holger Steltzner writes in Frankfurter Allgemeine Zeitung that Wolfgang Schauble can no longer claim the rescue of Greece did not cost any money. An interest moratorium constitutes a debt restructuring in all but name. It makes no difference to the taxpayer whether he get less in terms of interest rates, in terms of repayment, or in terms of both. The illusionists keep on pretending that Greece could ever repay its debt. He also makes the point that the bond repurchasing programme is unlikely to succeed, as the market price is likely to be too low. The joker in all of this is the ECB, which will ultimately foot the entire bill through monetary financing – another taboo term like debt restructuring. He says it will be interesting to see whether Angela Merkel can really keep the lid on all of this until the elections.

Greek government relieved, opposition dismissive

While Antonio Samaras and his coalition partners showed themselves to be pleased with the outcome of the deal in Brussels, the biggest opposition party SYRIZA leading in opinion polls dismissed the deal and said it fell short of what was needed to make Greece’s debt affordable. It also accused the conservative-led coalition of “following a strategy of subordination and being absent from negotiations,” according to Kathimerini.

OECD is really, really pessimistic

The irritating thing about continental European newspapers is that they analyse OECD or IMF forecasts only from a national perspective – which means that they are missing the big picture, which is particularly important today.

The only big picture coverage we saw this morning was in the FT, which led on the OECD 1.4% GDP growth forecast for 2013 – for the group of 34 OECD countries – down from a 2.2% forecast in May. The OECD said that the risk of a major eurozone contraction cannot be ruled out, and that the eurozone itself could be in danger. It called on the ECB to cut rates, and on Germany to expand the fiscal policy (neither of which is likely to happen in our view). In addition, the OECD advised the ECB to adopt a policy of forward guidance.

Ok, and now for the national news.

Spain

El Pais focuses on the OECD forecast of an increase in Spanish unemployment to 26.9% in 2013, and 26.8% in 2014. It said the government will miss its deficit targets, which fall only gradually. Meanwhile, debt-to-GDP will continue to increase, reaching 97.6% in 2014. Like the IMF, the OECD emphasised the size of the fiscal multiplier, given the environment of tight credit. In terms of fiscal policy, the OECD recommends that Spain fully uses the fiscal stabilisers, and accept missing the deficit targets. On the positive side, the OECD notes that Spain had improved its competitiveness, with the first positive trade balance since 1998.

Italy

Il Sole 24 Ore focuses on the OECD’s lower GDP forecast for Italy, which is now put at 2.2% this year and 1% in 2013, compared to May forecasts of contractions of 1.7% and 0.4% respectively. If the estimates are correct, further fiscal tightening in 2014 would be necessary to achieve the planned debt reduction path, the OECD said. It praised the structural economic reforms Mario Monti’s government has introduced but stressed that they must be fully and consistently implemented, expecially in the labour markets, if they are to produce results in the next years.

Il Messaggero quotes Vittorio Grilli as saying that Italy does not need an help or more austerity measures in 2014, despite the OECD’s warning that it might. Italy is on track with its planned path of structural debt reduction. The Italian government won’t slash spending again in 2014, while the OECD said that painful austerity measures of tax hikes and spending cuts introduced by Mario Monti were not sufficient. Grilli remarks Italy is running a primary surplus and will balance the budget late 2013, as expected. Grilli also said Italy is able to avoid the worst-case scenario and the job market remains remarkably resilient despite rising unemployment.

Germany

FT Deutschland reports on the OECD’s forecast for Germany of a growth rate of 0.5%, after 0.8% this year – which is below the forecasts of the German government, Germany’s economic institutes, and the Council of Economic Advisers. The OECD estimates a contraction of 0.2% in Q4 this year, and 0% for Q1 in 2013, driven by a decline in exports, which in turn has contributed to the fall investment, which will not pick up until the spring next year. Most worryingly, the OECD believes that the current account imbalances are likely to get worse account. Germany will increase its current account surplus from 5.8% to 6.4% in 2013.

Bersani is set to win Italian centre-left primary thanks to Vendola, Polito wrotes

The centre-left primary will decide the future of Italy, Antonio Polito writes on Il Corriere della Sera. PD secretary Pier Luigi Bersani, winner of the first round with 44.5% of votes, will be confronted by the young mayor of Florence, Matteo Renzi (35% of votes), next Sunday. But the third candidate, the governor of Puglia Nichi Vendola who gained 15% of the votes, holds the balance of power, and is planning to support Bersani. If so, the secretary of the Democratic Party would win easily. A defeat for Renzi would be a defeat for Italy and a victory of conservatism and gattopardismo, a contest in which things will have to change in order that they remain the same.

The crisis hits Italian households: real income drops for the fifth consecutive year

The real income of Italian households has fallen for the fifth consecutive year in 2012, with a drop of over 2.5%, the Bank of Italy said, according to Libero. In the next year the fall is set to be even bigger than the 2.5% drop during the 2009 recession. The gross savings rate of Italian households has dropped to 9.5% of disposable income, the lowest since 1980.

Spanish banking rescue news

Europa Press reports that the Bank of Spain on Tuesday approved the restructuring plans of the four nationalized Spanish banks, keeping to the timetable established by the Memorandum of Understanding with the European Union. This paves the way for the disbursement of the European banking bailout funds in the first half of december.

In connection with this, El Confidencial reports that La Caixa will buy Banco de Valencia very cheaply, after it is recapitalised to the tune of €4.5bn and has its worst assets transferred to the Sareb ‘bad bank’. In addition a portfolio of loans to SME that will remain on the books of Banco de Valencia will enjoy a state guarantee against losses.

As we reported on Monday, the EU competition authorities will demand 6,000 layoffs from Bankia as part of the conditions for disbursing the bank aid. A group of ‘indignados’ who organized themselves as plaintiffs in the ongoing judicial investigation of the failure of Bankia, 15MpaRato has reacted to these news by calling on Bankia employees to come forward as whistleblowers in cases where customers were defrauded in the sale of the preferred shares. It is estimated that the conditions of the Memorandum will result in losses of up to 60% for preferred shareholders.

ECJ okays ESM

The ECJ ruled that the ESM is in line with the European treaties after all. A permanent mechanism did not contravene Art. 125 TFEU.  The justices argued that in the case of the ESM the state is the ultimate guarantor of the loan. (So does that make the proposed direct bank aid through the ESM illegal?) The case was brought by an independent Irish MP – in respect of the Irish ESM ratification – and subsequently referred to the ECJ by the Irish supreme court.

Bloomberg against ECB

The general court in Luxembourg will decide tomorrow whether the ECB should release two internal papers, which according to Bloomberg show how Greece has used derivatives to hide its debt. Bloomberg News sued the ECB in December 2010 to obtain those two documents under European Union freedom-of-information rules. The ECB said at a court hearing on June 14 that making the two documents public could aggravate the crisis, putting the future of the single currency at risk. The files contain assumptions and hypotheses that were used to shape decisions and their release could threaten policy making, the central bank has argued. If the court rules against the ECB, the central bank would have two months to comply. Both sides can appeal the decision at the European Court of Justice.

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

France goes from strength to strength.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.723	0.691	0.691
Italy	3.336	3.320	3.324
Spain	4.209	4.108	4.169
Portugal	6.682	6.323	6.608
Greece	15.086	14.778	-1.43
Ireland	3.051	3.097	3.215
Belgium	0.865	0.821	0.831
Bund Yield	1.421	1.437	1.433
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.297	1.2925
Yen	106.680	105.72
Pound	0.809	0.8076
Swiss Franc	1.204	1.2034
ZC Inflation Swaps
	previous	last close
1 yr	1.64	1.75
2 yr	1.68	1.78
5 yr	1.87	1.75
10 yr	2.11	1.98
Euribor-OIS Spread
	previous	last close
1 Week	-6.100	0
1 Month	-4.071	-2.271
3 Months	5.171	5.171
1 Year	41.757	42.657
Source: Reuters