The quandary of Angela Merkel’s ever so loyal opposition
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- SPD MPs revolt against party leadership’s mechanistic support for everything Angela Merkel does;
- news reports quote party members as saying that a vote on Tuesday would have led to a No vote, but opinion in the party is now more balances;
- the Bundestag is likely to pass the package in any case since the Greens will vote in favour;
- Wolfgang Schauble says the Greek package will only cost the German taxpayer €600m in 2013, and €530m in 2014;
- according to one news report, NCBs will deduct cost of sterlisation policies from profits on Greek bonds before passing on the net profits to governments;
- Mario Draghi says the ECB is ready to supervise all 6000 banks from 2014 onwards;
- says the timetable is ambitious, but doable;
- the European Commission proposes a mostly lacklustre masterplan for the future of the eurozone, in which it plays the central role of the treasury;
- the Greek finance minister says Greece could borrow up to €14bn to fund the bond repurchasing scheme;
- ominously speaks of a Plan B if the scheme does not work out;
NCBs might roll over their Greek debt holding to reduce future financing needs; - French unemployment reaches new records;
- the French Senate rejected the 2013 budget;
- Francois Fillon is now considering to form a break-away party;
the Irish central bank says financial sector still weak and vulnerable to shocks; - Spanish retail sales show steepest fall on record;
- Spain breaches 6 out of 11 indicators in Eurostat’s Macroeconomic Imbalances Procedure;
- a referendum in Catolania is becoming more distant, and possibly even less likely;
- Confidustria says the Italian economy slumps this autumn;
capital flight out of Italy showed the third largest drop since the beginning of the eurozone in October; - Banca Monte dei Paschi di Siena, the world’s oldest bank, is asking the government for a bail-out;
- Matteo Renzi has done well at the last TV debate with his opponent Pierluigi Bersani, but Bersani is still most likely to win the run-off for the PD leadership;
- Allessandro Leipold says eurozone ministers should accept the inevitability of OSI;
- the Bundesbank says many companies have fallen behind schedule in their preparation for SEPA;
- Paul Krugman says statistics may be the cause behind Italy’s productivity riddle;
- Patrick Welter, meanwhile, recalls Bolivia’s experience with a bond repurchase programme, and says the evidence is not encouraging.
The SPD has taken the notion of a government’s loyal opposition to a new extreme. Whatever the Merkel government proposes, the SPD loyally votes in favour whilst trying to score some political points over footnotes. True to form, the SPD’s parliamentary leader, Frank-Walter Steinmeier mechanistically signaled support for the Greek programme this week, but this time he ran into trouble from SPD MPs, who do not agree with the government’s position. Sueddeutsche leads with this story on page 1, saying that if the vote had taken place Tuesday, the SPD would have voted No. But the outcome is now more balanced. The coalition has a majority of 20. 15 CDU MPs have voted no, and one abstained. The article says one important tactical issue is the position of the Greens, who will support the government. By voting No alongside the Left party, with the Greens supporting the coalition, could risk a break in likely electoral alliance between SPD and Greens, and might drive the Greens towards Merkel.
Schauble details costs of Greek rescue
Die Welt has the story that Wolfgang Schauble has given details about the budgetary impact of the Greek rescue (which is very small at this point). He said the agreement included foregone central bank profits of €10bn, with a German share of €2.7bn, plus €130m lost in foregone interest rates profits. For the 2013 budget the costs are €600m, and another €530m in 2014. In a letter to opposition leader Frank-Walter Steinmeier, Schauble acknowledged that more measures might be taken in the future to secure that the Greek debt targets can be reached.
Suddeutsche reports that the central banks will deduct interest rate costs relating to the sterilisation operations from the profits on the Greek bonds– and it is only the bottomline profit they will pass on to governments.
Mario Draghi says ECB ready to supervise all 6000 banks from 2014
This is probably the most important issue (for now) in the debate on banking union: Mario Draghi says he needs to supervise all 6000 banks directly from January 1, 2014. FT Deutschland reports that timetable was ambitious, but doable. To achieve this deadline, the EU needs to take a formal decision by December, he writes in a legal opinion, to give the ECB time to build up the infrastructure for the SSM. For the transitional period from 2013, the ECB wants access to all data from national supervisor, and wants to be able to subject banks to stress tests.
(Draghi wants to counter the German criticism that the ECB would be overwhelmed supervising all banks. He seems to be putting his foot down on the issue of non-separation of bank supervision, while for the moment he has given on resolution and deposit insurance.)
European Commission plans deeper economic and monetary union over the long term
To much fanfare, The European Commission on Wednesday released a “blueprint for a deep and genuine Economic and Monetary Union” where “all major economic and fiscal policy choices by Member States would be subject to deeper coordination, endorsement and surveillance”. The Commission envisions three stages:
- in the first 6 to 18 months, already agreed governance reforms (the so-called six-pack and two-pack) would be implemented. A banking union would be established, with a single supervisory mechanism for banks agreed by the end of this year, followed by a single resolution scheme by the end of next year. The Multiyear Financial Framework (“EU budget”) for 2014-2020 should be agreed.
- within 18 months to 5 years, having agreed a banking union and the EU budget, a “fiscal capacity” for the Eurozone would be developed, allowing support for structural reforms in countries under stress, and including a “debt redemption fund”, possibly eurobills, and EMU Treasury within the Commission, and joint tax and employment policy. This medium-term stage might require treaty change
- beyond 5 years, the Commission foresees an “autonomous Eurozone budget”, providing fiscal capacity to support member states in difficulties, and the issuance of common debt “enhancing monetary policy”.
(It is hard to find an original idea in any of this. The main issue for the Commission seems to the be the inter-institutional question of who does what – whether the new Treasury is to be located inside the Commission, or whether it should be a separate agency. This is hardly inspiring stuff.)
Greece set to borrow €10bn-€14bn funds for buyback scheme
Yannis Stournaras said on Wednesday that Greece would borrow up to €14bn to fund the bond buyback scheme. ” It’s our patriotic duty to succeed ,” he said according to Kathimerini. He refuted reports that the government would issue T-bills, saying that funds would come from the EFSF. He also said that if the voluntary scheme fails to attract enough interest, there is a “Plan B” which he refused to elaborate on. Reuters reported that private sector analysts questioned whether it would attract enough interest from bondholders to deliver the promised savings. A Greek finance ministry official said that hedge funds might hold as much as €25bn of Greek bonds bought at very low prices. Officials have said that the repurchase has a target cost of around 35 cents on the euro. Greece’s Public Debt Management Agency expects to publish the invitation for the plan early next week, maybe as early as Monday.
National central banks may roll over their Greek debt holdings
Euro zone central banks might roll over their Greek debt holdings to cut by €5.6bn the amount eurozone governments will have to provide Athens by 2016, according to a document seen by Reuters. Such a move would cut the required funds to €2bn, increasing the likelihood of the deal being accepted in bailout-weary parliaments. If the euro zone’s national central banks decide to replace the Greek bonds they hold with new Greek paper as the debt matures, it would save Greece the need to redeem €3.7bn in 2012-2014 and €1.9bn in 2015-2016. But only 13 of the euro zone’s 17 national central banks have Greek bonds in their investment portfolio, the Bundesbank not among them, and with the exception of France, Spain and Portugal, these are generally small amounts.
The rollover idea is separate from the issue of the ECB returning profits to Athens from the Greek bond portfolio it has acquired under its Securities Market Programme (SMP). That will reduce the financing needs of Greece by €4.1bn in 2012-2014 and another €3bn in 2015-2016, assuming that all profits are returned, which is not yet decided.
French unemployment reaches new records
French unemployment is exploding, Le Monde writes on its front page. Between May and October 240000 registered unemployed, 45000 alone in October. France never as many unemployed in modern history, and the pace is accelerating. The article says unemployment will be subject No 1 once the internal battle of the UMP stops being all over in the media.
The French Senate rejected the 2013 budget
The French Senate rejected the 2013 budget – envisaging €24bn in tax increases and €10bn in expenditure cuts – with 165 votes against 156. The left majority, with only six votes ahead, failed to vote en bloc, as communists abstained allowing the right and centrists to dominate the vote. Le Monde expects the next step, the reconciliation committee to fail, which means the 2013 budget goes back to be discussed in the parliament, then the Senate, before the parliament has a final verdict
UMP psychodrama continues
The crisis within the UMP, meanwhile, shows no signs of abating. On the contrary, after a failed intervention of Alain Juppe and Nicolas Sarkozy, Francois Fillon threatened to create a dissident group, as he and Jean-Francois Cope cannot agree on the conditions for a party on whether or not there should be a new vote to clarify their claim to the party’s presidency. While both reached agreement for such a referendum to happen, the latest éclat came with the question, who should be in charge until then.
Irish banking sector remains fragile
Ireland’s banking system remains in a fragile state and is vulnerable to further shocks, the Irish Times cites the Central Bank’s second Macro-Financial Review. Persistently high levels of impaired loans, loss-making tracker mortgages, the high cost to the banks of fees paid to the Government for liabilities guarantees and intense competition for deposits are some of the factors that are hindering the sector’s return to profit.
Spanish retail sales slump
Spain’s statistical institute INE released retail sales figures showing the steepest one-month drop on record, and a 10% drop year-on-year, Reuters reports. This is the 28th consecutive month of dropping retail sales, but the depth of October’s drop may be a direct consequence of the VAT increase in September (Reuters only mentions the headline 18% to 21% raise, but essential goods previously subject to an 8% reduced VAT rate also had their rate raised to 21%, which may have had the bigger impact on consumption).
On Wednesday, Eurostat published its Macroeconomic Imbalances Procedure scorecard (see Commission press release). Spain received a warning, writes Europa Press, as it breaches the limits in 6 of 11 indicators even though the current account deficit has dropped to 4.3% and will soon be within the allowed limit of 4%. Spain’s worst imbalances are: net investment position of -92% of GDP, share of world exports, private debt (218% of GDP), public debt (69%), and unemployment (20% three-year average).
Catalonia: much ado about nothing?
Catalan Premier Artur Mas attempted to secure the participation of independentist left party ERC, but the latter’s leader Oriol Junqueras “almost” ruled out joining the government, reports El Pais. ERC is demanding “softer” budget cuts and a reorientation of next year’s budget, for instance reintroducing the inheritance tax which CiU campaigned to eliminate in the previous parliamentary term. Since the election, CiU has tried to pressure ERC to join the government on the argument that only a “strong” government can push through a self-determination referendum. The speaker of CiU in the Spanish Parliament Josep Antoni Duran i Lleida said that he would prefer a coalition government including both ERC and the PSC. All the parties claim they want to avoid new elections. The speaker of the Catalan Government, Francesc Homs, decried that “everyone wants to lead the opposition because they don’t want the erosion of taking decisions to preserve the welfare state”, writes Europa Press. Meanwhile, Spanish PM Mariano Rajoy phoned Artur Mas to discuss the situation, writes La Vanguardia.
(At this rate CiU might get stuck forming a minority government unable to pass an austerity budget, and delaying an independence referendum)
Italy’s economy slumps this autumn, Confindustria says
In the fourth quarter of 2012, the Italian economy will observe a new aggravation of the decline in GDP, the Italian business lobby Confindustria remarks, as La Repubblica reports. The 2012 autumn will be the worst for several years, maybe since the introduction of the euro. In fact, industrial activity, Confindustria says, fell 0.5% in November, after falls of 0.4% in October, and 1.2% in the fourth quarter, while orders volumes fell by 1%. This winter, the unemployment rate is set to reach the highest level since 1995. The government’s efforts are not enough to avoid a deep recession 2013, with Confindustria forecasting a fall in GDP of around 1-1.5%.
Capital flight from Italy continues
Private-sector deposits at Italian banks fell by €26.4bn to €1.441tn in October, La Stampa reports. The Bank of Italy data showed the third largest monthly drop in Eurozone history. The fear of a massive wealth tax is driving the capital flight from Italy to Euro-area safe havens, according to financial analysts. The trend, says the newspaper, is destined to remain constant until the end of the year, due the expectations of a deep recession and political instability.
Monte dei Paschi, the world oldest bank, asks for government aid
As Linkiesta reports, Banca Monte dei Paschi di Siena ask for a rescue package to Italian government. Later this month the country’s third biggest bank posted an unexpected third quarter loss of €47.4mn (versus an expected profit of €60mn) due to a hugh increase in write-downs on bad loans and its exposure on Italian BPTs. According to Linkiesta, Monte dei Paschi will ask for €3.9bn, €500mn over the expectations, to government. The rescue will be provided through the so-called Monti Bonds, hybrid capital bonds currently counts as core Tier 1 equity.
Renzi says he can still win the primaries
Matteo Renzi, the Mayor of Florence and candidate in the run-off for the leadership of the centre-left Partito Democratic, has won the last TV-battle against his opponent, party secretary Pier Luigi Bersani, according to Il Corriere della Sera. The paper says Renzi seems to be more grounded in the European issues, notably the eurozone policies. He has been campaigning for a full fiscal union and for eurobonds, while Bersani focuses on more growth and less German-inspired austerity. Renzi and Bersani will face a political run-off on next Sunday. Political observers say the outcome will be determined by the supporters of Nichi Vendola, the governor of Puglio who came third in the first round of the primaries last Sunday. Vendola himself is supporting Bersani.
The Eurozone ministers should recognize the necessity of Greek OSI, Leipold writes
Alessandro Leipold writes on Il Sole 24 Ore that Europe has provided an unedifying spectacle in the history of international crisis lending. The Greek debt sustainability cannot be restored with half-measures, Leipold says. And now it’s the turn of official creditors to accept the inevitability of OSI. The IMF know that point, the Eurozone ministers refuse to recognize it. That’s why, according to Leipold, only one thing is certain: there are going many more long and sleepless nights in Brussels.
Bundesbank says many companies have fallen behind schedule in SEPA implementation
Boersenzeitung has the story that Bundesbank director Carl-Ludwig Thiele warns that many companies are not yet understanding the complexities involve in the transition to the SEPA pan-eurozone payment system, which will produce a single European payments markets. By February 2014, all payments, including direct debits and standing orders have to be moved to the new system. He warned their could be liquidity problems if companies do not prepare the transition in good time. Large companies and insurance companies are well advanced in the preparations, but smaller companies have made little progress.,
Italy’s productivity riddle
Paul Krugman wonders why Italy’s productivity has fallen off the cliff in the middle of the last decade. He cites a theory from Dean Baker who said it might be a statistical illusion. Around that time, many companies had legalised hidden labour – yet measured GDP had always taken account of the black market. Krugman said this theory might also explain another anomaly – the wide divergence in different measures of Italian cost competitiveness.
Reason to be cautious on debt buybacks
Writing in Frankfurter Allgemeine, Patrick Welter urges caution about debt buybacks, quoting the famous Bulow/Rogoff paper, which recalls the experience of Bolivia in 1988, which bought back 46% of its debt for a price of only 11% of the nominal value. It looked like a good deal at first, but the benefit was small. Before the debt repurchase, the national debt traded at a total value of $40m, later that fell by 1%. Welter also recalled the statement by Christine Lagarde, who said it was better not to talk too much about the debt buyback.
(There is really nothing new in this story, as it merely recites the Bulow/Rogoff paper. We mention it because it is so rate that the German media make any comparison with Latin America, let alone quote from the debt crisis literature, which is largely unknown to policy makers and most economic journalists. )
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Spreads are falling again.
| 10-year spreads | |||
| Previous day | Yesterday | This Morning | |
| France | 0.691 | 0.681 | 0.683 |
| Italy | 3.292 | 3.221 | 3.205 |
| Spain | 4.108 | 3.967 | 4.014 |
| Portugal | 6.323 | 6.306 | 6.438 |
| Greece | 14.778 | 15.081 | -1.39 |
| Ireland | 3.097 | 3.145 | 3.227 |
| Belgium | 0.821 | 0.830 | 0.838 |
| Bund Yield | 1.437 | 1.374 | 1.39 |
| Euro Bilateral Exchange Rate | |||
| Previous | This morning | ||
| Dollar | 1.292 | 1.2949 | |
| Yen | 105.780 | 106.31 | |
| Pound | 0.807 | 0.8083 | |
| Swiss Franc | 1.203 | 1.2037 | |
| ZC Inflation Swaps | |||
| previous | last close | ||
| 1 yr | 1.75 | 1.73 | |
| 2 yr | 1.78 | 1.75 | |
| 5 yr | 1.75 | 1.83 | |
| 10 yr | 1.98 | 2.06 | |
| Euribor-OIS Spread | |||
| previous | last close | ||
| 1 Week | -5.900 | 0 | |
| 1 Month | -2.571 | -2.171 | |
| 3 Months | 3.671 | 5.571 | |
| 1 Year | 41.886 | 43.586 | |
Source: Reuters |
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