EUROINTELLIGENCE DAILY BRIEFING, 30 de Novembro de 2012. Enviado por Domenico Mario Nuti.


Stournaras tells banks they must participate in voluntary debt buy-back

  • Greek finance minister is putting heavy pressure on domestic banks;
  • Greek banks are resisting as they stand to lose €4bn, which would jeopardise the next rights issue;
  • a news report says buybacks are likely to come with “varied prices”;
  • size is estimated to be around €30bn;
  • IMF says the loan tranche cannot be released until the buy-back is completed;
  • a poll says that 60% of Greek voters are undecided, while Syriza cements its lead;
  • UMP crisis benefits centrists and the far right;
  • the General Court rules that the ECB has the right to withholding documents on the grounds of protecting the public interest, and avoiding misunderstandings;
  • Mark Rutte says this is a good time to claw back powers from Brussels;
  • the SPD has decided to support the German government over Greece after all;
  • Michel Barnier says worst of crisis is over, all the important decisions have been taken, it is now time to implement;
  • the EP wants the ECB to formally delegate powers over banking supervision back to national supervisors;
  • Reinhard Schmidt says the ECB needs a lot more staff than planned to oversee a banking union, even on the assumption of strong delegation;
  • there is an outcry in Spain over the European Commission’s quid-pro-quo banking layoffs as a price for banking support;
  • the OECD advises Spain to relax firing laws and broaden the base of VAT;
  • the European Commission’s industry confidence index points towards a further decline in investment in 2013;
  • the business and consumer survey has shown the first uptick in eight month;
  • Italy’s business confidence hit the lowest level since March 2009;
  • at yesterday’s auction, Italian interest rates fell further;
  • il Sole 24 ore says there are signs that the monetary transmission mechanisms are being fixed;
  • Pierluigi Bersani wants to introduce a permanent and progressive wealth tax on Italians;
  • there is more confusion about Italy’s centre right as Berlusconi holds off launch of a new party;
  • economists, meanwhile, try to explain the puzzle why Spain has a different trade-off between unemployment and changes in GDP.

The Greek finance minister, Yannis Stournaras, made it clear in the meeting with the country’s four largest banks, which together hold about €17bn of government bonds, that they would be required to sell their entire holdings even though the buyback is billed as “voluntary”, the FT reports. But Athens bankers appeared reluctant to be forced into a sale that would weaken their balance sheets and discourage local investors from participating in rights issues expected early next year as part of a €24bn recapitalisation of the sector. “The banks stand to lose some €4bn by having to sell their bonds at around 33 cents on the euro,” the FT quotes one Athens banker. Kathimerini reports some banking representatives said they did not want their institutions to take part in the bond buyback scheme. Reuters quotes one official saying that Greek bond buyback are likely to feature varied prices, depending on the bond.

The size of the buyback has not been announced but one official said it would have to reach €30bn for Greece’s debt pile to be reduced by 10-12 percentage points in 2020. About half the €62bn of bonds issued in a partial restructuring of Greek debt last February are held Greek banks (holding about €17bn), pension funds (around €8bn), state entities and individual investors.  The debt management agency is set to announce details next week of the buyback scheme, which would be completed by December 12.

Greece’s race to fulfil conditions for €34.4bn loan release

A spokesman for the IMF, Gerry Rice, stressed that the successful completion of the bond buyback scheme was necessary before the release of a crucial 34.4-billion-euro rescue loan. There is also concern within the administration about a required draft bill overhauling tax legislation. One of the main areas of contention between the coalition parties is the scrapping of tax breaks for families with children. Stournaras met with Prime Minister Antonis Samaras on Thursday to discuss this issue as well as the completion of the 48-billion-euro bank recapitalization. Stournaras is to meet with representatives of PASOK and Democratic Left today in the hope of settling any differences over the tax bill.

Greek polls ahead of deal show majority is undecided

The share of undecided voters of 60% was actually more informative than the slight increase of  Greece’s anti-bailout leftists in the polls, which was conducted  between Nov. 23 and 26, just before the eurogroup struck the deal. According to Reuters, the main opposition SYRIZA party stands to get 31.5% (up 1pp) of the vote against 26.5% (down 0.5pp) for New Democracy if an election were held. The ultra-nationalist Golden Dawn party ranked third, but its popularity rates fell to 12.5% from 14% a month earlier.

UMP crisis benefits FN and Borloo’s new right-centrist party

Le Monde writes that the biggest winners of the UMP crisis are the Front National and the new centrists-formation UDI around former minister Jean-Louis Borloo. The centrist UDI has become attractive to moderate MPs who want to keep their distance to the far-right FN as long as the UMP crisis lasts. Once Francois Fillon makes true of his threat to create his own party, Borloo stands to lose as there would be two parties battling for the centre-right electoral ground. The leader of the far-right Front National, Marine Le Pen did not miss out on the opportunity to project her party as the future to the right.

ECB right not to disclose documents to Bloomberg

The General Court in Luxembourg ruled that the ECB had the right not to disclose the documents on the economic situation in Greece in 2010. “Disclosure of those documents would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece,” Reuters quotes from the court ruling on Thursday.  The court agreed with the ECB that it could not disclose the first document because the information it contained was outdated, posing a substantial risk of severely misleading the public in general and financial markets in particular. The court also found that the content of the second document was closely connected with the first, and that the ECB had not made a mistake in assessing that its disclosure too “would undermine the economic policy of the EU and Greece”. The ruling can be appealed the the European Court of Justice within the next two months.

(The European Court has thus established an important legal principle. If you claim to act in the public interest, you can break the law. And the definition of the public interest rate, is, of course,  a political one.)

Mark Rutte says this is a good time to roll back Europe

If you constructed the EU from scratch, you would probably not start with a highly decentralised monetary union and a highly centralised agricultural union. This fundamental misspecification is one of the deeper reasons why the EU has lost its way in the last couple of decades. But is this the moment to reverse it, as Mark Rutte suggests in an interview with Suddeutsche Zeitung?

He proposes a politically independent economic commissioner to enforce budgetary discipline. But he also said he wanted to ensure that the EU does not interfere in certain policy areas as much as it does – while refusing to say what they were. He defined the areas where he wants closer European cooperation as currency, internal market and human rights.

(So where is the EU is “interfering” the most? Quite clearly: Competition policy, the Single Market, and fiscal policy – all areas Rutte wants to be dealt with at European level anyway. It does not make sense. Or is he just talking about the CAP?)

As ever, the SPD barks but does not bite

The German ratification of the Greek package was never in doubt – not because of the government’s own majority, which is not guaranteed, but because the Greens are supporting the government, thus pushing them over the majority line, no matter what the SPD does or says. Having considered voting No, the SPD’s leadership has managed to persuade its unhappy MPs to vote with the government, again. Suddeutsche reports that the party’s leadership had held difficult discussion until the early hours of yesterday morning. Peer Steinbruck warned the party that it must not repeat the mistakes of the CDU to subject to overriding national and European interest rates to narrow party political expediency.

“Crisis Over” – Watch: Michel Barnier edition

As the euro crisis has hit another of those phases where people think it is over, we thought it might be useful to report on some of these “crisis over” moments. Today’s entry is Michel Barnier, as reported by Frankfurter Allgemeine Zeitung, who said he was convinced that the eurozone had the worst of the crisis behind it and that we are now at the start of the second half (of the game). The eurozone had taken all the right decisions, he is quoted as saying, they just needed to implemented, which takes time. (What decisions? We still do not have OSI. No fiscal union. No banking union. No political union. If all the important decisions had already been taken, why then bother with this blueprint for an economic union, which the Commission presented yesterday.)

The European Parliament’s fudge on banking union

The European Parliament’s economic and monetary affairs committee proposed a compromise in the debate about whether the ECB should supervise all banks. While the ECB wants to supervise all banks centrally to preserve a level-playing field, the EP wants to give the ECB the option of delegation to national authorities.

(This is not as innocuous as it sounds – like having an option, but not exercising it. It really creates a presumption that the ECB hand over powers to national authorities, which it can only reclaim in some sort of an emergency- i.e. when it is already too late. There is now a non-trivial danger that the EU settles on some hugely complex arrangement where nobody knows who is in charge.)

Reinhard Schmidt says banking union plans are not going to work

Reinhard Schmidt, a German banking professor, is quoted by Boersenzeitung as saying that it will be impossible for the ECB acquire the necessary know-how  to regulate all 6000 banks. The number of staff will need to be a lot larger than currently planned even if a large part of the job is delegated back national supervisors. He said that if you delegate, but retain ultimate control and responsibility, at the very least you will need to understand how the national regulators operate. He recalls the differences of what constituted core tier 1 capital between the EBA and the German supervisor. Another expert is quoted as saying that the ECB would need between 200 and 400 even if under a scenario of extensive delegation.

European Commission criticised on banking layoffs

The demand that several thousand rank-and-file banking employees be sacked as a condition of the banking rescue has triggered an outcry in Spain. An editorial in Cinco Dias criticizes the conditions imposed, particularly on Bankia, by the European Commission’s competition authorities. Where Commissioner Almunia argued that the limitations on the rescued cajas’ future business (both in geographical scope and in business lines) is necessary to ensure that the state aid they received does not distort competition, the editorial argues that the imposed limits are themselves a breach of the principles of free enterprise, competition and the single market. Also, the editorial criticizes the contrast between the demand for adjustment and the lax enforcement of employment regulations, in particular the setting of severance packages well below the legal minimum which the government had already lowered this year as part of its economic reforms.

OECD asks for Spanish reforms to be deepened

Diario Pregresista reports that the OECD is advising Spain that, in order to meet its 2014 deficit target, the government should be made cheaper to lay off workers, and raise VAT revenues by shifting more products into the higher rate band. These reforms would go in the same direction as those already adopted in 2012. The OECD also suggests ending the duality between permanent and temporary employment by introducing a “single employment contract” with less worker protection than the current permanent contract.

Eurozone survey points towards continued weak investment

The European Commission’s survey of industry found expectation of a 1% fall investments in 2013, while its wider monthly business and consumer survey picked up moderately in November – by 1.4 points to 86.7 – ending an eight-month run of fall. The two conflicting signals suggest that the pace of the recession is not accelerating, but there is not going to be a genuine recovery at least until 2014. (We believe it will be a technical recovery only, and not feel like one.)

Italian business confidence fell to lowest level since March 2009

As La Repubblica reports, Italian business confidence in November dropped back close to level in March 2009 according to Istat. The national statistics agency said its index fell from 77.1 points last month to 76.4 points in November. The drop was due to pessimism among entrepreneurs in the services and construction sectors, while industry and retail showed some improvement, thanks to the onset of the Christmas holiday season.

Italy sells bonds at lowest yields since two years

The good news for Italy is that interest rates have been falling, according to Il Sole 24 Ore reports. At yesterday auction, interest rates on 5-year and 10-year Italian bonds hit their lowest levels in two years. Il Sole says this may be the first sign that the monetary policy transmission mechanism are being repaired. The Treasury sold €6bn worth of bonds at the average interest rate of 4.5% for the 10-year BTPs, and of 3.23% for the 5-year BTPs.

The Italian centre-left leader is considering a personal wealth tax

Partito Democratico secretary Pier Luigi Bersani told Rai2 radio that he wants to introduce a personal wealth tax on large fortunes in Italy: not a one-off tax, but a structured tax on higher incomes, like the French model introduced by François Hollande. Italy is facing huge challenges, and needs more fairness in its fiscal system.

More confusion about Berlusconi 

The Italian centre-right is in a right mess over its primary vote, Il Messaggero reports. First Silvio Berlusconi has cancelled the date of primary vote, while Angelino Alfano, PdL secretary, called an executive meeting next week to decide on holding primaries. Berlusconi suddenly cancelled the plan to launch yesterday a new breakaway party, Forza Italia 2.0, to revitalize the centre-right, but the confusion is high.

Explaining Spain’s high unemployment

It is not every day that we’re told that Spain’s job market is too flexible, but the New York Fed’s blog Liberty Street Economics did just that. Comparing the paths of Spain and Greece during the recession, Thomas Klitgaard and Ayşegül Şahin observe that both countries have similar unemployment levels around 25%, but that Greece’s GDP has dropped much more than Spain’s for the same increase in unemployment. Greece’s relationship between unemployment and GDP is said to be in line with the rest of the Euro area. The authors observe that there is an unusually high reliance on temporary contracts in Spain, and conclude that Spain’s experience “illustrates the cost to the economy of firms having such flexibility in how they manage workers”. In addition, Europa Press reports on statistic showing that unemployment among foreigners in Spain has tripled to nearly 35%.

Another comparison of Spanish and Greek unemployment and GDP was provided by Bill Mitchell based on data from the IMF World Economic Outlook. Mitchell observes that Spain and Ireland have had much larger employment drops than appears justified by their GDP contractions, and attributes this to the weight of the construction sector in the run-up to the crisis. Mitchell argues that Australia had a similar construction bubble to those in Spain and Ireland, but that fiscal stimulus in 2008-9 prevented a recession in Australia while Spain and Ireland were forced into austerity by the EU.

Mitchell also points out that Spain has a higher rate of “involuntary temporary employment” than the rest of the Eurozone. He concludes that unlike in normal recessions where employment conditions recover after the crisis, in Europe “working conditions previously enjoyed will be lost forever” due to austerity which, despite the rhetoric about excessive debt, is really about wealth transfer to the elites and the dismantling of the welfare state.

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

Mostly sideways

10-year spreads
Previous day Yesterday This Morning
France 0.681 0.675 0.671
Italy 3.222 3.211 3.199
Spain 3.967 3.986 4.029
Portugal 6.306 6.162 6.335
Greece 15.081 14.980 -1.38
Ireland 3.145 3.111 3.210
Belgium 0.830 0.808 0.804
Bund Yield 1.374 1.371 1.383
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.297 1.2998
Yen 106.450 107.16
Pound 0.810 0.8101
Swiss Franc 1.204 1.2043
ZC Inflation Swaps
previous last close
1 yr 1.73 1.78
2 yr 1.75 1.78
5 yr 1.83 1.83
10 yr 2.06 2.06
Euribor-OIS Spread
previous last close
1 Week -5.400 0
1 Month -2.400 -2
3 Months 6.043 5.743
1 Year 41.029 43.029
Source: Reuters

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