Crisis over – Spanish bank edition

• Eurogroup agrees astonishingly low figure of under €40bn for Spanish bank recapitalisation;
• decision forms part of an overall strategy of denial about the need to substantial capitalisation;
• markets react extremely positively, with peripheral yield spreads coming down everywhere;
• Moody’s downgrades also failed to make a dent to the EFSF’s own ratings;
• Greece announced the details of the bond buy-back programme, which will come in the form of a Dutch auction;
• analysts are predicting a take-up rate of 60 to 70%, but there are some incentives for bondholders to hold out;
• the Greek debt management agency will hold 20 separate auctions;
• the Greek government seems ready to climb down on proposals to tax incomes at over €26000 at 45%;
• Reuters Breakingviews takes issue with the governance structures of Greek banks after the recapitalisation;
• Yanis Varoufakis fears that Greece will turned into a Kosovo, a Euroised protectorate run by a kleptocracy;
• the debate on banking union has made no progress, with Berlin digging in on its position to limit banking union to the largest banks only;
• there is a lot of soul searching in the UK, following the remarks by Christian Noyer, about the role of the City of London vis-à-vis the eurozone;
•  the latest manufacturing PMI suggests that activity is still falling, but at a reduced pace;
• Matteo Renzi has pledge to support for Luigi Bersani;
• Berlusconi say he is ready to lead the centre-right against Bersani in 2013 Italian general elections;
• De Paolini says that the Italian government is overestimating the proceeds of the financial transaction tax;
• according to Eurostat, one quarter of Europe’s population at risk of social exclusion;
• Spain’s treasury failed to raise half of the modest €2.5bn in revenue expected from a tax amnesty;
• Spanish government expects to miss its 2012 deficit target of 6.3% of GDP by 0.5%;
• 70% of European commercial property loans defaulted this year;
• Joerg Assmussen said  Portugal must issue more longer term bonds to qualify for OMT;
• in Germany, meanwhile, the debate about how to measure competitiveness goes on.

We never thought the €60bn recapitalisation figure for Spanish banks was realistic (our estimates our about three to four times this amount). Now we are told that the requirement is even less than the sums originally earmarked by external consultants. Yesterday, the eurogroup approved €39.5bn in help to Spanish banks, the FT reports this morning. Under this agreement the ESM will provide short-term notes to the Spanish bank rescue fund Frob. The Frob would then provide Spanish banks with loans of a 12.5- year maturity with a 10-year grace period and an interest rate in the first year of less than 1%.

 (This is not really a recapitalisation, merely a very long kick-down-the-road.  The only good news is that the debate about ‘legacy assets’ might become less acute. If the banking union ever gets off the ground, the ESM should be able to recapitalise Spanish banks directly – which will cost a lot more €40bn.)

Yields are coming down

The decision had a positive impact on Spanish 10-year yields, which have fallen back to 5.25%. Italian 10-year spreads fell below 300bp, as Il Sole 24 Ore reports, the lowest levels since November 2010. And there is also some good news for the EFSF. Boersenzeitung reports that Moody’s downgrade of France and of the EFSF so far had no important impact on yields of EFSF instruments. Yields on the five-year EFSF bonds increased by 1.5bp to 15.5bp, while spreads on the 10-year bond remained unchanged at 35bp.

Bond  buyback surprised markets with better than expected terms

Greece launched its bond buyback programme with terms better than expected. The price range stands about 4 to 10% above November 23 prices, writes Kathimerini, the yardstick the eurogroup communicated last week. They also chose the Dutch auction method implying that the state will pay the same amount to all bidders at the price of the highest bid. The Public Debt Management Agency (PDMA) announced on Monday that the country will have €10bn at its disposal from the EFSF, with offers from private bondholders to be accepted up until 7 p.m. on Friday. The total amount of bonds for the buyback is €61.4bn. The PDMA will conduct 20 different auctions, as many as the number of bonds in question. The first market’s response was favourable.

The FT warns that some bondholders could calculate they will profit more by not taking part in the buyback – and then seeing their holdings increase in value once others fall into line and the risk of Greece exiting the eurozone declines. The article quotes several analysts predicting a 60% to 70% participation rate by hedge funds which are believed to hold about €21bn of bonds, bought at between 11 and 17 cents. Wavering investors will be warned that not taking part could risk the IMF walking away from supporting Greece and that they could face writedowns being imposed in the future.

New income tax proposal splits coalition

In Athens the government appeared ready to climb down on parts of its tax legislation that is causing friction in the three-party coalition, Kathimerini reports. Coalition partners PASOK and Democratic Left oppose plans to tax annual incomes above €26000 at a rate of 45%. PASOK leader Evangelos Venizelos said this would turn society in its entirety against the government. “People cannot pay this. We need to find alternatives,” said Democratic Left spokesman Andreas Papadopoulos. “There is no way the tax bill will reach Parliament in its current form.”

Breakingviews: Greek bank governance leaves too much power to existing owners

The eurozone and the IMF are putting nearly €50bn into Greece’s banks, but they don’t want to take control of the lenders themselves or let Greek politicians meddle in the industry. So they’ve concocted a governance scheme which risks leaving too much power with existing owners according to Reuters Breakingviews. The current plan is that at the Hellenic Financial Stability Fund (HFSF) three out of five directors are subject to approval and the troika also has two observers in the board. If banks can raise at least 10% capital privately, the HFSF has no right to change the board.  The troika has recently insisted on appointing a “monitoring trustee” for each bank. The trustees will report directly to Brussels and have the ability to block transactions linked to media or politics. But it still may not be adequate to prevent problems, concludes the article. The troika now need to appoint a crack team of trustees and ensure they have real teeth.

Yanis Varoufakis on the Eurogroup’s Greek subterfuge

Greek economist Yanis Varoufakis blogs that the latest Eurogroup agreement on Greece is a joint attempt by all concerned to conceal various truths from their constituents:

creditor Eurozone governments are not ready to break it to their parliaments and citizens that Greece’s debts cannot be repaid;

the IMF is not ready to admit to having participated in a program with a country whose debt is not viable;

the Greek government is misleading its citizens that the policies will turn around the country’s economic collapse;

the ECB is pretending it can prevent contagion and avoid further bailouts.

Varoufakis ‘fears’ that Greece is ‘becoming another Kosovo’: a Euroised protectorate run by an undemocratic kleptocracy in hock to Berlin. Also, he argues that the Eurogroup’s assertion that growth will come to Greece without the need for any investment means that Hollande’s attempt to obtain a meaningful growth pact has been a failure, and that depression will come to hit all of the periphery and possibly even France.

Banking union not going well

Another week of diplomatic activity around the banking union. Reuters reports that formidable differences remain over the concrete construction of a banking union, pointing out three remaining big obstacles:

Germany is sticking to its position that only the biggest banks should come under the legal framework of the SSM, while the European Commission, the ECB and most member states are pushing for a comprehensive framework;

Britain wants to ensure that the new regime does not encroach on the single market, and threaten London’s position as a financial centre;

And then there is open question of how to secure proper representation of the non-eurozone members. The Swedes are particularly concerned.

The article says France is pushing agreement as soon as possible, while Germany is more cautious on the timetable. The article quotes Wolfgang Schauble as saying that he was not sure whether the legalities would be agreed by the end of the year. He also said he was doubtful that banks would be able to tap the euro zone rescue fund for help anytime soon.

(As we have said before, it is important to understand banking union not as a quick fix for the crisis, a task it cannot fulfil, but as the single most important institutional reform triggered by the eurozone crisis, which, if done well, could provide cohesion to the eurozone in the future. A supervisory mechanism, without full control, and without resolution powers, is not going to provide those benefits.)

Britain debates its own position in this new world

This FT article provides an interesting insight into how the debate about the future of the eurozone, and the banking union in particular, has put Britain on the spot, by questioning the lazy assumption that there is a viable biosphere outside the eurozone, but inside the EU. The article says Britain’s have-your-cake and eat-it approach to the EU is now under threat from the SSM. Christian Noyer’s remarks were the bluntest statement yet from an official about what threat the UK may be facing. At stake is not only the role of the City of London, but more importantly the case for EU membership itself.  The article quotes former chancellor Alistair Darling, who said if the banking union, which he supports, turns into a trading block, it would raise issue of existential importance, similar to those in 1973.

Some cautious signs of stabilisation in the manufacturing sector

We are still a long way away from good economic news. This is an example of some of the bad news getting a little less bad. Markit’s purchasing managers index for the manufacturing sector rose from 45.4 to 46.2 in November – still deep in recession territory in which it has languished for 16 months, the FT reports. Chris Williamson of Markit is quoted as saying that the recession got worse in Q4, but the manufacturing sectors seems to have bottomed out in July, as a result of which production and employment will continue to fall in the sector, but at reduced speed.

After primary, Renzi will support Bersani

Matteo Renzi and Pier Luigi Bersani will cooperate in the leadership of the Partito Democratico, La Repubblica reports. After the Sunday run-off, the mayor of Florence says he is ready to help Bersani, despite their deep policy differences. The main political goal of the PD is to persuade Beppe Grillo’ voters to swap to Bersani. The latest IPSOS poll, taken after centre-left primary vote, sees PD at 34.6%, Grillo’ Movimento 5 Stelle at 18.9% and Berlusconi’ Popolo della Libertà at 14.8%.

Berlusconi will lead the centre-right against Bersani in 2013 Italian general elections

Silvio Berlusconi is ready to return in front-line politics after Pier Luigi Bersani victory in the centre-left primaries, according to Il Corriere della Sera. After much confusion, Berlusconi is now likely to lead his current party, Popolo della Libertà, in a centre-right primary, scheduled for December 16. Il Corriere says that with a strong figure like Bersani on the left, Berlusconi has changed his mind about his original pledge to retire from politics. But the paper says the real reason is that his party is suffering from a leadership vacuum since Berlusconi stepped back from the front-line.

De Paolini says that the Italian government is overestimating the proceeds of the financial transaction tax

Italy’s version of a financial transactions tax will not reach the target of €1.1bn in revenues per year, Osvaldo De Paolini argues on Il Messaggero. Italy will introduce a levy on stocks and derivatives, compliant with EU schemes, but the probabilities to obtain planned target will dramatically due to capital flight. The country’s investors will transfer trading activities to UK or Asia, countries in which the environment is more conducive.

One quarter of Europe’s population at risk of social exclusion

On Monday, Eurostat released poverty statistics for 2011, according to which 120 million people, one quarter of the Union’s population, were “at risk of poverty or social exclusion” (see the European Commission press release). The statistic worsened only slightly since 2008, but press coverage is shocked nevertheless.

Those “at risk of poverty or social exclusion” meet at least one of three not-mutually-exclusive conditions:

* relative poverty based on disposable income after social transfers;

* severe material deprivation;

* living in “low work intensity” households.

The best and worst performers in the Eurozone in each category were: for overall risk, Greece (31%) and the Netherlands (16%); for income poverty, Spain (22%) and the Netherlands (11%); for material deprivation, Greece (15%) and Luxembourg (1%); and for low work intensity, Belgium (14%) and Cyprus (5%). In absolute terms, 16 million Germans are at risk of poverty or social exclusion.

The failure of Spain’s tax evasion and money-laundering amnesty

Reuters reports that Spain’s treasury failed to raise even half of the modest (€2.5 billion) revenue it expected from a tax amnesty. Apart from offering a reduced tax rate of 10% on up to five years of undeclared earnings, the Spanish government had also allowed people to deposit large amounts of cash with financial institutions by exception of ordinary regulations preventing money-laundering by simply declaring the cash to have been in their possession before 2010.

Spanish cuts to miss the deficit target

El Semanal Digital reports that the Spanish government expects to miss its 2012 deficit target of 6.3% of GDP by 0.5%. In other failed austerity news, Catalan Premier Artur Mas has pleaded for Rajoy to set ‘fair and loyal’ deficit targets for Spain’s regions, or else they will be forced to cut on ‘basic issues’, reports Expansion.

70% of commercial property loans defaulted this year

This is a blast from the past, as most of these loans have been written off, but it is an important reminder of how deep-seated this financial crisis is. The FT reports that over 70% of European commercial property loans that reached maturity this year have not been repaid. Citing figures from Fitch Ratings, 24 of 122 CMBS loans that matured in the first 11 months of 2012 were fully paid at maturity, with a further 12 paid after maturity. The article says with falling property valuations, it has become difficult to refinance European commercial property loans.

Asmussen: Portugal must issue more longer term bonds to qualify for OMT

In an interview with Jornal de Negocios, picked up by  Reuters, Jörg Asmussen said Portugal took “a significant step forward” with the issuance of a three-year bond as part of a bond swap in October, but that was “not enough”. Portugal replaced almost €3.8bn in bonds maturing in 2013 with three-year debt but “the majority of the bonds were bought by domestic investors, which means that international investors have not yet returned to the country,” Assmussen told Negocios, adding that “one three-year bond issuance is not sufficient” in any case. To gain access to the yet-to-be-activated Outright Monetary Transactions (OMT) bond-buying programme, he said: “I would say that it will be necessary to issue reasonable amounts of bonds with longer maturities … along the yield curve.”

More about the GDP deflator vs. unit labour costs debate

This is a debate we have been watching with not a great of enthusiasm from a distance – triggered by Hans-Werner Sinn (again) about how to measure economic adjustment. He argues that one should use the GDP deflator, which shows that hardly any adjustment is taking place, while others are saying unit labour costs are a better indicator.

Mark Schieritz has picked up on the debate, pointing out the Bundesbank has aligned itself against Sinn. The main argument against the deflator is that it includes administrative price increases, such as VAT hikes. Sinn has argued that unit labour costs are artificially depressed through one-off spikes in productivity growth, resulting from layoffs. Schieritz also points to a very detailed analysis by Gerald Braunberger of Frankfurter Allgemeine, who conclude that both measures are too crude to measure adjustments in competitiveness.

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

The markets are getting optimistic again. Spreads down, euro over $1.30.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.671	0.647	0.650
Italy	3.124	3.179	3.173
Spain	3.951	3.852	3.922
Portugal	6.218	6.026	6.382
Greece	14.782	13.302	-1.42
Ireland	3.099	3.013	3.166
Belgium	0.792	0.761	0.783
Bund Yield	1.38	1.41	1.416
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.303	1.3054
Yen	107.240	107.16
Pound	0.813	0.8111
Swiss Franc	1.205	1.2089
ZC Inflation Swaps
	previous	last close
1 yr	1.78	1.52
2 yr	1.78	1.61
5 yr	1.83	1.69
10 yr	2.06	1.94
Euribor-OIS Spread
	previous	last close
1 Week	-6.400	0
1 Month	-2.500	-2.5
3 Months	3.814	5.914
1 Year	42.986	42.886
Source: Reuters