Asmussen says no bank supervision framework this year

• ECB board member says deadline will be missed even if there is an agreement next week;
• Silvio Berlusconi has now officially returned to frontline politics;
• he will be the leader of the centre-right in the forthcoming general elections;
• says Italy needs him;
• La Stampa writes that his return to front-line politics makes a second term for Mario Monti less likely;
• Giulio Tremonti has also returned to frontline politics with a new party in close alliance with the Northern League;
• Eurozone retail sales collapsed in October;
• Italy’s tax revenues have increased substantially this year due to higher property taxes;
• Ralph Atkins see green shoots on the basis of the latest PMI, and says forecasts are being revised downwards just as things get better;
• Italy slides down in the Transparency International corruption index, and so does Greece;
• Olli Rehn has become the latest official to declare the crisis to be over;
• Lorenzo Dilena and Antonio Vanuzzo argue that Italy, too, will need to set up a bad bank, similar to what happened in Spain;
• Fitch gave Spain’s banks a negative outlook due to their exposure to Spanish sovereign debt and the weakening Spanish economy;
• the European Commission and the Spanish government disagree on the role of the charitable foundations as owners of the cajas that have turned into banks;
• the Greek banks say they will decide Friday whether to participate in the bond buyback;
• Ireland delivered its sixth successive austerity budget, with controversial new property taxes;
• the introduction of CaCs brings a quiet revolution to eurozone bond markets next year;
• John Paulson, meanwhile, has lost an arm and a leg with his bets against the eurozone.

Jorg Asmussen of the ECB said the year-end deadline for a final agreement on a bank supervision framework was now out of reach. He is quoted by Reuters as saying that even minister were to agree a deal on December 12, it would not be possible to finalise the framework because of the need to involve the European Parliament.

(That seems a correct assessment, but it is not that big a deal. Decision making procedures are complex, and timetable get pushed a bit. What to watch out is not whether the decision gets taken on Dec 12 or Dec 13, but whether the banking union to be agreed is viable).

Berlusconi is back…

Silvio Berlusconi is now officially back. After a few chaotic days, he has finally unveiled his plans. According to La Stampa, Berlusconi will be the candidate for the centre-right. His target is to achieve 25% in the general election. He reiterates in a statement that the country needs him, because austerity and poverty are rising, while competitiveness and credibility are falling. If true, Berlusconi will be up against the Partito Democratico leader, Pier Luigi Bersani. As La Stampa remarks, the main effect of Berlusconi’s candidature is to reduce the probability of a return by Mario Monti. There is now a reduced likelihood of a parliamentary coalition of forces that would support a second term for Monti.

…and so is Tremonti

Giulio Tremonti will lead a new political party in 2013 general elections, in support of the Northern League, Il Corriere della Sera reports. He launched his movement Lista Libertà Lavoro to be ready for Lombardy regional elections and, in agreement with Northern League, also for general elections. Tremonti thus returns to the party from which he stemmed originally. As Il Corriere remarks, the Northern League will now consider to make Tremonti their candidate as PM. According to an internal Corriere poll, the Northern League with Tremonti would reach 8.5% in elections, 8.1% without him.

(That would return Tremonti to his old role as a potential power broker, especially if Berlusconi could manage some sort of a recovery for the centre-right. The simultaneous return of the old duo Berlusconi and Tremonti is clearly an indication that the right is clapped out politically, but the present polls may underestimate the extent of their decline.)

Eurozone retail sales collapse in October

There has been more evidence of a deteriorating recession during October, with retail sales down 1.2% mom, and 3.6% yoy, according to Reuters. Eurostat also revised downward the September figure from -0.2 mom to -0.6%. This data, combined with other recent evidence, suggests that the fourth quarter is going to be very weak.

(This is clearly the fiscal multiplier at work here. As you contract the fiscal position in a recession, this is the kind of data you get, with more to come  in 2013.)

Italians to pay more taxes in 2013

The Italian government has taken €322.8bn in taxes in the first 10 months of 2012, an increase by 4% against the previous year, La Repubblica reports. The increase was partly attributed to the controversial new IMU property tax. Tax revenues will rise further due to further real estate taxes arising out of a previous austerity programme. As the Italian economy is weakening, VAT revenues have dropped by 2%.

Ralph Atkins sees green shots

Writing in the FT, Ralph Atkins notes that the economic news is not all bad. He points to the latest PMI data, which the support the idea that the economy is turning. The composite indices are still well below 50, i.e. in recession territory, but they have come up from the troughs. “Ïn other words, growth forecasts are being downgraded just as things are getting better. The ECB, at least, has a record of revising down too far – only for it to have to revise up again subsequently.”

(The PMI are a valuable indicator, along with others, but as in all indicators, there is noise – especially in times when things a little more complicated than usual. We have unprecedented levels of austerity, in a recession, a still ongoing banking crisis, and a relatively modest global recovery, which are all objective factors that will keep the eurozone in recession at least in the beginning of next year. PMIs are not precise indicators of recession turning points. )

Italy slides down in corruption index

Italy has slid three notches to 72nd place in Transparency International’s 2012 Corruption Perception Index. In a 100-point scale, the country scored 42, a very low position for a G20 member. As Il Sole 24 Ore says in an editorial, Rome is well behind Namibia and Rwanda. In particular, the perceived level of Italian public-sector corruption seems to be increased due to the vulnerability of economic system. Greece, which fell to 94th place, and Italy were seen has having suffered from increased corruption amid the Eurozone crisis. Competitiveness and credibility are the main important issues to restore in Italy, Il Sole says.

Greek corruption on the rise, Stournaras suggests jail sentences for tax evaders

The press throughout Europe picked on the latest report of Transparency International, according to which corruption in Greece has increased during the crisis. Kathimerini quotes the head of TI’s Greek branch, Costas Bakouris, said “The economic crisis is connected to corruption and the fight against it is one of the keys for Greece to emerge from its fiscal woes”. Finance minister Yannis Stournaras immediately went public to call for tougher penalties for tax evaders heralding new legislation on immediate jail terms for large-scale tax evasion. Under the current law, jail terms are suspended., Greeks hold €38bn in Swiss banks, according to information from the Swiss Association of Bankers, significantly less than earlier press reports had suggested.

(We doubt the corruption has increased during the crisis. The TI index tells as less about Italy and Greece than about how flawed these indices are. Greece has gotten poorer, and people have become more pessimistic about everything, including perceptions of corruption.)

Crisis over! (Olli Rehn edition)

This is our next instalment in this series. In its penultimate edition before its closure, FTD has an interview with Olli Rehn, who has become the latest official to pronounce the crisis to be over. The latest acute phase of the crisis was in June, he said, and now we have reversed the trend. The reason he gives is the austerity policy, which will have led to a reduction in the eurozone-wide deficit from 3% this year to 2.5% in 2013. He said the Commission would from now onwards no longer look just at nominal targets, but increasingly at structural targets – and be willing to accept a trade-off between structural reforms and deficit reduction.

The Italian banking system will follow Spain, Linkiesta argues

Italy could be obliged to create a bad bank for non-performing loans,  Lorenzo Dilena and Antonio Vanuzzo write in Linkiesta because the banking system is suffering from imbalances due to the exposure to the country’ sovereign debt. In early 2013, the IMF will conduct an intensive screening of the Italian banking stability. The IMF’ Financial Soundness Indicator indicates that Italian banks have 11.7% of doubtful loans, while the Italian banking association remarks the real level is at 5.9%, or €117bn. In addition, Linkiesta calculates, with Bank of Italy figures, the doubtful loans are at 12.3%. Dilena and Vanuzzo argue that the IMF will suggest a restructuring plan, in line with what happened in Spain.

Fitch’s negative outlook on Spain’s banks

In a report released on Tuesday, Fitch put Spanish banks on ‘negative outlook’ in 2013, because of their exposure to sovereign debt, and the ‘weak’ economic environment in which banks are being restructured, writes Expansion. Specifically, according to Fitch a downgrade of Spain’s debt, which is currently BBB on a negative outlook, would cause a downgrade of Spanish banks.

Spain and Brussels disagree on the cajas’ future role

One of the most controversial point about the restructuring of Spain’s cajas is the final status of their charitable foundations. According to El Pais, Spanish Economy Minister Luis de Guindos and an unnamed ‘highly placed source’ in the European Commission are contradicting each other on whether the charitable foundations could retain control of a caja-turned-bank. The Commission and the Spanish Ministry are interpreting the Memorandum of Understanding differently, presumably to protect the four cajas which emerged from the crisis without need for state aid: La Caixa, Kutxabank, Unicaja and Ibercaja. The relevant language in the July 20 MoU is:

… The Spanish authorities will prepare by end-November 2012 legislation clarifying the role of savings banks in their capacity as shareholders of credit institutions with a view to eventually reducing their stakes to non-controlling levels. Furthermore, authorities will propose measures to strengthen fit and proper rules for the governing bodies of savings banks and to introduce incompatibility requirements regarding the governing bodies of the former savings banks and the commercial banks controlled by them. …

Greek banks to decide on Friday whether they participate in buyout

Greek banks will hold board meetings on Friday to decide whether to take part in a bond buyback, two banking sources told Reuters on Wednesday. Greek lenders, which hold an estimated €17bn of bonds out of the €63bn eligible for the buyback, are expected to take part in it because they depend on bailout funds that Athens stands to receive after successful completion of the buyback. On Thursday, senior Greek bankers will meet finance minister Yannis Stournaras to discuss the plan. Friday is the last day in which Greece will accept investors’ bids (unless the deadline is extended).

Ireland presented its sixth austerity budget

Irish government delivered its 2013 budget with €3.5bn in austerity measures, €1.25bn through tax hikes and €2.25bn expenditure cuts, writes the Irish Times.  The most controversial element is the property tax, to be levied at a rate of 0.18% on properties worth up to €1m and 0.25% on properties valued at more than that. A cut to child benefit, increased duties on alcohol and tobacco products, a hike to the student contribution charge, and rises to the rates of motor taxes and a tax on savings were some of the other headline announcements. On the expenditure side there are cuts in the health  sector, lower GP and drug rates, higher prescription charges, sharper  eligibility criteria. The government had a comfortable majority of 108 to 49 on the first vote on the Budget

The eurozone’s very slow CaC revolution

The FT has an article about the CaCs that will kick in next year throughout the eurozone, which have the purpose to force holdouts to take part in a debt restructuring. The introduction of CaC is advanced economy sovereign bond contracts is a significant departure. The euro-CACs differ from typical clauses in two crucial aspects. While most CACs have a voting threshold of 75%, the eurozone clauses will have thresholds of two-thirds, for the entire stock of bonds, and 50% for individual bonds. With a large home bias in eurozone bond markets, it would be hard for holdouts to must a blocking position. Incorporating the new clauses into the eurozone government bond market will be a slow process, given the size of the outstanding non-CAC market. Also, treasuries will fund 45% of next year’s borrowing by adding to pre-existing, non-CAC bonds. The article quotes Lee Buchheit as saying that it will take decades before the clauses are fully incorporated into a government’s debt stocks. While most analysts believe the CaCs are no big deal, the article also quotes an interesting dissenting view from SocGen, according to which the CaCs already had a negative impact on the entire market, and over the years, they will make the market for the older bonds less liquid.

Paulson loses money on his eurozone bets

The FT has a report that John Paulson, who had placed heavy bets against the eurozone this year, has incurred large losses – in addition to those he incurred last year when he overestimated the US recovery. He told investors this year that he had reduced such bets the ECB started the OMT programme. The leveraged investments were down 18.4% this year by end-October, and the unleveraged one down 12.7%

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

Spreads rising again.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.642	0.657	0.657
Italy	3.035	3.160	3.149
Spain	3.855	4.065	4.138
Portugal	6.073	6.034	6.410
Greece	13.960	13.887	-1.36
Ireland	3.026	3.105	3.271
Belgium	0.768	0.794	0.813
Bund Yield	1.394	1.346	1.357
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.312	1.3055
Yen	107.890	107.69
Pound	0.814	0.8113
Swiss Franc	1.214	1.2099
ZC Inflation Swaps
	previous	last close
1 yr	1.64	1.51
2 yr	1.71	1.71
5 yr	1.69	1.7
10 yr	1.94	1.93
Euribor-OIS Spread
	previous	last close
1 Week	-6.400	0
1 Month	-2.614	-2.714
3 Months	5.814	5.914
1 Year	42.786	42.686
Source: Reuters