Another fine mess in Rome

• Mario Monti loses two votes – one in the Senate, one in the House – after Silvio Berlusconi’s PdL withdraws support from the government;
• there were conflicting reports about whether the PdL would formally withdraw its support for the Monti administration;
• Italian sovereign yields immediate shot up on the news;
• Pier Luigi Bersani said the Monti government was now on the brink of collapse;
• there is increasing talk of early elections in February, as opposed to the originally scheduled date of May;
• President Giorgio Napolitano says whatever happens, reforms will continue;
• Ferrucio de Bortoli says the Italian centre-right is a mess, and it needs to separate from Berlusconi;
• the hard-left Il Fatto Quotidiano applauds Berlusconi for putting an end to German austerity;
• marvels at the thought that Italy could be without a government by Christmas;
•  the German government is furious about Herman van Rompuy’s proposals for a three-stage process towards economic union;
• Germany is not ready to commit to any concrete action and timetables before 2014;
• German government is particularly angry that the van Rompuy proposal contains so many ideas from the European Commission’s proposals, including a common fiscal space;
• van Rompuy also wants a framework in place by March 2013 to allow direct ESM-funding of banks;
• the Greek government presents its new income tax codes, which includes significant tax increases for ordinary citizens;
• Greek entrepreneurs have trouble paying their tax bills;
• Greek unemployment reaches 26%;
• ECB revises 2013 GDP growth forecast range down to -0.9 to +0.3%;
• no changes in interest rates, but Draghi confirms GC discussed negative deposit rates;
• Draghi said a banking union that fails to give the ECB power over all banks is unworkable;
• says he has received overwhelming legal advice that Art 127,6 TFEU constituted a sufficient  legal basis for a common bank supervisor;
• Benoit Coeure says goal of OMT is not to get rid of bond spreads;
• El Pais says Spanish government is in denial of the deteriorating economic outlook, and the impact of austerity on growth;
• Pol Antràs and Ignacio Conde-Ruiz, meanwhile, argue that Spain has been cooking the inflation numbers by putting pressure on oil company to delay price increases.

Yesterday’s events in Rome showed that it takes only a relatively minor hiccup for confidence in the eurozone to be reversed. The big news was the decision by Silvio Berlusconi to withdrew support of his Popolo della Libertà party for two confidence votes in Parliament. As Il Corriere della Sera reports, Berlusconi told to his MPs to abstain in a crucial vote in the Senate over government’s economic-development bill because of an amendment that ban convicted political candidates. As a result, Mario Monti lost a majority. After two hours, Berlusconi recommended to his MPs to abstain in another vote in the House on measures to reduce the costs of Italy’s local and national political system. As in the Senate, Monti lost the majority in the Lower House too.

There were conflicting media reports about whether the PdL is about to pull the plug or not. The party leadership will a formal decision in the next few days. The spread between 10-year BTPs and German Bunds shot up by 18bps after the PDL announced it was deserting the Senate vote.

… Bersani warns about a possible Italian government collapse … 

Pier Luigi Bersani admits that Monti’s government is on the verge of a breakup after Berlusconi’s actions, which he called completely irresponsible, as L’Unità reports. The PD’s Senate whip, Anna Finocchiaro, said that if the government no longer has a majority, Monti should go to the Quirinale for consultations with Giorgio Napolitano. If early elections come, they would take place in February instead of May.

… and Napolitano says Italy will avoid the worst case

In Italy, all powers rest with the president during times of political crises. Napolitano yesterday tried to bring back some calm by saying yesterday that there will be no change in economic policies, La Repubblica reports. He said he was ready to talk with Berlusconi, Bersani and Monti to guarantee the viability of the current government. But he ruled out early elections.

Italy centre-right completely doomed by Berlusconi, De Bortoli writes

The Italian centre-right is like the famous oil painting “The Raft of the Medusa”, by Théodore Géricault: without any kind of control. On an editorial on Il Corriere della Sera, Ferruccio De Bortoli writes Italy needs a strong centre-right party, to revitalize the political fight with the centre-left Partito Democratico and to represent millions of Italians. However Berlusconi has killed his creature, abandoning it to his fate. That’s why the core base of the centre-right should split from the media mogul: it’s the only way to survive Berlusconi’s whims.

An Italian Christmas without a government 

Italy could be without government before Christmas, according to an editorial on Il Fatto Quotidiano. Monti’s time is over, and with him the German-austerity measures, the radical left newspaper argues. Unprecedently, Il Fatto says Berlusconi had done the right thing, and Bersani should follow this way to go to early elections.

(We find this comment particularly interesting because it shows how austerity is now triggering a disunion of the left. This could be very problematic for Bersani.)

German government is furious about van Rompuy’s three-stage strategy

Frankfuter Allgemeine reports that Berlin is furious about the van Rompuy report towards economic union. The German government says these proposals go too far. In particular, the government is appalled by the idea of  a “three stage process”. Berlin is happy to talk about everything in general and vague terms, but refuses point blank to be drawn in on any commitments beyond 2014 (we wonder why). The government is also angry that van Rompuy has taken over many elements of the proposals from the European Commission last week. The article says that a firm commitment towards these goals would trigger a dynamic that might be difficult to get under control. Berlin does not want to address the issues, including treaty change, until 2014.

The three stages outlined by the proposal are the completion of the existing legislation in 2012 and 2013, including on banking union and Basel III. The second stage is a common bank resolution administration and a common resolution fund – but the article said a common deposit insurance has been dropped. A third stage includes changes to the European Treaties, with the setup of a common fiscal capacity.

Van Rompuy wants ESM bank aid framework by March 2013

Reuters reports that the van Rompuy report includes a framework for the direct recapitalisation of banks by the ESM before end-March (as part of the stage one proposals, we presume). The report also advocates a form of common debt issuance. In particular, it recommends a common fiscal centre to absorb economic shocks.

New draft tax code draft with lower tax raises on income and higher child benefits

Yannis Stournaras latest draft of the tax code to be presented to coalition party leaders increases income tax by less than in previous draft, Kathimerini reports. According to the plan, incomes of up to €25000 will be taxed at a rate of 21%, incomes between €25000 and €40000 at 36% and incomes over €40000 at 40%. The income tax-free threshold of €5000 will be abolished for a €1950 tax reduction for earnings up to €18000 per year, lower for higher incomes. The tax break will be boosted by 5% for every child in a family. If the draft law is approved, a family with one child and an income of €30000 would pay €630 more in income tax than now. Additional income is expected from a deal between Greece and Switzerland on the taxation of deposits. Currently both sides negotiate about a sliding scale of 15%-38% depending on the size of deposits. One third of the €38bn is said to belong to ship-owners.

Today is also the deadline for the banks and hedge funds to decide on whether or not they participate in the bond buyback programme.  Greek banks will hold board meetings during the day.

Greek entrepreneurs under strain to pay taxes, enterprises shut down, unemployment reaches 26%

Seven out of every ten entrepreneurs are finding it difficult or are unable to keep up with their tax obligations, while only 5% say they will definitely be able to pay their taxes, Kathimerini cites a survey by the Athens Chamber of Commerce and Industry’s Studies and Research Center. Latest data also suggests that for every enterprise that is set up, four are shutting down.

The Greek unemployment rate, meanwhile, hit a new record of 26% in September,  according to latest ELSTAT publications, more than double of the Eurozone average of 11.3%.

A summary of what was decided, or rather not decided, at the ECB

The significance of the ECB’s downward revision of its forecast is not so much a reflection of a recent change in the economic dynamics in the eurozone (we agree with those who say that the ECB is probably lagging behind). The significance lies in the signal for future policy. The ECB puts the range of GDP growth in 2013 at -0.9% to +0.3%, which tells us only two things: they have no clue how bad 2013 is going to be, but they are getting more pessimistic. Forget the reported mean figure of -0.3%. This is entirely meaningless. The GC left interest rates unchanged, but there was a discussion about a negative deposit rate. The dynamics of all of this together suggests that – in the absence of a changed outlook – another rate cut may indeed by possible.

In a separate development, the ECB extends the full allotment policy in its liquidity operations. A statement said the GC will conduct its main refinancing operations as fixed rate tender with full allotment for as long as necessary, and at least until the end of the sixth maintenance period of 2013 on 9 July 2013.

Draghi sets out the minimum requirements for banking union

Mario Draghi’s political style is interesting. He is calm, polite, but very firm. The FT reports him saying that a decision that fell short of giving the ECB the power over all the banks would be unworkable. “You want to avoid fragmentation in the banking market, you want to keep a level field,” he is quoted as saying. He said the ECB cannot, in practice, supervise all 6000 banks. “As the size of the bank and its systemic significance decreases, so will decrease the intensity of supervision being carried out at central level and will increase the intensity of the supervision being carried out at national level.” He also said the ECB was doing some “deep thinking” about how to ensure that supervision was separate from monetary policy.

He also said that the overwhelming legal advice he had received is that article 127.6 TFEU constituted an adequate basis for creating a single supervisory mechanism in the euro area.”

Coeure says goal of the OMT is not to eliminate bond spreads

Since the OMT is largely a phantom programme, this is all a bit speculative. Reuters quotes Benoit Coeure as saying that the goal of the OMT is not the elimination of spreads. He said a complete convergence of bonds is not necessary for a monetary union to function. “Nor is the ECB willing to purchase any amount of sovereign bonds necessary to balance governments’ inter temporal budget constraints.”

Perplexity spreading about Spain’s lack of economic policy

An editorial in El Pais (English edition) wonders why the Spanish government is in denial of the worsening economic situation, and the bad prospects for next year, as ‘perplexity spreads’ about an economic policy limited to budget cuts with no visible impact on the deficit, which is ‘ostensibly’ the reason for the cuts. The editorial enumerates the failures of government policy: fiscal consolidation has been ineffective at reducing deficits;
there has been no employment stimulus in sectors not affected by the downturn;
the private sector hasn’t been effectively encouraged to invest in R&D;
and the failure to trigger the OMT condemns Spanish businesses to higher borrowing costs than the Eurozone average. The foreseeable consequence of all this is an unemployment figure that will in all likelihood reach 6 million in the 4th quarter of 2012.

Is Spain cooking the inflation numbers?

Writing on the blog of think-tank FEDEA, Pol Antràs and Ignacio Conde-Ruiz argue that the slowing down of Spain’s year-on-year inflation rate in November is due to a remarkable drop in Spanish fuel prices in the six weeks from mid-October to end-November. The blog post has charts showing similar fuel price increases in the four largest Eurozone countries, plus Portugal, from end-November 2011 to mid-October 2012, but flat prices in Germany, large drops in the others, and by far the largest price drops in Spain in the six weeks after mid-October. The authors show that, in the week after Spain’s inflation figure was published, the price of fuel has begun to increase, against dropping prices in all other four countries surveyed. They speculate that the reduction of the margins of oil companies in November may be the result of ‘external pressure’ and that prices should revert to their trend in the next few months as that ‘pressure’ is relaxed.

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

Look at Italian spreads. The euphoria has completely disappeared. And the euro is down below $1.30.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.657	0.698	0.698
Italy	3.111	3.321	3.301
Spain	4.065	4.184	4.241
Portugal	6.034	6.155	6.573
Greece	13.887	13.672	-1.31
Ireland	3.105	3.245	3.415
Belgium	0.794	0.830	0.853
Bund Yield	1.346	1.293	1.313
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.307	1.2968
Yen	107.770	106.92
Pound	0.811	0.8076
Swiss Franc	1.210	1.2088
ZC Inflation Swaps
	previous	last close
1 yr	1.51	1.49
2 yr	1.71	1.58
5 yr	1.7	1.68
10 yr	1.93	1.93
Euribor-OIS Spread
	previous	last close
1 Week	-6.000	-5
1 Month	-4.314	-2.614
3 Months	4.914	4.914
1 Year	44.843	42.943
Source: Reuters