After Monti

• Mario Monti has announced that he will step down after the vote on the budget, due before Christmas;
• Monti took the decision after the Silvio Berlusconi’s PdL had withdrawn support from his government;
• overnight market reaction has been muted;
• Gianfranco Fini says Monti’s resignation was a nice counterattack against Berlusconi;
• Pier Fernando Casini says Italy does not want to return to the bad old days of Berlusconi;
• Klaus Regling says Italy must not endanger the reform process;
• Berlusconi reiterates his will to fight the next elections, and tries to woo Matteo Renzi into his camp;
• the Italian parliament is likely to vote in favour of the budget, which would pave the way for election in early February;
• Guido Gentile expects an increase in bond spreads as a result of this uncertainty;
• Eugenio Scalfari says Berlusconi is a lot more dangerous than Beppe Grillo;
• Ferrucio de Bortoli urges Monti to run in the upcoming elections;
• Wolfgang Munchau said Monti was wrong on austerity, the reversal of which is now the most important task of his successor;
• Tobias Piller says the resignation means that many reforms will never see the light of day;
• Greece is said to have received €27bn in offers for buyback, might go for more;
• Jens Weidmann says banking supervision inside the ECB would require constitutional change;
• also says he is not happy about the Greek programme, as it is partly funded by debt monetisation through the central bank;
• Holger Stelzner says the real winners of the Greek bond buy-back are the hedge funds – a problem that will come to haunt the SPD;
• a PIMCO report says Cyprus banking sector needs €9.1bn-€9.5bn in new capital;
• the Irish government insists that there will be no changes in the austerity budget, which is likely to pass next week;
• El Pais writes that a Spanish rescue application is ‘urgent’, and that Spain should not seek prior approval from Germany;
• the Bank of Spain expresses doubt whether Spain can meet its deficit targets;
• Jordi Sevilla, meanwhile, calls for someone to relieve Spain from ‘austericide’.

The Italian crisis is returning with the announcement by Mario Monti that he plans to resign after the passing of the budget – due before Christmas. Mr Monti took the decision on Saturday after it became clear that he had the lost the support of the largest of the three parties that support his technical government.

As Il Corriere della Sera reports, the withdrawal of support first in Senate, then in Lower House, by the Popolo della Libertà has persuaded Monti to seek talks with President Giorgio Napolitano, in which he announced his intention to resign after the budget. The overnight market reaction has been muted, with Italian 10 year spreads at just under 3.3% this morning, but most of the increase in spreads already occurred on Friday, after it became clear that the PdL no longer supported the government. On Thursday, Monti had won the two last crucial votes, but lost the overall majority in the Parliament.

(We mistakenly reported on Friday that Monti had lost the two votes. He won the votes, but it was clear that he no longer a stable governing majority after the PdL withdrew its support.)

After Monti’s announcement there was some speculation about Monti’s return as a political candidate, with denials all around.

Monti enjoys broad support among Italy’s political establishment, and also among Italian commentators. A recurring line among many observers is that Monti is now free to pursue his own political agenda, and that his resignation may have been a smart tactical move. A typical example was the comment by Gianfranco Fini, who spoke in the ‘Che tempo che fa‘ TV programme, said Monti ‘has scored a nice goal in a counterattack against Berlusconi who has gone back to the old politics of not giving you his confidence, whilst not withdrawing it either. In other words: I will keep you on the roasting grill, and you will fry over time.” Reuters quotes Pier Ferdinando Casini, head of the centrist UDC, the party with the most enthusiastic support of Monti, as saying on SkyTG24 TV: “A large part of civil society does not want to return to the populism and demagoguery of the past. We must give them the political offering they seek.”

The European reaction was predictably defensive – with everyone reminding the Italians that they must continue Monti’s policy. One of the most quoted references this morning was an interview given by Klaus Regling to Suddeutsche Zeitung, in which he said Italy had initiated important reforms which the markets have honoured, but there was now concern about current political developments – in other words about Berlusconi.

Berlusconi opens election campaign and woos Renzi

Silvio Berlusconi immediately went on the attack after Monti’s resignation announcement, La Stampa reports. The media mogul, through a letter sent to a supporters’ website, said he will run in 2013 elections, and invites all the liberal people to run with him. This was interpreted as an invitation to Matteo Renzi, the Mayor of Florence who lost the Partito Democratico primary against Pier Luigi Bersani. In addition, Berlusconi underlined what is likely to be his main message during the election campaign – that an intolerable fiscal pressure is the reason of Italy’s lack of growth.

Italian parties likely to pass quickly Budget Law to permit Monti resignation

The Popolo della Libertà secretary Angelino Alfano says that his party is ready to vote the Budget Law in double-quick time. As La Repubblica reports, Alfano stressed that his party’s commitment to ensuring the bill’s approval is consistent with prior announcements to that effect, delivered to the President and Parliament. At the same time, the Partito Democratico leader Pier Luigi Bersani said he is ready, too. For this reason, the general election could be held February 10, but everything depends on the time table of approval for the Budget Law. According to La Repubblica, everything will be known before Christmas.

The markets will price the Berlusconi effect, Gentili writes

Italy’s spread will rise again, Guido Gentili writes on Il Sole 24 Ore, reflecting the recent political turmoil. Uncertainty, lack of confidence in reforms implementation and risks of deeper recession: Italy is on the brink again. After the G20 in Cannes in November 2011, when Silvio Berlusconi was forced to ask for IMF help, another meeting in Cannes is crucial for Italy. During the last World Policy Conference, Angel Gurria asked to Monti why he did not make a request for an aid. Monti said Italy does not need a bailout, but according to Gentili time is running out. Now, the markets will devour Italy. And maybe it’s too late for ask for a support, Gentili argues.

Italians could be tired by Berlusconi’s illusions, Scalfari writes

Mario Monti’s surprise resignation unveils a blanckmail’ strategy by Silvio Berlusconi, who is become ever more similar to Beppe Grillo, but with more political sharpness. Eugenio Scalfari, on La Repubblica, considers the latest strategy of Berlusconi worse than Grillo’s. The nihilism of Berlusconi is more dangerous because the media mogul is a better merchant of illusions, like a magician, Scalfari writes. However, this time could be different: after 20 years of Berlusconismo, Italians should be tired by illusions. They need concrete actions, not populism. After Monti? The hope is for a prudent choice, in line with EU integration project. Not so simple, Scalfari argues.

But now Monti is free to run as PM, De Bortoli writes

Mario Monti should, and will run in next general elections, Ferruccio De Bortoli argues on Il Corriere della Sera. After a very difficult weekend, Monti appears freer than two months ago, when the first rumors of a possible second term in office as PM started. The resignation could be the first step for the presentation of a party (or a list, included in another party) with Monti at the top. According to De Bortoli, Silvio Berlusconi and Angelino Alfano have destroyed a government, but not a leader. The appeal of Monti seems at its highest level: according to latest polls, a Monti’s party could reach over 18%.

Wolfgang Munchau about the Monti bubble

In his FT column, Wolfgang Munchau says the end of the Monti regime gives Italy the chance of a policy correction. Austerity has produced a depression with a self-reinforcing debt trap. Monti’s successor will have to do two things: the first is to end austerity in 2013, the second is to confront the EU, and Germany in particular, that Italy’s position in the eurozone is not sustainable without a eurozone bond – or some other form of debt mutualisation. Despite a much reported tactical victory at the June EU summit (which was never for real anyway), Monti never stood up to Merkel on this substantive issue. His policy to solve Italy’s problem through austerity has played well into Merkel’s strategy of postponing any of form resolution and any serious discussion on institutional reform beyond the German elections.

Tobias Piller says reforms are stopped dead in their track

Tobias Piller,  writing in Frankfurter Allgemeine, says Monti’s resignation means that the reform programme has been stopped dead in its tracks even before it took off. As an example he cites Monti’s inability to reform the state, including the planned reduction in the number of the 110 provinces, and a tax reform to simplify the Italian tax code. A small austerity offset economic stimulus programme has also stalled in the parliamentary process, and will expire unless approved by the end of this week.

Greece said to have received €27bn in offers for buyback, might go for more

Greece may ask additional offers from bondholders in a debt buyback plan.  The invitation might be renewed on Monday to top up the offers already received, three officials close to the proceedings told Reuters.  A deadline for bondholders to submit offers expired on Friday. A Greek government official said that Athens had received offers of about the targeted sum of €30bn. According to Mega TV, Greece received offers for at least €15bn-€16bn from foreign investors and about €10bn-€11bn from Greek banks by Friday. Bloomberg quotes state run NET TV reporting  offers of €27bn. Antonis Samaras said on a press conference on  Monday or Tuesday he would be able to say “with great certainty” that the process had done well.

Weidmann critises Greek deal and says banking supervision needs constitutional change 

Bundesbank president Jens Weidmann criticised a new debt deal for Greece in an interview with the Welt am Sontag, aka Reuters. Greece’s funding gap would be financed by new credits and for the first time by actual transfers from national budgets. “Unfortunately the central banks are also not spared,” he said. Weidmann also criticised the fact that Greece would meet part of its funding needs through short-term T-bills, passed over to local banks, who re-finance themselves with central bank means. He also said that it would require a change in EU constitution to avoid a conflict of interest between monetary policy and banking supervision. “I cannot see how with the current legal framework we can transfer supervisory duties to the ECB.”

Stelzner on the Greek buyback

In a commentary in Frankfurter Allgemeine, Holger Stelzner writes the real winners of the Greek bond buyback are the hedge funds, who had placed lucrative bets ahead of the buyback, while the real losers are the Greek savers. He says the SPD’s euro policies would lead to more such policies, which is ironic given the SPD’s hostility towards hedge funds.

PIMCO report says Cyprus banking sector needs €9.1bn-€9.5bn

The IMF and the Central Bank of Cyprus received a report by PIMCO on the state of Cypriot lenders on Saturday morning that will determine whether the IMF will deem the Cypriot debt sustainable and agree to participate in the country’s bailout, Kathimerini reports. The report estimates the capital requirements of the battered banking sector at between €9.1bn and €9.5bn, along the lines of the Cypriot finance ministry.

Irish government insists no changes on budget, crucial votes this week

The Irish government is adamant there will be no row-back on any aspect of the budget in the face of growing criticism from Fine Gael and Labour backbench MPs on cuts in child benefits and respite care. A Government source told the Irish Times there were fears if concessions were granted on any one issue everything would unravel.  Crucial votes will take place this week on the Social Welfare Bill, giving effect to cuts in child benefit, and a motion of no confidence from Sinn Féin. Ahead of both votes, the number of TDs from Fine Gael and Labour who have criticised the budget has risen to over 20. There is a strong consensus that the majority will support the Government, according to the article.

El Pais asks for a Spanish rescue

In an editorial, El Pais writes that a Spanish rescue application is ‘urgent’. The reason given is that the government’s high risk premium is also raising the funding cost spread between Spanish non-financial firms and their competitors elsewhere in the Eurozone, ‘strangling’ the Spanish economy and maybe delaying the end of the recession beyond even 2014. El Pais claims this analysis is ‘unanimous’, including among Mariano Rajoy’s economic team. The editorial adds that both the government and the citizenry ‘know’ an ECB rescue application is a foregone conclusion. For these reasons, El Pais concludes that delaying a rescue that would enable the OMT is a strategic mistake. The only explanation the paper can muster is that Rajoy is wary of the political and electoral cost, which isn’t really justified given that there will be no more elections until 2015. El Pais also invites Rajoy to give up waiting for Germany’s previous approval of a rescue application, because ‘the most convenient measure for economic recovery and unemployment reduction cannot depend on the acquiescence of another country’. Finally, El Pais takes for granted that a rescue will happen and that a reform of the pension system will be demanded by the ‘troika’;
thus, Rajoy should not be afraid of the inevitable demand for pension reform.

Bank of Spain also has doubts about deficit target

On Friday, Reuters reported on the Bank of Spain Governor’s doubts that Spain will meet its deficit target for 2012. By saying the 6.3% deficit target was ‘not completely assured’, Luis Maria Linde added to Mariano Rajoy’s expectations management last week, when he said the target would be ‘hard to meet’ even as his government failed to update pensions with inflation. Reuters wrote that this would ‘please the ECB’ which is opposed to inflation indexing of wages and pensions.

Former Spanish minister Jordi Sevilla calls for deliverance from debt slavery

In a blog post, Spanish economist and former Public Administration minister Jordi Sevilla calls for “someone to relieve Spain from ‘austericide'”. Sevilla argues that, on its stated objectives, the austerity policy pursued since May 2010 has been a failure. After two labour reforms sold to ‘keep employment’, unemployment is at historical highs. After three financial reforms, including one EU rescue, sold to ‘revive credit’ the October new credit figures are also at historical lows. Fiscal consolidation is sold to ‘reduce deficit’ but targets continue to be revised upwards and then missed. ‘Belt-tightening’ to pay down debt is leading to no reduction in private debt and a rise in public debt. The welfare state ‘is sacrificed to generate market confidence’ and the risk premium hovers at unsustainably high levels.

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

Not great, given the news, but could be worse.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.698	0.663	0.665
Italy	3.291	3.294	3.288
Spain	4.184	4.167	4.245
Portugal	6.155	6.141	6.594
Greece	13.672	13.230	-1.30
Ireland	3.245	3.287	3.442
Belgium	0.830	0.804	0.826
Bund Yield	1.293	1.294	1.30
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.290	1.2901
Yen	106.570	106.32
Pound	0.806	0.805
Swiss Franc	1.208	1.2071
ZC Inflation Swaps
	previous	last close
1 yr	1.49	1.44
2 yr	1.58	1.66
5 yr	1.68	1.66
10 yr	1.93	1.92
Euribor-OIS Spread
	previous	last close
1 Week	-4.900	-5.6
1 Month	-4.414	-2.214
3 Months	5.457	7.657
1 Year	43.671	43.971
Source: Reuters