EUROINTELLIGENCE DAILY BRIEFING, 18 de Dezembro de 2012. Enviado por Domenico Mario Nuti.



Monti won’t be a candidate, but will support a centrist alliance

  • Corriere della Sera reports that Monti will publish his own manifesto, but will not be a candidate at the forthcoming elections;
  • instead he will support the centrist party of the Ferrari chairman, and the UDC;
  • President Giorgio Napolitano expresses concern about Italy’s future, criticising in particular the failure by the political system to reform the electoral law;
  • Berlusconi renews his attack on Germany, blaming German current account surplus and an obsession with austerity for the crisis;
  • Berlusconi now wants to team up with the Northern League ahead of the elections;
  • the European Commission has approved the financial aid for Monte dei Paschi di Siena;
  • the troika warns of a large implementation risk of Greek reforms, quoting political and legal obstacles;
  • troika also warns that spending cuts next year will hurt growth more than expected;
  • Greece received first loan tranche, with next tranches dependant on further policy action;
  • 41% of young Greeks consider emigration;
  • an increasing number of healthy Greek companies are fleeing the country to benefit from better lending conditions;
  • the German press is outraged by reports that the co-chairman of Deutsche Bank called the prime minister of Hesse, complaining about a police raid;
  • the bank is investigated for massive tax evasion and criminal conspiracy in relation to CO2 trading scheme;
  • Rudolf Augstein says the bank behaves a like a drug cartel, and needs to be dismantled;
  • French pension funds need extra funding despite recent reforms;
  • due to a wealth tax the marginal total tax paid some wealthy Frenchmen exceeded 100% of income this year;
  • protestors are calling on Portugal’s president not to approve the 2013 budget;
  • Austria has been gripped by yet another local funding scandal, this time in Carinthia;
  • Yves Mersch says ECB won’t cut interest rates;
  • Takatoshi Ito calls on Japan’s new prime minister to get tough on the central bank, and force it set an inflation targets, and buy Japanese construction bonds;
  • Santiago Niño Becerra says Spain would need to grow at 2% to create net employment, which is not going to happen;
  • Spain’s employers association is forecasting 4.4% drop in employment with 800000 jobs lost;
  • the number of Spaniards who are owed back pay has risen;
  • judicial foreclosure have doubled in Spain this year;
  • as a result of the crisis, Spain’s humanitarian aid has shrunk 95% over the last four years;
  • the president of the Spanish banking association says bank executives should be personally liable for losses;
  • Nouriel Roubini says eurozone crisis not over, will come back in 2013;
  • Jens Nordvig has discovered spread better as a metric to forecast eurozone survival probabilities;
  • Mark Schieritz, meanwhile, said German MPs fretted in 1931 about the inflationary threats, when prices were already falling by 8% that year.

The future of Mario Monti seems to be clear. After weeks of rumors and denials, Il Corriere della Sera reports that the political manifesto of Monti will be ready by the end of the week. Just after the approval of Budget Law, to be discussed in the Senate today. He won’t be a candidate, but lend external support for the centrist party led by Ferrari’ Luca Cordero di Montezemolo and UDC’ Pierferdinando Casini. This makes four rival contestants for the upcoming elections: Silvio Berlusconi’s Popolo della Libertà, in likely alliance with the Northern League; the Partito Democratico, the centrist party (with Monti), and Beppe Grillo’s Movimento 5 Stelle.

Napolitano attacks parties over the missing opportunity of a new electoral law

President Giorgio Napolitano reaffirms his concern over Italy’s future, saying that the country should not lose the confidence it had gained over the last year. As Il Messaggero reports, Napolitano says that Parliament’s inability to deliver a new electoral law was unforgivably serious, likely to lead to further political instability.

Berlusconi accuses again Germany over austerity and economic imbalances

For the fifth time in a few weeks, Silvio Berlusconi attacked Germany. As reported by Il Sole 24 Ore, he called Germany selfish, guilty of having caused the Eurozone crisis through forcing austerity measures and running current account surpluses. Meanwhile, Berlusconi is trying to lure the Northern League into a coalition after the next election. According to the Sole 24 Ore, the prospects of an alliance between Berlusconi and Monti are not good.

Now MPS bank is saved, thanks to Monti bonds

The EU Commission approves temporarily the bailout of Monte dei Paschi di Siena bank, the world’s oldest bank and the third biggest in Italy. As Repubblica reports, the bank will receive the money by the Italian Government in the coming weeks, but this rescue is subject to the submission of a restructuring plan within six months. The government has been helping it get back on its feet after a €2bn first-half loss with so-called Monti bonds, hybrid instruments guaranteed by the Treasury, with the ability to improve capital ratios.

Troika report warns of “very large” implementation risks to Greece’s reforms

Political resistance and potential court challenges are among “very large” risks to Greece’s reforms, according to the now released troika report:  “The key risks concern the overall policy implementation, given that the coalition supporting the government appears fragile and some components of the programme face political resistance, despite the determination of the government…Important budgetary measures are likely to be challenged in courts, which could lead to the need to fill a fiscal gap emerging as a consequence,” Reuters cites from the troika report.  A separate report by an EU task force on Monday said by the end of October Greece had completed only 88 of the targeted 300 audits of large taxpayers and 467 of 1,300 audits of high-wealth individuals. The troika’s report warned those spending cuts next year could hurt the weak economy more than expected, though that could be stemmed by the government paying bills that have been in arrears.

Prior actions required for remaining €14.8bn loan tranches

Greece received its first tranche, €34.3bn, on Monday. To receive the remaining €14.8bn in the next quarter, the following prior actions will be required according to the troika report: for January the tax reform bill should pass through Parliament and electricity rates should increase. These measures will allow for the disbursement of €9.2bn,  of which €7.2bn is for the recapitalization of banks. For February midterm fiscal plan should be revised and spending ceilings set for government entities, particularly local authorities and hospitals, for the next three years. That will see the release of another €2.8bn. In March, the government will have to complete its ministerial report determining the number of unnecessary staff and the figure of those departing per quarter up until end-2014. Pharmaceutical prices will also have to come down for the March tranche of €2.8bn to be released.

41% of young Greeks ponder emigrating

A survey conducted by Metron Analysis over the last 12 months and presented to the European Parliament on Monday indicated that 67% of Greeks expect things to get worse in the future. A third of households said they are finding it difficult to make ends meet, while 41% of young people are thinking about emigrating, Kathimerini reports.

Healthy Greek firms move abroad

The Washington Post reports how healthy Greek firms, from celebrated yogurt makers to a Coca-Cola bottling subsidiary, are moving their headquarters to safe haven countries such as Luxembourg and Switzerland to improve their access to credit. With the economy in a depression, “Greece’s biggest, healthiest businesses have the most to gain by moving their headquarters elsewhere”, and not only have investment, tax revenue, and educated workers migrated away from the crisis countries, but Germany or Switzerland “are pulling in the very businesses that could be drivers of recovery” in Greece.

The incredible deflation of Deutsche Bank

We always thought that the revenge against the bank would come with a delay, but with massive force. In Germany, it seems to be happening right now, as heavily armed policemen stormed the headquarters of Deutsche Bank to investigate suspected crimes in connection with a CO2 emissions trading scheme and a tax fraud. One of the people under investigation is one of the two co-chairmen of the bank, Jurgen Fitschen. As it became known yesterday, Fitschen then made the fateful mistake of calling the prime minister of the state of Hesse to complain about the heavy-handed police tactics. Spiegel Online has this extraordinary story, which has the potential to do huge damage to Germany’s – and the eurozone’s – largest bank.

Augstein calls Deutsche Bank an organised crime syndicate and calls for the bank’s dismantling

One of Germany’s most influential commentators on the left, Jakob Augstein, writes that the directors of Deutsche Bank were behaving like the bosses in a drug cartel, and that they now stand accused to be at the centre of organised crime in Germany. He said the failure to clamp down on the bank’s was probably Angela Merkel’s biggest political mistake as it would now give the SPD an opening to demand that this bank be split up into small, and less harmful units.

(In Germany, the anti-bank sentiment has become explosive. Augstein may well be right that Peer Steinbruck’s only chance of winning the election would be a broad-based anti-bank campaign – something that put would put Merkel in an uncomfortable position. But one should consider the wider economic consequences of a clamp down on the banking sector – that may well become Germany’s official policy in the next legislature.)

French pension funds need €19bn extra funding until 2017

The latest forecasts for the French pension system  are showing that despite the reforms the deficit will be rising in the coming years, from €14bn in 2012 to €18.8bn in 2018 until it peaks in 2030 at €26.2bn. Only after 2030 will the deficit come down and reach equilibrium in 2060, Les Echos reports in its front page story.  This means that the government will have to find some €19bn until 2017 to cover the financing gap. Another reform is beckoning and this will have to be put up by a Socialist government, which never managed to push through a pension reform in the past. All pension reforms in France have been implemented by conservative governments, but this time Socialists will have to act, argues Vincent Cohen in his analysis.  The report writes that the financial needs will have to be covered by either increasing the contributions or reducing the pension/salary relationship or extending the retirement age, none of which is going to be popular.

Has Depardieu really paid 85% taxes this year?

Impossible, argue some articles in the French press. But Les Echos shows that it was possible due to an exceptional wealth tax on households with more than 1.3bn in assets and the fact that this surcharge has no upper limit relative to income. Certain households thus face a tax bill which is higher than 100% of their income. In 2013, the article argues, this should not happen again, as a cap of maximal 75% of income will kick in.

Protest calls on Portuguese president to refuse 2013 budget

Thousands of union workers had taken to the streets in Portugal to protest against the country’s budget plan on December 16.  The demonstrators called on President Cavaco Silva to cancel the 2013 budget plan approved by the parliament end of November. The president  now said he will not bow to pressure and will decide based on his legal advice and what he considered to be in the national interest, Jornal de Negocios reports.

Further ripples of the Salzburg speculation scandal

In Austria, the region of Velden in Carinthia is the latest named as being involved in risky financial investments, losing close to €500 000 of taxpayers money, the Salzburg Times reports. If correct it Velden would be the latest in a number of local government bodies that has lost with speculative investments. In the Salzburg province, the scandal is estimated to cost up to €3bn. At the centre of it is an alleged rogue trader who made massive losses in 2006 buying Icelandic sovereign bonds. To cover up losses she got her staff to sign the deals off – then forged his signature after that – and used a complicated system to cover her tracks until 15 October, 2012, when the scandal first came to light. The deputy governor of Salzburg is said  to resign next month. Der Standard discusses the political implications and  what a constitutional ban for speculative deals would bring,

ECB won’t cut interest rates…

After Peter Praet’s comment last week, the ECB now wheeled out Yves Mersch, who told Frankfurter Allgemeine in an interview that interest rates will not come down any further from current levels. He said the unconventional policy measures were more effective, which is why he had trouble understanding the discussion about lower interest rates.

As an aside, the FT has, what seems to be a co-ordinated set of opinion pieces arguing against further interest rates cuts. The argument seems to be that this is bad for the profitability of banks – as they reinvest the surplus liquidity in the ECB’s deposit facility – and with reduced profits, bank lending is likely to fall as well. See for example Patrick Jenkins, or David Keohane of FT Alphaville.

…but Japan may

We are usually not going of the reservation – i.e. the eurozone – but the changes that are currently happening around us make very important. The US Fed Reserve has embraced Michael Woodford’s recommendation of forward guidance;
Mark Carney is talking about nominal income targeting in the UK;
and Japan’s new prime minister Shinzo Abe is putting pressure on the Bank of Japan to conduct a more aggressive monetary policy, and to set an inflation target. It is interesting to read Takatoshi Ito in the FT this morning, who is calling on Abe to stick to his guns and beat deflation, pointing out the nominal GDP has fallen by 7% since Abe’s previous term in office six years ago. Ito makes that the point that the BoJ should buy construction bonds in unlimited quantities until the inflation target is met.

Spain’s deflationary debt trap

In a blog post about the latest OECD report on Spain, Santiago Niño Becerra says Spain is trapped in a vicious circle as it needs to grow at 2% in order to create net employment, and the increasing costs of debt service are subtracting from the public expenditure necessary to turn around the growth trend. He also says that the usual recommendations from the OECD will not help improve the situation which is “desperate”.

ABC reports that the employers’ association CEOE is forecasting 6 million unemployed in 2013, the destruction of 800,000 jobs, and a 4.4% drop in employment. And The New York Times reports that an increasing number of Spaniards are owed pay checks. Many people are owed thousands of Euros of back pay and an increasing number are trying to recover them through judicial appeal to the State’s salary guarantee fund. Claims have quadrupled since before the crisis, only because the system is log-jammed and cannot process cases quickly enough.

The Chairman of Spain’s Supreme Court told the Spanish Parliament that judicial foreclosures have more than doubled in 2012 from the previous year, reports Europa Press.

Humanitarian aid has gone extinct in Spain

Humanitarian aid from the Spanish government has dropped by 95% in the past 4 years according to a report from Doctors Without Borders and the IECAH. An IECAH spokesman said humanitarian aid was disappearing as a public policy while the cuts make virtually no contribution to deficit reduction, reports Europa Press.

Spanish Banking Association advocates manager responsibility for bank failures

Appearing before the Spanish Parliament’s subcommittee on transparency in financial products the President of the Spanish banking Association advocated that the former managers of failed financial institutions be made to pay for the bankruptcies of their institutions and the damage they have caused and continue to cause to their customers and to other, healthy banks. He also said failed institutions should “disappear” and not continue to function, reports El Economista.

Nouriel Roubini: Germany only delays Eurozone day or reckoning by refusing banking or fiscal union

In a comment on Project Syndicate, Nouriel Roubini writes that Germany is in denial of the fact that “successful monetary unions such as the United States” involve substantial risk-sharing in a full banking union, and a fiscal union with a shock-absorbing federal budget and permanent transfers from richer to poorer state. Roubini concludes that, despite the ‘tail risks’ being mitigated, the fundamental Eurozone crisis in no closer to a resolution and “the day of reckoning” is likely just postponed.

Jens Nordvig on a metric for eurozone exit probability

Jens Nordvig has been on the lookout for a metric on eurozone exit probabilities, and found it in the form of spread bets. According to those bets that probability of a break was 60% in the summer, and has gone down to below 30%. Adding his own adjustments, his own numbers are 17-22% for a Greek exit, and 5-10% for an exit of another eurozone country.

A Weimar history lesson

This is fascinating stuff by Mark Schieritz, who has been digging some quotes from German MPs in 1931, when deflation was already 8%,and 4.5m people were unemployed. He quoted a Bavarian MP at the time, exhorting chancellor Heinrich Brüning not to allow inflation to return. Another MPs cried out: Let the policies be as tough as possible, but do not allow the calamity of inflation. Schieritz quotes the historian Knut Borchardt as saying that with the room for political manoeuvre was severely limited. Even the trade unions did not dare come up with a sufficient stimulus in this poisoned climate.

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




10-year spreads
Previous day Yesterday This Morning
France 0.631 0.641 0.642
Italy 3.252 3.279 3.249
Spain 4.048 4.068 4.119
Portugal 5.664 5.687 5.968
Greece 11.666 11.651 -1.40
Ireland 3.292 3.287 3.372
Belgium 0.772 0.779 0.802
Bund Yield 1.35 1.371 1.401
Euro Bilateral Exchange Rate
  Previous This morning
Dollar 1.316 1.3171
Yen 110.500 110.61
Pound 0.813 0.8121
Swiss Franc 1.208 1.2086
ZC Inflation Swaps
  previous last close
1 yr 1.56 1.46
2 yr 1.62 1.49
5 yr 1.76 1.65
10 yr 2.03 1.91
Euribor-OIS Spread
previous last close
1 Week -5.700 -5.1
1 Month -4.514 -2.714
3 Months 3.386 5.686
1 Year 37.257 39.657
Source: Reuters

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