Berlusconi raises prospect of euro exit for Italy

• Il Cavaliere says either ECB must support the Italian bond market and drive down interest rates, or Italy leaves the eurozone to become more competitive;
• comment suggests that Berlusconi will turn Italy’s position in the eurozone, and German-inspired austerity, into central election themes;
•  Reuters has an interview with his economic spokesman, Renato Brunetta, who rails against Mario Monti’s “blood, sweat and tears” approach to economic policy;
• Monti will today meet with the Ferrari chairman to discuss his political strategy;
• Monti will be involved with a centrist coalition of four separate party lists, which include a group of disgruntled Berlusconi supporters;
• the Italian ISTAT report shows that the number of Italian households with scarce resources has been climbing;
• another report says that Italy has been regressing in terms of social mobility;
• a French bank reform will propose a separation from speculative trading and banking activities, but will leave the concept of a universal bank in tact;
• Les Echos says the report goes soft on banks, and could lead to tension with the Socialist Party;
• a pro-government Senate majority rejected the 2013 French budget for tactical reasons, as the bill now going back to the House for fast track approval this week;
•  the Greek supreme court will rule this Friday whether it is legal for the Greek government to collect taxes via electricity bills;
• Spain’s bank restructuring fund values nationalized banks at negative €30bn;
• the European Commission wants Spain to increase the retirement age beyond 67;
• Artur Mas’ CiU and the left Catalonian nationalists have agreed on a coalition and on a referendum for independence in 2014;
• German lawyers, meanwhile, continue to question the legal basis for a banking union – using spurious and haphazard arguments.

The return of Silvio Berlusconi to the front line of Italian politics has brought with it a broader debate on the euro, and Italy’s sustainability as a member of the eurozone. Yesterday, Silvio Berlusconi  said on Italian television RAI that more needed to be done to turn the ECB into a genuine lender of last resort. He said unless this is possible, and unless Italian interest rates come down, Italy “will be forced to leave the euro and return to our own currency in order to be competitive,” according the Italian news agencies Ansa and Agi (as reported by Reuters). He made similar comments a few months ago, but this is the clearest indication that Berlusconi is ready to turn the euro into a central subject of the election campaign.

The mastermind behind Berlusconi’s anti-euro campaign

Reuters also has interesting interview with Renato Brunetta, a former minister and professor of economics, who is now Berlusconi’s main economics spokesman. He is openly calling for an end to what he calls the “blood, sweat and tears economic policy designed by Angela Merkel”. He said Monti had made three big mistakes. The first was extending a property tax to include primary residences (which basically means a levy on most Italian households). Second on the list is both pension reform, which left thousands of early retirees with no job or pension;
and third, the labour reforms were botched up. He said

What about Monti?

The future of Mario Monti becomes clearer. As reported by La Repubblica, Monti will today meet with Ferrari chairman Luca Cordero di Montezemolo to close the deal. Probably will be presented four lists, that would lead a coalition of the centre. The four lists are: the catholic UCD, the moderate Futuro e Libertà, a group of MPs who previously supported Berlusconi, and the Monti list. There are rumours that the ex-Berlusconi camp is growing in size.

Italian households unsatisfied by their economic condition

As The Huffington Post Italy reports, the annual ISTAT report shows that the number of families saying they had «excellent or adequate resources» fell from 56.8% in 2011 to 52.5% this year. At the same time, the number of households that claimed «scarce resources» rose from 37% to 40.3%. Households expressing greatest satisfaction in their condition were located in the North and least satisfaction in the South.

Another report shows that Italy has been regressing in social mobility. As Europa Quotidiano reports, quoting from the national social security institute INPS, ISTAT and the Labour ministry, 62.6% of employed people found themselves in a different social class than their parents in 2009, down from 65% in 1998.

French banking reform leaves universal bank model intact

The French government will today reveal the details of a bank reform law aimed to deliver a campaign pledge to separate “speculative” activities from those “useful” to the economy. It will force banks to set up a subsidiary for speculative trading activities deemed unrelated to the financing of the economy. According to the FT these include proprietary trading, algorithmic arbitrage and financing for certain types of hedge funds and private equity though the vast bulk of market-making activities remains unconcerned, thus putting the reform at odds against the recommendations of the Liikanen report. The subsidiary will have to be financed independently and the regulator will be given more powers to allow for more intrusive regulation.  The bill will go through parliament mid-February and the banks have been given until July 1 2015 to comply.

Les Echos finds the reform goes soft on banks and could rattle further the left of the Socialists. Though the subject provokes less emotional reactions than the nationalisation debate around Arcelor Mittal, it is considered similar in essence, as a political response to the “faceless enemy”.  Hollande’s method to talk left but to act as to ensure the “sustainability” of the French economy is likely to be challenged by the left wing of his party. Arnaud Montebourg insisted already this week in Le Monde that one cannot correct the French productive sector with ordo-liberal methods.

French Senate rejected budget 2013 to ensure its vote through in Parliament

The French senate rejected the 2013 budget, this time with the help of the Socialists, reports Le Monde. The calculation is to prevent conservative Senators to bring in more amendments in a second reading, relying on the fact that the budget will now be send back to parliament, which will have a final vote on Thursday.

Supreme court to rule whether special property tax levy via electricity bill was illegal

The Supreme Court in Greece is expected to issue a verdict on Friday as to whether the Greek finance ministry had the right to levy a special property tax via electricity bills, Kathimerini reports. A lower court had ruled the practice illegal earlier this month, appealed by the Greek state and the management of the state-owned Public Power Corporation (PPC). During Tuesday’s hearing, the appellants cited reasons of national interest as well as precedent, given that Greek governments have used electricity bills to collect other levies, such as the fee for ERT state television, for decades.

Standard & Poor’s, meanwhile, raised Greece’s sovereign credit rating to B-minus with a stable outlook, from selective default.

Spain’s bank restructuring fund values nationalized banks at negative €30bn

After valuing its net worth at a nearly €7bn in the red, Spain’s bank restructuring fund FROB acquired Catalunya Bank for €1, and converted €1.25bn of preferred shares in the FROB’s hands into common equity, reports RTVE. This will allow the institution to receive €9bn from the EU’s bank rescue fund. Caixa Catalunya, the former caja, will become a charitable foundation with no connection to Catalunya Bank.

(The separation of cajas into a listed bank and a charitable foundation with ownership of the bank was decided at the start of 2011 (see an Expansion story from then for details)

La Voz de Galicia also reports that Novagalicia Bank has been valued at negative €3bn, and the FROB will inject €5.4bn of its own capital, funded by the European rescue. According to sources, the haircuts for preferred shareholders and subordinated bondholders will be known later in the week, possibly as early as Wednesday.

(Galicia has probably been the region most affected by popular protests over the sale of preferred shares to unsophisticated customers, and might flare up again once the haircuts are announced)

Banco de Valencia, which had recently been acquired by Caixabank (formerly La Caixa) for €1, has been valued at negative €6.3bn.

(The fourth nationalized institution, Bankia, had been valued at negative €13.6bn back in June, and will receive €18bn from the European rescue fund, see Europa Press story from June)

European Commission advocates further increases of retirement age in Spain

El Confidencial reports that The European Commission’s annual fiscal sustainability report (see Commission press release) attributes a ‘visible positive impact’ on Spain’s fiscal position to the increase of the retirement age from 65 to 67 introduced in 2011 (by Zapatero’s government). Nevertheless, the Commission expects Spain’s pensions bill to exceed the EU average, and so advocates “guaranteeing the sustainability of the pension system” by linking the retirement age to life expectancy.

Catalonia on the road to a self-determination referendum

Incumbent CiU and left nationalist ERC finally clinched a ‘governability’ agreement allowing sitting regional Premier Artur Mas to be reappointed to the Catalan rational government. ERC extracted a compromise from CiU to hold a referendum in 2014. According to El Diario, the agreement foresees having the regional parliament issue a ‘declaration of sovereignty’ at its first plenary sitting, followed by a formal request to hold a referendum to be submitted to Madrid by mid-2013. The agreement, however, contains a clause allowing CiU and ERC to postpone the consultation beyond 2014 by mutual agreement.

Some misinformation from the German press

This story, by Florian Eder in Die Welt, is interesting not so much for the information it provides, but for the disinformation. It argues that the banking union contravenes the EU law – without even a reference to Art 127.6, which constitutes an unambiguous legal basis for an ECB-based banking union. The article is based on interviews with ultra-conservative Germany orthodox lawyers, whose fundamental belief is that monetary policy and banking supervision must be separate at all times.  This is all dressed as factual legal opinion: for example, one lawyer who says the separation between the governing council and the new board of the SSM has to be watertight, or it contravenes against the law. (which law, one may ask? The principle of an SSM is covered by the treaty, the rest can be done under secondary legislation. A fiscal union – if it ever happens – would require a full treaty change, but a banking union fortuitously does not. People interpret laws according to their beliefs, but this is quite an extreme example of cognitive dissonance.)

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

Optimism returns.

 

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.641	0.645	0.634
Italy	3.205	3.082	3.066
Spain	4.068	3.903	3.967
Portugal	5.687	5.620	5.889
Greece	11.651	11.436	-1.43
Ireland	3.287	3.192	3.350
Belgium	0.779	0.767	0.788
Bund Yield	1.371	1.411	1.427
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.317	1.324
Yen	110.500	111.63
Pound	0.812	0.8142
Swiss Franc	1.207	1.2079
ZC Inflation Swaps
	previous	last close
1 yr	1.46	1.55
2 yr	1.49	1.59
5 yr	1.65	1.65
10 yr	1.91	1.91
Euribor-OIS Spread
	previous	last close
1 Week	-5.700	-5.1
1 Month	-3.186	-2.586
3 Months	3.514	5.514
1 Year	39.357	39.757
Source: Reuters