Mario Monti will run for office after all

• Several newspapers report that Mario Monti has decided to become the leader of a centrist political list for the upcoming Italian elections;
•  an official announcement is expected sometime this weekend, after the dissolution of parliament;
• President Giorgio Napolitano wants to set Febuary 24 as the election date;
• Silvio Berlusconi has said that he would support Monti – but nobody is quite sure of what that means;
• there has been an escalation in the conflict between Spain’s central government and Catalonia, with a contingency plan by Mariano Rajoy to ban Catalonia’s premier Artur Mas from office;
• the central government also plans to challenge both the referendum law, and, if it happens, the referendum itself;
• the central government also nullified a Catalonian tax on bank deposits, by introducing a national zero-rated spoiler tax;
• the latest move is will also cause problems for several other regions;
• Jorg Asmussen outlines a path towards a resolution mechanism, which he wants to be anchored at the ESM, and to rely primarily on the bail-in of private investors;
• Mary Watkins writes that a degree of normality has returned to the banking sector, but the challenge of a return to senior funding remains;
•  Yannis Stournaras warns that a Grexit is still possible if the political system cannot cope with the reforms in 2013;
• Greek public sector workers have staged a 24-hour strike in protest against new austerity measures;
• the Greek government has moved 164 directors and other senior officials in the tax departments, as part of a major shake-up;
• the Greek constitutional court rules that the government can, after all, collect taxes through electricity bills;
• the IMF says a restructuring of the Irish promissory notes is an essential pre-requisite for a return to the bond market;
• eurozone sovereign bond markets have rallied towards the end of the year, with Portuguese 10-year yields having fallen below 7%;
• a Milan court, meanwhile, passes a criminal conviction against four banks, including Deutsche Bank, in connection with derivative trades to the city of Milan.

Mario Monti will run in Italian general elections as a candidate for the office of prime minister, according to La Repubblica. After days of uncertainty, the newspaper says, it is now clear that Monti decided not just to be a supporter of a centrist list, but to act as its leader, with the support of Ferrari’s boss Luca Cordero di Montezemolo and former Confindustria head Emma Marcegaglia. The official statement is expected to be held on the weekend, according to International Cooperation minister Andrea Riccardi.

The FT also corroborates this story, saying Monti had “signalled his readiness to plunge into politics”. The article quotes an unnamed source as saying that Monti would be the chief of the operation.

(Almost the entire Italian financial and business establishment has lined up behind Monti, which suggests to us that his movement may well end up doing well at the elections. It is interesting to see how his candidacy will play with the Partito Democratico and its leader, Pier Luigi Bersani.)

Faced with defeat, Berlusconi says he will support Monti. Or not…

Silvio Berlusconi plans to support Monti at the next election, Il Foglio writes. The reason is that the latest polls point to a big defeat for Berlusconi’s party, Popolo della Libertà (PDL). According to IPSOS, the centre-left Partito Democratico is at over 30%, while the PDL is around 16%.

(Be careful with any such announcement. Berlusconi is clearly playing tactical games with his constant flip-flopping.)

Italian elections to be held on February 24, Napolitano proposes

The vote in the next election will be the 24th of February. As La Repubblica reports, President Giorgio Napolitano said a quick vote would serve to reassure the markets. Until then, the responsibility of the political parties is to continue with the Monti agenda.

Rising political stakes between Spain and Catalonia

There has been a big escalation in the tug of war between the central government in Madrid and the regional government in Catalonia over the proposed referendum on independence. Mariano Rajoy is preparing a strategy that might involve barring Catalan Premier Artur Mas from public office, and suspending the regional government. El Pais reports that the Spanish government still hopes the referendum will never take place, because the ERC-CiU agreement includes an ‘out’ clause allowing a graceful exit, and because one of the two parties making up CiU reportedly is not very happy about the idea. Nevertheless, the Spanish Government is preparing first to appeal any law CiU and ERC pass on the referendum, and then the referendum itself, before the Constitutional Court, which the Central Government is sure the Court would strike down. El Mundo goes a bit further, and reports that the Government plans to then go to the criminal courts if Mas goes ahead with an explicitly unconstitutional referendum, barring him personally from public office and suspending the regional government (which is allowed by article 155 of the Constitution). El Pais also mentions that the recent reform of the Budget Stability law and the introduction of the Regional Liquidity Fund (which Catalonia has tapped to the tune of €5bn) allow the Finance Ministry to intervene a regional government as well.

(This is clearly and attempt at shock-and-awe, but at least it-s playing it strictly by the book. Some press outlets such as El Mundo are throwing red meat to both Catalan and Spanish nationalists by emphasizing the ‘criminal’ action and the ‘suspension of autonomy’ as a last-resort.)

Madrid sabotages a Catalonian deposit tax

Another sticking point has been a tax on deposits proposed by the Catalan Government. The minister for Finance and Public Administration, Cristóbal Montoro, reacted by pre-emptively introducing a national-level deposit tax, but with a tax rate of zero. As there cannot be two different taxes of the same category (though national taxes can be delegated to the regions), this would nullify the Catalan proposed new tax. The problem is that three other regions, Extremadura, Andalusia and the Canary Islands were already applying such a tax, and these regional government will presumably appeal against Montoro’s zero tax before the Constitutional Court, reports Europa Press. In another story by Europa Press, Montoro threatens to go to the Court himself against the stated intention of the Catalan Government to introduce a decree making the tax retroactive to all of December, so that it is in place before the national tax comes into force. The problem is that the Catalan government is ‘acting’ (due to the recent elections), and Montoro would challenge the legality of an acting government legislating a new retroactive tax by decree.

(Another sticking point is the charging of €1 per pharmaceutical prescription, to fund health care. This is being introduced by both the Madrid and Catalonia regional government, but the Central Government is mostly criticizing the Catalan government and may also go to the Constutional Court)

ECB proposes a bank resolution fund to be anchored at the ESM

Frankfurter Allgemeine has the story this morning that Jorg Asmussen wants the future bank resolution fund to be run by the ESM. He said this would give the fund an appropriate, and existing, institutional framework, while allowing the ESM to use its own funds for bank recapitalisations. He stressed the linkage between ESM-support and SSM supervision. Money shall only be granted after all existing liabilities have been properly identified and the capital requirements have been estimated (yeah right, look at what happens in Spain, where an underestimation of capital requirements is likely to lead to a multi-annual drip feed.) He also said that the private sector would be bailed in before the official sector contributes. The ESM would only fund if all the other available sources have been exhausted.

(Asmussen’s vision of how a banking union would work is consistent with that of the German government. This is primarily a bail-in system. All additional funding would initially come from the ESM – out of the existing €500bn available for lending. The funds available for bank rescues would be increased over time through contributions by the banks themselves, but not through an increase in the ESM’s lending ceiling. While this constitutes a significant institutional reform in the long-run – and a clear improvement on the national systems currently in operation – it does not address the critical issue of the current under-capitalisation of the banking system.)

A return to normality

Mary Watkins of the Financial Times has an in-depth analysis about a return to normality in the banking sector, as the fear of a bank-run has been gradually removed from the system. The article says it is the combination of the LTRO, which acted as a lifeline to banks, and the OMT, which took out the tail risk of a eurozone breakup, which led to a vastly improved environment – with Commerzbank pondering whether to repay the LTRO money at the start of 2013, two years early. The key test will be whether banks will be able to return to unsecured funding – the main pre-crisis source of inter-banking finance. The article quotes an analyst as saying that the key to success will be the ability by banks to issue fresh senior debt and to reduce encumbrance.

Greece still faces possible risk of Grexit

In the midst of all the optimism about Greece, its finance minister Yannis Stournaras issued a stark warning in an interview with the FT, saying that next year will be a “make or break” year for Greece’s future in the Eurozone and that Greece still faces the “possible risk” of a Eurozone exit. “The break would be if the political system finds the situation too difficult to handle”, he added, referring to the danger of social unrest about austerity that could force the two left-of-centre parties to bring down the governing coalition. Stournaras said Athens would focus next year on an unprecedented crackdown on tax evasion, meet strict targets for privatisations, and remove bureaucratic obstacles to inward investment.

Greek public sector workers strike over reforms

Public sector workers have staged a 24-hour strike against new austerity measures disrupting transport and shutting public schools and tax offices, Reuters reports. The latest measures – which include earmarking 27,000 civil servants for eventual dismissal – are deeply unpopular among Greeks. About 6,000 teachers, doctors, municipal and transport workers rallied in central Athens as part of the walkout called by the ADEDY union. The turnout was much smaller than for previous protests this year. Unions also say that some Greeks, although fed up with austerity, could no longer afford to lose a day’s wages by taking part in strikes.  The demonstrators marched to the ministry overseeing public sector reform chanting “They won’t stop unless we stop them.”

Personnel shake-up at tax collection office

A major shake-up at Greece’s tax authorities was launched on Wednesday, with 164 directors, deputy directors and Finance Ministry observers being moved to different departments as part of efforts to improve tax collection, Kathimerini reports, though some of the staff who will be affected by the move have threatened to take legal action against the ministry. It also emerged on Wednesday that the Finance Ministry had decided to continue a measure that encourages taxpayers to collect receipts for another year worth 25% of their gross income or face additional tax  on the difference otherwise.

Property tax on electricity bill ruled as legal

On Wednesday the Supreme Court ruled that an emergency property tax introduced in 2011 could be levied via electricity bills.

IMF says deal on Irish promissory notes ‘essential’

The IMF on Wednesday urged the ECB to agree to restructure €31bn in Irish promissory notes by March, saying a deal was essential to ensure the country’s smooth return to bond markets, Reuters reports. Ireland needs to secure stable funding from bond markets this year if it wants to avoid a second international bailout when its current €85bn programme ends in December next year. It is a strongly worded criticism of European institutions and eurozone member states for failing to live up to commitments made earlier in the year, finds the Irish Times. The report can be downloaded directly from the IMF’s website.

Portugal bond yield drop bodes well for market return

Portuguese benchmark bond yields fell below 7% (6.92%) on Wednesday for the first time since early 2011, according to Reuters. The drop is part of a wider trend of falling borrowing costs driven by relief after Greece’s lenders agreed to unlock aid to Athens following a debt buyback. Analysts say Portugal is also benefiting from its disciplined approach to the austerity mandated under its bailout. The benchmark yield has come down from record highs of over 18% in January this year.

Under its bailout programme, Portugal has at least until September 2013 to resume bond issuance, but lower secondary market yields could accelerate its return.

Four banks founded guilty of fraud in a derivatives case

Deutsche Bank, JPMorgan Chase, UBS, and Depfa were found guilty of fraud by a Milan judge in a case involving derivatives sales to the City of Milan. As Il Sole 24 Ore reports, it is the first time that banks are sentenced for their derivatives trades. The judge Oscar Magi convicted the four banks, which had all denied the charges, ordering the confiscation of €88m. Magi also found guilty nine current and former bank employees, who received suspended sentences of 6 months to 8 months. The banks were accused of defrauding the city of Milan by hiding how much they earned on the swaps. Prosecutors alleged Milan lost €105mn as part of the sale of bonds worth €1.69bn between 2005 and 2007.

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

Italian spreads back below 3%. The markets are very happy.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.645	0.606	0.586
Italy	3.039	3.001	2.994
Spain	3.903	3.854	3.901
Portugal	5.620	5.464	5.745
Greece	11.436	9.993	-1.44
Ireland	3.192	3.138	3.242
Belgium	0.767	0.679	0.697
Bund Yield	1.411	1.429	1.436
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.325	1.3206
Yen	111.640	111.25
Pound	0.815	0.8124
Swiss Franc	1.208	1.2073
ZC Inflation Swaps
	previous	last close
1 yr	1.55	1.57
2 yr	1.59	1.6
5 yr	1.65	1.79
10 yr	1.91	2.05
Euribor-OIS Spread
	previous	last close
1 Week	-6.200	0
1 Month	-3.936	-4.786
3 Months	3.414	3.314
1 Year	39.057	37.457
Source: Reuters