Delirious markets declare euro crisis over

• Italian spreads fell to 283bp as markets react euphorically to the fiscal cliff deal, amid unbroken optimism about the eurozone;
• the latest Italian polls see a massive advantages for Pier Luigi Bersani’s PD;
• Mario Monti’s alliance scores between 10 and 12%, but could yet emerge as a king maker if the PD falls short of a majority in both chambers of parliament;
• Silvio Berlusconi says Monti was part of a criminal conspiracy of international banks to bring down his government;
• Monti said he keeps having difficulties following Berlusconi logic;
• the latest forecast show a massive rise in Italian unemployment, especially in the south;
• while the private sector suffers, the Italian public sector’s revenues are increasing;
• Jonathan Hopkin says Berlusconi will not win the election, but he could still score a surprise;
• Gavin Jones says Monti’s labour market reforms have so far failed to bring any benefits;
• the Greek general government had a primary surplus between January and November last year;
• finance minister says country will be within the agreed 2012 deficit target of 1.5% of GDP;
• the pressure is growing on a former Greek finance minister over allegations that he tampered with a list of tax refugees;
• the Spanish Socialists are proposing to turn the country into a federal state to counter the threat of regional separatism;
• the Spanish government is considering a number of measures to reduce SME’s dependence on bank loans;
• a Spanish newspaper writes that the 2012 deficit will come in at 9% of GDP – completely busting the target;
• Portugal’s president has referred the 2013 budget to the Constitutional Court;
• the eurozone’s manufacturing sector purchasing managers’ index continued to shrink further in December – while US manufacturing is slowly picking up;
• German employment reached a new record, despite the economic slowdown;
• car sales fell dramatically in Italy, Spain and France during 2012;
• an investors’ survey shows that the risk of a eurozone breakdown has fallen dramatically;
• US money market funds are slowly returning to the eurozone – or rather to Germany – but overall funding levels are still low;
• Lex, meanwhile, warns that the eurozone crisis is far from over.

Welcome back to our Daily Morning Newsbriefing in 2013, and a Happy New Year to all of our readers. The holiday season has been mostly quiet in our subject area. In Italy, Mario Monti said he will lead a centrist coalition in the next elections. In Germany, Angela Merkel continued to increase her poll lead over her Social Democratic rival, and in France, the constitutional court ruled against the 75% top tax rate.

Financial markets, meanwhile, have become near-euphoric about the eurozone. The spread between Italian 10-year BTPs and the German Bund benchmark closed yesterday at 283bps, thanks to US Fiscal Cliff deal, as Il Sole 24 Ore puts it. That is exactly half the level of the spread, marked at 575bps, in November 2011, when Monti took over from Silvio Berlusconi, when Italy was at the centre of the Eurozone crisis.

Italian polls see easy victory for Bersani

Pier Luigi Bersani’s PD is way ahead, but Mario Monti candidacy as leader of the centrist coalition has changed the political landscape. As Il Corriere della Sera reports, a TECNÈ poll sees the Pier Luigi Bersani’ Partito Democratico at 35.3%, Silvio Berlusconi’ Popolo Della Libertà at 19.5%, Beppe Grillo’s Movimento 5 Stelle at 16%, Monti List at 6%, the centrist UDC at 4.8%, the far left Sinistra, Ecologia e Libertà at 4.1%, the Northern League at 3.9%.

Another poll, made by influential Piepoli Institute, tries to unveils the votes by coalition. The centre-left is at 42%, the centre-right at 24%, the Northern League (in talks with Berlusconi’s PDL) at 6%, Monti/centre at 12%, Grillo’s M5S at 11%, the far-left (including the former prosecutor Ignazio Ingroia) at 5%. As a reminder, Il Corriere remarks that coalitions and PM candidates need to finalised by January 13.

Berlusconi attacks Monti and Napolitano, wants a commission of inquiry…

Berlusconi has accused Monti of a criminal complicity to use the Italian spreads to engineer his downfall. According to Il Messaggero Berlusconi said his resignation was triggered by a plot of international creditors, including Deutsche Bank, and by Monti. That’s why he wants to setup a special commission of enquiry. Berlusconi also said one investigate Giorgio Napolitano’s role in the crisis.

… and Monti jokes over the “international plot”

Monti responded to Berlusconi allegations, calling it “interesting” but odd. Berlusconi confuses him on a logical level, Monti said, expressing a hope that voters were less confused than he was, he said during an interview on the RAI radio show Radio Anch’io. Monti remarked his government had avoided a full economic disaster through austerity measures, which were needed to stabilise public finances. Monti also said he wants to cut payroll taxes to revitalize Italian economy.

Italy will face an unemployment cliff in 2013

As La Repubblica reports, the unemployment rate will climb in 2013 to 11.4% from actual 10.8%, as the industrial gap widens between north and south, according to a study by Unioncamere and Prometeia. The “unemployment cliff” will hit southern regions, expected to face an 18% jobless rate on average. In contrast, Trentino-Alto Adige, the small region bordering Austria, will face 5.8% unemployment, the lowest in the country. Despite the disappointing figures, Ferruccio Dardanello, the president of Unioncamere, said there were some signs of recovery in the year ahead, expecially for the North.

Due the higher taxes, Italy public finance ends 2012 in a better shape respect 2011

As La Stampa reports, the Italian state sector budget deficit ended 2012 at around €48.5bn, over €15bn less than the €63.8bn year-end of the 2011, the Italian Finance Ministry said in a statement. At the same time, in December 2012 Italy has obtained a surplus of €14.1bn, versus €5.6bn surplus in December 2011. The Treasury put the increase down to higher tax revenue and spending cuts. Thanks to new real-estate tax IMU, Italy has gained over €13bn in new revenues during the 2012.

Berlusconi could be a surprise, Hopkin writes

Jonathan Hopkin writes in Foreign Affairs that Silvio Berlusconi may not have enough support to become prime-minister again, but he can still have a profound impact in the February general elections. Hopkin says Berlusconi’s return signifies the failure of conservative political forces in Italy to generate a credible political party like in other EU countries. Berlusconi, not Monti, has a solid support base amongst the middle class and small business owners.

Italian labour reforms has failed (for now), Jones writes

The Italian labour reforms have not reached any sensible targets in the first six months, Gavin Jones writes in Reuters. He writes that for smaller firms, where job protection is almost absent, nothing changed under the reform. At the same time, the public sector, where there is the highest level of job protection, is also unaffected. In terms of job flexibility, Monti has tried to introduce a new German-based model of apprenticeships, but this failed because of too much bureaucracy.

Greek general government had a primary surplus in Jan-Nov 2012

Kathimerini reports that the Greek general government budget showed a primary surplus of €2.3bn in the first 11 months of 2012, quoting the General State Accounting Office. This number compares with a primary deficit of €3.6bn in 2011. The article quotes Yannis Stournaras as saying that for the year as a whole Greece was within the target of a total deficit of 1.5% of GDP. The primary surplus came about as a result of a vicious spending squeeze, with government spending down from €100.7bn to €89.9bn, while revenues went up €5bn to €97bn. The article said the positive development of the budget had been achieved at the expense of the private sector.

The talented Mr Papaconstantinou

This looks like a really ugly scandal – the allegations that the former Greek finance minister Giorgos Papaconstantinou may have tampered with a list bearing the names of Greek depositors at a Swiss branch of HSBC. Kathimerini says the evidence is not looking good for Papaconstantinou. First, he testified before Parliament that he had lost the original copy of the list. Secondly, he did not submit the names of the relatives concerned to a probe into the provenance of his and his family’s wealth. And thirdly, he did not react when the list was published without the contentious names after being leaked to a journalist. The article says the affair is hugely damaging, and affects the country’s credibility abroad.

Spain’s PSOE proposes federalist constitutional reform to counter separatism and centralism

The brewing institutional conflict over Catalonia’s position within Spain has prompted the leading national-level opposition party PSOE to propose a constitutional reform to make Spain explicitly a federal state, El Pais reported last weekend. The plan has been drafted by a group of legal experts, but will be presented by Ansalusian regional president José Antonio Griñán. The proposal includes making the Senate not directly elected but appointed by the federal states, similar to the German Bundesrat, and making it of equal rank to the Congress which would lose the ability to overrule the Senate in case of disagreement. The funding of the federal states could be regulated in detail by the constitution.

Spain’s government aiming to make SMEs less dependent on bank funding

El Confidencial writes that the Spanish government is considering to loosen the dependence of the Spanish economy on bank credit, by

• creating “a true market for company IOUs;”
• enabling new ways for firms to operate with “a state guarantee”;
• “realizing the full potential” of the already existing “mutual guarantee societies” (a way for associations of firms to provide a joint credit guarantee to enable member firms to access bank credit in better consitions);
• continuing to push state credits through the ICO (Official Credit Institute, another already existing initiative whereby banks act as service providers channelling state credit to firms).

Spain’s 2012 deficit might reach 9%

At the end of last week, El Confidencial had a report, based on government sources, that Spain’s deficit for 2012 might come close to 9%, about twice as much as the finance minister Cristobal Montoro had predicted a month earlier. The target overshoot is attributed to the impact of the economic crisis on revenues, as well as the cost of the banking rescue which will add up to 2% to the final deficit figures.

Portugal’s president refers 2013 budget to the constitutional court

The Financial Times reports from Lisbon that Portugal’s president Aníbal Cavaco Silva asked the constitutional court to look at the 2013 austerity budget. He said he had asked the court specifically to verify whether cuts in public sector pay and state pensions, and a solidarity tax on higher pensions, were permissible under the constitution. The article said the decision could force the government to redraft important parts of the budget, potentially undermining the overall deficit targets. There is also that the entire process gets suffocated by legal process.

Eurozone manufacturing gets deeper into recession

The manufacturing purchasing managers index for the eurozone drop a notch to 46.1 December, the Financial Times reports. The paper quotes the chief economist of Markit, which compiles the index, as  saying that 2013 would be another tough year for the sector, alleviated a little by a rise in demand from Asia. The decline in the index was broad-based. The German component fell from 46.8 to 46.

Just for comparison, the US manufacturing sector has now come out of the recession territory, with the ISM manufacturing index up from 49.5 in November to 50.7 in December, according to Calculated Risk

Yet, while Germany is clearly in recession, the country has recorded a new employment record. Suddeutsche Zeitung reports that total employment has reached 41.5m, a 1% increase over the year. But the paper reports that the employment trend has turned the corner, with employers becoming more cautious. Germany’s employment agency did not give a break-down of the type of jobs that have been created. The trade union are saying that most of the new employment generated were at the low income level – the so-called ‘mini jobs’.

Car sales down in all major Eurozone economies

One day ahead of the publication of car sales figures in Germany (which posted a 1.7% drop in the first 11 months of last year), Reuters reports that car sales in France (down 14%), Spain (13% fall) and Italy (down to 33-year low) fell dramatically in 2012. The article quotes an Italian car industry ‘think tank’ arguing that only the Eurozone is seeing declining sales, and attributing it directly to “the depressive effect of austerity policies on the real economy”.

Euro breakup risk down sharply, according to Sentix survey

This survey tells us what we already know – that the financial markets are no longer betting on a eurozone breakup. A survey by Sentix shows that only 25% of investors, who took part in a survey, expect one or more states to leaves the eurozone – almost all of those estimates referring to Greece. Only 2-2.5% seen an exit by Italy, Spain or Portugal.  Only about 10% believe that Cyprus will leave.

US funds return to eurozone money market

One of the main positive developments in 2012 was the beginning of a return to normality in the money markets. The FT  yesterday had the story that US money market funds had increased their exposure to eurozone banks for five months in a row at the end of last year. According to figures from Fitch Ratings US funds had raised their exposure to eurozone banks by 8% as of end November compared with October. But the flows are still heavily skewed towards Germany, which now account for 26% of allocations, while the French share is only 6%. Overall, the total exposure are still relatively low. While the US funds held 30.6% of their overall holdings in eurozone banks, that share was down to 13.7% at the end of November 2012. The paper quotes an expert as saying that the Basel III rules on liquidity will make it unlikely that the US fund flows to the eurozone would return to their 2011 levels.

A reality check by Lex

The Financial Times’ Lex column is sceptical about the end-of-crisis prophecies. While Mario Draghi no doubt deserves the credit for calming things down a bit, after his intervention in the summer, this is unlikely to be sufficient.

“Words alone will not keep the eurozone together indefinitely, however. Investors worry about the level of complacency that sets in whenever eurozone leaders make the slightest progress. It will not do simply to have the ECB on standby to wade into the debt markets when the next stage of the crisis occurs, as it undoubtedly will. The eurozone will remain in recession for much of 2013. Meanwhile, the ability of bailed-out countries to meet ever more demanding targets must be in doubt, especially in Greece. “

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

Almost euphoric.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.694	0.637	0.636
Italy	3.197	2.839	2.839
Spain	3.958	3.590	3.608
Portugal	5.517	4.986	4.992
Greece	10.604	10.196	10.21
Ireland	3.187	2.992	3.030
Belgium	0.753	0.699	0.697
Bund Yield	1.315	1.441	1.441
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.329	1.3138
Yen	115.900	114.61
Pound	0.814	0.8096
Swiss Franc	1.209	1.2092
ZC Inflation Swaps
	previous	last close
1 yr	1.49	1.49
2 yr	1.62	1.55
5 yr	1.7	1.85
10 yr	1.94	2.09
Euribor-OIS Spread
	previous	last close
1 Week	-6.171	-5.671
1 Month	-3.386	-2.186
3 Months	3.657	6.057
1 Year	36.100	37.9
Source: Reuters