Credit continues to contract

• Credit continued to contract in November, with continued weak growth in money supply;
• the latest economic data show that the eurozone economy remains firmly in recession;
• Mario Monti has shelved his style of understatement, and went on the attack on Berlusconi, calling him volatile in his private and public lives;
• he also criticises the extremism of the economics spokesmen of both large parties;
• Domenico Ferrara says Monti has always been a politician, not a technocrat;
• the executive director of RAI accuses Monti of abusing his powers to seek an excessive media presence;
• Italians will have to pay 15 new taxes in 2013;
• Francois Hollande and Jean-Mark Ayrault demonstrate a united front, hoping to quell rumours about a deteriorating relationship between the two;
• Ayrault sets out an action plan of 15 new laws, with vague promises on fiscal and labour reform;
• after the negative constitutional vote ruling, Pierre Moscovici says the 75% tax will come anyways, as he will now rework the bill to comply with the verdict;
• Vladimir Putin has given Gerard Depardieu Russian citizenship so that he can avoid French taxes;
• the Portuguese media say that the 2013 budget may come in effect after all, since the President’s referral to the Constitutional Court includes no time frame;
• Germany plans more austerity in 2014 to meet the target of a structurally balanced budget;
• the Greek 2012 budget deficit is likely to come in better than forecast;
• Ireland, too, will beat forecasts of its 2012 deficit;
• there has been a small rise – albeit from a low level – in Spanish savings deposits after the removal of a penalty on high interest accounts;
• Morgan Stanley puts Spain near the top of its investment recommendations due to the expected effects of the OMT;
• half of Spanish regions will miss their deficit targets – while the regions as a whole will meet it;
• Jorg Bibow, meanwhile, says the institutional response to the eurozone crisis is based on a fundamental misdiagnosis.

The most recent manufacturing PMI and monetary data tells us a very consistent picture of an economy that is still falling deeper into recession. Frankfurter Allgemeine reports that the slowdown in bank lending is now also happening in Germany, the result mostly of credit constraints in the financial sector, according to an expert quoted by the paper. Yesterday’s ECB data for November showed a eurozone wide contraction in credit by 0.8% in November compared with November 2011. Money supply M3 went up 3.8% – and this despite portfolio shifts from longer to shorted dated maturities.

(We had to read the last section twice. The FAZ reporter considered the 3.8% increase as alarmingly high, but found solace in the idea that the increase was mostly due to portfolio shifts. Effective money supply growth is thus close to zero. The data are telling us that the eurozone economy is subject to a simultaneous fall in demand and credit constraints – with no turnaround in any of the data series yet.)

Monti’s metamorphosis

Mario Monti has shelved his typical understatement and adopted an unexpectedly aggressive style with a sharp attack on Silvio Berlusconi. As Il Corriere della Sera reports, Monti hit back after Berlusconi accused him of lacking credibility because of his transformation from a technical to a political role. Berlusconi has been volatile in both his personal and political affairs recently, Monti told RAI television. In addition, Monti says that Berlusconi’s Popolo della Libertà party was increasingly adopting extreme positions on economic affairs. He also said the Partito Democratico should silence the anti-reform elements within its ranks. In particular he singled out the economics spokesmen of both large parties, Stefano Fassina of the PD and Renato Brunetta of the PdL – he accused the latter of being in the pocket of corporate lobbyists, according to the FT. Monti also unveils that the possible name for his list could be Con Monti per l’Italia (With Monti for Italy).

Always a politician, not a technocrat, Ferrara says

From a technocrat to a politician in ten days – Monti has been preparing for some time how to become a politician, according to Domenico Ferrara in Il Giornale. The newspaper led by Silvio Berlusconi’s brother said yesterday’s outspoken attacks, against both Berlusconi and Pier Luigi Bersani, are the stuff of politics. The constant references to tax cuts, the political reformism and the “right choices” to save Italy are proof that Monti has always been a politician, never a technocrat.

RAI television blames Monti over his media overexposure

Sergio Zavoli, the executive director of Italian State television RAI, blames Monti over his excessive participations in TV shows and interviews. As La Repubblica reports, Zavoli said the media overexposure of some politicians (he refers to Monti) was not justifiable. That’s why in Italy there is a law called Par Condicio, a sort of US Equal-time rule, that specifies that radio and television must provide an equivalent opportunity to any opposing political candidates who requests it. Since December 23, the date of Monti’s official candidature, there have been 20 scheduled appearances on TV and radio. For that reason, Zavoli has blocked a Monti interview scheduled for next Sunday.

Over 15 new taxes will hit Italy in 2013, study reveals

In 2013, Italians will pay €14.7bn more in taxes than in 2012. As reported by Panorama, a research of CGIA Mestre has revealed that about 15 new taxes will be introduced this year, including a VAT increase from July 1. The unpopular real-estate tax IMU went from temporary to permanent. In addition, as pointed out by Il Sole 24 Ore, both the Democratic Party and Monti are planning to introduce a wealth tax. CGIA says that in case of wealth tax, consumptions might shrink even more, fuelling the recession.

Hollande and Ayrault demonstrate united front against unemployment

With an orchestrated set of speeches and comments the French government and its president started into the New Year, careful to avoid the appearance of dissonance or to repeat the communication errors last autumn. Francois Hollande had to show his public backing for the prime minister Jean Marc Ayrault, amid rumours of a shaky relationship between the two. Citing Ayrault’s “seriousness, devotion and loyalty”, he said: “I reaffirm my confidence in him.” As for content, there was nothing really new according to Les Echos: Hollande confirmed unemployment as target No1, and promised the rising trend to be reversed within one year (allowing half a year more time for this than previously).  Prime minister Jean-Marc Ayrault promised a new “modèle français” (like many before him) and issued a five-page “programme of work” for his ministers, promising 15 new laws covering a broad range of issues for 2013. On fiscal policy and labour market reform the promises remain vague, a plan detailing €60bn in public expenditure cuts to be announced in the spring, the “generation contract” to employ the young and keep the elderly is to be discussed in the coming months, and a bill on job security currently negotiated between business and trade unions. Ayrault said any legislation would include worker representation on company boards, limits on “certain remuneration behaviour” and protection against hostile takeovers, writes the FT.

The 75% tax on the super-rich will come

In an interview with Les Echos, Pierre Moscovisci confirmed that the 75% tax for the wealthy will come and that the government will rework the bill to ensure that next time it will pass the constitutional council. The government’s initial plan to levy a 75% tax, which was aimed at all individuals earning more than €1m a year  (only income above that benchmark would be taxed at 75%) was rejected by France’s constitutional council. Late in December the Council ruled that the 75% super-tax was unfair because it flouted the law in France that taxes are decided by household, not by individual.

Russia welcomes Depardieu

Gerard Depardieu, who bought a house in Belgium in protest against a proposed 75% tax rate and vowed to give up his French passport out of rage against the prime minister’s dismissive comments on his move, was  granted Russian citizenship from Vladimir Putin yesterday,  France 24 reports. Depardieu had told friends he was considering three options to escape France’s new tax regime: settling in Belgium, relocating to Montenegro, where he has a business, or moving to Russia. The Belgians said Depardieu will have to choose between Russian or Belgian citizenship, can’t have both, Le Soir reports.

Portugal may fudge its way out of the budget impasse

After the decision by President Aníbal Cavaco Silva to refer the 2013 to the constitution court, the Portuguese media (see i.e. Economico or RSF radio ) are now discussing how relevant this move is, as Silva did not ask for a priority ruling. This could mean that the current provisions could be in place for the rest of the year as no date can be set for the ruling.

Germany plans more austerity in 2014

The German regional paper Rheinische Post reports this morning that Wolfgang Schauble’s budget draft for 2014 would include a net saving of €5-6bn to meet the goal of a structural budget balance that year. The article quotes Michael Meister, a senior CDU parliamentarian as saying that this was the remaining gap that needs to be closed, and it would have to be closed by savings on expenditures alone. The article says the finance ministry would now negotiate with spending ministries and prepare a budget draft by March. The calculations also include the effect of tax cuts, which have been vetoed by the Bundesrat, where the SPD and the Greens have a majority.

Greek 2012 budget deficit better than expected

Yesterday we reported that the Greek general government had run a primary surplus between January and November 2011. This Kathimerini article today says that final 2012 overall budget deficit will be an undershoot of the target of 1.5% by about 0.5pp, citing unnamed sources. The final data are due later this month. The biggest uncertainty relates to the funding needs of the social security funds.

Irish deficit falls below 8%

Ireland’s finance minister Michael Noonan said yesterday that the 2012 deficit will be below 8%, better than forecast, due to a larger tax take in December, according to the Irish Times. He said that the figures gave him the confidence that the 2013 budget goal of 7.5% was realistic “barring war or pestilence”.

Marginal growth in Spanish bank deposits in November

Expansion writes that deposits at Spanish banks grew in November 2012, by under 1% month-on-month, though the total deposit amount is still 7% below the figure 12 months earlier. The paper points out that in September the government removed a penalty on highly remunerated deposit accounts the previous government had introduced in mid-2011 to stem what the Bank of Spain considered a damaging price war in deposit-taking, the so-called “bank liability war” (Guerra del Pasivo in Spanish). As deposits grew marginally in September after five straight months of decline, but dropped again in October, Spanish bank deposits appear to have stabilized.

Morgan Stanley bullish on Spanish bonds

Spanish investment newsletter The Corner reports that Spain is second only to Switzerland in Morgan Stanley’s investment recommendations for 2013 based on “technicals” and “earnings and profitability”. Morgan Stanley argues that, if the OMT were to be activated in 2013, that could represent a windfall to Spanish bond holders.

Almost half of Spain’s regions may miss 2012 deficit target

With rumours that Spain’s deficit may reach 9% for 2012, the Finance ministry is warning in a report that seven of Spain’s 17 regions will miss their deficit target of 1.5% of GDP, reports El Economista. In the case of Catalonia it will depend on asset sales whether the target is met. The regions as a whole will meet the target, according a Ministry communication a week earlier.

Jörg Bibow calls Draghi’s liquidity bluff

El Pais carries an op-ed by Jörg Bibow arguing that “Draghi’s liquidity will turn out to be a bluff”. He writes that the reforms of the eurozone’s institutions were mal-designed, and would ensure the ultimate failure of the Euro, a result of a fundamental misdiagnosis of the causes of the crisis. According to Bibow, the Eurozone’s “original sin” was to provide for no overall demand management in good times, and lender of last resort functions in lean times. Bibow argues that, while the single currency eliminated competitive exchange rate devaluation, it did not do away with competitive labour cost devaluation. Germany, by depressing its labour costs since the start of the Euro with respect to its partners, violated what should have been a “golden rule”, that unit labour costs should keep pace with eurozone-wide inflation. Finally, Bibow argues that Germany’s structural reforms at the start of the previous decade were successful because they were carried out at a time when the global economy was growing strongly, but the Eurozone was much bigger and won’t enjoy a comparable global economic advantage.

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

Sideways.

 

 

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.637	0.645	0.637
Italy	2.834	2.843	2.799
Spain	3.590	3.548	3.596
Portugal	4.986	4.842	5.288
Greece	10.196	9.892	-1.52
Ireland	2.992	2.958	3.014
Belgium	0.699	0.734	0.752
Bund Yield	1.441	1.476	1.52
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.316	1.3043
Yen	114.690	114.47
Pound	0.811	0.8113
Swiss Franc	1.209	1.2089
ZC Inflation Swaps
	previous	last close
1 yr	1.49	1.64
2 yr	1.55	1.58
5 yr	1.85	1.76
10 yr	2.09	1.99
Euribor-OIS Spread
	previous	last close
1 Week	-5.671	-4.971
1 Month	-4.886	-4.886
3 Months	4.957	2.457
1 Year	36.071	33.971
Source: Reuters