Berlusconi rises in polls

• Il Cavaliere’s party now stands at 19% – or between 26-28% including the Northern League – only narrowly trailing the Partito Democratico;
• Mario Monti’s new list, Scelta Civica con Monti per l’Italia, stands at 15%;
• the big loser is Beppe Grillo’s Five Star Movement, now down at 13/14%;
• Corriere della Sera compares Montio’s Scelta Civica with the old Democrazia Cristiana;
• Monti, meanwhile, says he now against austerity and in favour of growth;
• says he wants to change the real-estate tax IMU and get rid of the scheduled VAT increase;
• Eugenio Scalfari, who has been a big Monti supporter, says he is disappointed by the fact that Monti has turned into a politician;
• a senior FDP minister has called on his party to elect a new leadership as it remains stuck below the 5% representation threshold in the latest opinion polls;
• Claus Hulverscheidt says the German elections are more open than one might think, despite Peer Steinbruck’s serial gaffes;
•  the Bank of Spain’s supervisors issued a highly critical report, saying “the usual reaction to hints of criminal behaviour is to look the other way”;
• the Wall Street Journal says that the Spanish social security fund has 90% of its assets invested in risky Spanish sovereign debt;
• Spanish politicians have created a cross-party political grouping against peripheral nationalism;
• the new Catalonian government has set up the “Catalan National Transition Council” to prepare the referendum;
• Javier Perez Royo says Spain faces a genuine constitutional crisis as the Constitution lacked democratic legitimacy in Catalonia, yet foresees no mechanism for a referendum;
• French budget minister Pierre Cahuzac says there will be a replacement of the 75% tax, possibly with a lower rate;
• he also promised to find an additional €2bn to fund an employment project;
• a Portuguese state secretary says Portugal would run out of money in 2013 if the Constitutional Court rejected the 2013 budget;
• James Bullard rails against the fiscalisation of the ECB’s monetary policies;
• the FT reports on a renewed discussion over Anne Krueger’s sovereign debt restructuring mechamism;
• Conor Killeen, meanwhile, advocates that Ireland should threaten euro exit and default to strengthen its negotiating position.

Silvio Berlusconi gained at least 5 points in 15 days of campaigning, according to a Mannheimer poll in Il Corriere della Sera. His Popolo della Libertà party is at 19%, or between 26% and 28% with Northern League. The Partito Democratico is over 30%, while Mario Monti’s new list, Scelta Civica con Monti per l’Italia (“With Monti for Italy – a Civic Choice”), is around 15%. Beppe Grillo’ Movimento 5 Stelle is the big loser, with 13-14%.

Curiously, Il Corriere wonders how it is possible for Berlusconi to improve his poll rating, given that he is anti-Monti, anti-euro, anti-Germany? (The answer is, of course, that his poll rating is rising precisely because of it – since he is taking votes away from the M5S.) The paper also talks about Monti’s Scelta Civica as a new edition of the old Democrazia Cristiana, the catholic party that led Italy since the end of WW2, in competition with the Communist Party.

Monti fashions himself as a tax cutter

Monti, meanwhile, said in an interview with SkyTV24 that he will change the real-estate tax IMU and block the announced VAT increase. After the end of financial emergency, Italy needs growth, not only austerity. About his candidacy, Monti said that the idea was not spontaneous, but pondered several months ago (when he denied it almost daily. We agree, of course, that the emphasis should shift from austerity to growth, but we believe that he was wrong to prioritise austerity during his tenure to the extent that he did. For him to jump on the anti-austerity bandwagon is not really convincing.)

Scalfari attacks Monti over his latest choices

The candidature of Mario Monti as centrist-coalition leader has disappointed many people. The most important of these is an old friend and supporter, Eugenio Scalfari. From the pages of La Repubblica, Scalfari explains that Monti has saved Italy from default, but also has fallen short of expectations. After a year of technical government, Monti came into active politics in an aggressive manner. He has changed his mindset, says Scalfari. Reduction of taxes, coalitions with centrist parties, attacks on politicians: this is the new Monti, in contradiction with old one, the technocrat. And this is precisely what worries a lot, Scalfari writes.

On the verge of extinction, Germany’s FDP ponders palace revolt

Each year, on January 6, the FDP holds an annual conference to ponder its future. Now faced with the acute existential threat, a government minister, Dirk Niebel, has told the conference that the party leadership under Philipp Rösler is incompetent and that he favours a new team. Frankfurter Allgemeine (and every other paper) report that Niebel, who is development minister in the Merkel cabinet, wants an early party congress to elect a new leadership.

The party is on the verge of extinction in Lower Saxony, where elections are held later this month, and where a defeat of the FDP would lead to the end of the present CDU-led government in the state, with important political implications for Berlin. National polls also put the FDP below the 5% representation threshold.

The outcome of the German election is more open than you think, says Claus Hulverscheid

Klaus Hulverscheidt has an excellent analysis in Suddeutsche Zeitung this morning, in which he warns not to take a victory by Angela Merkel for granted.  He says Peer Steinbrück’s monumental gaffes (the latest being his statement that the chancellor’s salary is too low) has led many observers to jump to early conclusions. But while Merkel enjoys a large personal poll lead over Steinbruck, the outcome is more open than it usually is nine months before an election. Merkel’s main problem is the lack of natural coalition partner. The FDP is persistently below the 5% mark, needed for representation in the Bundestag. Hulverscheidt does the math on two scenarios. If FDP and the Pirates both fail to enter the parliament, the SPD/Greens is would currently lack 5% for an absolute majority. If FDP and Pirates both get in, the gap narrows to 2.5% (he makes some additional assumptions to get to that number). He says this is very narrow gap, and could easily be closed by a rather small political scandal of the kind that happen only too frequently.

Bank of Spain inspectors denounce supervisory capture

When Bank of Spain Governor Luis Linde took office in mid-2012, he announced that a committee would be looking into past mistakes by the supervisor and proposing improvements. As part of that process, the Association of Inspectors, representing 80% of the Bank of Spain’s supervisory staff, has released a highly critical report claiming that “the usual reaction to hints of criminal behaviour is to look the other way”, writes El Pais. The Inspectors also demand that “the influence of banks and politicians be reduced” to prevent “supervisory capture”, and the draining of Bank of Spain executives to jobs in private banks.

Spanish Social Security investing increasingly in Spain’s own debt.

The Wall Street Journal has caused some of a stir with a report that Spain has been using the so-called Social Security Reserve Fund to buy up Spanish government debt. The piece claims that “at least 90% of the €65bn fund has been invested in increasingly risky Spanish debt, while the government has used the fund for some outlays in 2012 to avoid increasing the deficit.

(This is old news as already back in June there was a report that Spanish debt holdings by the Reserve Fund had gone from 55% in 2007 to 90%, and it was government policy to reach 100% by replacing maturing foreign debt holdings with new Spanish debt. It is also a bit of a noisy red herring, as a stock of €65bn is about 2/3 of the government’s annual pension bill, it is clear that the Social Security Reserve Fund accumulated over the past decade can never be a substantial contributor to future pensions. However, the Euro’s prohibition of central bank financing of state budgets may require the creation of such buffer stocks)

Political positions continue to harden in Catalan independence challenge

Publico reports that some PSOE leaders known for their opposition to Spain’s peripheral nationalism are joining forces with PP leaders by creating a new “foundation” to “defend the Constitution”. Meanwhile, ABC reports that the newly formed Catalan government is implementing the first steps of the CiU-ERC agreement by creating a “Catalan National Transition Council” aiming to legitimize an independence referendum. The Catalan government counts on the Catalan PP and the smaller party Ciutadans staying outside the “National Unity” front, while it in not clear what position the Catalan Socialists will take.

On Friday, El Pais carried an op-ed by noted constitutional expert Javier Perez Royo, in which he argued that the recent Catalan elections are evidence that the integration of Catalonia in Spain by means of the existing Spanish Constitution and Catalan Autonomy Statute is “unequivocally rejected” by a substantial majority of the Catalan electorate, mostly as a result of the successful challenge of the 2005 reform of the Statute before Spain’s Constitutional Court. Perez Royo argues that the current constitutional setup lacks democratic legitimacy in Catalonia, and that this poses a major political problem given that the question of an independence referendum cannot even be posed legally within the Constitution.

French super-tax might be lowered and stretched, no more new tax after 2013

French budget minister Pierre Cahuzac reiterated in a television interview that there will be a replacement for the 75% tax on the super-rich. Cahuzac hinted that the rate would be lower than 75%, pointing out that the constitutional council had indicated that a total tax burden above that level, including other levies, “could be judged as a confiscatory rate” by the council, according to the FT.  He also said that the tax might run for the rest of Francois Hollande’s term, rather than limit it to two years. He added that the government would not impose any further new taxes after this year. “Tax stability from now is the policy of the government,” he said.

On the expenditure side, Cahuzac promised €2bn would be diverted from elsewhere in the 2013 budget to boost an existing €6.5bn contingency fund with the intention of using the money for government employment projects.

Portugal to run out of money if court rules 2013 budget unconstitutional

State secretary Luis Morais Sarmento warned about the consequences of ruling the 2013 budget unconstitutional, as the first consequence would be that Portugal runs out of money, according to Jornal de Negocios.  At stake are three measures of the 2013 budget, on holiday allowances for civil servants and pensioners and an extraordinary solidarity contribution, which the Portuguese president had send to the constitutional court.  If the court were to rule those provisions unconstitutional, the state budget would face a gap of €1.3bn, so Saremento, with the risk of failing the bailout programme. He said the legality of the measures had been checked before and warned there is no Plan B.

James Bullard on the fiscalisation of the ECB’s monetary policies

We don’t hear this often from the US. James Bullard, president of the St. Louis Federal Reserve Bank, called the European Central Bank’s bond-buying program a fiscalisation of monetary policy, and said it had weakened the ECB’s response to the European recession, according to Reuters. He said the monetary policy process has been bogged down by political wrangling over the OMT and other programs,” he said in remarks to the American Economic Association.

The return of Anne Krueger’s SDRM

The FT has a speculative discussion this morning on the merits of a sovereign debt restructuring mechanism (SDRM), proposed by Anne Krueger at the IMF in 2001.  The trigger are the current legal battle, notably the recent victory by Elliott Advisers in the case against Argentina. The article quotes Anne Krueger as saying that a SDRM would have prevented many problems in the eurozone. The article cites lawyers arguing that the Elliott-vs-Argentina case has made future debt workouts in the future more difficult, as a result of which a new mechanism is needed. The IMF is unlikely to propose an SDRM without explicit support from the US, which would require Congressional approval, since an SDRM would involve changes to the IMF’s articles of agreement.

Killeen: Ireland should threaten with exit to get deal on bank debt

Conor Killeen in the Irish Times had some unhelpful advise for Ireland  on how to increase its negotiating position over a deal to the bank debt rescheduling: Ireland should just not shy away to threaten with Eurozone exit and default. He argues that if Ireland is serious, the threat of a Eurozone exit could send the whole region into chaos, increasing the costs of a non-deal. Killeen writes this is the only way the others will take Ireland serious.

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

Still good.

 

10-year spreads
	Previous day	Yesterday	This Morning
France	0.645	0.610	0.605
Italy	2.762	2.782	2.782
Spain	3.548	3.524	3.605
Portugal	4.842	4.662	4.990
Greece	9.892	9.714	-1.53
Ireland	2.958	2.858	2.976
Belgium	0.734	0.718	0.736
Bund Yield	1.476	1.532	1.532
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.304	1.3037
Yen	114.630	114.51
Pound	0.813	0.8135
Swiss Franc	1.209	1.2084
ZC Inflation Swaps
	previous	last close
1 yr	1.64	1.67
2 yr	1.58	1.7
5 yr	1.76	1.9
10 yr	1.99	2.01
Euribor-OIS Spread
	previous	last close
1 Week	-4.900	-5.6
1 Month	-4.114	-4.214
3 Months	3.671	3.571
1 Year	34.714	34.714
Source: Reuters