Towards a hung parliament in Italy

• Silvio Berlusconi and the Lega Nord have agreed an electoral pact, as a result of which a centre-left majority in the Senate is becoming doubtful;
• Berlusconi agreed not to be PM if the bloc were to win, but says he might become finance minister;
• the block’s candidates for the top job are former finance minister Giulio Tremonti and Angelino Alfano, PdL general secretary;
• Partito Democratico leader Pier Luigi Bersani has criticised Mario Monti over his decision to stand for political office;
• Corrado Passera, economic development minister in Monti’s cabinet, also joined the chorus of disapproval over Monti’s decision to seek political office;
• Stefano Folli said the electoral pact had been a clever ploy, and vastly increased the probably of a hung parliament – or a German-style Grand Coalition;
• La Repubblica says that tax increases were the main factor behind Italy’s primary surplus in 2012;
• Germany’s Target 2 claims are shrinking, but Hans Werner Sinn remains unperturbed;
• ECB acknowledges a further collateral error;
• Japan said it will buy ESM T-bills;
• in Spain, food consumption has been falling as a result of the crisis;
• in Portugal, political parties have launched a further legal challenges against the 2013 austerity budget;
• the Democratic Left in Greece expels two MPs over their vote to support an inquiry into the role of Evangelos Venizelos, the leader of Pasok, in his handling of the Largarde list;
• Ireland’s debt agency plans a syndicated tap of last year’s 2017 bond – an increase in the size of its issue;
• a majority of the Finns expect worse of Euro crisis to come, with 50% against further bailouts;
• Ewald Novotny is expected to be re-nominated as the head of the Austrian central bank;
• bankers say the new Basle liquidity rules will have no positive impact on the eurozone in 2013;
• Frankfurter Allgemeine says the FDP needs a new leadership;
• Robert Mundell, meanwhile, rails against a fiscal union.

Silvio Berlusconi has reached a deal between his Popolo della Libertà and the Lega Nord for the upcoming Italian elections. As La Stampa reports, the premier candidate could be the former Finance Minister Giulio Tremonti, one of the most important figure of Northern League.  Berlusconi himself brought Angelino Alfano, secretary general of his PdL, into play. According to Roberto Maroni, the leader of the Northern League, the pact explicitly stated that Berlusconi would not be Italian PM for a fourth time if the centre-right coalition wins. Berlusconi also said he may be the finance minister, if his bloc wins.

The political significance of the alliance is that the combined list has a good chance of winning a majority in the Italian Senate, even if the Partito Democratico wins the Lower House. Berlusconi had already threatened that he would boycott a government in this situation – which would effectively lead to a Grand Coalition of PD and PdL/Lega – thus bypassing Mario Monti’s  centrists. (This is why Monti’s decision to tie himself to the centre has been risky, and may backfire politically. A centre-left alliance could have had a majority if the right  had split between PdL, Lega and the Five Star Movement.)

Pier Luigi Bersani has again attacked Monti. He was given the job to be a technical PM, not a political actor, says the PD leader in a television interview in LA7. Bersani, now echoing  Monti’s most recent line, said that the country’s economic policy should be oriented towards growth, not just austerity. The centre-left leader has not excluded the possibility of the introduction of a wealth tax.

Passera attacks Monti

Corrado Passera, Minister for Economic Development, criticised Monti in an interview on Il Corriere della Sera. The former CEO of Intesa Sanpaolo said he was disappointed, like Eugenio Scalfari on Sunday, by Monti’s choice to stand for election. According to Passera, the Agenda Monti, the manifesto of the former EU Commissioner, missed the point on economics and growth. Too much austerity is not a good recipe for Italy, Passera says. He also said that his own life in politics was coming to an end.

The biggest risk now is a hung Parliament, Folli says

This is an alliance that is good for both parties, said Stefano Folli on Il Sole 24 Ore. The agreement between the Northern League and PDL will help Berlusconi. His share of the votes will approach that of Bersani by gaining votes from Beppe Grillo’ Movimento 5 Stelle. With that political constellation, there will be no solid majority in Senate, where the number of regions won largely determines the voting shares. According to Folli, this situation could drive Italy to a hung Parliament.

Italy had a primary surplus in 2012

High taxes have permitted to Italy to have a primary surplus in 2012, La Repubblica writes. In fact, the tax revenue in Italy was up 3.8% to €378bn in the first 11 months of 2012 compared to the same period in 2011, according to latest Finance Ministry figures. Due to real-estate tax IMU, Italy will collect over €24bn for 2012, La Repubblica calculates. In addition, revenues from stamp duty rose 107%, while proceeds from State-run gambling like lotteries fell 6.3%. The new money from tax evaders hits €6.4bn, up 9.3% on the previous period. The solidarity levy on those earning €300,000 or more a year brought in €259m.

Germany’s Target claims are now shrinking but this does not stop Hans Werner Sinn’s alarmism

So this looks like to be the end of the Target scare. Germany’s Target claims have fallen from €715bn to 656bn in December, Frankfurter Allgemeine reports. The reason for this trend reversal is the slow but steady recovery in the inter-bank market. The article quotes Commerzbank chief economist Jorg Kramer as saying that this was a definitive change in the trend, as the private financial outflows of the periphery had now stopped. But Hans-Werner Sinn says the fundamental problem persisted. The ECB’s OMT programme and the banking union allowed peripheral banks to fund themselves in the capital markets, which is why the Target balances are falling. But this means that the eurozone is increasingly slipping into a joint liability union.

ECB acknowledges another collateral error

Frankfurter Allgemeine has the story that the ECB has acknowledged another problem with its collateral policies, this time in France. The Banque de France has attached wrong ratings to 100 short-dated securities. The Banque de France blamed technical difficulties, but the problem had already been solved in August. Affected were securities with a nominal value of €6.5bn, which were mostly overrated, leading to a total valuation gap of €500m. The mistake had been immediately corrected.

Japan’s finance ministry’s decision to buy ESM debt drives up euro

The euro traded at $1.3124 this morning following an announcement by the Japanese finance ministry that it will buy ESM debt to help the eurozone. Reuters quotes Japan’s finance minister Taro Aso as saying that Japan will buy three month T-bills issued by the ESM later today – its first launch since it became operation last year. So far, Japan has bought €7bn worth of bonds issued by the EFSF.

Spanish internal devaluation shows up in food consumption data

Figures from Spain’s ministry of Agriculture, Food and Environment show that the per-capita food expenditure had been dropping for the three months from August to October 2012, El Pais writes. Nevertheless, year-on-year there is a modest (0.9%) increase in the amount of food bought. Disposable income has been shrinking as a result of unemployment, tax hikes and wage cuts. The Ministry’s survey data for November and December are not available yet, but the Bank of Spain in its end-of year quarterly report warned of a general demand slump, and low levels of consumer confidence.

New legal challenges against the Portuguese 2013 budget

In Portugal the 2013 budget came under fresh fire on Monday as opponents lodged more legal challenges against the austerity measures, raising the chances of the Constitutional Court throwing it off track, according to Reuters. The Communist Party and Left Bloc complained against the 2013 budget, following the Socialist Party and the country’s president last week. The country’s ombudsman, who defends citizens’ rights, and the Portuguese judges union were also preparing challenges. President Cavaco Silva paved the way for the challenges last week when he signed the 2013 budget into law but at the same time asked the Constitutional Court to check whether its tax hikes are fairly distributed and legal.

Greek government loses 2 MPs over probe into Lagarde list

The smallest party in the Greek government, the Democratic Left, expelled two lawmakers on Monday for backing an investigation into Socialist leader Evangelos Venizelos’s role over his handling of a list of possible tax cheats, Reuters reports. The expulsions left the ruling coalition with 164 lawmakers in the 300-seat parliament. Prime Minister Antonis Samaras’s government has rejected calls to look into accusations that Venizelos has not done enough to pursue the alleged tax cheats, focussing instead on the role of Venizelos’s predecessor at the finance ministry, George Papaconstantinou. On Monday opposition party SYRIZA submitted to parliament its proposal over the set-up of a parliamentary committee that will investigate both former finance ministers. Two secret ballots will be held early next week on this issue. Kathimerini writes the fact that the votes are secret could lead to some sceptical MPs embracing SYRIZA’s proposal for Venizelos to be put on the spot.

Greek banks may need more money for recapitalisation

Greece’s main banks are considering requesting additional funds for their recapitalization, Kathimerini reports. Senior bank officials say that the rapid deterioration in financial conditions caused by the back-to-back elections in mid-2012 has led to a greater increase in nonperforming loans than originally foreseen in the Blackrock report a year ago. The bond buyback was another blow. Their calculations show that capital requirements could rise up to €3bn-€4.5bn, depending on the severeness of the recession. As a result the capital stock of €5bn formed by the Bank of Greece for future needs may have to be used immediately by the big banks, eventually taking the total bill of the recapitalization process to over €30bn.

According to a separate report from Reuters  Greece’s securities regulator on Monday gave conditional approval to National Bank to buy rival Eurobank.

Ireland tempts markets with €2bn bond deal

Ireland will offer around €2bn of bonds in its first debt sale of 2013, reopening a 2017 bond first sold in July according to Reuters. In July, it sold the 2017 paper at a yield of 5.9% but Irish debt has performed strongly since, trading at a yield of 3.25% before the NTMA’s announcement rising to 3.35% thereafter. The country’s debt agency said on Monday it planned a syndicated tap of the 2017 bond, at a pre-determined price for a five-year period.  The Irish Times says the deal could get away as early as today. National Treasury Management Agency (NTMA) has said it wants to raise another €10bn this year to cover the country’s 2014 funding requirements.

Majority of the Finns expect worse of Euro crisis to come, with 50% against further bailouts

A majority of Finns believes that the euro crisis will continue, 67% said the worst is still to come, according to a poll commissioned by the TV station YLE. The poll also shows that 50% of the respondents are ready to withhold additional support for other struggling eurozone countries even if there is a risk of a collapse of the eurozone, only 33% would continue providing financial support. Not surprisingly, supporters of the Finns party were the strongest opponents,  80% among them ready to stop any further financial support. Among supporters for the governing parties, the National Coalition and the Social Democrats, close to half said they are ready to pull the plug.

Nowotny expected to be reappointed as Austria’s central bank chief

Ewald Nowotny is likely to be reappointed as head of the Austrian National Bank this week but may not serve the entire six-year term, sources familiar with the matter said on Monday. Nowotny, who will be 69 years old in June, may instead hand over to former European Central Bank Executive Board member Gertrude Tumpel-Gugerell half way through the period, two sources told Reuters. This idea should not to be mistaken as a deal, warns Der Standard. According to the procedure, the CB council nominates three candidates per position, which the government might or might not take on. The president then appoints the positions upon recommendation of the government. Two other positions to be filled in the OENB council.

New Basel rules will not have a big effect on Europe

Reuters has a very useful analysis on the likely effect of the revised Basel rules giving banks four more years to build up cash reserves.  The article quotes eurozone bankers as saying it will have little effect on the eurozone in 2013, as the falling in bank lending to consumers and companies is mostly driven by a dearth of demand. The consensus among those interviewed was that it would have a positive effect in the medium-term, but not for 2013. There are, however, also signs of tightening loan standards by banks, but the main reason, according to an ECB bank survey, are not capital or liquidity requirement, but the worsening economic outlook, which in turned the reduced the ratings of the debtors.

About the FDP

One of the critical things to watch out for in the German elections is whether the FDP can survive. The polls have consistently put the FDP’s share at below 5%, and Sunday’s traditional New Year’s party conference has seen the party hopelessly divided (as we reported yesterday). In a front-page editorial, Frankfurter Allgemeine has now joined the chorus of those demanding the resignation of party chief Philipp Rosler. The paper characterised his speech as a competent recital of liberal principles, one that totally fell short of a political agenda.  The party should not wait until the ordinary party congress in May to change its leadership.

(The key date to watch is January 20, the election in Lower Saxony, where the FDP is currently polling 3-4%, below the 5% needed. If the party fails there, Rosler is very likely to be pushed out immediately afterwards, something might yet rekindle the FDP’s fortunes.)

Robert Mundell against fiscal union

Frankfurter Allgemeine reports from  the annual congress of the American Economic Association in San Diego, quoting Robert Mundell as warning against a fiscal union. He said it would folly to create a central authority to co-ordinate taxes and expenditure. The right course of action would be to go back to the status quo ante, to the model of fiscal discipline among member states. He recalled the experience of the US debt crisis of the 1830s, when ten states got into difficulty, with only two paying back their debts in full, while the others defaulted or sought agreement with their creditors. Mundell was speaking in a panel that also included Kenneth Rogoff, Ronald McKinnon and Martin Feldstein. Rogoff said he expected further defaults, while Feldstein predicted that the markets may soon cease up on France.

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

Dollar rises, but spreads are also trending upwards.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.610	0.601	0.596
Italy	2.735	2.876	2.869
Spain	3.524	3.602	3.672
Portugal	4.662	4.704	5.017
Greece	9.714	9.760	-1.52
Ireland	2.858	2.909	3.037
Belgium	0.718	0.724	0.742
Bund Yield	1.532	1.514	1.521
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.303	1.3124
Yen	114.350	114.86
Pound	0.812	0.8145
Swiss Franc	1.209	1.209
ZC Inflation Swaps
	previous	last close
1 yr	1.67	1.67
2 yr	1.7	1.7
5 yr	1.9	1.89
10 yr	2.01	2.01
Euribor-OIS Spread
	previous	last close
1 Week	-6.100	0
1 Month	-2.214	-2.214
3 Months	3.529	5.629
1 Year	34.929	36.829
Source: Reuters