SPD considers rejection of Cyprus aid

• According to Suddeutsche Zeitung, SPD chief Sigmar Gabriel says he cannot see the SPD approving an aid package for Cyprus, which is expected to be agreed at eurozone-level next month;
• the Greens and parts of Angela Merkel coalition are also opposed, all fiercely critical of the practice by Cypriot banks to attract money from Russian oligarchs and Greek tax evaders;
• in an editorial, Claus Hulverscheidt writes that the Cyprus issue comes as a god-sent for the SPD, which now has its first opportunity to challenge Merkel’s eurozone policies;
• Mario Monti says his government was forced to raise taxes because of an acute financial crisis caused by his predecessor;
• Silvio Berlusconi repeated his call for Germany either to accept the ECB as a bond buyer of last resort, or to quit the eurozone;
• Pier Luigi Bersani says he wants a big electoral pact with Monti;
• Italian pollster Roberto D’Alimonte says Lombardy will be the Ohio of Italy, and predicts a centre-right blocking vote in the Senate;
• Marco Sarti writes that Monti decided to become a politician to stop a return by Berlusconi and to quell the Five Star Movement;
• the latest polls put the centre-left alliance – without Monti – at close to 40%;
• unemployment hits a new euro-era record, with 11.8% in November, and further increases to be expected throughout 2013;
• youth unemployment in Italy and Spain also hit new records;
• Kevin O’Rourke says Europe’s complacent political class underestimates the threat these numbers are posing;
• the European Commission’s economic sentiment indicators nudges up a little, albeit at a very low overall level;
• the European Commission’s Employment  and Social Developments report sees increasing divergence among EU member states;
• French minister Arnaud Montebourg declares trade multilateralism to be dead;
• Ireland raised €2.5bn in the syndicated bond market yesterday at a yield of 3.3%;
• the Dutch finance minister Jeroen Dijsselbloem looks set to become the new Jean-Claude Juncker;
• yesterday saw the beginning of the age of the euro-CAC with a Dutch bond issue;
• Hélène Rey, meanwhile, says delay in the Greek debt exchange reduces chance that Greece returns to solvency.

This is a political story to watch out for. Suddeutsche Zeitung is reporting this morning that the SPD is considering blocking a Cyprus deal on the grounds that it won’t support tax dumping and money laundering. SPD chief Sigmar Gabriel is quoted as saying that the SPD could not approve a package for the Cypriot banks on the basis of current information available. If Angela Merkel were seeking SPD support (which she will need to get the package through the Bundestag), she will have to come up with good reasons, he said, a scenario he considers implausible. As the Greens have the same reservations about Cypriot banks, a Bundestag majority is not guaranteed – especially given the trend towards rising opposition within Merkel’s coalition. The article also quotes a German CSU MEP, who demanded a guarantee that the money goes to help the citizens of Cyprus, and not the oligarchs of Russia. The paper quotes government sources as saying that Merkel will only accept a package unless Nicosia accepts radical reforms (but did not say what that meant in practice). Cyprus has asked for a package of €17.5bn, of which €12bn are earmarked for the banking sector. The timetable is for the package to be approved by the eurogroup on February 10.

In an editorial, Claus Hulverscheidt writes the Cyprus issue comes as a stroke of luck for the SPD and its struggling candidate, Peer Steinbrück. He writes the party had been searching for a showdown with Merkel for years, and that this was politically an ideal, almost too good to be true-type of opportunity. Considering that the SPD’s reservations are shared by the vast majority of the German population, no one would criticise the SPD of having created an electioneering-type manoeuvre.

Monti said his government was forced to introduce more taxes

Mario Monti said that his emergency government was forced to raise taxes because “irresponsible people” put Italy into the financial crisis, as La Repubblica reports. According to Monti the financial emergency is over, but Italy is in an economic and social emergency. La Repubblica writes that Monti made this comment after the publication of the Employment and Social Developments in Europe 2012 report, in which the EU says the Italian real-estate tax IMU needs to be made more progressive if it is to enact a fairer redistribution of wealth. Monti also calls for cuts to public salaries and MPs.

Berlusconi said Germany should accept ECB as guarantor or prepare to exit 

La Stampa reports on a comment by Silvio Berlusconi that if Germany does not agree to a new role for the ECB, as guarantor of Eurozone sovereign debt, then it should consider leaving the euro itself. For the fifth time in two months, Berlusconi said Germany is the biggest obstacle to the ECB becoming a real central bank. In addition, he said that he proposed to the Northern League to become Economic Development Minister.

In the meanwhile, Bersani prepares a big deal with Monti

Pier Luigi Bersani does not rule out an agreement with Mario Monti after the upcoming Italian elections. As Il Giornale reports, the Partito Democratico leader is considering an alliance in Senate and the Lower House between his party and Monti’s coalition. After the decision by the Catholics to stand on centre-left party list, Monti should make a deal with Bersani after the vote. According to Il Messaggero, it will look like a national unity government, committed Monti’s reform agenda.

Lombardy could be the Ohio of Italy, says D’Alimonte

Lombardy will play the role of Ohio at the next election, along with Campania, according to Roberto D’Alimonte, possibly the most influential Italian pollster, writing in Il Sole 24 Ore. Italy will face the scenario of a hung Parliament if the Northern League, allied to Silvio Berlusconi’s Popolo Della Libertà, wins in Lombardy. At the same time, the PdL could win Campania. That would constitute a blocking vote because in the Senate the 55% seat premium (out of a total of 315) is calculated on a regional basis and each region’s number of senators depends on its population. In contrast, for the Lower House elections, the party (or coalition) winning the highest number of seats obtains a minimum of 340 seats out of 630, 55% of total. The centre-left coalition can currently count on a majority in Lower House, but not in Senate.

The one million dollar question: Why Monti is running for premiership?

Why is Monti running in the Italian election, asks Marco Sarti on Linkiesta. Before the announcement, Monti was destined to become president of the Republic, to succeed Giorgio Napolitano. The president plays a pivotal role during the crises. According to Sarti, there are two explanations for Monti’ choice: to block the rise of Beppe Grillo’s Movimento 5 Stelle or to avoid the ascent of Silvio Berlusconi. He dismisses the idea that Monti may have come under pressure from international lobbies or that the decision was motivated by personal ambition.

The latest IPSOS poll sees centre-left coalition near 40%

The latest IPSOS poll for Lower House, published by Il Corriere della Sera, sees the centre-left coalition is at 39.8%, the centre-right at 23.1%, Monti List at 17.6% and Beppe Grillo’s M5S 12.5%. In contrast, the poll for Senate sees centre-left at 40.3%, centre-right at 23.8%, Monti at 16.6% and M5S 12.2%. The complete national poll by party sees the Partito Democratico at 33.3%, the Popolo Della Libertà at 16.1%, M5S at 12.5%, Monti at 12%, Sinistra Ecologia e Libertà (far left) at 5.5%, Rivoluzione Civile (far left) at 5.5%, UDC (which supports Monti) at 4.3%, Northern League (which supports Berlusconi) at 4%, Fratelli d’Italia (which supports Berlusconi) at 1.6%.

Eurozone unemployment reaches a record high

This is probably the first of several records we will be reporting this year. The Wall Street Journal has the story that eurozone unemployment hit a rate of 11.8% in November, up from 11.7% in October 2012, and 10.6% in October 2011. Total youth unemployment was 24.4%, up from 24.2% a month earlier. The article says the rise in unemployment suggests that fourth quarter GDP must have contracted. The article predicts that the unemployment rate is likely to continue to rise this year as governments implement austerity measures and cut public sector jobs. The article cites Ernst & Young’s forecast of a 12.5% unemployment rate by early 2014.

There was, however, some moderately good news as well. The European Commission’s monthly measure of industrial confidence rose to minus 14.4 from minus 15, while its measure of services confidence rose to minus 9.8 from minus 11.9. Its overall measure of business and consumer confidence, the economic sentiment indicator, rose to 87 from 85.7. It was the second straight monthly rise in the ESI, which is now back to levels last in July and August.

Spanish and Italian youth unemployment hits new extremes

Figures released by Eurostat show Spanish youth unemployment at 57.6%, tied with Greece, against a Eurozone average of 24.4% and EU average of 23.7%, reports El Diario. In Italy, as La Stampa reports, citing data from the national statistics agency, youth unemployment in November hit a new record with 37.1%. This is the worst monthly result since January 2004 and the worst quarterly record since 1992.

European Commission’s Employment  and Social Developments report sees increasing divergence among EU member states

The European Commission on Tuesday released its Employment and Social Developments in Europe review for 2012 (see press release and FAQ). The report highlighted:

• increasing economic divergence among EU countries during the crisis
• “real gross household disposable income declined between 2009 and 2011 in two-thirds of EU countries for which data is available”, led by Greece, and followed by Spain, Cyprus, Estonia and Ireland.
• Long-term unemployment has increased from 3% to 4.6% of the active population between 2009 and 2012, led by Slovakia, Spain, Greece, Ireland, Latvia, Lithuania and Estonia where the LTU rate exceeds 7% of the active population. Spain accounts for 43% of the EU-wide increase in long-term unemployment between 2008 and 2011.

Kevin O’Rourke on the meaning of those unemployment figures

Writing in the Irish economy blog, Kevin O’Rourke says “the only thing that makes Europe’s useless political class worry is the risk of imminent cardiac arrest, as proxied by bond yields and the like;

but the cancer of unemployment will do just as much damage if allowed to progress unchecked.” He says it was now of utmost importance that policymakers must now make policy proposals to reverse the trends in 2013, and to implement those policies quickly. “You have to live through times like this to really appreciate the wisdom of Keynes’ famous line about the long run,” he concludes.

(He is right, of course, but we see little chance of an actual change in the policies, perhaps a small moderation in the extent to which austerity is applied. It looks to us that the eurozone will remain stuck in a recession through most of 2013, heading for a very lacklustre recovery that won’t feel like one.)

Montebourg says Multilateralism is dead

Arnaud Montebourg, an advocate of limited protectionism in trade and industrial policy, told journalists in Paris “Multilateralism is dead….We prefer bilateral deals … because it’s not possible to find rules that are suitable to everyone, with each requiring the right to a veto.” The latest call for a broad deal is from David Cameron, who has urged the European Union and the United States to broker a free trade deal. Officials have told Reuters talks will begin in mid-2013. Montebourg said he disagreed with the method by which the European Union negotiated on behalf of its member states. The French government targets to narrow its trade deficit, which reached €60,59bn (13.8bn without energy) in the first 11 months of 2012, less than in 2011. To rebalance trade with China, Montebourg said Europe needed a currency that made its exports more attractive, closer to the US. dollar than the former German unit, the Deutsche Mark.

Ireland raised €2.5bn for 3.3%

Ireland raised €2.5bn in the syndicated bond market yesterday, with a bond price of €109.45 and borrowing costs of 3.316%, not seen since before the bailout programme started in December 2010. The costs of funding are also below 3.5% average costs under the EU/IMF programme. The Irish Times quotes the debt management agency, according to which over 200 investors submitted bids for the deal, with 13% taken up by domestic investors and 87% by overseas investors, the majority of whom were based in the UK. Borrowing costs were 290bp higher than for Germany.

The new Mr Juncker

The Irish finance minister, in his role as representing the Irish EU presidency, said that Jeroen Dijsselbloem, the Dutch finance minister, seems to be a suitable candidate to take over from Jean-Claude Juncker as eurogroup chairman. An announcement is likely January 21. In his comments, Noonan was hiding behind what he had read in the newspapers (EU-level appointments, and this one in particular, are always highly sensitive and frequently blow up.) Noonan said Dijsselbloem was ready, willing and able to do the job, as quoted by Reuters.

The age of the Euro-CAC has started

Le Monde reminds us that as from January this year all bond issuances by member states of the European Union are to include a collective action clause CAC, a framework to negotiate debt restructuring.  The first issuances this year to include such a clause are from the Netherlands, to be followed by Germany and Spain.

Hélène Rey says delay in the Greek debt exchange reduces chance that Greece returns to solvency

In her column for Les Echos Hélène Rey looks back at the Greek bond exchange last year, probably the biggest bond restructuring ever made, affecting about €200bn in Greek bonds with an average haircut of about 55%-65%, predominantly on short term bonds, cutting Greek debt by 45% in actual value. The three lessons for the Eurozone are that an orderly default within the Eurozone is possible that by making the new bonds senior to the old ones the country can keep the number of non-participating bond-holders small, and that one needs to act quickly. Between May 2010 and 2012 private bondholders has been replaced by public bondholder, the ECB in particular.  If the restructuring had happened earlier, about €40bn could have been included in the bond exchange. The fact that it was not part of the deal, now reduces the chances for Greece to become really solvent.

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

Spreads are rising again.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.601	0.624	0.622
Italy	2.839	2.882	2.866
Spain	3.602	3.588	3.635
Portugal	4.704	4.873	5.143
Greece	9.760	9.826	-1.50
Ireland	2.909	2.875	2.967
Belgium	0.724	0.737	0.757
Bund Yield	1.514	1.488	1.504
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.311	1.3084
Yen	114.560	114.45
Pound	0.815	0.8149
Swiss Franc	1.209	1.2087
ZC Inflation Swaps
	previous	last close
1 yr	1.67	1.67
2 yr	1.7	1.59
5 yr	1.89	1.78
10 yr	2.01	2
Euribor-OIS Spread
	previous	last close
1 Week	-6.000	0
1 Month	-3.814	-2.214
3 Months	4.629	5.429
1 Year	37.557	37.457
Source: Reuters