Prosecutor launches criminal investigation against Bank of Spain

• Spain’s chief public prosecutor reacts to the recent report in which the Bank of Spain is criticised of condoning criminal behaviour by banks;
• Eduardo Torres-Dulce says he does not think the Bank of Spain committed a criminal offence, though he said the behaviour was at the very least reproachable;
• the Bank of Spain said it will undertake reforms of its supervisory mechanisms;
• reforms include a tightening of the regime of site visits;
• Spain will today issue its first CAC bonds, as a Spanish newspaper says retail investors will now always lose out against the banks in a CAC vote;
• an IMF report proposing further austerity in Portugal, has a hit a raw nerve in the country;
• the IMF proposed large scale layoffs and cuts in pensions, education, health, and unemployment benefits;
• Ireland’s debt management chief says the country is very close to the normalised market funding that would make it eligible for the ECB’s bond-buying programme;
•  the Irish government said it sold all of the €1bn in contingent convertible capital notes in Bank of Ireland;
• Jose Manuel Barroso and Herman van Rompuy say they are supporting a deal on promissory notes;
• Silvio Berlusconi makes a pre-election promise to eliminate employer social contributions for young people;
• Mario Monti says he only hopes that Berlusconi is not going to win the elections, but he does not yet want to be drawn into a discussion of an alliance with the PD;
• Pier Luigi Bersani  proposes a cut in taxes for lower income earners, funded by higher taxes for the rich;
• Italy’s retail association says 2012 was the worst year since the Second World War;
• S&P says eurozone could start to overcome debt crisis in 2012;
• the FDP’s parliamentary leader says he doubts the Bundestag would approve a Cyprus aid package;
• the latest polls have the CDU at 42% – and the FDP out of the Bundestag;
• Angela Merkel widens her polling lead over her rival;
• the Wall Street Journal, meanwhile, has a story about a whistleblower, who alleges that Deutsche Bank made half a billion dollars through massive libor bets, feeling safe because they were able to manipulate the market.

After reports of a document by Bank of Spain inspectors containing strongly worded criticism of the way the institution handled potential evidence of wrongdoing in financial institutions, Publico reports that the chief public prosecutor Eduardo Torres-Dulce will investigate whether the Bank of Spain itself broke the law, though he stated Wednesday that he believes the allegations may point to “reproachable but not criminal conduct”.

Late on Tuesday, the Bank of Spain had announced that it will undertake reforms of the supervisory mechanisms to make them stricter, reported El Diario. The reforms would tighten the regime of site visits, requiring reports every six months and ensuring that the management of both the Bank of Spain and the supervised banks get a write-up of supervisors’ observations or required improvements. In its communique, the Bank of Spain defend the past “independence and technical quality” of the institution, as well as its continued collaboration with the courts and prosecutors.

Starting today, Spain introduces Collective Action Clauses into its new debt

Spain will have its first debt auction of 2013 Thursday, and El Diario reports that the Spanish government intends to include a Collective Action Clause in its bond issues for the first time ever. The story is framed as the government “doing away with the safety of investing in sovereign debt” and surmises that Spain’s big banks will have the majorities needed to agree to bond haircuts over the opposition of retail investors (mostly risk-averse savers). The article also draws parallels with the losses experienced by holders of preferred shares and subordinated debt of the failed Cajas. Finally, the piece speculates that the Greek “Private Sector Involvement” exercise, where a small number of holdout investors caused difficulties, may have motivated European authorities to agree with the Spanish authorities to include such an ‘out’ clause. On the other hand, the Spanish Treasury is putting in place a secondary market for retail debt holders, also for the first time. The paper also points out that Thursday’s issue has a maturity of two years, which falls within the scope of the OMT.

IMF report on Portugal’s state reform sparks controversy

Yesterday the IMF report about how Portugal could cut €4bn through state reform was published, listing large-scale layoffs and cuts in pensions, education, health and unemployment benefits. Jornal de Negocios  published the story first before the report  was posted on the government’s website provoking a heated debate in Portugal.  The country’s largest union, the CGTP, issued a statement on Wednesday with the title “Reform of the State to promote social terrorism.”  Among the possible measures outlined by the IMF was a cut in civil servants of between 10% and 20%, which would save between € 795m and €2.7bn.  An across-the-board cut in pensions of 10% would save € 2.3bn;
alternatively cutting only future pensions would save €600m, according to Reuters. By late February the Portuguese government has to present its own proposals, saying that the IMF report was only one element under consideration.

Ireland plans monthly auctions, eyeing the  ECB’s OMT scheme,…

Ireland is very close to the normalised market funding that would make it eligible for the ECB’s bond-buying programme after the country’s bond sale this week, Reuters quotes the debt agency chief John Corrigan. The National Treasury Management Agency (NTMA) hopes to resume monthly auctions at some point this year and said this could be enough for it to qualify for the ECB’s Outright Monetary Transactions (OMT) scheme. According to the plan, countries in a bailout programme can benefit from unlimited ECB purchases when they demonstrate full market access, though did not provide a definition of what this means. “The ECB would probably say a significant issuance of 9-year paper – maybe twice – and then they would call that full access,” Michael Noonan told a news conference.

…and sold €1bn of its BoI notes

Ireland’s government said it sold its entire €1bn of so-called contingent convertible capital notes in Bank of Ireland, as investors bid for almost five times the amount on offer mainly from abroad, Bloomberg reports. The sale was completed at a 1% premium to par value, and the proceeds will be used to lower the nation’s debt, according to Noonan. ”The remaining taxpayer investment in Bank of Ireland is a 15% ownership stake, and €1.8bn of relatively less risky preference shares according to the Irish Independent and part of the €64bn tax payers invested in the Irish banks. Noonan said the state intends to sell its almost €7bn of remaining non-equity investments in Irish banks “in time.”

Barroso and van Rompuy support Irish bank deal ‘in general’

José Manuel Barroso said in an interview with the Irish Times that he is supportive of Ireland finding a solution to the promissory notes issue, echoing comments by European Council president Herman Van Rompuy yesterday. Barroso said the Commission was generally in favour of a deal, though he declined to comment on specific proposals, stressing it was in the remit of the ECB.

Berlusconi promises to cut social costs for employees hiring young people

Silvio Berlusconi proposes exempting Italian employers from paying social security contributions and taxes for young employees, as La Stampa reports. Italy needs something exceptional to revitalize the labour market, he said. Berlusconi said the unemployment rate (at 11.1% in November) should be the biggest concern for every Italian, especially youth unemployment, which has now reached the record level of 37.1%. With four million companies, Italy has the capability to introduce an exemption for new hires.

Mario Monti says respond to Berlusconi attacks 

Mario Monti says he hopes that Silvio Berlusconi won’t win the election February 25 and 26. Speaking on Radio Monte Carlo, Monti said Italy does not need a new mandate of Berlusconi, but a new way to fight the current crisis. Monti also said it was premature to talk about alliances with the centre-left Partito Democratico, as Il Corriere della Sera reports. His comment came only hours after Pier Luigi Bersani suggested his party would open its doors to Monti after the upcoming elections. Yesterday Bersani officially confirmed he will ask for outgoing Premier Mario Monti’s support if elected.

Bersani plans to review Italian tax system

If elected the Partito Democratico would want to review Italy’s tax system, the party leader Pier Luigi Bersani says. As La Repubblica reports, Bersani promises that his government would reduce taxes for lower-income earners and shift the burden to those with higher earnings. Italy needs more transparency in its tax system, Bersani says. As a reminder, the latest reform of Italian tax system was that of 1971.

The crisis hits spending power of Italians

The spending power of households in Italy falls in 2012, ISTAT remarks. As Il Sole 24 Ore reports, the spending power fell by 4.1% in the first nine months of 2012 compared to the same period in 2011. Due to high taxes, the disposable incomes drops by 1.9% in the third quarter of last year than in the same three months in 2011, ISTAT says.

The 2012 was a horrible year for Italian retailers

The 2012 was the worst year for consumer spending in Italy since World War II, the retailers association Confcommercio said. In a report published on Il Fatto Quotidiano, Confcommercio said its consumer spending index continues the downward trend in November, when it registered a 2.9% drop compared to the same month in 2011 and a 0.1% fall versus October. As the association remarks, the 2013 could be worse that the past year.

S&P says eurozone could overcome debt crisis in 2013

Another optimistic prognosis, this time from S&P, which published a report on the eurozone forecasting that the eurozone could overcome market volatility and fragmentation. The report says member states investor confidence will only return if member states continue to rebalance their economies by further reducing external deficits – i.e. austerity – in exchange for support programmes to deal with the social fallout. It said this was a doable agenda, but implementation risks loom large.

FDP parliamentary chief says Bundestag won’t back Cyrus aid

Bild has the story that the FDP, too, will not vote in favour of aid to Cyprus.  Rainer Bruderle, the party’s parliamentary leader, says the Bundestag is unlikely to approve a Cyprus aid package because of concerns over the role of Cypriot banks accept deposits from tax evaders.

Has Merkel perhaps peaked too early?

Reuters has a summary of the latest German polls. They are looking really good for Angela Merkel – but it is still nine months to go until the German elections.  A Forsa opinion poll  has the CDU/CSU on 42%, the SPD at 25% and the FDP at just 2% – a level at which the FDP would not be presented in the parliament. The Greens are at 15%, and the Left Party at 9%. Merkel’s popularity has also continued to rise – she is now supported by 58% of the Germans according to a Stern/RTL poll, while Peer Steinbruck is down at 22% – partly because of his latest comments that he considered the chancellor’s salary as insufficiently low.

(With this result, the only government that is plausible would be a Grand Coalition under Merkel’s leadership. This is by far the most probable outcome, unless there is a significant change in the relative position of the parties.)

Whistleblower accuses Deutsche Bank of placing massive Libor bets and possible market manipulation

The Wall Street Journal (hat tip Naked Capitalism, which also has a very useful assessment) has the story of a whistleblower accusing Deutsche Bank of placing massive bets on, and attempting to rig,  the Libor interest rate market, and reeking in profits of half a billion dollars. The article says that Deutsche Bank made very large bets on a widening differentials between one, three and a six month dollar, euro and sterling Libor, as the financial crisis became more severe.

 Here is the bullet:

“The former employee has told regulators that some employees expressed concerns about the risks of the interest-rate bets, according to documents. He also said that Deutsche Bank officials dismissed those concerns because the bank could influence the rates they were betting on.”

Considering that this was a time when other banks were reducing risks, the allegation is that the bank has colluded in the manipulation of the Libor rate – and profited from it massively. The bank denies the allegations.  Naked Capitalism is sceptical that much will come of this – not because the blog defends the bank, but because such evidence is hard to pin down legally.

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

Sideways.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.624	0.631	0.632
Italy	2.809	2.845	2.828
Spain	3.588	3.656	3.725
Portugal	4.873	4.957	5.268
Greece	9.826	10.227	-1.49
Ireland	2.875	2.886	2.993
Belgium	0.737	0.721	0.744
Bund Yield	1.488	1.475	1.492
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.307	1.3046
Yen	114.470	114.97
Pound	0.813	0.8148
Swiss Franc	1.209	1.2085
ZC Inflation Swaps
	previous	last close
1 yr	1.67	1.52
2 yr	1.59	1.55
5 yr	1.78	1.76
10 yr	2	1.98
Euribor-OIS Spread
	previous	last close
1 Week	-5.900	0
1 Month	-3.214	-2.214
3 Months	3.757	5.657
1 Year	37.814	37.214
Source: Reuters