Around the horn in Europe - China and Europe GDP data disappoints , spanish , france debt auction details , Spain delays requesting a sovereign bailout until Rajoy's hand is forced....

http://www.telegraph.co.uk/finance/financialcrisis/9556803/Spain-risks-break-up-as-Mariano-Rajoy-stirs-Catalan-fury.html

By Ambrose Evans-Pritchard

8:59PM BST 20 Sep 2012

117 Comments

It is the latest move in a fast-escalating clash between Catalan nationalists and Spanish nationalists, the latter backed by King Juan Carlos and the Spanish military.

Jose-Manuel Garcia-Margallo, the foreign minister, threw down the gauntlet, calling Catalan secession “illegal and lethal”. He warned that Spain would use its veto to stop the region of Catalonia becoming an EU member “indefinitely”.

The constitutional crisis has eclipsed the parallel drama of a Spanish bail-out request from the European Stability Mechanism. It is no longer clear whether premier Mariano Rajoy can deliver on any austerity deal with Brussels.

Catalan leader Artur Mas held high-stakes talks with Mr Rajoy in Madrid on Thursday, armed with a mandate from the Catalan parliament and with charged emotions left from an unprecedented protest by 1.5m people in Barcelona 10 days ago.

He demanded an independent treasury for the rich Catalan region, with control over its own tax base akin to the model already enjoyed by Basques. The 9m Catalans have an economy the size of Austria’s.

“It did not go well,” he said. The Rajoy government said Spain’s constitution allows no margin for compromise. Mr Mas refused to meet the press in the prime minister’s offices, retreating to the Catalan delegation, where he spoke before the Catalan and EU flags. “Constitutions may or may not be modified, but they do not subjugate the will of the people,” he said.

Catalonia’s parliament will meet next week to “think deeply” about its next fateful step. “Catalonia will follow its path. We have no enemies but we will build our own project as a country,” said Mr Mas.

The newspaper Confidencial reported that his Convergència i Unió (CiU) party and coalition partners have asked the European Commission whether Spain can prevent Catalans exercising democratic self-determination, and whether a sovereign Catalonia could remain part of the EU’s single market and the euro.

The speed of events has caught almost everybody by surprise, including Mr Mas himself. His CiU has, until now, pursued a policy of calculated ambiguity over secession. Mr Mas has pivoted quickly, embracing what he calls the “popular outcry” as his own.

The antagonisms date back to the Franco era and, above all, to 1714 when Philip V abolished all Catalan institutions, and imposed Castilian laws and absolutism by right of conquest.

Diplomats say Mr Rajoy’s Partido Popular has provoked the latest eruption of fury by exploiting the economic crisis to break the power of the regions. This came to a head over the summer when Catalonia was forced to request a €5bn rescue from Madrid, though it is a net contributor to the Spanish state.

Spain’s economic slump has frayed nerves across the country, much as it did before the Civil War in the 1930s. Unemployment has risen to 25.1pc and may go higher as the delayed effects of austerity bite deeper.

Citigroup expects the economy to contract by 3.2pc next year and 0.8pc in 2014, pushing public debt to 100pc of GDP.

Chief economist Willem Buiter said the mix of austerity and reform will not restore Spain to “fiscal sustainability”, even if EU loans keep Spain going for another couple of years. He expects “debt restructuring” in the end. The warm glow of the European Central Bank’s bond plan helped Spain sell 10-year debt at 5.66pc on Thursday, the lowest since February.

Mr Rajoy appears to determined to play for time, hoping that he can muddle through without a rescue.

Traders say such gamesmanship is unlikely to succeed for long. Mr Rajoy also hopes to siphon off part of the €100bn in EU rescue package for Spanish banks, but this is certain to infuriate Germany’s Bundestag.

Spanish politics are now intruding, in any case. An EU bail-out memorandum would have to include fiscal restraint for the regions, further inflaming Catalonia.

The risks of a misjudgement are growing. The king caused irritation in Catalonia this week by warning against the seduction of “chimeras” – his first such crisis intervention since 1981.

A serving army officer, Colonel Francisco Alaman, has fuelled the flames by comparing the crisis with 1936 – when Gen Francisco Franco seized power – and by vowing to crush Catalan nationalists, described as “vultures”.

“Independence for Catalunya? Over my dead body. Spain is not Yugoslavia or Belgium. Even if the lion is sleeping, don’t provoke the lion, because he will show the ferocity proven over centuries,” he said.

Retired Lt-Gen Pedro Pitarch, a former army chief, said the words reflect “deeply-rooted thinking in large parts of the armed forces”. He also accused Madrid of bungling the Catalan drama disastrously.

“Are we looking at a failed state?” he asked. Investors holding Spanish debt are listening carefully.

and....

http://www.telegraph.co.uk/finance/financialcrisis/9556442/Italy-slashes-economic-growth-forecasts.html

The government had previously forecast a shrinkage of 1.2pc in 2012 and an expansion of 0.5pc in 2013 in a report released in April, AFP reported.

As he presented the new data, Prime Minister Mario Monti stressed 2013 would be "a year of recovery", even though the overall result would be contraction.

"The light of the recovery is visible," Mr Monti told reporters.

The government also said it was not altering a commitment to balancing Italy's budget next year made by the previous government of Silvio Berlusconi.

"The cornerstone of our policies for healing public finances remains unchanged - the aim of a structural balance in 2013," Mr Monti said.

Thursday's report also forecast that the economy would grow by 1.1pc in 2014 and by 1.3pc in 2015 "as demand increases both domestically and internationally and the positive effects of a balanced budget, a decreasing debt and structural reforms permeate throughout the economy".

and....

http://soberlook.com/2012/09/mariano-rajoy-waiting-for-markets-to.html?utm_source=BP_recent

Mariano Rajoy waiting for markets to force his hand

Once again Mariano Rajoy is playing a dangerous game by not officially requesting assistance. The lull in the European markets is temporary since the fundamental issues of Spain's weakening economy and distressed banking sector have not been resolved. The Eurozone and the ECB have handed Rajoy a lifeboat and Spain needs to get on fast. Waiting for yields to rise - which is what the Spanish government seems to be doing - will only cause more uncertainty and worsen an already dire situation.

Spain's labor market and housing are continuing to deteriorate, putting further pressure on the banking system. The banks are now borrowing close to €400bn from the central bank - with little hope of finding alternate sources of financingsince depositors have fled the country. With things moving at "Eurozone speed", Spain's banks are yet to see any of the €100bn bailout package promised to them earlier this year.

Spain housing market index; 2005=100 (Bloomberg)

Spain's misery index hit another record as unemployment rose and taxes (VAT) pushed up inflation.

Misery index; Spain: white; EU: yellow

This morning Barclays Capital analysts downgraded their 2013 GDP projection for Spain.

Barclays: - The outlook for the Spanish economy remains very subdued andwe have revised our GDP growth forecast for 2013 down accordingly from -1.4% to -1.8%, below consensus, and broadly unchanged with respect to our current growth forecast for this year. We think that given some delay in the implementation of consolidation measures in the first half of this year and a weaker economic environment, the general government deficit will once again overshoot the target (Barclays: 7.0% of GDP this year and 5.0% of GDP in 2013 vs. Government: 6.3% of GDP this year, 4.5% of GDP in 2013).

We project final domestic demand to keep contracting on a quarterly basis until Q4 next year, reflecting ongoing weaknesses in both private consumption and investment, which are likely to be impaired by severe fiscal consolidation and the corresponding fall in disposable income. We anticipate that fiscal tightening will gain momentum as the government is currently implementing additional measures following the different packages announced over the summer. The budget due to be presented on 28 September is likely to confirm this stance and should give the details of the additional measures.

Spanish regions' fiscal issues (discussed here) have not been resolved and will force the central government to take on additional debt (see discussion).

Barclays: - We believe, in fact, that the regions will be asked to step up policy implementation on the expenditure side to repair their balance sheets which (in most cases) seem to be off-track with respect to their budget deficit targets set for this year.

Clearly a number of political reasons are causing Rajoy to delay asking for ECB's assistance (discussed in this FT article). Applying now however would give Spain time to negotiate the bailout conditions versus having to do it under duress. Sadly, critical decisions in the Eurozone seem to be made only under duress. And given the economic and fiscal trajectory of Spain, it is just a matter of time before market conditions will force Rajoy's hand.

FT: - Bankers in Madrid say Mr Rajoy would be wise to apply for aid soon, when market conditions are relatively benign, rather than after sentiment turns against Spain once more and creditors will impose stiffer terms.

http://www.telegraph.co.uk/finance/debt-crisis-live/9554037/Debt-crisis-live.html

13.45 There is unrest in Greece today, where police officers staged a protest outside the prime minister's office. Some offices were, according to AFP, pepper-sprayed as they demonstrated against new austerity measures the government is planning:

Officers guarding the central Athens building sought to push back the 20 demonstrators, who held up a banner that read "Protect those who protect you." No arrests were reported by authorities.

"We staged a small protest together with colleagues from the Coast Guard and the Fire Service. We wanted to hand over a petition to the government," Grigoris Bakaris, a senior member of the Greek Police Officers' Association who joined the protest.

"There was an argument - I wouldn't call it a scuffle, but an argument - and that was a very limited use of chemicals (pepper spray) and the incident ended there. We later were allowed to hand in our petition."

13.28 At 08.20, we mentioned that the deepening crisis in Spain worsening is fanning Catalan separatism. There are calls for Catalonia to be able to raise and spend its own taxes, but the region's head, Artur Mas, said that Spain's prime minister had redused to open neogtiations on this issue in a meeting today. Mr Mas told a news conference that Mariano Rajoy had declared that "there is no margin to negotiate the fiscal pact".

12.22 Greek creditors could have to take another 'haircut', according toCommerzbank's chief executive, Martin Blessing. According to Reuters, he told a conference in Frankfurt that “Greece will get another debt restructuring as the country’s debt level is far too high even after the haircut” accepted by private investors earlier this year.

Private bondholders agreed to a Greek debt swap earlier this year, the largest sovereign restructuring in history, Reuters added. Banks including Commerzbank accepted losses of 53.5pc on the face value of their Greek bond holdings, reducing the country’s debt by about €100bn.

12.03 At 09.26, we mentioned that EU and Chinese leaders are meeting at a summit in Brussels. AFP reports that the annual get-together has got off to a sour start, though, with Beijing raising long-standing complaints over its treatment by the bloc.

Premier Wen Jiabao, in opening remarks, gave a lengthy list of achievements over the past 10 years, stressing: "We do not have major conflicts of interest."

But there was a sting in the tail when he used forceful diplomatic language to raise the issue of an EU arms embargo, imposed since the 1989 Tiananmen Square pro-democracy protests, and the EU's refusal to treat China as a fully-fledged market economy and so lift all tariffs on Chinese goods.

"I have to be very frank in saying this ... but the solution has been elusive over the past 10 years. I deeply regret this and I hope the EU side will take greater initiative to solve these issues," he added.

EU sources had said Wednesday ahead of the summit, that "we have agreed to disagree" with the Chinese on the arms embargo.

11.46 Some brighter economic news. The CBI's monthly industrial trends survey showed that British factory orders improved more than expected in September.

The Confederation of British Industry survey's total order book balance rose this month to -8 from -21 in August, above expectations of a reading of -15. The export order book balance rose to -10 from -17.

However, the business body did warn of challenging months ahead. Anna Leach, head of economic analysis, said:

Uncertainty is expected to build through the autumn - with key decisions to be made in the euro zone and the approach of the U.S. fiscal cliff - meaning that conditions are likely to remain difficult for UK manufacturers.

11.29 Irish GDP figures are out and show the country's economy was unexpectedly flat in the second quarter, just about avoiding a return to recession after a poor first three months of the year.

Having fallen 0.7pc in the first quarter, GDP was flat in the second-quarter. Year-on-year, it fell 1.1pc. Economists surveyed by Reuters had expected the economy to grow by 1pc in the tree months to June.

10.44 Spain's borrowing costs might have fallen at that auction, but the market does not seem overly impressed. Yields on Spain's 10-year debthave edged up 2.2 basis points to 5.66pc. Italy's are up 5.5 basis points to 4.95pc. The euro is struggling against the dollar this morning, trading around $1.2942.

10.30 In another bond auction this morning, France sold almost €8bn of debt, with yields on two and three-year notes falling. Yields on five-year notes did, however, tick up.

The French government sold €3.17bn of notes maturing in September 2014 at an average yield of 0.2pc, down from 0.54pc at the last auction on June 21.

It sold €1.3bn in securities maturing in 2016 at 0.53pc, compared with 1.05pc at the June sale.

France also sold €3.51bn in five-year debt at an average yield of 0.98pc, up from 0.86pc on July 19.

09.52 Spain has got its bond auction away. The country beat its target of €4.5bn, raising €4.8bn. Spain sold the 10-year bonds at an average yield of 5.666pc, compared with 6.647pc at an auction on August 2.

Spain sold €859m of 10-year bonds and €3.9bn of a new three-year issue. The average yield on the 2015 bond was 3.845pc.

09.35 With shoppers watching the Olympics, UK retail sales ticked down in August. Data from the Office for National Statistics shows that sales volumes including petrol dipped 0.2pc on the month; that is not quite as bad as economists had expected, however - they had thought sales would dip 0.4pc. Online sales took a particularly bad hit, falling 6.7pc compared to July - the sharpest decline since December 2007.

08.59 France did not fare quite so well, however. Markit's flash PMI showed that the country's private sector output suffered its sharpest decline since April 2009. In September, output fell to 44.1 from 48 in August, marking a 41-month low.

Services activity dropped to 46.1 from 49.2 and manufacturing declined to 42.6 from 46.

Jack Kennedy, senior economist at Markit, commented:

French private sector output slumped in September, falling at the steepest rate in nearly three-and-a-half years. All the more concerning was the fact that new business and employment also showed accelerated declines, while service providers’ future expectations slipped into negativity for the first time since early 2009.

08.55 Data this morning from Markit shows that German private sector output came close to stabilising in September. It ticked up to 49.7 in September from 47 during August, although anything below 50 still marks a contraction rather than an expansion. But, activity did strike a five-month high and activity in the services sector rose to 50.6 in September from 48.3 in August, a four-month high.

Tim Moore, senior economist at Markit, said:

Germany managed to shake off the summertime blues in September, with renewed services growth helping to stabilise private sector output as a whole. Manufacturing also made a contribution to the slightly less gloomy picture, albeit simply by achieving a slower contraction of production compared to August.

08.20 With the pain in Spain worsening, Reuters reports this morning that the crisis is fanning Catalan separatism. The wire reports that popular momentum for independence has never been stronger in Catalonia, a wealthy region in north-eastern Spain that generates one-fifth of the country's income:

More than half of Catalans say they want a separate state, and hundreds of thousands marched in Barcelona last week - the biggest such show of separatist fervour.

Still, few see a rapid road to an independent Catalonia, a dream rooted in the Middle Ages when Barcelona was a Mediterranean trade centre with a parliament.

"It's going to be a difficult and long process ... For us to get it they would have to have a referendum, and they're not going to give us that," said Jose Maria Prats, a nurse who joined the march.

The upsurge in Catalan separatism is founded on a conviction that Madrid is draining the region financially.

The central government collects most taxation payments then redistributes them to Spain's 17 self-governing regions, which run their own schools and hospitals. Each year Catalans say they pay 16 billion euros more in taxes than the regional government spends.

"The crisis has shown that Spain's regional financing model does not work. There is no doubt we need to advance towards a federal system of taxation," said Jose Ignacio Conde-Ruiz, deputy head of think-tank FEDEA.