http://www.zerohedge.com/news/2012-09-27/egan-jones-downgrades-spain-cc-cc

Egan-Jones Downgrades Spain To CC From CC+

Submitted by Tyler Durden on 09/27/2012 15:42 -0400

While nobody else dares to junk Spain, yet, for fear of the gates of hell opening up and swallowing them whole, here comes Egan Jones, which downgraded Spain from CC+ to CC, with an outlook of C.

Hoover-esque. Spain's has unemployment near 25% and yet the govt is proposing tax increases and a raiding of social security funds in an effort to rein-in its budget deficit. (The deficit was 4.77% for the first 8 months.) The rub is whether Spain will be able to cut enough to obtain EU support (probably) and whether there will be an eventual haircut for current debtholders (probably). Catalonia, Valencia and other regions will probably need $20B of aid, the sen. debtholders of the weak banks will be forced to take losses, and there might be some sharing of losses among all banks. An estimated decline in GDP of 1.7% (per the Economy Ministry), the IIF's recent estimate of addl bank loan losses up to EUR260B, and depositor flight hurt. From 2008 to 2011, Spain's debt jumped from EUR436B to EUR735B while its GDP declined from EUR1.09T to EUR1.07T.

Social benefits are a prob; while pmts to the govt have been more or less flat over the past four years (up EUR 3B), payments from the govt. have been up EUR 45B. As a result, Spain is short about EUR50B per year for social payments, EUR20B per year for interest, and an addl EUR 20B for asset growth; hence the EUR90B per annum increase in debt. Spain will inevitably be faced with addl pmts to support a portion its banking sector and for its weaker provinces. Assets of Spain's largest two banks exceed its GDP. We are downgrading our rating to "CC".

and.......

http://www.zerohedge.com/news/2012-09-27/summarizing-what-spain-just-announced-and-what-was-left-unsaid-hint-cash

Summarizing What Spain Just Announced, And What Was Left Unsaid (Hint: Cash)

Submitted by Tyler Durden on 09/27/2012 14:50 -0400

With EURUSD now 100pips higher, equities holding gains, and Monti confirming to the world that his Spanish friends have made considerable moves here, we leave it up to BNP to point out the sad reality of what we have just been sold. The 2013 budget does indeed focus on spending cuts (worth potnetially 0.75% of GDP next year) which is providing a headline of epic austerity, but the use of the social-security fund to buy time, the overly optimistic growth forecasts for 2013, and the lack of detail on structural reform was disappointing (or should have been to anyone who actually listened). It seems Spain has effectively agreed the terms for financial aid, without agreeing the terms of financial aid and while their hope is that the leftovers from the banking bailout fund will ease some pain; it seems the regional angst (Catalonia for example) and the fact that, as we noted a month ago, Spain only has enough ash to see it through to October, leave them likely to need EUR30-50bn minimum in October (as we said a month ago).

BNP: Spain: Hostage to Catalonia (among other things)

Spain is edging closer to asking for financial aid, but it’s a long, slow process. We think Spain will find it very difficult to hold out longer than October, though a transfer from the social-security stabilisation fund could give it some room to manoeuvre.

After today’s announcement of the 2013 budget and planned structural reforms, the next event is tomorrow’s publication of the results of the bottom-up bank audit.
The Eurogroup should take a broadly positive view on the new measures, assuming it is given more detail, allowing the Spanish government to spin any bailout as a reward for eform. This could remove part of the stigma associated with it, at least domestically.
The country’s regional elections on 21 October could be the last obstacle to an aid request. Another glitch, however, is Catalonia’s call for an early election in November and a potential referendum on regional autonomy.
Any unused funds from the bank bailout may be used to lower the final cost of a sovereign bailout, something that should appease Germany. But we don’t think these funds will be enough and expect Spain to request additional funding.

After today’s presentation of the 2013 budget, a new swathe of structural reforms and tomorrow’s publication of the bottom-up review of the Spanish banks, we should have a bit more clarity on the potential timeline and scope of any Spanish aid request.

The next Ecofin meeting on 8 October will assess the reforms and the budget, as well as the details of the bank reforms to be undertaken as soon the first tranches of the bank bailout funds are released. We think the assessment should be positive, assuming more details are provided, as both the reforms and budget have been drafted with the input of the IMF and the European Commission. Both IMF chief Christine Lagarde and the European Commission have confirmed that teams from their institutions have been in Madrid in recent weeks, helping to compile the 2013 budget and to lay out the structural changes that are needed in the Spanish economy.

The Spanish budget for 2013 will focus on spending cuts in a bid to pull the country out of the current crisis, the Spanish government said today. At the same time, tax revenues are likely to increase by 3.8% next year, while tax income in 2012 will be higher than budgeted. Central government spending will increase by 5.6% as a result of the increase in spending on social security and debt-servicing costs. The only areas to see higher spending next year will be pensions and third-level education.

The government estimates that the spending cuts could be worth EUR 7.5bn, or just over 0.75% of GDP in 2013, with revenue changes amounting to almost 0.6% of GDP. There will be an 8.9% cut in ministerial spending across the board, a 20% tax on lottery winnings that is expected to raise EUR 824mn) and a freeze on public-sector pay for the third year in a row, the government said. It also plans to do away with mortgage rebates, do away with certain corporate tax exemptions and transfer EUR 3bn from the social-security stabilisation fund to pay for pensions and social benefits, or “short-term liabilities”, as the vice premier termed it. The government already transferred EUR4.75bn in August from the off-budget stabilisation fund, which had around EUR 66bn in its coffers at the end of 2011.

A new budgetary authority will be created to keep Spain on the fiscal straight and narrow. The framework for the new body will be in line with recommendations by the European Commission and the IMF.

The government left unchanged its budget-deficit forecasts for this year and next at 6.3% of GDP and 4.5% of GDP, respectively.Surprisingly, it also left its growth forecast for 2013 unchanged at -0.5%, despite announcing new tax increases, which are likely to further damp already weak internal demand. We think that both deficit targets are optimistic and forecast a deficit-to-GDP ratio of 7.0% of GDP for this year and around 5% for 2013. We have a growth forecast of -1.8% for 2013.

It plans more than 40 economic reforms over the next six months and will present reforms to the pension system by year end. Those reforms will include an increase in the retirement age, a measure Spanish Prime Minister Mariano Rajoy had been resisting until recently.

On the structural-reform front, there was some disappointment.Economics Minister Luis de Guindos said the government would take on board all of the EU’s recommendations, but he was somewhat short on detail. Mr de Guindos said the government would reduce the incentives for collective wage bargaining, but didn’t specify how. Incentives to take early retirement will be reduced, he said, though the details will have to be agreed with the social partners.

So, Spain has, in effect, already agreed to the conditions for financial aid, without agreeing to the conditions for financial aid. The presentation of the reforms before a begging trip to Brussels should make the bailout an easier sell domestically. ESM and ECB support will be seen more as a reward for government efforts and less as a punishment for fiscal and structural laxity. However, the Spanish government still thinks it should wait before requesting help. Question is, how long?

The Bank of Spain says the Spanish Treasury deposited EUR 26bn with Spanish banks at the end of July. This can be considered arough estimate of the liquidity available to the Spanish state and the best point from which to examine the current capacity of Spanish coffers.

Over the last five years, the Spanish primary deficit in the last four months of the year has been around 38% of the deficit for the year as a whole. If we assume that this year’s budget-deficit target of 4.5% of GDP (EUR 45bn) is to be met, and taking into account the tax increases to come into effect on 1 September (worth EUR 4.9bn, according to the government’s estimates) and the cuts in civil-service Christmas pay (EUR 5.2bn), this leaves a total EUR 20bn of to be financed through the end of 2012 (or close to EUR 5bn per month). However, the distribution of this financing gap is not homogeneous. September and October usually see an average monthly surplus of around 0.4% of GDP (close to EUR 4bn), while in August and in the last months of the year, the central government usually posts monthly deficits. However, as we have seen since the beginning of the year, the central government has been transferring funds every month to the autonomous regions, so these surpluses may be lower this year.

So, if Spain refinances its bills in the market, based on the pattern of last year’s deficit, it may only have enough cash to cover its deficit and its bond redemptions through the end of October. It is a very close call, however, and October could well be the last financially tricky month in 2012. November and December are usually months in which the budget balance averages a deficit of 0.6% of GDP. Spain could try to muddle through after October, either by increasing the size of its auctions, increasing bill issuance, or just running arrears.

If this is the case, however, Spain will be left with almost no cash and will be pretty much forced to live from day to day, in fiscal terms. At that point, Spain will be forced to request help. And Mr Rajoy must have realised this, as yesterday, he said in New York that Spain would “surely ask for support” if yields remained too high for too long. Still, the EUR 3bn transfer from the social security fund could buy it a little time, if it happens this year.

So, not only is the fiscal clock ticking for Spain, but there are other factors that could influence the timing of a request.

France and Italy are among those countries with the biggest interest in Spain asking for aid before the EU summit on 18-19 October.Germany, in contrast, would prefer for domestic political reasons to postpone any Spanish bailout, especially as Spain is only on the verge of receiving the initial tranches of its bank recapitalisation funds. But even Germany’s resistance seems to be faltering. Over the past week, both German Finance Minister Wolfgang Schaeuble and Michael Meister, chief whip of Chancellor Angela Merkel’s CDU party, said that Spain needed to decide quickly whether it needed support or not.

Mr Rajoy seems more inclined to wait until after the 21 October regional elections in Galicia and the Basque country. The latter is not an issue, as the prime minister’s Partido Popular has little chance of winning there anyway. But Galicia is Mr Rajoy’s home region and, according to the latest polls, the PP could lose control of it. An aid request before that vote would be a bitter blow to the campaign and would be seen as a personal defeat for Mr Rajoy.

Recent comments by members of his party usually more supportive of his positions suggest that Mr Rajoy may be becoming increasingly isolated in his position, though. So, Spain could end up asking for support before the elections on 21 October, but after the Ecofin meeting on 8 October.

And to top things off, developments this week in the region of Catalonia could increase the urgency of a Spanish request, as its political manoeuvrings could amplify the already significant doubts the market has about Spain. Early this week, the government of Catalonia called an early election for 25 November in a bid to underpin its defiant stance against the Spanish central government. And this after the region asked for a handout of EUR 5bn from the central coffers. Now, it seems local politicians are touting a possible referendum on self-determination as an electoral carrot. But even if the calls for Catalonian independence can be taken with a pinch of salt, the turbulence stemming from all of the regions’ unwillingness to toe the fiscal line can only make the central government’s job more difficult and the markets more sceptical.

Today’s announcement of the creation of a national fiscal council to wrestle control of regional finances is a positive step, but we can’t help but wonder what power it will have when the regions are striving for more and more autonomy. Moreover, if the government of Catalonia is successful in its strategy and gets its loan on easier terms, why shouldn’t more regions do the same? As if on cue, today, Castille la Mancha requested EUR 800mn in aid from the central government, making it the fifth Spanish region to ask for help from Madrid.

The question of the amount of any Spanish bailout, meanwhile, is also something that has yet to be addressed. The EU has already set aside EUR 100bn for a programme to recapitalise the Spanish banks and, according to the latest reports, their capital needs may be just EUR 60bn. The banks could potentially find EUR20bn of that either in the market or by selling assets to the country’s future bad bank, leaving between EUR 40bn and EUR 60bn to play with.

One possibility touted by the media is that Spain could transfer its unused bank bailout money to the government. This would keep Germany happy, as the transfer could be made courtesy of a tweak to the bank-bailout MoU, avoiding the need for German parliamentary approval. Another possibility doing the rounds is that Spain might try to avail of the ESM’s bond-guarantee scheme, which would cover investors for the first 25% of any losses on Spanish government bonds.

However, aside from any potential legal objections, for ECB intervention to occur, a country must either be under a “full” austerity programme, or have requested a precautionary one. So, even if Spain were to go down this route and the other European countries were to agree, a new MoU would have to be signed, with all of the conditions that go with it. And this might not be enough.Spain’s funding needs for the next 12 months are close to EUR 180bn. If an ESM programme were to fund only 50% of Spanish issuance, this would mean it would need a capacity of close to EUR 90bn, more than the EUR 40-60bn that might be left over from the bank bailout. And the ESM bond-guarantee option also seems unlikely, in our view, as the ECB would require a greater commitment from the government before starting to buy its bonds.

So, the most likely scenario, in our view, is that Spain will have to request further financing of EUR 30-50bn, even if the unused bank-bailout funds can be transferred. And despite having some time on its hands, we think Spain will be forced to request help in October.

and......

Berlusconi's Back With A New Grand Plan?

Submitted by Tyler Durden on 09/27/2012 - 13:16Germany Italy

Presented with little comment as the populist media mogul steps back into the European political landscape with these little beauties:

*BERLUSCONI SAYS EURO A `SCAM' WITHOUT CENTRAL BANK BACKING IT
*BERLUSCONI SAYS GERMANY LEAVING EURO WOULDN'T BE A TRAGEDY
*BERLUSCONI: BAILOUT CONDITIONS WOULD LEAD ECONOMY TO COLLAPSE
*BERLUSCONI SAYS ITALY RISKS HEADING TOWARD 'ENDLESS CRISIS'

It appears he has a new plan then - Allow Germany to leave; and let the rest of the broke insolvent European countries print themselves to socialist utopia. Vote Bunga...

and.....

http://www.zerohedge.com/news/2012-09-27/spanish-bank-deposit-outflow-surge-continues-august

Spanish Bank Deposit Outflow Surge Continues In August

Submitted by Tyler Durden on 09/27/2012 08:09 -0400

European Central Bank

Eurozone

Gross Domestic Product

Reuters

Stress Test

The crux of the "pain for Spain" was exposed in August, when the world learned that despite all attempts to the contrary, Spanish banks are no longer perceived as safe by the locals, and the result was a record 5% deposit outflow in one month from local banks: cash that was promptly redeposited elsewhere in the Eurozone. And as money flow theorists know all too well, if cash is exiting the Spanish banking system - i.e., if the confidence is just not there, not only is growth impossible, not only are any austerity plans or otherwise to push GDP higher futile, but all attempts to save the local banking system - which is now reliant on the ECB for funding to the tune of a record €412 billion, and which means the country has already been bailed out by the ECB - are futile and merely sunk, literally, costs. In short: the deposit outflows continued, and while not at the record July 5% pace, a whopping €17 billion, or 1.1% of total, deposits left the country for good and is unlikely to come back.

From Reuters:

Consumers and firms continued to pull their money out of Spanish banks in August but at a slower speed than in July, with private sector deposits falling slightly more than 1 percent as Spain was sucked into the centre of the euro zone debt crisis.

Private-sector deposits at Spanish banks fell to 1.492 trillion euros at end-August from 1.509 trillion euros in the previous month, hitting their lowest point since April 2008.

Which also means that if the continued Spanish government cash decline persisted into August after plunging from March to July (as we reported before), then at this point not even a long-overdue bailout request by Rajoy will do anything more than push up Spanish bonds for a week or two before the Spanish house of cards finally comes tumbling down.

But back to Spain's deposits, or lack thereof, in today's scary chart of the day:

Naturally, the above chart means that with the ECB needed to step in Spanish banks, the entire country has already been effectively bailed out.

And a detailed breakdown:

Today, however, it is not Spanish banks that will dominate the newsflow, but the resumption of Spanish riots as Rajoy announces shortly the details of his plan to promote futher austerity, even as more and more insolvent regions demand that the insolvent government bail them out. From the FT:

As protesters descended on Spain’s parliament for a second night on Wednesday, Mr Rajoy called on Spaniards to ignore “short-term interests”. His government is also preparing to unveil a new reform programme and the results of a banking stress test.

There was more trouble for Mr Rajoy in the regions when Castilla La Mancha, run by his centre-right Popular party, requested a €800m bailout from the central government. Castilla La Mancha is the fifth of Spain’s heavily indebted regional administrations to request financial assistance from Madrid.

The political turmoil continued to put pressure on Spanish stocks, with the Ibex share index falling 0.6 per cent on Thursday morning. On Wednesday, events in Spain triggered a sell-off of European shares as investor concerns mounted about the eurozone’s fourth-largest economy.

The financial pressures on Mr Rajoy’s government have been intensified by a constitutional crisis brewing over the Catalonia region, which called snap elections this week that could hasten a move toward independence.

“Spain is increasingly slipping from his hands,” said Alfredo Pérez Rubalcaba, the leader of the country’s opposition socialist party. “There are very clear fractures in Spain, and the one I am most worried about is social fracture.”

and.....

Greece's other debt problem

New Democracy, PASOK face own financial crisis

By George Georgiopoulos & Stephen Grey
The two main political parties in Greece are facing their own financial crisis. New Democracy and PASOK, the key members of the country's coalition government, are close to being overwhelmed by debts of more than 200 million euros, say rivals, as the big parties head for a slump in state funding because of falling public support.
In Greece's state-financed political system, parties that receive more votes get more funding. Relying on past good results, the big political parties have pledged future state funding as collateral for bank loans. But in the most recent poll their support collapsed, leaving them with big loans and facing much smaller incomes.
Banking sources familiar with the issue say that conservative New Democracy and socialist PASOK now owe a combined 232 million euros to Greek banks. Some of the loans are going unpaid, those sources say. The debts far exceed the combined 37 million euros the parties received in state funding last year -- a figure set to decline.
The parties' debts raise questions about potential conflicts of interest because the government is in hock to a financial system that it also needs to reform. Athens is already struggling to implement spending cuts and reforms demanded by the European Union, International Monetary Fund (IMF) and European Central Bank (ECB) in return for the 130 billion euro bailout keeping Greece afloat. On Wednesday unions called a nationwide strike protesting against austerity.
Leandros Rakintzis, Greece's independent inspector-general of public administration, believes the financial crunch the two big parties face is proof that Greece's political funding system is flawed. «This is all about the exchange of favors,» he said. «These parties cannot pay the debt so it's a vicious circle in which they come to depend on the banks. It creates an interdependence of politicians and banks."
The loan pressures will intensify early next year when state funding is recalculated to reflect declines in the parties' support. At present, funding is still based on the proportion of votes each party won in the June 2009 election. But in January funding will change to reflect votes cast in June 2012.
At that election PASOK saw its share of the vote plunge from 43 percent to 12 percent, while New Democracy's share fell from 33 percent to 29 percent. The big winner was leftist SYRIZA, which opposed the bailout terms. Its share of the vote shot up to 27 percent from 4.6 percent in 2009, and it now stands to receive significantly more funding.

Costas Tsimaras, the general manager of New Democracy, the biggest party in the Greek parliament, told Reuters the bulk of its bank loans were currently being paid on time, but «a small proportion of the loans may have become late, non-performing."
For the parties to keep on top of the loans, he said, they should be restructured.
"It will be very difficult for the parties to pay back the debt if there is no arrangement. Down the road, a political decision needs to be made to give parties the capacity to service their liabilities, some type of settlement on these loans."
PASOK did not respond to requests for comment.

State handouts

Like many European countries, Greece provides some public funding for political parties and their election campaigns: last year the state handed out a total of 54 million euros.
Each year parties receive tax-free funding equal to 0.102 percent of annual state revenue, plus another 0.01 percent for «research and education» purposes. When national or European parliamentary elections take place an extra 0.022 percent of annual state revenue is handed out.
Private companies, owners of media and foreign nationals are banned from funding parties. Individuals giving more than 600 euros have to be identified and are allowed to give only up to 15,000 euros a year, though it is unclear how well these rules are enforced.
The lion's share of the state funding pie, 80 percent, is divided between parties that win seats in parliament, each one receiving amounts proportional to the votes they score. That funding does not include the cost of MPs salaries and other parliamentary expenses, which are paid separately.
Greece is among the most generous of EU countries to political parties. It provided an average of 6.5 euros per registered voter per year between 2007 and 2011 - the fourth highest funding in the EU after Luxembourg, Cyprus and Finland, according to Forologoumenos, a Greek taxpayer association that tracks state spending on politics.
By another measure, Greece hands out three times the amount spent by Germany on political parties. Per valid vote cast, Athens spends an average 9.4 euros versus Germany's 3.1 euros, says Forologoumenos.
In 2011 New Democracy, led by Antonis Samaras, received 16.9 million euros and Pasok, now led by Evangelos Venizelos, 21.7 million. That state funding accounted for about 75 percent of New Democracy's income, the party said, though the proportion fluctuates from year to year. Pasok did not comment on how much it depends on public funds.
In 2010, when Greece's debt crisis exploded and forced Athens to seek a bailout, the country spent a total of 65 million euros on funding parties in a country of 11 million people. Germany, with a population more than seven times larger, limits state funding of political parties to 150 million euros.
For German lawmaker Klaus-Peter Willsch, the generous state funding in Greece is emblematic of the country's financial malaise. «This self-serving mentality will not come to an end as long as Greece is funded by the solvent states in the euro zone,» he said. «The fact that Greek parties get three times as much funding per vote as in Germany is part of the problem."

Willsch, a member of Angela Merkel's Christian Democrats who sits on the Bundestag's powerful budget committee, voted against the Greek bailouts.

Mind the gap

Even with state funding, Greek parties have had to borrow to fill the shortfall between their revenue and expenditure.
The main lender has been state-owned ATE Bank. By this year New Democracy owed ATE 105 million euros and PASOK owed ATE 96 million, according to banking sources. A senior source in the Greek parliament confirmed these amounts to Reuters.
Separately, Piraeus Bank, the country's fourth largest, lent New Democracy 15 million euros and PASOK 6.5 million euros. Three other banks made small loans to the parties. A banker familiar with the matter told Reuters that some of the loans «are non-performing, they are past due more than 90 days».
Piraeus denies any problem. «Piraeus Bank's loans to political parties are a small percentage of the total. They were given against guarantees of state funding. The loans are performing,» said a Piraeus spokesman.
In late July, ATE had to be rescued from collapse, with parts of the bank, including the political loans, being taken over by rival Piraeus Bank. At the time the political loans were performing, said a source at ATE and a senior government official.
Piraeus has filed a lawsuit against Reuters, claiming 50 million euros in damages after Reuters published a report about a series of property deals between the bank and companies run by the family of its chairman. Reuters stands by the accuracy of its reports.
A banker with knowledge of the political loans said limits should be set «on the percentage of state funding that can be accepted as collateral and for how many years in the future. Otherwise, one would have to be a Houdini to know for sure what amount of state funds a party will be entitled to far out in the future, 10 years down the road."
For the parties, some pressures are already evident. One former staff member of Pasok, who asked not to be named, said that payments to party workers had been irregular since September last year.
New Democracy said its staff were paid on time. «We do not owe a single euro to anyone on the payroll,» said general manager Tsimaras. However, he added: «Our bills to suppliers do face some delays."
A PASOK staff member said party funding had sometimes been spent poorly. In 2009, for instance, the party built a fully-equipped gym at its new headquarters and employed a personal trainer. «It is now a smaller party and costs have to be reined in,» said the party staffer.
PASOK did not respond to requests for comment.

Rising anger

Greece is now in its fifth year of recession and is struggling to meet fiscal targets set by its euro zone partners and the IMF. The gap between government spending and revenues is projected at 7.3 percent this year, based on IMF estimates. The country's accumulated debt stands at 332 billion euros, equal to 163 percent of GDP.
Greek Prime Minister Antonis Samaras asked in August to be given a «breathing space» by the EU and IMF, which are pressing for more public spending cuts. At the same time, critics say the political system itself should tighten its belt.
"State funding to political parties must be adjusted to what the Greek economy can afford and not be far off from the corresponding average in the European Union,» said Yannis Sarris, the general manager of small party Dimiourgia Xana, which calls itself the ‘common sense' party.
Others say it is politically unacceptable for parties to be propped up with bank loans when many businesses are unable to obtain credit even against sound collateral. The small Democratic Alliance party (which folded into New Democracy at the June election) has previously called for a 50 percent cut in state funding to parties.
"On the one hand we have a country on the brink of bankruptcy, a suffering society, victim of an unprecedented tax onslaught,» Democratic Alliance deputy Christos Markoyannakis told parliament in December last year. «On the other, we face the absolute provocation by those bearing the biggest share of responsibility for the country's crisis. As long as the cash flows into party coffers, all is fine and dandy."
The Group of States against Corruption (GRECO), a body set up by the Council of Europe, has also levelled serious criticisms at the way Greece funds its politics.
It has urged Athens to improve transparency of party funding, to strengthen controls over small donations for fear that rich donors could abuse the system, and to ensure that loans are repaid under their original terms - otherwise they risk becoming de facto donations.
The group concluded: «There is in Greece a general public mistrust of the system of political financing and supervision, which may be attributed to an overall inefficient and opaque system of supervision, in which political parties are both judge and jury.
"This system has failed, under current law, to uncover and sanction any -- even minor -- infringement of the rules on political financing."
So far, none of GRECO's 16 recommendations have been implemented, the organization says.
The omens for reform are not encouraging. Last year Nikos Alivizatos, a constitutional lawyer, helped draft a new law to correct shortcomings of the current system, including barring banks from lending to political parties. The legislation was shelved because the two main parties were keen to maintain the status quo, say political observers. [Reuters]

and.....

Greek leaders agree on bulk of cuts

The leaders of Greece's power-sharing government on Thursday agreed on most of the cost-cutting measures demanded by the troika of foreign lenders, the chief of a junior coalition member said.
“We reached an agreement on the main axes. There are still some outstanding issues. We are going to seek for a four-year extension [of the Greek fiscal adjustment program], said Democratic Left leader Fotis Kouvelis after the meeting.
Prime Minister Antonis Samaras of conservative New Democracy party was also meeting with PASOK leader Evangelos Venizelos.
Finance Minister Yannis Stournaras, who was present at the meeting of the three leaders, described the agreement as a “basis for strong negotiation” with the troika.
Stournaras said the proposed measures will first have to be approved by the troika envoys, expected in Athens during the weekend, before they are voted upon in Parliament.

ekathimerini.com , Thursday September 27, 2012 (13:51)

and from Athens News....

Police face police in protest at ND headquarters

by Damian Mac Con Uladh

27 Sep 2012

Police representatives say their salaries have fallen 35 percent as a result of austerity (Damian Mac Con Uladh)

New Democracy’s headquarters was the scene of an unusual sight on Thursday morning as police officers peacefully protesting pay cuts and spending cutbacks were faced a line of their colleagues in the riot police who were drafted in to protect the building.

Uniformed officers aligned with New Democracy said the protest was part of a campaign for better conditions they started a month ago.

“We have seen our salary cut six times, after each of the memorandums and as a result of four government decisions,” said Lieutenant Nikos Karadimas, who is also vice-president of the Attica Police Employees’ Federation (EAYA), which represents all members of the force in Greater Athens.

Elsewhere in the city, delegations of Pasok and Democratic Left members from the Attica Police Employees’ Federation (EAYA) held protests in front of their respective party offices.

The cuts have amounted to a salary cut of 35 percent, Karadimas continued, leaving officers unable to pay their rent, income levy, property tax and children's education.

Moreover, he added operational cutbacks had greatly affected the effectiveness of the police, with negative consequences for public safety.

Petrol rationing means each patrol car gets 25 litres of petrol a day, regardless of needs. He also said that faults in patrol vehicles are left unrepaired.

"There's even a shortage of basic stationary, such as paper," he continued.

"There only seems to be money for tear gas," he added, in reference to the widespread use of chemical weapons by his colleagues in the riot police during demonstrations.

About twenty officers took part in the protest.

http://www.telegraph.co.uk/finance/debt-crisis-live/9569351/Debt-crisis-Spanish-budget-live.html

12.01 European leaders could do more to help Greece, says Mr Venizelos, although he doesn't go into specifics. He adds that EU partners must acknowledge the sacrifices its citizens have made, and not undermine the country's efforts

11.56 Evangelos Venizelos, leader of Greece's socialist PASOK party, is also speaking on state TV.

He stresses that an overall agreement - including an extension - is needed to alleviate Greece's recession. He adds that the agreement must ensure debt sustainability.

11.46 Greek leaders have (finally) reached a "basic agreement" on a fresh package of budget cuts, according to the country's finance minister.

Yiannis Stournaras told state TV that the package included a request for a two-year extension, but would need to be discussed with EU debt inspectors from the European Central Bank, European Commissionand the International Monetary Fund next week.

10.52 Italy has got a bond auction away this morning, where it has sold long-term debt at the lowest rate since March.

The country sold almost €3bn of 10-year government bonds at average yields of 5.24pc. This compares with 5.82pc at a previous auction in August.

It also sold a range of five year bonds, including one issue which attracted average yields of 4.09pc (v.4.73pc).

Demand was slightly lower, with 1.33 (v 1.42) bidders for every bond on offer at the ten year auction.

10.42 Economic confidence in the euro area has fallen unexpectedly in September.

The European Commission's Economic Sentiment Indicator (ESI) fell to 85 from 86.1 in August in the eurozone, and 86.1 from 87 in the EU. In a statement, the EC said:

In both areas, the decrease was due mainly to weaker confidence among services and retail trade managers, and consumers. While confidence in industry decreased in the euro area as well, it remained broadly stable in the EU. On the positive side, construction managers in both areas were less pessimistic than in August.

10.25 Ciaran O'Hagan at Societe Generale explains why Tuesday's statement does conflict with the promises made at June's EU summit:

This German-Finnish-Dutch caucus was bad news for spreads on several levels:

1) The very existence of a caucus shows euro area disunity.

2) The caucus is designed to put pressure on Eurogroup ministers, before more details are fleshed out.

3) The joint statement narrows the potential scope of the 29 June statement. Ministers can still argue what “legacy” means. But the objective is clear: the caucus does not want to have to pay debts elsewhere.

Austria’s finance minister yesterday echoed the caucus: “Recapitalization possibilities for banks can’t be about the ESM simply taking over the old stock of all existing troubled assets and bad banks in various nation states. This responsibility should remain with the nation states.” All this reduces the chance that ESM intervention, in the future, would reduce the toxic consanguinity between banks and the States, inherited from old borrowing bubbles. It also dampens hopes for debt relief.

The 29 June statement didn’t have much detail. Nor did the recently released draft Guidelines on the Financial Assistance for the Recapitalisation of Financial Institutions say anything about direct assistance. So that was a gap for the caucus to fill and constrain future burden sharing.

No sign the caucus governments are listening to Mr Rehn, when he says uncertainty over the euro’s future must stop.

10.12 Back to the battle between the AAA austerity hawks and the rest of Europe (see 09.28). To recap, Germany, the Netherlands and Finlandissued a joint declaration late Tuesday that supports leaving the Spanishand Irish governments on the hook for legacy bank losses. To recap:

Here's what leaders said after June's EU summit:

When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding.

...and here's what was said by Germany, the Netherlands and Finlandon Tuesday:

“2) the ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities; 3) the recapitalisation should always occur using estimated real economic values; 4) direct bank recapitalisation by the ESM should take place based on an approach that adheres to the basic order of first using private capital, then national public capital and only as a last resort the ESM.”

09.52 Separately, the ONS said that the UK's current account deficit in the second quarter climbed to the highest on record.

The deficit hit £20.8bn in Q2, up from a revised deficit of £15.4bn during the previous quarter.

Britain's trade deficit widened to £10.1bn in the second quarter, up from £8.1bn in Q1.

09.34 The ONS initially estimated that the British economy had contracted by 0.7pc in the second quarter. It then revised this estimate to -0.5pc in August.

09.31 I will return to this in a minute.

There's good news on the domestic front this morning, where the UK economy contracted by less than initially expected in the second quarter.

UK GDP shrank by 0.4pc in the three months to the end of June, the Office for National Statistics said.

09.28 Interesting comments by Finnish finance minister Jutta Urpilainenthis morning, who has stuck to her guns and insisted that Europe's permanent bail-out fund must "start with a clean slate".

Speaking to reporters in Helsinki, she said that the European Stability Fund (ESM), which is due to come into force next month, "shouldn’t be used to recapitalise banks to deal with existing and old problems”. He added:

The starting point for the banking union isn’t to resolve the current crisis but prevent future ones and create mechanisms to deal with future crises.

She also said:

There is no conflict because the possibility of direct bank recapitalisation is explicitly tied to the existence of a single bank supervisor. It is possible various member states have had differing expectations for the use of the ESM. This is clearly seen in the comments by those countries.

09.11 German unemployment has climbed for a six month in a row. The number of people without a job increased by 9,000 to 2.91m, according to Germany's Federal Labor Agency.

However, economists had forecast a gain of 10,000, and a unemployment rate held steady at 6.8pc.

08.56 Trade union sources told Reuters that some of the cuts were likely to include extending a public sector wage freeze to 2013, while Europa Press reported that cuts to individual departments would range from 4.2pc at the justice ministry to 30pc at agriculture.

08.52 Today we return to Spain, where the government will present details of its 2013 budget.

Budget minister Cristobal Montoro will hold a news conference at around 1pm UK time.

08.49 If it's not Greece, it's Spain. Another cycle of cuts and protests focused on Athens yesterday, where a general strike paralysed the nation and Greeks took to the streets en-masse to protest against another wave of belt-tightening.

and now we see why Asia jumped last night.........

http://www.zerohedge.com/news/2012-09-27/overnight-sentiment-better-china-joins-global-easing-fest-sort

Overnight Sentiment Better As China Joins Global Easing Fest... Sort Of

Submitted by Tyler Durden on 09/27/2012 07:11 -0400

After seeing its stock market tumbling to fresh 2009 lows, the PBOC decided it couldn't take it any more, and joined the Fed's QE3 and the BOJ's QE8 (RIP) in easing. Sort of. Because while the PBOC is prevented from outright easing as we have been saying for months now (even as "experts" screamed an RRR or outright rate cut is imminent every day while we warned that Chinese inflation has proven quite sticky especially in home prices and food and China's central bank will not attempt to push its stocks up as long as the situation persists, so for quite a while) it can inject liquidity on a ultra-short term basis using reverse repos (or what are called repos here in the US). And shortly after it was found that Chinese companies industrial profits fell 6.2% in August after tumbling 5.4% in July, we learned that the PBOC added a record 365 billion Yuan to the financial system in order to prevent a creeping lockup in the banking system. While this managed to push the Shanghai Composite by nearly 3% overnight, this injection will prove meaningless in even the medium-term as the liquidity is now internalized and the PBOC has no choice but to add ever more liquidity or face fresh post-2009 lows every single day. Which it won't as very soon it will seep over into the broader market. And as long as the threat of surging pork prices next year is there, and with a global bacon shortage already appearing, and food prices set to surge in a few short months on the delayed effects of the US drought, one thing is certain: China will need a rumor that someone- even Spain- is coming to its rescue.

Recall what we said two days ago:

perhaps the biggest news of the day came from China where in addition to Taiwan boats being sprayed by water Japanese water cannon to cool nationalist tensions, 1 year repo rates rose for a 7th day, the longest since March, while 7 day repos surged by 19 bps to 4.70%, on continued liquidity concerns. Increasingly the country's banks are demanding more cash from the PBOC however with food prices already set to soar, the central bank has no choice but to continue with the daily reverse repo band aid operations it has been engaging in for months. At some point this tensionwill come to a climax, and then we will get rumors that Spain is bailing out Spain.

For tnow the climax has been avoided due to sheer brute force. Even that will very shortly prove insufficient. From Reuters:

China's central bank injected a net 365 billion yuan ($57.92 billion) into money markets this week, traders said, the largest weekly injection in history, as regulators struggle to maintain liquidity without producing inflation as forex inflows slow.

"It was a bit much," said a trader at a state-owned bank in Beijing, in reaction to the size of the injection.

"This means that there's no cut to (banks') reserve requirement ratios likely in the near term."

The injection was aimed at preventing a potential short-term liquidity crunch at commercial banks. Chinese banks need to sequester money both to meet central bank-mandated reserve requirements, measured at the end of the quarter, and also need cash to meet withdrawal requirements over the upcoming week-long holiday.

China used reverse repos to inject 290 billion yuan on Tuesday and 180 billion yuan on Thursday, offset by 107 billion yuan in maturing reverse repos, which drain liquidity.

For most of the last decade, the People's Bank of China (PBOC) was occupied with sterilizing inflows for foreign money, and it used open market operations primarily to drain liquidity from the system.

But as foreign investment into China - in particular speculative flows betting on the rise of the yuan - have abated, the bank has become a net supplier of cash to the market.

It has also increasingly turned to short-term precision tools, specifically reverse bond repurchase agreements with tenors between seven and 28 days, to keep liquidity stable.

And the cherry on top were these headlines:

PBOC’S LIU SAYS CHINA GOVT CONCERNED ABOUT ECONOMIC SLOWDOWN
PBOC’S LIU SAYS GLOBAL ECONOMIC OUTLOOK GRIM EVEN WITH QE3

Just as we have been saying for months.

In other overnight headline news, we got the latest Spanish region demanding a bailout as Castilla-Lamancha demanded €800MM in aid from the government; Eurozone consumer confidence which posted a "surprising" drop, and unchanged, a revised UK Q2 GDP, which naturally contracted, but slightly less than the expected -0.5%, instead printing -0.4%, modestly better than Q1; a tiny miss in German unemployment change, which printed at 9,000 instead of the expected 10,000 rising for the sixth consecutive month; and contrinued failure to unclog European credit piplene as August M3 printed a disappointing 2.2% on expectations of a 3.4% M/M rise (2.9% Y/Y, Exp 3.3%), down from a revised 3.2% in July.

For the balance of the recap, we turn as usual to DB's Jim Reid:

Briefly recapping yesterday’s European moves, risk assets were bathed in red with the Stoxx 600 finishing down 1.8%. Spanish and Italian bourses finished 3.9% and 3.3% weaker yesterday as images of protests in Madrid and Athens flashed across screens. The Bank of Spain suggesting that the Spanish economy had contracted at a “significant pace” in the third quarter didn't help. The previous day's joint statement from the German/Finnish and Dutch finance ministers that the ESM can take direct responsibility of banking sector problems that occur under a common banking supervision framework, but "legacy assets should be under the responsibility of national authorities" also weighed on sentiment, although interpretations of the statement were varied. Austria’s finance minister sided with her northern European counterparts, agreeing that bank recaps should adhere to the “basic order of first using private capital, then national public capital and only as a last resort the ESM”.

Meanwhile, EC spokesman Olivier Bailly appeared to distance the European Commission from the statement saying that “Our position regarding breaking the vicious circle between banks and the sovereign is very clear…this should be done quickly” (WSJ).

Elsewhere in Europe, Bundesbank President Weidmann reiterated that it was the job of governments to bridge Greek funding gaps and this role “is not to be filled by the central bank”. This followed yesterday’s comment from the Greek finance ministry that a EU13-15bn funding gap, if the country was granted a two-year extension to meet fiscal targets, could be bridged by rolling over bonds held by the ECB. On a similar vein, Reuters reported that the IMF has been pushing for a comprehensive restructuring of Greece's debt owed to officialsector creditors including potential notional haircuts. This has reportedly exacerbated tensions with the EU and the ECB, who prefer giving Greece more time to meet bailout goals and are not willing to accept hair cuts at the moment.

Moving to overnight markets, Asian bourses are trading with a better tone with the Hang Seng (+0.5%) and KOSPI (0.3%) trading up. The Shanghai Composite (+0.3%) recovered from the session’s earlier multi-year lows on news that the PBOC followed up yesterday’s record RMB290bn of liquidity injections with an additional RMB180bn today - taking the weekly net total to RMB365bn in reverse-repos and bill redemptions. On a more sobering note, the Chinese government released statistics showing that industrial profits were down 6.2% from a year earlier in August, compared with -5.4% in July, the fastest pace of profit declines this year. The Nikkei (-0.1%) is underperforming on reports that Japanese car makers will slow production at Chinese facilities in response to slumping demand arising from the Sino-Japanese territorial dispute. On that note, Japanese PM Noda told media in New York that Japan will not compromise with China on the disputed Diaoyu/Senkaku islands.

Looking at the day ahead, Spain’s budget and reform announcements will be the obvious focus. That aside, the Eurozone’s economic confidence indices, M3 and German unemployment are the key data points in Europe. The UK will print final GDP revisions today. Meanwhile, it will be a busy day in the US with durable goods orders, August pending home sales and initial jobless claims all scheduled before the US market open. However, all eyes will be on Madrid today.

and.....

http://www.zerohedge.com/news/2012-09-26/why-europe-selling

Is This Why Europe Is Selling Off?

Submitted by Tyler Durden on 09/26/2012 14:55 -0400

Finland

Germany

Italy

The odd timing of the Fed's QEternity (given macro data, risk, financials conditions, inflation expectations, and equity valuations) provided some impetus for the markets which had anticipated Bernanke's action. The supposed 'safety net' which we suspect has now been used up - by market front-running from a lower than implied Fed Put strike - does however look in question as the US fiscal cliff looms and global growth concerns grow. However, as Deutsche notes, there remain a large number of hurdles ahead for Europe - and while many 'believe' that progress has been made, it seems now that the rubber is meeting the road, that path forward looks a little less clear - and hence risk-wary investors are unwinding peripheral ST exposure and reverting back to the core (or US MBS/TSYs).

So Far So Good...

But The Going Gets Tough From Here...

Spanish Government may want to stall OMT request until after regional election (October 21st)

Structural reform plans in Spain are to be presented very shortly - which could form the basis for an MoU

Italian Government currently delaying aid request to avoid losing momentum on reform implementation

Pressure on Italy likely to mount after Spain requests aid

Ultimately market pressure to dictate whether Italy requests aid before / after the election in early 2013

Greek program significantly off-track

TROIKA report delayed, don't expect decision until late Oct/Nov

The most likely outcome is an extension of the Greek program via tacit agreement that covers the larger up-front needs, with finding shortfalls discussed further down the road (e.g. Official Sector Involvement)

Euro zone PMIs surprised to the downside in September

Composite PMI down to 45.9, 8th month of contraction

Substantial drop in Services to 46.0 but moderate rise in Manufacturing to 45.5

Today's news that Finland, Germany, and Holland are not chomping at the bit to provide their capital is a large set-back for bank re-caps

It seems the road ahead is just as prone to mines as the road traveled and as we have seen again and again - while Germany (and her 'AAA'nxious friends) are happy to toe-the-line with jawboning and showing support verbally, once the need for real hard money comes to bear - it appears the faith is gone...

We remain cognizant of the odd timing of Ben's deliverance and wonder just what he knew that we do not yet...

Catharsis Ours

Thursday, September 27, 2012

Around the horn in Europe - September 27th ......The Telegraph liveblog key news and data , Zero Hedge and other key items of the day including news from Greece....