- Rating agency expects a further sharp increase in funding costs or even a loss of market access;
- Moody’s is also concerned about political risks, and contagion from other eurozone economies;
- Silvio Berlusconi will be his party’s candidate for the job of prime minister at the next election;
- the latest polls show him in the lead, ahead of Beppe Grillo’s Five Star Movement, with the Democrats close behind in third place;
- Confidustria expects a 2.4% fall in GDP this year, worse than the official estimates;
- Novagalicia Bank has become the latest Caja to request a large capital injection;
- the bank has previous apologised to its customers over a number of scandals, including the sale of toxic products;
- De Guindos says that Spain wants to follow Germany’s example in reforming its labour market and social security system;
- Spain takes further steps to centralise fiscal policy through a special fund to help, and control, the autonomous regions;
- Klaas Knot says there is no “religious belief” that 0.75% constitutes a rate floor for the ECB;
- the cut in the ECB’s deposit rate triggered a large fall in the amounts held in the deposit facility, but the money was merely diverted to banks’ current accounts at the ECB;
- the SPD said it will support Merkel once again over the Spanish banking rescue;
- a poll shows that a majority of the young people in Germany believe the euro will not succeed;
- industrial production rebounds strongly in May, but not in France and the Netherlands;
- Merrill Lynch finds that Ireland and Italy have most to gain from leaving the eurozone, and Germany the most to lose;
- the Greek finance minister is seeking new savings ahead of the return of the Troika to be able to avoid another pay cut;
- Les Echos gives ten reasons why the euro might come to an end this summer;
- Martin Lueck at UBS, meanwhile, argues the decision of the German constitutional court is closer than you might think.
Moody’s Investors Service has today downgraded Italy’s government bond rating to Baa2 from A3, with negative outlook. “Italy is more likely to experience a further sharp increase in its funding costs or the loss of market access,” Moody’s said in a statement. The rating agency has also lowered the Country Ceiling to A2 from Aaa. “The lower ceiling reflects the increased risk of economic and financial dislocations,” Moody’s said. The political risks and the contagion from Eurozone crisis are the main driver of decision. In plus, Moody’s is now expecting real GDP growth to contract by 2% in 2012. Today the Italian Treasury will sell some tranche of BTPs, from a minimum of €3.5bn to a maximum of €5.25bn.
Berlusconi will run alone in next election
Silvio Berlusconi is the only candidate of centre-right party PDL for next Italian elections, Repubblica reports. “Yes, Berlusconi is the prime minster candidate,” lower house PDL leader Fabrizio Cicchitto said at the end of the party’s meeting in Rome. According to last polls, the PDL party is close to 25%. The second party is Movimento 5 Stelle, leaded by Beppe Grillo, a popular Italian comedian. The Democratic Party, divided by internal struggles, is close to Movimento 5 Stelle. According to PDL secretary Angelino Alfano, Berlusconi will be the only frontman of the party. In last days Berlusconi has said he’s ready to run. “Since Berlusconi stands as a candidate, the primaries are no longer an issue. They might be considered to select other party roles,” Chicchitto said.
(Just savour, for a moment, the idea of a Berlusconi-Grillo coalition.)
Italy will face a deep recession
Italian GDP in 2012 will fall by 2.4% at least, according to Confindustria’s head Giorgio Squinzi, La Stampa reports. “Probably it will drop even more because in the second half of the year I have some difficulty seeing improvements,” Squinzi said. The IMF also lowered its economic perspective on Italy. In addition, the Italian banks are facing huge problems. Foreign deposits at Italian banks down 20.4% year on year in April, meanwhile net foreign funding down €94bn in 12 months to April according to Italian banking association (ABI). “Despite the main refinancing interest rate cut by ECB, the Italian banking system is facing huge difficulties”, ABI said in a statement.
The next Spanish caja needs cash
After Bankia, now comes Novagalicia Bank, which needs to plug the Frob, with a shortage of about €6bn in capital, El Pais reports. The bank had apologised to customers for selling toxic products and for the multi-million compensation to its former directors. The final figure will depend on the September audit of the Spanish banking sector, which may well trigger the sale of the bank. The new chief executive expressed hope that he can sort out the mess, despite evidence, as El Pais put it, that the bank is a little monster that keeps gobbling up capital. The bank has lost thousands of customers as a result of various scandals.
De Guindos says Spain will follow the German example
In an interview with Frankfurter Allgemeine Zeitung Luis de Guindos says the Spanish government inspired itself from the reforms Germany underwent under Gerhard Schröder. “The Spanish economy needs the medicine that Germany had to take 10 years ago”, Spains economy minister explained. “The German reforms of the labour market, the social security as well as the great moderation with the salaries are examples. Spain is doing all that now even faster and more intensively.” Yet de Guindos said he was optimistic for the Spanish economy. “Spain has a trade surplus with the eurozone. Spain is one of the few countries that has maintained its international export quota.” Also the minister tried to reassure the European creditors of the Spanish banking rescue that their loans would be repaid. “I am convinced that there will not be even the slightest loss for the creditors.”
Spain takes further steps to centralise fiscal policy
Reuters reports that the Spanish government will soon start a procedure to back the debt repayments of the 17 autonomous regions through the creation of a fund. It will help them to repay debt in exchange for new and binding commitment to clean up the deficit. Butdget minister Cristobal Montoro also said the deficit path for the autonomous communities would be relaxed in 2013 before being tightened again in 2014.
Klaas Knot says there is no “religious belief” that 0.75% constitutes a rate floor for the ECB
Talking to Financial Times Deutschland Klaas Knot hinted at further rate cuts by saying that there was no “religious belief” within the ECB that the current policy rate of 0.75% should constitute a floor. “Should the situation deteriorate further there is no religious belief that would keep us from going below 0.75%”, the Dutch central bank president said. Also the ECB governing council member hinted at the possibility of introducing negative deposit rates by saying that the ECB would keep an eye on Denmark that cut its overnight deposit rate to minus 0.2%. “We should learn from the experience of other countries with negative interest rates before we decide whether that is an option for us”, he told FTD. Turning to the debate about the ECB’s supervisory role and its scope the central banker said the banking crisis in Ireland and Spain showed that it should not be limited to the currency union’s global systemic banks. “In both countries the problems originated from smaller regional banks, one could also say, from strongly politicized banks. Therefore we would miss the problem if we limited supervision to the large banks only.”
Where did the money go after the ECB cut the deposit rate to zero?
The use of the ECB’s deposit facility dropped by almost 60%, but the money was merely diverted to the banks’ current account – which also yields zero interest rates, the FT reports. Funds kept at the overnight deposit facility were down Wednesday night, from €808.5bn to €324.9bn
SPD will vote for Spanish bank rescue
The SPD will most likely vote for the rescue measures for the Spanish banking sector, Thomas Oppermann, a leading parliamentarian among the social democrats, told Spiegel Online. Oppermann applauded the tough conditions in the MoU for the Spanish banking sector. But the parliamentarian also said that he thought it was crucial that Angela Merkel manages to get her own majority in her coalition which she did not manage to do in the recent vote on the ESM. The Bundestag will convene for a special session on July 19 to vote on the Spanish banking rescue.
German youth has a negative image of the euro
A study done by the German banking association shows that Germans between 14 and 24 years have a negative image of the euro and its future, Die Welt reports. Asked about the euro’s long term chances of success 56% responded the euro would not be successful against 42% who thought it would be successful. 51% think that the euro has proven itself with the remainder thinking the opposite. But the study also showed a huge ignorance in this age group regarding important basic economic concepts. 95% of the respondents did not even have a vague idea how high the inflation rate currently is.
Is this the end of the downturn?
These data look encouraging. Eurozone industrial production increased by 0.6% in May, according to Eurostat, but fell in France and the Netherlands. Reuters reports that a poll had given a consensus of a 0% change in the data. But Eurostat revised downwards the April figure from an 0.8% drop to a 1.1% drop. The question is whether the May figures are a freak, or whether there is a change in the trend. The article quoted an analyst as saying that weakening business surveys are pointing to a more rapid rate of decline.
Who has the most incentive to leave the euro area?
Italy and Ireland have more incentive to quit the euro than Greece, while Germany would benefit the least from quitting, according a game theoretical cost-benefit analysis of Bank of America Merrill Lynch. Foreign exchange strategists David Woo and Athanasios Vamvakidis concluded in a July 10 report that investors “may be underpricing the voluntary exit of one or more countries” from the Eurozone. The report was widely quoted by the financial press, including Bloomberg. Italy would enjoy a higher chance of achieving an orderly exit than others and would stand to benefit from improvements in competitiveness, economic growth and balance sheets while Germany has the least incentive of any country to quit because it would face weaker growth, possibly higher borrowing costs and a negative hit to its balance sheets.
(This is a pure economic cost-benefit analysis, which ignores completely the political dimension of such a breakup process. What it shows once more again is that the eurozone is now considered by investors more like an exchange rate mechanism which you can join and leave rather than a single currency area.)
Ministers to find new savings ahead of troika meeting
Yannis Stournaras gave ministers a week to come up with cost-cutting measures, including reductions in military procurement and further cuts to health and local government spending, the FT reports. If sufficient savings could be identified it might be possible to avert a 12% wage cut agreed with the creditors, which would save €205m.
For the next two years Greece is looking to save €11.5bn. Sources told Kathimerini that savings about €7.5bn would have to come from the state budget, €3bn from social transfers and €2bn from changes to the structure of the central administration. The biggest savings, more than €1bn, are due to come from cost-cutting at local authorities and central government spending. There are also plans to cut all pensions above €1500 by 10%. This will save €600m a year. Auxiliary pensions will also be limited so retirees can earn no more than €2400per month from the basic and supplementary packages they receive. This will save roughly €1bn.
According to the FT, European officials have given assurances that in spite of delays in making transfers to the budget, funds will be available to cover a €3.2bn sovereign bond repayment due in August.
10 reasons why the eurozone will be in perish this summer
Les Echos enumerates 10 reasons why there will be no summer respite for the currency union:
- The bad economy will fuel defiance
- Uncertainties about the Spanish bank rescue
- Uncertainties about the future of Greece
- Doubts about Italian bond purchases by the EFSF/ESM
- Delays in getting the ESM up and running
- The central banks run out of ammunition to contain the crisis
- Rising spreads in Spain and Italy
- Slowdown in the Chinese economy
- Disappointing corporate results
- Uncertainties due to the presidential campaign in the US
The German constitutional court decision may be closer than you think
FT Alphaville did a good job digging up an excellent analysis by Martin Lueck at UBS, who has argued that the decision of the German constitutional court should not be taken for granted. He said the commentary had taken the upcoming decision too lightly. He cites for reasons why the court may just say No: First, there is less pressure on them to say Yes in order to avoid a crisis. The EFSF is, and remains, in place. Second, the court has already ruled that the transfer of budgetary sovereignty had reached its limits. The ESM extends those limits further. Third, the court wants to predict its own position, and lose power to the ECJ. Fourth, one of the justices had been on the board of the “Mehr Democracy” movement, one of the plaintiffs. In his conclusion Lueck says: the most important justices have previously complained about a perceived lack of democratic legitimacy at the supranational level. “All this does not look like a straightforward call to us.”
and July 12th .....
Eurointelligence Daily Briefing, 12 de Julho de 2012. Enviado por Domenico Mario Nuti.
- The Spanish prime minister announces €65bn in new austerity measures until end-2014;
- El Pais says it is the most Draconian economic package since General Franco’s stabilisation plan in 1959;
- the measures include a 3 point rise in the standard rate of VAT to 21%, and further tax increases;
- there will be cuts to unemployment benefits, housing benefits, and other social benefits;
- civil servants wages and holidays will also be cut;
- a poll suggests a majority of Spaniards oppose the measures, but believe they will end the crisis;
- austerity protests in Madrid turned violent yesterday;
- Paul Krugman says this is a lot of pain for what ultimately will be only a small fiscal and competitiveness effect;
- Xavier Vidal-Folch says Spain’s MoU is hardly distinguishable from a normal troika operation;
- Credit Swiss has a report showing a dramatic capital flight from Spain, with domestic savers starting to take part;
- Mario Monti gets gloomy about his fight against prejudice;
- Ignazio Visco says the ECB must do more as the threat of a eurozone breakup remains;
- the Bank of Italy is now expanding its portfolio to include corporate bonds;
- Wolfgang Schäuble endorses an idea from a German economic institute to impose a compulsory loan on people earning over €250,000;
- so does Mark Schieritz;
- the ratification of the fiscal pact in France poses risks for François Hollande;
- Greece is set to ask the eurogroup for a renegotiation of the target at the forthcoming meeting end of July;
- Portugal’s investors would also welcome a revision of the Portuguese austerity programme;
- Ireland’s Q1 contraction in Ireland is worse than expected;
- of the 31 banks that failed the EBA capital requirements, 27 banks now do;
- the euro’s status as a global currency, meanwhile, has suffered over the last year, according to an ECB report.
Spain’s conservative prime minister yesterday took Austerianism to its logical conclusion with a programme of €65bn in savings and higher taxes until 2014. As El Pais points out in its front page lead story, this is the most Draconian economic package during Democracy, in fact since General Franco’s stabilisation plan of 1959. The measures include:
on the revenue side:
- a three-point rise in the standard rate of VAT to 21%,
- a two point rise in the reduced rate from 8 to 10%
- a 1pp reduction in social contributions in 2013 and again in 2014
- increase in environmental taxes
- increase in certain excise duties
- elimination of tax credit for home purchases
on the expenditure side:
- reductions in unemployment benefit for those who have been unemployed for over six months, a large and rising portion of the Spanish population
- reductions in housing benefits.
- elimination of Christmas bonus for civil servants (another way of saying a cut in salaries)
- reductions in the number of holidays for civil servants
- reductions in benefits for people who temporarily disabled
- cuts in the costs of ministries
- cuts in subsidies for political parties and social organisations
- a review of social benefits with a view to enact further cuts
- abolishment of recruitment bonuses
The measures will be adopted by the parliament this Friday, when they become immediately effective. Rajoy himself admitted in parliament that the measures will prolong the recession in 2013.
(We assumed that this would have happened even under the previous regime. We think this plan will prolong the downturn until 2014/15. We also think that the budgetary impact will be much lower due to the strong consumption effect that results from higher consumption taxes; wage cuts, and other public expenditure cuts; Spain is likely to miss even the revised 6.4% deficit target because of this dynamics.)
El Pais reports of a poll according to which 76% think the measures will end the crisis – even though a majority of Spaniards are opposed to them.
Reuters reports that anti-austerity protests in Madrid turned violent yesterday with police firing rubber bullets at protesters who pelted them with stones, fruit, bottles and firecrackers outside the industry ministry. Tens of thousands or demonstrators joined hundreds of coal miners who had staged a long march from northern Spain in protest at cuts in mining subsidies they say will put them out of work, as public discontent over austerity measures grows.
Paul Krugman calls the austerity programme pointless
In his NYT blog, Paul Krugman says Spain faces a three-tier problem: a highly indebted banking sector, an increasingly indebted public sector, and a loss of competitiveness. To end the depression, the country needs an export-led recovery, which absorbs some of the employment lost in the housing crash. But it now confronts a multi-annual depression. The programme will cut Spain’s debt by a cumulated 4% of GDP – which is not much. He has constructed a flat-tailed Phillips-curve to show that even the competitiveness effect is likely to be small. He says it is not clear why anybody would want to impose such harshness for so little benefit?
Xavier Vidal Folch on why the ESM programme for Spain is not different in principal from that of Greece
It was politically important for Mariano Rajoy that Spain is not subjected to the same type of conditionality as Greece was when it received its programme. The MoU, which El Pais published yesterday (and form which we quoted at length) is a very invasive programme, say Xavier Vidal Folch, El Pais’ main economics commentator. The EU and the IMF act like a bank. They impose conditions to insure that the money is repaid. In this case, these conditions relate to the banking sector. The conditions may be softer than they were for Greece, but this is still an intervention. And there is still troika control.
Capital flight out of Spain intensifies
This is from FT Alphaville. Credit Suisse has compiled numbers on capital flight out of Spain. Since the middle of last year, capital has been flowing out, with virtually no inflows. Yiagos Alexopoulos at CS reckons outlflows are currently running at an annualised rate of 50% of GDP. Important, he says domestic investors are now joining foreign investors in moving assets abroad. And if that trend accelerates, things will get ugly.
Monti gets gloomy
Mario Monti warns Italian political leaders over future economic challenges, Il Sole 24 Ore reports. “We are in a war, a very difficult war,” Monti said at the Italian Banking Association’s annual meeting. Recession, lack of market confidence, high yields on bond markets: Italy remains on the brink, also after the latest fiscal package, that will save over €26bn. “At G20 in Cannes, my predecessor Silvio Berlusconi underwent extremely unpleasant pressure that I imagine was close to humiliation,” Monti said. Now, according Monti’s view, Italy must fight “a battle against widespread prejudice.” But the investors question remains only one: Will Italy be able to pay its huge public debt of over €1,900bn? No, according to Citigroup Chief Economist Willem Buiter.
Ignazio Visco says ECB must do more as eurozone break-up remains a possibility
The Bank of Italy Governor Ignazio Visco said the ECB must guarantee enough liquidity for Eurozone lenders, AGI News Agency reports. “The ECB has no choice but to pursue these goals,” Visco said during a speech in Rome. In June ECB funding to Italian banks rose to €281.44bn from €272.7bn in May. According to Visco, the ECB should ensure banking stability using new actions such as intervention in secondary markets with Securities Markets Programme (SMP). “Every measure must be considered because a Eurozone break-up is a possibility. Remote, but a possibility,” Visco said. Talking about Italian current situation, Visco said the spread between BTP and Bund is a “lot higher than what is justified by the fundamentals of our economy.”. At the end of the day, the Italy 10 year government bond yield was at 5.813%.
The Bank of Italy wants to invest in corporate bonds
According to La Stampa, the Bank of Italy will hire two fund managers before the end of the year to revamp its treasury operations. With a portfolio of €125.6bn at the end of 2011, the Bank of Italy invests primarily in Italian government bonds and US Treasury bonds. Over $1bn will be managed by two US fund managers for a new investment strategy: corporate bonds. “It's a very interesting choice, we will act like an investment bank,” a Bank of Italy official said to La Stampa. ETF, corporate bond, stocks: the only condition is a BBB- rating, a step under investment grade.
Schäuble things taking compulsory loans from the rich is an “interesting” idea for euro crisis countries
Wolfgang Schäuble’s spokesman endorsed the idea of DIW, an economic research institute, to impose a compulsory loan on the rich in order to balance public finances. According to Frankfurter Allgemeine Zeitung he said the idea of applying a rate of 10% on individuals owning more than €250,000 was an “interesting” idea for euro crisis countries where the relationship between tax revenues and private wealth was out of balance. In Italy, for example, public debt is 120% of GDP while according to calculations of Commerzbank private wealth represents 175% of GDP. According to Boston Consulting the relation of millionaires to the total of the population is even higher in Italy than in Germany. The situation is similar in other highly indebted countries such as Greece and Portugal. DIW argues with its proposal €230bn could be raised in Germany. Schäuble’s spokesman dismissed the idea for Germany because according to him the country’s public finances were in order. Also the constitutional court had prevented the government to institute a compulsory loan in 1984.
(So Germany makes proposals for others, but not for itself. We suspect that principle will prevail in the German approach to the banking union. It will be a banking union mostly for non-German banks.)
Mark Schieritz gives 10 reasons why a compulsory loan is a good idea
In his Herdentrieb blog Mark Schieritz gives 10 reasons why he thinks the DIW’s proposal to impose a compulsory loan on people owning more than €250,000 is a good idea. Among them are that the wealthy are particularly benefitting from the costly euro rescue measures, because private wealth in many euro countries surpasses by far the public debt in many euro area countries and because it avoids debt restructuring. If the German constitution is an obstacle, Schieritz argues it must be changed. “Laws are there to serve the people and not the other way around.”
Ratification of the fiscal pact will be risky for Hollande
According to Le Monde, the ratification of the fiscal pact could be politically risky. The paper points out that socialist deputies have noted with interest that in Germany 23 SPD parliamentarians voted against the pact when it was recently ratified. So there is no fear at the Elysée and the prime minister’s office that there may be dissidents within the government’s parliamentary majority and that the government may need the votes of the conservative opposition to get the pact adopted. Also there is uncertainty as to whether or not the inclusion of the golden rule on deficit reduction and a balanced budget will require a change of the constitution. Francois Hollande decided to submit the fiscal treaty to parliament after having campaigned against it and after having promised a “renegotiation” in case of his victory. Hollande considers that the recent EU council decisions on growth measures, banking supervision and the financial transaction tax amount to a renegotiation of the pact. In order to gain favours within his own parliamentary majority he wants to let the deputies vote on these items at the same time as they vote on the fiscal pact.
Greece to ask for renegotiation in eurogroup meeting end of July
The three leaders of the Greek coalition government agreed that Greece should adopt a more proactive stance, after Finance Minister Yannis Stournaras’s did not ask for any changes of the memorandum at the Eurogroup meeting in Brussels on Monday, Kathimerini reports. It is now likely that Stournaras will be asked to bring up the renegotiation of the memorandum at a Eurogroup meeting end of July. The three leaders also intend to form the key negotiating team involving officials at other levels. The meeting was called after Evangelos Venizelos appeared concerned that the government was giving the impression it was not making any effort to renegotiate the terms of Greece’s bailout. Powerful opposition leader Alexis Tsipras used the opportunity to accuse the coalition of surrendering to lenders over bailout terms and of failing to act in the interests of its people.
Revise or not revise
Portugal is still looking at the arguments. A growing number of analysts and investors believe that a revision of the austerity targets could have a positive effect on the risk perception of Portugal, Jornal de Negocios reports, which contradicts the view expressed by Mario Draghi, who said that that such a decision "would be seen by markets as a step backwards" in regaining credibility among investors in Portugal.
Q1 Contraction in Ireland worse than expected
The latest forecast from the Central Statistical Office in Ireland shows that the contraction in the first quarter of 2012 was worse than most forecasters expected, the Irish Independent reports. Output of goods and services (GDP) slumped by 1.1% and national income fell 1.3%. The figures are due to be published today, and had been accidentally posted online for 15 min yesterday. The Irish Independent writes that the downward revision casts doubt about how realistic the government’s budget targets will be for this year, as a weak start into this year makes it harder to meet the official forecasts, on which the budget targets depend. Last year’s forecast, meanwhile, was revised upwards, doubling the annual growth rate to 1.4%.
27 banks fulfill EBA requirements raising €94.4bn capital, €9.5bn through state aid
European banks had until the end of June, to meet the requirements of European Banking Authority (EBA), a core Tier 1 ratio of 9%. In a preliminary report, the EBA said that the 27 banks it sampled managed to raise €94.4bn, more than making up for the €76bn shortfall in capital that the authority had identified in December. The four banks – Bankia, Dexia, Oesterreichische Volksbank AG and Germany's WestLB - undergo “deep restructuring”;
Greek banks were excluded from the analysis.
Seven of the 27 banks, which fulfill the requirements, depended on state aid to achieve this. Three of them were Portuguese. The €6.15bn for the Portuguese banks represents nearly two thirds of the €9.5bn injected by member countries to banks, Jornal de Negocios reports.
The euro’s reserve currency status is coming under pressure as a result of the euro crisis
According to the ECB’s annual report on the international role of the euro, there are first signs that its status as the world’s second most important reserve currency is coming under pressure, FTD writes. While the euro’s share in world currency reserves has declined slightly by 0.4pp to 25.0% there are additional signs of decline. According to a survey quoted by the ECB report out 78% of the 54 currency reserve managers of central banks said that the euro crisis is affecting the way how they manage their currency reserves. Additional anecdotal evidence like the decision of the Swedish central bank to reduce the share of euro denominated securities from 50% to 37% points to the same direction. The report also points out that there is evidence that the Renminbi may gain the status of a major reserve currency much faster than commonly thought.
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