From the new-fangled EU fiscal compact declaration:
5. The rules governing the Excessive Deficit Procedure (Article 126 of the TFEU) will be reinforced for euro area Member States. As soon as a Member State is recognised to be in breach of the 3% ceiling by the Commission, there will be automatic consequences unless a qualified majority of euro area Member States is opposed. Steps and sanctions proposed or recommended by the Commission will be adopted unless a qualified majority of the euro area Member States is opposed. The specification of the debt criterion in terms of a numerical benchmark for debt reduction (1/20 rule) for Member States with a government debt in excess of 60% needs to be enshrined in the new provisions. Read more
The German government has stepped in to help Eon, the country’s biggest utility, secure a stake in Energias de Portugal, which the government in Lisbon is auctioning off as part of reforms spurred by the eurozone debt crisis, reports the FT, citing people familiar with the situation who said Angela Merkel, chancellor, sought to stress the benefits of Eon’s offer for Lisbon’s 21 per cent stake in EDP in a recent conversation with Portuguese prime minister Pedro Passos Coelho. As well as a €2bn bid, Eon has offered to move the base of some renewable-energy businesses to Portugal, something that Eon – and Berlin – argue could help the Portuguese economy at a very tricky time. But the German government and Eon also run the risk of looking like they are trying to profit from Portugal’s austerity drive – a policy demanded by Berlin in return for help from the eurozone rescue fund.
The price action in on Italian bonds on Monday, that is.
Italy’s new government has promised a “multitude of sacrifices” in a $40bn austerity plan, beginning a crucial week for the eurozone, reports the FT. A leaders’ summit on 9 December will call for an EU treaty change to harden fiscal integration, although France remains wary of Germany’s demand for national budgets to be subject to veto by a central authority, Reuters says. Italy’s labour minister wept as she announced increased retirement ages under the government’s plan, according to the WSJ. A raft of grim PMIs underscored on Monday that the eurozone already faces recession, with a composite PMI for November signalling that the eurozone economy has contracted 0.6 per cent in the fourth quarter, Reuters adds.
Italy’s new technocratic government has approved tough austerity measures and reforms including tax increases, pension changes and spending cuts amount to a savings of €30bn over the next three years, reports the FT. Mario Monti, prime minister, on Sunday night underlined the gravity of the crisis facing his country, but promised that the “multitude of sacrifices” he was implementing in his “Save Italy” decree would also be used to promote economic growth by reducing the cost of labour. About €10bn of the savings will be put back into the economy through measures to promote growth, including cuts in the cost of labour and incentives to get more women and young people into the workforce. The government’s first macro-economic forecasts project a fall in Italy’s GDP in 2012 of 0.4 to 0.5 per cent and zero growth in 2013. The measures are in a single emergency decree that allows them to take effect immediately, before formal parliamentary approval, but Mr Monti will have to secure the backing of legislators within 60 days for them to remain in force, says Reuters.
George Osborne on Tuesday steered Britain towards another five years of austerity as he mapped out a bleak course of stalling growth, public sector pay restraint, painful cuts and rising borrowing stretching into the next parliament, the FT reports. Admitting that even this dark outlook could turn out to be optimistic if the eurozone crisis worsened, the chancellor warned that political failure in Europe could result in “a much worse outcome” for Britain. Among his “tough choices”, the chancellor took £1bn a year out of planned child tax credit increases and about £280m from working tax credits – both paid to “squeezed middle” households – as well as over £1bn over three years from overseas aid spending. But these cuts paled in comparison with £15bn a year spending cuts he pencilled in after the next general election, just to meet his borrowing targets. The FT has more coverage of the Autumn update, including comment from Martin Wolf, who says Osborne is “trapped by his own rigid fiscal framework”.
Spotted on Il Sole 24 Ore over the weekend — the official Italian government reply to Olli Rehn’s little inquiry about reform:
Berlusconi ‘ready to pull plug’ on Monti – FT
Silvio Berlusconi looks posed to pass over the rains to a caretaker government lead by Mario Monty, a former European commissioner, rather than continuing to push for early elections, reports the FT. After an announcement by LCH Clearnet SA on Wednesday morning that margins on Italian bonds would be increased, yields on Italy’s 10-year bonds reached record highs as did the spread over German Bunds. On Thursday morning, yields had fallen, but not to a level viewed as sustainable by many economists. Italy’s Senate, meanwhile, is rushing to pass reforms that will see asset sales and an increase in the retirement age in order to rein in public debt, reports Bloomberg. The budget measures had originally been touted at a summit on October 26th as a result of pressure from other eurozone countries, notably France and Germany.
Greece’s political crisis deepened on Wednesday after a deal to give the premiership to the speaker of parliament fell through at the last moment, reports the FT. Philippos Petsalnikos, speaker of parliament and a former justice minister, was poised to become premier, having emerged as a compromise candidate after fierce infighting inside the PanHellenic Socialist Movement over the candidacy of Lucas Papademos, a former ECB vice-president. But George Papandreou, the departing Socialist prime minister, reportedly reintroduced Mr Papademos’s candidacy, along with that of Evangelos Venizelos, the finance minister. The presidency said another meeting would be held at 10am on Thursday.
I guess you guys have to be creative here.
Spot the odd one out: Read more
So, bondholders (if they “agree”) will give Greece more of a fighting chance to tackle its debt burden. But Greece will also have to pull its own weight.
Without its own currency, what is the best course of action? John Major, former UK prime minister, proposes (in Thursday’s FT) a strategy akin to Latvia’s ‘internal devaluation’: (emphasis ours) Read more
11 October 2011 – Statement by the European Commission, the ECB and IMF on the Fifth Review Mission to Greece
Staff teams from the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) have concluded their fifth review mission to Greece to discuss recent economic developments. The mission has reached staff-level agreement with the authorities on the economic and financial policies needed to bring the government’s economic program back on track. Read more
First the caveat. The following is written by the chief economist of a big Italian bank. So you can be forgiven for thinking “he would say that, wouldn’t he.”
But Unicredit’s Erik F Nielsen is surely onto something when asks why Italian funding costs are sitting above 5 per cent while investors demand just above 1.6 per cent to lend to the UK government. Read more
The Greek government has conceded it will overshoot the 2011 deficit target from its last bailout, amid continued talks with official lenders on securing a second, Reuters reports. The government will post a deficit of 8.5 per cent of GDP in 2011, above a 7.6 per cent target, according to its 2012 budget, which was approved over the weekend. The original 2012 deficit of 6.5 per cent is also forecast to be missed, despite $9bn of extra austerity measures, Bloomberg says. Meanwhile, it is more likely than ever that Greece’s bondholder swap will be reopened to feature bigger write-downs, not so much because austerity is failing but because the taxpayers of the northern eurozone will not stand for it, John Dizard writes in the FT.
Greek authorities tried again on Monday night to convince international lenders they had a credible plan to close a growing financing gap, the FT reports, amid signs that negotiators were hardening their line over a €8bn aid payment Athens needs in three weeks to avoid running out of cash. The Greek proposals, made in a conference call with heads of the so-called “troika” – the European Union, International Monetary Fund and European Central Bank – came after a German-led group of European creditor countries made clear they were unsatisfied with measures unveiled last week.
Ministers are set to be told this autumn that a £12bn black hole has opened in the public finances, in a forecast that threatens to derail the coalition’s deficit reduction strategy and prolong austerity well into the next parliament, the FT says, based on the paper’s replication of the model of government borrowing used by the independent Office for Budget Responsibility, which suggests the structural deficit in 2011-12 is now £12bn higher than thought, a rise of 25 per cent. By repeating and extending the fundamental elements of the OBR methodology, it is clear that even if there is no slippage in borrowing from previous forecasts, the level of spare capacity in the economy is lower than expected, so the OBR will not be able to forecast as much catch-up growth as it did in March. More of the deficit appears permanent and will not be eliminated by a bounce back in the economy. One minister told the FT there had been “agonised discussions” in recent months about whether the Treasury should try to further tighten the fiscal screw if the structural deficit turned out to be bigger than expected. Meanwhile the WSJ reports that Portugal’s central bank said Madeira island had failed to report €1.1 billion in debt from 2008 to 2010 related to agreements between the government of Madeira and construction companies. This effect this will have on the public deficit is 0.3 per cent of GDP, the bank said.
Greece will seek to persuade its lenders that it deserves another €8bn loan payment in a pivotal conference call on Monday as the government battles to head off a looming cash crunch, the FT reports. The call will pit Evangelos Venizelos, the Greek finance minister, against representatives from the so-called troika that crafted the €109bn rescue package granted to Athens last year. The onus will be on the Greeks to prove they are delivering the budget cuts and fiscal reforms mandated by that emergency loan – a task that has grown more arduous as a deeper-than-expected recession has cut into tax receipts. In addition, eurozone ministers at the weekend lowered revenue estimates for a proposed property tax, which the Greek government had hoped could raise about €2bn a year in 2011 and 2012. Greek officials estimate they have enough cash for the remainder of this month, and perhaps the first 10 days of October. An emergency cabinet meeting on Sunday showed signs of renewed brinkmanship between Greece and its rescuers, says the WSJ, as the country’s finance minister, Evangelos Venizelos, pledged new cuts but also lashed out at eurozone countries that are funding the bailout.
Viewers of European CNBC early on Thursday morning will probably have seen Danske Bank making their case for cutting the UK’s credit rating by no fewer than four notches, from AAA to A+.
(Which is about where Italy is at the moment.) Read more
With Greece “pausing” IMF talks and admitting that this year the budget deficit will be bigger and growth smaller…
Erm, OK, not God. Not even the Pope — although an editorial in L’Osservatore Romano by the Pope’s banker comes close:
During a prolonged crisis, inheritance taxes, new forms of taxation or similar alternatives reduce or wipe out resources for investments, discouraging the trust of investors, penalizing the cost of the public debt and the possibilities of its renewal at its expiration. In this context, imposing taxes on property and on income is equivalent to a suicidal anti-subsidiarity of the state to the citizen. Those who legally possess assets, on which they have paid the proper taxes, have contributed to creating wealth and, thanks precisely to these assets, continue to produce them with investments and consumption. Read more
Italy’s squabbling centre-right government has cobbled together a compromise austerity package that relies heavily on a renewed crackdown on tax evasion to reach the goal demanded by the European Central Bank of a balanced budget by 2013, reports the FT. After three weeks of disputes and multiple revisions, Giulio Tremonti, finance minister, reached a political deal with coalition leaders and a text was submitted to the senate budget commission on Thursday evening. The spectacle of Italy’s ruling politicians led by Silvio Berlusconi quarrelling over where the cuts should fall had already undermined the country’s credibility among foreign investors well aware that the eurozone’s third biggest economy, with €1,900bn ($2,700) of debt, is too big to rescue with a Greek-style bail-out. But disclosures on Thursday that Italy’s 74-year-old prime minister was once more embroiled in a sex scandal – and allegedly blackmailed by a prosthetics businessman pimping for prostitutes – raised questions over his ability to survive yet another controversy while imposing unpopular austerity measures.
Italy’s second austerity package in less than a month has met with a chorus of criticism, Reuters reports, with the largest union federation threatening a general strike over the “injustice” of the measures. President Giorgio Napolitano on Saturday signed the emergency decree introducing sweeping austerity measures to cut the fiscal deficit by some €45.5bn and balance the budget in 2013, a year ahead of its previous schedule. The austerity plan includes a “solidarity tax” on those earning more than €90,000 a year, but economists, unionists and business leaders agreed a tax on wealth rather than on labour income would have been better because it would have targeted tax evaders who do not declare their real income but often own large assets. The critics include nine members of prime minister Sylvio Berlusconi’s own coalition, the FT reports. They also say the measures will strangle Italy’s stagnant economy and unfairly target public sector employees, pensioners and mid-income workers, leaving the wealthy almost unscathed. The Italian stock market reopens on Tuesday after a public holiday.
It’s just one day, but Tuesday ended in very poor fashion for Italy’s government bonds. The 10-year benchmark bond yield had breached five per cent at pixel time.
In CDS-land Italy was back close to 200bps, according to Markit’s intraday report (the blue line shows liquidity — high, essentially): Read more
Here’s a great collection of charts from Société Générale on Greece, Ireland, Portugal, and the short-term treadmill that binds them all (click to enlarge):
No sooner had the Greek parliament said yes to the Medium-Term Fiscal Strategy (MTFS), than the question was raised; “where next?” The weaker member states are still battling to attain public debt sustainability and address structural growth issues. Even in the best case scenario, this will take years. And with weak growth and unemployment set to climb higher, this is likely to prove an uphill battle. Looking ahead, we see opportunity for a period of calm in the debt crisis, but this will in all likelihood prove short-lived. Each quarterly EU/IMF loan tranche comes with a new review for Greece, Portugal and Ireland, and markets will remain concerned that targets could be missed… Read more
Parents and travellers are among those facing disruption on Thursday as up to 750,000 teachers, lecturers and civil servants stage a one-day strike over pension reforms, the FT reports, while business leaders warn that the dispute threatens to undermine productivity. The UK Border Agency said travellers could face airport delays when passport officers walk out. The government expects a third of schools in England and Wales to be closed, and another third partially closed.
Market bulls have got what they wanted after the Greek parliament passed a package of austerity measures and US Treasuries continued to see strong selling, reports the FT. The FTSE All-World equity index, up 1.4 per cent, has rebounded 2.6 per cent this week in the belief that Athens’ acceptance of loan conditions set by the European Union and International Monetary Fund will cut the chances of a Greek default and reduce eurozone sovereign debt contagion fears. Discussions between European banks about rolling over Greek debt have also convinced some investors that the financial system can avoid – or for the sceptics, put off for now – a damaging hit to balance sheets as Greek IOU’s are restructured. Asian stocks also rose slightly on the news, Reuters reports, and were further boosted by traders covering short positions built up ahead of the Greek austerity vote.
So that’s that.
Other than the outcome and the protests in the streets, there was just one bit of drama related to Wednesday’s fiscal austerity vote in Greece, as reported by Reuters: Read more
Greece will be committing “suicide” if its parliament fails to back sweeping austerity measures aimed at averting a catastrophic default, according to the head of the country’s central bank. The stark warning by George Provopoulos, governor of the Bank of Greece, further heightened the stakes ahead of a knife-edge vote on Wednesday in the Greek parliament, the FT reports. The Wall Street Journal says the Socialist government controls a majority of 155 deputies in Greece’s 300-member parliament and needs a simple majority of 151 votes to pass the measures. Despite earlier wavering by four lawmakers within its ranks, that majority now appears to be holding. Bloomberg says stocks are rising ahead of the vote.
US Treasuries are in sell-off mode as a firmer euro and confidence in Greece eliminate some of the demand for “safe haven” assets, the FT reports. At the same time, risk assets have stabilised and then rallied as some in the market hope a damaging eurozone sovereign debt contagion crisis can be averted. Bloomberg reports that Asian equities and the South Korean won have both climbed for a second day on hopes of a resolution. A French-led plan to rollover Greek debt, now joined by German banks as well, is seen by optimists as reducing the chances of a default by Athens, and investors now appear to be betting that the Greek parliament will pass the latest austerity package in votes this week. The euro has sprung higher, and because its moves have of late been used as a broad risk appetite barometer by the more slavish among the trading fraternity, it has triggered a headlong rush back into racier plays. Meanwhile Christine Lagarde, confirmed as the new IMF chief, will immediately face tough decisions over the Greek bail-out, says the FT.
European officials have begun debating contingency plans in case the Greek parliament fails to approve a €28bn austerity package, which will be voted on after a three-day debate that began on Monday, the FT reports. The austerity measures have been agreed with international lenders as a condition of a July €12bn aid payment which Athens needs to avoid a sovereign default next month. The Financial Post says the ‘Plan B’ might is designed to ensure Greece gets the liquidity needed to avoid default in the absence of the next, €12bn tranche of its emergency loan package, due by mid-July. Barron’s adds that billionaire hedgie George Soros has suggested the need for a ‘Plan B’ to save the entire eurozone.