New Greek Prime Minister Antonis Samaras is next in line for the hot seat. The Eurozone continues to unfold while the politicians sit back and watch, and ultimately the fate of everything will likely depend on what happens with Greece.
A recent release from BNP Paribas has more updates on Greece, along with Italy, Portugal, and the little known until disaster struck last week Cyprus.
- Italian cabinet passes EUR 26bn of spending cuts: Developments in the aftermath of the EU summit suggest the Italian government is trying to capitalise on its political victory at EU level to push ahead with the reform agenda. A case in point is the cabinet’s approval of EUR 26bn worth of spending cuts through 2014 (EUR 4.5bn this year, EUR 10.5bn in 2013 and EUR 11bn in 2014) early this morning. The spending cuts will affect the public healthcare system, reduce the size of the public sector and force central and local government to scale back expenditure. Prime Minister Mario Monti said that “the savings will allow us to avoid an increase in the value-added tax of 2 percentage points that was scheduled for October”. The VAT increase has now been pushed back to July next year. The deputy finance minister, Vittorio Grilli, noted that in order to do away with the need for a VAT increase altogether, the government will still have to save an additional EUR 6bn.
- Portugal likely to miss its fiscal target for 2012: According to a report released yesterday by the parliamentary budget office, Portugal is unlikely to meet its budget target for this year. The budget office said the slippage in tax revenues versus target were the main reason for the lapse.
- This report follows last week’s release of Portugal’s budget numbers for Q1 2012, which showed that the Portuguese budget deficit reached 7.9% of GDP in Q1 2012, up from 7.5% in Q1 2011 and close to our estimate of 7.8% of GDP. Spending fell by close to 3.5% y/y, but revenues also fell, by 14% y/y.
- According to the parliamentary budget office, even though the bulk of the government’s planned expenditure cuts have yet to be implemented, the revenue slippage from the start of the year suggests that the deficit target of 4.5% of GDP is likely to be overshot.
- In our view, this overshoot could be as much as 1pp (for more details, please read our article entitled Portugal: Walking on Thin Ice, published in last week’s Market Mover).
- Portuguese constitutional court rules 13th- and 14th-month pay cuts for civil servants and pensioners are unconstitutional: Yesterday, the Portuguese constitutional court ruled that the wage and pension cuts implemented by the government for 2012 and 2013 were unconstitutional, arguing that the move prevented the equal treatment of all citizens. The court added, however, that the measure can still be applied for 2012, as its cancellation at this stage could have severe consequences for the national deficit target. For 2013, however, other measures will have to be found to replace the cuts.
- Note that the government expected to save close to EUR 1bn (0.6% of GDP) with these cuts and, according to comments made yesterday by the Portuguese prime minister, it could be replaced by similar measures applicable to all taxpayers. One option would be a repeat of the tax increase implemented last year that was equivalent to half of the Christmas pay of all workers. However, this revenues generated would fall short of the EUR 1bn objective, so a more substantial tax increase, equivalent to a full month’s pay would probably be needed.
- This option would carry political costs, however. The Portuguese deficit will be above target for this year, and despite some leeway from the Troika, further measures will probably need to be taken already in 2012 and 2013, making broad political backing for further tax increases more difficult to achieve.
- New Greek prime minister has his first meeting with the Troika: Greek Prime Minister Antonis Samaras “repeated the basic positions regarding the future of the Greek economy as set out in his letter to leaders of the eurozone attending the recent EU summit (where he asked for some “necessary modifications”)”, according to a statement released by his office, after the prime minister’s first meeting with the Troika. He added that the government is “determined to proceed more effectively with fiscal adjustment and to speed up structural reform in order to ensure economic recovery, create jobs and secure social cohesion”.
- Meanwhile, Finance Minister Yannis Stournaras noted that “the programme is off track and we can’t ask for anything from our creditors before we get it back on course”. Mr Stournaras is to meet with the Troika officials again on Sunday, after the government presents its policy agenda in parliament today. He will then attend the Eurogroup meeting on Monday. As we highlighted yesterday, although the eurozone finance ministers could decide what stance they will take with respect to the review and renegotiation of the Greek programme at their meeting on Monday, before the Troika team finalises its review of the the Greek programme and provides an assessment of Greece’s progress, in-depth discussions regarding a possible renegotiation of the programme are unlikely.
- Cyprus could still receive a loan from Russia: Despite asking for financial support from its eurozone peers, news yesterday suggested that Cyprus has still not closed the door to a possible loan from Russia. Cypriot President Demetris Christofias said that Cyprus needs the money to develop its economy and to recapitalise its banks. “The Russians, as good friends of Cyprus, want to take care of us,” he said. According to Reuters, when asked whether he would rather receive a loan from Russia or the EU, he said “we could combine both … Let’s just hope we manage both.”
- Cyprus may still be sceptical about funding from the EU, as the conditionality attached to it would be exacting, as for the programmes for Greece, Portugal and Ireland. Therefore, if part of the money the country needs for its bank and funding needs comes from Russia, it could try to secure the best possible bailout terms from its eurozone partners.
Also included in the report is this chart comparing sovereign credit ratings and CDS spreads across the Eurozone.
We can see that Portugal, for example, is still trading at levels consistent with further downgrades.
Here’s a table laying out where the big 3 credit raters place the Eurozone nations.