A new report from Citi provides a well rounded update on the sovereign debt crisis going on in Europe. You don’t have to read much to see that there is mountains of bad news pouring out of the Eurozone right now.
European Central Bank President Mario Draghi was the top news this week with his outspokenness in regards to taking action. Said action of course, whatever that may be, is what will make or break what’s left of the crumbling European territory.
Draghi on Euro — In a speech in London yesterday, ECB President Mario
Draghi said that “Within our mandate, the ECB is ready to do whatever it takes to
preserve the euro. And believe me, it will be enough.” His comments suggest that
the ECB is less opposed to supporting sovereign bond markets again either
indirectly through multi-year LTROs or directly through the use of the SMP.
However, in our view, such action is only likely after governments act first, i.e. by
activating the bond market support facility for Spain and Italy.
Response to Draghi comments — The IMF and French FM Moscovici
welcomed Mr Draghi’s comments, but so far there has been no reaction from
Germany. In our view, the lack of comments from Germany is unlikely to signal
Spain — Spanish sources quoted by Reuters say Spain is not about to request
financial assistance. Spanish FM de Guindos indicated that he had never
believed there was even the remotest possibility that Spain would need a bailout.
However, Belgium’s FM Reynders suggests Spain needs more help.
France — France’s independent OFCE forecasting institute says that France will
struggle to hit the 2013 budget target of 3% of GDP.
Italy — Employers’ organization Confindustria sees Italian economy contracting
further and unemployment continuing to rise.
Greece — In Athens yesterday, EU Commission President Barroso highlighted
the importance of Greece delivering the measures requested under the bailout
programme. According to a Reuters report, Greece has identified cuts of €11.7bn
for 2013/2014. IMF spokesman says it is premature to talk about the outcome of
the Greek programme discussions. Greek bank deposits fall in June.
Ireland returned yesterday to the long-term bond markets for the first time since
Portugal — OECD says Portugal’s implementation record sound but
recommends more reforms.
Hungary — Government may revise the Financial Transaction Tax on EC
Economic data released today — Spanish unemployment reaches 24.6% in
Q2. Available data from German states suggest that inflation was flat or slightly
up in July. Consumer sentiment declined in France in July.
“Whatever it takes to preserve the euro”: In a speech in London ECB
President Mario Draghi said that “Within our mandate, the ECB is ready to do
whatever it takes to preserve the euro. And believe me, it will be enough.” He
added that he thinks that the “euro is irreversible” but did not want to give an
estimate on the chances of a country leaving the euro area. According to Mr.
Draghi “the euro area is much, much stronger than people acknowledge today.”
In his speech he stressed that the mandate of the ECB is price stability and that
the ECB does not want to supplement actions that can be taken by governments.
Comment: Mr. Draghi is now also outspoken in respect of taking unconventional
measures to preserve the euro. His comments suggest that the ECB is less
opposed to supporting sovereign bond markets again either indirectly through
multi-year LTROs or directly through the use of the SMP. However, in our view,
such action is only likely to be taken after governments have taken action first,
i.e. by activating the bond market support facility for Spain and Italy.
IMF welcomes Draghi Comments, German officials quiet so far. Yesterday
IMF spokesman David Hawley welcomed the ECB President’s statements saying
that “Mr. Draghi’s remarks are a welcome reiteration of the ECB’s well-known
commitment to do what is necessary.” We have so far had no reaction from
German officials, neither from the Bundesbank nor government or opposition
politicians. Also the media is relatively quiet on the issue. However, the
economics editor of Die Welt in a commentary described the ECB as a “Trojan
Horse”, arguing that the ECB might buy periphery bonds in a major way and thus
would no longer stand for stability in the euro area. Comment: As expected the
IMF welcomed Mr Draghi’s comments, but it is somewhat surprising that so far
there have been no comments from German officials. In our view, the lack of
comments from Germany is unlikely to signal quiet agreement. It probably
reflects more that some of the protagonists are on holiday and that German
politicians normally hold back from criticising the ECB.
French FinMin welcomes Draghi statements – French Finance Minister Pierre
Moscovici in a news conference also praised Mr Draghi’s comments which
indicated that the bank was ready to act to lower unreasonably high government
borrowing costs in countries where these hampered the transmission of
monetary policy. Mr Moscovici, responding to a question on whether the EFSF
should be used to buy Italian and Spanish sovereign bonds, said that “on the
issue of market intervention, [that option] should not be ignored,” adding that “it
cannot forever remain a line in the conclusions of a European Summit. The ways
and means, the best instruments and the best mechanisms, must be found.”
According to Reuters, Mr Moscovici also remarked that in his view, solutions to
the debt crisis could not wait until after the summer. Comment: With the ECB
seemingly prepared to do more to contribute towards ensuring the financial
stability of the euro area, Mr Moscovici is satisfied given the very clear position of
the French Government about the need for greater ECB involvement. However,
we suspect that the ECB will only play its part after the EFSF bond-buying
programme has been activated, after a country applies formally for financial
Spanish sources quoted by Reuters say Spain not about to request
financial assistance – Reuters quoted a number of sources on Thursday
denying German and Italian newspaper reports on Thursday that Spain was on
the point of asking the euro zone’s EFSF rescue fund for help. However, sources
acknowledged that some action was possible later this year. One of the sources
indicated that “neither a total rescue of the Spanish economy nor a bond-buying
program from the EFSF is being looked at”. Another source added that “we have
to respect the times, the rhythms. Spain sought aid for the banks on June 9 and
we only signed the final agreement this week … The government is not looking at
that (further rescue),” adding that “some instruments are not even up and
running. It would not make sense to make statements about mechanisms which
don’t exist”. Late on Thursday, Spanish Finance Minister Luis de Guindos
indicated that he had never believed there was even the remotest possibility that
Spain would need a bailout. He added that “in the medium and long term. Spain
is solvent and able to pay its high debts. In the short-term, we have the capacity
to meet our obligations.” According to Reuters, he also noted that the
government coffers were in the same liquidity position as last year. Finally, he
qualified ECB President Draghi’s comments on the euro area as being “well
timed”. Comment: a lot of manoeuvring is taking place behind the scenes, but it
seems that a financial assistance programme for Spain remains at least a few
weeks away, perhaps during the course of September. Statements from Mr de
Guindos suggest that the government remains strongly opposed to a bailout
beyond the programme for banks.
Belgium’s Reynders suggests Spain needs more help – Belgium’s Foreign
Minister Didier Reynders was quoted by Spanish newspaper El Pais suggesting
that Spain should seek additional assistance. He noted that “we only received
one request from Spain: money for the banks. I am not sure it will be enough. I
see that there are now problems in the regions. The government has to say it
needs more. Not necessarily money. Maybe it would be useful to ask for more
time to comply with the commitments. Or seek more money. Maybe it would be
useful to organise something with the ECB.” He remarked that, while the ECB
should be able to support struggling member states directly if such a request was
made, such a move would only be possible if member states asking the ECB for
assistance committed to a programme to bring down their deficits. Comment:
We have sympathy with the view expressed by Mr Reynders whose experience
of European financial matters should not be overlooked.
France to struggle to hit 2013 budget target of 3% of GDP says OFCE -
France’s OFCE forecasting institute, an independent consultancy part of the
Sciences-Po University, anticipates that the government’s fiscal tightening will
lead to lower growth in 2013 than the 1% assumption used in the 2013 budget.
The OFCE baseline envisages a GDP gain of only 0.1% and argues that the
government will have to choose between bringing the budget deficit to zero in
2017 and a lower unemployment rate. Comment: We essentially agree with the
OFCE’s findings which conclude that the government will need to find an extra
€10bn to reduce the budget deficit from 4.5% of GDP in 2012 to 3% in 2013. Our
baseline envisages a GDP fall of 0.2% in 2013 and a budget deficit of 3.8% of
Confindustria sees Italian economy contracting further and unemployment
continuing to rise. According to Il Sole 24 Ore, the country’s employers’ lobby
Confindustria said that Italy’s GDP will continue to fall and unemployment will
continue to rise, driven partly by an increase in the number of women looking for
work to boost family income.
Barroso in Athens: Commitments must be honoured. After seeing officials in
Athens, EU Commission President Jose Manuel Barroso highlighted the
importance of Greece delivering the measures requested under the bailout
programme. He added that “Greece should stay in the euro as long as the
commitments made are honoured” and also highlighted that “European Union
and the wider international community have shown unprecedented solidarity with
the people of Greece”. In respect to the broader measures to deal with the
sovereign debt crisis, Mr. Barroso highlighted the importance of working towards
a banking union. In that respect he said that the Commission will present a
proposal on the structure of a single banking supervisor (the ECB) in early
September. He also emphasised the role of the ECB saying that together with
national governments and the EU Commission the ECB “will do whatever is
necessary to secure the financial stability of the euro area.” Comment: While Mr.
Barroso makes clear that the Europeans are willing to continue supporting
Greece, he made very clear that Greece has to fulfil its commitments under the
bailout programme. His comments also make very clear that he welcomes the
statements by Mr. Draghi.
Reuters report that Greece has identified cuts of €11.7bn for 2013, 2014.
Greece has put together a plan to save nearly €12bn over the next two years. A
Greek official told Reuters that the €11.7bn in savings for 2013 and 2014 will be
submitted for approval to the troika after the three parties in PM Samaras’
government sign off on it on Monday. According to the report, €5bn of those cuts
will come from areas overseen by the labour ministry, including pensions and
welfare benefits. The remaining cuts will be spread out across various ministries,
including a substantial amount from the health ministry. The troika is due to wrap
up its visit in early August but is not expected to finalize its assessment of
Greece’s progress until September.
IMF spokesman says that it is premature to talk about the outcome of the
Greek programme discussions before they have even started. IMF expects
discussion on Greek programme to continue in September and said that
assessing Greek debt sustainability will be part of the work which the IMF will do.
Fall in bank deposits in Greece. Data from the ECB published yesterday
showed that deposits in Greek banks fell by 4.3% month on month in June.
Ireland yesterday returned to the long-term bond markets for the first time
since September 2010. The National Treasury Management Agency (NTMA)
raised €5.2bn in total at a weighted average rate of 5.95%, made up of €4.2bn in
new money, of which €3.9bn came from a new five-year bond at 5.9% and
€1.3bn from an existing 2020 bond at a yield of 6.1%. The remaining €1bn came
from debt due to be repaid in 2013 and 2014 which was switched into longerterm
bonds. According to the NTMA, international lenders provided an estimated
60% of the money raised. Note that on 5 July, the NTMA had tested the water by
raising €500 million in three-month treasury bills at a yield of 1.8%. Finance
Minister Michael Noonan said yesterday that the strong demand and the €4.2bn
of new money from investors was a “significant step for Ireland in regaining our
OECD says Portugal’s implementation record sound but recommends more
reforms and sees regaining of market access during the programme period
as challenging. The OECD published yesterday its latest country review of
Portugal. The review concluded that: the government is resolutely implementing
the EU-IMF financial assistance programme of fiscal adjustment and reform and
that as a result significant legislation has been passed, with broad political
support, to improve the performance of the labour and product markets.
However, the OECD recommended that Portugal:
– (i) Further reduce severance pay and introduce binding arbitration in conflicts
– (ii) Further promote firm-level wage bargaining by abolishing administrative
extension of collective agreements; and
– (iii) Adopt action to boost the educational levels of children from the lower
Moreover, the OECD concluded that: “The programme is expected to remain on
track but the balance of risks is skewed on the downside. The size of the
consolidation is very large and the risk that fiscal targets are not met because
growth undershoots expectations in a credit constrained and weak international
environment is significant. Therefore, the government faces additional challenges
to regain full market access within the programme period.” Portugal’s fiscal
consolidation for 2012 is worth 5.4% of GDP but our estimates suggest that given
the underperformance of fiscal revenues in the year to date and the likely
increase in social security outlays, the government is unlikely to be able to meet
the target of 4.5% of GDP for the deficit.
Hungary — Government may revise the FTT on EC pressure. The
government may revise the Financial Transaction Tax (FTT), if the EC starts an
infringement procedure. The IMF and EU are asking for expenditure cuts to
ensure a durable fiscal adjustment.
Economic data roundup:
– Spanish unemployment reaches 24.6% in Q2. According to figures
published today by INE, the unemployment rate rose further to 24.6% in Q2
(from 24.4% in Q1). This compares with a government forecast published in
the country’s Stability Programme for 2012-15 of a rate of 24.3% in 2012 and
our own forecast for an average rate for 2012 of 24.7%. Moreover, while we
expect Spanish unemployment to climb further to 26.1% in 2013, the Spanish
government’s latest forecast is for a slight decrease in the unemployment rate
to 24.2% in 2013.
– German inflation: Available data from North Rhine Westphalia (NRW) and
Saxony suggest that inflation was flat or slightly up in July. Compared to June,
the CPI in NRW and Saxony increased by 0.4% MM in July. This is below our
forecast of +0.6% MM for pan-Germany, which would have led to an increase
in the pan-German inflation rate from 1.5% to 1.7%. The remaining four states
covered by the flash estimate for Germany will report during the day.
– France: Consumer sentiment declined from downwardly revised 89 (prel
90) in June to 87 in July. This was clearly below the consensus (90) and our
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