Tag Archives: Italy

LOTS OF FROTH, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

A brand new development in the history of the ECB has occurred: leaks yesterday revealed the broad outlines of its new sovereign debt securities’ purchase programme. One cannot help thinking that it was necessary to prepare the ground in advance, with the ECB decisions falling well short of some of the mounting speculation.

According to Mario Draghi, there will be no limit to the amount of bond purchases on the secondary market – but the scope of the announcement needs to be put into perspective. They will in fact be decided on a case by case basis, and not as soon as a specific threshold has been crossed: based on interest rates or spread for example. It has also been confirmed that it will concern securities with a maturity of between one and three years, something already anticipated recently by the market, judging by the result of the issues which have occurred.

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BEHIND THE SCENES, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

There are some sinister goings-on behind the scenes of the European financial system, which are hardly being proclaimed from the rooftops! Even Mario Draghi himself is preoccupied by it, drawing attention to vague manifestations of “fragmentation” which are developing at the heart of the Eurozone. What was he alluding to?

It is occurring in three stages: an ongoing capital flight from countries on the verge of the abyss, leading to their banks becoming increasingly dependent on ECB loans, with the liquidities then supplied by the latter being used to buy state-issued debt, in order, for the time being, to prop up the whole edifice.

The way to put an end to this ultimately destabilizing process would be to renew confidence in the continuity of the Eurozone. This explains the plan to put together a fiscal union, then a banking one, and finally a political union. But all this takes time, and there is precious little of that available. All the more so as the regulators themselves are pushing for a reduction in these financial establishments’ cross-border exposures so as to reduce systemic risk, thus accentuating a process that people are trying to stop elsewhere ….

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SURRENDER, YOU ARE SURROUNDED!, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

It is not just Italy and Spain causing problems, after the decisions taken during the last summit suffered a setback, in view of the spectacle of great confusion and nervousness we have witnessed with regard to the joint press release – which wasn’t one – from Spain, Italy and France demanding immediate implementation. Simultaneously, Greece is providing an example of the strategic retreat of the European authorities and of the IMF.

It is now the ECB and the Eurosystem which hold the vast majority of the Greek debt, a fact which has allowed the commercial banks to consider the countdown which has already begun with a far greater degree of equanimity. The same cannot be said for the European authorities.

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QUIET ON THE SET, AND… INACTION!, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

Events are moving fast. We were expecting it of Greece, but Spain is overtaking it. Yesterday evening, a human tidal wave invaded Spanish town streets, which these days have become virtually permanent places of mini-demonstrations at midday or after work. Today, at the very moment when the Eurogroup ministers were adopting the bail-out plan for the Spanish banks, the bond rate had edged up to 7.20% and the Madrid Stock Market plunged more than 5%. Instead of falling as had been predicted, the government has announced that the official unemployment rate is going to reach 24.6% by the end of 2012. A bona fide rescue package will soon be required, something the Bundesbank and the Members of the Bundestag have been advocating, seeing an opportunity to carry out yet another brilliant demonstration, associated with another round of austerity measures. Time will tell soon tell us which one will be first.  

Italy is likely to be the next domino to fall. Major stock values fell by around 5% on the Milan stock market, since the Italian banks are saturated with debt securities whose value is gradually falling as bond rates increase in line with Spain’s. The Spanish scenario is repeating itself due to the increasingly interconnected links between public and private debt which have developed over recent months. Italy may not have the colossal property bubble, but it has a public debt situation that is just as bad.

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FIRST IT WAS THE AGENCIES, NOW ITS THE FORECASTERS’ FAULT, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

“I can’t see any time soon when…the pressure will be off” replied David Cameron, the British Prime-Minister, in an interview with The Daily Telegraph. He continued, “this is a period for all countries, not just in Europe but I think you will see it in America too, where we have to deal with our deficits and we have to have sustainable debts”. In conclusion, his austerity policies are likely to continue beyond 2020, as the situation is “a lot tougher than the forecasters were expecting”. Georges Osborne, the Chancellor of the Exchequer, has already extended to 2017 the austerity plan of 2010, which was initially intended to last five years.

The prolongation of the schedule which is taking shape is now being referred to, in veiled terms, within the Eurozone, a good example being Jérôme Cahuzac, the French Budget Minister, when he announced that “ I’m afraid that reducing the debt may take a little longer” in reply to a journalist who was talking of one, two or three years.

In its annual report, the IMF has just outlined a road map for the Eurozone, advocating – when it actually makes any concrete proposals – measures which focus on pooling the debt, an issue which radically divides politicians. The continuing crisis, it now says, is raising questions about the viability of the monetary union because “its root causes remain unaddressed” and “the adverse links between sovereigns, banks, and the real economy are stronger than ever”.

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THE RESULT OF UNRAVELLING A BALL OF WOOL… FROM THE WRONG END, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

François Hollande has confirmed that the Government is going to propose for adoption an organic law (which a simple law cannot undo) in order to have the balanced budget rule adopted, on the advantageous pretext that it is provisional. There have been many occasions in recent French history when special measures have been adopted for their presumed importance, without ever leaving good memories behind.

At the same time, the debate in Europe continues to move on, focusing once again on the reduction of the banks’ debts. Thanks to the Wall Street Journal, we have learnt that during their latest meeting, the ECB advised the European Finance Ministers to force the senior debt-holders to participate in the bail-out of the Spanish banks. A 180° U-turn which was not actually followed, since the draft of the memorandum which is supposed to be adopted during the next Eurogroup meeting on the 20th July makes no mention of it.

According to the newspaper’s sources, the ministers did not wish to follow Mario Draghi’s proposals at the meeting, as they were afraid of how the markets would react. It was also out of fear that the Irish government would demand equal treatment, since to save the European banks – in particular the British ones – the Irish Government had to borrow money to pay off the senior creditors of their country’s banks. Nor would the Greek and Portuguese Governments have failed to jump on the bandwagon.

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WELL SPOTTED, BRAVO!, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

As already highlighted the Spanish government is already benefitting from a de facto rescue plan under another name. To save appearances, the new austerity measures put forward for vote in parliament have not been the object of a memorandum jointly signed with those providing the funds, as had previously been the case for other countries. In fact, the announcement of these measures came the day before that of the banking bail-out!

One major difference with the preceding rescue plans can be observed: the entirety of the 100 billion Euros loans provided – whose planned repayment schedule is staggered until June 2013 – is destined for the banks. The State will merely pass on the funds, something which has not prevented the Government from imposing austerity measures on the Spanish, even though the two things are not strictly connected.

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WHEN WE’RE NOT MOVING FORWARDS WE’RE GOING BACKWARDS…, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

The European Finance Ministers managed during the course of the night to finalize a minimal agreement, which needs, as usual, to be examined in detail due to its grey areas. They put together a set of nominations to the ECB and the ESM based upon the provisional re-appointment of Jean-Claude Juncker at its head, in the absence of any other solution. Then they reached a “tentative agreement” (another way of saying a broad outline) with regard to the particular case of Spain which needs to be wrapped up for adoption on the 20th July.

An additional year will be given to Spain to reduce its deficit and get back on track, which confirms that things are in the process of getting out of hand, and which depends on the new austerity measures that Mariano Rajoy is going to announce this week. These are said to include an increase in VAT, reduced social security payments, reductions in unemployment benefits and a revision of the methods used to calculate retirement benefits. A preview of the program has already been presented by the Spanish Finance Minister, Luis de Guindos.

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GUILTY PARTIES WANTED !, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

In accordance with the predictable script, the bond market is under pressure again. The cost of servicing Spanish and Italian debt has continued to increase as their financing plans move forward in little measured steps. The effect of all this is to place an additional burden on the budgets, undermining those measures which are intended to reduce the deficits.

The statistical institutes INSEE (France), IFO (Germany) and ISTAT (Italy) all agree: Europe is sinking into a recession which they describe as ‘technical” in an attempt to make it sound innocuous, but which, regardless of what they call it, amounts to the same thing. This is why the ECB has, unsurprisingly, just decided to cut its main interest rate.

It explained that it was trying once more to encourage banks to develop credit in a bid to restart the economy. With the markets having anticipated the move, there is no guarantee of success. Success is assured, on the other hand, for the Eurosystem in its role of bad bank, the central bank having once more lowering the bar for the collateral guarantees it will accept from banks in return for this operation. Once again, the hidden purpose is to ease the pressure on the banks.

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A BIG BANG, OR NOTHING , by François Leclerc

Guest post. Translated from the French by Tim Gupwell

With the G20 meeting being held in Mexico at the start of the week, our perspective will find itself altered, falsely accustomed as we are to only seeing the debt crisis from a European angle. On the 18th and 19th June, the greats of this world are going to gather in Los Cabos, a tourist resort in Southern Lower California, under the double auspices of debt and global recovery.

To avoid standing idly by whilst confronted by a disaster of its own making, the British Government has just announced a plan to relaunch the economy with banking credit, funded by a Bank of England liquidity programme. In the context of an overall 80 billion programme, there are plans for monthly injections of around 5 billion Pounds (6.1 billion Euros). But the question that needs to be asked is whether the results will be as inconclusive as those obtained from the ECB’s massive injections, or indeed the tireless pursuit of zero-rate loans (from 0% to 0.1%) by the Bank of Japan – still without any further success – and whose 700 billion Euro acquisition programme of private and corporate securities is still in force.

The British Government wants to make these banking loans conditional on the latter making specific commitments, but hasn’t this been heard before? The monetary policy instruments of the Central Banks merely allow more time to be bought, and do not resolve any of the unanswered questions.

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THE RAMIFICATIONS OF THE SPANISH BANKING BAIL-OUT, by François Leclerc

Guest post. Translated from the French by Tim Gupwell.

Some important details are still lacking with regard to the Spanish banking bailout plan: its final amount, which is going to depend on the results of the audit commissioned by the government; its rate, which we will be coming back to; and the stabilizing measures for the banks which will be associated with it. These will include massive lay-offs in the banking sector and will further worsen the unemployment situation.

One other aspect has, however, not been highlighted enough. The funds will have to be paid out – at least initially – by the EFSF, which itself will borrow them on the financial markets using the guarantees of its members (which include that of Spain itself). It remains to be seen under these conditions, at what rate the EFSF will be able to borrow in order to then lend on to Spain. The whole of the edifice will be further weakened, with the guarantees relying de facto on an increasingly limited number of countries.

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