The pain in Spain … spreads to Italy

September 21, 2012

This morning, we exclusively report that Spanish Prime Minister Rajoy could be about to break another promise by freezing pensions and bringing forward a planned rise in the retirement age.

This latest austerity policy will be political poison at home but will give Madrid more credibility with its euro zone peers since that was one of Brussels’ policy recommendations for the country back in May. We know that at the end of next week the government will unveil its 2013 budget and further structural reforms which all smacks of an attempt to get its retaliation in first so that the euro zone and IMF won’t ask for any more cuts if and when Madrid makes its request for aid.

The pensions shift could well be kept under wraps until regional elections in late October are out of the way. It is less likely that the government can defer a request for help from the euro zone rescue fund, after which the ECB can pile into the secondary market, for that long given some daunting debt refinancing bills falling due at the end of next month.

Rajoy is in Rome today for talks with Italy’s Mario Monti. The Greek and Irish premiers, Antonis Samaras and Enda Kenny, are also there for a centrist political party gathering. They are all expected to hold bilateral with Monti as well. The only member of the euro debt club missing is Portugal although its prime minister is speaking in the Lisbon parliament.

Later in the day, Portuguese President Anibal Cavaco Silva’s consultative State Council meets to discuss government-proposed tax hikes that provoked massive street protests, sharp criticism by business leaders and unions and threatened to cause a rift in the ruling coalition of Prime Minister Pedro Passos Coelho. The president has the power to veto bills but is more likely to call for some sort of a compromise or alternative measures since the government has already said it will continue to discuss the plan with the unions and employers next week.

In Berlin, German Finance Minister Wolfgang Schaeuble – who has been saying Spain should not yet take a bailout because its borrowing costs have fallen in recent weeks – faces the press.

Italy’s plight was put into sharp relief yesterday when it cuts its 2012 GDP forecast to a contraction of 2.4 percent, doubling the previous forecast slippage. That made our analysis yesterday all the more timely. It showed how for all the hoopla, Monti’s labour and deregulatory reforms have done precious little to raise Italy’s trend rate of growth, which has been the lowest in Europe for a decade. Without improvement there, it is unlikely Rome can make any inroads into the national debt pile. To prove that point, the government revised up its deficit forecast for this year to 2.6 percent of GDP, from 1.7.

It would be interesting to hear Monti’s thoughts today.

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