New Italian turbulence

October 29, 2012

With Spain content to sit on its hands for now (European Central Bank policymaker Nowotny highlighted the status quo on Sunday, saying Madrid is fully financed for the rest of the year), Greece and Italy will hold the euro zone spotlight for the next few days.

Yesterday, we reported that the EU and IMF have refused to offer any further concessions on the labour reforms they are demanding and which one party in Greece’s ruling coalition refuses to countenance. The government could just about carry a vote in parliament without the support of the Democratic Left but it would only take a handful of rebels within the New Democracy and PASOK parties to turn the tables. So we’ve got another standoff. The bill is due to go to parliament next week.

With the debt numbers clearly not adding up, more money – up to 30 billion euros —  is going to be needed, be that via lower interest rates and longer maturities on loans and/or a writedown on Greek bonds held by the ECB and euro zone governments. Athens looks set to get the extra two years it requested to make the cuts demanded of it.

We know the IMF is very keen on an official sector writedown, believing that is the only way the numbers can be made to add up. We also know that Germany and others are just as resistant. German Finance Minister Wolfgang Schaeuble again ruled out on Sunday accepting a haircut on Greek bonds. Worth watching French President Francois Hollande’s meeting with IMF chief Christine Lagarde today.

Other schemes, such as Athens using privatization proceeds to buy back bonds, which has inbuilt leverage since it can do so at a quarter of their face value, may yet come into the mix but don’t look like they’ll do enough alone. What is clear is that the euro zone will accept pretty much anything that keeps the show on the road which won’t cost Germany and others lots more money while the IMF has set the bar higher, and will need to be convinced that debt sustainability is back on track.

The other one to watch is Italy where the convicted but appealing Silvio Berlusconi threatened on Saturday to bring down Mario Monti’s government not, he said, because of his being found guilty of tax fraud, but because of the “spiral of recession” that austerity policies were creating. For some time, we’ve penciled in spring Italian elections as a key moment but could that point come much sooner? Monti’s government of non-elected technocrats would lose its majority and have to resign if most of Berlusconi’s PDL party withdrew support. On top of that, tens of thousands of people marched through Rome for “No Monti Day”. We’re also awaiting results from Sunday’s Sicilian elections. Counting begins today.

Monti meets Spanish Prime Minister Mariano Rajoy in Madrid with the focus, unusually, more on the Italian than the Spaniard. Well worth watching Italian spreads today and Rome is also flogging a hefty 8 billion euros of 6-month bills. Monti would be very happy to see Spain seek help from the euro zone rescue fund, after which the European Central Bank could buy its bonds. But with Madrid needing to raise next to money in the short-term, it is in no rush.

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