The Italian Job
Italy has dropped out of the spotlight a little following the protracted political soap opera surrounding Silvio Berlusconi. But it remains perhaps the euro zone’s most dangerous flashpoint.
Prime Minister Enrico Letta now has some time to push through economic reforms, cut taxes and spending in an effort to galvanize activity. But already the politics look difficult.
Italy’s three main unions are to strike over the government’s 2014 budget plan. Former premier Mario Monti resigned as head of his centrist party after it supported the budget which he viewed as way too modest, lacking in meaningful tax cuts and deregulation.
The centre-right PDL, which makes up a fractious coalition government with Letta’s centre-left, is crying foul though for different reasons. The budget, which must be passed by year-end, is only a first step towards putting Italy right and it’s in trouble.
This week, Italy will sell debt from bills to bonds at three separate auctions. It has encountered few problems with debt-raising this year but given the backdrop, this bears watching. Rome starts off today with an offer of up to 3 billion euros of zero-coupon and inflation-linked bonds, then up to 8 billion euros of Treasury bills on Tuesday. On Thursday, it will auction up to 6 billion euros of five- and 10-year bonds.
If anyone needed reminding, there was a sobering warning from key ECB policymaker Joerg Asmussen, who said Italy’s fate will determine the euro zone’s and that it has to put itself right because it is too big to be rescued from outside. He went on to say Rome would do what is necessary. His colleague, Benoit Coeure, has declared the euro is out of the danger zone.
Dutch Finance Minister Jeroen Dijsselbloem, who chairs the Eurogroup of euro zone finance ministers, is in Spain. It seems certain that Madrid will not seek to extend its 41 billion euros banking bailout which expires at the end of the year. The European Commission has made positive noises about Madrid’s economic reform programme too, though with unemployment still above 25 percent no one can really call this recovery.
Third quarter Spanish GDP data are due later in the week. The Bank of Spain has already said it expects 0.1 percent growth, putting an end to nine quarters of contraction. Central bank governor Luis Maria Linde also speaks today.
Of growing concern to the euro zone will be the climb of its currency, up more than eight percent versus the dollar since early July. Countries like Spain have dragged themselves off the floor largely through exports. All well and good if they are staying within the euro zone but a chunk are going further afield and there, the currency appreciation will hurt.
However, it’s worth looking at the charts. The euro has essentially traded a $1.20-$1.60 range over the last five years and is now slap bang in the middle of it. So rapid action from the European Central Bank is unlikely although many expect a further long-term liquidity feed for banks next year.
Slovenia’s central bank chief is expected to hold a news conference at the end of an IMF mission visit. Having indicated that his country might need a bailout if borrowing costs don’t fall, Bostjan Jazbec said last week that it could be avoided despite bank bad loans totalling nearly eight billion euros – about a quarter of the whole economy. Bank stress tests, which could well be decisive, are due to be published in November.
An inconclusive result from Czech elections has sparked a round of jockeying for position and the Social Democrats who polled best with only 20.5 percent of the vote promptly called on its leader, Bohuslav Sobotka, to resign. He, almost as promptly, refused to go.
The split party wants to talk with the centrist party ANO, an anti-corruption movement started two years ago, and the centrist Christian Democrats to form a three-party coalition.
Israel, with a new central bank governor about to take the helm, is likely to leave interest rates at 1.0 percent. After serving as deputy governor for 5-1/2 years, Karnit Flug has been acting governor since July and under her leadership the monetary policy council cut rates by a quarter-point last month.