MacroScope

The Greek government pulled it off last night, winning parliamentary approval for an austerity package which offers yet more deep spending cuts, tax rises and measures to make it easier and cheaper to hire and fire workers. But boy was it tight. With the smallest member of the coalition rejecting the labour measures, Prime Minister Antonis Samaras carried the day by just a handful of votes. The overall budget bill is expected to be pushed through parliament on Sunday.

So the show remains on the road and this government has shown more resolve than its predecessors which may buy it some goodwill from its lenders. Attention today turns to the monthly policy meeting of the European Central Bank, a key player in negotiations to put Greece’s debts back on a sustainable path.  Mario Draghi could well rule out taking a haircut on the Greek bonds it holds, something the IMF has pushed it and euro zone governments to do but which Germany and others won’t countenance.  However, the ECB could forego profits it has made on Greek bonds it bought at a steep discount. Those profits have to be funneled through national euro zone central banks and would only be realized when the bonds mature but it would still help.

Greece is set to get two more years to make the cuts demanded of it and EU economics chief Olli Rehn told us yesterday that lengthening the maturities on official loans to Greece and lowering interest rates on them could be done but a haircut was out. There is the possibility of a meeting of the Eurogroup Working Group (the expert officials who prepare for euro zone finance ministers’ meetings) but it seems less likely that a deal will be struck at next Monday’s Eurogroup meeting, with officials now giving themselves until the end of November to come up with something. There were suggestions that Washington had urged big decisions to be put off until after the presidential election. True or not, that roadblock is now out of the way.

The ECB is expected to leave rates at a record low 0.75 percent even though Draghi was decidedly gloomy about the state of the currency bloc’s economy on Wednesday. Nonetheless, he is champing at the bit to put his bond-buying plan into action and probably wants to keep focus on that rather than a rate cut which wouldn’t do much to revive the economy. On that front, if he gives any further detail on how he will demonstrate the ECB will not be a preferred creditor on any bonds it buys it will be of serious interest to investors.

A Reuters poll last week gave an 80 percent chance the ECB will hold its main rate at 0.75 percent, though most of the 73 analysts polled expected a cut to a new record low of 0.5 percent within the next few months. Draghi is not likely to say much about Spain while its request for help is pending

The American people have spoken but for the markets the votes of 300 Greeks could be of even more importance in the short-term. German Bund futures have opened flat, not really reacting to Obama’s victory, while European stocks have eked out some early gains.
       
We await a knife-edge parliamentary vote in Athens on labour reforms to cut wages and severance payments, which the EU and IMF insist are a key part of a new bailout deal, but which the smallest party in the coalition government has pledged to vote against. That leaves the two larger parties – New Democracy and PASOK – with a working majority of just nine lawmakers and on a less contentious vote on privatizations, a number of PASOK deputies rebelled. Ratcheting up the pressure is a second day of a general strike which will see thousands take to the streets.

We know that the troika has advised that another 30 billion euros needs to be found to keep Greece afloat. We also know that the IMF has been pressing for the ECB and euro zone governments to take a writedown on Greek bonds they hold, which Germany refuses to do so (which means it won’t happen, for now at least). The Eurogroup is awaiting the troika’s final report and it’s looking less likely that a definitive plan will be signed off at next Monday’s meeting of euro zone finance ministers.

Nonetheless, it’s in no one’s interests to let Greece crash at this point so the presumption is a deal will be done, probably featuring Greece getting two extra years to make the cuts demanded of it, extending maturities on its loans and cutting the interest rates. Talk of the ECB foregoing profits on the Greek bonds it holds (rather than taking a loss, since it bought them at a steep discount) continues to do the rounds. A further German condition is for a ring-fenced escrow account to hold some Greek tax revenues to ensure that it services its loans. Greece will probably also be allowed to issue more t-bills to tide it over though that requires the ECB’s acquiescence since Greek banks are entirely dependent on central bank liquidity and have been offering those t-bills up as collateral. Mario Draghi is speaking today.

El Pais has seen tomorrow’s European Commission forecasts for Spain and they’re grim. The Commission predicts the economy will slide by 1.5 percent next year while Madrid’s forecast is for a 0.5 percent contraction. That puts the target of getting the budget deficit down to 3 percent of GDP  even harder to attain – the Commission predicts a deficit of 6 percent next year and 5.8 percent in 2014 while the Spanish government insists it will get it down to 2.8 percent in two years’ time.

Peering through the numbers, the key question is whether this vista will make it more likely that Spanish Prime Minister Mariano Rajoy will seek help from the euro zone rescue fund, after which the European Central Bank can intervene to buy Spain’s bonds.

Rajoy has been in no hurry to seek help and given Spain’s funding needs for this year will be met in full after an auction on Thursday there is no pressure on that front. But with the economy in dire straits its borrowing needs are likely to climb next year so a pre-emptive strike would have some merit. It would also give the euro zone the broader benefit of showing the ECB will put its money where its mouth is. ECB policymaker Ewald Nowotny said yesterday that the ECB’s bond-buying programme should be put into use to dispel market doubts – not that that is a consideration for Rajoy.

Following Silvio Berlusconi’s threat to demolish Mario Monti’s government, Italy will try to sell up to four billion euros of five- and 10-year bonds at auction today. It will get away but investors could be forgiven for being nervous. Monti was in Madrid yesterday and issued a veiled plea for Spain to seek help from the euro zone rescue fund, which would trigger ECB bond-buying, in the hope that would drive down Italian borrowing costs too. But Spain, with nearly all of its 2012 funding done, is in no hurry.

Monti continues to insist Italy doesn’t need to seek help itself but said the ECB needed to be seen in action, rather than just offer speculators the threat that it could intervene, in order to keep the euro zone shored up. One suspects that is true.

Also last night, Sicilian election results showed the centre-left Democratic Party and anti-establishment 5-Star movement cleaned up at the expense of Berlusconi’s party. Perhaps the most worrying figure was the record low turnout by an electorate disillusioned by constant austerity. The possibility of Monti retaining the premiership after spring 2013 elections has helped keep market attacks at bay. In reality, that looks unlikely although he could take over the presidency to retain some voice and influence. The fractured nature of Italian politics raises the threat of no solid government emerging from the general election. Fitch cut Sicily’s rating to BBB late yesterday and warned of more to come.

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.

The Greek standoff continues. The Democratic Left, a junior party in the government’s coalition, could not be swayed and said it would vote against labour reforms demanded by the EU and IMF, so a deal putting Greece’s bailout terms back on track remains elusive.

Just as worryingly, Reuters secured an advance glimpse of the EU/IMF/ECB troika’s report on Greece which showed the debt target of 120 percent of GDP in 2020 will be missed (surprise, surprise) and as things stand will come in at around 136 percent. In other words, 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 European Central Bank and euro zone governments.

We know the IMF is very keen on the latter, 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. 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 alone look like they’ll make enough of a dent in Greece’s debt mountain. Athens looks set to get the extra two years it requested to make the cuts demanded of it, which also falls into the “necessary but insufficient” category.

Big day in Berlin with European Central Bank chief Mario Draghi entering the lion’s den of the Bundestag to explain to German lawmakers why his plan to buy sovereign euro zone bonds in potentially unlimited amounts poses no threat to the ECB’s remit and the euro zone economy.
Former ECB chief economist Juergen Stark – one of Draghi’s most trenchant critics – told us yesterday that the ECB president must present much more convincing arguments than hitherto as to why the plan would not pile enormous risks onto the ECB’s balance sheet for which European taxpayers could have to pay.

The session, which will include 10-minute introductory remarks from Draghi followed by a lengthy Q&A and then short public statements from Draghi and Bundestag President Norbert Lammert, is a rarity. The hawks in parliament will demand to know how bond-buying is remotely in line with the ECB’s mandate. The more moderate will at least want to hear what sort of conditionality the ECB wants to see before it leaps into the breach, and the backdrop is coloured by continued Bundesbank opposition to the Draghi strategy. Angela Merkel is speaking at a separate event in Berlin in, as does Wolfgang Schaeuble later in the day.

Spain will probably loom largest for the German lawmakers but Greece continues to run it a close second with suggestions growing that it will get an extra two years to make the cuts demanded of it. But even that may not be enough for the EU/IMF/ECB troika of inspectors to conclude that Athens’ debt sustainability programme is back on track. The IMF appears to believe that only a writedown of Greek bonds held by the ECB and euro zone governments will do the trick. They, predictably, are not keen.

Spanish Prime Minister Mariano Rajoy secured an overall majority in regional elections in Galicia over the weekend but in the Basque country, the nationalists were the big winners. These polls have been identified as one reason why Rajoy has held off asking for sovereign aid and Catalan elections still loom next month. Rajoy is likely to have to offer politically poisonous pension reforms in return for outside assistance.

So far, we seem to be no closer to a bailout request, which could then trigger European Central Bank intervention, and with 10-year yields having dropped more than two percentage points from a 7.5 percent peak since Mario Draghi’s vow to do whatever it takes to save the euro, one could reasonably ask why Madrid should be in a hurry. Some officials are saying Spain could quite comfortably wait until the turn of the year, leaving a prolonged period of limbo.

The fact is that if market pressure comes back on, Spain can quickly approach the euro zone’s ESM rescue fund for help and the ECB can pile in thereafter. So what has happened is that a bit of fear has been put back into investors intent on shorting the euro zone periphery to their hearts’ content; fear that wasn’t there until recently. It looks increasingly likely that Madrid would seek a precautionary credit line from the ESM, with conditions attached, which in theory could allow the ECB to buy Spanish bonds without the government actually taking money from the rescue fund. That would be a much easier sell politically.

Folklore and modern horror are replete with tales of people summoning  ghosts by recanting their name or chanting a particular phrase. Centuries ago there was Bloody Mary. The 1980s brought us the Evil Dead trilogy and Beetlejuice, while Candyman appeared in the 90s.

And in the 21st century there is the euro zone debt crisis, conjured repeatedly by the phrase from Europe’s leaders, “The worst is over,” and variations thereof.

French President Francois Hollande was the latest to tempt the crisis apparition on Wednesday night:

The day before an EU summit that probably won’t come up with anything decisive in crisis management. If that sounds rather underwhelming beware. There’s an awful lot of jockeying for position over when Spain will seek sovereign help, the Greek troika talks continue to look messy with time running very short and the leaders would be very well advised to demonstrate that their longer-term plans for closer integration are not running out of puff – item one on that agenda is getting plans for step one of a banking union back on track.

We could get a decent crack at this today with a number of EU leaders, including Angela Merkel, Spain’s Mariano Rajoy and Greek premier Antonis Samaras, gathering in Bucharest for a centre-right political congress.

On the jockeying front, German Finance Minister Wolfgang Schaeuble has called for a leap forward in euro integration, particularly in terms of fiscal union with a commissioner given power over members’ budgets. That’s going to prompt some heated debate in Brussels on Thursday/Friday with France, in particular, likely to be aghast.