MacroScope

How many politicians does it take to change a government?

Talks between Angela Merkel’s CDU and the centre-left SPD will resume on forming a German grand coalition but any agreement is probably weeks away yet.

With the Greens having bowed out at least we now know it will be a joint administration of the big two parties or fresh elections. The former remains odds on.

The SPD is scarred by its experience of coalition in the last decade, when its support slumped, but it’s probably the lesser of two evils for the party since a new vote would be quite likely to increase Merkel’s support. She only just missed out on a rare overall majority first time around.

SPD leaders will be pushing for concrete concessions from Merkel on a minimum wage, something Germany does not have. Without that, it may be difficult for them to sell the idea of entering full-blown negotiations to a meeting of 200 senior SPD members scheduled for Sunday.

After the afternoon talks wind up, Merkel will meet European Council President Herman Van Rompuy for talks ahead of an EU summit later in the month.

A jobless guide to interest rates

The Bank of England’s decision to peg any move in interest rates to the downward progress of unemployment has invested the monthly figures, due today, with huge importance.

In a nutshell, markets don’t believe the jobless rate will take the best part of three years to fall from 7.7 percent to below 7.0, the point at which the Bank said it could consider raising rates from a record low 0.5 percent. For what it’s worth, the consensus forecast is for the rate to be unbudged at 7.7 in August.

There are some reasons to think the Bank might be right – an ageing population working longer, slack within companies (such as part-time working) which can be ramped back up again before any new hiring takes place – but if markets continue to price in a rate rise early than the Bank expects, then it has de facto policy tightening to deal with.

A tale of two budgets

 

It’s deadline day for euro zone member states to submit their 2014 budget plans to the European Commission for inspection and we’re waiting on Italy and Ireland.

Having survived Silvio Berlusconi’s attempt to pull the government down, Prime Minister Enrico Letta’s coalition has to overcome differences on tax and spending policy.
The aim is to agree a 2014 budget that reduces labour taxes by some 5 billion euros but also undercuts the EU’s 3 percent of GDP deficit limit, so spending cuts will be required.

Rome has a chequered track record in that regard. The cabinet will meet at 1500 GMT to try and agree a comprehensive package. A Treasury source said the scale of tax cuts would be dictated by how much the various government ministries are prepared to forego.

Of euro budgets and banks

Euro zone finance ministers meet today and will have one eye on budgetary matters given a Tuesday deadline for member states to send their draft budgets to the European Commission for inspection, and with protracted German coalition talks keeping other meaningful euro zone reform measures on hold.

Most draft budgets are in but we’re still waiting on Italy and Ireland. Dublin will unveil its programme on deadline day. Italy’s situation is more fluid so we may get something today.

Over the weekend, Dublin said it may quit its bailout by the year-end without any backstop in the form of a precautionary credit line. That would rule it out for ECB bond-buying support, which it probably also doesn’t need. But it needs at least the 1.8 percent growth forecast for next year to keep bearing down on debt.

This little piggy went to market

Italy and Spain are both set to launch syndicated bond sales today, taking advantage of temporarily benign market conditions and maybe with a weather eye on the U.S. debt stalemate which could soon throw the world’s markets into turmoil with an Oct. 17 deadline fast approaching.

After Silvio Berlusconi’s failure to pull down the government, Italy’s political crisis is in abeyance for now and its bond yields have eased back. Spain has issued nearly all the debt it needs to this year already.

It’s not quite “crisis what crisis” but the news flow has been largely positive:
- Portugal (after its own self-inflicted  political crisis over the summer) has seen its borrowing costs fall to their lowest in more than a month after its EU/IMF lenders said it was meeting its bailout goals.
- Greece is predicting an end to six years of recession in 2014 and, just as importantly, a primary surplus.
- And the IMF yesterday predicted Italy, Spain, Portugal, Greece and Ireland (which will soon become the first euro zone member to exit its bailout programme) would all grow next year.

Greek turning point?

Greece will unveil its draft 2014 budget plan which is expected to forecast an end to six years of recession.

The draft will include key forecasts on unemployment, public debt and the size of the primary surplus Athens will aim for to show it is turning the corner. The government has said any further fiscal belt-tightening will not bring cuts in wages and pensions and that savings will be generated from structural measures.

If even Greece has passed the worst then maybe the euro zone crisis really is on the wane. The FT reports that billionaire John Paulson and a number of other U.S. hedge funds are investing aggressively in Greece’s banking sector, expecting it to get off its knees – an interesting straw in the wind.

Stay of execution?

No sign of movement on the U.S. government shutdown but in Italy, party talks have been running red hot, keeping Italian markets in thrall.

Yesterday, senior figures in Silvio Berlusconi’s PDL party urged their colleagues to defy the former premier and back Prime Minister Enrico Letta in a parliamentary confidence vote expected today. Most tellingly, the media mogul’s key ally, Interior Minister Angelino Alfano, called on the party to back Letta.

Now nothing is certain in Italian politics and sources close to Letta say he will not call a vote if the numbers aren’t there, and could resign instead. But given he has a firm grip on the lower house, if even some PDL members support him in the Senate he should win the vote.

The never-ending story

Italian bond yields reversed a big chunk of their losses and stocks followed suit yesterday on the back of our scoop that 20 of Silvio Berlusconi’s senators had told him they could form a breakaway group if he pushed Italy into political chaos.

Whether they would switch their support to Prime Minister Enrico Letta and give him a workable majority in the Senate (he has a firm grip on the lower house) remains to be seen. That could buy several months of relative stability without the threat of Berlusconi mucking things up at any moment.

But we’re not anywhere near that yet and even then, elections would be likely in the spring. Those same senators did not speak out at a PDL meeting on Monday where Berlusconi said the party must push for early elections.

Oh Silvio

Even before the vote on his political future, Silvio Berlusconi ordered his five ministers to quit Italy’s teetering coalition government over the weekend in an attempt to force fresh elections.

With markets already alarmed at the prospect of another self-inflicted political wound – the U.S. government budget shutdown – Italian assets could take a hammering today with investors finally waking up to the potential chaos looming.

Bond yields did climb a little last week but not to the extent that suggests the worst-case scenario is anything like priced in. Italian BTP futures have plunged by well over a full point at the open and the euro is on the skids. Let’s hope everyone still believes in the European Central Bank’s euro zone backstop.

France on a budget

The French 2014 budget will be presented in full today with the government seeking to reassure voters with a plan that makes the bulk of savings through curbs in spending, having relied more heavily on tax increases so far.

The government has already said it expects 2014 growth to come in at a modest 0.9 percent, cutting its previous 1.2 percent prediction, and that after a 2013 which is likely to boast hardly any growth at all.

As a result, the budget deficit is expected to push up to a revised 3.6 percent of GDP from 2.9 next year. That puts Paris in line with IMF and European Commission forecasts but what Brussels thinks about the plan as a whole is another matter.