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.
So euro zone finance ministers conferred about Greece and Germany’s Schaeuble came out to declare significant progress although no deal yet. Eurogroup head Jean-Claude Juncker looked forward to a final settlement at the ministers’ face-to-face meeting on Nov. 12.
But a source with no particular axe to grind was much more downbeat, saying there was no real progress with Germany and the IMF at loggerheads over the need for euro zone governments and the ECB to take a haircut on the Greek bonds they hold in order to make the numbers add up.
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.
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.
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.
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.
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.
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.
Some interesting flesh to pick from the bones of the IMF gathering in Tokyo. Most notably, a clutch of high-up euro zone sources in Tokyo told us that Spain could ask for aid next month at the same time as the Greek bailout package and one for Cyprus are sorted out. All roads appear to be pointing to the Nov. 12 meeting of euro zone finance ministers. However, there are other voices saying that Spain could hold off until the new year, given the fall in its borrowing costs since ECB chief Mario Draghi declared he would do whatever it takes to save the euro.
The IMF is ratcheting up the pressure on the euro zone again, telling it to deepen financial and fiscal ties as a matter of urgency to restore confidence in the global financial system. Despite the European Central Bank’s recent statement of intent, the Fund said the risks to financial stability had risen over the past six months and it raised its prediction of how much European banks are going to have to offload as part of a deleveraging process that has a long way to run.