European soap

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Overnight we saw more politico-speak over the the ongoing Greek collateral squabbling. We now seem to be in a new phase where all those involved claim that there will be a resolution even though their very obviously isn’t one yet:

Euro zone countries are discussing ways to charge fees on any collateral Greece would use to back bailout loans, an approach that could resolve a nasty row over a second rescue package, Austrian Finance Minister Maria Fekter told Reuters.

Finland reached a bilateral deal with Greece earlier this month on collateral in exchange for loans, sparking requests from some other euro zone countries for a similar arrangement.

Austria criticized the deal, saying all countries should be treated in the same way.

“I believe we will get a solution that is acceptable,” she said in an interview at the Alpbach economic forum on Wednesday.

“If collateral is linked to fees — if they cost something just as a bank guarantee costs something — then everyone’s desire for it will immediately be limited. These kinds of market-conforming models are under discussion now,” she said.

She reiterated Austria’s demand for equal treatment if Finland gets its wish for cash collateral to back loans to Greece under a new 109 billion euro ($157 billion) rescue package.

“Just to say we (Finland) get 20 percent in cash and the others should pay for it, as the Finns negotiated with Greece to the detriment of the community of nations, that doesn’t pass muster,” she said.

Fekter said the euro zone collateral discussion was going on at a technical expert level but she liked the idea of adopting fees as long as they were not “illusionary costs.”

I note, however, that the Finns are not budging from their original position even though their original plan has been scuttled under pressure from Germany:

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EU affairs and trade minister Alexander Stubb said the wealthy northern country’s demand for Greece to give guarantees for Finland’s part in the second Greek bailout is not down to fear of losing money.

“It isn’t a question of the money. It’s a question of principle. It reflects a sentiment that we have that you should not be rewarded for lax public finances. That’s the whole point of being in the euro … people have to be responsible about their public finances,” he said.

Helsinki believes that its demand for guarantees falls within the letter of a July eurozone agreement on the new rescue package.

But its tough line has prompted Austria, Malta, the Netherlands, Slovakia and Slovenia to insist that if Finland gets guarantees, then they should get them as well. With financial markets watching the talks for any sign of new risk to euro stability, the dispute threatens to delay plans to implement the new bailout by the end of September.

Stubb said he is “confident” and “optimistic” that a compromise can be reached. But he added: “If we don’t find a deal, then we’ll see what happens … We understand the demand our government has posed is not easy for others to accept.”

So it seems we are now heading for some sort of loan collateral deal based on bank shares even though, as I said yesterday, if Greece does default those shares will be worthless because they have cyclic counter-parties. I suspect we will be seeing this stretch into gold reserves shortly as Greece itself is now publicly admitting that its economy is a train wreck:

Greece’s debt has run out of control and government policies are failing to restore finances, an independent parliamentary committee of experts wrote in a report released on Wednesday.

“The steep debt rise, high primary deficit … have exacerbated to the maximum the dynamics of debt, which is out of control,” the committee of experts appointed by the Finance Ministry said in a monthly economic bulletin.

“It is clear that the country’s problem is not just the size of the public debt but the inability to consolidate the current fiscal management. Despite gigantic effort for fiscal adjustment, no primary surplus has been achieved, on the contrary the primary deficit widens,” it said.

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No one should be surprised by these statements, it was always going to happen. I explained why here.

The Greek squabble was not, though, the most interesting news last night, that came from Italy. In what looks to be a massive bluff from Berlusconi aimed at the Eurozone, ECB and his own country’s internal political machine, he has announced even more wind-backs in the Italy austerity program:

The Italian government has decided to scrap a widely criticized plan to delay retirement for some workers, people with direct knowledge of the situation said Wednesday.

Dropping the measures leaves the government with a significant shortfall in its EUR45.5 billion budget-cutting package. The sources said the pension overhaul would have generated EUR1 billion in savings from 2014, a gap the government will now seek to cover by tightening its crackdown on tax evasion.

Under the aborted plan, Italians would no longer be allowed include their college years and military service in the 40 years of work needed to be eligible for retirement. Military service was compulsory in the country until 2005.

The reversal marks yet another misfire by Prime Minister Silvio Berlusconi’s conservative coalition, which has spent the summer struggling to put together an austerity package that will satisfy the premier’s fractious allies as well as the European Central Bank. The ECB has begun buying large amounts of Italian bonds in an effort to stop the country’s slide into the euro-zone debt crisis.

With just a few weeks to go before parliament is expected to cast its final vote on the package, Berlusconi is running out of options. He has already ditched a plan to levy a so-called “solidarity tax” on Italians who earn more than EUR90,000 a year. He has also weakened plans to cut government funding to small towns.

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The Financial Times adds some interesting comment to the Italian political gaming:

Silvio Berlusconi’s scandal-ridden and dysfunctional coalition government is still in disarray, mired in squabbles over the final shape of its emergency austerity package.

Giulio Tremonti, finance minister, was said to be in “damage limitation” mode on Wednesday, seeking to assure Italy’s partners that a budget could still get through parliament’s twin chambers by the end of next week, despite the prime minister’s decision to jettison some key proposals, including a wealth tax.

Three weeks after the centre-right cabinet agreed an austerity package – with €45.5bn ($65.4bn) of savings intended to balance the budget by 2013 – the government on Wednesday missed its self-imposed deadline to present legislation to the senate, the first step towards parliamentary approval.

Insiders admit, however, that the budget could amount to a stopgap measure, the second since July, and might need to be reinforced at a later date.

External pressure is building. “We do not expect the agreed deficit targets to be called into question,” the European Commission said. “We will pay particular attention to the final composition of the package.”

The Bank of Italy has tried to inject a sense of urgency, warning that the 300 basis points spread between Italian and German 10-year bonds is unsustainable in the long term. With Italy’s debt close to €1,900bn, equal to 120 per cent of GDP, the Treasury noted that €130bn would need to be rolled over by the end of the year.

Marco Elser, a banker with Rome’s Advicorp, accuses Italy’s prime minister of putting narrow party interests above those of the nation: “The emperor has no clothes and Berlusconi has woken up to that fact.”

All good fun for commentators, but ultimately disastrous for Europe.

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