| Economic and Finance Ministers meeting 28-29 November |
| 30.11.11 16:19 | |
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As expected, this meeting mainly focussed on 'maintenance' issues and as such delivered a mildly positive picture to markets, which will be waiting for more from the EU Heads of States meeting of the 9th December. From press reports (there is no official communiqué), the discussions delivered on two points: the EFSF leverage and Greece, and some comments on Italy. 1. Leverage was meant to take two possible forms: insurance of third countries/entities participation: - Insurance scheme: governments agreed to provide a first-tranche loss insurance of 20 to 30% with the hope of covering the probability of default as priced by the markets. As we argued before, this might not be enough to induce investors to come back to sovereign bond markets. The expected leverage from such a scheme would be 2x to 3x; - Third countries participation: the idea remains to get private sector (sovereign wealth funds), possibly of non euro countries or the IMF to beef up the remaining available funds of the EFSF. As we mentioned before after the G20 meeting, it appeared unlikely that third countries or funds will put significant amounts of money in the EFSF. That said, a possible outcome of these discussions is that national central banks of the Euro system agree to lend money to the IMF, as they did in April 2009 with a view of beefing up the $390bn available at the IMF (http://www.imf.org/external/np/sec/pr/2009/pr09143.htm and http://www.imf.org/external/np/exr/faq/contribution.htm for a list of participating central banks with the associated amount). This would beef up the IMF ability to lend. - Greece: as expected, following the Greek opposition party letter, the Eurogroup has expressed satisfaction and authorized the 6th tranche of the first programme to be paid to Greece in December. - Italy: for his first meeting, Mario Monti presented his budgetary and economic reforms plan. The project seems to have gone down well with the Eurogroup, though the Eurogroup President JC Junker required further fiscal measures of €11bn for 2012. The amount demanded is in line with what local papers have been indicating in recent weeks, though may not be sufficient to reach the 1.6% of GDP budget goal currently indicated on the MoF projections. (please see Italy: waiting for more details for a breakdown of measures under review.) On a positive note, it appears that PM Monti is already responding to ongoing market concerns and downside risks to growth and maybe unveiling a bigger adjustment package next week, when he is likely to disclose the details of the policy adjustment. According to local reports, the government maybe working at an adjustment of EUR25-40bn cumulative for 2012-2013, supported by tighter measures on pensions (halting indexation for example could save EUR6bn) and spending reviews. It remains to be seen though whether the adjustment is gross or net, PM Monti has explicitly signalled the desire to rebalance the tax system, introducing as quickly as possible a reduction in labour taxes and direct taxes on lower income brackets. Given the significant uncertainty still surrounding the details of the measures and the political backing, we would not expect ECB scaled up intervention until the plan -included the additional €11bn- has actually gone through Parliament and be voted to a large extent source: Bank of America ML |
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