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Spain passes law to tackle excessive spending in regions; ECB warns of high levels of ‘shadow government debt’ in the eurozone

13 Apr 2012

The Spanish parliament yesterday approved a ‘budgetary stability’ law which obliges all levels of Spanish government to cut their annual budget deficits to zero by 2020 and to limit total public debt to 60% of GDP. The law also allows the central government to intervene in regions which continue to miss budget targets. Antonio Beteta, Secretary of State for Public Administrations, criticised the “excesses” of the regional governments after they played a significant role in Spain missing its deficit target last year.  

Meanwhile, speaking yesterday Spanish Prime Minister Mariano Rajoy again dismissed the prospect of a Spanish bailout, adding “it's not possible to rescue Spain”. According to El Pais, Spain may be fined for not meeting the macroeconomic requirements under the new EU six-pack regulations aimed at tackling large imbalances in the eurozone. Spanish bank Banesto yesterday announced significantly lower profits after having to increase its provisions against souring loans by €475m.  

FAZ reports that the ECB has warned that eurozone countries may face high levels of ‘shadow government debt’ in the form of banking guarantees and commitments to the eurozone bailout funds. In the case of Germany, this burden is equal to 11% of total public debt, in Ireland it is as high as 43%, while in Greece and Cyprus it totals 26% and 16% respectively.  

In a speech at the Brookings Institution in Washington yesterday IMF Director Christine Lagarde said that a stronger firewall was needed for the eurozone and reiterated her commitment to increasing the IMF’s resources, although she added that the increase may not be as high as the original estimate of $500bn, according to EurActiv.  

Separately, the Irish Independent reports that members of the EU/IMF/ECB troika may not hold their usual press conference following the completion of their latest review of the Irish bailout in order to avoid questions over the upcoming referendum on the fiscal treaty in Ireland.  

Der Spiegel reports that the Greek Central Bank is to pay a €96.6m dividend to its shareholders, with €80m going to the Greek state, €13.3m going to other private shareholders including Greek banks and the rest paid in taxes. This is despite the Greek Central Bank still having large unsettled balances with other eurozone central banks.  

De Volkskrant reports that despite claims that Dutch political parties were close to reaching a budget agreement, Geert Wilders, head of the PVV party, warned that these reports were “premature”, and that negotiations could still go in any direction.
FT WSJ Economist CityAM WSJ 2 Irish Times Irish Times 2 Telegraph WSJ 3 Guardian Times Sun EurActiv BBC Irish Independent FT 4 CityAM 2 Irish Times 3 Irish Independent 2 Irish Times 4 EurActiv Irish Independent 3 Irish Independent 4 FAZ Volkskrant Spiegel Bild Handelsblatt El Pais  

Deadlock over EU proposals to implement Basel III capital requirements;
MEPs propose cap on bonuses
Handelsblatt reports that EU negotiations on implementing the Basel III agreement on bank capital requirements are deadlocked due to fundamental differences of opinion between a number of member states, including the UK, Spain and Sweden, on the one hand, and the Commission and European Parliament on the other. The UK and others are calling for the ability to choose to impose stricter capital requirements than an agreed EU minimum. EU finance ministers will meet on 2 May to try to reach an agreement. Meanwhile, in their review of the bank capital rules, MEPs have proposed including a cap on banker’s bonuses at no more than their salary.
Handelsblatt EUobserver FT Irish Times EurActiv  

Raoul Ruparel: Spanish fears stoked by genuine concerns over bank exposures and regional government spending
Writing in City AM, Open Europe’s Raoul Ruparel argues that there are three major causes of concern in Spain: “the exposure of Spanish banks, regional governments’ fiscal profligacy and a risk that structural reforms won’t reap benefits soon enough.” He writes, “One in five of the loans by Spanish banks to the bust real estate and construction sectors is seen as ‘doubtful’, i.e. at serious risk of never being repaid. Against some €136bn (£112bn) in potentially toxic loans, Spanish banks hold only €50bn in loss provisions…This is troubling, firstly, because Spain cannot afford to bail out its banks. And, secondly, because Spanish banks have been the main recent buyers of Spanish sovereign debt. If these banks don’t have the cash to buy Spanish debt, then who will?”  

An FT leader argues that “Many of Spain’s troubled banks are too small to bring down the whole system. Mr Rajoy should therefore consider telling bank bondholders that they cannot expect taxpayers to bail them out. It is a risky step, but one that may prove necessary to secure his country’s future.”  

Writing on Dutch news site De Dagelijkse Standaard, Open Europe’s Pieter Cleppe comments that, given the increased interest rates Spain and Italy need to pay on their borrowing, “the effect of the gigantic ECB interventions in December and February already seems to be over…Apparently it needs to go further and further every time in order to keep the house of cards standing.”
City AM: Ruparel FT: Editorial WSJ: Dalton De Dagelijkse Standaard: Cleppe  

The Economist’s Bagehot looks at the Green Paper published last month by the Fresh Start group, the group of Conservative MPs calling for a new UK-EU relationship, which argues that securing EU single market access for British firms “should not come at the expense of Britain’s ability to compete in fast-growing and emerging markets elsewhere.”
Economist: Bagehot Fresh Start  

Monti faces calls to tackle corruption within political parties
The leaders of Italy’s three main political parties yesterday put forward limited plans to reform the system of public funding for political parties. The plans received a lukewarm reception since they focused on increasing transparency rather than actually cutting funding. Figures released by the auditor of public spending showed that parties had received €2.25bn as reimbursement for election costs since 1994 but had spent only €579m on campaigns.  

The FT reports that, according to a poll by Eurisko, 43% of Italians would vote for a broad coalition led by Italian Prime Minister Mario Monti after the next election, while a further 24% said they would consider doing so. In a sale of three year bonds yesterday Italy was forced to pay slightly higher rates, although demand remained solid.
FT FT 2  

Süddeutsche reports that a number of member states including Britain, France, Poland and the Czech Republic are putting pressure on the EU to consider energy from nuclear power plants just as clean as energy from renewable sources, meaning that new nuclear power plants could be eligible for subsidies.
Süddeutsche  

MEPs are set to push for an EU Common Consolidated Tax Base in a vote next Wednesday, calling for a more ambitious scheme than proposed by the Commission.
European Voice  

In the Spectator, Policy Exchange Director Neil O’Brien warns that “hostile EU regulation and the rise of new rival centres could stop London's financial heart.”
Open Europe Research: Continental Shift  

The Economist’s Charlemagne column notes that the European Commission has gained “unprecedented powers to intrude into national economic policies” as a result of the debt crisis, and that “this raises profound concerns about its legitimacy.”
Economist: Charlemagne  

In an interview with the Independent, UKIP leader Nigel Farage says his party is “having conversations” with Conservative MPs who feel out of tune with David Cameron's leadership.
Independent  

The Irish Times reports that left wing French Presidential candidate Jean-Luc Mélenchon’s campaign has managed to gain momentum by uniting several disparate radical factions, putting him on 14% ten days before the election.
Irish Times Le Figaro  

Euractiv reports that British Labour MEP David Martin, who is the European Parliament’s rapporteur for the Anti-Counterfeiting Trade Agreement (ACTA), said yesterday that he would urge the Parliament to reject the controversial treaty.
Euractiv  

The Guardian reports that David Cameron will call for the EU to ease sanctions on Burma later this month as an incentive to the regime to introduce political reforms.
Guardian

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