full report and disclosures - Berenberg Bank

More documents

Recommendations

Info

Berenberg Macro Views Economics probably be. We are less concerned about political instability in Italy than we were in early 2013. before Logic suggests that Berlusconi, while playing hardball to get as much out of his centre-left coalition partner as possible, does not have an incentive to go for new elections. If he lost such elections, as he probably would, his chances of getting any kind of leniency or even pardon from a new Italian government and/or the Italian president would probably be zero. His best chance to stay out of jail, or at least avoid lengthy house arrest, would be to stay on speaking terms with President Napolitano and the centre-left rather than throwing the country into new turmoil in a rash response to losing his Senate seat. President Napolitano has shown a steely resolve to keep Italy out of trouble. If he feared that the uncertainty created by new elections could disrupt Italy’s economic healing process, he might just ask Prime Minister Letta to stay on as interim prime minister for an extended period until it were safe to call new elections or until a post-Berlusconi centre-right sorted itself out and joined the government again. In the meantime, a centre-left interim government would have a majority in Italy’s House of Representatives but not in the Senate. In such circumstances, Italy might not get much done. But neither would it provoke a disaster. After all, US President Obama and Germany’s Chancellor Merkel are in the same position: both lack a majority in their upper houses and cannot get major laws passed unless they strike specific deals with the opposition. Berlusconi: how best to stay out of jail? A caretaker government if need be? New elections in Italy in late 2013 or early 2014 would be much less of a risk than they would have been in May or June. Memories of the savage Monti tax hikes of 2012 are now less raw. Italian consumer confidence and other leading economic indicators have recovered. Beppo Grillo has shown himself to be a dictatorial leader of his “Five Star” movement, alienating some erstwhile supporters. Opinion polls (Chart 2) suggest that new elections would now be a straight race between the centre-left and centre-right with both sides, on balance, likely to pursue fairly sensible and pro-euro policies if they won. Chart 2: Centre-left up, Grillo down: Italian opinion polls 40% New elections in Italy would be awkward but less dangerous than before 35% 30% 25% 20% 15% 10% 5% Berlusconi coalition Centre-left coalition Monti Grillo Other Grillo is trailing far behind the mainstream 0% Feb 2013 Mrz 2013 Apr 2013 Mai 2013 Jun 2013 Jul 2013 Aug 2013 Average of the five most recent opinion polls each week. Source: Ipsos, Coesis, IPR, EMG, Peipoli, LORIEN, Euromedia, SWG, Tecne 4
Berenberg Macro Views Economics Risk 2: German court Some time after the German elections on 22 September 2013, the German Constitutional Court will probably give its verdict on the ECB’s OMT programme. Judging by the tone of the court hearings on 12 and 13 June 2013, the judges are no fans of the ECB promise to buy sovereign bonds of peripheral countries in the event of renewed market turmoil, to put it mildly. But Berlin sees the ECB’s safety net as essential to contain the euro crisis. The court has no tradition of contradicting Berlin on key issues of Germany foreign policy. And whatever their misgivings about the OMT, the judges probably have no desire to trigger grave financial turmoil. We thus expect the judges to say that the OMT is legal under the German constitution and the German interpretation of the Maastricht treaty if the OMT respects some constraints which the judges will outline. The genuine risk we see is that the judges, in trying to constrain the OMT, may do so in a way that renders it ineffective. In markets, perceptions matter even more than substance. And the judges are not financial experts. If markets conclude after the verdict that a constrained OMT is no longer a reliable shield against contagion risks, contagion might again spread like wildfire in the Eurozone, sending financial markets and leading economic indicators into a tailspin. We consider this unlikely. But we cannot rule it out. If the risk were to materialise, the ECB would need to find other ways to make good on its vow to do all it takes to preserve the euro. As a first reaction, the ECB would probably cut rates by 25bp and remind markets that the bank has other powerful instruments including outright quantitative easing at its disposal. If that were not enough, the ECB would probably start a major programme of quantitative easing with outright purchases of sovereign bonds of all member countries above a certain ratings threshold. The threshold would likely be set to include Italian and Spanish bonds but not those of Greece or Portugal. Massive quantitative easing would probably calm markets again. The risk of renewed recession in the wake of escalating market turmoil would give the ECB the justification to act so decisively. It would be one of the ironies of history. If the German Constitutional Court rules against the ECB promise to buy sovereign bonds of some countries that meet certain conditions, the result could be massive and unconditional purchases of sovereign bonds of almost all Eurozone countries. That would be unfortunate. But it would not spell disaster. The judges have no tradition of upsetting Berlin on key issues of foreign policy Expect the judges to constrain the OMT But what if these constraints render the OMT ineffective? If worst came to worst, the ECB would not shy away from quantitative easing to end a market panic An irony of history? The end of the crisis? Not yet, but maybe soon At the start of 2013, we had a clear idea of what we wanted to do at the end of the year: we wanted to write a big report declaring the end of the euro crisis. As we discussed in March, the biggest risk to our plan remains that we may have missed the boat. Judging by the level of market tensions, the euro crisis was largely over by February 2013. But we first need to actually see the economic rebound in the euro periphery which leading indicators are now flagging, and we need to get beyond the German court verdict, before we can judge whether or not the crisis is over for good. Until then, we still face the risk that a new but probably less vicious wave of crisis could hit the Eurozone before we can sound the all-clear. A merry Christmas? 5
Page 1 and 2: Berenberg Macro Views Economics Eur
Page 3: Berenberg Macro Views Economics 3.
Page 7: Berenberg Macro Views Economics Con

full report and disclosures - Berenberg Bank

Create successful ePaper yourself

Delete template?

Save as template?