Any German coalition agreement on fiscal policy is likely to be set with reference to existing targets, limiting the scope for any significant shift to deficit-financed expenditure, Fitch Ratings says.
In the run up to the election, the CDU/CSU and the opposition SPD differed in some details on tax and spending policy, but both remained bound by constitutional debt limits and committed to existing objectives. Having beaten its general government fiscal balance target last year, and met its federal structural deficit target well ahead of the 2016 deadline, Germany has more fiscal space to absorb potential shocks to the public finances than some other ‘AAA’ rated sovereigns with high debt-to-GDP ratios.
Exceeding fiscal targets or meeting them early demonstrates fiscal discipline and supports our expectation that debt growth has peaked and the ratio will drop to closer to 70% of GDP by 2017.
While debt-to-GDP is substantially higher than the ‘AAA’ category median, other factors supporting Germany’s sovereign rating include: the fiscal financing flexibility it enjoys as the eurozone’s pre-eminent benchmark bond issuer; its high value-added economy; and its strong net international investment position.
A coalition of the CDU/CSU and SPD is the most likely and would have a majority in both the Bundestag and Bundesrat, but may be harder to negotiate because of the SPD’s poor election result in 2009 after a coalition with Merkel’s first government in 2005. This means the coalition is likely to take a long time to form; the 2005 CDU and SPD coalition took 65 days to form.
Will Draghi confirm what every extrapolating talking head believes – that Europe is recovering – or will be stick to the facts that credit creation is collapsing, the core has turned down, and unemployment rates and delinquencies are at all time highs? But how will Draghi explain his forward guidance to his imperial leader?
*MERKEL SAYS GLOBAL TIGHTENING OF MONETARY POLICY NEEDED
We are sure the “market” will be offered as evidence that OMT has worked and that recovery is just another quarter around the corner… just a little more accomodation
Just over a week ago, the probability of a September ‘Taper’ were a mere 14% with the majority of the ‘smart’ money betting on a ‘December 2013 at the earliest’ start to the Fed’s removal of the punchbowl. September 2013 is now the front-runner at a 36% probability, based on PaddyPower’s latest odds. September has surgede from a 7/1 outsider to a 7/4 favorite in that brief time (and October also improved from 11/1 to 7/1). It seems that JPY-carry is well aware of this shift (having surged over 4% in the same period). Between Merkel’s election and the FOMC, the 3rd week of September (which just happens to perfectly correspond to an option expiration) looks set for some fireworks one way or another.
While bonds may well have repriced for this slowing of liquidity delivery, and credit and FX moves signal an awareness that a disturbance in the force is forthcoming, we suspect stocks remain sanguinely oblivious still.
Almost 50 years ago, JFK immortalized the donut with his comment “Ich bin ein Berliner,” with pressure from Merkel to come clean on the NSA’s efforts, we wonder if the current US President will admit, “Ich bin ein Berlistener,” as he delivers a speech from The Brandenburg Gate.
Just six short months ago (before GGBs rallied 119% and the Athens Stock Index 53%), the EU and IMF agreed on Greek Debt/GDP targets, pronounced the nation “fixed”, and went on winter vacation. Well, surprise, the hockey-stick of expected GDP has not come to pass and now, as Der Spiegel reports, the IMF is refusing to participate in further rescue programs for Greece unless financing for the nation is secured for the next 12 months – in other words – a new haircut for Greece will be required to cover the EUR4.6 billion funding shortfall.
Christine Lagarde’s ‘fund’ is putting pressure on EUR members, after their mea culpa last week at the biliousness of their previous efforts to save the troubled PIIG nation, to agree to these new haircuts. This will not be a pretty dance – as with Merkel now a few short months away from a general election (and Germany owed EUR15 billion in KfW loans and a further EUR35 billion contributions to ESM/EFSF mechanisms), any agreement on her part would solidify opposition parties’ proof that taxpayer money was lost (and the good money after bad argument).
Perhaps that is why GGB prices have dropped over 10% in the last week?
In a little under two minutes, Nigel Farage sums up the utter farce that “the religion” that Europe has become. He explains, his fear is that what will break up the Euro, “is not the economics of it, but wholesale, violent revolution,” in the Mediterranean, and that is “all so unnecessary!” Speaking at Simon Black’s Offshore Tactics workshop, the so-called modern day Cicero goes on to point out that France’s Hollande is “the number 1 among idiots running countries around the world,” and worries that Merkel’s pending election means there will be more and more ‘tough talk and action’ as she shows the people she is in charge. Simply put he warns, alongside Ron Paul, that if you have money in European banks, “Get your money out,” because, “when the next phase of the disaster comes, they will come for you.”
The weekend has produced five talking points. The leaked French Socialist draft document that was critical of Germany (and the UK) and the Bundesbank’s letter to the German Constitutional Court objecting to the ECB’s Outright Market Transactions do not really reveal anything new and we do not expect them to influence trading in the new week.
The Iceland election and the formation of a new Italian government are important. An Austrian weekly is claiming that national central bank estimates that to wind down a nationalized bank by the end of this year as the EU is demanding would cost the government 14 bln euros or ~4.5% of GDP. We recognize this as potentially important, but not immediately a market factor.
That in private moments the French Socialists are critical of Germany and Merkel is a dog bites man story, even if the Financial Times thought it worthy of front page coverage over the weekend. The tensions between the French Socialists and the conservatives are not new or unilateral. No where in the FT’s coverage, for example, is one reminded that Merkel campaigned, as much as a German Chancellor could, for Hollande’s rival, Sarkozy. Nor is there any reference to the recent German criticism of the weakness of the French government, with claims among other things that French finance minister had to be woken at a recent crisis gathering.>> Read More
With their economy appearing to slow dramatically, if the PMI and Ifo data is anything to go by, and a nation increasingly disavowed with the European project, it seems the ‘people’ are not amused. As MNI reports, a poll by Forchungsgruppe shows Merkel’s CDU/CSU support fading. Critically, with only 40% backing Merkel, and the ‘Merkel bloc’ down to only 44%, the opposition and more anti-Europe SPD party gained a point and shifted their ‘bloc’ vote to 48%. Given that the mainstream parties have excluded a coalition with the Left party, such results would allow only coalitions of Merkel’s CDU/CSU with the SPD or the Greens. This raises the question of whether Merkel becomes more hard-nosed in her treatment of European bailouts, cow-towing to her populist needs (especially as Euro membership remains the most popular ‘concern’ for Germans); or eases the pressure in the hope of a short-term juice of markets believing in joint-debt dreams into the election. We suspect the former, especially given the clear signals from the people as the ‘Alternative for Germany’ party gathers more headlines - if not representative votes.
and Euro membership remains the most pressing concern for Germans>> Read More