Friday, 28 September 2012

Mike Lenhoff: Spanish turmoil persists but eurozone equities hold up

Billed as a ‘crisis budget designed to exit the crisis’, Spain’s announcement of the details of further austerity measures together with the final assessment today on the additional capital requirements of the Spanish banks suggest that a formal request for financial assistance is but a few weeks away.

The Eurogroup of Finance Ministers next meets on 8 October and the next EU summit is on the 18th. It is likely that at one or the other, and probably the former, some indication will be given by the Spanish government on its intentions. According to the European Commissioner for Economic and Monetary Affairs, Olli Rehn, Spain’s reforms have gone beyond what was required. Spain is introducing a supervisory agency that will have oversight responsibility for ensuring budgetary compliance across government, not quite the equivalent of the UK’s Office for Budget Responsibility, but something not far from it.

Also, the government has indicated that, if a showdown is what the independently minded Catalonia – which has called an election for 25 November – actually wants, a showdown is what it will get. Spain’s deputy Prime Minister indicated that it is prepared to use legal and constitutional provisions to prevent the autonomous region from holding a referendum.

President Hollande will be tested today when he presents his own first budget to the cabinet this morning. His target of achieving a budget deficit to GDP ratio of 3 percent for 2013 means he will have to find considerable budget cuts. His approval rating is on the slide. 

The good news is that Mario Monti has said he would consider a second term if asked. Somebody must have asked!

Also, as the chart shows, the eurozone equity market still looks ok despite this week’s brief squall. 

Mike Lenhoff
Chief Strategist

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