Spanish borrowing costs are soaring once again, despite the fact that the ECB cut its refinancing rate to 0.75% and the deposit rate to zero on Thursday.
On Friday Spanish 10-year government bond yields briefly exceeded the psychologically 7% level, which is widely regarded by experts as unsustainable. This suggests that markets are not convinced that the decisions made during last week's EU summit will stabilize the situation in the area.
On Monday the Eurogroup will meet again this time to discuss the progress in Greek reforms and the Spanish bailout program.
Italy cuts public spending instead of rising VAT
Italian PM Mario Monti's cabinet was debating until the small hours on Friday to find ways of raising funds alternative to a VAT increase, already scheduled for October. Finally 26 billion euros of public spending cuts for the next three years were approved, affecting mainly the health system and employment.
In 2012 the savings will amount to 4.5 billion euros, next year to 10 billion and in 2014 to 11.5 billion. 2 billion euros of the funds raised will be earmarked for the reconstruction of the Emilia-Romagna region, hit by two earthquakes in May. Mario Monti also hopes to bring down the country's budget deficit to 1.7% GDP in 2012.
The cuts are directed mainly at health care spending as well as employment. Plans include a 10% reduction in public sector jobs and a 20% reduction in state managers. Funding to local governments will also be trimmed.
The Italian government is facing strong opposition from labor unions which have already warned that a general strike to protest the measures might be organized.
EMU growth slowdown induces the ECB to cut rates
As widely expected the ECB decided to cut the refi rate by 25 basis points to 0.75%. The deposit, and lending rates were also reduced by 25 basis points.
During a press conference held after the decision was announced ECB head Mario Draghi suggested that inflation should decline further throughout the rest of 2012 and fall below 2% at the beginning of 2013, or even earlier. Elevated energy prices as well as increases in indirect taxes might exert upside pressure on inflation, but the risks are broadly balanced.
Various factors contribute to the renewed deceleration of growth in the Eurozone, such as high prices of energy, rising unemployment and instability on financial markets. As the entire EMU is experiencing the weakening of growth, the rate cuts have been “genuinely addressed to the whole area.”
Mario Draghi expressed his satisfaction with the outcome of last week's EU summit saying that the decisions made by EU officials will help tighten the economic and monetary union in the area. He welcomed the enabling of direct recapitalization of banks and assured that “the ECB is ready to serve as an agent to the EFSF/ESM in conducting market operations,” and will make full use of becoming banks supervising authority, although it will retain its independendce.
In the opinion of the ING team of analysts “the ECB feels it has done enough for the time being.” One of the ING experts, Martin van Vliet comments: “It is again up to eurozone politicians to make furher progresss in resolving the debt crisis. So in the end, we got a 25bp cut in the refi rate, a rather experimental move in the deposit rate all the way to zero, partly aimed at discouraging 'core' banks to hoard cash at the ECB, but no sign whatsoever of any new unconventional measures. In short: enough not to disappoint.”