After a meeting of the Spanish cabinet with King Juan Carlos I it was announced that the new set of budget cuts, presented by the President Mariano Rajoy on Wednesday, had been approved.
The package includes a increase in the VAT, which will come into effect on September 1, as the Finance Minister Cristóbal Montoro informed. The government also approved 600 million euros worth of cuts in ministerial spending, the reduction of public servants' salaries and bonuses and a reform of the pensions system, among others.
Following the meeting of the cabinet vice president Soraya Sáenz de Santamaría praised the new program of austerity measures saying that they are neither “easy nor popular” but necessary in the current difficult situation.
Solid demand at Italian debt auction, yields fall
The debt auction held by Italy on Friday, shortly after Moody's announced a downgrade of the country's rating to Baa2, nonetheless met with decent demand and saw a decline in yields. The country managed to sell 3.5 billion worth of 3-year bonds out of the 2.5-3.5 billion euro target.
Bonds maturing in 2015 yielded 4.65%, in comparison with 5.3% the country had to pay at the June 14 sale. It is the lowest level to which the yields on these bonds have fallen since May.
UK announces Funding for Lending Scheme to combat credit squeeze
On Friday the BoE and UK Treasury announced details regarding the FLS (Funding for Lending Scheme), through which the central bank will make cheap financing available to banks in return for an increase in lending to distressed businesses and home-buyers. The BoE will provide rates between 0.25% and 1.50%, depending on volumes and periods. The BoE added that “the total cost of funding for an institution using the FLS will be lower than current term funding rates, even for the strongest institutions.”
Meanwhile, the Libor scandal widens its proportions as the European authorities suspect of a cartel operation manipulating not only the Libor, but also the Euribor and Tibor.
Moody's downgrades Italy to Baa2; negative outlook
Moody's just downgraded Italy's government bond rating to Baa2 from A3, stating it maintains negative outlook. As read by Moody's statement, the decision to downgrade Italy's rating reflects the following key factors:
1. Italy is more likely to experience a further sharp increase in its funding costs or the loss of market access than at the time of our rating action five months ago due to increasingly fragile market confidence, contagion risk emanating from Greece and Spain and signs of an eroding non-domestic investor base. The risk of a Greek exit from the euro has risen, the Spanish banking system will experience greater credit losses than anticipated, and Spain's own funding challenges are greater than previously recognized.
2. Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets. Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding.
At the same time, Moody's notes that the sovereign's current Baa2 rating is supported by significant credit strengths relative to other euro area peripheral economies, including (1) maintenance of a primary surplus, (2) large and diverse economy that can act as an important shock absorber in the current crisis, and (3) substantial progress on the structural reforms which, if sustained in the coming years, could improve the country's competitiveness and growth potential over the medium-term.
Troika: Irish bailout program implementation satisfactory
Troika inspectors, which conducted the seventh review of the Irish economic program at the beginning of July, decided that the implementation of the conditions attached to the bailout is satisfactory. In a document jointly released by the EU, ECB and the IMF on Thursday the country's progress is described as “strong in a challenging environment."
Troika's document states that Ireland managed to reach the required 2012 deficit target of 8.6% GDP. It praises the steadfast way in which Irish authorities reduce spending and raise taxes in order to bring down the deficit further.
Nevertheless, the country's deficit is still the highest in the Eurozone and unemployment is excessively elevated. Ireland should thus primarily concentrate on stimulating growth and employment.
The positive outcome of Troika's review will allow for the disbursement of the next tranche of the rescue money, amounting to 1.9 billion euros.
Spanish government announces new austerity plan
Spanish 10-year bond yields decreased by 16 basis points on Wednesday after Spanish President Mariano Rajoy appeared before the parliament to present a program of additional budget cuts, which will allow for savings of 65 billion euros in two years. Rajoy hopes to bring down this way the country's budget deficit below 3% of GDP by 2014. The reforms mainly affect civil servants' salaries, the VAT and unemployment compensations.
Standard VAT will be raised from 18% to 20%, while the reduced VAT will increase from 8% to 10%. Civil servant's salaries will be cut and their year-end bonuses will be eliminated. The number of local lawmakers will be reduced. The model of granting unemployment benefits will be revised.
Mariano Rajoy also said that it is a very difficult time for Spain as it finds itself in the second largest recession in history. He urged Brussels to speed up the implementation of summit agreements on direct recapitalization of Spanish banks, in order to reassure the markets. He also expressed his satisfaction with the bailout conditions.
The new austerity measures will be introduced as a response to EU officials calls' on Tuesday. During the Eurogroup meeting at the beginning of the week Spain's deficit target has been extended by one year and additional cuts will help the country to meet it.