Italy: Bailing out two banks to the tune of EUR17bn
The ECB announced that two Italian banks from the Veneto region, Banca Popolare di Vicenza and Veneto Banca, are “fail¬ing or likely to fail”, thereby triggering the EU’s Single Resolution Mechanism (SRM). However, the SRM concluded that the conditions for a resolution action were not met as neither of these banks is considered systemic. Hence, the winding up of the banks could take place under national proceedings. Thus, the government published a liquidation decree protecting senior bonds and deposits with only junior bondholders and stakeholders set to take a hit. However, retail junior bond¬hold¬ers involved in the burden sharing can be refunded up to 80%, with EUR60mn set aside for the reimburse¬ment. The plan has received preliminary approval from the European Commission and allows Italy to avoid a bailout under potentially tougher European rules. The Italian government will provide EUR5.2bn in state aid including EUR4.8bn for Intesa Sanpaolo to maintain its capital ratios following the acquisi¬tion of the two banks and EUR12bn in asset guarantees for the non-performing assets. In total this is about 2% of GDP which will add to the 133% of GDP total stock of public debt.
Romania: Despite political turmoil, the economy booms
Last week, lawmakers from the center-left PSD and the center-right ALDE ousted their own six-month-old coalition government in a no-confidence motion. It was a move against PM Grindeanu (PSD) who reportedly had fallen out with the PSD leadership after the government was forced to defer its plans in February to weaken anti-corruption laws, following the largest mass demonstrations since 1989. In a bid to end the political crisis swiftly, President Iohannis appointed outgoing economy minister Tudose, chosen by PSD party leader Dragnea, as prime minister, clearing the way for a new PSD-led govern¬ment to be formed by the end of this week. We do not expect major changes in government policies. Attempts to soften anti-corruption laws as well as substantial fiscal stimulus are likely to continue. The latter has pushed economic growth to the highest in Eastern Europe since 2016 but also resulted in warnings from the European Commission that compliance with EU fiscal rules is at risk. Real GDP growth surged to +5.7% y/y in Q1, driven by vigorous private consumption (+6.7% y/y) on the back of successive VAT and excise tax cuts since 2015. Government consumption was flat and fixed invest¬ment contracted (-0.7% y/y) again in Q1. We expect full-year GDP growth of at least +4.4% in 2017.
U.S.: Consumer confidence may be boosting housing
Consumer confidence rebounded +1.3 points in June after a two-month slide, to a level of 118.9, still historically high. The percentage of respondents who said business conditions were good rose from 29.8% to 30.8%, and those who said jobs are plentiful rose from 30% to 32.8%. The present situation component jumped +5.7 points to the highest level in 16 years. That confidence may have supported new home sales which rose +1% m/m in June. High demand and a tight supply of only 5.3 months drove an +11.5% m/m surge in the median sale price. Similarly, existing home sales rose +1.1% m/m, and although prices rose only +3.2% m/m, it was the third consecutive month of gains greater than 3%. But the manufacturing sector produced another disappointment as durable goods orders fell for the second consecutive month, losing -1.1% m/m in May. Perhaps even more disappointing, after stripping out volatile components, core capital goods orders fell -0.2%.
Eurozone: Risks tilted to the upside
The Eurozone Composite PMI for June continues to suggest a sustained path of growth in both manu¬fac¬turing and services sectors. The average index came in at a high level of 56.4 points in Q2, slightly above the reading in Q1, indicating that GDP growth should maintain a pace close to the +0.6% q/q posted in Q1. Manufacturing is the best in class as its PMI increased to 57.3 in June, the highest level in more than six years. New orders registered significant growth, mainly thanks to strong export sales (intra and extra regional). The slowdown in commodity prices, notably oil prices, has eased price pressures on inputs, benefiting company profitability. The Services PMI is down by -1.6 points to 54.7 in June, indicating easing momentum. Overall, we expect GDP growth to pick up to +1.9% in 2017 from +1.7% in 2016. Monetary policy should remain accommodative as there is no immediate pressure from rising prices. Statements on further tapering of QE starting in January 2018 are expected this autumn while a first deposit rate hike to -0.2% is likely in H2 2018.