Week in Review (15 February)

Spanish general election confirmed for 28 April

This morning the Spanish government confirmed that a general election will be held on 28 April. In deciding to go for an April election, rather than the previously mooted option of a ‘superdomingo’ tie in with the late May European elections, Sanchez may be hoping that the PSOE can stake a claim to the political centre.

Sanchez views a standalone election, unencumbered by the considerations that voters make in other polls, as the best means to campaign on this ‘moderation’ platform. It should be noted that this would be moderation in terms of national politics – Sanchez putting himself between the Catalan nationalists on one side, and the Spanish nationalists on the other. He is still likely to accent any election campaign with left leaning economic promises.

The problem for Sanchez, and any attempt at moderation, is that this election looks set to be fought on identity grounds rather than policy.

Barring massive voting shifts, however, the result of the election, in terms of vote share, is likely to be further fragmentation. In the context of an election fought on nationalistic grounds, however, a PP-Ciudadanos-Vox arrangement – similar to that agreed in Andalusia – becomes a distinct possibility.

EU’s General Court reject Vestager’s tax ruling against Belgium

In 2016, Europe’s Competition Commissioner Margrethe Vestager ruled against a tax scheme Belgium had granted to certain companies, finding that it gave 55 multinational companies preferable tax treatment over standalone entities or entities forming part of domestic corporate groups.

The Belgian government appealed this ruling alongside the Irish government who joined the case in support, culminating in a 14 February ruling by the EU’s General Court overturning the Commission decision. As part of its contribution to the case, Ireland submitted that the decision disturbs the balance of competences between the European Union and the Member States when it comes to direct taxation. However, the Court upheld the Commission view that although the Member States enjoy fiscal autonomy in the field of direct taxation, any fiscal measure a Member State adopts must comply with the State aid rules of EU law. In our view, this means that Ireland’s appeal against DG COMP’s ruling vis-à-vis Ireland’s tax arrangement with Apple remains unlikely to succeed.

SREP reports lift Italian banks

In the last week four of Italy’s major banks – Ubi Banca, Banco BPM, UniCredit, and Intesa Sanpaolo – revealed their results in the ECB’s latest SREP assessment. All four institutions recorded CET1 and Total Capital Ratios well in excess of those set by the supervisory authority for 2019.

The release of the news carried Italian bank shares higher, despite the fact that Italy has now entered into recession. The fact that SREP requirements had been kept at roughly the same level as last year indicates that the ECB does not see any of the banks as having become riskier. This also reinforces the view that, while political pressure pushing Italian bond yields up will erode the CET1 position of banks, they do have the capacity to take a certain amount of pain. Research from the Bank of Italy has suggested that an upward shift of 100 basis points in the government yield curve would reduce the CET1 ratio by 50 basis points (40 points for the significant banks and 90 points for the less significant banks).