Monday, June 11, 2012

Debt crisis: as it happened, June 11, 2012

QuotePolicy conditionality will focus on the financial and banking sector [...] There will be no new conditions on fiscal policy and structural reforms because these issues are dealt with under the reinforced economic governance and there, the normal policy conditionality applies.

18.31 Dennis Lockhart, the chairman of the Atlanta Federal Reserve, has described the Spanish bank bail-out as "good news," but that markets were still expecting more detail on the bail-out.

On the possibility of QE3, Mr Lockhart said that more money printing wasn't needed "quite yet". However, he added that no policy tool should be taken off the table just yet.

18.11 Spain has issued a statement saying that it has sought a ?100bn bailout. No news there, obviously, but there's an interesting line towards the end which shows its intention to keep selling (or attempting to sell) bonds:

QuoteThe details on this financial assistance package will be established in coordination with our European partners and duly communicated to the market. In this context, the Spanish Treasury reaffirms its commitment to capital markets, and will therefore continue to execute its funding programme through its regular auction calendar.

17.50 S&P says that Spain's bank bailout won't have an immediate impact on its rating:

QuoteThe Spanish government's decision to seek up to ?100bn from eurozone member states to recapitalise its banks has no immediate effect on our ratings on Spain.

17.12 Reuters reports that eurozone finance ministers have discussed imposing capital controls in a "worst-case plan" for a Grexit. This would also involve temporary stringent border controls and a limit for cash machine withdrawals. But sources were keen to stress that it was contingency planning, not planning for an expected event...

16.47 European markets breathed a sigh of relief as it appeared that Spain would be saved by a bailout, sending stocks soaring this morning. At one point the FTSE 100 hit a high of 5,536 and Spanish 10-year yields came back under 6pc. But it wasn't to last: reality set in after lunch and shares first gave up their gains, then slipped into the red. Spain's yield climbed all the way to 6.465pc and Italy's rose to 6.004pc.

The FTSE 100 lost 0.05pc, the CAC dipped 0.29pc and Spain's IBEX slipped 0.54pc. Italy's FTSE MIB tumbled 2.79pc. Only the DAX escaped the gloom, gaining a modest 0.17pc on the day.

Kathleen Brooks, research director at Forex, gives us her take:

QuoteThe markets have whimpered to the finish line today after a bout of knee jerk euphoria post the announcement of the Spanish banking bailout at the weekend. The markets haven?t perceived the bailout as way to reduce credit risk in the periphery, in fact Spanish bond yields rose to their highest level since the end of May as investors digested the prospect they may not get all of their money back in the event of a Spanish default. And it didn?t stop there. Italian 10-year yields are rising at an alarming rate, and have ended the European session above 6pc, for the first time since January.

16.31 Fitch downgraded Spain this month, and now it's moved in to take a swipe at two of its struggling banks: BBVA and Santander. Both have been cut from A to BBB+, with a negative outlook into the bargain to suggest that it could be taken even further.

15.25 Britain could be on the way to leaving the EU, suggests Tim Bale, Professor of Politics and European Studies at Sussex University. In a blog post for the LSE he argues that the Conservatives may need to promise the UK a referendum on EU membership at the next election, and Labour may have to follow suit.

QuoteI never thought I would write this sentence but here goes: the UK is on the road to leaving the EU. This doesn?t mean that it will happen ? there are too many powerful interests with a stake in continued membership for that. But it does mean that it might.

The Tories are moving, seemingly inexorably, from ?soft? Euroscepticism (a critique of the EU and how it currently functions) towards ?hard? Euroscepticism (the belief that membership of the EU is inimical to the national interest). And in David Cameron they have a leader who, ever since he made and then honoured his rash promise to pull Tory MEPs out of the EPP-ED group in Brussels, seems unwilling or unable to tell them ?no?.

15.07 Reuters is reporting (from an unnamed source, so far from concrete) that the Spanish bailout is likely to come from the existing EFSF, rather than the ESM which comes into being in a few weeks. They're similar bailout pots, but there are some subtle differences...

An ESM bailout could potentially raise Spain's borrowing costs in the long run, as the loan would take precedence over private investors for repayment in the event of a default. But an EFSF loan would involve troika inspectors and demand the approval of other eurozone nations.

14.42 The US markets have opened for the week, catching up with the latest situation on Europe's markets to make cautious gains on the Spanish bailout announcement, tempered by concern over upcoming Greek elections.

The Dow Jones is up 0.56pc in early trading, the S&P 500 by 0.53pc and the Nasdaq has gained 0.59pc.

14.31 With a couple of hours trading left in Europe, the relief rally kicked-off by Spain's request for a bailout is winding down, but still remains firmly in positive territory.

The FTSE 100 is up just 0.68pc, the CAC is 1.19pc higher and the DAX has gained 1.7pc. Spain's IBEX is up 1.95pc at 6676, having hit a high earlier in the day of 6937.

14.10 A pithy response to Spain's agreement and a potential request from Cyprus for bail-out funds from strategist Lorcan Roche Kelly:

13.55 While Spain scrabbles to help its banks and investors start worrying about Italy, German Chancellor Angela Merkel is still pursuing the issue of the financial transaction tax - and plans to discuss it at a summit with France, Spain and Italy later this month.

Her spokesman Steffen Seibert said Germany "is not the only one in Europe that can decide when such a tax would come" but insisted: "We will be campaigning for it hard."

The UK remains opposed to such a a tax on an EU-wide basis, saying it would have a disproportionate hit on the City of London as Europe's largest financial centre.

13.40 A domino effect seems to be in action - Cyprus has hinted today it may need to aply for a bailout before the end of June, for both its banks and its government funds.

Finance Minister Vassos Shiarly said:

QuoteThe issue is urgent. We know the recapitalisation of the (island's) banks must be completed by June 30, and there are a few days left.

One of the country's biggest lenders, Cyprus Popular Bank, has been very hard hit by its exposure to the already bailed-out Greece, and Cyprus has been under pressure to apply for aid to prop up the bank.

Cyrpus is due to take on the rotating EU presidency for six months on July 1, which could lead to embarrassment if the issue is not resolved.

13.30 Spanish newspaper El Mundo is reporting a fairly extraordinary set of text messages between PM Mariano Rajoy and the country's finance minister during the bank bialout negotiations this weekend.

According to El Mundo editor Pablo Rodriguez, Mr Rajoy texted Luis de Guindos: "Resist, we are the 4th power of the EZ. Spain is not Uganda."

A follow-up message has been translated as: We are powerful, and if they don't give in, the whole thing will go down. It will cost Europe 500 billion if Spain goes bust, and then another 700 billion if Italy goes bust.

Did Mr Guindos (below) take this advice on board when he was at the negotiating table?

13.25 Sport and politics - a little bit of late-lunch eurozone levity, thanks to Twitter:

13.15 Here's more detail of what will be in the terms of Spain's bank bailout - this time on the interest rates likely to be charged.

European Commission spokesman Amadeu Altafaj said it would be "reasonable" to charge a rate of 3-4pc on a rescue loan for Spain's banks.

He told public television station TVE:

QuoteIt is premature to talk about interest rates, you cannot talk about a definite rate since it will depend on market conditions. But, yes, percentages of 3pc or 4pc are reasonable for these operations.

13.00 Here is what has happened to Spanish 10-year bond yields over the last week - this morning's delight was short-lived...

12.20 And a bit more from Bruno Waterfield on that inspection of Spain's finances by EU and IMF officials:

12.10 The other detail on the Spanish bailout now coming through is on which EU fund will stump up the money.

A German government spokesman said the permanent ESM fund, which comes into effect on July 1, is mos likely to be the source. Martin Kotthaus said:

QuoteThe ESM is a more likely option than the EFSF... The ESM is in almost every regard more effective than the EFSF.

It will depend when Spain submits its formal application for financial aid whether the ESM is used, Mr Kotthaus said.

12.00 Bruno Waterfield, our man in Brussels, is reporting details of how a Spanish bank bailout might be arranged, via Twitter. It looks like it will indeed involve supervision by the EU, ECB and IMF, meaning it is more similar to the other bailouts than it at first seemed:

11.50 Spanish shares are still up, but not nearly as spectacularly as first thing this morning, when they jumped close to 6pc. The IBEX index is now up 2.5pc, while yields on 10-year government bonds have gone back above 6pc.

David Jones from IG Index explains why the 'bailout bounce' will only be temporary:

11.45 The OECD has some fairly gloomy predictions out this morning - the economic think tank's latest leading indicators show the pace of growth in China and India starting to falter and the eurozone economy continuing to suffer as a result of the debt crisis.

The OECD said its composite leading indicator (CLI) for China, which provides a measure of future economic activity, slipped to 99.1 from 99.4 in April, falling further below its long-term average of 100.

The CLI for India also showed signs of weakening, dropping to 98.0 from 98.2, again below the 100 average.

The euro area, meanwhile, remained stable at 99.6, as did France, while Italy inched down to 99.1 from 99.2, as ongoing debt troubles in Europe continued to keep economic growth below long-term trend.

The CLI for Germany was also unchanged at 99.4. Britain's, however, inched up to 99.8 from 99.7 but remained below its long-term average.

11.30 As reported in our 07.40 post, George Osborne has come under fire from some MPs on his own side for blaming the eurozone crisis for the continuing recession in the UK.

Our commentator Jeremy Warner says in fact neither the eurozone, austerity measures nor lack of supply-side reform are to blame.

The true reason why Britain's economic recovery has lagged other G7 nations lies somewhere else ? it's almost wholly down to still subdued household consumption. Household spending has failed to recover as robustly from the post Lehman crash as in other major economies.

The current process of adjustment in household spending back to a more sustainable, income dependent, path has in all probability still got several more years to run, so we can expect demand in the UK economy to remain weak for quite a while yet, almost regardless of what happens in the eurozone and the degree of structural reform the Government engages in.

Up to a point, Osborne is right that there is little he can do about the present economic funk, but he's chosen the wrong target as an alibi. It's not the eurozone, much of which after years of living high on the hog actually faces the same problem as the UK in adjusting to a lower overall standard of living, but the toxic legacy of over indebtedness left him by the last Government.

11.20 Cold water has been poured on Ireland's hopes for a renegotiation of its bailout - also designed to row out banks which had taken on too much debt in a property boom - following the agreement with Spain.

The Irish Times reports this morning that because the money will not go directly to Spain's banks but be guaranteed by the government, it does not open the way for Ireland to receive direct bank aid too, removing onerous terms on the Irish state.

11.05 Questions are already being asked about Italy, following Spain's agreement to a bank bailout over the weekend. And Italian politicians are already giving the idea short shrift:

Italy has "already done what was needed to save itself," said industry minister Corrado Passera.

11.00 Well, that didn't last long - Spanish bond yields are now back over 6pc, trading at 6.2pc now.

10.00 The price of oil has also had a boost today - Brent was up more than $2 a barrel at $102.21 in morning trading after the larger-than-expected bailout for Spain.

09.40 Fidelity's David Simner, portfolio manager of the Euro Bond Fund, explains why the markets have rallied on news of a Spanish bank bailout, but also sets out why there are many reasons to remain cautious:

Quote This weekend's announcement is positive for several reasons. It will enforce the long-awaited external scrutiny of Spain's banks. This will remove a significant element of economic uncertainty once a final clean-up cost is arrived at.

The funding will be provided at below-market rates and, we assume, long maturities, which takes the heat off Spain's regular sovereign issuance. It is a signal of intent by eurozone powers that they want to stop the rot by pre-emptively deploying firewall resources. This raises hopes for progress at the end-of-June European Council meeting.

On the other hand, Spain's banks are only one layer of the economy's shaky foundations. It still has the highest unemployment and the third widest fiscal deficit in Europe in the context of a painful recession. The current government has a poor track record of crisis management and data quality has been poor.

The funding provided by the EFSF/ESM will inflate the government's debt and there is an open question of creditor subordination.

09.10 Italy's latest GDP figures are out - the final revision - and show the economy shrank 0.8pc in the first quarter of 2012, and contracted by 1.4pc year-on-year.

08.45 Good news! Spain's bail-out already has it's own abbreviation - the 'spailout' according to Blake Hounshell, the editor of Foreign Policy. For everyone who was tiring of Grexit...

08.35 Markets have certainly taken heart from the news Spain has agreed on an EU bailout for its banks, however market watchers are highly sceptical the rally can last - even until the end of today.

The BBC's Robert Peston has called the move "another very large piece of sticking plaster but not a permanent solution", while Sky's economics editor Ed Conway has a number of questions, including whether Ireland will now be seeking a renegotiation of its bailout terms, which were far more stringent than Spain's, and whether this is a pre-emptive move by Spain to protect itself in case of a Greek eurozone exit after this coming weekend's elections.

08.10 And it's not just good news for stock markets, in bond markets, Spain and Italy's borrowing costs have fallen.

The yield on 10-year Spanish government bonds fell below 6pc, down 0.2pc percentage points to 5.96pc, while Italy's yield fell 0.14 percentage points to 5.6pc.

08.05 European shares have followed Asian markets higher at the open:

The FTSE 100 was up 1.6pc at 5,524 points shortly after opening, while Spain's IBEX jumped more than 5pc.

07.50 Joaquin Almunia, the EU Competition Commissioner, has spoken about Spain's bank bailout this morning - and it doesn't look good for people hoping Spain has not handed over any financial independence with the move.

The banks which receive aid will have to present restructuring plans to to EU, Mr Almunia said this morning, and there will also be a visit of the "troika" - the EU, the European Central Bank and the International Monetary Fund - to Spain.

07.40 George Osborne has been ticked off by Tory MPs for using the eurozone crisis as an "alibi" for Britain's own economic problems.

As reported over the weekend, the Chancellor said the debt crisis on our doorstep has "killed off" the recovery. However, some MPs said there was still plenty the UK could be doing to help itself.

Rowena Mason reports:

Mr Osborne delivered a stark message that the Government is powerless in the face of ?headwinds? from Europe, as Spain became the fourth country to require a multi-billion pound bail-out.

But he was accused of making excuses for Britain?s ?awful economic performance?.

David Ruffley, an MP and member of the Treasury Select Committee, urged the Chancellor ?radical action? to get the economy growing.

?Of course eurozone meltdown is damaging business confidence but this must not be used as an alibi for no growth in the UK,? he said.

?We can?t just say the eurozone is destroying confidence in the UK and nothing can be done.?

07.25 In the spirit of full transparency, political blogger Guido Fawkes, as mentioned in the 06.58 post, has refuted our claim that he may have overdone the euro gloom and has even put his money where his mouth is:

07.10 Time for a look at the specifics of the ?100bn bank bailout which Spain has been offered by the EU.

The full terms were not available last night, but Spanish officials said the loans would cost the country 3pc a year in interest, rather than the rates of 6pc-7pc which Spain is paying to borrow from bond markets.

The EU indicated over the weekend that the money for the loans would come from its bailout funds, but not which ones. Using the temporary EFSF (European Financial Stability Facility) would have to be voted for by individual member states, according to Dutch PM Mark Rutte.

The permanent European Stability Mechanism (ESM), which comes into force in July, could be used instead, however it has its own problems, as Louise Armistead reports:

Since ESM debt would rank above private bondholders, loans from this fund could make Spain even less attractive to private investors on the capital markets.

06.58 So, markets up, euro up - for the short-term at least things are looking a little brighter. It seems Guido Fawkes and City AM editor Allister Heath overplayed the "eurogeddon" angle last week:

06.55 The FTSE 100 is expected to open 2pc higher at 8am, with the Dow up 1.2pc this afternoon.

06.52 Italy is holding a bond auction later today. Will be interesting to see how it fares after the Spanish bank bailout.

06.50 Ambrose Evans-Pritchard maintains that Europe's democracies must not subcontract their destiny to the Bundesbank:

The weekend deal is a fresh evasion by EU leaders. Another loan package will be inflicted on another country that cannot afford more debt, though the stakes are higher this time.

Europe?s democracies can stop this destructive course before it is too late. They do not have to subcontract their destiny to the Bundesbank. The broad Latin bloc commands the majority votes to compel the ECB to act as lender of last resort and reverse monetary contraction. They should use that power.

If such a confrontation causes Germany and its satellites to storm out of EMU in a huff, that too is a solution of sorts. Monetary asphyxiation would end. The Latin euro would weaken to equilibrium levels. Capital would flow back into southern Europe once the boil had been lanced.

Just do it. Call the German bluff. One bound and you are free.

06.45 The Sunday Telegraph's James Quinn believes the bailout won't end Spain's property nightmare:

The situation that is now playing out in Spain is one that risks the very firmament of the entire European financial sector. Although at the time of writing the early stages of a plan to rescue the Spanish banking system appeared to be coming together, there is no guarantee that the capital that will be injected will be enough.

The Spanish predicament is, as was the case in the US with the subprime mortgage collapse that fuelled the 2008/9 financial crisis, property-led.

Recent data from the Knight Frank Global House Price index shows that Spanish residential properties fell by 7.3pc in the year to the end of March. Official Spanish data state that prices are down 20pc from the peak, but those figures are based on bank valuations, rather than actual sales.

Anecdotal evidence suggests that the fall from the top of the market is closer to 30pc, but how much further can prices go?

06.42 Asian markets and the euro have jumped this morning following the bailout.

The euro rose nearly 1pc to $1.26694, its highest level since May 23, while Japan's Nikkei average added 2pc, after sagging 2.1pc on Friday.

06.40 Mr Rajoy said he was not pressured into requesting aid, saying he was the one who had pressed for this line of credit, insisting it was different than bailouts taken by Greece, Ireland and Portugal because their lifelines include strict outside control over public finances - and Spain's does not.

Spain admitted last week that its high borrowing costs of between 6pc and 7pc have meant it was effectively locked out of the money markets.

Spain's deep economic misery will get worse this year despite a financial lifeline to save its banks, Mr Rajoy said.

Quote This year is going to be a bad one: Growth is going to be negative by 1.7pc, and also unemployment is going to increase.

06.35 No prizes for guessing what the big news of the weekend was. Spain will be given a ?100bn bailout for its struggling banks, with PM Mariano Rajoy saying the move boosted the credibility of the euro.

Quote If we had not done what we have done in the past five months, the proposal yesterday would have been a bailout of the kingdom of Spain... Yesterday, the credibility of the euro won, yesterday the future won, yesterday, the European Union won.

06.30 Good morning and welcome back to our live coverage of the European debt crisis.

Debt crisis live: archive

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