Second summer crisis on financial markets

Panic selling of shares in Spain as country's bond yields go above 7.5%

Big falls on world financial markets as fears grow of second successive eurozone summer crisis

the Guardian,

23 July, 2012

Spain announced tough curbs on the short-selling of shares on the Madrid stock exchange on Monday after fears of a second successive summer crisis for the eurozone triggered big falls on the world's financial markets.

Interest rates on US Treasury bonds dropped to levels not seen since the 19th century as investors sought safe havens in anticipation that Greece would be the first country to exit the 17-nation single currency area.

Madrid announced that it would ban short-selling – the process whereby dealers sell shares they do not have in the hope of buying them back more cheaply later – after the interest rate on 10-year Spanish bonds rose to 7.59%, a level unprecedented since the birth of monetary union more than a decade ago.

Speculation that Spain will become the fourth eurozone country after Greece, Portugal and Ireland to require formal assistance from the International Monetary Fund (IMF) and the rest of Europe sent share prices tumbling by 6% in early trading.

Other European bourses were also gripped by panic selling – Italy also announced a short-selling ban – as it became clear that more Spanish regions, including Catalonia, would follow Valencia in asking for financial help from Madrid.

Nick Parsons, of National Australia Bank, said: "It looks as if we are in for another August crisis. The question for Europe is whether things have got better over the past year, and the answer is no. Very little progress has been made."

Markets were also unsettled by reports that the failure of Greece to stick to its austerity programme will lead to the IMF cutting off support.

The IMF said it was still working with Athens to get the programme back on track, adding that its officials would be arriving in Athens on Tuesday for talks with the coalition government.

Reports from Berlin suggested that the mood in Germany is hardening towards providing any more assistance to Greece unless fresh austerity measures are both agreed and implemented.

Markets fear that in the absence of bailout cash Greece could be unable to pay its debts by the middle of next month.

Spain's emergency action to ban short-selling led to a late rally in share prices, although analysts warned that the respite was likely to prove temporary.

Spain's borrowing costs soared higher on Monday, taking it closer to a dangerous national bailout as concern switched from the country's ailing banks to its struggling regional governments.

The IBEX index in Spain closed 1.1% down on the day, registering smaller falls than in Germany's DAX (3.2%), France's CAC (2.9%) and Italy's FTSE MIB (2.8%).

In London there was not a single gainer in the FTSE 100, which closed 2.1% lower after a fall of more than 117 points.

New York's Dow Jones Industrial Average was down more than 100 points by lunchtime, while fears that Europe's recession-hit economy would drag down global growth led to a drop of $3 a barrel in the price of oil.

Spain's finance minister, Luis de Guindos, was adamant on Monday that his country would not need to ask for more outside help following the decision by last month's European summit to provide €100bn (£78bn) for Spain's banks. De Guindos, who will travel to Berlin on Tuesday for talks with Germany's finance minister, Wolfgang Schäuble, said: "Markets are overreacting."

Jonathan Loynes, of Capital Economics, said: "It looks almost certain that Spain will need a sovereign bailout as well as a banking package.

"People were hoping that the eurozone crisis would die down over the summer and we could all forget about it until September. It doesn't look like that."

Analysts estimate it would cost at least €300bn to bail out the eurozone's fourth-largest economy for the next two and a half years, with estimates going as high as €400bn.

European commissioner Joaquin Almunia suggested on Monday that Spain should try to activate the recently-approved bond-buying powers of the eurozone's rescue funds.

De Guindos is likely to repeat Spanish pleas for pressure to be put on the European Central Bank (ECB) for it to buy Spain's debt and help push down yields.

"Spain right now is the breakwater in the current uncertainty surrounding the euro. But this goes beyond Spain," De Guindos said, adding that the country had done its part by approving economic reforms.

ECB president Mario Draghi said in a Sunday interview in France's Le Monde newspaper that buying sovereign bonds was not part of his job.

The Bank of Spain, meanwhile, confirmed on Monday that Spain's double-dip recession was getting worse. The country's economy shrank by 0.4% in the second quarter, compared with 0.3% in the first three months of the year.

A €65bn austerity package approved earlier this month has not calmed markets and is expected to deepen Spain's double-dip recession even further.

The government now believes recession will extend into next year, with the economy shrinking another half a percent in 2013. Spain's 24% unemployment rate is also thought to be set to remain steady until well into next year.

Louise Cooper, of BGC Partners, said the €100bn package agreed for Spain's banks would not be nearly enough to deal with the country's debt problems. "I think the austerity package is the last thing Spain needs at the moment," she said.

Eurozone danger mounts as Spain spins out of control

Spain is battling to avert a fully-fledged sovereign rescue after borrowing costs spiralled out of control, with dangerous knock-on effects in Italy and Eastern Europe.

Ambrose Evans-Pritchard,

the Telegraph,

23 July, 2012

The yields on closely-watched two-year debt surged by 78 basis points to a modern-era high of 6.42pc, leaving it unclear how long the country can continue funding itself. Italy’s two-year yields vaulted to 4.6pc.

“We can’t keep going like this for another 15 days,” said Prof Miguel Angel Bernal from Madrid’s Institute of Market Studies. “The European Central Bank has to bring out its heavy artillery.”

Andrew Roberts, credit chief at Royal Bank of Scotland, said the dramatic spike in short-term borrowing costs marked a key inflexion point in the crisis, replicating the pattern seen in Greece, Ireland and Portugal as they lost access to market finance. “We are fast approaching the endgame,” he said.

Exchange clearer LCH Clearnet raised margin requirements on both Spanish and Italian bonds, a move that will automatically cause further selling by some funds.

Confidence has evaporated since Germany effectively blocked plans for the European Union bail-out machinery to recapitalise the Spanish banking system directly, as originally announced after the EU summit deal in June.

The EU’s €100bn (£78bn) package will be a loan to the Spanish state. This fails to sever the fatal link between banks and vulnerable states, each pulling the other down.

The mood has gone from bad to worse as Spain’s regional governments line up for internal rescues, with Catalonia preparing a €3.5bn bail-out request following moves by Valencia and Murcia in recent days. The regions must roll over €15bn of debt by the end of the year.

The Spanish newspaper El Confidencial reported sources close to premier Mariano Rajoy complaining bitterly that the crisis engulfing Spain was a “failure of the whole European Project and the incompetence of its leaders”.

There is deep shock in government circles that the €65bn austerity package passed by the Spanish parliament last week amid bitter protests across the country – and imposed by the EU – has failed to make any difference.

El Confidencial said the Rajoy team was thinking of “putting on the table” a possible withdrawal from the euro, a dramatic escalation in the game of brinkmanship between the eurozone’s Latin bloc and German-led creditor core.

“We would have our own currency again and restore competitiveness. It would have some disastrous consequences at first, but we would regain control over our own policies and we would escape from the crisis sooner,” a government source reportedly said.

Spain has enough funds to muddle through into the autumn, but it is under mounting pressure from the EU authorities to swallow its pride and accept rescue to halt contagion to Italy, where bond yields are testing danger levels.

Joaquin Almunia, the European Competition Commissioner, said the proper course of action at this stage was direct purchases of Spanish debt by the eurozone bail-out fund (EFSF). “Spain can’t do this alone,” he said.

The surge in Spain’s short-term yields adds another twist to the banking crisis, a cost that now falls on the state. Spanish banks borrowed €315bn from the ECB under the long-term refinancing operation (LTRO) and “parked” a large chunk in Spanish two-year to five-year sovereign bonds until they need the money to cover their own debt rollovers.

While this so-called “carry trade” helped to stabilise the Spanish bond market for a few months during an exodus by foreign investors, it has now backfired badly. The two-year bond has shed 9pc in face value since the second LTRO in February, leaving the banks heavily under water. “This has turned into an unmitigated disaster. They will have to crystallise these losses when they sell,” said Mr Roberts.

The latest Fiscal Monitor by the International Monetary Fund has pencilled in public debt to GDP of 96pc in Spain by next year, up from 84pc just two months ago – a sign of how quickly the situation is snowballing out of control.

Gary Jenkins from Swordfish said the EU may be able to “rustle up” just enough money to finance an EU-IMF Troika rescue for Spain – probably around €400bn – but Italy is too big to handle.

The existing EU bail-out fund (EFSF) is down to about €160bn after covering the needs of Greece, Ireland, Portugal, Cyprus and the Spanish banks. The new permanent fund (ESM) will have €500bn, but is facing a challenge in the German constitutional court. It is far from clear whether these funds can raise large sums on the open market at viable cost.

Mr Jenkins said the fire must be contained before it reached the next big country, either by massive ECB intervention or full fiscal union. Germany is still blocking both. “The battle for Spain is already lost. The battle for Italy has begun,” he said.