The Euro debt crisis is back - with a vengeaqnce

Markets Tumble on Unrest in Greece and Spain

NY Times,

26 September, 2012

Clear signs of the political and social cost of the euro zone crisis sent financial markets tumbling Wednesday as Greece faced a crippling 24-hour strike and Spain cleaned up after violent protests near the country’s Parliament.

Spanish bond yields approached 6 percent for the first time in months, while European shares and the euro fell sharply, as developments in Greece and Spain sent a new wave of anxiety through the ranks of international investors.

The Euro Stoxx 50, a measure of euro zone blue chips, closed 2.7 percent lower on Wednesday. National benchmarks were also down, led by the Ibex in Spain, which fell 3.9 percent, and the MIB in Milan, down 3.3 percent.

The euro was at $1.2863, down from $1.2950 late Tuesday in New York.

Spanish bond yields had fallen back from levels thought unsustainable after the European Central Bank announced a plan Sept. 6 to buy the sovereign bonds of debt-strapped euro countries, like Spain and Italy, in amounts sufficient to bring the cost of servicing their debt down to a manageable level.

The renewed spike in borrowing costs indicates that the E.C.B.’s pledge is losing its power to calm markets, at least in the case of Spain. Higher borrowing costs also put pressure on the Spanish government, which is hoping to avoid a full-scale bailout.

The gap between the rates Spain and Italy must pay is growing, with Spain’s borrowing costs rising amid new challenges from disgruntled regional authorities and continuing uncertainty over the central government’s intentions concerning a possible bailout.

Spain’s benchmark 10-year government bond yield rose 30.1 basis points to 5.988 percent late Wednesday, while Italian 10-year bonds rose 10.4 basis points to 5.181 percent. A basis point is one-hundredth of a percent.

Italy’s short-term borrowing costs fell Wednesday at an auction of debt. The Italian Treasury sold €9 billion, or $11.6 billion, of six-month debt priced to yield 1.503 percent. That was down from the 1.585 percent it paid to sell debt at the last such auction, and was the lowest the Treasury has paid for debt of that maturity since March.

Leaders in Greece and Spain are confronting difficult decisions on spending cuts intended to satisfy either international lenders or the bond markets, and events in the two countries highlighted the growing European backlash against the politics of austerity.

In Greece, where political leaders are seeking to negotiate a new round of cuts to placate the troika of international creditors — the European Commission, the European Central Bank and the International Monetary Fund — protesters clashed with the riot police in the first big anti-austerity strike since a new coalition government took power in June.

The troika’s mission to Greece is to release a report next month on whether the government is Athens is on track to meet the commitments it made in exchange for a bailout. At stake is whether the country receives further installments of aid.

In Spain, several thousand people converged on the Parliament on Tuesday, where confrontations followed with more than 1,000 police officers. Wielding batons, the officers charged protesters, and some demonstrators broke down barricades and threw rocks and bottles.

The results of an independent assessment on the crisis in the country’s financial system are due to be released this week, along with next year’s budget and plans for new structural overhauls.

The Spanish prime minister, Mariano Rajoy, has said he is considering whether to seek a new rescue package for his troubled country to lower borrowing costs, but only if they stay too high for too long. He has already secured a promise of up to €100 billion from Spain’s euro zone partners to salvage the nation’s sickly banks.

Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels, said the turmoil in Greece and Spain had added to bearish market sentiment that carried over from comments Tuesday by Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia. Mr. Plosser said the Fed’s latest effort to bolster the economy by buying bonds would probably be ineffective and said the central bank could risk its credibility.

“We have budget discussions in Spain, the troika decision in Greece and demonstrations in both places,” Mr. Gijsels said. “That’s not helping things.”

“I would compare the current situation to August 2010, though,” he added, when the world economy was slowing and there were worries about recession and deflation. “This time all the major central banks are pumping money into the system, but back then it was only the Fed.”

That liquidity, Mr. Gijsels said, has to go somewhere, and if the real economy is moribund, it is likely go into the financial markets, bidding up prices for financial assets.

As a result, he said, he did not expect the current wave of selling to be sustained

Spain's crisis flares again as AAA club scuppers bank rescue deal

Spain's debt crisis has returned with a vengeance after Germany, Holland and Finland reneged on a crucial summit deal and scuppered hopes of direct eurozone help for Spanish banks.

By Ambrose Evans-Pritchard

the Telegraph,

26 September, 2012

Yields on 10-year Spanish bonds punched back above the danger line of 6pc and spreads over German Bunds reached 450 basis points, intensifying pressure on Madrid as it continues to resist a sovereign bail-out.

The alliance of hardline creditors said the European Stability Mechanism (ESM) – or bail-out fund – could not be used to cover “legacy assets” from past banking crises, even after the eurozone’s banking supervisor starts work next year.

This prevents the ESM from recapitalising Spain’s crippled banks directly under a €100bn (£79bn) loan package agreed with Madrid in June. The burden will fall entirely on the Spanish state.

The Spanish newspaper Expansion said the AAA trio had “dynamited” the EU accord. The extra debt burden is likely to be around €60bn or 6pc of GDP, depending on bank stress tests to be unveiled on Friday. Pessimists fear it could rise to 15pc of GDP once full losses from the property crash are crystallised.

The European Commission appeared shocked by the German-led volte-face, saying the original summit deal was “quite clear”. All EMU leaders signed a pledge to break the “vicious cycle” between banks and states. The document said the ESM must be allowed to “recapitalise banks directly”, clearly referring to Spain.

“Europe’s debt crisis may just have returned to centre stage,” said Fathom Consulting. The IBEX index of stocks in Madrid fell 3.7pc.

The Bank of Spain said the economy had shrunk at a “significant rate” in the third quarter, with all major indicators deteriorating. This follows a GDP contraction of 1.3pc in the second quarter.

The deepening slump is playing havoc with public finances. Tax revenues fell 4.8pc in July from a year ago, largely offsetting gains from austerity. This replicates the pattern seen in Greece, where drastic fiscal tightening – without monetary stimulus or exchange rate relief – has fed a self-defeating downward spiral. Premier Mariano Rajoy may have accelerated the sell-off by telling the Wall Street Journal that Spain will not request a full sovereign bail-out unless borrowing costs go “too high, for too long”.

“He is inviting the markets to short Spanish debt,” said Marc Ostwald from Monument Securities. “Markets now know they are fighting Rajoy, not the European Central Bank.”

The ECB says it will not buy Spanish bonds until the country requests an ESM rescue and signs a “memorandum” giving up fiscal sovereignty. Mr Rajoy said he will decide when he learns the exact terms, but talks have become a political minefield.

Madrid is gambling that a reform package and a tough Budget to be unveiled this week will suffice without further conditions.

Yet the German and Finnish parliaments must vote on each ESM rescue. They are certain to demand tougher terms. Spain in turn has issued thinly-veiled threats to bring down the euro temple on Germany’s head if pushed too far. German bank exposure to Spain is €145bn.

Desmond Supple from Nomura said Spain’s 10-year yields would rise back to 7pc over coming weeks as the stand-off drags on, not helped by the “fresh hand grenade” of Catalonia’s threatened secession.

“We fear Rajoy will try to delay a rescue until after the Catalan election. The conditions of any ESM bail-out will involve control over the regions, so this has become intractable,” he said.

Catalan leader Artur Mas has set off a constitutional crisis by calling a snap poll for November 25 – deemed a proxy referendum on independence. “If the government refuses to allow a referendum, we will do it anyway,” he said, calling on Spain to learn from Canada’s handing of Quebec and behave in a “civilised” fashion. Mr Mas said nothing could stop the Catalan people taking “sovereign decisions”, describing recent events as the most dramatic in the 300 years of Catalan history.

King Juan Carlos said it would be “blindness” not to recognise the gravity of the crisis. It is becoming unclear how much longer Mr Rajoy can govern. Anti-austerity clashes with police are turning violent. The latest Metroscopia poll shows 84pc of Spaniards have lost confidence in his leadership.