The Spanish bank run has started
Spain yesterday paid a whopping 5.22% for three month bonds, and 5.33% for six-month bonds, as Spanish banks are now too weak to support their own government’s debt issuance. The reason is a withdrawal of deposits – a quiet bank run – that is now in full swing in the banking systems of several southern European countries (see also the story below). The Spanish short-term interest rates are now about 2 percentage points higher than they were a month ago, which shows a dramatic escalation of the crisis. Spanish 10-year spreads were at 4.726% this morning, with Italy’s at 4.966%.
El Pais pointed out that Mariano Rajoy had asked for half an hour of support, and he got precisely that. The article said that Jens Weidmann was in the country yesterday, underlining his hard line.
European banks under massive pressure The ongoing crisis and the EBA’s plans to toughen the ad hoc stress tests are putting European banks under enormous pressure, Financial Times Deutschland, Frankfurter Allgemeine Zeitung and Handelsblatt report. According to FTD, Deutsche Bank ponders what to do with its wealth management that is dealing with €350bn from professional investors. All options including a partial sale are on the table. Particularly hard hit is Commerzbank, which may have to ask for government money, according to Handelsblatt. The background for the troubles of the German banks is that the EBA’s toughened stress tests will apparently reveal a significantly higher need for recapitalization than thought so far. Both papers cite an additional need of €5bn for Commerzbank alone, which market analysts think the bank will be unable to raise on the markets. At the same time FAZ cites an analysis by Citi that points to a creeping capital flight from Southern European banks. The two Italian banks Unicredit and Intesa saw their deposits decrease by 10% and 16% respectively in Q2, the two Spanish banks BBVA and Santander by 11% and 10% and BNP Paribas and Société Générale by 6% and 7% according to the study. According to Handelsblatt French banks are also increasingly dependent on the ECB to satisfy their liquidity needs. Figures provided by the Banque de France show that they borrowed €100.6bn in October compared with only €37.6bn in the previous month.
No sign of a German move towards Eurobonds or the ECB as the lender of last resort Angela Merkel and the German economic establishment yesterday reiterated their uncompromising resistance against Eurobonds and an ECB backstop, Frankfurter Allgemeine Zeitung reports. At a conference of Germany’s employers federation, the chancellor said it was “inappropriate” that the Commission had brought up the debate now. If Eurobonds were ever to see the light of the day, it would have to be at the very end of the budgetary and fiscal integration, not at the beginning. The same message came from Bundesbank president Weidmann. Ifo president Hans-Werner Sinn drew huge applause when he said José Manuel Barroso’s Eurobond proposal should be called “instability bonds” because they would lead to excessive capital movements. In the end, Europe would be “be drawn into a huge morass of debt”, Sinn predicted.
Ultimatum for Samaras The EU decided to send Athens the ultimatum after talks between Jose Manuel Barroso and New Democracy’s vice president and foreign minister Stavros Dimas failed to secure a shift in the stance of ND president Antonis Samaras, who has refused to offer written guarantees to Brussels, saying his word should be enough. “Would there be no cross-party agreement, that disbursement of course could not take place,” Jean Claude Junker warned. Dutch Finance Minister Jan Kees de Jager said his country would block further aid unless Samaras changes his tune.
Meanwhile the leader of the third coalition party LAOS, Giorgos Karatzaferis, shifted from his earlier suggestion that he would do “everything necessary” to secure crucial loans, saying that instead of signing a letter, he would write an article outlining his commitments in his party’s newspaper, Kathimerini reports. In another interesting article, Kathimerini analyses how the participation in the coalition government exposed the ideological rifts inside the conservative ND party, arguing that this could well lead to a breakaway.
The Dutch finance minister announced yesterday that he will meet his German and his Finnish colleagues tomorrow in Berlin in order to discuss how to proceed on the question of whether or not Greece should be granted the next tranche in the EU/IMF loan despite Antonis Samaras’ refusal so far to sign a letter in which he accepts the terms of the new loan, Börsenzeitung reports.
(One would be forgiven for thinking that this attitude shows either steely determination, or in the case of the LAOS leader, a great sense of humour. We fear, however, that this is merely a sign that parochial politics is simply totally out of its depth.)
Belgium on course to insolvency Our table of 10-year bond spreads registered a value of 3.184% for Belgium this morning. This is where Italy and Spain were about five months ago. With a 100% debt-to-GDP level, rising short-term interest rates, no immediate prospects of a government, and the non-zero probability of a disorderly split-up of the country, it is no surprise that investor consider Belgium as a candidate for insolvency. As bond yields rise, this becomes a self-fulfilling prophecy.
Another comprehensive solution beckons: a treaty change that somehow misses the point We are going to hear a lot more about as this is we approach the next summit. The German are pushing for a Treaty change, which they genuinely believe will solve the crisis, and which reflects their warped interpretation of why this crisis arose. Angela Merkel said yesterday: “Treaty changes are for me an immediate part of solving the crisis, the political response to a politically-derived confidence crisis… I don’t see any other alternatives currently. One can’t muddle through anymore,” she was quoted by Reuters. (A treaty change that effectively promises more austerity, forever, and everywhere is not going to calm the markets. Just look at the market reaction to Mariano Rajoy’s victory in Spain. In our view, we have moved to a stage in the crisis, where the only political commitment anybody would care about now would be a strong form of Eurobonds, and an ECB lender of last resort status. The crisis has escalated precisely because Merkel has ruled out both, and of course due to muddling through.
Angela Merkel wins over Nicolas Sarkozy for EU treaty changes Nicolas Sarkozy last night announced that he supported Angela Merkel’s request to change the EU treaty “in order to avoid that (euro) countries can diverge in budgetary, economic and fiscal policies”, Les Echos and Le Figaro report. Sarkozy’s support is an important victory for the chancellor who wants euro countries, which repeatedly break the deficit rules, to be made subject to direct interference by Brussels. Also she wants to possibility to bring them to the ECJ. The question now is, the paper says, whether Sarkozy has obtained a quid-pro-quo, for example German concession on an ECB backstop. Nicolas Sarkozy hinted this could be the case.
Drastic consolidation measures in France The French finance ministry has drawn up a plan to go further than currently envisaged in debt reduction, Les Echos reports. The ministry of Francois Baroin wants to get the debt level, which currently is at 84.4% of GDP and which will rise to 88.3% next year, down to 81.8% in 2016. To do that, the ministry wants to melt down the part of public expenditure in GDP from currently 56.3% to 52.8% by 2016. These plans could be jeopardized by the economic environment because the finance ministry foresees improved economic conditions in the coming years, an assumption that seems somewhat optimistic. The finance ministry’s plans coincide with an interview of Olli Rehn in Le Monde where the economics commissioner applauds France for its most recent consolidation packages but asks Nicolas Sarkozy to go even further. “On top of that, there could be a need for additional measures in 2013 given the economic environment”, he said. “These measures must be adopted, if necessary, during 2012 in the framework of the evaluations that we are preparing in spring. We will make new recommendations in June.”
Martin Wolf on the eurozone In his latest FT column, Martin Wolf argues that the eurozone faces two short-term challenges – managing an illiquidity trap for peripheral countries, and reversing their loss of competitiveness. He writes that „promises of austerity that are bound to make the economy weaker undermine credibility rather than strengthen it. Interest rates have to be capped at manageable levels.“ To achieve this, he says a combination of unlimited EFSF/ECB support is necessary. The latter requires higher inflation. “The ECB should seek to ensure enough demand in the years ahead to facilitate the improvement in competitiveness now needed in peripheral countries. By this standard, the ECB has been unsuccessful. Growth of broad money has collapsed.”
“Bild” thinks that the whole world is out to got “our money” Mass circulation daily Bild today runs an article under the title: “The whole world wants our money”. It announces that today José Manuel Barroso will present his plans for Eurobonds. “Everybody will guarantee for everybody – but in the end only one party will pay the bill: Germany!” But the paper also underlines that the US, the UK and France all press Germany to allow the ECB to turn on the money printing press to solve the crisis. Bild quotes Francois Fillon as having said: “We need to equip the currency union with an instrument to defend our currency”, he said, adding this needed to happen via “a certain evolution of the role of the central bank”. And Bild concludes: The French are also after the big money – and in the end that can only be German money.”
Spreads, Forex, and ZC Swaps Worse everywhere.
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