It was always a fallacy that the three-year LTRO would give governments about two or three years’ time. That this is not so is now becoming obvious. The Spanish spreads are back up at 4%, and are also dragging up Italian spreads close to that level. Another acute phase of the crisis is returning, as the markets are slowly realising that an LTRO has not really changed the underlying parameters of the crisis. The latest increase in spreads was triggered by a Spanish bond auction on Thursday,   when a debt auction yielded just €2.6bn, with a target range of €2.5-3.5bn.

 

 

Mariano Rajoy now wants to step up austerity to calm the markets, by seeking a further €10bn in what he called efficiency savings in the health and education sectors. He is due to spell out the plans tomorrow. (Much of the news coverage on this story suffers from an internal contradiction. The headlines say: more austerity to calnm markets, but later in the story it emerges that austerity is what the markets are most afraid of.)

 

 

Bloomberg reports that Charles Dallara, head of the Institute of International Finance said Europe was focusing too much on austerity, and that his threatened the economic recovery. He said it was essential for the European to strengthen their firewall, and that that progress on this front had been insufficient.

 

Reuters Breakingviews on the hard options facing Spain

 

 

Reuters Breakingviews says Spain and the eurozone are heading for another difficult period. The overshoot in the deficit target may have been the trigger for the latest round of nervousness, but markets are worried about growth, and the rising social tensions, with youth unemployment now over 50%. The article quotes an estimate by Citigroup which says that Spanish banks could stand to lose another €200bn under a distress scenario. A full EFSF programme is too large, but a partial programme to deal with the banking system is more likely.

 

 

(Even that may overburden the EFSF/ESM. We come to a similar conclusions as Citigroup, as the Spanish housing market has much further to fall. Austerity is accelerating the Spanish crisis. We believe that the country is heading for a programme that will overburden the ESM, and simultaneously not solve the problem, as it will force an even larger fiscal adjustment.)

 

FT demands growth agenda for eurozone

 

 

The Financial Times calls for a eurozone growth agenda in an editorial, one that includes demand management, not just supply-side reforms. First, the article says, Europe must increase its level of investment to compensate austerity. Second, the eurozone must do more to support the internal devaluation in the periphery through co-ordinated fiscal policies to stimulate consumption in the core. Third, there is room for further monetary easing.

 

 

(Dream on. The ECB is not going to cut rates, unless pressure was rising further, and there is no chance of a coordinated fiscal policy, as everybody is tightening, albeit to varying degrees. There is some limited support from Germany’s economic strength and a likely inflation overshoot – but that is not going to produce a eurozone-wide stimulus.)

 

Head of Egan-Jones rating agency expects large transfers

 

 

The guy is without a doubt a maverick, but he is the head of the world’s No. 4 rating agency, and his track record has been pretty good. He told Frankfurter Allgemeine in an interview that the situation in Portugal was unsustainable. He also predicted another Greek programme, and a total loss by investors of 95%. Since this disaster will ultimately require massive transfers from the north to the south –his rating agency has downgraded Germany.

 

Portuguese bank’s borrowing from ECB hits new record

 

 

Portuguese banks’ borrowings from the ECB jumped to a new record in March as they took advantage of its LTRO offer of cheap long-term funds, according to Reuters. The Bank of Portugal said on its website on Monday cumulative borrowing at the end of last month rose 18% to €56.3bn from €47.5bn in February and greater than the previous record level of €49.1bn in August 2010.. The March dat a reflected Portuguese banks’ take-up of the February LTRO offer. According to Bank of Portugal head Carlos Costa over 80% of ECB money borrowed by Portuguese banks was now three-year funding.

 

Greece extended deadline for debt swap again

 

 

Greece extended a deadline for a second time on Thursday for remaining bondholders to accept a debt swap, giving Athens a little more breathing space to formulate a response to investors who have refused to sign up for swap deal, Reuters reports.  Athens gave investors on Thursday until April 20 to join in. Then the government is left with three options: continue to service the bonds, default and trigger litigation, or come up with a new offer while ensuring fair treatment for those that accepted the swap.  Greece needs to decide what it will do by May 15, when a €450m bond expires. Greece said earlier it cannot afford to fully pay holdouts and that the swap deal that domestic-law bound bondholders were forced to accept last month is the best available offer.

 

Main parties are hitting new lows in polls ahead of official campaign start

 

 

The popularity of Greece’s two mainstream political parties fell to a new all-time low, according to poll results Monday, just days before the official start of the campaign for the country’s national election. The conservative New Democracy and socialist PASOK combined would command together just 32.4% of votes, while six other parties would also be represented in parliament. The newly formed, right-wing Independent Greeks would command 7%, benefiting from languishing support for New Democracy. 10% said they wouldn’t cast a vote or 19.2% haven’t decided what they are going to vote. Greece will dissolve parliament on Wednesday, paving the way for the official start of the campaign for the country’s national election thereafter, according to Dow Jones. Elections are expected to be held on May 6.

 

Greek parliament approved new money for parties

 

 

Yesterday, the Greek parliament narrowly voted Monday to grant the main political parties a 29-million-euro cash injection ahead of elections but the issue caused a significant rift, writes Kathimerini. The main parties owe more than €100m in unpaid staff and bills, and also owe large amounts to Greece’s main social security fund, IKA.

 

Hollande announces finance audit if elected

 

 

Francois Hollande said on Thursday he would order an audit of public finances if elected in May, Reuters reports.  The move appeared designed both to steal some of Sarkozy’s show and to prepare the ground for austerity measures that could be blamed on his predecessor’s handling of France’s debt and deficit. It also came after a cover story in the Economist weekly entitled “France in Denial” made waves in political circles by accusing both leading candidates of lacking serious ideas for tackling the country’s economic and fiscal problems.   

 

Sarkozy catches up in second round poll, Le Pen popular among the young

 

 

An opinion poll published today by Le Figaro suggests that Sarkozy is keeping its lead in the first round with 28.5% and increases his chances in the second round, whith Francois Hollande receiving 53% (-1pp) of the votes against Nicolas Sarkozy with 47% (+1pp).  Marine le Pen, meanwhile, is becoming frontrunner among young voters, aged 18-24, with 26% support in the latest polls (up from 13% in Q4 2011) Le Monde reports. 

 

German Pirates now ahead of the Green

 

 

The new Pirate party in Germany is shaking up the political landscape to such an extent that the Social Democrats and Greens have lost their polling lead over the current coalition. This is no real consolation for Angela Merkel, as this reflects a reposition among the Left. Der Spiegel has a Forsa poll out this morning according to which the Pirates have overtaken the Greens (with 13% vs 11% respectively). Merkel’s CDU/CSU has 36%, SPD 24%, and the Left 8%, and FDP 5%. This result suggests two most likely outcomes – a Grand Coalition under Angela Merkel, or a coalition of SPD, Greens and Pirates. The latter, however, would not have a majority in the current poll if the FDP were to make it into the Bundestag (something we expect to happen despite its current crisis).

 

Adam Posen says Germany’s unemployment rate to fall below Nairu

 

 

This is an interesting comment made by Adam Posen of the Bank of England about his estimates of the German natural rate of unemployment. According to Reuters, he said during a conference in the US that German unemployment will continue to fall from a most recent level of 6.7% to below the Nairu of about 5%. That fall would generate some inflation, he predicted, which will make things a little difficult for the ECB. Posen also expects faster wage growth in the next couple of years. Eurozone average unemployment, however, is likely to stay high.

 

Boeri and Garibaldi dismiss Monti’s labour reforms

 

 

Writing in Lavoce, Tito Boeri and Pietro Garibaldi gave a critical assessment of the recently agreed Italian labour reforms. The compromise maintains the principle of easier dismissals, but with fewer restrictions on the abuse of temporary contracts. They argue that the compromise will not resolve the main issue – the dual labour market, and it will increase the tax wedge and the complexity of the dismissals procedure. They conclude that it will take for more courage to open up the labour market, which will now have to be done in another reform programme.

 

Wolfgang Münchau on the madness of the Wolfson prize

 

 

In his FT column, Wolfgang Münchau has a go at the Wolfson prize, which asks this year how to coordinate a eurozone break-up in best possible manner. Munchau says the economic illiteracy of eurozone policymakers is matched only by the political and legal illiteracy of the economics community. A breakup of the eurozone may still be possible, he argues, but there are no friendly and cooperative ways to attain such a catastrophic outcome. Given the necessity to announce an exit relatively quickly, the options are seriously limited. If a country decided to break the treaty, and not leave the EU, a unilateral exit would drown the EU in innumerable law suits. The other options are a treaty renegotiation or an EU exit, but either option would take too long to negotiate and ratify for this to be practical, since a pre-announced changeover would produce capital flight that would be hard to stop – even with emergency legislation. By assuming all these problems away, the economics community has done itself no favours, and cemented their irrelevance in this debate.

 

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

Just look at those spreads.

10-year spreads
	Previous day	Yesterday	This Morning
France	1.151	1.261	1.272
Italy	3.574	3.727	3.780
Spain	3.913	4.043	4.090
Portugal	10.424	10.630	10.802
Greece	20.383	20.264	#VALUE!
Ireland	5.102	5.189	5.345
Belgium	1.713	1.843	1.876
Bund Yield	1.805	1.73	1.677
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.307	1.313
Yen	106.440	107.06
Pound	0.823	0.8244
Swiss Franc	1.201	1.2019
ZC Inflation Swaps
	previous	last close
1 yr	2.07	2.07
2 yr	2.02	2.02
5 yr	2	2
10 yr	2.21	2.21
Euribor-OIS Spread
	previous	last close
1 Week	-8.871	-8.271
1 Month	-0.757	-0.057
3 Months	28.907	29.407
1 Year	98.129	100.529
Source: Reuters