Eurointelligence Daily Briefing, 11 de Abril de 2012. Enviado por Domenico Mario Nuti.

So much for “the worst is over”

  • Spanish and Italian bond spreads are now above 4%, as crisis returns in full force;
  • Spanish 10-year yields rise to above 6%, approaching the levels at the height of the crisis;
  • the Italian stock market falls 5%, led by a rout on bank shares;
  • investors are getting increasingly nervous about the viability of the Spanish fiscal adjustment programme, as the probability of a Spanish ESM programme increases;
  • Miguel Ordonez says Spain was not even close to an ESM programme;
  • Luis de Guindos says Spain had already raised half of its 2012 finance requirements;
  • analysts say that a Spanish application to the ESM would reveal the mechanism as too small;
  • European Commission picked this very day to say that they are pleased with the latest Spanish austerity programme;
  • John Plender says the effects of the LTRO are petering out as balance sheet encumbrance produces the opposite effect of what the ECB had intended;
  • Reuters Breakingviews warns against further monetary stimulus, as this may drive up the oil price;
  • there is increasing nervousness about different collateral rules being applied by national central banks;
  • Nicolas Sarkozy recent advance in the polls seems to have come to a halt in the latest poll, which shows Francois Hollande recovering ground;
  • Francois Bayrou is now under 10%, and Marine Le Pen is rising again;
  • the French think tank Terra Nova, meanwhile, finds that Sarkozy’s fiscal plan is not adding up. 


It was only a couple of weeks ago, when Wolfgang Schäuble and his subordinates brief journalists in Brussels that it was the calming financial markets made a big firewall unnecessary. And remember all these statements, including from Mario Monti, according to which the worst of the financial crisis was behind us? Complacency is the default mode of eurozone policy makers.

Yesterday, the financial markets produced a reminder that the crisis continues. Italian and Spanish 10-year spreads are now back in the familiar territory of over 4%. Global stock markets fell over fears of a renewed eruption of the eurozone crisis, with Milan down 5%, driven by 8% falls in the share prices of Unicredit and Intesa San Poalo. Spanish ten-year yields now trade above 6% for the first time since December, and in Madrid there is clear no sense at all that the worst of the crisis is over. The 10-year bund yield fell to an astonishing low of 1.649%.

The news coverage, as ever, struggled to explain the turnaround in market sentiment – oscillating between “markets worried about Spain missing its deficit targets” and “markets worried about Spain trying to hit its deficit targets”. Our sense is that investors have belatedly realised that the austerity drive is counter-productive, and that Spain is virtually certain now to require an ESM programme.

El Pais lists the reasons for the shift in market sentiment is the visible deterioration in the Spanish deficit;

the ECB’s LTRO running out of steam; an insufficient attempt to force the Spanish banks to take losses; and doubts over the latest austerity budget. The article noted that the announcement of further €10bn in cuts failed to calm the markets. The bond spreads are now only a whisker from its absolute peak in November when they reached 4.7%. The articles quotes a financial analyst as saying that once Spain applies for the ESM, the mechanism will then be regarded as quite small. Spanish officials were wheeled out yesterday to downplay the crisis, with economy minister Luis de Guindos saying that Spain had already raised half of its 2012 refinancing requirements, and central bank chief Miguel Ordonez insist that Spain was “not even close” to an ESM programme.

Earlier in the day Reuters reported – without even a hint of irony – that the European Commission welcomed new Spanish austerity plans, and that it had a positive view on the 2012 budget draft.


John Plender on Spain

In his FT column, John Plender says there was always a fundamental problem with the LTRO.


“It reinforced the incestuous relationship whereby undercapitalised eurozone banks propped up overstretched sovereign borrowers who stood behind those same fragile banks. In Spain’s case foreign investors have been deserting the bond market and domestic banks are finding it harder over time to plug the gap.”

Plender also makes an important technical argument. Bank balance sheets have been weakened because access to ECB liquidity requires banks to pledge assets at a time when collateral requirements were rising in important market segments, such as covered bonds and repos. The result has been an increase in balance sheet encumbrance – “the pledging of collateral to one group of creditors at the expense of another”. One consequence is that it pushes senior unsecured bondholders down the pole, and that means that senior funding becomes harder to obtain. And as banks find it harder to obtain wholesale funds, they cut their assets, which is, of course, the opposite of what the LTRO has hoped to achieve. Plender concludes:

“So it is beginning to look as though the initial benign impact of the liquidity injection on government bond yields was a temporary phenomenon. Solvency is once again an issue in southern Europe. We are, it seems, back to make do and mend in the eurozone, while over-dependent on an under-powered US economy to extract us from the mess.”


Reuters Breakingviews on opposing interests of consumers and financial markets

Reuters Breakingsview is wondering how central banks will react to the latest round of market nervousness. The article says central banks have been right so far to hold back on further stimulus, fearing a backlash via a rise in oil prices and a negative effect on growth. The article concludes that central banks have a choice to make. If they stick to their current policies, stocks and commodities will take the strain. A drop of $20-$30 in the oil price would help the economic recovery. “What would be bad for financial markets would be good for ordinary consumers, growth and jobs.”


The Balkanisation of the eurozone

Reuters has an interesting analysis on new central bank rules, which strengthen the autonomy of national central banks, and may endanger the coherence of the eurozone’s single monetary policy. The freedom of NCB to set their own collateral rules has been strengthened, while at the same time they are no longer insured against losses by the euro system. The fear is that the northern central banks will stop accepting collateral from the periphery, something that has already happened in Germany. The article says that one consequence of the rule change is that the Greek central bank would now be stranded with collateral losses if a Greek bank were to collapse. The article quotes Willem Buiter, who recently warned that the eurozone was en route to become a post-Soviet style rouble zone.


Sarkozy’s poll lead is stalling

The latest French opinion polls shows that Nicolas Sarkoy’s advance in the polls has now stalled, with Francois Hollande maintaining or extending his second-round lead. A poll by Ipsos Logica for Le Monde and several other news organisations saw Sarkozy at 29% in the first round, half a point down, against Hollande at 28.5%, one point up, while Hollande maintains his second round lead of 55% against 45%. Two further polls had earlier put the second-round result at 53%-47% in favour of Hollande. The Ipsos-Logica poll also showed that Francois Bayrou has now fallen below 10%, and that Marine Le Pen is once again on the rise – though nearly enough to be a threat to Sarkozy.

Reuters quotes Ifop analyst as saying that Sarkozy needed a four-to-five point lead in the first round, to get ahead of Hollande in the second. He said Sarkozy’s response to the Toulouse killings had helped him, but it was not enough, as voters are mostly concerned about unemployment and the falling purchasing power.

The Le Monde also includes another interesting statistics from the Ipsos Logica polls. While 82% of those who voted for Sarkozy last time, will support him this time, Hollande only attracts 68% of those first-round voters who supported Segolene Royal five years ago.


Terra Nova: Sarkozy’s presidential programme lacks €35bn in financing

On its website, the French think tank Terra Nova goes through the programme costs of the presidential candidates and presents its own calculations.  Nicolas Sarkozy’s programme to return to a balanced budget by 2016 is based on cost calculations that, according to Terra Nova, are likely to be underestimated (€26bn rather than €9.6bn). Also there are about €22bn additional taxes that will have to be approved to achieve the balanced budget goal by 2016. Compared to the Socialist programme, which aims to a balanced budget only by 2017, Sarkozy relies more on expenditure cuts (75% compared to 60%) while Hollande counts heavily on the reduction of tax loopholes.


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Spreads higher, euro lower. The crisis has returned in full force.










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Source: Reuters




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