 S&P downgrades Spain by two notches
Eurointeligence Comment and AnalysisThe neglect of finance in macroeconomics has left us badly unprepared for a credit crisis. Central bankers and top academics united in saying that ‘no one saw this coming’. That is patently false: there are alternatives ways of doing economics and clear forewarnings of crisis had been issued by many in fact. Significantly, none of them adhered to the cutting-edge models, and all include the economy’s financial structure in their analysis.
The downward ratings spiral is now starting again, as the recession looms. S&P downgraded Spain by two notches to BBB+, with a negative outlook on the obvious grounds that the Spanish economy is about to fall into a black hole. The official wording is a bit different, but meaning essentially the same. In its statement, S&P said Spain will miss the deficit target as the economy contracts, and at the same time will need to provide fiscal support to the banks. As a consequence there is now an acute risk that Spanish debt would increase further.
S&P was fairly complementary about the Spanish current account adjustment and the new government’s labour and financial reforms, which should support growth in the long-term. But S&P noted:
Under S&P main scenario, Spanish GDP would decline by 1.5% this year, but under an adverse scenario the decline could be as high as 4%. Under this scenario, the current account deficit would adjust faster, but the fiscal position would deteriorate further. In that case further ratings downgraded would be expected. The Spanish government reacted with the same alienation as other governments have done before: They are not taking into account our reform effort. (If you read S&P’s statement, one discovers that they actually have taken the reforms into account. The problem is that the reforms are irrelevant in dealing with the country’s short-term problems.)
Spanish government releases a falsely translated IMF report with the intent to downplay the risks inherent in the Spanish banking sector
El Pais was in good form this morning, with a story that the preliminary findings of an IMF report on the Spanish banking sector includes a warning of a potential solvency problem as a result of hidden risks in Spanish bank balance sheets. The paper noted that the Spanish translation, released by the government, has softened the language of the report, which said that Spanish had “masked” the risk, while in the Spanish version this had been translated into a warning a “hidden” risks in relation to assets that had a downside, but no potential for an upside. The most important example of such risks is the refinancing of loans to companies and individuals who have no means of repaying them. By refinancing a non-performing loan, it is turned, technically, into a performing loan. The article quoted other examples of euphemisms contained in the Spanish version of the report. The IMF noted that the Bank of Spain has been trying to prevent the abuse of such refinancing tricks, but the lack of concrete data has fed the suspicions of international investors.
Dutch parties agree budget deal
Just three days ahead of a European deadline, the Dutch centre-right minority government was able to agree a budget deal with opposition parties that sets the country on a trajectory for a 3% budget deficit in the 2013. The two main government parties – the Liberals and Christian Democrats – managed to coopt the Green party, in addition to several small central parties, thus giving prime minister Mark Rutte a needed majority. The Dutch paper De Volkskrant reports that the agreement has an expiration of September 2012, which means that the Rutte caretaker administration can proceed normally as planned. The deal consists of cuts to education and healthcare – which one of the opposition parties immediate said it will use as a base for the upcoming election campaign. The paper also included some hilarious quotes by Geert Wilders, whose reluctance to accept the agreement brought the premature end of the coalition. He said the “Kunduz coalition” had surrendered to Brussels. Wilders promised an electoral campaign to safeguard “our sovereignty, our borders, and our future.”
The measures in full
The Volkskrant has another article listing the measures in detail. The cuts total €14bn. They include the following:
Merkel rebukes Hollande on fiscal pact
Angela Merkel rebuked Francois Hollande over his request to renegotiate the fiscal pact. The pact was signed by 25 governments and thus was „not up for a new renegotiation“, the chancellor told WAZ-Mediengruppe, Germany’s biggest regional newspaper group, according to dpa newswire. Merkel stressed that growth had been for a long time „the second pillar of our strategy“ and nothing needed to be changed with this strategy. Also Wolfgang Schäuble said growth had always been part of what the government promoted and there was no need for strategy changes. „Of course we will continue to talk very intensely with the Europeans and with the future French president about what can be done in order to give more impulses for sustainable growth on this basis and in order to overcome the horribly high youth unemployment in some countries“, the finance minister told Südwestpresse, another regional daily.
Draghi wants common eurozone bank rescue authority
Mario Draghi wants euro governments to create a body that would manage bank rescues in the currency union. „In particular in the euro area, the case for strengthening banking supervision and resolution at a euro area level has become much clearer,“ Draghi said at a conference on financial integration according to Frankfurter Allgemeine Zeitung. „Work on this would be most helpful at the current juncture“, he continued.
Unemployment surges in France
For the 11th consecutive month unemployment surged in France according to national data released yesterday. Le Figaro reports that the number of unemployed registered by the French employment agency rose by 16.600 last month bringing the total number of the jobless to 2.9m. The newspaper which normally goes out of its way to support the outgoing president stressed that in 59 months at the Elysée palace Sarkozy presided over 44 months of rising unemployment. On a year on year basis unemployment has risen by 7.2%, the highest level since 1999, Le Figaro writes.
Franco-German anti euro advocates ask for return to national currencies
A group of anti-euro advocates in Germany and France have drawn up a 3-page memorandum, in which they ask for a rapid return to national currencies and the status quo ante 1999, Handelsblatt reports. Among the signatories are the four plaintiffs against the rescue measures for Greece at the German constitutional court. On the French side there is a Gaullist group called „Débout le Republique“.
Robin Wells on the impact of the eurozone on the US
An interesting article in the Guardian by Robin Wells on the impact of the likely-to-fail European austerity experiment on the US. She writes that the direct impact is relatively small in terms of trade. There are some indirect factors that are bigger, such as a potential shift in the exchange rates. But the most important is probably political, and it may be good for President Obama.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
A little better, especial for France, but Italian and Spanish ten-year spreads still above 4%.
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