Eurointelligence Daily Briefing, 12 de Junho de 2012. Enviado por Domenico Mario Nuti.

The markets yesterday gave their thumbs-down to the deal struck over the weekend – though it took market participants a few hours to realise that none of Spains’s problems can be resolved through the EFSF/ESM credit. The day had actually started with a strong market rally, which had already been evident in overnight trading and which we reported in yesterday’s briefing. The rally continued in Europe during the morning, but the gains more than reversed during the day. This morning, Spanish 10-year spreads were back at 5.3%, with yields at over 6.5%. Five-year credit default swaps rose to 595bp, close to an all-time high. We felt the most pertinent comment on Spain was that of Joseph Stiglitz, who said: “The Spanish government bails out Spanish banks, and Spanish banks bail out the Spanish government. It’s voodoo economics.”

 

 

Yesterday’s market reaction significantly increases the chance that the Spanish state, too, will soon require a bailout. (It has always been our assumption that a Spanish programme will be triggered by follow-on programmes, as Spain’s banking crisis cannot be resolved with a European equity injection, and resolution.)

 

Xavier Vidal-Folch on the costs of the deal

 

 

Xavier Vidal-Folch of El Pais did some of the maths behind the deal and concluded that it will raises Spain’s deficit by €3-3.5bn, which will have to be covered through savings elsewhere. He said if the Frob were to recoup some of the money, the annual interest payment will go into the budget deficit. Furthermore, Spain’s debt-to-GDP ratio will rise to over 90%,  compensating any positive effects of the bialout (something that was already evident yesterday.)

 

About the politics of crisis denial in Spain

 

 

Ramon Munoz of El Pais has an interesting analysis of how both Jose Luis Zapatero and Mariano Rajoy denied that there was a crisis in the first place, and once this was no longer deniable, denied that they needed to act. He cited the example of the government’s handling of the Reuters story on Friday, which  said that a  Spanish rescue would be negotiated over the weekend. The story was first denied by a spokesman. As more news organisations confirmed the story, deputy prime minister Soraya Saenz de Santamaria went in front of the microphones to deny it again. And now the government is using euphemestic language: a tax amnesty is a law facilitate labour reforms; and the rescue becomes a soft loan.

 

Maria Fekter says Italy may be next

 

 

Helpful as ever, Austria’s finance minister Maria Fekter yesterday produced a mumbled statement, in which she confirmed that Italy may be a candidate for an ESM programme. She said it was up to Italy to bring itself out of this dilemma, but the possibility of a programme cannot be excluded. She added that given the size of the ESM, it would be unlikely that the funds would be sufficient for an Italian programme.

 

Will there be a programme for the Spanish state?

 

 

Reuters Breakingviews asks this question and concludes that this is unlikely to be the case. For once, international investors these days only make up a fifth of all sovereign bond holdings. The main buyers have been domestic banks, and the recapitalisation is likely to give them more room for manoeuvre to increase their purchases. But banks can’t finance the government forever, and rising yields would accelerate the capital flight from Spain. And when Spain gets under the umbrella, ltaly might be dragged into the vortex as well.

 

Barroso proposes banking union for next year

 

 

This is the most concrete proposal we have yet heard, at least it attached with a date. In an interview with the Financial Times, Jose Manuel Barroso is calling for a banking union where member states submit all their banks to a common system of supervision, including bank recapitalisation and deposit insurance. He said the change in the regime could be made without a treaty change (though we believe that they changes, along with the fiscal pact, and the ESM, will ultimately have to be brought into the treaty.) This is the most far reaching proposal to have come out of the European Commission for two decades. But Barroso cautioned that this should not be seen as a direct bank resolution policy, but a policy to address the problems in the long-term. (We suspect this is language to placate the complacent members of the European Council who believe that none of this is necessary. But the whole purpose of a concrete decision to a banking union, to be implemented within months, is, of course, to address the present crisis).

 

Who got the better deal?

 

 

In Ireland there is a lively discussion about whether or not Spain has secured a better deal than Ireland even if the final details of the deal are not yet on the table.  Prime Minister Enda Kenny said on Monday that Ireland already has some advantages over Spain including having until 2015 to cut its budget deficit to 3%, a year after Spain. Ireland’s bailout does not require to apply preferred creditor status on its loans from Europe, as it is for Spain, deputy finance minister Hayes said. And Europe Minister Lucinda Creighton made it clear that if Spain is offered interest rates and repayment periods that are more beneficial than those offered to Ireland, Dublin would seek and expect “parity and equivalent treatment.”

 

We too!

 

 

The bailout for Spain fueled strong hopes in Greece for a better deal, Kathimerini reports.  “Developments in Spain fully vindicate us in our reading of the crisis: This is a deep structural crisis of the eurozone itself,”SYRIZA spokesman Panos Skourletis said, adding that the developments in Europe open new perspectives for Greece and the eurozone. Conservative leader Antonis Samaras suggested that Athens should seek to negotiate with Europe rather than clashing with it. Reutersnotes that whichever of the two parties wins on June 17, it seems likely that the terms of Spain’s rescue will put Athens on course for a new showdown with Brussels that could determine whether Greece remains in the euro.

 

Relaxed neighbours

 

 

In Portugal Pedro Passos Coelho said Monday that he has no doubt any special treatment Spain may receive on its aid will be given to other bailed-out countries, according to Dow Jones.  He stressed, however, that Portugal isn’t seeking changes to its €78bn aid programme. Jornal de Negocios writes economists expect the bailout of Spanish banks to also benefit Portugal directly.

 

Contingency plans in preparation for Grexit

 

 

The Euro Working Group has been discussing detailed contingency plans for the worst case scenario of a Greek exit, according to Reuters. The discussions have taken place in conference calls over the past six weeks, as concerns have grown that a SYRIZA may win the second election and renege on the bailout agreement. Among the ideas discussed are limiting cash withdrawals and imposing capital controls, but the possibility of suspending the Schengen agreement though it is still examined whether there was a legal basis for such extreme measures, according to one official.

 

Lagarde says eurozone has three months to save the euro

 

 

Christine Lagarde told CNN (via a report in El Pais) that she agreed with George Soros’ assessment that the EU had about three months to save the euro. She added that this was not a precise date, but what mattered at this stage is the demonstration of a clear political will to solve the crisis.

 

German economic establishment supports Merkel’s euro policy

 

 

The economic council of the CDU, a group of business people close to Angela Merkel’s Christian democrats, overwhelmingly supports the chancellor’s euro crisis policy, Handelsblatt reports. A poll among the 12.000 members showed that they were in favour of a rapid ratification and implementation of the fiscal pact and the ESM and that they also supported further European integration. 

 

Otmar Issing warns against a further mutualisation of debt and risks

 

 

In a guest comment for Frankfurter Allgemeine Zeitung Otmar Issing warns against any further mutualisation of debt and risks in the EMU.  “The principle that each country is responsible for the mistakes of its own policy (no-bail-out-clause) is not only a fundamental part of the foundation of the currency union, it is also a non-negotiable element of a union of sovereign states”, the former ECB chief economist writes. It is in total contradiction “with democratic principles and economic reason for citizens to accept liability when they have no influence on the parliaments that take the decisions”, Issing continues. “Germany would do the right thing to stick to the treaty and as the others to do the same. A Germany that would drown in debt because it takes liabilities as a result of an ill-conceived sense of solidarity will provoke the rage of its citizens and alienate them even further from the European idea as is unfortunately already the case now.”

 

Antonio Padoa-Schioppa asks Germany to spell out the terms under which it is ready to engage into a political union

 

 

In a guest comment for Handelsblatt Antonio Padoa-Schioppa asks Wolfgang Schäuble and the German government to spell out the terms under which it is ready to engage into a political union. The law professor and brother of Tommaso Padoa-Schioppa warns that Germany’s tough current stance in the euro crisis risks destroying the euro and provoking strong anti-German feelings elsewhere in the eurozone. “If personalities of your country with the experience and the prestige of Helmut Kohl, Helmut Schmidt, Gerhard Schröder, Joschka Fischer or Jürgen Habermas – to cite the most prominent ones – are highly alarmed, is that no reason to worry?”, he asks. Padio-Schioppa reminds Schäuble that he was the co-author in 1994 of the Schäuble-Lamers-paper that argued for a strongly integrated core Europe. If Germany proposed a fiscal union with its own resources, a mutual responsibility for debt and a truly democratic government for Europe, “then I am sure the response will be positive”, Padoa-Schioppa writes.

 

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

 

 

The crisis returns.

10-year spreads
	Previous day	Yesterday	This Morning
France	1.180	1.257	1.278
Italy	4.436	4.833	4.833
Spain	4.913	5.222	5.299
Portugal	9.733	9.376	9.307
Greece	27.741	27.645	#VALUE!
Ireland	6.049	6.027	6.239
Belgium	1.777	1.868	1.982
Bund Yield	1.337	1.307	1.307
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.261	1.2495
Yen	100.300	99.34
Pound	0.811	0.8066
Swiss Franc	1.201	1.201
ZC Inflation Swaps
	previous	last close
1 yr	1.41	1.52
2 yr	1.35	1.41
5 yr	1.43	1.54
10 yr	1.8	1.93
Euribor-OIS Spread
	previous	last close
1 Week	-6.014	-4.714
1 Month
3 Months
1 Year
Source: Reuters