 Bond spreads rise as constitutional court postpones ruling until September 12
The German constitutional court announced yesterday that it will rule on September 12 on the ESM,Spiegel Online reports. While the announcement gives clarity to the judges’ calendar, it also raises the question what would happen should Italy require help before that date. The website points out that there is enough money in the EFSF to deal with the Spanish bank rescue program. Italy itself has not ratified the ESM because there is controversy around the fiscal pact which is up for ratification with the ESM. Also Malta and Estonia have so far not ratified.
Yesterday, Italian 10-year spreads reached 500bp, with 10-year yield at over 6.2%. Spanish spreads have also jerked up again, to over 5.6%. The situation is once again deterioriating. Two months of uncertainty is a very long time in the eurozone crisis. Expect a very hot summer.
IMF says Spain will even miss the revised deficit numbers
Of course they will. Those deficit targets are a joke because the minute you adjust them, they will already be out of date. According to the IMF Fiscal Monitor, and as reported by Reuters, Spain’s deficit will only fall to 7% this year (from 8.9% in 2011), and to 5.9% in 2013. (The implication is that there is no way that Spain can meet the 3% target in 2014.) Spanish debt-to-GDP would go up to 90.3% in 2012 and 96.5% in 2013. The latter figure would come down sharply if and once the direct recapitalisation of Spanish banks came into force. (And if the full risk resides with the EMS, which is not yet clear). The reason for the deficit overshoot is less revenue to due to the recession, and higher spending on unemployment and social benefits.
The IMF also cut its global growth forecast for 2013 to 3.9%, down from 4.1%, warning of further downward revisions unless European policymakers started to speed their crisis resolution policies. It also warned that the productive capacity in China, India and Brazil may be lower than previously believed and that future growth could disappoint. “The most immediate risk is still that delayed or insufficient policy action will further escalate the euro area crisis.” The economic outlook for the advanced economies is thus relative grim, with growth 1.4% this year, and 1.9% in 2013.
Spanish unions expect large scale job losses in the Spanish banking sector
El Pais has the story that the restructuring of the Spanish banking sector has severely negative consequences on employment in the sector, and on the access of rural areas to bank branches. UGT claims that the policies will leave 4.8m people with no bank branch in their area, 12.7% of the population. The union demands the creation of a public bank group. The report shows that between 2008 and March this year 30,172 jobs in the banking sector have been lost, and 5,700 branches have been closed. Anlother 5,000 branches are expected to close as a result of pending mergers, with a further 10,000 closes expected in the future.
Bavaria is going to the constitutional court over the Länder financial transfer system
The state government of Bavaria will decide today to go to the constitutional court over the inner-German financial transfer system, Süddeutsche Zeitung reports. Bavaria is the biggest net contributor to the system in which also the two other wealthy Southern German states Baden-Württemberg and Hessen pay in while all the other 13 states are either receiver states or finically neutral. But Bavaria is particularly exposed because out of the €7.3bn paid into the transfer system, €3.7bn came from that state. Bavaria requests that its payment be diminished and a cap be established. Should more money be needed the federal government has to pay for it, Bavaria requests. Baden-Württemberg and Hessen are also unhappy with the current system but they so far don’t intend to go to court over it. Seehofer faces state elections in 2013 and financial transfer system is unpopular with his electorate.
Draghi was backed by the ECB’s governing council in his push to impose losses on senior bank bond holders
According to Financial Times Deutschland Mario Draghi was backed the ECB’s governing council in his push to impose losses on senior bond holders of unviable banks. Just before last week’s eurogroup meeting the ECB’s board members and the 17 national central bank presidents held a telephone conference to give Draghi authority to push for letting senior bond holders bleed in case a is deemed unviable and will be liquidated, the paper reports. According to FTD the plan met opposition by some finance ministers and the commission. There were two reasons for the ECB to go for the plan that represents a U-turn compared to the policy followed by Draghi’s predecessor Jean-Claude Trichet who had fiercely opposed involving the senior bond holders in the Irish bank rescue for fear of undermining the entire bank bond market. First the restructuring needs of the Spanish and some other bank sectors are of such a magnitude that the existing instruments were insufficient to cover the needs. Second the plan is destined to save taxpayer’s money because the political support for the bank rescues is eroding which puts into danger the entire concept of the divers rescue programs.
Noyer admits that low policy rates don’t benefit the banks
The banks of the eurozone are not fully benefiting from the ECB’s record low interest rates as funding costs in the market remain high, Banque de France governor Christian Noyer told Handelsblatt. In an unprecedented move, the ECB earlier cut the euro zone’s key interest rate to a record low of 0.75% and lowered the rate it pays banks for overnight deposits to zero. But Noyer told the paper that such changes had little effect on banks’ funding costs. “What we see is that we have a clear problem of transmission of monetary policy. In the eyes of the markets, the interest rate charged to individual banks depends on the funding costs of the sovereign and not on the rates set by the central bank”, Noyer said. “This means that the monetary policy transmission does not work. We tried to counter this phenomenon which is unacceptable for a central bank in a monetary union,” Noyer said. To ease banks’ funding strains, the ECB has pumped more than €1tr into the banking system in the form two of 3-year loans in December and February, but Noyer said the ECB could not keep such support measures in place indefinitely. “For the future we cannot indefinitely rely on a system where the central bank is massively funding the banking system and massively receiving liquidity on the other side of its balance sheet,” he said.
ECB rate cuts may kill off money market funds
When central bankers discuss the pros and cons of extremely low interest rates, they invariably talk about money market funds. We recall a statement by former Bundesbank president Axel Weber, who rejected zero rates on the grounds that they would destroy the business model of these funds. Reuters has a story, citing S&P, according to which the funds face a difficult future, with accumulated fund closures of €79bn, with a total remaining asset pool of €133bn. Because of the 0% deposit rate, there is now an increased likelihood of negative yields on individual money market investments and a greater chance of lower net asset values. The story says that if the ECB were to cut rates further, investors may decide to redeem their shares, increasing strain on the money market funds.
ECB’s policy shift gives munition for Noonan’s case
The ECB’s “extraordinary” shift of policy on burning senior bondholders, which was presented and rejected by the eurogroup of finance ministers, might serve as a extra “leverage” to Michael Noonan’s case for a substantial reduction to be applied retrospectively, the Irish Times reports. The argument is that a change in the ECB position last year could have allowed the Irish government to negotiate a writedown of debt with senior unsecured unguaranteed bondholders at Anglo Irish Bank and Irish Nationwide holding almost €4bn of debt and €16bn across all Irish lenders at about the time of last year’s bank stress tests. The practical significance of a writedown is less today. All but €160m of senior debt in the former Anglo Irish Bank and Irish Nationwide had already been paid.
IMF approved Portugal disbursement with cautious warning
The IMF on Monday approved a €1.48bn loan disbursement to Portugal under the country’s €78bn- bailout and urged it to stick to strong economic policies and reforms so it can regain access to capital markets, Reuters reports. It said Portugal’s end-2012 fiscal targets (4.5% deficit to GDP) “remains within reach” but cautioned that weaker revenues meant that the authorities risked missing the budget deficit goals.
Gillian Tett on what it really takes to have a banking union
Hurray: Latvia may meet full euro criteria next year
Now that the Latvian economy is essentially wrecked, it is on the verge of meeting the full eurozone entry criteria, according to the IMF, and as reported by Reuters. “The staff believes Euro adoption would help remove exchange rate risk and reduce vulnerabilities stemming from currency mismatches, lower interest rates and enhance financial sector stability,” the IMF report said. The only criterion, on which Latvia might struggle is the inflation rate, which now stands at 3.6%. Current IMF projections suggest that Lavia may just make it to get inflation below the reference rate.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Spanish spreads spike again to over 5.6%, and Italian spreads reach 5%. The euro stabilises in the $1.22/1.23 range, for now.
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