Eurointeligence Comment and Analysis

 

El Pais has the details on the Spanish rescue package, which show that the government has been misleading the Spanish about the nature of the bailout: it is not just a bank bailout but much broader, and much more flexible. El Pais has seen the 139-page document, which is published in Germany and the Netherlands, but not in Spain. It allows the country to buy up to €100bn in secondary market debt. For as long as Spain meets the criteria, it has access to the full gamut of instruments allowed by the EFSF. The document imposes milder, though still onerous, conditions on Spain compared to Greece, which is a political problem for Germany in particular. It also includes some commentary. The Dutch version says that the assumption that Spain has sufficient capacity to repay the loan was based on the premise that “financing costs will fall from current high levels”. The El Pais article makes the point that this statement logically implies that Spain cannot pay its debt if financing costs remained at today’s levels.

 

Also interesting is a flexibility clause. If Spain wants to use other financial mechanism, it suffices that it writes a letter to the eurogroup, after which the ECB, the Commission and the IMF will negotiate a change to the MoU.

 

Why this secrecy?

 

In a related article, El Pais wonders why this document is not discussed by the Spanish parliament. It contrasts the secrecy in Spain with the openness in Germany, the Netherlands and Finland, which are the prime sources of information. These documents include the MoU, which imposes a timetable of 32 reforms, as well as the document detailing the financial elements of the programme.

 

Spain to sell €3bn in bonds

 

Spain will auction as much as €3bn bonds today, maturing in 2014, 2017 and 2019, Bloomberg reports. None of the securities acts as a benchmark and each bond already has an outstanding volume of at least €16bn euros, according to data compiled by Bloomberg. The two- year security traded to yield 5.25% and five-year yields rose 6.32% yesterday. By focusing on shorter-dated bonds, the Treasury has reduced the average maturity of outstanding debt to 6.36 years in May. Yesterday, 10-year Spanish spreads have reached a new eurozone record of 5.8%.

 

Spanish House prices accelerate at fastest rate so far

 

This sounds bad, but is actually good news. If you know that house prices have to adjust 50-60% in total, but have only come down 20% so far, then the news of an acceleration in house price declines means that the adjustment is finally under way in earnest. El Pais reports that in Q2 the annual rate of house price falls was 8.3%, as published by the Ministry of Development. It is the largest annual decline recorded since the outbreak of the housing bubble, and marks a return to 2004 levels. Bigger than average falls were recorded in Andalusia, Calalonia, and Madrid. The average peak to trough fall is now 23.8% (with still a lot more to come). What drives this process right now is the recession. The article has a lot of details about the breakdown of these figures according housing types, and region. There are also signs that prices are beginning to fall in the big cities. In Barcelona they were down 14% during the year.

  

Xavier Vidal Folch on Rajoy mishandling of the crisis

 

El Pais chief economics commentator Xavier Vidal Folch says the Rajoy doctrine, like earth, consists of four elements: lack of judgment, openly displayed reluctance, helplessness, and faith in technocratic solutions. On the first, he cites some examples of his statements, and concludes that lack of judgement went hand in hand with a lack of principles. On the second he said, the government expresses its displeasure at taking those measures, which is hurting confidence. Helplessness comes in the form of statements, claiming that all this is imposed on us by the EU, leaving Spain no choice. And the blind faith in the measures results is based on a lack of economic analysis.

 

Wolfgang Munchau on why he cannot see that the ESM will inject equity into Spanish banks

 

In his Spiegel Online column, Wolfgang Munchau writes that he cannot see the second element of the Spanish bank rescue package ever to be introduced. The summit reached no decision on the details, yet those details matter. Germany insists that the Spanish state remains liable even if the ESM were to finance banks directly.  But that would be absurd and render the whole idea of severing the link between banks and sovereigns ad absurdum. But the ESM is clearly not equipped, technically and legally, to hold shares or contingent shares in lots of banks, which is what they would need to do if the capital injection has any effect on the eurozone banking sector’s capital position. He calls on Bundestag MPs to demand clarity from the German government on this important point.  He also said that the constitutional court may rule whether the ESM Treaty is sufficiently flexible to allow equity injections, something that is not as clear as the EU authorities seem to make it out.

 

Banking union is needed within months, Noyer urges

 

Euro zone countries need to establish a banking union within the coming months, Christian Noyer told the French radio station Europe 1 according to Reuters. “We have got to put a banking union in place very quickly,” the Banque de France governor said. “We at the ECB and at the Bank of France are working on it this summer. It needs to be in place this autumn”. Some Europe officials have suggested that setting up ECB-led banking supervision by the end of the year would not be possible and that it might not be until the middle of next year before it could be up and running. “We’ve got to have collective intervention capacities for all the euro zone banks in order to provide reassurance,” Noyer stressed.

  

Asmussen warns a negative ruling of the German constitutional court would mean the end of the ESM

 

In an interview with Stern magazine, Jörg Asmussen warned that a negative ruling by the German constitutional court on September 12 would mean “that the ESM in its current form has failed”. In this case “we would lack a very important crisis resolution instrument”, the ECB executive board member stressed. Asmussen also said that he was worried about centrifugal forces at work within the eurozone. “There is a perceived north south divide that I have not known in the past 10, 15 years and that we have to overcome quickly”, he said. Europe is at a crossroad. Either it integrates further and render national powers to the European level or it disintegrates, the central banker insisted. “There are only those two possibilities, we cannot afford to have permanent instability”, Asmussen said.

 

Weidmann opposes Spanish or Italian bond purchases by the ECB

 

In an interview with manager magazin Jens Weidmann reiterated his opposition to purchases of Spanish or Italian bonds by the ECB. “The critical stance of the Bundesbank against bond purchases is well known”, Weidmann said. The Bundesbank president also underlined his opposition to the introduction of short term euro bills as a first step to mutualising some of the eurzone’s debt. He called the euro bills idea “the next attempt to push ahead with an extensive mutualisation of risks without building a consistent framework in the currency union for such a landmark decision or without having a legal framework that would be compatible with it. From our viewpoint such a strategy is not appropriate to overcome the confidence crisis.”

 

Merkel is optimistic that Bundestag will vote in favour of Spanish bank rescue

 

Angela Merkel is optimistic that the Bundestag will vote in favour of the Spanish bank rescue at its special session today, Frankfurter Allgemeine Zeitung reports. Wolfgang Schäuble and his state secretary Thomas Steffen spent the day yesterday trying to convince several Bundestag committees that the bank rescue with a magnitude of €100bn was the right way to take instead of a full blown EU/IMF program. A lot of parliamentarians consider it a mistake that the eurozone has opted for a bank rescue with relatively mild conditionality instead of an EU/IMF program with strict conditions and enforcement. But Steffen told a Europe working group of CDU parliamentarians that a full EU/IMF program would have cost €300bn instead of €100bn.

 

Grilli rules out news fiscal austerity for Italy

 

Italy does not need for other austerity measures, Italian Finance Minister Vittorio Grilli said. According to Il Corriere della Sera, the government “does not have plans”­ for a wealth tax, a VAT increase or other fiscal measures. After the last IMF Article IV Consultation, IMF has requested to Italy to do more on fiscal consolidation. “Italy is on track, we won’t be like other bailouted countries in Eurozone,” Grilli said. The Italian Finance Minister also said that the EU bailout fund ESM will not be operational from this July, but he is not worried. “There is the EFSF,” said. Italy will contribute €14.33bn to ESM by 2014.

 

(This reminds us of what Christobal Montoro said in Spain a couple of months ago.)

 

Fiat to halt production of its new model in August

 

The Italian carmaker Fiat will halt its production for two weeks at its Pomigliano plant due a slump in European sales, La Stampa reports. In Pomigliano, near Naples, in August over 2,000 workers of will remain at home, Fiat said, adding that “The crisis in car sales shows no sign of ending”. Sergio Marchionne, Fiat/Chrysler Group CEO, argued that the Italian automotive market is now back “at levels last seen in 1979”. That is penalising for Fiat, especially in the city car segment where the carmaker owns 60% of the market with its Panda and 500 models. Fiat sales dropped 16.7% in Europe last month, according to European automakers’ association ACEA.

 

Greek coalition agreed on outline for spending cuts, leaves the details for later

 

The three coalition partners in Greece agreed on a basic outline for saving €11.5bn in spending cuts to be implemented over the next two years, Kathimerini reports, without giving any more details. Following a meeting of the party leaders, government officials insisted that they were in agreement but avoided providing details about where the savings would come from. After the meeting Evangelos Venizelos said there would be no new measures for 2012 — despite rumors that another €2bn of cuts being demanded by the troika. He added that leaders had agreed to seek an extension to the country’s fiscal adjustment period, that a new midterm fiscal plan would have to be drawn up to act as a basis for the 2013 budget, and that structural reforms, including privatizations, would have to be speeded up.

 

Switzerland is Germany’s biggest creditor

 

According to Neue Züricher Zeitung, Switzerland is probably the biggest single creditor to Germany. The paper quotes Hans Kaufmann, the leading specialist for financial questions with the populist party SVP according to whom the Swiss National Bank (SNB) is currently holding 7 to 8% of the German federal debt which amounts to about SF100bn. The currency holdings of the SNB are rising because of the exchange rate floor between the Swiss Franc and the Euro that the SNB has committed itself to defend. Since there only remain four AAA-countries in the eurozone (Germany, Finnland, the Netherlands and Luxemburg) in which the SNB is prepared to invest without reserves and Germany is the only one of the four with a deep and liquid market the Swiss holdings of German government bonds has risen continually and will probably continue to do so. The SNB did not confirm the figures put foreward by Kaufmann but experts consider them to be plausible.

 

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

 

Getting worse, much worse for Spain, with spreads now over 5.8%. Euro has stablised after recent falls.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.863	0.893	0.887
Italy	4.801	4.992	4.984
Spain	5.596	5.744	5.830
Portugal	9.315	9.283	9.301
Greece	23.235	23.214	#VALUE!
Ireland	4.961	4.983	5.052
Belgium	1.242	1.295	1.283
Bund Yield	1.232	1.208	1.216
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.228	1.2281
Yen	96.990	96.48
Pound	0.785	0.7844
Swiss Franc	1.201	1.2009
ZC Inflation Swaps
	previous	last close
1 yr	1.43	1.47
2 yr	1.39	1.39
5 yr	1.55	1.49
10 yr	1.81	1.81
Euribor-OIS Spread
	previous	last close
1 Week	-5.286	-5.286
1 Month	1.086	-0.814
3 Months	23.964	22.164
1 Year	90.736	88.936
Source: Reuters