It is hard to beat the Spanish administration in terms of incompetent communication policies. Having previously reported on Mariano Rajoy’s assertion that he was presiding over a “fascinating” situation, economy minister Luis de Guindos yesterday said “Spain doesn’t need a bailout at all”, and that thinking otherwise is “a bit of a misunderstanding”. According to the Wall Street Journalsome in the audience, the LSE, reacted with laughter. Guindos described the ECB’s bond purchasing proposal as an intervention in the secondary market with “certain conditionality”, “not very far” from existing excessive deficit procedure and the European semester.
Reuters reports that de Guindos was picketed by Spanish protesters chanting “you don’t represent us”. Earlier he had face-to-face meetings in London with leading funds, denying that he had solicited investments in Spain’s bad bank. The government hopes that less than 50% of the capital of the ‘bad bank’ will be from the Spanish state so as to avoid it counting against the public debt, and that part of the private capital would come from abroad.
Mario Draghi says the ECB has done its job, it is now up to governments
The FT focused on the essential element of yesterday’s ECB governing council meeting in Slovenia, where Mario Draghi came close to calling on Spain to apply for a programme. Draghi said: “We are ready and we have a fully effective backstop mechanism in place. Now it’s really in the hands of governments. As I’ve said many, many times, the ECB cannot replace the actions of governments.” Draghi also offered some new details: the OMT would only be offered to countries with full, complete access to bond markets and bond purchases would be suspended if a country’s compliance with the fiscal and structural reform conditions attached was put under review.
As ever, when on the annual outing to a member state, the ECB did not discuss interest rates, which seems to have surprised several market participants, given the extreme market reaction to a lack of a rate cut, with spreads and the euro both rising again.
Linde asks for more adjustments
Spain’s new central bank chief Luis María Linde missed Thursday’s ECB meeting in Slovenia as he appeared at the Budget Committee of the Spanish Parliament. According to El Mundo, he told MPs that there were risks of deviation from this year’s deficit goal, advocating additional austerity measures. Linde said that the OMT announcement had had a stabilizing effect, but it would do little more than buy time to take the necessary decisions. He acknowledged that official government projections of a 0.5% GDP drop in 2013 budget were “certainly optimistic” but that this would not impede the credibility of the fiscal consolidation in 2013.
Gloomy Spanish and foreign commentary feed back on each other
The Spanish press is paying attention to foreign commentary, and the picture isn’t pretty. Blogging on Project Syndicate, Christopher T. Mahoney says “Spain is not Uganda”, thus agreeing with an infamous Rajoy text message to Guindos but for different reasons. He says Spain was like Enron. He describes bad credits as Ponzi schemes “in the sense that they must continuously borrow more to stay afloat”. As private creditors will quietly fail to roll over their Spanish debt holders (unlike official creditors), Mahoney says Spain was the largest sovereign credit problem since Germany in 1931. “Spain owes the world about a trillion euro in a currency that she doesn’t print”, which means “she needs a new central bank, quickly”.
Mitt Romney scores in debate at Spain’s expense
The Spanish commentariat reacted with shock at Mitt Romney’s mention of Spain in the first US Presidential election debate on Wednesday night:
“Spain — Spain spends 42% of their total economy on government. We’re now spending 42% of our economy on government. I don’t want to go down the path to Spain. I want to go down the path of growth that puts Americans to work with more money coming in because they’re working.”
Uri Friedman‘s blog at Foreign Policy magazine has a clip from the debate and a fairly comprehensive survey of Spanish reactions. Government reactions generally countered Romney’s argument or questioned his “understanding” and “misperceptions”, while press commentators reflected on the badly damaged ‘Spain brand’.
Political risks mount in Southern Europe
On Monday, James Badcock had an article in Foreign Policy magazine on “The Pain in Spain”, quoting Nicholas Spiro in the NY Times: “Spain is the only country in the world that must contend with a banking, economic, sovereign debt, political, and constitutional crisis all occurring simultaneously.” He quotes political analyst José Ignacio Torreblanca, who said Spain had reformed everything except the financial and the political sector, which are highly interconnected. In yesterday’s newsbriefing we reported an FT article by Mark Mazower arguing that democracy itself is at stake in Greece as its two-party system is unravelling. James Badcock’s piece above points to a similar development in Spain.
And in this vein, on Tuesday Paul Mason of BBC Newsnight had a very good analysis on Spain’s “buried unpleasant truths”, arguing that the unthinkable is becoming thinkable:
“Before the austerity hit there were a whole series of unthinkables in Spain: that the Civil War divisions, of right and left, could ever be reopened;
that the military could ever again intervene into politics (the last time, the Tejero coup of 1981 descended into high farce);
that the modernization and growth that Spain enjoyed could ever be reversed;
that the federal state could never shatter.”
Going a bit further, on Sunday Ambrose Evans-Pritchard of the Daily Telegraph saw parallels between the current crisis and the 1930s… in France:
“Mr Hollande … is replicating the disastrous deflation policies of Labour Chancellor Philip Snowden in 1931, before the Labour Party woke up to the delicious possibility that you could lift two fingers to the forces of reaction and leave the Gold Standard.
Worse yet, he is perilously close to re-enacting the desperate deflation decrees of Pierre Laval … and like Laval he is doing so to uphold a fixed exchange system that is slowly asphyxiating his country and no longer makes any sense.”
French economy stagnates in Q3, too optimistic government forecasts
Latest quarterly figures from INSEE showed that the French economy is stagnating, failing to grow since the last quarter of 2011 and will continue to do so through the end of this year. That will bring growth in GDP for the whole of 2012 to just 0.2%, just below the government’s forecast of 0.3%. Based on those forecasts, and figures already known, economic growth would have to jump to 0.3% quarter-on-quarter throughout the whole of 2013 to meet the government’s annual target of 0.8%, Wall Street Journal quotes INSEE’s head of its economic analysis department Cedric Audenis.
Portugal explores privates placements after successful bond exchange
Portugal is exploring the potential of private placements after a successful bond exchange yesterday, Bloomberg reports. The Portuguese debt agency, known as IGCP, exchanged bonds maturing next year for securities due in 2015, reducing its 2013 repayment burden. It bought €3.76bn of bonds due in September 2013. Portugal has to meet the 2013 bond redemption without relying on the bailout programme, which extends until the middle of 2014. More than 60% of the primary dealers participated in the swap. The IGCP yesterday said it plans to sell as much as €5.75bn of bills with maturities of as much as 18 months in auctions during the fourth quarter.
Italy tries to boost economy with Digital Agenda plan
The Italian government has passed two measures to boost economic growth, a digital agenda bill and measures to reduce the political corruption, La Stampa reports. The latter comes in the wake of a string of regional scandals culminating in the arrest of Franco Fiorito, former Lazio Region caucus leader of ex-premier Silvio Berlusconi’s Popolo della Libertà (PdL) party. Among other things, the anti-corruption bill would use the Audit Court to carry out preventive supervision of the regions’ accounting. The bill also foresees that the tax police can get involved. If the Audit Court rules that certain administrators committed actions that destablized the government, they can be banned from office for 10 years. The Digital Agenda bill aims boost the hi-tech sector and start-up companies. Monti said the idea behind the bill is to close the technology gap. He puts the total effects at “several percentual points” of GDP.
The other victims of Italian crisis: the farmers
Italian farmers said they are facing serious financial problems due to high production costs, expensive taxes and low yields, Il Messaggero reports. The national statistics agency ISTAT said production costs were high while prices for crops are falling. Energy costs were serious factors, rising by 10.6% in the past year, while fertilizer prices rose by 8.8%. Yet at the same time, farmers’ earnings are falling, says the Italian Farmers Confederation. In Q2 2012, prices paid to farmers fell an average of 1.1% compared with the previous three months and increased by just 0.6% from one year earlier. Significant price drops were noted in the sales of cereals, potatoes, olive oil, and fruit. Farmers fear the gap between input costs and what they earn may widen further during 2013, in line with ISTAT expectations.
Monti should decide its political future, Debenedetti said
Italian economics commentator Franco Debenedetti writes on on Il Sole 24 Ore Monti (here the link to his blog) should consider to become a more political actor, as Italy moves away from a technical governments. He says the next election round is crucial for Rome. Italians should decide what kind of eurozone they want: an area in which States freely converge on common (and good shaped) fiscal policies or a “eurozone under continuous special surveillance.” Monti should declare what kind of eurozone he wants.
Martin Wolf defends the Liikanen report
In his FT column Martin Wolf notes that the assets of European banks of 350% of GDP. They are not only too big to fail, but too big to save. He applauds the Liikanen report as a step in the right direction. It contains four salient points: first, it ringfences trading activities, not retail banking; second, it demands a hierarchy of bail-inable debt instruments; third; it imposes an extra capital buffer on the trading books; fourth, it proposes changes to renumeration and to risk disclosure rules. He says these measures would make an important difference, but says they will need to followed by further action.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Not good. Spanish spreads back over 4.5%. The Euro rise to over $.130.
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| 10-year spreads |
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Previous day |
Yesterday |
This Morning |
| France |
0.754 |
0.725 |
0.743 |
| Italy |
3.598 |
3.778 |
3.748 |
| Spain |
4.376 |
4.463 |
4.510 |
| Portugal |
7.318 |
7.178 |
7.446 |
| Greece |
17.727 |
17.566 |
-1.48 |
| Ireland |
3.686 |
3.616 |
3.730 |
| Belgium |
1.080 |
1.046 |
1.063 |
| Bund Yield |
1.443 |
1.449 |
1.479 |
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| Euro Bilateral Exchange Rate |
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Previous |
This morning |
|
| Dollar |
1.295 |
1.3012 |
|
| Yen |
101.750 |
101.98 |
|
| Pound |
0.803 |
0.8035 |
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| Swiss Franc |
1.213 |
1.2115 |
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| ZC Inflation Swaps |
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previous |
last close |
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| 1 yr |
1.85 |
1.87 |
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| 2 yr |
1.68 |
1.7 |
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| 5 yr |
1.8 |
1.82 |
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| 10 yr |
2.04 |
2.05 |
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| Euribor-OIS Spread |
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previous |
last close |
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| 1 Week |
-8.186 |
0 |
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| 1 Month |
-5.486 |
-3.186 |
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| 3 Months |
3.543 |
5.643 |
|
| 1 Year |
54.871 |
54.971 |
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Source: Reuters
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