Saturday, 16 June 2012

More Pain in Spain, ‘Herculean Tasks’ and the Latest from the ECB

Spain's Bond Market Still Under Pressure: Although Spain's stock market has remained buoyant over the past two trading days – no doubt because the prospect of the bank bailout is keeping a bid under bank stocks for now – the Spanish government bond market has continued to go haywire.
Yields reached a new euro-era high on Thursday, almost touching the 7% level (10 year yield) intra-day before backing off slightly to close at 6.911%, a new closing high.

The subordination of Spain's existing creditors to the EFSF/ESM after the  bailout as well as the wave of credit rating downgrades the plan has set into motion both evidently continue to weigh on Spain's government bonds. Slowly but surely it looks like we may have to discard the 'temporary double top' idea. So far the breakout is still small, but it is becoming less so by the day.

Spain's 10 year yield closes at 6.911%, a new record high since Spain adopted the euro – click chart for better resolution.

Spain's 2 year yield is still well below the November panic high, bit it too is rising fast - click chart for better resolution.

Economy minister Louis de Guindos felt he had to add his two cents to the proceedings and promised he would do whatever it takes to bring yields down:

„Spain's Economy Minister Luis de Guindos said on Thursday the government would take further measures in coming days and weeks to help bring down a debt risk premium that is seen as unsustainable.
On Thursday the spread between Spain's ten-year bond and benchmark German bunds hit a new euro-era record high of over 550 basis points.
"It is not a situation that can be maintained over time…and I am convinced that we will continue to take more measures in the coming days and weeks to help bring it down," he told reporters in the corridors of parliament.“

The thing is, this may not really depend on anything he does or doesn't do; as it were, it is our impression that Spain's government is fairly serious about wanting to get a grip on its deficit. However,  the banking crisis and the collapse of the real estate bubble are a 'moving target'  – the problems are getting worse and worse as time passes. In fact, the recent strength in bank stocks is slightly mysterious considering how closely intertwined the fate of the banks and that of the government have become. We have taken the two charts depicted below from a recent CLSA missive – they highlight the problem nicely:

Holdings of euro area government bonds of Spanish banks – the spike in late 2011/early 2012 ensued following the ECB's LTRO's, and the banks bought mainly Spanish government debt - click chart for better resolution.

Apart from being weighed down by government debt that loses value every day of late, the banks also have to battle an accelerating run on deposits. It is little wonder that their borrowings from the ECB have reached yet another record high in May, closing in on € 325 billion.

The run on deposits in Spain – corporations have been faster to withdraw their money,  but individuals are now following suit - click chart for better resolution.

The IBEX has continued to bounce over the past two trading days - click chart for better resolution.

Germany, Europe and Hercules
German chancellor Angela Merkel and BuBa president Jens Weidmann made a number of remarks ahead of the G 20 meeting that tell us that Germany remains steadfast in its approach to the crisis – so far, anyway. We suspect it will eventually succumb to agreeing to further ad hoc measures as the crisis worsens. Mrs. Merkel invoked Hercules and noted that 'Germany's strength is not infinite'. Presumably the same goes for Germany's patience.

„Germany's Angela Merkel rejected any quick solution to the euro zone's deepening debt crisis as counterproductive on Thursday, saying Europe must instead pursue the "Herculean task" of closer political integration. 
Speaking to parliament before a meeting of Group of 20 leaders in Los Cabos, Mexico, next week, the chancellor reiterated her opposition to "miracle solutions" like joint euro zone bonds and a Europe-wide deposit guarantee scheme for banks, saying Germany could only go so far. 
"Germany is strong, Germany is the economic engine and Germany is the anchor of stability in Europe. I say that Germany is putting this strength and this power to use for the well-being of people, not just in Germany but also to help European unity and the global economy," Merkel said. "But we also know, Germany's strength is not infinite."
All eyes are focused on Germany because we are the biggest economy in Europe, because we are a big exporter." 
But she rejected "easy solutions" involving the mutualisation of European debt as counterproductive and said that they were constitutionally impossible in Germany. 
"We don't make policy for the markets, but for the future of the people in our country," Merkel said.“

(emphasis added)
So one can for now continue to forget about all 'solutions' that establish joint liability without accountability in the euro area. We're not sure that the markets wanted to hear that there is someone not 'making policy for them'. They will have been even less enamored of what Jens Weidmann had to say about the ECB's role at this juncture:

“The European Central Bank must resist calls to widen its mission of defending price stability, even against the backdrop of the escalating debt crisis ravaging the currency zone, European Central Bank Governing Council member Jens Weidmann said Thursday. 
Allowing inflation to rise wouldn't solve the continent's problems, Mr. Weidmann, who also serves as president of the Deutsche Bundesbank, said at an event in Mannheim. 
"Monetary policy's obligation to its primary goal of price stability is a historical achievement, and there should not be any concessions to this," Mr. Weidmann said. 
The ECB has come under mounting pressure in recent weeks to take further action to help end the crisis, particularly from Spain, where government bond yields have risen to record levels. Policy makers and analysts from across Europe and the U.S. have also urged the central bank to relax its inflation-fighting focus and carry out further crisis-fighting measures, including cutting interest rates below 1% and buying more government bonds.
In a question-and-answer session after the speech, Mr. Weidmann stressed the ECB has already "taken very extensive special measures in the crisis [and has] arrived at the limits of [its] mandate." 
Mr. Weidmann said price stability remains the best contribution monetary policy can make toward financial stability. 
"Discussions about the use of higher inflation goals or an extended mandate for monetary policy…are poisonous for confidence," he said. "Short-term emergency measures…shouldn't run against the long-term aim of stability." 
"The Bundesbank has repeatedly warned the ECB's extraordinary measures risk stoking inflation over the longer term. The ECB "shouldn't give in to the time span of markets," which shift their focus every few weeks, Mr. Weidmann said. 
Rather, it is up to governments to overcome the crisis by determining a future direction for the euro zone, which will restore market confidence, he stressed. But he warned loans to troubled euro-zone states must be accompanied by tough conditions to ensure problems don't recur. 
"Conditionality is one of the key preconditions [to ensure] that poor competitiveness is tackled at its roots," and the political will to reform is maintained, he said. Turning to Spain, Mr. Weidmann said the country's "hope for funds without conditionality is an example that countries find it difficult to give up autonomy" on fiscal matters.
The Bundesbank head also took a rare public swipe at another euro-zone state, saying the different cultures in the euro zone would also be a challenge to fiscal union. He referred to France, where President Francois Hollande recently moved to lower the retirement age from 62 to 60 for some workers. 
"Let's not be under any illusions: there are big differences here even between Germany and France. Public spending is 46% of GDP in 
Germany, and 56% in France," Weidmann said.
"While Germany is reacting to demographic challenges with a gradual increase in the retirement age to 67, in France, a recently enacted increase from 60 to 62 years is now due to be partially reversed," he said.”

(emphasis added)
Whoa! Yet another German not eager to please the financial markets. As to 'politicians solving the crisis', good luck with that. If they could, they probably would have done it already. Of course there can be no doubt that Weidmann is correct. Higher inflation won't resolve anything.
Hollande's government meanwhile deserves every public swipe it gets. Let's have more of those.

ECB Refuses to Release Details on Greek Swaps

Meanwhile, the ECB continues to clamp down on the details of the Goldman Sachs swaps with Greece that allowed the Greek government to hide the extent of its budget deficit. Releasing the details would be bad for business, so the argument goes:

“The European Central Bank said it can’t release files showing how Greece may have used derivatives to hide its borrowings because disclosure could still inflame the crisis threatening the future of the single currency. 
Bloomberg News is suing the ECB to provide the documents under European Union freedom-of-information rules. The papers may help show the role EU authorities played in allowing Greece to mask its deficit for almost a decade before the nation’s troubled finances necessitated a 240 billion-euro ($301 billion) bailout and the biggest debt restructuring in history.

(emphasis added)
Note that the FOIA request is pending since 2010 – this is how long it has been tied up in the courts already. We rather think that the contents of the documents sought by Bloomberg could prove embarrassing for a number of people and that this is the true reason for the reluctance to release them (see also past articles by our occasional guest author ECB Watch for details).

Let us not forget, the company that enabled the complex debt hiding swaps was Goldman Sachs – the former employer of a certain Mario Draghi, today president of the ECB.

Egan-Jones Downgrades France, Montebourg Spouts More Populist Nonsense

The 'ahead of the curve' credit ratings agency Egan-Jones (it leads, the other rating agencies follow in almost 100% of the cases) has just downgraded France from A- to BBB+, outlook negative. The text contained yet another swipe at the Hollande government:

“For the most part, over the past 18 months France has been exempted from the rise in funding costs. However, as the crisis evolves, we expect that France will be pressured. The deterioration in France's credit metrics combined with the needed supported for France's banks are likely to pressure the country. A major catalyst is likely to be charges for the weakened periphery countries. Hollande will be under pressure to keep campaign promises which will ultimately hurt credit quality.

(emphasis added)
How very true. In the meantime, Mountebank…err, industry minister Montebourg has piped up again with more inanities, which were summarized over the wires as follows:

“ECB should be in charge of monetary policy”
“Euro at current level because ECB not in charge”
“Merkel blinded by ideology”
“Transaction tax should help pay public debt”

In other words, he wants a euro devaluation, which of course can only be accomplished via inflation and will in the end lower everyone's living standard. Furthermore he wants Germany to pay for everything, no questions asked.

In addition he wants to ruin European capital markets with the 'transaction tax' that will pay for precisely nothing. A number of independent studies -  commissioned by the EU as it were – have shown that the tax would destroy more revenue than it would bring in due to the extremely negative economic effects that would have to be expected from its introduction. Sweden has tried it in the 1990's and rescinded it again after it became clear what an awful idea it was. The Swedish prime minister has repeatedly warned other political leaders in Europe about it and pointed to his country's experience.

We will continue to refer to the French industry minister as Mountebank for the time being – he richly deserves it.

As to devaluation and what to expect from it, we want to briefly quote Ludwig von Mises (from 'Human Action'):

“The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due  to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. 
However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation's welfare.
In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.”

In short, all it does is it makes everyone poorer. The prosperity bought with inflation and devaluation is always a fleeting mirage at best.

Addendum:  ECB's Monthly Bulletin Released

For readers interested in an extensive overview of euro area economic and monetary data, the ECB has just released its monthly bulletin (pdf). 

Charts by:,, CLSA


1 comment:

  1. good EU PLAN B:
    Let South be obrero / migrant workers for Euro's again.
    This is how Eu once started.
    Form the EU of willing of the North.
    North is 80% anyway. what's the point splitting between workers and spanish educated obrero's ...
    Stop the debt AND flow free labour laws and south can pay.
    A good economy needs dual labour laws. US/mexican. Chineese rual workers ect.