Italian Economists Slam Austerity Measures
Spanish Debt Wilts Amid €250bn Rescue Plan Confusion
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By Ambrose Evans-Pritchard, Telegraph.co.UK | 17 June 2010
Brian Coulton, the agency's head of sovereign ratings, said German members of the ECB appeared to be blocking the sort of muscular intervention in southern European bond markets needed to restore the shattered confidence of investors. "There has been an unwillingness to follow through, and markets are going to want to see the ECB's money. It will require hundreds of billions in my opinion," he told a global banking conference.
The ECB agreed to start buying Greek, Portuguese, and Irish bonds in April to help buttress the EU's 'shock and awe' package, known as the European Financial Stability Facility. Total purchases so far have been €47bn ($58bn). It has focused its firepower on Greece, mopping up some €25bn of government bonds. This has prevented a collapse of the Greek debt market but at the high political price of letting banks and funds dump their holdings onto the EU taxpayer.
ECB council member Jose Manuel Gonzalez-Paramo said it was "not entirely correct" to assume that the ECB was the sole buyer of the debt. "We will continue buying bonds until the situation has stabilized," he said. The Bundesbank is reportedly irked that French banks have led the rush to the exits while German banks have stuck by a gentleman's agreement to keep their Greek assets.
The ECB's council insists that it has "sterilized" all purchases, offering no net stimulus. In effect, the ECB has done little to offset severe fiscal tightening by some eurozone states, even as the M3 money supply contracts. "The ECB commitment seems half-hearted," said Andrew Balls, head of PIMCO's team in Europe. "The European sovereign problem has started to contaminate the European banking sector and the global economy."
Experts attending a seminar by the Central Banking Journal said the ECB had been behind the curve for months. "They were always one day and one euro too late," said Paul Mortimer-Lee, market chief at BNP Paribas. A smooth auction of €3.5bn of Spanish bonds offered some respite yesterday after a week of stress on the EMU periphery, but Spain had to pay punitive rates. The average yield on 10-year bonds was 4.86%, a near record spread of 220 basis points over German Bunds.
Silvio Peruzzo from RBS said the auction does little to help Spanish banks and firms that have been frozen out the debt markets and face a funding crunch. "The ECB needs to act before contagion becomes endemic. Spain's banking system in at the heart of an ice-storm and there is a risk of 'sudden stop' if they can't roll over debt. We expect intervention, probably in covered bonds," he said.
Spain's premier Jose Luis Zapatero said the banks remain well capitalized, and has led the way in pushing for release of stress tests on each lender. "There is nothing better than transparency to show solvency, and leave behind baseless rumours," he said. Santander has emerged from the 'probe' as the strongest of the EU's large banks, according to leaks in the Spanish press. Madrid said weaker lenders would need just a third of the country's €99bn bank-rescue fund.
Marco Annunziata from UniCredit said the release of the stress tests is a gamble. "Spain has raised the stakes, and market expectations: now it will need to show it is up to the challenge. Spain is the eurozone's lynchpin. If it fails, the eurozone's wheels will come off," he said.
European president Herman van Rompuy said the EU-wide results would be published in July, helping to clear the air and restore trust to the inter-bank lending market. The Bundesbank insists that "back-stop" facilities should be in place, a tacit admission that some lenders are in dire shape. Fitch said European banks must refinance nearly €2 trillion of long-term debt by the end of 2012 in an unfriendly market. "There's an awful lot of debt coming due in 2011 and 2012, and that is becoming a concern," said Bridget Gandy, the agency's banking expert.
Smaller banks have put off refinancing in the hope that spreads would fall and are now caught in a vice. Mrs Gandy said the situation could turn serious if global growth falters, tipping Europe into a double-dip recession. David Owen from Jefferies Fixed Income said the eurozone may start contracting again in the second half of the year.
He said the "core problem" haunting the European debt markets is that investors have little faith in the EU strategy of forcing states to carry out draconian cuts in the middle of a recession. He added that these countries need sustained growth to claw their way out of debt-deflation traps, and that will require fully-fledged quantitiatve easing by the ECB, and drastic currency depreciation. "If the euro falls to parity or down to 80 cents against the dollar, we would start to see a solution," he said. [[But at what cost? A recession in the U.S.?: normxxx]]
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Italian Economists Slam Austerity Measures
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By Ambrose Evans-Pritchard | 17 June 2010
"The 'politics of sacrifice' in Italy and in Europe run the risk of accentuating the crisis in the end, causing a faster rise in unemployment and company failures, and could at a certain point compel some countries to leave monetary union. We must have an immediate debate on the extremely grave errors in economic policies now being committed," the economists said.
"The fundamental point is that the current instability of monetary union is not just the result of accounting fraud and over-spending. In reality, it stems from a profound interweaving of the global economic crisis and imbalances within the eurozone." [[Those 'imbalances' are a dig at Germany's chronically positive balance of payments: normxxx]] The letter, which has echoes of a famous letter to The Times by 360 economists denouncing the Thatcher cuts in the early 1980s, was drafted by a network of Left-leaning Keynesian economists and published by Il Sole.
The letter accused the EU authorities and leading governments of being out of step with 'modern' economic thinking, marking the first clear revolt by parts of the eurozone's intellectual elite against EMU orthodoxies and especially against the "deflationary economic policies" being imposed by Germany. The group said states might choose to leave EMU in order to end job destruction. "Some countries will be pushed out of the eurozone, others will break away to free themselves from a deflationary spiral."
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Spanish Debt Wilts Amid €250bn Rescue Plan Confusion
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By Ambrose Evans-Pritchard | 16 June 2010
Spain's finance minister Elena Salgado reacted angrily to reports in a Spanish newspaper that the plans were well advanced. Photo: Bloomberg
The spreads on 10-year Spanish bonds jumped to a post-EMU high of 224 basis points above German Bunds as traders brace for a crucial auction by Madrid on Thursday. The relentless rise in bond yields replicates the pattern seen in Greece at the onset of crisis. Spain must raise €25bn of debt in a cluster of auctions in July.
"We're in a dangerous and stressful situation," said Gary Jenkins, a credit expert at Evolution Securities. "Spain is a big enough borrower to wipe out the EU's rescue fund". Elena Salgado, Spain's finance minister, reacted angrily to a report in the Spanish daily El Economista claiming that the support plans are well advanced. "It has been denied by the Spanish government, by the European Commission, and by the IMF. How much more can we deny it"? she said.
The story refuses to die, however. Three German newspapers have run similar stories over recent days, citing German sources. The markets are convinced that some form of contingency planning is underway.
"In our view there is absolutely no doubt that a backstop facility for Spain will be put in place should stress in the system remain," said Silvio Peruzzo, an economist at RBS. El Economista said officials from the EU, the IMF, and the US Treasury had been discussing a credit line of €200bn to €250bn, dwarfing the €110bn package for Greece. Dominique Strauss-Kahn, the IMF's managing director, reportedly called a secret meeting of the IMF's Board of Directors to tackle the crisis.
The loan terms would be softer than the draconian budget cuts imposed on Greece, with the lion's share of the money coming from eurozone states under their €750bn 'shield'. Mr Peruzzo said the facility was likely to resemble the IMF's Flexible Credit Line devised for Poland and Mexico. This is a "precautionary" credit for healthy borrowers facing a "cash crunch". The funds can be drawn at any time, without strings attached.
Mr Jenkins said it is unclear how the EU would finance a full rescue for Spain. Under the Greek formula, the EU-IMF ratio of aid is 8:3, implying an EU share of around €180bn— with a risk that the sums will escalate. Moreover, the number of eurozone states available to fund the package is shrinking.
"The issue here is political risk. If they keep bailing out countries, it will mean printing money: that is not going to go down well in Germany," he said. Theodora Zemek from AXA Investment Managers said any rescue will have knock-on effects on the credit ratings of donor states. "Germany and France risk going from AAA to AA," she said.
The original hope behind the EU's €750bn "shock and awe" headline was that the announcement of such sums would end all doubts about the political solidarity behind the euro project, but nationalist 'body-language' from EU capitals and daily spats between France and Germany have sapped confidence. What haunts markets is fear that Spain may be the last line of defence. There can be no easy rescues after that because the money will have run out.
If investors ever start to question Italy's public debt— the world's third largest— they may face a sovereign version of the Credit Anstalt [1] crisis of 1931. So far, Italy has remained as strong as a rock.
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