Spain is broke. ECB
suggested that bank bond holders could be burned. This translates to either
negotiation tactics (do as we say or prepare to die) or possibly means what it
says. In that case any bailout measures will not save everyone and everything –
and this is making markets nervous, as it is unclear what will be saved in the
end. Also, if a really lousy bank is burned in the process and some others get
in trouble because of this, who will foot the bill for these additional
rescues? Not Spain, because Spain is broke.
 |
| 1) Spain 10y, last five years |
Spain’s regions are now already applying
for bailouts, and markets were definitely not happy with the Eurogroup’s
Memorandum of Understanding that was published on Friday. At the same time
riots and demonstrations against austerity, real economy tanking deeper than
officially expected, bond auctions went badly, govvie yields increasing and
shorter maturities increasing even faster (yield curve inversion is always a
sign of very, very bad things ahead). What worries me are the non-performing
loans of the Spanish banks – the total number increases each month at a linear
rate. This implies the data is fabricated, and there are a lot of losses that
the banks are simply hiding. If the banks are doing it, everyone else, from
regions to central government, are also doing it. Did I
already say Spain is broke?
 |
| 2) Spain 10y, last three months |
ECB’s
Draghi said in an interview that the bank could do more if it were given the
powers to do it. This is easy to translate: the euro crisis is moving beyond
the capacities of the existing defense mechanisms and new ones are needed. The
only thing left in the toolbox is for the ECB to start quantitative easing,
i.e. buy massive amounts of periphery bonds, with stated intention to hold them
for a very long time – and even be prepared to take losses and print the losses.
ECB also
states Greek government bonds are not good collateral anymore, and this leaves Greece with only ELA financing. This is blackmail
(do the cuts and reforms you have agreed to do, or the flows stop), and the Greece and the Troika are now back to a
game of chicken. Just when I was finishing this, Mish noticed that IMF is
supposedly saying they will stop funding Greece. Italy is also moving very much into focus, and it is a good candidate for euro exit politically as well.
 |
| 3) Spain 10y vs 2y, last twelve months |
And now a word on the charts. 1) The ten-year Spanish bond yield clearly shows the two spikes (last summer, followed by ECB's bond purchases and last Christmas, followed by ECB's 3-year LTRO). This is the third one. Nothing but ECB can solve this any longer. 2) The same bond yield a little bit closer, and I believe the range breakout is clearly visible. To be honest I was not expecting this yet. 3) The relative performance of the Spanish two-year bond yield versus the ten-year yield. Right after the euphoria of the last LTRO in March, the short end started increasing and has outpaced the longer end. That is even worse than just increasing yields. The curve flattening means banks that took LTRO loans are struggling with losses, while the risks (default, renomination etc.) are seen happening soon rather than later.
Previously
on MoreLiver’s:
GENERAL
Euro exit and depreciation would bring economic
gains – The
Telegraph
In an exclusive extract from his updated book,
Roger Bootle explains why allowing a country such as Greece to leave the euro is
not as hard as critics think.
As the euro zone struggles to pull together, Britain is trying to pull away
IMF loses all faith in the euro project – The
Telegraph
The IMF is the leader of the Eurosceptic camp
now.
The Lion in the Grass – John Mauldin
/ The Big Picture
Topics: Europe and Japan. Very good
JP Morgan: In this narrow sense, there is a first mover
advantage for a core country exiting.
A summer lull? – MacroScope
/ Reuters
The ECB may cut interest rates further but it
seems very reluctant to create more money or buy government bonds unless the
euro zone crisis needle hits critical again, although if we do get a summer
onslaught from the markets, it remains pretty much the only game in town, given
the euro zone’s ESM rescue fund won’t be operational before September .
Should the eurozone be mutualised? – bruegel
Investors worldwide need to know what is the
safe euro asset. For America they know what it is—the Treasury bond—and they are stockpiling it in
spite of their doubts about the soundness of American public finances. For the
euro zone they thought they knew what it was—all euro-zone government
bonds—until they paid a price for this wrong belief.
Bank bondholders: Burning sensation – The Economist
Taxpayers should not pay for bank failures. So
creditors must
Back to the brink – Free
exchange / The Economist
But while they resist the policies that could
make a real difference in solving the problem—real sovereign risk-sharing, real
euro-zone-wide bank guarantees backed by the ECB, and higher inflation in Germany—each new intervention will buy a bit less time. And the capital flight
from the periphery will continue and peripheral recessions will deepen. And
then, one day, it may all come apart in a flash.
ECB
Interview Mario Draghi: Interview with Le
Monde – ECB
“We stand ready to do more, if our powers were
to be strengthened.”
Speech
Benoît Cœuré, presentation slides here
SPAIN
Death Spiral in Spain; Six Spanish Regions
Seek Aid; Bankrupt Spain to Bail out Bankrupt
Regions – Mish’s
(see also Reuters
and BB)
There are 17 Autonomous communities of Spain of which at least six
have applied for or are expected to apply for aid. Eventually most, if not all
of those regions will request aid. Spain itself needs a
bailout (which it still denies but the market is going to force any time now).
The plan in place now is for the bankrupt to bail out the bankrupt.
Eurogroup
statement text and market reaction charts
"the money will last [only] until
September", and "Spain has no 'Plan B".
The more pressure you put on the front end … it
is saying that the near-term risk of default is going up through the roof. It’s
exactly the dynamic you saw in all of the other curves before they went into a
bailout. You actually saw things like the Greek curve invert.
Recession
to continue, regions asking for help, and accepted bailout package too little,
too late.
not only have the chances of Spain's failure gone up but
also the time to default has been shortened.
Demand for Spanish Bonds Collapses; "No
Money Left to Pay Services" says Treasury Minister; Massive Protests Over
Austerity; Two-Year Yield soars 60 Basis Points – Mish’s
At some point, however (and this could be it), Spain is going to hike the
VAT one time too many. At that juncture, the willingness of Spanish voters to
stay on the euro will fly right out the window.
Prepare for Spanish Implosion: Businesses
Threaten to Leave Spain Over Tax Hikes; Finance Minister Proposes 56% Tax on
Short-Term Financial Transactions – Mish’s
In short, Spain is resisting the
measures that would be productive, and implementing those measures that will do
the most harm.
Desperate for more ECB funding and running out
of collateral, Spain is creating a new type of covered bonds – Sober
Look
With these new bonds in place the central bank
lending will increase further. Over time the nation's whole economy will in
effect be funded by the central bank and any private credit that can be
packaged into covered bonds will be pledged as collateral.
Four More Spanish Regions Seek Bailout; German
Nürburgring Faces Bankruptcy – ZH
Castilla-La-Mancha, Murcia, the Canary Islands
and possibly Andalusia are also having difficulty funding themselves and some
of these regions are studying plans to tap the recently created emergency-loan
fund that Valencia said it would use
Monthly Economist Report – Ministry
of Economy and Competitiveness (pdf)
OTHER PIIGS
A bleak combination of routine corruption,
misused funds and mafia influence is taking the beautiful, troubled island to
the brink of the abyss
Expect Strikes and Protests to Spread to Italy; Another Look at Why Italy Will Exit the
Eurozone Before Spain – Mish’s
Every day that passes, the more strength the
Five-Star Movement will gain. The irony is that it would be in the best
interest of the eurocrats to hold elections now rather than later, before the
anti-euro movement becomes politically unstoppable.
Collateral eligibility of bonds issued or
guaranteed by the Greek government – ECB
ECB Says Greek Bonds No Longer Eligible As
Collateral, Leaves Greece With Under €65bn Of
ELA Borrowing Capacity – ZH
According to Der Spiegel, the IMF Wants to Stop
Aid to Greece as soon as the ESM is up and running in September. At that time Greece would become
bankrupt.