Counterparties: Can Mariano be a closer?
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Eleven days ago, Mario Draghi announced that the European Central Bank was ready to do what he’d been hinting at for months: buy unlimited amounts of sovereign debt to hold down borrowing costs in countries like Spain. Assuming, that is, that national leaders request aid and agree to the central bank’s conditions.
As a result, since Draghi’s announcement, the burden has been on Spanish Prime Minister Mariano Rajoy to formally apply for the aid. But his immediate reaction, like that of Italian PM Mario Monti, was noncommittal. As of last week, Rajoy was still recalcitrant, saying he didn’t “know if Spain needs to ask for” help beyond the €100 billion bank bailout it received in July, which was less than a sterling success.
Economic reality appears to be limiting the amount of time Rajoy has for consideration. Spanish 10-year debt is now yielding right around 6%, which means it has now essentially risen right back to where it was just before the ECB made its announcement.
Spanish banks, meanwhile, are losing deposits at an alarming rate, with a record €26 billion withdrawn in July alone. That leaves the country’s already shaky financial institutions with worsening loan-to-deposit ratios and a clear deficit of public trust. Catalonia, Spain’s wealthiest region, isn’t happy with the amount of taxes it is shipping to Madrid and wants its “own project”, separate from the current path of the rest county.
That said, Spain does appear to be tiptoeing towards asking for aid. Reuters reports that Spain “will set clear deadlines for structural reforms by the end of the month,” which would precede an official request for assistance. Still, the final decision has to be taken by Rajoy.
As Paul Murphy at FT Alphaville put it, markets are telling Rajoy what his only option is: call Draghi. — Ben Walsh
On to today’s links:
Why the Fed’s latest move is “shamanistic economics” - New Economic Perspectives
QE3 will help a little but, but we “need more than a little bit of help” - Jared Bernstein
Banks can’t process mortgage applications fast enough for consumers to see QE3 benefits - FT