Opinion

Felix Salmon

Counterparties: The never-ending story of the Euro crisis

September 26, 2012

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com 

The pattern of Euro crisis flare-ups is getting very familiar:

Step 1: News of political turmoil in ailing European Country X raises questions about their dedication to austerity. This is often be accompanied by missing deficit targets, riots and/or burgeoning political change.

Step 2: The bond market freaks out, which raises borrowing costs for European Country X. Wonks, politicians and pundits quickly chime in.

Step 3: The can is thoroughly kicked down the road. Concessions are made for Country X, negotiations are held, quotes are given/intentions leaked.

Step 4: After some period of time, the crisis appears again.

Spain, like Greece, is is back in the Euro crisis spotlight today, as the country is gripped by massive protests over budget cutbacks and rising borrowing costs. Greece, of course, has been through this process before; Spain has now proceeded to step 2.

The world has been waiting for Spanish prime minister Mariano Rajoy to formally request an EU bailout. But, Rajoy appears to be in no particular hurry, even as analysts doubt Spain will meet its own deficit targets. Ahead of the release of Spain’s 2013 budget tomorrow, the FT cites uncertainty over whether Rajoy will impose harsh enough cuts to win the EU’s approval, using methods like freezing pensions and raising the retirement age. (Then there’s the minor worry that an entire region of Spain wants to secede). (See step 1)

Predictably, European markets tanked and yields on Spanish 10-year bonds jumped to back toward the danger zone of 7%. Nouriel Roubini and Bill Gross were quick to prognosticate on what’s next; just as quickly, Rajoy offered the perfunctory we-are–totally-committed-to austerity comments. (See step 2).

But how will Spain ever get to Step 3? Bloomberg wonders if Rajoy is simply playing a game of bailout chicken with Italian prime minister Mario Monti — forcing Italy to request a bailout first, the thinking goes, would mean a greater leverage and a better deal for Spain. Joe Weisenthal points to one analyst who thinks Rajoy’s new budget will be impose much of the austerity burden on regional governments.

Rajoy, in an interview with the WSJ, seemed relaxed: “I can assure you 100% that I would ask for this bailout.” Asking for that bailout, though, will mean imposing even harsher cuts on the masses who are taking to the streets of Spain. (Approximately 25% of Spain’s citizens are unemployed. Eco Diario shot this gripping footage of a Madrid cafe owner by making a peaceful stand against riot police).

This puts Rajoy in that familiar European position, caught between serving his citizens and bowing to the EU’s bailout requirements. As a recent Goldman Sachs report put it : “The more the Spanish administration indulges domestic political interests … the more explicit conditionality is likely to be demanded.” — Ryan McCarthy

On to today’s links:

Liebor
A British banking group may give up control of everyone’s favorite rigged interest rate – Dealbook
“Our six-month fixing moved the entire fixing, hahahah” – Bloomberg

Charts
The long decline of labor – Felix
Where uninsured Americans live – Atlantic Cities

The Fed
We’re falling “deeper into permanent zero bound territory” – Tim Duy
The Fed’s latest move is helping bank profit margins, not homeowners – Bloomberg

Apple
Apple could have easily waited another full year to improve its crappy map product – The Verge
Foxconn pulls in just $8 for every iPhone it builds for Apple – Slate

Alpha
Everything you think you know about risk and return is wrong – Falkenblog
Smartphone patents are the new asset class – Dealbook

Amaranth-esque
Commodity traders, now systemically important institutions – FT Alphaville

Economics
“56% percent of women said contraception had allowed them to support themselves financially” – BuzzFeed

Oxpeckers
Penguin sues to recoup advances from writers, plus random amounts of interest – The Smoking Gun

Strange Bloomberg Headlines
Grads Shun Italy Disease Proving Dirty US Hands Work – Bloomberg

Plutocracy Now
Being rich and powerful turns out to not actually be that stressful – LAT

Wonks
Why the US is already in a recession – Lakshan Achuthan

Be Afraid
100 million people (16,000 people per day) will die if we do nothing about climate change – Reuters

Investigations
11 different U.S. agencies have investigated HSBC for money laundering charges — and they can’t get along – Reuters

Troubling
Tesla is burning through cash and missing production targets – Dealbook

Awesome
“My name is Joe Biden and I’ll be your server” – The New Yorker

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •