MacroScope

Euro zone ying and yang

By Mike Peacock
May 28, 2012

The ying.
Sources told us last night that Spain may recapitalize stricken Bankia with government bonds in return for shares in the bank. That would presumably involve an up-front hit for Spain’s public finances (it is already striving to lop about 6 percentage points off its budget deficit in two years) which might be recouped at some point if the shares don’t disappear through the floor.
The ECB’s view of this will be crucial since the plan seems to involve the bank depositing the new bonds with the ECB as collateral in return for cash. If it cries foul, where would that leave Madrid?

Spain’s main advantage up to now – that it had issued well over half the debt it needs to this year – may already have evaporated after the government revealed that the publicly stated figure for maturing debt of the autonomous regions of 8 billion euros for this year is in fact more like 36 billion. Catalonia said late last week that it needed central government help to refinance its debt.  If more bonds are required to cover some or all of Bankia’s 19 billion euros bailout, Spain’s funding challenge in the second half of the year starts to look very daunting indeed.

The yang.
Latest Greek opinion polls, five of them, show the pro-bailout New Democracy have regained the lead ahead of June 17 elections although their advantage is a very slender one. If the party manages to hold first place, and secures the 50 parliamentary seat bonus that comes with it, then it looks like it would have the numbers to form a government with socialist PASOK which would keep the bailout programme on the road … for a while.

After a disastrous campaign first time around, maybe New Democracy has got its act together. Its leader, Antonis Samaras was out yesterday bluntly saying his anti-bailout SYRIZA opponents would leave Greece isolated for years and without food, drugs, fuel and power. Sobering stuff. Officials have already told us Greece will run out of money by July if outside money dries up.

Samaras is calling for Greece to be given four years rather than two to make the spending cuts demanded of it. PASOK’s Venizelos says it needs three. Could there be a deal to be done with  Brussels and the IMF there? Maybe, but there does seem to be a distinct lack of sympathy from Athens’ international lenders. Over the weekend, IMF chief Lagarde effectively accused Greeks of being tax dodgers and said she was more concerned about the plight of deprived children in Africa. That caused a storm on her Facebook page, causing her to soften her tone a little. Germany’s interior minister chipped in, ruling out pouring money into a Greek “bottomless pit” and a senior Deutsche Bank executive said it was a failed state.

On the Greek exit contingency planning front, British interior minister Theresa May said work was under way to restrict immigration in the event of a financial collapse although she was later slapped down by deputy prime minister Nick Clegg. And the Lloyd’s of London insurance market said it had reduced its exposure “as much as possible” to the euro zone in preparation for a collapse of the single currency.

German Bund futures have slipped as a result of the latest Greek polls but traders said Spain was weighing heavily on the other side of the ledger. European stocks are up 0.7 percent.

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