No Greek relief for pain in Spain

June 19, 2012

There was no Greek relief rally (though at least we had no meltdown) and Spanish 10-year yields shot back above seven percent as a result, setting a nasty backdrop to today’s sale of up to 3 billion euros of 12- and 18-month T-bills.

Madrid has had little problem selling debt so far, particularly shorter-dated paper, but it’s beginning to look like the treasury minister’s slightly premature assessment two weeks ago that the bond market was closing to Spain is beginning to come true.
The 12-month bill was trading on Monday at around 4.9 percent. As last month’s auction it went for a touch under three percent. If that is not hairy enough, Spain will return to the market on Thursday with a sale of two-, three- and five-year bonds.

We’re still awaiting the independent audits of Spain’s banks which will give a guide as to how much of the 100 billion euros bailout offered by the euro zone they need. Treasury Minister Montoro was out again yesterday, pleading for the ECB to step in – presumably by reviving its bond-buying programme – something it remains reluctant to do, although a strong sense of purpose and commitment on economic union at the EU summit in a fortnight could embolden the central bank to act.

At the  Mexico G20, euro zone leaders agreed to move towards a more integrated banking system, breaking the negative loop whereby weak countries bail out their weak banks who in turn by the debt of their government which is declining in value, driving both into a negative spiral. They also talked up their plans for fiscal union. We’ll hear more of this at their end-June summit though much of it could take years to put in place. Berlin has so far refused to countenance a full banking union, including deposit guarantees, until the path to economic union is set in stone. Were there hints in Los Cabos of some softening on that?

Germany has crossed some of its red lines recently and there were hints in the G20 draft communiqué that it could be prepared to acquiesce to demands it should consume more, although we’ll await proof of that since it would be possible for Europe to point to its hitherto anaemic growth strategy as justification. The G20 said in its draft communique that countries without heavy debts problems were ready to act together to spur growth, if the economy slows a lot more.

The IMF finally secured a Chinese pledge to boost its war chest to over $450 billion. The official line had been that the resources would be for non euro zone countries drawn innocently into the fray. Last night Lagarde said they could help meet the financing needs of all financing members and were there as “a second line of defence”, the inference being the Fund will if necessary bolster the euro zone’s rescue fund.

Back to Greece. It looks like conservative New Democracy will form a pro-bailout coalition government with socialist PASOK today. They will have a workable majority, holding 162 seats of the 300 in parliament, and could get the support of the smaller Democratic Left too. But given the two traditionally dominant parties summoned not much more than 40 percent of the vote between them, meaning a sizeable majority voted for anti-bailout parties, SYRIZA will feel emboldened to lead stiff opposition within parliament and without. This government looks anything but secure and money is running perilously short.

Fitch Ratings said the Greek election result had lowered the risk of a disorderly default and the scenario of a euro zone exit, but it also warned that any new government in Athens was likely to be fragile.  Since Germany’s foreign minister came out on Sunday night to declare Athens could get more time to deliver on its austerity programme there has been much cooler rhetoric on that from his peers and from Brussels.  New Democracy is now asking for four years rather than two to spread the cuts over. Some sort of deal there could help shore it up in the short-term.

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