MacroScope

Things are on the move in Spain although nothing is set in stone yet.
Treasury minister Montoro’s call yesterday for “European mechanisms” to be involved in the recapitalization of Spain’s debt-laden banks – a reversal of Madrid’s previous insistence that it could sort its banks alone – unleashed a barrage of whispers in Europe’s corridors of powers.

Our sources say that the independent of audit of Spanish banks’ capital needs, the first phase of which is due by the end of the month, will be a key moment after which things could move quickly.

The hitch is that Madrid still doesn’t want the humiliation of asking for a bailout and Germany will not countenance the bloc’s rescue funds lending to banks direct. One possible solution floated last night –  the EFSF or ESM bailout funds could lend to Spain’s FROB bank rescue fund, which could be viewed as tantamount to lending to the state but would give the government some political cover to say it wasn’t asking for the money. This is anything but a done deal and there would still be some strings attached which could be tough for Prime Mininster Mariano Rajoy to swallow.

Madrid has pressed for the ESM to be allowed to lend to banks direct but Berlin is opposed and even if it was agreed it would probably require another time-consuming round of euro zone parliamentary ratification. However, although the legal situation is murky it is possible that the ESM could lend to the FROB without its mandate officially having to be changed.
Today Spanish Economy Minister de Guindos meets his French counterpart Moscovici in Paris.

Montoro startlingly ratcheted up the rhetoric yesterday saying Spain was effectively shut out of the bond market, amazing timing given there’s a Spanish bond auction on Thursday.

Chris Reese contributed to this post.

A barrage of rotten economic news around the world has suddenly and vigorously reawakened the prospect of additional monetary easing by the Federal Reserve – most notably a report on Friday showing job growth slowed sharply in recent months.

William Larkin, portfolio manager at Cabot Money Management in Salem, Mass., said:

The chance of another recession is on the table, no question about it. It might force the Fed to develop another growth strategy like a QE3.

With Spanish Prime Minister Mariano Rajoy calling for a new euro zone fiscal authority to manage the bloc’s finances and send markets a signal that EU leaders mean business about defending the euro, it is clear that the push towards fiscal union, led by Germany, is gathering momentum. Germany has also conceded that Spain should get an extra year to make the spending cuts demanded of it, suggesting it is aware that the crisis is lapping at its door again.

But economic union, even if agreed (it runs contrary to generations of French political culture to relinquish that amount of national sovereignty) will take many months even years to put into practice, given the complex treaty changes that will be required.

The hope is that a strong signal of intent at the end-June EU summit will calm markets and encourage the European Central Bank to hold the fort in the meantime. The former looks like a somewhat heroic hope. On the latter? Well, the ECB has made it quite clear it wants government to sort out the mess but has also consistently proved itself to be the only institution capable of moving quickly enough when the crisis turns acute. So it will almost certainly intervene again if the bloc reaches the point of calamity, though that is more likely to take the form of an interest rate cut and a third round of three-year money creation than a serious revival of its bond-buying programme.

With the past week’s dismal U.S. jobs data, signs of increasing financial strain in Europe, and discouraging news from China, the proposition that the global economy is returning to a path of healthy growth looks highly implausible.

It is more likely that negative feedback loops are again taking over as falling incomes lead to falling confidence, which leads to reduced spending and yet further declines in income. Financial strains hurt the real economy, especially in Europe, and reinforce existing strains. And export-dependent emerging markets suffer as the economies of the industrialized world weaken.

The question is not whether the current policy path is acceptable. The question is, what should be done? To come up with a viable solution, consider the remarkable level of interest rates in much of the industrialized world. The U.S. government can borrow in nominal terms at about 0.5 percent for five years, 1.5 percent for 10 years, and 2.5 percent for 30 years. Rates are considerably lower in Germany, and still lower in Japan.

By Sarmista Sen and Sumanta Dey

Economists predicting jobs growth in the United States, or rather the lack of it, scored an unfortunate hat-trick on Friday – vastly overestimating the rise in payrolls for three consecutive months.

The U.S. economy added 69,000 jobs last month, less than half the Reuters median for a gain of 150,000 jobs and missing even the lowest forecast of 75,000 from nearly 80 economists .

Forecasters last achieved that feat between April and November 2008, when the actual NFP number consistently missed the lowest forecast in the survey, for eight consecutive months.

Moving from one house or apartment to another is mainly onerous, but one of its few pleasures is coming across papers you have not seen for years: the adventure stories your grown son wrote when he was eight years old or the book report he wrote on William Shakespeare’s Richard III when he was 10.

Another potential source of amusement is finding an older newspaper or magazine article or column, preserved on purpose or inadvertently. One reads these pieces with the benefit of time: You, dear reader, have seen the future at which the columnist, either hapless or prescient, could only make a guess, educated or otherwise.

So herewith are excerpts from two side-by-side columns published in the Summer 2005 edition of TIAA-CREF’s “advance,” two years before the financial crisis sent the global economy into its worst downturn since the Great Depression.

The European Commission leapt off the fence yesterday proposing many of the policies – a bank deposit guarantee fund, longer for Spain to make the cuts demanded of it and allowing the euro zone rescue fund to lend to banks direct (though there were some mixed messages on that) – that would buy a considerable period of time to move towards its ultimate goal: the sort of fiscal union that would make the euro zone a credible bloc much harder for the markets to attack.

The proposals would go a long way to removing Spain from the firing line, and suggests Brussels at least has decided it now urgently needs to shore the country up. But Germany opposition to all three still appears to be steadfast.

Time to dust off the golden rule of this crisis – dramatic decisions are taken only when the bloc is staring right into the abyss. We’re not quite there yet, though not far off, so there has to be a chance of something seismic resulting from the end-June EU summit which follows June 17 Greek elections. The leaders of Germany, France, Italy and Spain meet in between, just after a G20 summit which will presumably press Angela Merkel hard too. As European Commission President Barroso said yesterday, speed and flexibility will be of the essence although at least some of what is being discussed would require time-consuming treaty change.

More than five years into an unprecedented slump, the U.S. housing sector continues to languish. Pending home sales fell in April to a four-month low, while house prices continue to bounce along near recent lows. The National Association of Realtors said on Wednesday its index, based on contracts signed last month, fell 5.5 percent to 95.5, its lowest level since December, after a downwardly revised 3.8 percent increase in March. The weakness suggested other more closely watched indicators may also flag in coming weeks and months.

Writes Daniel Silver, economist at JP Morgan:

The level of pending home sales reported for April (95.5) was the weakest reported so far this year, and the latest data point to some weakening in existing home sales ahead because pending home sales – measured when contracts are signed – typically lead existing home sales – measured when transactions are completed – by about one or two months.

The picture that emerged from the home price data was equally discouraging. Prices climbed just 0.1 percent in March, and were down 2.6 percent compared to a year earlier. Yale professor Robert Shiller, one of the two names behind the Case/Shiller index, told Reuters Insider:

Spain’s plans to revive Bankia with state money and sort out its regions’ finances have well and truly unnerved the markets. It seems that Plan A — to inject state bonds straight into the stricken bank so that it could offer them to the ECB as collateral in return for cash — was roundly rejectd by the European Central Bank, so Madrid rapidly produced a second plan which will involve the government raising yet more money on the bond market, not helpful to its drive to cut debt.

That leaves the impression that Spain is making up policy on the hoof, not something likely to endear it to the markets. That’s particularly unfortunate since it has actually done an awful lot on the austerity and structural reform front over the past two years. But not enough.

It’s not all one-way traffic. Madrid is pressing its insistence that the ECB should be the institution to deliver a decisive message to the markets that the euro is here to stay – presumably by reviving its bond-buying programme (highly unlikely at this stage).

It’s almost June. So why is the euro zone story just about the same as it was in January? It’s a little like the movie Groundhog Day – every day seems to be a repeat of the last, and the story remains the same. But remember: That movie ended. And every day wasn’t the same. Bill Murray made incremental changes – painful ones – until he figured his way out. That’s what the euro zone is doing right now.

Despite all of the elections, the pain, the protests and the German Sturm und Drang, the fundamental basis of the crisis, and the situation, remains the same. Yet this isn’t as bad as it sounds. The actors in the euro zone are very much playing the long game. They’re using the markets both to punish deviations from the outcome they see as the best possible one and to engineer that outcome and help them shape the policies they think will end the crisis for good.

Despite the protests, the overall commitment to the euro zone remains as strong among all of the key players – Berlin and the peripheries – as it was before. That’s hugely important, reflecting that the overall tenor of the conversation has not shifted toward the disintegration of the euro zone, or any individual exits. Indeed, after the long, dragged-out process that’s happened in the markets these last months, the Germans are finally showing the willingness to compromise that we have long expected. They are very gradually moving toward the idea of the ECB increasing the money supply, accepting some inflation, softening the fiscal compact in the zone – moving forward on a whole host of issues, in fact. But with all that movement, they aren’t giving up on the fundamental premise of keeping the euro zone fiscally stable over the long term and recommitting every member nation to budgetary responsibility. That’s why it’s taken so long to get from there to here.