MacroScope

Just a typical euro zone day

Spain will sell up to four billion euros of six- and 12-month treasury bills, prior to a full bond auction on Thursday. Italy attracted only anaemic demand at auction last week and Madrid has already had to pay more to borrow since the Federal Reserve shook up the markets with its blueprint for an exit from QE.

However, yields are nothing like back to the danger levels of last year and both countries have frontloaded their funding this year. Economy Minister Luis de Guindos, who declared over the weekend that the Spanish economy will grow in the second half of the year, speaks later in the day.

The political backdrop is also shaky, and getting shakier by the day, although that doesn’t always infect market sentiment. Prime Minister Mariano Rajoy rejected calls to resign on Monday over a party financing scandal and said his reform programme would continue unaffected.

Easier said than done given the former treasurer of his centre-right People’s Party gave new testimony, saying he had made 90,000 euros in cash payments to Rajoy and a senior party official in 2009 and 2010. The betting, for now, is that Rajoy will survive, partly because of the weakness of his opposition. But popular support for his ruling party is leaching away.

It looks like a typical euro zone day. Greek labour unions are striking over public sector cuts and there’s been another downgrade – this time by Fitch of the European Financial Stability Facility, the bloc’s first rescue fund – following France’s loss of its ‘AAA’ status on Friday.

Portugal, ECB, Turkey — trials and tribulations

How to pull defeat from the jaws of victory in one easy lesson; look no further than Portugal.

After the resignation of both finance and foreign minister last week, Prime Minister Paolo Passos Coelho salvaged things by making the latter – Paulo Portas – his deputy and putting him in charge of dealing with the country’s EU/IMF/ECB lenders.

That could have created tensions and problems but we never got to find out because the president then rocked the political class to its foundations by throwing the deal out.

Turkish trouble

How much time does massive central bank currency intervention buy? About a day at a time in Turkey’s case. It spent $1.3 billion of its reserves yesterday to stop the lira going into freefall having thrown a record $2.25 billion at the market on Monday.

So far this year, the central bank has burned over $6 billion of its reserves which have now dropped below $40 billion. So that can’t go on for long, meaning an interest rate rise which a slowing economy really doesn’t need must be on the cards. The lira hit a record low versus the dollar on Monday.

Much of this is to do with the global emerging market sell-off sparked by the Federal Reserve’s exit plan from money-printing but Ankara has sown the seeds of crisis too, first with the very public standoff with protesters in its main cities who railed against what they see as Prime Minister Tayyip Erdogan’s increasingly authoritarian rule.

Banking on union

The European Commission will present its blueprint for a body to refloat or fold troubled banks, largely in the euro zone. As we’ve said ad nauseam, there is no chance of a great leap forward on this front ahead of Germany’s September elections. The question is whether Berlin’s line softens thereafter.

Brussels will suggest a cross-border body able to overrule national authorities. Germany is opposed and says that would require treaty change which could take many years. Beyond that the EU’s executive appears to have pulled its punches somewhat.

The new authority will have to wait years before it has a fund to pay for the costs of any bank closures since the plan foresees a levy on banks to build a war chest of up to 70 billion euros which is expected to take a decade, leaving the agency dependent on national schemes for years.

Forward guidance; will it work?

After the European Central Bank broke with tradition and gave forward guidance that interest rates will not rise for an “extended period” and could even fall, some of its members – including French policymakers Benoit Coeure and Christian Noyer, and Bundesbank chief Jens Weidmann – head to an annual gathering in the south of France.

Mark Carney’s Bank of England adopted the same tactic, showing just how alarmed the big central banks are at the potential turmoil unleashed by the Federal Reserve’s money-printing exit plan.
The big question is whether forward guidance can possibly allow them to escape the backwash from the Fed’s “tapering” when it comes or, whether in the euro zone’s case, sovereign borrowing costs will rise further, potentially pushing a number of countries back into danger territory.

An early test will come from today’s key U.S. jobs report. If it comes in strong, European bond yields are likely to rise across the curve.

A day to reckon with

This could be a perfect storm of a day for the euro zone.

Portugal’s prime minister will attempt to shore up his government after the resignation of his finance and foreign ministers in successive days. The latter is threatening to pull his party out of the coalition but has decided to talk to the premier, Pedro Passos Coelho, to try and keep the show on the road.

If the government falls and snap elections are called, the country’s bailout programme really will be thrown up into the air. Lisbon plans to get out of it and back to financing itself on the markets next year. Its EU and IMF lenders are due back in less than two weeks and have already said the country’s debt position is extremely fragile.

Given the root of this is profound austerity fatigue in a country still deep in recession a further bailout is increasingly likely. Portuguese 10-year bond yields shooting above eight percent only add to the pressure; the country could not afford to borrow at anything like those levels. President Anibal Cavaco Silva’s will continue talks with the political parties today.

Oscar Wilde and the euro zone

To paraphrase Oscar Wilde, to lose one looks like misfortune, to lose two smacks of carelessness.
Portugal’s government has been plunged into crisis with the foreign minister resigning a day after the finance minister did, the latter complaining that the public would not tolerate his austerity drive.

Prime Minister Passos Coelho has refused to accept the second departure, essentially putting the government’s survival in the gift of Foreign Minister Paulo Portas, who objected to Treasury Secretary Maria Luis Albuquerque replacing Finance Minister Vitor Gaspar. Portas could pull his rightist CDS-PP party out of the coalition government, which would rob it of a majority. The opposition is calling for early elections, the premier says not.

All this is happening with the next review of Portugal’s bailout progress by its EU and IMF lenders just two weeks away and with euro zone borrowing costs already firmly on the rise again. Portuguese yields lurched higher after Portas’ resignation and doubtless will continue in that direction today.

One small step…

EU finance ministers succeeded last night where they failed last Friday and reached agreement on how to share the costs of future bank failures, with shareholders, bondholders and depositors holding more than 100,000 euros all in the firing line in a bid to keep taxpayers off the hook.

Germany and France had been at odds over how much leeway national governments would have to impose losses on those differing constituencies and, as with many EU deals, a compromise was reached whereby some flexibility is allowed.

This is not to be sniffed at. For the first time it sets a common set of rules (albeit with wiggle room built in) to deal with bank collapses but, as we’ve explained ad nauseam in recent weeks, it is only one building block en route to a comprehensive banking union which was promised last year and would amount to the last vital plank in the defences being built around the currency bloc to banish future existential threats.

Quis custodiet ipsos custodes?

Who guards the guards? In the case of Europe’s banks, the answer is still a work in progress given the faltering efforts to create a banking union.

Today, we interview Jaime Caruana, head of the Bank for International Settlements which said on Sunday that its central bank constituents should not be deterred by fears of market volatility when the time came to start turning off the money-printing machines. That moment was fast approaching, it said.

The big question is why it would not be safer to wait until the world economy is on a sounder footing before turning the money printing presses off, particularly since there is a notable absence of any inflationary threat.

Just when you thought it was safe to get back in the water…

A worrying weekend for the euro zone.

Greece’s coalition government – the guarantor of the country’s bailout deal with its EU and IMF lenders – is down to a wafer-thin, three-seat majority in parliament after the Democratic Left walked out in protest at the shutdown of state broadcaster ERT.

Prime Minister Antonis Samaras insists his New Democracy can govern more effectively with just one partner – socialist PASOK – but the numbers look dicey, although it’s possible some independent lawmakers and even the Democratic Left could lend support on an ad hoc basis.

Samaras has ruled out early elections and says the bailout – without which default looms – will stay on track. If the government fell and elections were forced, the likely beneficiaries would include the anti-bailout leftist Syriza party which, if it got into government or formed part of one, really would upset the applecart.