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.