After a May Day holiday lull, the euro zone roars back into life with Spain facing a game of chicken with the bond market as it auctions three- and five-year bonds and the ECB holding its monthly policy meeting in Barcelona, which lends it a certain poignancy.
Spanish yields will rise sharply compared with the previous equivalent sale and the auction is the first since S&P’s two-notch downgrade of Spain’s credit rating last week. Spanish banks, flush with three-year cash despite their horrendous bad loans problem, continued to load up on Spanish government debt in March while international investors backed off. Whether they will continue to do so is a very open question.
Three- and five-year yields on the secondary market are more than a percentage point higher than when this maturity was last sold earlier in the year. But 2.5 billion euros is a modest amount to shift and Spain has already sold half its debt issuance target for the year in the first four months.
France will also hold a bond auction, three days before its presidential election run-off.
Mario Draghi pulled a surprise rabbit out of his hat last week when he added his voice to calls for a European growth strategy. With no policy change in the offing from Barcelona anything he says about that will be closely scrutinized although it already seems that he and his colleagues don’t envisage the ECB doing much to help beyond keeping policy loose. What is being talked about is some extra lending power for the European Investment Bank and some reallocation of existing EU funds, along with much-heralded structural reforms. That may help a bit but it’s nothing like enough to turn the euro zone economy around. With monetary policy already ultra-loose, that would require serious fiscal stimulus.
Euro zone leaders, led by Merkel and Schaeuble, have made it quite clear they won’t tolerate any let-up in the austerity drive to cut debt. Nor are the markets likely to accept a big shift on that front.