Spain To Bail Out Regional Governments 

On Friday Spain's government announced a €15 billion 'internal bailout' package to support its regions, several of which teeter on the brink of insolvency. To widespread incredulity, the government insisted that this would not increase the government's debt. Our initial conclusion from this was that Spain's government has, or at least believes to have, very good relations with Santa Claus, who will presumably provide the funds.  Failing such an intervention by the mythical gift-bearer from the North pole, we would expect that the public debt will in fact increase.

We also guessed that the government has once again done its calculations with the help of the special government abacus we have seen in action many times in recent years. It is a calculation device that only spits out politically expedient results, regardless of what actually happens in that widely shared continuum generally referred to as reality.

However, it seems the government is looking at various alternative options to fund these expenditures, ranging from redeploying lottery proceeds to the sale of publicly-owned real estate and other privatization measures, so in this case it may actually be true that the trajectory of the public debt won't be impacted by the bailout measures.

Edward Hugh (who is quoted below), notes that Spain's treasury has a war chest set aside for the bailout and that it is 'not the end of the world'.

However, the market reaction to the announcement was extremely negative, as it came at a less than propitious point in time. After all, Spain's government bond market has been under enormous pressure for quite a while already and could well be on the verge of an outright panic.

As Bloomberg reports:


Spain’s plan to offer cash-strapped regional administrations emergency loans leaves the Treasury with 12 billion euros ($15 billion) of additional funding needs that the government says won’t affect its borrowing plans.

The central government will tap the lottery for part of the 18 billion-euro fund for regions, leaving 12 billion euros for the Treasury to finance. While Economy Minister Luis de Guindos said yesterday that the plan won’t affect the nation’s borrowing program, economists including Jose Carlos Diez at Intermoney SA say it will be hard to sustain without selling more debt.

Where will it come from?” said Diez, chief economist at the Madrid-based brokerage, which is Spain’s biggest bond trader. “In the end it has to add to their financing needs.”

Spain’s Cabinet approved the creation of the fund on July 13 to help regions that have lost access to markets meet debt redemptions and finance deficits. The decree states that the facility will be funded with public debt and the Treasury’s borrowing program will “incorporate the amounts” needed. Valencia, the second-most indebted region, said today it was preparing to tap the fund as it faces a liquidity squeeze. 

Unless they sell public companies, I don’t see any other way to do it without tapping the bond markets,” said Rafael Pampillon, an economics professor at Madrid’s Instituto Empresa business school. “There are no other options.”

De Guindos is already pushing for the government to privatize publicly-owned real estate, and a July 11 austerity plan included measures to sell off air, rail and maritime transport services.

Spain’s benchmark 10-year bond yield rose yesterday above the 7 percent level that prompted sovereign bailouts in euro nations including Greece, and traded at 7.24 percent as of 3:20 p.m. in Madrid. Debt maturing in 2020 issued by Catalonia, the biggest regional economy, yielded 13.24 percent, compared with 6.95 percent on similar notes issued by the central government.

De Guindos yesterday said the region’s funding mechanism won’t add more stress to the market, at a time when foreign investors are reducing their holdings of Spanish debt.

The mechanism will be financed without the need to modify the Treasury’s calendar for debt sales so the creation of this fund won’t mean additional stress on the market,” de Guindos said in Parliament.

An official at the ministry, who asked not to be named in line with policy, said the borrowing program hadn’t changed and the 12 billion euros would come from the Treasury’s cash. She declined to comment further.

They’ve probably got a war chest,” said Edward Hugh, an independent economist based in Barcelona who publishes research for Roubini Global Economics. “It’s a lot of money but it’s not the end of the world.”


(emphasis added)

If we are generous and take Mr. de Guindos at his word, then no additional increase in the public debt will occur, at least not in the near term (i.e., the debt auction calendar for 2012 won't be altered). However, the announcement once again served as a reminder of how the Zapatero government tricked the markets into believing it had fulfilled its deficit goals: it simply starved the regions of funding, with the result that the debt moved from one part of Spain's public balance sheet to another. After the election that brought Mariano Rajoy's administration to power, it was revealed that the deficit target had in fact been missed by a huge margin. The regional chickens had come home to roost and there they remain, roosting. It is noteworthy that Catalonia, the blunder-prone largest region, now pays 13.24% for 10 year debt. That doesn't seem sustainable, given that the central government pays 7.24% as of Friday last week, which is widely regarded as unsustainable as well – including by the government itself.

 

Worrisome Technical Conditions

Looking at the chart of Spain's 10 year government bond yield, we are struck by the fact that the recent back and forth around the 7% mark looks like a so-called 'running correction' (roughly speaking an upwardly slanted correction, in which one of the partial corrective waves actually manages to put in a new high above the peak of the preceding impulse wave). Moreover, it looks at though the yield is currently in a third wave up – usually the most powerful part of the trend. If the 'running correction' idea is correct, then this could become a very big move indeed. A running correction usually betrays the fact that the forces driving the market are especially strong in the direction of the main trend – and there can be little doubt as to what the main trend in Spanish yields is these days.

 



Spain's 10 year government bond yield as of Friday. The back and forth since early June looks like a running correction. If so, then a big move has likely begun – click chart for better resolution.

 



However, yields are also close to their channel top (see the weekly candle chart in the credit market charts update section further below), which has so far managed to contain all advances. Currently the upper rail of the weekly channel is at about 7.53%, but this increases of course with every passing day (the channel's slope is approximately 35 degrees on a linear chart).

We believe that the ECB is highly likely to intervene in the market once yields exceed the 7.5% mark, as that is the level at which previously countries in the euro area tended to apply for a bailout.

It is reasonable to expect that the euro area authorities want to avert this scenario for Spain by any means available, as there isn't even a fully funded bailout mechanism in place yet that would be able to finance Spain's government. The ESM is still in the ratification process in many countries, and even if it is ratified everywhere, its capital will be insufficient for a full-scale bailout of Spain. We believe that the currently idled 'SMP' (securities market program) will soon be revived in order to buy Spanish and Italian bonds. This could temporarily halt the advance in yields at the channel top mentioned above. However, traders and investors should watch very closely what actually happens once this point is reached: if ECB intervention fails to stop the advance in yields, then a breakout above the channel top could conceivably happen,  in which case the above ruminations about the wave shape of the chart and what it implies will gain in significance.

Interestingly, the approval of the Spanish bank bailout, which was received on Friday as well did absolutely nothing to calm the market.

Meanwhile, protest have erupted on the streets across Spain last week in the wake of the  Rajoy government's recent announcement of €65 billion worth in additional austerity measures. We're not quite sure what the protesters are hoping to achieve, given that the government is on the brink of insolvency.  Surely the government can not go back to spending money it doesn't have.  People seem to hold the erroneous belief that there is a horn of plenty hidden somewhere that could be employed to shower them with freebies, if only the government were willing make use of it.  This is of course akin to believing in fairy tales – every cent the government spends it must take from someone else, either by taxation, borrowing or inflation. It has no resources of its own. The fact remains though that political pressure on Spain's government is rising.

 



A well attended demonstration against austerity in Barcelona late last week.
(Image source unknown – the Web)


  

Italy – Spain with Better PR?

Italy's yields, as is usually the case, rose in sympathy with Spain's and the ten year bond yield ended the week at just below 6.23%. As one analyst recently remarked, 'Italy is just  like Spain with better PR'. We happen to think that the differences are more profound than that, but there can be no doubt that Italy is in deep trouble as well. As noted in the excerpt below, it is possible that Silvio Berlusconi will return to the political fray. If so, then the period of 'better PR' will be well and truly over.

Moreover, is seems increasingly likely that Italy's government will miss its deficit target this year, in spite of the recently announced additional spending cuts.  


“Italy has escaped closer attention than Spain in recent weeks, but this could be due to technocratic Prime Minister Mario Monti selling its story better than the Spanish government. And markets' faith in Monti could leave whoever succeeds him in a tricky position.

Monti has said he won't seek election again, but no credible alternative to his technocratic government has yet risen from the ashes. There have even been whispers that former Prime Minister Silvio Berlusconi could return to the fray.

The government is expected to miss its deficit targets for this year and next by a growing number of analysts. Targets for 2012 and 2013 are 1.7 percent and 0.5 percent of GDP, respectively, but Marco Stringa, European economist at Deutsche Bank predicts that the figures will come in at 2.3 percent for 2012 and 1.5 percent for 2013.

The IMF raised its estimates for Italy's national debt Monday, moving it up by 2.5 percent in 2012 to 125.8 percent, and by 2.6 percent in 2013 to 126.5 percent of GDP, as it cut global growth forecasts. And more bad news came from ratings agency Moody's, which cut the credit ratings of Italian banks including Unicredit and Intesa SanPaulo on Monday, after downgrading Italy's sovereign rating last week.

Bond markets are showing an inextricable correlation between the fortunes of the two countries.

"The Italian data is as bad as Spain, the difference is that Monti's a fantastic PR man compared to the PR disaster of the Spanish government. He also has some popularity. If that is lost, then that crucially exposes Italy," Michael Gallagher, director of research at Idea Global, told CNBC's "Squawk Box Europe" Monday.

Yet there are plenty of differences between the two countries – notably Italy's industrial strength and its relatively low levels of household debt.


(emphasis added)

The markets are currently treating Italy's government bonds with more equanimity than Spain's, but the two markets remain closely linked directionally. It probably won't take much to make Italy the center of attention again. Berlusconi re-entering politics may provide the impetus, so Italians should certainly hope that he reconsiders. However, as the article excerpeted above notes, there is currently no credible candidate to succeed Mario Monti in sight . Berlusconi may therefore conclude that his chances are quite good.

 



10 year government bond yield of Italy – at 6.23% at the end of last week. This chart isn't really inspiring much confidence either – click chart for better resolution.

 


 

ECB Plays Hardball with Greece

In other news, the ECB decided on Friday to no longer accept Greek debt as collateral until after the latest 'Troika' review has concluded. Since it is already known that Greece has once again missed all targets, one wonders in what way the review could possibly change the ECB's mind. It appears though that the move is primarily designed to put pressure on Greece's government ahead of the review in order to get it to speed up the implementation of the most recently agreed upon set of new austerity measures.

As Reuters reports:


“The European Central Bank turned up the heat on Greece on Friday ahead of a review of its bailout programme, saying it would stop accepting Greek bonds and other collateral used by Greek banks to tap ECB funding, at least until after the review.

The ECB move, which analysts said was aimed at stepping up pressure on Athens to adhere to the commitments of its EU/IMF bailout, will force Greek banks to turn to their national central bank for Emergency Liquidity Assistance (ELA) funds. Those funds will be more expensive than funds available in the ECB's regular liquidity operations.

The ECB said the collateral exclusion was due to the expiration of a temporary 35 billion euro scheme agreed with Greece and euro zone leaders whereby the ECB would continue to accept Greek bonds after they went into default earlier this year.

"The ECB will assess their potential eligibility following the conclusion of the currently ongoing review, by the European Commission in liaison with the ECB and the IMF, of the progress made by Greece under the second adjustment programme," the central bank said in a statement.

European and IMF officials are due to visit Athens next week to decide whether Athens merits another tranche of aid from its latest bailout package and analysts said the ECB move was designed to step up pressure on Greece ahead of the visit. Greek leaders this week pushed back talks to hammer out nearly 12 billion euros of austerity cuts demanded by their lenders until next week after a deal proved elusive.

"In this way the ECB could be putting pressure (on the Greek government) to bring about a positive review by the troika," Alpha Finance bank analyst Nikos Lianeris said.”


(emphasis added)

In short, this move won't cut off funding from the Greek banks. They will simply make use of the Bank of Greece's 'ELA' facility (emergency liquidity assistance), which is more costly, but will keep Greece's commercial banks going for now.  

 

Credit Market Charts

Below is our customary update of credit market charts: CDS on various sovereign debtors and banks, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different price scales in mind when assessing 4-in-1 charts). Where necessary we have provided a legend for the color coding below the charts. Prices are as of Friday's close.

The most noteworthy move last week was of course the decisive break of Spain's 10 year government bond yield above the 7% barrier. This makes it ever more likely that Spain will have to apply for a full-scale EFSF/ESM bailout, or alternatively default on its debt at some point further down the road.

CDS on Spain are once again approaching the 600 basis point barrier. Apart from the rise in Spain's yields and CDS spreads, the week was however rather uneventful – there were only very small moves in the other indicators we follow.

We have included Nomura's leading indicator for China as well this time. Just as has recently happened with the ECRI WLI, it looks as though it is about to roll over from a third lower high. If it indeed declines again from here, this would be bad news for risk assets and the chances of a so-called 'soft landing' being engineered in China. Please note that the innocuous seeming term 'soft landing' actually signifies the expectation that the government will succeed in diverting more scarce resources toward bubble activities. Although it is widely held to be a term describing a healthy economic development, this is not really what it is.     

 



5 year CDS on Portugal, Italy, Greece and Spain – click chart for better resolution.

 



5 year CDS on France, Belgium, Ireland and Japan – click chart for better resolution.

 



5year CDS on Bulgaria, Croatia, Hungary and Austria – click chart for better resolution.

 



5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – click chart for better resolution.




5year CDS on Romania, Poland, the Ukraine and Estonia – click chart for better resolution.




5year CDS on Morocco, Saudi Arabia, Turkey and Bahrain – click chart for better resolution.




5year CDS on Germany (white line) , the US (orange line) and the Markit SovX Index of CDS on 19 Western European sovereigns (yellow line) – click chart for better resolution.




3 month, one year, three year and five year euro basis swaps – click chart for better resolution.




Our proprietary unweighted index of 5 year CDS on the senior debt of eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – click chart for better resolution.




Our euro bank CDS index (white line) compared to 5 year CDS on the senior debt of Goldman Sachs (orange), Morgan Stanley  (red), Citigroup (green) and Credit Suisse (yellow) – click chart for better resolution.




10 year government bond yields of Italy (bid price, generic is at 6.09%), Greece, Portugal and Spain – click chart for better resolution.




Austria's 10 year yield (green), UK gilts yield (yellow), Ireland's 9 year yield (white) and the price of the Greek 2 year note (orange – note, prior to the PSI deal break this showed the yield, not the price) – click chart for better resolution.



 

10 year government bond yield of Spain, weekly candlestick chart. This chart shows the channel we have discussed further above. Currently the upper rail of the channel lies at about 7.53% (basically only one bad hair day in the market away).

 




5 year CDS on Australia's 'Big Four' banks – click chart for better resolution.
 


Nomura's China leading economic indicator (white line) versus the HSI (Hong Kong Share Index, orange line), and the Shanghai Stock Index (yellow line) – click chart for better resolution.

 


 

A chart showing global alcohol consumption; by the WHO.




Canadian versus US house prices: the bubble in Canada remains intact for now. This is the main reason why Canadian households currently have higher net worth than US households on average (via Reuters) – click chart for better resolution.



 



Charts by: Bloomberg, WHO, Reuters, Bigcharts


 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

4 Responses to “Euro Area – The Debt Crisis Intensifies”

  • What I see in the CDS charts is there has been a lot of easing in Europe outside of the headline countries. Belgium has surprisingly come back into line. Somehow, I don’t believe the calm is going to remain for long.

    • Correct, the calm has dissipated as of Monday and today. A new chart update will be out later today – the other CDS spreads have now turned back up with a vengeance as well. Spain’s has reached a new all time high of 626.5 basis points, and the 10 year yield has broken above the upper channel rail.

  • Crysangle:

    Clearly the markets do not believe that the regional fund is outside of state accounts . From snippets of news I have read , even the fund created months ago to pay up outstanding regional bills is not properly funded and so is subject to delays . The latest plan to bail regional debt has only just been created – it is possible the the government will merely back regional issuance , still a liability, or will borrow to create a proper fund . Simple fact is that if the government takes over borrowing (at yields over 10% by regions) , it will be absorbing that reality , and that will reflect in sovereign yields. Spain is bankrupt , it cannot roll its debt at an acceptable rate , and all new borrowing is at punitive rates .

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • A Surprise Move in Gold
      Traders and Analysts Caught Wrong-Footed Over the past week gold and gold stocks have been on a tear. It is probably fair to say that most market participants were surprised by this development. Although sentiment on gold was not extremely bearish and several observers expected a bounce, to our knowledge no-one expected this:   Gold stocks (HUI Index) and gold, daily. As noted in the annotation above, a Wells Fargo gold analyst turned bearish at the worst possible moment...
  • May Away
      May Gone in June... Yes, now that June is here, it is indeed the end of May. Theresa May, to be precise, the henceforth former British Prime Minister. After delivering her unparalleled masterclass in “how to completely botch Brexit”, British cartoonists are giving her a well-deserved send-off, which we are documenting below. But first, in case you don't know anything about Ms. May's heroic “Brexit”-related efforts, here is an explanation of how she tried to finagle the best...
  • Elizabeth Warren’s Plan to Bamboozle American Voters
      A Plan for Everything! The run-up to the presidential primaries offers a funhouse reflection of American life.  Presidential hopefuls, hacks, and has-beens turn to focus groups to discover what they think the American electorate wants. Then they distill it down to hollow bumper stickers. After that, they pump their fists and reflect it back with mindless repetition.   A plea for clemency from Mr. 1/1024th crow. [PT]   Change We Can Believe In.  Feel the...
  • Fed Chair Powell’s Plan to Pickle the Economy
      A Loose Relationship The Dow Jones Industrial Average made another concerted run at the elusive 27,000 milestone over the last several weeks.  But, as of this writing, the index has stalled out short of this psychosomatic barrier.  By our estimation, this is for the best.   Since early 2018 the DJIA has gone nowhere, albeit in interesting ways... [PT]   While not always apparent, the stock market generally maintains a loose connection to the underlying...
  • Paul Tudor Jones Likes Gold
      Gold is Paul Tudor Jones' Favorite Trade Over the Coming 12-24 Months In a recent Bloomberg interview, legendary trader and hedge fund manager Paul Tudor Jones was asked what areas of the markets currently offer the best opportunities in his opinion. His reply: “As a macro trader I think the best trade is going to be gold”. The relevant excerpt from the interview can be viewed below (in case the embedded video doesn't work for you, here is a link to the video on...
  • The Italian Job - Precious Metals Supply and Demand
      Lira Comeback? The price of gold jumped 35 bucks last week, and that of silver 48 cents. The dollar is now down to 23 milligrams of gold. Keith is on the road this week, so we will just comment on one thing. If Italy is serious about moving back to the lira, that will make the euro less sound (to say nothing of the lira). That will drive people mostly to the dollar, but also to gold.   Italian deputy prime minister Matteo Salvini (as the leader of the Lega party he is...
  • Bitcoin: What is the Best Day of the Week to Buy?
      Shifting Patterns In the last issue of Seasonal Insights I have discussed Bitcoin’s seasonal pattern in the course of a year. In this issue I will show an analysis of the returns of bitcoin on individual days of the week.   Bitcoin, daily – since bottoming in early December, BTC has advanced quite a bit. It remains an excellent trading sardine. [PT]   It seems to me that Bitcoin is particularly interesting for this type of study: it exhibits spectacular price...
  • Feeling the Heat of a Civilization on the Downside
      An Epic Folly for the Ages Today we begin with a list.  A partial list.  And in no particular order... Angela Merkel. Donald Tusk. Mario Draghi. Donald Trump. Jerome Powell.  Shinzo Abe.  Haruhiko Kuroda.  Theresa May. Boris Johnson. Mark Carney. Xi Jinping.  Emmanuel Macron.  Vladimir Putin. Justin Trudeau. Juan Trump.  And many, many more...   Politicians and bureaucrats of the modern age of statism and central planning... fighting a rearguard action...
  • Silver Remains a Monetary Metal - Precious Metals Supply and Demand
      Silver Price Driven by Reservation Demand The price of gold went up a buck last week, but the price of silver dropped back 13 cents. And the gold-silver ratio marches further upwards. Keith spoke at a conference this week, about how to analyze the fundamentals of supply and demand in gold and silver. He talked about the basis of course.   Silver coins – silver prices are partly influenced by an industrial demand component, but the fact that they move most of the time with...
  • “We’re All Socialists Now”
      An Ominous Sign of Things to Come Despite being probably robbed of the Democratic Party’s nomination by the Clinton political machine, the success of the Bernie Sanders’ 2016 campaign with his advocacy of “democratic socialism” was an ominous sign of things to come and, in some sense, more telling of the political climate than Donald Trump’s improbable victory in November, 2016.   Bernie Sanders, yet another professional finger-wagger (he is actually famous for his...
  • How Do Stock Prices React to Rate Cuts by the Fed?
      The “Greatest Economy in History” Stumbles “This is the greatest economy in the history of our country”, Donald Trump opined just a few months ago. Alas, recently there is growing evidence of an economic slowdown.   The Morgan Stanley MSBCI business conditions gauge plummets to its lowest level since 2008, as recent economic data releases ominously persist in disappointing. [PT]   This has fueled speculation of imminent rate cuts by the Fed. You may...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!