Europe moving beyond the LTRO

So it appears, at least in the short term, that the ECB’s LTRO effect is starting to wear off as markets finally catch up on the story of the underlying economy’s of periphery Europe:

Euro zone bond markets Thursday received their first jolt since the Greek debt exchange was clinched earlier this month as Italian and Spanish bond yields soared with investors rushing to book profits ahead of the end of first quarter of 2012.

The sell-off in Italian debt pushed yields to their highest levels in a month, evaporating the gains made since the second of the European Central Bank’s three-year liquidity operations in February, where the ECB poured more than a half a trillion euros into the financial system. Italy had distanced itself from Spain in bond markets in recent weeks but Thursday’s rout sparked nervousness across financial markets and served a reminder that the crisis in the euro zone is far from over.

As I have been explaining over the last few weeks there is renewed market focus on Spain because it is becoming apparent that its economy continues to weaken. Overnight there have been nation wide strikes protesting against labour reforms and spending cuts. Spain’s economy contains massive private sector debt created by a now failed housing market, but Spain’s economy is also tightly coupled with Portugal which is another area of concern:

Portugal’s central bank said the economy will contract more than previously forecast in 2012 and won’t grow next year as consumer spending drops and export growth eases.

Gross domestic product will fall 3.4 percent this year after declining 1.6 percent in 2011, the Bank of Portugal said today in its spring economic bulletin. In January, the bank forecast GDP would decrease 3.1 percent in 2012, also a bigger drop than previously estimated, and predicted that the economy would expand 0.3 percent in 2013.

“The risks surrounding the current projection point to more unfavorable economic-activity developments,” the Lisbon- based central bank said in a statement. “These risks stem to a large extent from external-driven factors, in particular related to the sovereign-debt crisis in the euro area, which may constrain external-demand developments.”

Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of a 78 billion-euro ($104 billion) aid plan from the European Union and the International Monetary Fund. As the country’s borrowing costs surged, Portugal followed Greece and Ireland last April in seeking a bailout and now plans to return to bond markets in 2013.

Surely none of this is a surprise to anyone, as I have stated previously this should be a totally expected outcome. However, to add to the downside Moody’s cut the ratings of some  Portugese banks:

Moody’s investors service has downgraded four Portuguese banks debt and deposit ratings by one notch, aligning their ratings at the same level or one notch below the ratings of the Portuguese government, which was downgraded to Ba3 from Ba2 on 13 February 2012. All ratings have a negative outlook.

According to the rating agency: “While none of these pressures are new, they continue to mount against the backdrop of the ongoing euro debt crisis. Positively, Moody’s recognises the supportive stance toward the Portuguese banking system by its government and the euro area authorities including the ECB. However, Moody’s has concluded that this supportive stance does not fully offset the aforementioned negative drivers.”

Sometimes, however, I get the feeling that presenting economic statistics to people really doesn’t give them an appreciation what is actually happening in these economies. For that I think you need the human story, unfortunately that too is fairly tragic:

Overnight  Moritz Kraemer, head of sovereign ratings at Standard & Poor’s, also expressed some opinions on Greece that, although not unexpected, certainly isn’t helping the mood:

There may be “down the road, I’m not predicting today when, another restructuring of the outstanding debt,” he said at an event in London late on Wednesday. “At that time maybe the official creditors need to come into the boat.”

Speaking at the same event at the London School of Economics, Poul Thomsen, the IMF mission chief to Greece, said while the country has made an “aggressive” fiscal adjustment, it will take at least a decade to fully complete the country’s restructuring.

To Copenhagen then, where it appears the Eurozone finance ministers will be doing as I expected:

A draft agreement prepared for the finance ministers’ meetings reveals a plan to retain the €240bn (£200bn) rump of the European Financial Stability Fund (EFSF) until next year.

The move boosts the available bail-out funds to €740bn from this summer but falls far short of the €1 trillion firewall that international leaders have been calling for.

It marks a concession from Germany but is unlikely to stem fears over the advancing debt crisis, particularly in Spain.

On Thursday night Germany’s finance minister, Wolfgang Schaeuble, said the fund would be further boosted to €800bn, with help from the International Monetary Fund (IMF). He dismissed fears of countries leaving the eurozone as “nonsense”, and said that Spain must implement labour reforms or Europe would “never succeed” in solving the debt crisis.

Still, happy to be surprised on the upside, but it looks increasingly doubtful at this stage. The more things change, the more they stay the same.

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Comments

  1. It seems all the ltro did was buy some time and unfortunately they didn’t use this time effectively enough. Quel surprise ?

    I suspect politicians were just glad of some breathing space to concentrate on their own national political agendas.

    The problem going forward is that the people of the piigs have seen direct action in Greece and then seen the debts of Greece written off in part. Why wouldn’t they try the same? I don’t think the strikes in Greece were actually the reason for the haircut to private creditors, rather the numbers just didn’t add up any other way, but you could understand why it would seem so.

  2. The human dramas such as in that video or a couple of days ago in Italy where two people set themselves on fire in protest are absolutely horrible.

    However, it is very hard to sell pouring more money into the southern member states when northern states are also facing cuts and stories like these keep popping up:

    http://www.keeptalkinggreece.com/2012/03/20/greek-miracles-blinds-who-see-paralyzed-who-walk/

    http://www.telegraph.co.uk/news/worldnews/europe/spain/9084202/Castellon-airport-Spanish-ghost-airports-unused-runway-to-be-dug-up-to-meet-regulations.html

    This is one thing that makes the crisis such a difficult one to solve. Southern states need help but it is very hard to convince others that the money will not just be squandered again on unsustainable expenditure…

    Try solving that as a politician.

    • Southern states need help but it is very hard to convince others that the money will not just be squandered again on unsustainable expenditure…

      Well this is exactly what will happen, which would then lead to sore feelings on all sides, once Germany et al get “the finger” from defaulting PIIGs after they really are forced to cut budgets and enact severe austerity measures. Unlike now, which only seems like it’s bad. Wait till the PIIGs are confronted with razing unemployment and health benefits to keep northern bondholders and banks whole.

  3. rob barrattMEMBER

    It’s awful,depressing and very damaging to self-esteem to be unemployed at any stage in life, particularly for young people starting out and people with young dependents. So what are the lessons? Apart from banking’s derivative madness and balance sheets built on debt, is there an element of socialist governments finally running out of their own and other people’s money? Ultimately, the state cannot protect you from the forces of natural and financial evolution, the slowest zebra goes to the lions and so also the uncompetitive business. There’s no doubt the worst is yet to come.

    • There’s no doubt the worst is yet to come.

      Especially since governments have decided on double or nothing, gambling everyone’s future.