It feels as if Europe has rolled the clocks back to 2011 as the effects of the ECB’s LTRO have now well and truly warn off and the markets appear to have reconnected with idea that the fundamental issues of the Eurozone have never been addressed.
Spain is 55% through its debt schedule for the year but, as the shadow of emergency operations passes over, yields are rising quickly:
Spain sold 372 million euros of a bond maturing January 31, 2015 at an average yield of 4.375 percent, after paying 2.89 percent April 4, with a bid-to-cover ratio of 4.45 after 2.4 in April.
The bond maturing July 30, 2015 sold 1.0 billion euros, had a yield of 4.876 percent compared to 4.037 percent May 3 and was 3 times subscribed following a bid-to-cover ratio of 2.9 percent at the last auction.
The bond maturing April 30, 2016 sold 1.1 billion euros with an average yield of 5.106 percent, higher than 3.374 percent March 15. Demand was lower than previously, with the bond 2.4 times subscribed after 4.1 times at the March auction.
But that wasn’t Spain’s only problem overnight:
The Spanish government moved Thursday to quell fears of massive deposit withdrawals in Bankia SA (BKIA.MC) as its shares were pummeled by an unconfirmed local media report that depositors were withdrawing savings after the government rescued the ailing lender last week.
“It is not true that there’s a deposit flight,” Deputy Finance Minister Fernando Jimenez Latorre told a news conference to discuss the country’s economic outlook. “Depositors are safer now than they were a couple of weeks ago.” He also dismissed the notion that Spanish banking sector could face massive deposit withdrawals.
Bankia’s stock fell as much as 29% early in the session, before recovering some of the ground and ending down 14% on the day.
And then this morning Moody’s took a blowtorch to the rest of the banking system:
Moody’s Investors Service has today downgraded by one to three notches the long-term debt and deposit ratings for 16 Spanish banks and Santander UK PLC, a UK-domiciled subsidiary of Banco Santander (Spain) SA. The rating downgrades primarily reflect the concurrent downgrades of most of these banks’ standalone credit assessments, and in five cases also Moody’s assessment that the Spanish government’s ability to provide support to the banks has reduced.
The debt and deposit ratings declined by one notch for five banks, by two notches for three banks and by three notches for nine banks. The short-term ratings for 13 banks have also been downgraded between one and two notches, triggered by the long-term ratings changes.
The outlooks on the debt and deposit ratings for ten of the 17 banks downgraded today are now negative. For the remaining seven banks affected by today’s actions, their ratings remain on review for further downgrade, for reasons specific to each bank
It is now quite apparent that the sovereign and banking system in Spain are so intertwined that they are coming to be seen a one thing by the CRAs. The problem is this looks like a downwards spiral for both with no apparent solution to addressing the country’s underlying economic problems. Spain’s broader equities market was down another 1.1% overnight and 35% for the year, while yields continue to rise back towards their November 2011 peaks.
But it isn’t just Spain having trouble with banking deposits, and banking stability more generally. Greece is most certainly struggling from the same, but with the added issue that the ECB is refusing to work directly with a number of Greek banks:
Depending on who you talk to, anything from €700m ($892m; £560m) to €1.2bn was taken out of banks in the days after the election, out of total deposits of around €160bn. That total, in turn, is about a third lower than it was at the end of 2009.
At the same time, the ECB has apparently now said that it won’t directly lend to some Greek banks that it judges to be technically “insolvent”. These are banks that have holes in their balance sheets, because, thanks to the restructuring of Greek sovereign debt, they can’t now expect to get back all of the money that they lent to the government.
That sounds bad, but the banks that have lost access to direct ECB funding can almost certainly still get money from the Greek central bank, which, of course, is ultimately, getting its cash from the ECB (though unlike the more direct form of ECB liquidity support, all the risk implicit in this so-called ELA lending is, formally at least, borne by the Greeks alone).
Please see this post for some further discussion of ECB/NCB interactions.
Just like Spain, Greece also managed a downgrade overnight with Fitch ratings downgrading the sovereign, sighting the outcome of country’s election as the major reason for the cut:
Fitch downgraded Greece’s credit a notch Thursday, to CCC from B-, citing political uncertainty over the country’s commitment to a crucial bailout and possible exit of the eurozone.
“The downgrade of Greece’s sovereign ratings reflects the heightened risk that Greece may not be able to sustain its membership of Economic and Monetary Union (EMU),” Fitch Ratings said in a statement.
Fitch said that a strong showing by Greek “anti-austerity” parties in May 6 parliamentary elections and the subsequent failure to form a government “underscores the lack of public and political support for the EU-IMF 173-billion-euro ($220 billion) program.”
In the meantime, as an interim procedure, Greece has installed a temporary cabinet in the lead up to elections:
Amid deepening economic and political upheaval and under the watchful eye of foreign creditors, Greece’s caretaker prime minister, Panagiotis Pikrammenos, on Thursday appointed a temporary cabinet that will be in place until June 17 when the second general election in a little more than a month is expected to determine the future of the troubled country in the euro zone and the broader stability of the bloc.
According to the polls Syriza’s leader Alexis Tsipras could be the next Greek Prime Minister, and he has kicked off his new campaign in much the same way he left the last one:
“There is no memorandum,” the Syriza leader, Alexis Tsipras, 37, told state channel Net. “The memorandum is finished politically because it has not produced results,” said Mr. Tsipras, referring to a deepening recession in the debt-wracked country.
“Mrs. Merkel is becoming increasingly isolated in Europe,” he said, referring to the German chancellor, Angela Merkel, whose country has taken the toughest line on Greek economic reforms. “Austerity has failed across Europe,” he added and he insisted that his party’s line does not expose the country to a possible euro zone exit even though European leaders have stressed that nonenforcement of the bailout provisions would achieve just that.
We’ll have to wait for the results of the June election before we can determine what happens next, but Mr Tsiparas isn’t alone in Europe calling for a serious re-think of the “fiscal compact”:
France’s new finance minister has reiterated that the country’s new socialist government will not ratify the European Union’s (EU) fiscal pact. Pierre Moscovici said the pact would have to include provisions for growth before France signed up.
The fiscal pact aims to ensure governments keep a tighter control of spending to reduce debt levels. French President Francois Hollande is campaigning for a greater focus on growth alongside austerity.
Austerity alone, he says, will not solve the eurozone debt crisis.
“What has been said quite clearly is that the treaty will not be ratified as is and that it must be completed with a chapter on growth, with a growth strategy,” said Mr Moscovici in a television interview, his first public comments since his appointment.
As I said at the start of the post it feels like 2011 again. A worrying mix of political squabbling on top of the fact that there is no credible plan to address the problems of the countries at risk.
Surely it’s time for another summit, or at least talk of LTRO 2.5.