Bank bonds vs German intransigence

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The fallout from the Spanish bank “bailout” continued overnight with Spanish yields moving back up and over their November 2011 euro area highs:

Sovereign yields, however, are the outcome. The root cause of is a mix of enforced government austerity and collapsing housing bubble, and on the latter the news continues to get worse:

The house prices fell by 11.1% yoy in May, which accumulates and a drop of 30.2% from their peak levels in December 2007, according to the Spanish Real Estate Market Index (IMIE) of Tinsa.

By area, the towns of the Mediterranean coast were those who returned to mark the sharpest annual decline in May, 14.1%, followed closely by the capitals and major cities (-13.3%) and metropolitan areas (-11.8%).

Below the market average stood for other municipalities, whose year decline amounted to 8.4%, followed by the group of Balearic and Canary Islands, which ranked last, with a drop of 6%.

In terms of cumulative declines, the Mediterranean coast has experienced a fall in prices from their peak levels of 37.9%, followed by the capital and big cities (-32.9%), metropolitan areas (-31.2% ), the rest of the municipalities (-25.9%) and the Balearic and Canary Islands (-24.1%).

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The full report from Tinsa can be found here, but the major take away is the YoY evolution chart showing that the rapid acceleration in housing declines in April has been added to in May, albiet at a slower rate of change:

Relative YoY Evolution of Spanish house price Index : Source Tinsa

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It seems that the backfiring bailout it also dragging Italy back into the spotlight as we see the country’s yields also trending up again. That probably wasn’t helped by the Austrian finance minister’s latest comments on the country’s outlook:

Raising the stakes in Europe’s debt crisis, Austria’s finance minister said Italy may need a financial rescue because of its high borrowing costs, drawing a furious rebuke on Tuesday from the Italian prime minister.

Maria Fekter’s assessment of the euro zone’s third largest economy amplified investors’ fears that Europe is far from ending 2-1/2 years of turmoil.

“Italy has to work its way out of its economic dilemma of very high deficits and debt, but of course it may be that, given the high rates Italy pays to refinance on markets, they too will need support,” Fekter said.

She sought to soften her remarks on Tuesday, saying she had no indication Italy planned to apply for aid.

Mario Monti was obviously less than impressed, but showed some restraint:

“I consider it completely inappropriate that a European Union Finance Minister should comment on the situation in another member state, particularly in a way she did,” Monti said, adding that he would “restrain” himself from commenting on her words.

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But this wasn’t the only overnight stoush. As I mentioned a couple of times over the last few weeks Europe’s “fabulous 4” (European Commission President Jose Manuel Barroso, European Central Bank President Mario Draghi, Eurogroup Chairman Jean-Claude Juncker and European Council President Herman Van Rompuy ) are supposedly working on grand plans for Europe to be presented at the next EU summit. Mr Barroso has been focussing on a banking union as one of the key deliverables in what appears to be a mix of supra-European macro-prudential regulator and bailout fund:

A banking union giving a cross-border agency supervisory powers over major lenders in all EU states could be enacted by next year, European Commission President Jose Manuel Barroso was quoted on Tuesday as saying.

The EU needed to take a “very big step” towards deeper integration if it was to learn the lessons of the sovereign debt crisis, he told the Financial Times in an interview.

The plan would also include a regional deposit guarantee scheme and a rescue fund paid for by levies on financial institutions. It could be implemented by 2013 without changes to the bloc’s treaties, Barroso said.

But it wouldn’t be Europe if we didn’t see grand announcements of greater co-operation immediately quashed by another party:

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Andreas Dombret, a key board member of the Bundesbank, said the grand plan by Brussels is unworkable. “It has to follow a deeper fiscal union as it would imply significantly increased risk sharing amongst countries.”

Mr Dombret said a pan-EMU deposit-guarantee scheme and a debt resolution fund would require “a genuine, democratically legitimated fiscal union” and a new treaty.

The Bundebank’s vice-president Sabine Lautenschlaeger hammered home the point in what is a clearly co-ordinated push to kill the plan. “The result would be a pooling of the governments’ liabilities through the back door,” she said.

“Whoever is footing the bill must also have a right of control, particularly when it comes to the large sums that are seen in banking crises,” she added, alluding to rulings by German courts that unquantifiable EU liabilities breach Germany’s constitution.

Chancellor Angela Merkel endorsed the tough line at a party conference yesterday, insisting that Germany will not accept variants of debt pooling or eurobonds until Europe has created a machinery of joint government.

Which brings us back to the old chicken and egg dilemma we’ve seen from Europe for this entire crisis. Although Germany will “talk” about long term goals for the Eurozone they have been uncompromisingly steadfast in their message that it is fiscal/political union first, everything else second. In the eyes of Germany, the first step is that all countries must bind themselves, and enact, the fiscal compact and until this has occurred Germany is unwilling to move. Obviously I consider this entire thing totally misguided, but it certainly is not new.

Given the economic situation of peripheral Europe, many nations are finding that they are being ensnared in the fiscal compact like it or not. Although Mariano Rajoy would like to believe otherwise it would appear that Spain is now firmly latched up to the European austerity wagon, with Cyprus likely to follow in the coming weeks. The outstanding, and rather large, entity left is Italy and that is where the focus will now turn.

Interesting times ahead!

Just a note for those of you with a little too much time and a penchant for European economics. The ECB released the June 2012 European (in-)stability review overnight, and I am slowly making my way through it. The press release is here and the report is here. But be warned, at 125 pages it’s not small.

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