Greece, Spain, Portugal on the rack

Overnight the politicking over a banking union continued and Greece began to fill the gap to meet Friday’s €5bn bond redemption:

Greece sold 4.06 billion euros ($5.16 billion) of one- and three-month treasury bills on Tuesday to roll over a 5.0 billion euro issue that comes due Nov. 16, its debt agency (PDMA) said.

PDMA sold 2.762 billion euros of one-month T-bills priced to yield 3.95 percent and 1.3 billion of three-month paper at 4.2 percent, four basis points below a previous sale in October.

The three-month auction’s bid-cover ratio was 1.66, down from 1.90 in the Oct. 16 sale.

That doesn’t quite make it, but following the ECB’s decision last week to widen eligible securities under the ELA the rest is expected to be met via asset backed securities. So once again imminent default is averted, as expected. I discussed yesterday what the various options are for Greece’s creditors in terms of providing short term relief to the country, namely providing more money and lengthening maturities of existing debt.

The chart below shows the composition of Greece’s outstanding debts and you can see there is very little in the way of non-offiicial sector debt while much of the private sector component has already taken a write-down following the PSI:

Greece’s loans have already been altered twice previously so making further adjustments seems the most likely outcome of the latest discussions, but there is talk that already approved tranche instalments could be speeded up providing Greece with more money up-front.

As I’ve stated previously, I expect some form of last minute deal to be stitched together so that the problem can be kicked into 2013, but it is very obvious that this does nothing to change the path of the Greek economy. The bailout money will simply be recycled through to creditors while the agreed additional €13bn in cuts guarantees a worsening outcome for the country.

Speaking of worsening outcomes, the latest German ZEW Survey results came out overnight and disappointed:

The headline index, which measures investors’ expectations for the German economy in six months’ time, fell from -11.5 to -15.7, below the consensus forecast of a slight rise. The fact that it has fallen deeper into negative territory means that a larger majority of respondents now expect German economic conditions to deteriorate.

I’m unsure as to the reason why the forecast was for a rise. The survey has been falling for 6 months and the latest PMI data , including forward estimates, continues to show weakness and recent industrial production numbers have disappointed.  Germany will report 3rd Qtr GDP on Thursday and I wouldn’t be at all surprised if growth had a negative sign in front of it, as there is already talk of recession coming to Germany

As I mentioned yesterday Angela Merkel was in Lisbon earlier this week in support of the government, but there are growing signs of discontent. Overnight Portuguese Newspaper Economico reported that the government had informed the Troika that it is likely to miss already revised estimates on a deficit of 5% this year as revenues have failed to meet estimates in recent months. Fitch Ratings released its latest assessment in which is noted these revisions while leaving Portugal on BB+ with outlook negative.

As I explained back in October it is becoming apparent, at least to me,  that Portugal is reaching the limits of possible adjustment under the current plan. That being the case additional measures like the ones announced last month are likely to be counterproductive and lead to further loss of government revenue due to the multiplying effect they will have through private sector retrenchment. Portugal is looking for an increase in exports through 2013 to drive the economy forward which, although possible, the slowdown in other Eurozone members, particularly France,  puts this at risk.

Moving to Spain and the bad news on the housing front continues, as Tinsa reports:

  • Fall in house prices increased at the start of the last quarter
  • Capitals and Major Cities continue to fall the fastest. The least affected markets are the Balearic and Canary Islands.
  • The year-on-year decline in the IMIE General index intensified during October to 12.5%, after the index reached 1525 points. The cumulative decline in house prices since the top of the market in December 2007 was exactly 33.2%.
  • In terms of the overall decline from the peak of the market, the “Mediterranean Coast” recorded a fall of 39.8% to October, followed by “Capitals and Major Cities” with 37.5%, “Metropolitan Areas” with 34.7%, “Other Municipalities” with 27.2% and lastly “Balearic and Canary Islands” with 26.7%.
Once again Catalonia is at the head of the pack with nearly 40% losses from peak on the Mediterranean coast. This continues to be an obvious risk given the state of political relations in that region. Given this data I can only assume that Spanish bank bad debts will continue to rise from their already record level which will inevitably place more pressure on the Rajoy government to finally seek a bailout. So just some more risk pushed into 2013 by the looks of it.
Full report from Tinsa below.

Tinsa housing index Oct 2012

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  1. It is difficult to fathom what the EU game plan is here.

    The EU and IMF know that Greece is gone, they probably know that Portugal is close to it, Spain and Italy are getting closer, but Eire is probably going to get out (reflecting an economy that didnt have long term budget deficit issues – and was only pushed there by a government decision to stand behind dodgy banks).

    They know they are merely kicking the can down the road. They know that the German economy – and more seriously the Italian Spanish and French economies – are still heading south. There isnt a sign of a strong economic rebound in play anywhere in the Eurozone.

    • I have been hearing similar “rational” scenarios for the last 5 years, and they all reflect the hopes of the people making them rather than the facts. You´d be hard-pressed to find a common cause or a common cure for PIIG+US+UK economic woes. Yes, all had some sort of macro imbalances (housing bubbles in Ireland, Spain, UK and US; large public debt in Greece, Belgium, Italy or Portugal; inflexible labour markets in Mediterranean Europe; trade imbalances;…) but although any of these seem a rational enough cause, there are plenty of other countries that have avoided similar fates with the exact same problems. Now that the tide has started to recede the ones with water above the waist are laughing at the ones near the shore. Alas we are not yet at low tide so I wonder, who really has their trunks on?