German yields are suddenly backing up in line with everyone else's.
The question is is this a long overdue correction to an overbought market, or a sign that suddenly the market have realised Germany simply doesn't have the firepower to save the Eurozone. German government debt is already over 80% of GDP. To think they have the monetary capacity to take on Spain and Italy is simply deranged.
Europe needs the ECB to step in. It is the only solution that is remotely likely to work. It is unpalatable to Germany at the moment, but maybe a sharp deterioration in their own bonds will make them rethink.
Don't hold your breath.
Wednesday, June 13, 2012
Monday, June 11, 2012
Hiding to nothing
Well I guess the intentions were good. The theory was that if they could bailout out Spain ahead of the upcoming Greek election then they could ring fence the "core" eurozone and let Greece go if they wanted to.
The plan as conceived is actually about the best they could have come up with. Use EU money to bail out Spain's banks, hoping to stop the rot before it sets in and let the Spanish government claim that it's not a sovereign rescue.
There are still a variety of problems with that idea though - most of them huge.
By using money from the permanent ESM (ignoring for the moment where that money is actually going to coming from) for the bailout they have avoided the problems of Finland demanding collateral for the loans, as would have happened with EFSF money, but they have now structurally subordinated every senior Spanish sovereign debt holder to the ESM. Only the IMF would rank higher, and if things do get worse in Spain you can be pretty certain the IMF will be involved in the future. This means that all Spanish bond holders are now potentially in the same situation as Greek ones of last year. Those creditors ended up taking 75% haircuts - and they may not be finished with the pain yet judging by how things are going there.
Recent debt auction results have shown that non-Spanish demand for their governments debt was already minimal, and external holdings had been falling consistently for the last few months. As a result of the new structural subordination what little external demand for Spanish government debt there was is likely to be minimal going forward. The only buyers are likely to be the Spanish banks - the very institutions being bailed out. So now the government will rely on money from effectively insolvent banks to keep it afloat, and those banks are relying on money from the ESM, which is being routed through the Spanish government and so is effectively Spanish government debt, to keep them afloat. It's a circle of insolvency. If Spain's banks have to mark their government debt holdings to market they will show huge losses, reducing capital, necessitating more support from, and additional debt for, the very state whose insolvency is causing the losses.
It can't end well
And then there is the political fallout. If I was a Greek voter (or indeed Irish or Portuguese) I would be demanding to know why the Spanish are getting what appears to be very preferential treatment. True the Spanish are going to be taking plenty of austerity style pain but there is next to none of the EU/ECB/IMF troika oversight and ritual humiliation that those countries are being subjected to.
It seems to me that this deal has played straight into the hands of those parties demanding to renegotiate, or walk away from, the existing bailouts in Greece. The deal designed to ring fence core Europe from a Greek default or exit seems to have made that default or exit more likely.
Given the impossibility of northern Europe agreeing to joint debt pooling and bond issuance, the only viable solution remains the ECB being allowed to buy bonds from struggling nations, as long as those nations are making efforts to sort out their budget and debt woes. ECB purchases would cap their interest rate levels and guaranteeing market access until their finances are in a better state and they are able to find themselves at sustainable levels.
The plan as conceived is actually about the best they could have come up with. Use EU money to bail out Spain's banks, hoping to stop the rot before it sets in and let the Spanish government claim that it's not a sovereign rescue.
There are still a variety of problems with that idea though - most of them huge.
By using money from the permanent ESM (ignoring for the moment where that money is actually going to coming from) for the bailout they have avoided the problems of Finland demanding collateral for the loans, as would have happened with EFSF money, but they have now structurally subordinated every senior Spanish sovereign debt holder to the ESM. Only the IMF would rank higher, and if things do get worse in Spain you can be pretty certain the IMF will be involved in the future. This means that all Spanish bond holders are now potentially in the same situation as Greek ones of last year. Those creditors ended up taking 75% haircuts - and they may not be finished with the pain yet judging by how things are going there.
Recent debt auction results have shown that non-Spanish demand for their governments debt was already minimal, and external holdings had been falling consistently for the last few months. As a result of the new structural subordination what little external demand for Spanish government debt there was is likely to be minimal going forward. The only buyers are likely to be the Spanish banks - the very institutions being bailed out. So now the government will rely on money from effectively insolvent banks to keep it afloat, and those banks are relying on money from the ESM, which is being routed through the Spanish government and so is effectively Spanish government debt, to keep them afloat. It's a circle of insolvency. If Spain's banks have to mark their government debt holdings to market they will show huge losses, reducing capital, necessitating more support from, and additional debt for, the very state whose insolvency is causing the losses.
It can't end well
And then there is the political fallout. If I was a Greek voter (or indeed Irish or Portuguese) I would be demanding to know why the Spanish are getting what appears to be very preferential treatment. True the Spanish are going to be taking plenty of austerity style pain but there is next to none of the EU/ECB/IMF troika oversight and ritual humiliation that those countries are being subjected to.
It seems to me that this deal has played straight into the hands of those parties demanding to renegotiate, or walk away from, the existing bailouts in Greece. The deal designed to ring fence core Europe from a Greek default or exit seems to have made that default or exit more likely.
Given the impossibility of northern Europe agreeing to joint debt pooling and bond issuance, the only viable solution remains the ECB being allowed to buy bonds from struggling nations, as long as those nations are making efforts to sort out their budget and debt woes. ECB purchases would cap their interest rate levels and guaranteeing market access until their finances are in a better state and they are able to find themselves at sustainable levels.
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