http://ftalphaville.ft.com/blog/2012/06/12/1038671/another-potential-irk-for-spanish-bondholders/
[Spanish bank bailout] Another (potential) irk for Spanish bondholders
This is what prospective investors in Spanish sovereign debt have to consider, writes Gary Jenkins of Swordfish research:
That they are subordinated;That all new issues over the term of 1 year now contain collective action clauses. Thus the EU is sending a clear signal that you could face crystallised losses on these bonds;Indeed a template was set for losses via the use of PSI when Greece was bailed out. If the Spanish economy continues to deteriorate or the economic malaise lasts longer than expected then at some stage you should not be surprised if governments demand PSI before advancing more funds to Spain,And that Spain is rated non-investment grade by Moody’s (If their actions follow their words.)
That last note is a reference to something Jenkins spotted in Moody’s weekend note. Yes, they will downgrade Spain to sub-investment grade if the assistance has ANY conditions. Which may have been another reason for all the talk of no conditions… which we know isn’t quite the case. Anyway, Jenkins had yesterday pointed out the following about Moody’s late-Friday eurozone outlook statement:
“Moody’s believes the debts of euro area sovereigns that are dependent upon funding from official sources represent noninvestment grade risks because future support – particularly if likely to be needed for a sustained period – would likely be made conditional on loss sharing with private investors or in extremis withdrawn altogether. These risks are present regardless of the explicit terms under which that support is provided, unless the support is unlimited and unconditional.”
As Jenkins writes:
So unless the rating agency regards the support as “unlimited and unconditional” or they just want to avoid a massive row then it is likely that Spain will soon be rated in line with Ireland at Ba1. Portugal is rated Ba3 by Moody’s but note that S&P rates Ireland at BBB+ so it might only be a Moody’s decision.
Of course, to paraphrase Lorcan on Target2 imbalances… if that happens, we’ll probably have bigger things to worry about anyway.
and....
http://www.zerohedge.com/news/spanish-italian-bonds-continue-sliding-risk-sees-modest-squeeze
Spanish, Italian Bonds Continue Sliding As Risk Sees Modest Squeeze
Following yesterday's blistering market fall, the dead cat is in play, if only for a few hours like on Monday morning, precipitated by some aggressive short covering in the EURUSD, which will continue to be the primary buffer of every fall courtesy of the record number of net shorts, who cover on even the tiniest bit of pseudo-favorable news, no matter how ludicrous. As Bloomberg recaps, European markets gain led by telcos, utilities. Financials trade slightly higher having dropped earlier. Italian shares underperform. The euro reversed earlier losses against the dollar to trade stronger. Commodities fall led by natural gas, the GSCI index is off intraday lows. But the biggest data continues to be the action in Spanish, and now Italian, which everyone is watching very closely, bonds. As the charts below show, subordination is bad, bad thing, and one the Spandora's Box is opened, it can't be closed: both are substantially wider on the day, and the only potential buying catalyst would be for the ECB to come back into the market after 3 months of absence.
Spain 10 Year:
Italy 10 Year:
We expect the dead cat to rediscover gravity once Wall Street opens those Spanish and Italian CDS screens first thing this morning.
and why the banking union will go nowhere fast .....
http://ftalphaville.ft.com/blog/2012/06/12/1039411/a-banking-union-no-go-summary/
A banking union “no go” summary
A few things that are worth being taken together. First from José Manuel Barrosoin the FT (with our emphasis):
All 27 EU countries should submit their big banks to a single cross-border supervisor as part of a banking union to be enacted as soon as next year, the president of the European Commission has urged.In an interview with the Financial Times, José Manuel Barroso said the EU needed to go beyond the incremental legislative measures proposed by his institution last week and take “a very big step” towards deeper integration if the bloc is to learn the lessons of the sovereign debt crisis.The plan, which would also include an EU-wide deposit guarantee scheme and a rescue fund paid for by levies on financial institutions, could be achieved by next year and without changes in the bloc’s existing treaties, Mr Barroso said.
And then from the Bundesbank, which has been singing the same tune for quite a while:
Germany’s Bundesbank has warned of possible risks from banking union in the EU, saying it would be tantamount to a back-door pooling of sovereign debt, unless accompanied by fiscal union that allowed control over national budgets.
… Sabine Lautenschläger, vice-president of the Bundesbank, said banking union could only work in tandem with fiscal union – meaning some common cross-border binding rules on how countries could set budgets.The views of Germany’s hawkish central bank reflect broader German opposition to any agreement that could leave the eurozone’s largest economy liable to bailing out banks in weaker countries, unless in return for measures that more closely integrate budget and spending policies.…Speaking at a Bundesbank conference in Frankfurt, she said banking union without fiscal union would, in particular, benefit banks in weaker economies with higher refinancing costs. If those banks then bought more of their own countries’ sovereign bonds, they would, in effect, pass on cheaper refinancing costs to their domestic governments, Ms Lautenschläger said.
And, finally, from Gideon Rachman in an article which really should be read in full:The demands being made of the German government… are politically unrealistic and dangerous. They are textbook solutions that fail the real-world test. Worse, if enacted, they would risk provoking the very political radicalisation they are ultimately meant to prevent.Consider just one of the proposals on the shopping list: a Europe-wide bank deposit insurance scheme. As a senior Dutch politician who shares the German view, puts it: “We cannot push through a banking union when the French have just cut their retirement age to 60 and we have raised ours to 67.”
The Merkel government is not ruling out eurozone bonds or EU deposit insurance for ever. It is arguing that any such moves can come only as part of a bigger project – the formation of a political union. Anything else will feel like giving southern Europe a German credit card, without setting a credit limit.
It is hard to see how European politicians could achieve such profound reforms within weeks or months – as the Americans and others are urging.
Put all of that together and you have a basically unchanged situation, with an eloquent explanation as to why.
http://ekathimerini.com/4dcgi/_w_articles_wsite2_1_12/06/2012_446554
Don't put euro bank union cart before horse, says Bundesbank VP
"In a banking union, a crisis in one country's banking system may require the use of taxpayer money from other countries,» Bundesbank Vice President Sabine Lautenschlaeger said in the text of a speech at a banking supervision conference. "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 said. A number of European policy makers have suggested a banking and fiscal union to shift the burden of the financial crisis onto broader European shoulders, relieving individual countries like Greece or Spain. It is not yet clear what politicians mean by «banking» or «fiscal» union, Lautenschlaeger said, but a banking union would bring advantages if it implied more integrated banking supervision or greater firepower to wind down national banks and prevent bank runs. Lautenschlaeger warned against creating a banking union without a supporting fiscal union. Banks in countries with high refinancing costs would benefit most from a banking union and might use the advantage to buy more government bonds from their home country, she said. In effect, banks would pass on their more favorable refinancing conditions to their home countries and thus dampen the disciplining effect of the financial markets. The pooling of responsibility through a banking union would spread through to sovereign bonds of problem states, she said. "The result would be a pooling of the governments' liabilities through the back door, without the possibility of control or the protection of a fiscal union,» Lautenschlaeger said. [Reuters]
and.....
Greek shipowners warn SYRIZA against abolishing tax break
Greek ship owners who remitted more than $175 billion in untaxed earnings to the country in 10 years say they would relocate the businesses if a new government scraps the fiscal exemption, risking as many as 60,000 jobs. The country’s estimated 762 vessel owners pay no tax on international earnings brought into Greece under rules incorporated in the country’s constitution since 1967. The SYRIZA party, which opposes Greece’s international bailout and is shown by polls as vying for first place before a June 17 election, says it wants to abolish the tax break. Greek maritime companies and others in related service and supply industries employ 200,000 workers, of whom almost a third could lose their jobs if local ship owners were to leave, according to the National Confederation of Hellenic Commerce. As well as vessel managers, work in insurance, ship repair and other industries would also be at risk, according to Vassilis Korkidis, the confederation’s president. “Shipping is an offshore industry, and any act against it is like shooting yourself in your own foot,” Ted Petropoulos, founder of Petrofin Research, said by phone yesterday. He worked in his family’s shipping business in the 1970s and also held positions at lenders including First National Bank of Chicago before starting the ship-finance consulting firm. Greek vessel owners remitted 15.4 billion euros ($19.2 billion) to the country in 2010, Bank of Greece (TELL) figures in the Union of Greek Shipowners’ annual report for 2011 showed. Remittances between 2000 and 2010 came to 140 billion euros, according to the data. Alexis Tsipras, leader of SYRIZA, said in a June 1 election speech he would seek to abolish tax breaks for owners. The Greek-controlled fleet numbered 3,325 vessels, or about 15 percent of the global total, the union said. There were 762 companies managing ships from the country last year, according to Petrofin. Greeks are voting again this month after an election in May failed to produce a viable governing majority. New Democracy, the largest pro-bailout party, led Syriza by 22.7 percent to 22 percent, according to an ANT1 TV poll on June 1, the last date surveys were made public.
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http://www.telegraph.co.uk/finance/debt-crisis-live/9325838/Debt-crisis-live.html
12.58 Alithia, one of the largest newspapers (by circulation) in Cyprus(below), has said the country's government has asked Russia for a €5bn bilateral loan.
12.47 A top official with Germany's central bank says Greece must stick with the spending cuts and economic reforms demanded as part of its bailout loans.
Andreas Dombret, an executive board member at the Bundesbank, said that Greece needs to stick with its program "no ifs, ands or buts".
12.38 The European Commission has said that eurozone officials had held contingency "discussions" in case Greece abandons the euro, after press reports of possible capital controls.
"There are indeed discussions, and we are asked to clarify what is foreseen in EU treaties," Commission spokesman Olivier Bailly said.
12.34 France backs fiscal integration in the eurozone but believes the first priority should be solving the crisis in the region, Europe MinisterBernard Cazeneuve has said.
Speaking after talks in Paris with his German counterpart Michael Linke,Cazeneuve said eurozone leaders urgently needed to compromise on steps to pull the region out of a debt-induced crisis and find concrete measures to boost economic growth.
We wish to continue the political discussion on the process of greater economic and monetary integrations... at the same time this cannot constitute the urgent response to the crisis we face.
12.31 Mocked-up posters in Italy depicting German Chancellor Angela Merkel in a Nazi uniform, with a euro symbol instead of a swastika.
"You're paying for the bailouts, not the banks. Thanks a lot EMU."
11.18 EC "not aware" of Greek exit plans for capital and border controls to stop capital leaving the country. Adds that it is working on "only one plan" to keep Greece in eurozone.
11.05 Austrian Finance Minister Maria Fekter says there are no signs Italy will apply to tap EU bailout funds. Adds that Italy will be helped if there is a request.
Meanwhile, 70pc of Italians say the euro has brought more disadvantages than advantages, according to an ISPO poll.
10.40 Fitch: UK, France and US AAA ratings under pressure.
10.35 An EU banking union proposed by EU Commission chief Jose Manuel Barroso is a good idea but should not be a "permanent income transfer union", Finnish Prime Minister Jyrki Katainen has said.
"We must be ready to develop this union and not to prevent its development. But we have our own starting points. It cannot become a permanent income transfer union in which the north is always paying the south," Katainen told Finnish financial daily Kauppalehti.
10.24 Nicholas Spiro, managing director of Spiro Sovereign Strategy, has commented on the rising bond yields of Spain and Italy this morning:
Spanish and Italian benchmark yields are moving in lockstep - so far both up 7bps to 10bps this morning. While the yield gap between the Spanish 10-year and its Italian equivalent was 80bps as recently as June 1, it is now roughly 50bp. Italian bonds are relinquishing their large gains in January and February. We're witnessing the strongest reversal of the post-LTRO rally in Italian debt as a result of contagion from Spain. There is a complete lack of differentiation between the Spanish and Italian credit stories. Country-specific conditions count for very little in the eyes of investors. This is contagion with a vengeance and bodes ill for Thursday's Italian bond auction.
UK factory output in April fell 0.7pc. Analysts expected a 0.1pc fall.Sterling weakens, FTSE 100 falls.
09.25 Spanish 10-year bond yields pass 6.6pc - the highest level since November 30, 2011. Italian yields are at 6.166pc.
09.18 Japanese ratings agency R&I (not one of the big three) has cutSpain from A to BBB+. S&P and Moody's still rank the country one notch above Russia. Can that last?
09.12 EU Commissioner for Economic Affairs, Olli Rehn, has said European leaders will discuss financial and fiscal union and growth compact at June Summit. Adds that quick approval of "two-pack" fiscal rules is needed. Rehn says any risk-sharing agreement needs to prevent anyone fom having the ability for a free ride.
09.06 Paul Mason, Newsnight's economics editor:
08.31 Fitch: "third LTRO [from ECB] is increasingly likely." Adds that a Greek exit would make LTRO inevitable.
08.25 An unnamed Irish minister has said that the "Spain bank deal doesn't appear to have worked". Bond yields are up and markets fell yesterday after the initial joy over the bailout wore off.
07.07 The Times reports that the EU is working on plans for a federal economic union.
The blueprint is being drafted at the request of German ChancellorAngela Merkel and the other leaders by a quartet of EU top brass:Herman Van Rompuy, President of the European Council; Mario Draghi, head of the European Central Bank; Jean-Claude Juncker, chairman of the Euro Group council; and José Manuel Barroso, President of the European Commission.
They are to present what they call building blocks for integration, including fiscal and banking union and possibly proposals for pooling debt through joint bonds, to a gathering of EU leaders on June 28. One European diplomat said that the significance of the summit would be huge.
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