Tuesday, June 19, 2012

Might Italy leave the EMU before Spain ? Mish gives six reasons why in a great post on the Italian situation ! As noted in the Around the horn post , apart from the two spanish auctions sold at unsustainable yields for 12 and 18 month debt as well as the horrid ZEW from Germany , Spain has pushed back the audit by the big four audit team until September ( which should really buoy confidence and certainty as to what's going on in the spanish bank roach motel )

http://globaleconomicanalysis.blogspot.com/2012/06/spanish-banking-audits-delayed-until.html

( Amusingly , the first excuse given earlier today for why the July 31st report wouldn't be completed on time was the August vacations.....Spain actually is making Greece look credible these days.. )


Tuesday, June 19, 2012 3:08 PM


Spanish Banking Audits Delayed Until September, Another €50 Billion Likely Needed


Via Google Translate from La Vanguardia, please note that Spanish banking audits are delayed until September
 Audits of Spanish banks, which should conclude in late July, will be delayed until September in order to get "further examination", as reported by Efe sources close to the process.

The monitoring committee, which includes representatives from the Ministry of Economy and the Bank of Spain, have made this decision in order to have more complete information on the balance of Spanish banks.

PwC, Deloitte, Ernst & Young and KPMG will audit, as part of the second phase of the Government's strategy to dispel doubts about Spanish banks and in a first stage assessment of the consultants Oliver Wyman and Roland Berger , whose results will be announced Thursday.
A month ago, the Ministry of Economy and the Bank of Spain announced that at first these two consultants evaluated the balance sheets of Spanish banks, which was submitted to stress tests to detect the needs of capital.

These results are expected in two days, but the market as a given that the capital they require Spanish financial institutions as a whole will be between 60,000 and 70,000 million.

In addition to this assessment, in a second phase, four auditing firms to be responsible for further evaluation, expected end of July and is now delayed until September.

The audit will serve to contrast the expected losses due to impairment of assets of each bank and that the four companies evaluate loan portfolios of the entities in detail.

Not only real estate loan losses, which is where the government has required greater provisions, but also consumer credit to businesses and families, to refine the necessary write-downs.

That review, experts speculate, could force much of the sector to increase supplies significantly, so that together with the capital needs to be detected in the first phase of the evaluation may lead institutions to take up 150,000 million euros.
Why the Delay?

There is a political need to get the ESM up and running with a lower preliminary figure before the real audit reports a need for capital that exceeds 200% of the preliminary number (€60-70 billion), and €50 billion over the credit line number of €100 billion.

Amsusingly, the ESM has not been ratified by 13 of 17 countries, including Germany, although it has been signed by most countries. 


and.....


http://www.zerohedge.com/news/humpty-van-rompuy-has-fallen-wall

Humpty Van Rompuy Has Fallen Off The Wall

Tyler Durden's picture
Submitted by Tyler Durden on 06/19/2012 08:18 -0400




From Mark Grant, author of Out of the Box
Europe, A Victim Of Its Own Folly
“Do you wrestle with dreams? Do you contend with shadows? Do you move in a kind of sleep? Time has slipped away. Your life is stolen. You tarried with trifles, Victim of your folly.”

                       -Frank Herbert, Dune

You may have noticed, I have certainly noticed, that Europe is living in a kind of dream world where they propose various schemes and hope that you see them as some kind of solution for their problems and so; go back to sleep. This worked initially and they keep hoping it will work again but the Sleeper has awakened and is paying attention which is why the “Headline Rallies” have become so short in duration. Many of the schemes now are coming from the troubled countries or the ones that may be troubled shortly, to quote the famous song in Casablanca, “As Time Goes By.” I think it has gotten to the point that they believe their own rhetoric. They spewed it for the masses and they spewed it for the world’s investors and it has been repeated so often that they now rely upon their own fantasy as truth. The Europeans have become the victim of their own folly.
If you stand back and place all of the current schemes upon a small knoll and observe them carefully you will notice one thing; each is tied with a red ribbon trying to get Germany, the Netherlands, Austria and Finland et al to pick up the tab for everyone else. The Spanish pleas for ECB intervention, some Grand Duke to supervise, control and pay for the banks, Eurobonds, bailout funds; they all have the same purpose which is a plea for money from those that have it to be transferred to those that do not have it waved under the banner of a United Europe where each nation is responsible for every other nation and where each country eventually settles to the same cost of funding and standard of living as all of the countries; at the mean. This is the theme that wafts in the wind and it is just various color bearers that wave the flag.  The Germans and the rest of the monied countries have taken two tacts in response to all of this. First they say that “maybe, somewhere out in the future, when the time is right” and so forth to placate those asking for the averaging of Europe which will accrue to their benefit and then, when pressed, they just say, “No” which ends the conversation as nothing can be done without the acquiescence of those still holding their own bags of gold. The politics is not complicated. Germany, for their part, wants to keep the other European nations placated so they will keep buying their goods and services but this part of the equation is also getting problematical. The poorer nations beg, the richer ones hand out some charity but refuse to pour out their purses upon the ground and very little gets done or will get done because the two camps are at cross purposes that cannot, and will not in my opinion, ever get resolved.

If cousin Jake got in financial trouble and his business verged on bankruptcy and he was forced to move to a walk-up tenement in Brooklyn and he pleaded for help I am sure that you would respond. You would “do what you could” you would say which would be to provide him some money. You might even wander over to his business and look at his books and set down guidelines for the receipt of your money so that it would not be squandered. You would not, however, endanger your own way of life and give him so much money that you were forced to move from your very pleasant house in Westchester and give up your Bentley to help your cousin who had brought this all upon himself. This would not be happening and it will not be happening in Europe and all of the schemes and plans and artifices devised by those in need will not get Germany and the rest to live in the same fashion as those in Athens, Dublin, Lisbon and Madrid. When you see the next, new, new fanciful plan floating around in the wind don’t be alarmed and don’t be taken in by the pretty colors. Unless Germany agrees to something it will not be happening and Germany will not, cannot without severe political consequences, agree to the demands of their needy neighbors.

Heading South
All of Europe is gripped by a recession except for Germany. Germany will soon be included as the demand for their goods and services dries up due to the financial conditions on the Continent. There is no decoupling in the world and there has not been in decades as the economy for all of the world is now global. So the United States will also head into a recession which will be caused by the troubles in Greece, Portugal, Ireland and Spain just as the recession in 2008/2009 was caused by the idiocy of free money and no documentation mortgages that took place in America. Europe will soon be returning the favor. That is my opinion. It will not be Armageddon or some 1930’s type of travesty but it will be unpleasant and serious especially as Europe wants to concentrate on liquidity and firewalls and all manner of schemes that do not address the real problems of the countries that are deeply troubled. The solutions proposed do not confront the core issues and, until they do, the situation will only worsen with Spain and Italy joining Casey at the bat.

It’s What You Count That Matters
Allow me to comment on one final issue this morning. When calculating the debt to GDP ratios of the countries in Europe I include their derivatives, regional guaranteed debt, bank guaranteed debt, corporate guaranteed debt and other obligations assumed by the nation. It is not Mark Grant’s opinion or viewpoint rather it is just that I count everything while Europe does not. However the difference is only academic when things go rolling merrily along. When economies head into a recession the differentiation matters.
Europe also allows for sovereign debt to be counted as risk-free assets and not marked-to-market. Many nations, Spain is one example, allow for Real Estate loans, mortgages and even commercial loans to be carried at face value as a matter of financial engineering. I think it is a bad joke but the bite has come. This occurs when the loans no longer pay and the revenues are no longer present no matter how you carry them on your books. Then, if the banks try to off-load the properties they have assumed they take losses which are real losses and have to be accounted for on the books or they are securitized and placed as collateral at the ECB which then hides the problem for a while but not indefinitely and the “indefinite” has run out of time which is why any number of banks are calling “Uncle” and why the sovereign nation nations are crying “Uncle” and trying to deflect their problems first back to the ECB and then to find some new scheme so that the country does not fall victim to the Men in Black. All fine, all dandy, but, once again, the central issues are not dealt with and all of the schemes like all of the King’s men and horses cannot put Humpty back together again.

Humpty has fallen off the wall.
and.....



http://globaleconomicanalysis.blogspot.com/2012/06/six-reasons-why-italy-may-exit-euro.html


Tuesday, June 19, 2012 5:07 AM


Six Reasons Why Italy May Exit the Euro Before Spain; Ultimate Occupy Movement


As I have said repeatedly, Greece is noting but a sideshow, with the election last Sunday in France far more important than the election in Greece that has had everyone's attention.

For further discussion, please see Greek Election Sideshow; Socialists Win Absolute Majority in France; How Long Will the Bond Market Celebrate Another Glorious Can-Kicking Exercise?

Today I want to expand on that topic with the idea that Spain is a sideshow to Italy.

Rise of the Five Star Movement

Reader Andrea who is from Italy but now resides in France writes ...
 Hello Mish.

As I told you some days ago, in Italy something quite new and disruptive is happening in the political landscape. As expected, the “Movimento 5 Stelle” (5 Stars Movement) had been the real winner of the recent round of regional elections a couple of weeks ago, and in my opinion it is worth to keep an eye on them especially in the light of the recent elections outcome in many European countries.

The founder of the movement is Beppe Grillo, a comic showman, very popular in the 70s and 80s. He was (unofficially) “banned” from Italian TV in the mid-80s when he made in a Saturday night show a very satiric (and funny) joke about the Socialist party and its chief Bettino Craxi, at that time Italian PM.

In the first half of 2000s he started Beppe Grillo's Blog, posting messages in a satiric style about economy, politics, ecology, society.

The movement is quite different from the other parties. It does not not a clear, hierarchic and defined organization. It is more a mixture of a method, a guideline and a set of rules to select candidates and programs and obtain its logo be part of the network.Main Rules for the Five Star Movement


  • Not be an elected politician prior to 5 Stelle
  • Commit to stay in charge for no longer than 2 terms
  • Commit to take a minimum salary and give the rest back to the community
  • Post a public platform on the internet
  • Be willing to hold a public debate on the platform
  • Get out of the Euro and default on debt

In the latest elections, Five Star Movement candidates have been able to get almost everywhere between 10 and 20% of votes, sometimes even more, all without a single minute of TV advertising or a single advertising page on newspapers.

The movement has simply spread via the internet, social networks and public meetings around the country. The message sent by their success is clearly: we are fed up with this corrupted, inefficient and incompetent political class.

The most important thing for the future months is the last stance Beppe Grillo has decided to take just before elections: get out of the Euro and default on debt. This position has been strongly criticized the rest of the political class and mainstream media, but the fact that Beppe Grillo has been breaking this “Taboo” and that there was a strong reaction by political and media environments, has finally opened the debate in Italy and has certainly made people to start seriously think about it, despite the fact that Italy so far had no financial help from the EU or IMF.

The Monti consensus is now rapidly decreasing, mainly because the tax increases are starting to bite and because he seems unable to cut waste of taxpayer money as he promised. Political elections in Italy will take place in the spring of 2013: Beppe Grillo said after recent elections “see you in the next Parliament”.


If he will be present in the next Parliament with a significant number of members (which is likely), you can be sure that the topic will be more and more debated.


It already is. In numerous talk-shows, the issue is now openly debated. Discussing Italy leaving the eurozone one year ago was almost considered as "heretic". Now it's not.


Best regards, Andrea.
Ultimate Occupy Movement

That email from Andrea actually came in several weeks ago. In a recent followup post Andrea writes ...
 Hello Mish,


Movimento 5 Stelle just won the its first Mayor of an Italian significant city, Parma (more known for its Parmesan cheese and the Parma ham).

For a movement born just 3 years ago and with no funds it is extremely significant. The prior local administration of this city had to resign,  pushed out by an angry crowd literally waiting for them outside city hall after discovering that they had indebted the city up to bankrupt.


Sounds familiar?
Regards, Andrea
The only way the "Occupy Movement" is ever going to work is the way it just worked in Italy: vote the bums out, not in favor of more bums, but rather in favor of candidates with principles.

European Unity on the Rocks

Inquiring minds are digging through a fascinating six-page report by PEW Research entitled European Unity on the Rocks.
 The report is a survey on attitudes within the eurozone towards the EU, the euro, and how countries in the EU view each other. Here are a few tables and comments.



Across the eight European Union member countries surveyed, a median of only 34% think that European economic integration has strengthened their country’s economy. Indeed, majorities or near majorities in most nations now believe that the economic integration of Europe has actually weakened their economies. This is the opinion in Greece (70%), France (63%), Britain (61%), Italy (61%), the Czech Republic (59%) and Spain (50%). Only in Germany (59%) do most people say that their country has been well served by European integration.Among the five euro area nations surveyed, a median of only 37% believes having the euro as their currency has been a good thing. This includes just 30% of the Italians and 31% of the French. At the same time, the three non-euro zone countries surveyed are quite happy they have kept their own currencies, including nearly three-quarters of the British (73%).



Among the Europeans surveyed, only in Germany is there a growing majority that believes that integration has been an economic boon for the nation and a strong majority that says EU membership has been good.

Despite the falloff in EU favorability, most Europeans surveyed still see the European Union in a positive light, including 69% of the Poles, 68% of the Germans and 60% of the French and Spanish. And more than half in all five euro area countries surveyed – including 71% of the Greeks, 69% of the French and 66% of the Germans – would like to keep the euro as their currency and not return to the drachma, the franc, the mark or other national currencies.





The euro crisis has also undermined support for free market capitalism. Solid majorities in only three of the eight countries surveyed – Germany 69%, Britain 61%, and France 58% – still believe that people are better off in a free market system. Moreover, since 2007, before the global financial crisis began, belief in capitalism is down 23 percentage points in Italy, 20 points in Spain, 15 points in Poland, 11 points in Britain, and nine points in the Czech Republic. In comparison, over that same time frame backing for the free market has remained relatively unchanged in the United States.
44% off Italians View the Euro as a Bad Thing, Only 30% a Good Thing

The critical chart is the second one. 44% of Italians view the euro as a bad thing and only 30% a good thing. That is the biggest negative spread in the survey. In contrast, Greece has the largest favorable spread at +20 percentage points.

IPOS Poll Shows Only 50% of Italians Would Vote to Keep the Euro 

Inquiring minds are also digging through a May 2012 Eurozone Poll by IPOS.
 As fears reverberate through financial markets that Greece could leave the euro zone and throw the region—and the rest of the world—into economic turmoil, a new poll of citizens in some of the most crucial countries engaged in the debate, debacle and damage control—Greece, Germany France, Italy and Spain—indicates that, on average, a majority (60%) with a decided view would support a national referendum in their country to decide whether they should keep the Euro as their currency and if there was such a referendum, an average of six in ten (65%) of decided citizens would vote to keep the currency.

In Italy, half (52%) would support holding a referendum in their country to determine the future of the Euro versus just over one third (36%) who would oppose having one and 12% say they “don’t know”. Backing out the undecided, six in ten (60%) Italians support and 40% oppose having a referendum. Asked how they’d vote in a referendum if it were to take place today, half (50%) of Italians say they’d vote to keep the Euro as their country’s currency while four in ten (38%) would vote to leave it—8% say they “don’t know” how they’d vote and 4% say they wouldn’t vote. As such, backing out the undecided and those who say they wouldn’t vote, of decided Italian voters, six in ten (57%) would vote to stick with the Euro while 43% would vote to leave it.
Totals by Country

Germany: 51% Keep Euro, 38% Leave, Other 11%
Spain: 55% Keep Euro, 32% Leave, Other 13%
France: 62% Keep Euro, 24% Leave, Other 14%
Italy: 50% Keep Euro, 38% Leave, Other 12%
Greece: 70% Keep Euro, 20% Leave, Other 10%

Notice that Italy followed by Germany have the least support for retaining the euro.

As an amusing sidelight, recall that Greek prime minister George Papandreou was forced to resign when he proposed holding a referendum on the euro. That foolish action by the EMU helped give rise to Syriza and the radical left.

Italy Too Big to Rescue

Via a somewhat choppy Google translation, Spiegel columnist Wolfgang Münchau is discussing Just Before the Collapse.
 The interest on Spanish ten-year bonds are now at 6.8 percent - and in the midst of a recession and unemployment at nearly 30 percent. It is now only a matter of time before Spain itself must be under the parachute. According to an estimate by the U.S. bank JP Morgan has to finance Spain in the years 2012 to 2014 about 350 billion euros of debt or refinance. If you add the 100 billion € at current Bank assistance so that the entire financial cushion for the new rescue mechanism ESM would be exhausted. Because maybe there is still room for Cyprus, but for anyone elseThe problem is not just the size of the ESM, but its structure. Here are liable all who are outside of the screen, all for less. If Spain also joins them, two things happen simultaneously. The total guarantees to skyrocket. And there are few countries that stand up for those guarantees. One cannot solve the problem so you should expect to increase the rescue easy.

Italy was never prepared for the euro

Spain still fits just below the screen, but in Italy there is no solution. With long-term interest rates of more than six percent, a debt of 120 percent growth and a structural weakness of Italy can not maintain his membership in the euro. Italy needs € bonds - that is a permanent reduction in financing costs through a joint debt of the euro area - possibly even a debt and a strategy for improving competitiveness.

The appointment of Mario Monti the Italian prime minister last year, the audience first with euphoria in the markets, but the record is disappointing . He sat on the wrong reforms, and he lacks the political power base. His poll numbers have slipped into the basement, and within his coalition to support the leaves also. Some even speak of the necessity of early elections.

Italy's problem is not his prime minister. The country was never prepared for the euro. With the entry of Italy has lost its competitiveness gradually. Even in good years, the economy grows just one percent. And now Italy is in deep recession and has a weak government with a maturity period of a few months.

Italy is not far away from the point at which it can finance itself without outside help is not continued in the markets. But Italy is actually too big for the rescue. According to JP Morgan fund, the Italian government until 2014 a total of 670 billion euros in the markets. Italy and Spain come together around one trillion euros. One would thus doubling the screen to get the two countries including. And then the whole load Germany and France would jointly contribute. That would be an economic and political suicide.


The combination of banking, fiscal and political union would solve the problem. It is not the noble principle of a political union, but the actual debt restructuring that would work here. With a press release it will not solve the crisis. If the Euro-summit at the end of the month on a ten-year timetable for a political union agrees, the effect fizzles out in the markets, because Italy still puts it in a debt trap.


Then in Italy could increase due to the unacceptably high rates of political pressure for a Euro release. In this case I would expect that Italy would no longer service its foreign debt and then. Italy, unlike Spain would be able to do such a thing.
Italy Holds Enough Gold to Prevent Hyperinflation

According to the Telegraph,Italy's gold 'worth only a tenth of bailout it needs' 

 Italy holds 2,451.8 tonnes of gold – the third highest of any central bank in the world. Only the US, with 8,133.5 tonnes and Germany, with 3.401 tonnes holds more. The International Monetary fund also has reserves of 2,814 tonnes.


One tonne is the equivalent of 32,150.75 Troy ounces. The gold price is currently at about $1,764 per troy ounce, so one tonne of gold is worth about $57.6m. This means Italy’s total central bank holdings are worth around $141bn (£88.6bn).


According to Gary Jenkins, a fixed income analyst at Evolution Securities, Italy requires $1.4 trillion to fully cover its bail out.


This means Italy’s gold holdings are worth about one-tenth of the estimated total amount required.


The cost of repaying Italy’s debt by 2013 is expected to hit £424.9bn, with the country’s total debt currently standing at about $1.9 trillion.
Although Italy's gold is woefully short of what it needs to cover its debt (at least at these prices), having the third highest central bank holding of gold in the world is easily enough to avoid hyperinflation.

Six Reasons Why Italy May Exit Before Spain
  1. Rise of the Five Star Movement
  2. 44% of Italians view the euro negatively, only 30% favorably. That is biggest negative spread in the eurozone. In Spain more view the euro positively than negative, albeit by a small 4 percentage point spread.
  3. A separate poll shows a mere 50% of Italian would vote to keep the euro if given a chance. That is the lowest percentage in the eurozone.
  4. Italy is too big to bail
  5. Interest rates have reached a point where Italy will struggle to roll over its debt
  6. Eurozone Impossible Politics: The Bundesbank said there should be no banking union until there is a fiscal union. Angela Merkel said that there should be no fiscal union until there is political union. And François Hollande said that there should be no political union until there is a banking union.

Here is the bonus seventh point: Italy has enough gold reserves that it could avoid hyperinflation if it left the euro.


As I said in November of 2011, Eventually, Will Come a Time When ....
 Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

That person was not Marine Le Pen, perhaps it will be Beppe Grillo.

Regardless, here is the bottom line: If Germany doesn't leave the euro, Italy must.

Mike "Mish" Shedlock

and how close is Spain to the meltdown moment in its bond market .....

http://www.businessinsider.com/bofa-spanish-bond-market-collapse-without-ecb-intervention-2012-6

BofA Merrill Lynch believes the "stars are aligning for an ECB intervention in the Spanish bond market."
Rates strategists Sphia Salim and Max Leung write in a note to clients this morning that the surge in yields in the Spanish bond market recently are "not really reflective of increased short-term default risk for Spain but rather the result of poor liquidity conditions in the bond market, and the pricing in of further liquidity deterioration on the basis of potential haircut increases for repo trading on LCH Ltd, and repo operations at the ECB."
BofA believes the ECB will reactivate the Securities Markets Programme (SMP) to address further stress in the Spanish bond market because "it is necessary to prevent a potential collapse of the SPGB market, with serious consequences for the euro zone banking system." They also note that it would serve as a complementary measure to the recent bailout of Spanish banks, as the composition of balance sheets becomes increasingly comprised of Spanish sovereign bonds.
Salim and Leung explain that the Spanish treasury has recently been targeting smaller amounts and shorter maturities of new paper issuance at sovereign bond auctions because of the increased yields in the secondary market, but this in turn has the effect of further damaging liquidity in the bond market.
The BofA rates strategists say an LCH haircut on Spanish sovereign debt could come as soon as today due to the high yield levels it has traded at recently:

On 18 June, the Spanish 10y benchmark closed at 510bp above the AAA index (a simple average of German, French and Dutch 10y yields). The spread has been trading above 450bp since 11 June, closing at 455bp on that day. Accounting for that data point (uncertain, as it may not be considered “convincingly” above 450bp), a haircut increase could be announced as soon as today, assuming spreads do not tighten back (a tightening made more unlikely by the scheduled SPGB auction on Thursday).

Further, pending further action from ratings agencies, an ECB haircut on Spanish sovereign debt of up to 5 percentage points could be right around the corner as well, possibly from rater DBRS:

Although DBRS has only just recently (22 May) placed Spain on negative watch, the rating agency can conclude the assessment before the usual three-month deadline. If Spain is downgraded by three notches or more, then SPGBs would fall in the other bucket (BBB) and their haircut at the ECB would increase by 5ppt. Other Spanish collateral might also be affected by the sovereign downgrade and subsequently suffer from even larger increases in haircuts.
A simplistic estimate suggests that in such a scenario, over €30bn in additional collateral would be demanded by the Bank of Spain, with the assumptions that Spanish banks’ collateral composition is the same as the euro-area average in 2011 and that the securities all lie in the 5-7y residual maturity bucket (without accounting for the impact on ABS, “other marketable securities” and “non- marketable assets” that might have been put forward). Even if banks could mobilize their buffer collateral to meet the requirements, more securities (e.g., SPGBs) would be locked up at the ECB, which would further affect the liquidity of the bond market.


and...




http://www.zerohedge.com/news/spain-sells-1-year-bills-record-post-euro-yield-ing-says-spain-need-%E2%82%AC250-billion-more-german-ze


Spain Sells 1 Year Bills At Record Post-Euro Yield, ING Says Spain To Need €250 Billion More; German ZEW Implodes

Tyler Durden's picture
Submitted by Tyler Durden on 06/19/2012 07:02 -0400




In a meaningless "test" of investor appetite for Spain's Thursday issuance of 2, 3 and 5 years bonds, Spain today sold €3.04 billion in 12 and 18 month bills, well inside the LTRO maturity, and completely meaningless from a risk perspective - after all even Greece is issuing Bills. Yet for some reason the market which continues to be dumber by the day, somehow took the "successful" auction as an indication that there is actual demand for standalone Spanish subordinated debt. And what a 'success' it was: €2.4 billion in 12 month Bills were sold at 5.074%, the highest since at least 2003 and possibly on record. This is more than 2% greater than the same such auction at the end of May. In other words, Spain just locked in absolutely unsustainable 1 year rates. It also sold €639 million of 18 month paper at 5.107% compared to 3.302% less than a month ago. The good news: bids to cover for the two maturities, from 1.8 and 3.2, to 2.2 and 4.4 respectively. And of course they would: Spanish banks found what little LTRO cash they had lying around and in act of total desperation tried to do a carry trade whereby 3 year paper priced at 1% is used to buy 1 year paper yielding 5%.

So while Bill issuance is in no way a test for real Bond issues, here is a full list of upcoming Spanish bond auctions: good luck with them all. Should be rather interesting watching as each of these auctions prices at all time high yields:

  • 21 June: Spain auction. Bonds.
  • 26 June: Spain auction. Bills.
  • 5 July: Spain auction. Bonds.
  • 17 July: Spain auction. Bills.
  • 24 July: Spain auction. Bills.

Reuters with a brief summary:

Spain's short-term borrowing costs rose to their highest level since 1997 in a debt sale on Tuesday as investors worried the country will soon be forced to ask for international aid.

The euro zone's fourth-largest economy has become the focus of the regional debt crisis, with the country struggling to overcome recession and a costly banking sector restructure.

Yields on Spanish 10-year bonds have been trading above 7 percent, a level seen as too pricey for shaky public finances in the medium term by creating a self-full filling spiral like ones that have forced other euro governments to seek help.



The rise in Spain's longer-term interest rates put the sale of 3 billion euros ($3.77 billion) of bills in the spotlight ahead of a bond auction on Thursday.



There was good demand and the government met its target amount but the yield on the 18-month paper was the highest since November while the 12-month bill sold with the highest rate since before the birth of the euro.

"The yields are over 5 percent in both lines which is back at the levels we saw in November 2011 when the market was in huge distress and the ECB was forced to intervene," Credit Agricole rate strategist Peter Chatwell said.

Borrowing costs fell sharply after the European Central Bank flooded the market with around 1 trillion euros in cheap credit through two long-term refinancing operations (LTROs), in December and February, but they have since leapt back up.

Spain is hoping the ECB will ride to its rescue again. Officials have repeatedly said the central bank needs to take action to stop the euro zone debt crisis from getting worse.

Also putting things into perspective was ING, which said that Spain may end up needing another €250 billion bailout when all is said and done. From BBG:

  • A 3-yr bailout for Spain may be “too large” for the EFSF at €250b on top of €100b already pledged for banking system, ING strategist Alessandro Giansanti says in client note.
    • EFSF has free lending capacity of EU251b; ESM will need to be activated
    • Says Spanish government likely to need a bailout program to cover redemptions, budget deficit
    • Sees continuing flattening of Spanish curve, with inversion in 10/30 spread
    • SMP program may be restarted if Spanish 10-yr yields reach 7.50%; Sees only “short-term relief” and an increase in subordination risk
    • BNP says impact of ECB on Spain could be “very material”
    Finally, in what may be the most important news, the German ZER Survey of economic sentiment literally imploded, printing at -16.9 on expectations of a +2.3 print, and down from 10.8 previously. This was the fastest rate of collapse since 1998. From Reuters:
    German analyst and investor sentiment fell in June at its fastest rate since October 1998, with the worsening of Spanish banking sector and uncertainty over Greek election outcome likely to blame for the drop, a survey showed on Tuesday. The Mannheim-based ZEW economic think tank's monthly poll of economic sentiment fell to -16.9 from 10.8 in May, way below the forecast in a Reuters poll of 42 analysts for a drop to 4.0.The euro slid against the dollar and European stocks also dropped after the much weaker-than-expected survey. "The financial market experts' expectations are a strong warning against a too optimistic assessment of Germany's economic perspectives in the remainder of this year," said ZEW President Wolfgang Franz. "The risks of a pronounced decline in economic activity in countries with close trade ties to Germany are very clear," said Franz. "In addition, there is a situation in the euro zone which continues to be precarious." "The outcome of the Greek vote is a short breathing space - just that, nothing more and nothing less," he added. The index was based on a survey of 274 analysts and investors and conducted between May 29 and June 18, ZEW said.

    Well, at least Germany is Chile...



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