Around the horn in Europe - September 21 , 2012

https://hat4uk.wordpress.com/2012/09/21/exclusive-spain-broke-eurozone-rules-to-cut-bond-debt-costs-today/

EXCLUSIVE: Spain broke eurozone rules to cut bond debt costs today

FIX!

Although Madrid sources told The Slog this morning that next week’s formal Spain bailout will include “unlimited bond buying by the ECB”, market sources are suggesting this evening (5.00pm BST) that the Spanish government drove a coach and six through eurozone bond rules to artificially depress bond prices earlier today.

“The explanation is that Spanish banks have significantly increased their borrowing from the ECB, not LTRO funds, and are using the proceeds to buy Spanish debt at the auction, thereby causing yields to drop,” asserted one UK opinion leader, “Then the newly purchased bonds are used as collateral for additional ECB borrowing by the Spanish banks.  You can see that the drop in yields is far greater than the adjustment to the new OMT program.  This is a stealth Eurobond mechanism, and Germany is on the hook for 22% of the ECB liability.”

It’s not the first time the Peter-to-Pay-Paul-Ponzi scheme nonsense has reared its head in Clubmed, and it won’t be the last. But the scale and brazen nature of it makes Draghi’s subordination of the Greek bondholders look like philanthropy.

“All bets are off now,” agreed The Slog’s trusted Madrid informant and explicator, “they’re making it up as they go along, and the rules left the building long ago. A year ago it was a case of knowing smiles about the horsesh*t. Now it’s a case of watching every move like a hawk. They’ll kill the market before they’ve finished…it was bad enough destroying the credibility so much over Greece, but now the crooks have moved in, well….it can’t work, and it won’t work”.

The issue he describes is far from being restricted to Spain. An EU-IMF report into whether Greece’s debt is manageable looks set to be delayed until mid November because policymakers ‘want to avoid any more shocks to the eurozone economy’ . Bollocks: O’Drama wants a quiet life until he’s safely back in the Oval Office chair. I doubted the reality of this until last week, but despite the Mittgaffes that follow the GOP candidate wherever he goes, the Black Dude is clearly paranoid about rapid contagion screwing up his triumphal re-election. All of which might suggest that he either thinks (or more likely, is being advised) that when it comes, the Big Wave will be moving faster than a Hydron molecule.

Spain is, many of my friends out there believe, on the verge of break-up. Greece is showing signs of splintering as Left and Right battle to replace the ancien régime. Portuguese Prime Minister Pedro Passos Coelho told the Lisbon parliament that his government “was not deaf” to the fury unleashed after it announced plans to hike social security payments levied on workers.

Mario Monti was not playing host to three other leaders today as Prime Minister of Italy: he was doing so as fellow Goldman Sachs eminence grise behind Mario Draghi in the game of Rollerball now getting into its stride between the control freaks in Berlin and the sociopaths in ClubMed. Trying to work out the Venn diagram of their respective and individual motives in all this is rapidly becoming a mugs’ game. Gold is cruising upwards again, and glitz-bricks continue to sky-rocket. It really is batten down the hatches time.

http://globaleconomicanalysis.blogspot.com/2012/09/spains-fiscal-deficit-856-of-gdp-in.html

Friday, September 21, 2012 12:18 PM

Spain's Fiscal Deficit 8.56% of GDP in First Half; Impossible Second Half Targets

Spain's original deficit target for 2012 was 4.4%, then revised to 5% then 5.3%. The last revision brought the target all the way up to 6.3%. So how is Spain doing?

Via Google Translate Libre Mercado says Spain recorded a fiscal deficit of 8.56% of GDP in the first half

 The government set the offset recorded 45.233 million euros to June, equivalent to 8.56% of GDP semester.

Now Available budget execution data of all public sector until the second quarter of the year, and the first assessment of the Government of Mariano Rajoy on the deficit is not exactly favorable. According to data from the State Comptroller (IGAE), Public Administration (AAPP) reported a gap between revenues and expenditures (deficit) 45,233,000 euros through June in terms of the excessive deficit procedure (EDP, the methodology valid for Eurostat).

This corresponds to 8.56% of GDP until the second quarter cumulative -528 161 000 euros, according to the National Statistics Institute (INE) -. Thus, Spain moves away from deficit target committed to Brussels for the full year, set at 6.3% of GDP.

Central Government, Regional Governments, Local Government and Social Security admitted 173,320 million during this period, but spent 218,553,000. That is, the overall public sector continued spending 26% more than they entered through fiscal. In fact, the cumulative deficit through June is just half the total phase shift recorded last year (91,344,000) so that, if not corrected this trend, Spain in 2012 recorded a deficit similar to 2011.

Impossible Second Half Targets

Rajoy is sticking to the 6.3% deficit target for the year.

Let's see how ridiculous that idea is with a calculation to figure out what the second half deficit must be to hit that target.

(8.56 + X) / 2 = 6.3
8.56 + X = 12.6
X = 12.6 - 8.56
X = 4.04

Assuming GDP stays constant (it won't, Spain's GDP will be worse in the second half, probably much worse), Spain would need a second half deficit of about 4% to reach its target.


No one can possibly think 4% is a credible second half target. Sure, numerous tax hikes will kick in (supposedly raising revenue). However, tax hikes will also suppress growth which in turn will suppress revenue.

Thus, VAT hikes will not bring in what the government anticipates. How can it with unemployment soaring?

Note that Spain's 2013 target was 3% (revised up to 4.5%). Spain will not hit that target either, and Brussels will be calling for still more tax hikes next year.

How long will Spanish citizens put up with this?



and......

http://www.acting-man.com/?p=19706

Negotiations on Rescue Program Rumored to be Underway

We have already mentioned in our last 'Odds and Ends' collection on the euro area that rumors of secret negotiation over a bailout of Spain continue to flare up. It seems these rumors are correct, if we can believethe Financial Times, which just presented the latest one.

Given Spain's sorry economic and financial condition we are inclined to believe that such talks are indeed going on. Not least because we think that the whole sequence of recent events points to the idea that the bailout as such was already to be filed under 'done deal' and only the details were left to be hammered out. Why else would the ECB have announced the OMT?

A brief excerpt from the FT article:

“EU authorities are working behind the scenes to pave the way for a new Spanish rescue programme and unlimited bond buying by the European Central Bank, by helping Madrid craft an economic reform programme that will be unveiled next week.

According to officials involved in the discussions, talks between the Spanish government and the European Commission are focusing on measures that would be demanded by international lenders as part of a new rescue programme, ensuring they are in place before a bailout is formally requested.

One senior European official said negotiations have been conducted directly with Luis de Guindos, the Spanish finance minister. The plan, due to be unveiled next Thursday, will focus on structural reforms to the Spanish economy long requested by Brussels, rather than new taxes and spending cuts.

“It is a kind of ‘proto-programme,’ if such were needed,” the official said. The commission could, however, still request more austerity measures next month to meet existing EU budget targets, which Madrid is expected to miss.

Pre-approval by Brussels for Thursday’s announcement is intended to ease the political quandary facing Mariano Rajoy, the Spanish prime minister. Mr Rajoy is reluctant to ask the eurozone’s €500bn rescue fund, the European Stability Mechanism, to begin purchases of Spanish sovereign bonds because he fears that EU monitors would demand tough conditions in return.”

(emphasis added)

On the other hand, the article takes note of the German government's desire that Spain avoid asking for a bailout – as it would have to 'confront a reluctant Bundestag'. One way of bypassing the request would be to use money left over from the already agreed bank bailout to buy Spanish sovereign debt. In other words, the Spanish specialty of employing often astounding financial creativity would for a change be welcomed by the stern Germans. Wonders will never cease.

Of course the banking system is Spain's most pressing problem – and the proximate cause for investors loss of faith in the sovereign's debt.

Are Crises an 'Endemic Feature' of the Economic System?

In this context, there is an article on IFR about historical financial crises and the parallels they have to today's crisis in the euro area. The article ends with the following sentence:

“It is difficult for people to believe that crises are endemic to the political-economic system and even more difficult to believe that crises and failures will always be a feature of political economic systems”

Well, no, they actually need not be 'endemic'. We are always surprised (and dismayed) that in many reports discussing historical and modern day crises, the one major cause of the boom-bust cycle almost always remains unmentioned: namely fractional reserve banking.

There is nothing 'inherent' in the market economy that brings about boom-bust sequences. Booms are always, without exception, driven by credit and money supply expansions that falsify the market interest rate – whether with or without the aid of a central bank. Central banks make matters worse of course, because their interference leads to even bigger booms. Without a 'lender of last resort' backstopping them, commercial banks are slightly less likely to take on risks to the extent witnessed in recent decades. At the root of the trade cycle we undoubtedly find the practice of fractional reserve banking though. There is not even a need to discuss this:  if banks could not create deposit money from thin air, only actual savings could be used for lending purposes. The money supply could not possibly be altered.

The practice is legal, but it should not be: using demand deposits to expand credit has been rightly regarded as fraudulent throughout antiquity. After all, the promise to pay money back on demand can only be kept if the money is actually still there.

*  *  *

http://www.zerohedge.com/news/overnight-sentiment-rumors-regurgitated-refuted

Overnight Sentiment: Rumors Regurgitated, Refuted

Submitted by Tyler Durden on 09/21/2012 07:06 -0400

• Bad Bank
 
• Bond
 
• Conference Board
 
• European Central Bank
 
• Eurozone
 
• France
• Germany
 
• Gross Domestic Product
 
• headlines
 
• Housing Prices
 
• Initial Jobless Claims
 
• Italy
 
• Jim Reid
 
• Markit
 
• Monetary Policy
 
• Philly Fed
 
• Recession
• Unemployment

The overnight session has been dead, leading to continued trading on the two regurgitated rumors appearing overnight, one coming from the FT that the EU is in "fresh" talks over a Spanish rescue plan - something which is not news, but is merely the occasional catalyst to get algos snapping up EURUSD and to keep it from sliding far below the 1.3000 barrier. This rumor has subsequently been swatted down later when Italy's undersecretary of finance, Gianfranco Polillo, in an interview in Rome, repeated what has been known to most for over two months, namely that Italy and Spain won’t request bailouts unless there a new surge in bond yields (just as we explained first thing in August), and adding that "There won’t be any nation that voluntarily, with a preemptive move, even if rationally justified, would go to an international body and say -- ‘I give up my national sovereignty." A surprising moment of lucidity and truth for a European. Naturally the reemergence of the rumor is supposed to draw attention away from the real news, which is that broke Catalonia is ever closer to bluffing its independence in exchange for a bailout, or else. The other real news is that as Confidencial reported, the Spanish government has asked Santander, Banco Bilbao Vizcaya Argentaria and CaixaBank to take 30% stake in the Spanish bad bank, something which will hardly make shareholders in these companies happy for the simple reason that no bank in Spain is "not bad" if the current rate of deposit outflows continues. Finally, a second rumor appearing late yesterday is that Greek lenders are considering a new Greek bond haircut. This too has since been refuted when German Finance Ministry spokesman Martin Kotthaus told reporters in Berlin at a regular press conference that this report is without basis. In other words, as we said, rumors refuted, leaving us with essentially no real news overnight.

For the remaining (lack of) action we go to DB's Jim Reid for the best market action summary.

Moving to the US and taking a closer look at the Philly Fed print, while the headline was ahead of estimates it remained in negative territory for the fifth consecutive month. As DB’s Joe LaVorgna notes, the biggest negative in the report was the deterioration in shipments (-21.2 vs. -11.3), which fell to the lowest level since the recession (-30.5 in April 2009). On a more positive note, overall expectations of economic conditions six months forward rose sharply (+41.2 vs. +12.5). The flash Markit PMI was unchanged at 51.5, while the Conference Board Leading Indicators fell in 0.1% for August. Initial jobless claims  or the September employment survey week declined -3k to 382k but remain near the top of this year’s range (352k to 392k). Joe’s preliminary read on September employment number is +110k with no change to the unemployment rate at 8.1%.

Data aside, it was a relatively dovish day in terms of Fedspeak. Fed’s Kocherlakota advocated an unemployment targeting approach to monetary policy, saying that he would like to see rates at zero until unemployment reached 5.5%, although on the condition that the Fed fulfils its price stability mandate. Also speaking yesterday, Fed’s Lockhart reiterated his support for further QE while the more hawkish St Louis Fed’s Bullard said that he does not favour unemployment targeting, and opposed QE3 saying that he would not want to see a re-inflation of US housing prices.

Over in Europe, PMIs surprised to the downside, increasing the debate around ECB policy rates. The Eurozone’s flash composite PMI was down 0.4 in September (45.9) and disappointed versus expectations of 46.6. Most surprising was the divergence between France and Germany. The latter’s manufacturing PMI improved month-on-month (47.3 vs 44.7) but France was down sharply (42.6 vs 46.0). As Mark Wall noted this reasserts Germany’s relative PMI strength after a brief period of weakness. The implied reading of the ‘non-core’ bloc was softer on the month too, but we have to wait until the  start of October to see the details for the likes of Italy and Spain.

In other European headlines, der Spiegel is reporting that EU leaders are considering drafting a declaration designed to fulfil the conditions set out by last week’s German constitutional court ruling. The declaration will clarify that each country’s maximum ESM liabilities cannot be exceeded without that country’s parliamentary approval, and provides assurance that governments will have access to information held by the ESM. Elsewhere the Italian economy minister reiterated there were no plans for Italy to request aid, although the government lowered their 2012 GDP growth forecast to -2.4% compared to a previous forecast of -1.2%. For the record, DB is expecting growth in Italy of -2.3% this year. Staying in Europe Chinese Premier Wen during his trip to Brussels said that the country will continue its investments in the EFSF and the Eurozone.

In terms of the day ahead, it will be relatively light in terms of data. Spain’s trade data and the UK’s budget data for August will be the main focus. German finance minister Schauble is due to speak this morning in Berlin. In the US, the Fed’s Lockhart will be speaking in Atlanta. Last but by no means least, the iPhone 5 goes on sale today. How long will we be able to hold out!!??

and....












http://www.telegraph.co.uk/finance/debt-crisis-live/9556522/Debt-crisis-live.html

14.49 We'd been expecting a troika report on the debt situation in Greece next month, possibly before a meeting of eurozone finance ministers on October 8. But "EU officials and diplomats" have now told Reuters that it could be delayed until after the November 6 US election, in order to avoid shocking the global economy.

The report is anxiously awaited as it will be used to decide whether or not Greece has done enough to unlock its next tranche of bail-out cash. A senior EU official told Reuters:

The Obama administration doesn't want anything on a macroeconomic scale that is going to rock the global economy before November 6.

14.19 As we near the opening of the US markets, Kathleen Brooks of Forex.com has written a note to explain the movement in the European markets so far today:

As we head into the weekend there are a few things that have been causing some jitters in the markets:

1, Spain is reported to be planning a potential bail-out request and hashing out the conditionality with EU officials. Essentially a plan documenting conditional structural reform to the Spanish economy could be submitted next Thursday ahead of the big EU summit next month and a large bond redemption that Madrid faces in October.

2, Tensions between Israel and its Middle Eastern neighbours. There were reports of clashes between Israeli forces at the Egyptian boarder earlier on Friday; there are also plenty of news reports of protests in the Middle East against the US-made anti-Islam film. This could help crude oil recover after this week’s large declines. Technical factors could also support the oil price today as Brent crude is currently testing resistance at $111.30, above here opens the way for a larger move back to the post-QE3 highs of $115 per barrel.

12.25 Thanos Catsambas, an IMF representative, has told Ekathmerinithat the European Union must carry the full cost of any easing of Greece's debt rescue programme because the IMF has exhausted its lending capacity to Athens. Asked whether the IMF forsees any additional financing in the form of a restructuring of debts held by international creditors (known as 'official sector involvement'), he said:

Any additional funding in any form will come exclusively from Europe. The IMF has exhausted its possibilities to extend the loan beyond the amount approved last March. Therefore, and even if the IMF considers OSI to be the most advisable solution, the final decision rests with Greece’s European partners and will be determined by the political and institutional restrictions faced by governments and the ECB.

11.59 Greece's troika of international creditors has called for "time out" in its talks with the government. Negotiations over the country's bailout will be paused for about a week.

AFP reports:

"The discussions since the beginning of September have been very intense," Simon O'Connor, spokesman for EU Economic Affairs Commissioner Olli Rehn told a regular news conference, saying negotiators were "leaving this weekend" and "returning in about a week".

11.25 Faced with protests against sweeping austerity cuts, Portugal's prime minister has promised to listen to the country. But, he said more sacrifice will be necessary to fix the debt-laden country's economy. Pedro Passos Coelho said: "We are not deaf to the difficulties faced by the country."

Separately, the chief executive of Portugese bank BPI has said that Portugal's rising political tension could hinder the country's return to the bond market and presents a greater risk than Spain's spiralling debt crisis.

09.39 Britain's public sector finances are out and show that the country's budget deficit widened to the biggest on record for any August last month. Behind the rise was a fall in corporate tax receipts as benefit payments rose.

Public sector net borrowing - excluding financial sector interventions (such as the transfer of Royal Mail pension assets) - rose last month to €14.41bn from €14.365bn in August 2011, the Office for National Statistics said.

09.13 As speculation about Spain asking for a bailout continues to swirl, one senior Italian government official has said that neither Italy nor Spain will request bailouts unless a new surge in bond yields leaves them shut out of markets, as no government will voluntarily accept conditions imposed for the aid.

Bloomberg reports that Italy's undersecretary of finance, Gianfranco Polillo, said in an interview:

There won’t be any nation that voluntarily, with a preemptive move, even if rationally justified, would go to an international body and say - ‘I give up my national sovereignty’. I rule it out for Italy and for any other country.

09.05 As Mariano Rajoy travels to Rome, the Financial Times reports thatEU authorities are working behind the scenes to pave the way for a new Spanish rescue programme and unlimited bond buying by the ECB. The Pink 'Un reports that they are helping Madrid craft an economic reform programme that will be unveiled next week:

According to officials involved in the discussions, talks between the Spanish government and the European Commission are focusing on measures that would be demanded by international lenders as part of a new rescue programme, ensuring they are in place before a bailout is formally requested.

One senior European official said negotiations have been conducted directly with Luis de Guindos, the Spanish finance minister. The plan, due to be unveiled next Thursday, will focus on structural reforms to the Spanish economy long requested by Brussels, rather than new taxes and spending cuts.

08.56 Still with Greece, the Wall Street Journal reports that aconfrontation is brewing among the country's international creditorsover who will provide the financing needed to keep the country afloat:

A report by international inspectors, due in October, will state how big the funding shortfall is in Greece's bailout program, but European officials say the deficit is far too big for Greece to close on its own.

That means the International Monetary Fund, the European Central Bank, and euro-zone governments such as Germany will have to negotiate over which of them will make painful concessions to ease Greece's debt-service burden. That is intended to avoid a Greek bankruptcy that could force the country out of the euro and reignite financial panic across the currency bloc.

08.42 While leaders chinwag in Rome, talks in Greece between the crisis-hit country and the troika are continuing.

Ekathimerini reports that Greek finance ministry sources have suggested that Greece's coalition could conclude its negotiations with the troikaover a new package of cuts as early as today after Finance Minister Yannis Stournaras held extended talks with representatives of Greece’s lenders into early Friday morning:

The negotiations ended at about 1.30 a.m. and the Finance Ministry sources appeared optimistic that the measures could be finalized, pending coalition leaders’ approval, by the end of the day.

Sources added that the troika backed down over further demands for cuts to salaries, pensions and benefits. Stournaras is said to have told the officials from the European Central Bank, European Commission and International Monetary Fund that he would rather resign than approve these further reductions.

08.05 Spain's deepening crisis is fanning the flames of Catalan separatism, as Ambrose Evans-Pritchard, the Telegraph's International Business Editor reports. He writes that the ruling parties of Catalonia have sought guidance from Brussels on the legality of secession from Spain, requesting a “route map” for membership of the European Union and the euro as an independent state:

It is the latest move in a fast-escalating clash between Catalan nationalists and Spanish nationalists, the latter backed by King Juan Carlos and the Spanish military.

Jose-Manuel Garcia-Margallo, the foreign minister, threw down the gauntlet, calling Catalan secession “illegal and lethal”. He warned that Spain would use its veto to stop the region of Catalonia becoming an EU member “indefinitely”.

The constitutional crisis has eclipsed the parallel drama of a Spanish bail-out request from the European Stability Mechanism. It is no longer clear whether premier Mariano Rajoy can deliver on any austerity deal with Brussels.