Rajoy has full confidence in the power of prayer - and he is standing in the need of prayer......
http://globaleconomicanalysis.blogspot.com/2012/04/spain-government-may-take-over-some.html
The Wall Street Journal has additional details in its report Spain Government May Take Over Some Regions' Finances
http://www.zerohedge.com/news/spain-goes-irish-regions
Submitted by Tyler Durden on 04/16/2012 15:40 -0400
Submitted by Tyler Durden on 04/16/2012 13:57 -0400
http://www.zerohedge.com/news/ltro-bank-stigma-widest-ltro-announcement
Submitted by Tyler Durden on 04/16/2012 12:28 -0400
and......
http://www.zerohedge.com/news/anyone-who-bought-10y-spanish-bonds-year-now-underwater
Submitted by Tyler Durden on 04/16/2012 11:31 -0400
http://globaleconomicanalysis.blogspot.com/2012/04/spain-government-may-take-over-some.html
Spain Government May Take Over Some Regions' Finances; Spanish 10-Year Yield His 6.15%, CDS at Record High; Mission Impossible
Madrid Threatens Intervention as Regional Debt Worries Mount
The Financial Times reports Madrid threatens to intervene in regions
The Financial Times reports Madrid threatens to intervene in regions
Madrid has threatened to seize budgetary control of wayward Spanish regions as early as May if they flout deficit limits, officials said – as investors took fright at the fragility of some eurozone economies.
Concerns about overspending by Spain’s 17 autonomous regions and fears that its banks will need to be recapitalised with emergency European Union funds undermined confidence in the country’s sovereign bonds, forcing down prices and pushing yields up above 6 per cent on Monday – towards levels considered unsustainable.
The cost of insuring the country’s debt also rose, with Spanish credit default swaps jumping to a record 510 basis points, according to Markit, the data provider.
One possible candidate for intervention is Andalucia in the south, Spain’s most populous region, which has attacked Mr Rajoy’s austerity measures. Mr Rajoy’s Popular party had hoped to win a regional election last month and oust the leftwingers who have run Andalucia for 30 years but the PP did not get enough votes and the left remains in control.Spain Government May Take Over Some Regions' Finances
Andalucia, however, is not alone in failing to obey fiscal rules. All the major political parties, including the PP, have exceeded deficit targets in the regions they administer.
The Wall Street Journal has additional details in its report Spain Government May Take Over Some Regions' Finances
Spain's government Monday warned it could take control of finances in some of its autonomous regions to slash one of Europe's largest budget deficits and shore up investor confidence.
A top government official, who asked not to be named, told journalists there will soon be new tools to control regional spending. Parliament is expected to pass legislation by the end of this month allowing Madrid to force spending cuts, impose fines and take over financial management in regions breaching budget targets or falling into deep difficulties.
The official said Madrid may move take over at least one of the country's cash-strapped regions this year, as lack of access to financial markets and plummeting tax revenue are undermining their capacity to fund themselves.
"The way things are going, the regions themselves will request the intervention," the official said. "There are regions with no access to funding, no way to pay bills. That's why we are going to have to intervene."
The official added Madrid should have more information by May on the state of regional finances, and on which might need to be taken over. The government has set up a new credit line to regions so they can pay off large debts to their suppliers. To access the facility they must present a plan to pay back the money and provide detailed information on their finances.
Separately, Spanish Education Minister Jose Ignacio Wert met regional education authorities to agree a series of measures, including larger class sizes and longer teachers' hours, to cut EUR3 billion from regional budgets. The government meets regional health officials Wednesday to find another EUR7 billion in cuts. These two social services account for the bulk of regional spending, and the regions have long complained they can't reduce it unless Madrid changes regulations governing the services they must provide.
Mission Impossible
Wolfgang Münchau a Financial Times columnist says Spain has accepted mission impossible
I too have been preaching the "Mission Impossible" idea for months if not years. More importantly, the market has once again latched on to that idea with credit default swaps on Spain's sovereign debt at record highs, and the yield on 10-year Spanish bonds back above 6% today, settling at 6.07% after reaching a high of 6.156% according to Bloomberg.
History suggests the more eurocrats resists a default for Spain, the bigger the resultant mess. Greece should be proof enough. However, eurocrat clowns have no common sense, no economic sense either, and they do not care about history. Expect a gigantic eurozone mess as efforts to kick the can do nothing but make matters worse.
Wolfgang Münchau a Financial Times columnist says Spain has accepted mission impossible
News coverage seems to suggest that the markets are panicking about the deficits themselves. I think this is wrong. The investors I know are worried that austerity may destroy the Spanish economy, and that it will drive Spain either out of the euro or into the arms of the European Stability Mechanism.
The orthodox view, held in Berlin, Brussels and in most national capitals (including, unfortunately, Madrid), is that you can never have too much austerity. Credibility is what matters. When you miss the target, you must overcompensate to hit it next time. The target is the goal – the only goal.
This view does not square with the experience of the eurozone crisis, notably in Greece. It does not square with what we know from economic theory, or from economic history. And it does not square with the simple though unscientific observation that the periodic episodes of market panic about Spain have always tended to follow an austerity announcement.
European policy makers have a tendency to treat fiscal policy as a simple accounting exercise, omitting any dynamic effects. The Spanish economist Luis Garicano made a calculation, as reported in El País, in which the reduction in the deficit from 8.5 per cent of GDP to 5.3 per cent would require not a €32bn deficit reduction programme (which is what a correction of 3.2 per cent would nominally imply for a country with a GDP of roughly €1tn), but one of between €53bn and €64bn. So to achieve a fiscal correction of 3.2 per cent, you must plan for one almost twice as large.
Spain’s effort at deficit reduction is not just bad economics, it is physically impossible, so something else will have to give. Either Spain will miss the target, or the Spanish government will have to fire so many nurses and teachers that the result will be a political insurrection.Market Screams Mission Impossible As Well
I too have been preaching the "Mission Impossible" idea for months if not years. More importantly, the market has once again latched on to that idea with credit default swaps on Spain's sovereign debt at record highs, and the yield on 10-year Spanish bonds back above 6% today, settling at 6.07% after reaching a high of 6.156% according to Bloomberg.
History suggests the more eurocrats resists a default for Spain, the bigger the resultant mess. Greece should be proof enough. However, eurocrat clowns have no common sense, no economic sense either, and they do not care about history. Expect a gigantic eurozone mess as efforts to kick the can do nothing but make matters worse.
and....
http://www.zerohedge.com/news/spain-goes-irish-regions
Spain Goes Irish On Regions
Slowly but surely, the Spanish authorities are gradually socializing the rest of the world to the dismal truth that we have been so vociferously arguing - that their debt levels (or more specifically their debt/GDP ratios) are significantly higher (explicitly) than their current official data suggest. Today's news, via the WSJ, that the Spanish government may take over some regions' finances, in an attempt to shore up investor confidence (just as Ireland did with its banks and we know how well that worked out?) is yet another step closer to the 'realization' that all that is "contingent" is actually "explicitly guaranteed." As we noted here, this leavesSpain's Debt/GDP nearer 135% than its 'official' 68.5%. The WSJ notes comments from a top government official that "there will soon be new tools to control regional spending" and that they may take over at least one of the country's cash-strapped regions this year. As we broke down extensively here, this is no surprise as yet another group of political elite find the truth harder to deal with than the blinkered optimism they face the media with every day and yet as PM Rajoy notes "Nobody can expect that deep-seated problems be solved in just a few weeks", the irony of the euphoria felt around the world at the optical rally in Spanish spreads for the first few months of the year is not lost as Spain heads back into the abyss ahead of pending auctions and what appears to be moreponzified guarantees of regional finances(as long as they promise to pay it back and have 'a plan'). The simple truth is, as acknowledged by Rajoy, Spain has lost the trust of financial markets.
It seems that CDS markets have been ahead of the reality in Spain's true credit situation as it is perhaps a little easier to manipulate a few bonds than an entire sovereign CDS market. The velocity of the most recent move suggests some short-term action by the politicians/ECB soon enough though their failed attempt today suggests the wholesale exit of real money is a hole too big for even the ECB to comfortably fill - and furthermore, as we have noted, every bond the ECB buys via SMP increases the default risk (or more clearly reduces recoveries) on existing bondholders and thus making a situation worse...
and.....
It seems that CDS markets have been ahead of the reality in Spain's true credit situation as it is perhaps a little easier to manipulate a few bonds than an entire sovereign CDS market. The velocity of the most recent move suggests some short-term action by the politicians/ECB soon enough though their failed attempt today suggests the wholesale exit of real money is a hole too big for even the ECB to comfortably fill - and furthermore, as we have noted, every bond the ECB buys via SMP increases the default risk (or more clearly reduces recoveries) on existing bondholders and thus making a situation worse...
and.....
EUR Surging As FX Repatriation Rears Its Ugly Head Again
- Bank Run
- Bond
- CDS
- Deutsche Bank
- Equity Markets
- European Central Bank
- Eurozone
- France
- Germany
- Monetary Base
- None
- Reality
Back in October, there were those who were confused how it was possible that European sovereign bond yields could be exploding to their highest in a decade, even as the EURUSD keep grinding higher. We explained it, and said to prepare for much worse down the road. Sure enough, much worse came, and was promptly forestalled as both the Fed expanded its swap lines and lower the OIS swap rate, and the ECB "begrudgingly" ceded to LTRO 1+2 (that this resulted in nominal price gains was to be expected - after all humans enjoy being fooled when price levels rise when in reality just the underlying monetary base has expanded). But how did the EURUSD spike fit into all this? Simple - FX repatriation. This was explained as follows: "the sole reason for the EUR (and hence S&P and global 100% correlated equity risk) surge in the past 9 days is not driven by any latent "optimism" that Europe will fix itself, but simply due to the previously discussed wholesale asset liquidations (as none other than the FT already noted), which on the margin are explicitly EUR positive due to FX repatriation, courtesy of the post-sale conversion of USDs to EURs. Which means that the ever so gullible equity market has just experienced one of the biggest headfakes in history, and has misinterpreted a pervasive European, though mostly French, scramble to procure liquidity at any cost by dumping various USD-denominated assets, as a risk on signal!" It appears we are now back into liquidation mode, and the higher Euro spread surge, the faster EURUSD will rise as more and more FX is "repatriated." In other words, as back in the fall of 2011, the faster the EURUSD rises, the worstr the true liquidity situation in Europe becomes: a critical regime change, which will naturally fool the algos who assume every spike up in EURUSD is indicative of Risk On, and send ES higher when in reality, the underlying situation is diametrically opposite.
For those who missed the article back in October 2011, here it is again:
The Biggest Market Headfake Ever: Is A Wholesale French Bank Liquidity Run The Sole Reason For The Euro, And S&P, Surge?
Over the past two weeks, there is one simple thing that has been bugging skeptical macro observers: namely the paradox of i) just how ugly the European funding and liquidity situations have gotten, on the one hand, confirmed by the blow out in French bond yields (the French-Bund 10 year spread just hit an all time record yesterday) as well as continuing deterioration in credit spreads across core European nations, yet, on the other, ii) the euro, especially in that critical pair the EURUSD, has seen one of its most explosive rises in recent history, which as Zero Hedge pointed out yesterday, has totally decorrelated with the French-Bund spread, to which it had been firmly 'pegged' previously. As a result of ii), equity markets have surged due to legacy correlation arbs, which see Euro strength, and hence dollar weakness, as an empirical signal of equity "cheapness", which in turn leads all algos to treat a rise in the EURUSD as a buying signal. So how is it that even with the interbank liquidity situation in Europe frozen and getting worse, further keeping in mind that European banks are now expected to (or have already commenced - see yesterday's move in PrimeX) engage in widespread asset liquidations, that broad market risk is perceived as cheap? Simple. As the following note by Deutsche Bank's Alan Ruskin explains, the sole reason for the EUR (and hence S&P and global 100% correlated equity risk) surge in the past 9 days is not driven by any latent "optimism" that Europe will fix itself, but simply due to the previously discussed wholesale asset liquidations (as none other than the FT already noted), which on the margin are explicitly EUR positive due to FX repatriation, courtesy of the post-sale conversion of USDs to EURs. Which means that the ever so gullible equity market has just experienced one of the biggest headfakes in history, and has misinterpreted a pervasive European, though mostly French, scramble to procure liquidity at any cost by dumping various USD-denominated assets, as a risk on signal!
In other words, an internal bank run has somehow been interpreted to be stock positive... And there is your explanation for not only the paradoxical surge in the EURUSD and S&P, but why the correlation between the EURUSD and the Bund-France spread has completely broken down. Expect all of this to promptly, and very violently, correct once the market understands what an idiot it has been in the past two weeks.
From Deutsche Bank:
and......In the last few days there has been talk that European bank repatriation of capital may be behind EUR strength. Setting aside the timing of asset sales, and the reduced universe of potential bidders for these assets, it is worth considering what happens when a European bank sells USD assets. European banks in aggregate are regarded as having a still sizable shortfall of USD liabilities. The BIS has done some of the most comprehensive work on the USD shortage (see in particularly working paper: www.bis.org/publ/work291.pdf ). The most recent data for the end of 2010 (see the latest BIS annual report page 104), suggested the funding shortage had declined by at least half compared to before the 2008 crisis. More recently. the dependence on cross currency funding has gone up again, with the decline in US money funding. (DB’s Bill Prophet showed EUR region CDs of 7 of the 10 largest US money funds fell by over $70bn from May through September). Given this collapse, it is likely that European banks that do successfully sell USD assets, will try maintain the corresponding USD liability to mitigate against USD term funding that may not be rolled in the future. If a European bank sells a USD asset, it probably reduces the European Bank shortage of USDs by the sales amount. A smaller ‘USD shortage’, at the margin reduces the risk of a short USD squeeze of the sort seen in 2008, and to that extent is a minor USD negative, and EUR positive. It also fits with the EUR cross currency basis swaps coming in slightly of late, although this almost certainly has more to do with global risk appetite. This marginal USD negative, EUR positive impact, should not however be confused with a foreign exchange transaction whereby USD’s are converted into EUR.
Even Deutsche Bank is scratching its head to explain the dichotomy between the funding market and general risk. They do, however, provide the only real explanation, as opposed to the widely trumpeted by market cheerleaders ridiculous explanation that this is merely the latest "hope" rally. Ridiculous, because if that was the case, one would see a thawing of interbank liquidity and defaults spreads. As Zero Hedge readers know, 100% the opposite has happened.Note also that the EUR is going in the opposite direction to much purer gauges of EUR tensions in the bond market. The collapse in OATS today is a major story. This is not least because France is experiencing the negative side of its (still) AAA status and being a member of the core - the fiscal transfers are going toward the periphery and away from the core in terms of ability to tap the EFSF for bank recaps, and possibly bond insurance/guarantees. In the past, we have noted that the periphery flows fleeing toward the core has tended to leave the EUR trading like a closed system to the outside world, which is one explanation for surprising EUR resilience to periphery travails. The latest French balance of payments data (http://www.banque-france.fr/gb/statistiques/economie/economie-balance/ec... ) again showslarge French portfolio inflows that are very surprising,although the large errors and omissions do suggest the data is incomplete. (In the future, Target 2 balances will be another vehicle to use to check the degree to which inflows are being concentrated in Germany solely). In any event, instability in the French bond market has the capacity to significantly reduce points of refuge for risk averse funds at the EUR’s (shrinking) core, and adds to DB FX team’s doubt about the sustainability of the EUR’s rally...
And so on.Naturally, the Eurocrats will be delighted to associate the run up in risk assets and the European currency as a confirmation that the market is interpreting further lies, innuendo, and confusion as a risk on indicator, and is encouraging their behavior, when nothing is further from the truth. However, the biggest beneficiary of the recent move is none other than the insolvent French banking system, whose very own liquidity run has caused asset values to soar, on an epic misinterpretation of underlying market signals, and thus sell even more into market strength, when in fact the market should be selling alongside France...As for unwind catalysts for this most insidious market move, we are confident that the inability of the G20 to come up with any resolution over the weekend in Paris, nor the Eurozone Summit in one week to actually present any relevant details vis-a-vis the continent's bailout, or the EFSF's expansion into some multi-trillion Bailoutstein monster, will not be met too happily by a market which has just realized it has been thoroughly fooled by the cash-crunched French banking system.
http://www.zerohedge.com/news/ltro-bank-stigma-widest-ltro-announcement
LTRO Bank Stigma Widest Since LTRO Announcement
Since we first suggested in early Februarythat investors should be underweight LTRO-encumbered banks relative to un-encumbered banks, and summarily dismissed Mario Draghi's lies with regard any stigma associated with LTRO loans, the spread has increased from around 50bps to almost 140bps today. The move today has taken LTRO Stigma (the spread between banks that took LTRO loans and those that did not) to the widest it has been since the announcement of the LTRO program. So while financial spreads in absolute terms are not back to their very early January widest levels quite yet - the differentiation between the encumbered and unencumbered is gaping wide. Perhaps this helps to explain why a further indicator of funding stress - the 3Y EUR-USD basis swap - is deteriorating rapidly (at a similar velocity as was seen heading into the crisis epicenter last year) meaning European banks are increasingly willing to pay a higher premium for USD funding - not a sign of a healthy market in any way.
The LTRO Stigma (lower pane) has reached levels not seen since the initial announcement of the LTRO program as banks that face the ECB's implicit encumbrance notably underperform those that chose not to dance with the devil.
And the rapid deterioration in the 3Y EUR-USD basis swap is worrisome as it indicates European banks are increasingly willing to pay a premium to access USD funding (obviously post LTRO in this case).
Charts: Bloomberg
and......
http://www.zerohedge.com/news/anyone-who-bought-10y-spanish-bonds-year-now-underwater
Anyone Who Bought 10Y Spanish Bonds This Year Is Now Underwater
Via Peter Tchir of TF Market Advisors,
Anyone who bought the 10 year Spanish bond this year is now down money. It does have a 5.85% coupon, so if you bought the prior lows on Jan. 6th, you have earned 1.6% of carry. Anyone else has lost more and not earned as much interest.
This year matters because 1) a lot of funds were light on risk into year end, so even if they bought into the LTRO argument they waited until this year to buy, and 2) some funds may not focus on monthly returns, but all of them focus on YTD returns.
This bond is bouncing up and down today on no volume, but I think we are very close to levels that could see a mass exodus of stop loss trading on levered positions.
As we noted earlier, this also raises the very notable concerns regarding ECB margin calls - set to be announced tomorrow as it is entirely evident that any bank that actually took LTRO loans and used it to buy Spanish debt is now underwater by more than the de minimus haircut the ECB set at initiation. How this will impact bank capital is unclear as they seem strapped at best and on the margin desperate at worst.
and......
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