Rabu, 11 April 2012

Rising yields in Spain and Italy have the ECB already plotting what can be done to keep a lid on rates - enter more activity by way of the ECB's SMP program ?


European Central Bank Executive Board member Benoit Coeure suggested that the bank could revive its bond-purchase program to reduce Spain’s borrowing costs.
“Market conditions are not justified,” Coeure said at an event in Paris today. “Will the ECB intervene? We have an instrument, the securities markets program, which hasn’t been used recently but it still exists.”
European Central Bank executive board member Benoit Coeure suggested that the bank could revive bond purchases to support Spain in the face of rising borrowing costs. Photographer: Jean-Claude Coutausse/Bloomberg
Prime Minister Mariano Rajoy’s three-month-old government is struggling to convince investors it can reduce the budget deficit and crack down on overspending by regional administrations. Spain’s 10-year borrowing costs have jumped more than 1 percentage point since March 2, when Rajoy said the country will miss a 2012 deficit goal approved by the European Union.
“We have a new government in Spain that has taken very strong deficit measures,” said Coeure, who joined the ECB board at the start of the year and heads the bank’s market operations division. “All this takes time. The political will is enormous.”
The euro gained more than a quarter of a cent after the remarks and traded at $1.3143 at 1 p.m. in Frankfurt. The yield on Spanish 10-year bonds, which climbed to 5.99 percent this morning, slid to 5.87 percent. European stocks rose, with the Stoxx Europe 600 Index (SXXP) up 1 percent.

‘More Aggressive’

The ECB “should be a little more aggressive” with its bond purchases, Banco Santander SA Chief Executive Officer Alfredo Saenz said yesterday.

The ECB hasn’t purchased any government bonds for four weeks after its injection of more than 1 trillion euros ($1.3 trillion) of three-year loans into the banking system helped debt markets rally. Some ECB policy makers oppose the bond program, which was started in May 2010 to stem the spread of the sovereign debt crisis, arguing it blurs the line between fiscal and monetary policy.
“It’s interesting that Coeure does not mention another three-year tender, but sees a possible restart of the SMP,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “I think reviving the peripheral bond-buying program could face some resistance, especially by northern European governors who see it as too ‘political’ an instrument.”
Germany’s central bank said last month it has set aside an additional 4.1 billion euros to cover risks stemming from the ECB’s crisis-fighting measures.

Deep Austerity

The Spanish government is implementing the deepest austerity since the nation returned to democracy in 1978, even as unemployment approaches 24 percent and the economy is mired in recession. Rajoy said yesterday that Spain’s future is on the line as he tries to push through spending cuts and tax increases to restore investor confidence.
Spanish bonds are trading close to levels that prompted Greece, Ireland and Portugal to seek European bailouts.
“The idea that Spain is going to be able to avoid a bailout is going to be tested over the next few months,” Harvinder Sian, a senior interest-rate strategist at Royal Bank of Scotland Group Plc in London, said late yesterday. “We think the market will smash back to the highest levels we’ve seen and go beyond that.”
The ECB’s Governing Council has “never” discussed “at all” the possibility of Spain needing external aid, the country’s central bank governor, Miguel Angel Fernandez Ordonez, said yesterday.

Markets ‘Nervous’

“Spain shows the markets remain nervous,” Coeure said. “Yet if you look at Spanish fundamentals, there is no reason why the situation shouldn’t normalize.”

He also said the ECB will ensure that its lending to banks doesn’t fuel inflation.
“The ECB’s ability to maintain price stability remains intact” and “we will do whatever it takes to fulfill our mandate,” Coeure said, adding the prospect of higher interest rates will encourage banks to repay the three-year loans early.
“If the ECB decides to the change its key policy rates, or even hints at it, the indexation of the interest rate charged on our refinancing operations will immediately affect present and future funding conditions for banks, favoring inter alia the exit of some” borrowers, he said.
The interest rate on the three-year cash is linked to the average of the ECB’s benchmark rate, currently at 1 percent, over the life of the loans.
The loans don’t have the ability to target individual market segments in the same way the bond program does, said Michala Marcussen, global chief economist at Societe Generalein Paris. “If you’re looking to target specific dislocation, and the Spanish government is making all the right noises, that’s the most efficient tool in the box,” she said.

and items of interest from The Telegraph liveblog - note Rajoy telling his compadres in europe to watch their comments and disregad the " noise " about Spain , also the denials from Rajoy which counterintuitively confirm that Spain will be going to Brussels with a begging bowl and the 5.3 percent deficit target for 2012 is indeed conditional ....


13.13 Mr Rajoy also urged other EU leaders to be "careful with their comments" on Spain. He said:
QuoteTo all countries of the EU and euro zone we wish them the best. What is good for Spain is good for the euro zone. And what is good for the euro zone is good for Spain [...] We want the rest to do the same. That they accept their responsibilities, that they are careful with their comments.
12.55 Spanish PM Mariano Rajoy has been addressing parliament in Madrid. He said that Spain's 2012 deficit target of 5.3pc of GDP was "unconditional" and that the country should not listen to the "noise" or get distracted from its task.
He told MPs that the nation's debt had created a "vicious circle that strangles Spain" but wanted to make it “as clear as day” that it would not need to go to Brussels with a begging bowl. He said (translation by Bloomberg):
QuoteThey lend to you if they are confident you will pay it back because you don’t owe too much, because you have growth and create jobs and so you have income [...] There are countries near to us that couldn’t and they are in the situation everyone knows about. This is not the case for Spain. And this won’t be the case for Spain in the future.
Mariano Rajoy speaks during Spanish PMQs in Madrid (Photo: Reuters)
11.46 Spain will not need a bailout, the European Commission has reasserted today.
EC Spokesman Olivier Bailly added that the Commission would not be able to gauge Spain's efforts to consolidate its public finances until authorities had provided it with "the full pictures of the plan." He said:
QuoteThe figures we received from Madrid just covered the efforts made by the central government. The obligation that Spain has vis-a-vis the other members and the Commission is to meet the 5.3 percent deficit for the whole budget of Spain.
11.16 Spain isn't sick and we're all exaggerating - that's according toFrench government spokeswoman Valerie Pecresse, who told Reutersthat "fears being expressed today about the economic health of Spain are excessive."
09.49 Enam Ahmed, economist at Moody’s Analytics, comments on the disappointing Spanish industrial production figures released today (see 08.17):
QuoteDomestic demand has been the biggest drag. The unemployment rate in Spain is more than 20%; it is more than 10% in the euro zone. Worryingly, the PMI survey also showed new orders, both domestic and external, continued to weaken sharply. This suggests activity in Spanish manufacturing will remain on a weak footing for some time.
Manufacturing faces a rough ride. Spanish domestic demand is weak, and the government is vigorously pursuing fiscal austerity measures. Any further boost from global growth will likely be limited. Many of Spain’s trading partners are imposing fiscal austerity this year, including France. With industry likely to face stiff headwinds, the euro zone’s fourth largest economy will likely contract throughout the year.
09.43 Ralf Preusser, Merrill Lynch's rates strategist, highlights more reasons why he thinks "Spain is more vulnerable [...] than other peripheral countries":
QuoteSpanish and Italian banks’ funding concerns are not equal, with Spanish banks continuing to experience deposit outflows in February, while in Italy, deposits rebounded sharply. Interestingly, despite the deleveraging efforts in Spain, loan/deposit ratios there have been creeping up, while they have fallen in Italy (in Spain at their high since beginning of 2011, in Italy at their low). In January and February, Italian banks have seen their deposit (relative to loan) funding improve by EUR 28 bn, while Spanish banks have crystallized a funding need of EUR 8 bn. Given the analysis from our banks’ analysts on the long-term funding side, Italian banks also raised EUR 8 bn more in long-term funding compared to maturities over the same time-frame, while Spanish banks exactly covered their redemptions.
09.38 In a note released yesterday, Bank of America Merrill Lynchexamines whether the LTRO has enabled banks in the periphery to support their sovereigns further. It puts Spain and Italy in different boats.
QuoteIt is worth highlighting two very different approaches to accessing the LTRO, employed by Spain and Italy. Spanish banks bought about EUR 68 bn of government bonds December through February. Italian banks bought around EUR 54 bn of government bonds, however, also accumulated EUR 98 bn of bank bonds. Given the current environment, this is unlikely to represent an actual investment in financials, but rather a reflection of retained, government-guaranteed issuance. This leaves Italian banks in a very different position compared to Spanish ones. Spanish banks either had to post existing assets (at generally higher haircuts than for government guaranteed issuance) or purchase high-quality collateral in order to draw down liquidity to hedge their funding risks.
Assuming similar challenges on the funding front, Italian banks are currently long cash compared to Spanish banks. This leaves them in a much better position to support their sovereign going forward.
How Spanish auctions have fared recently (Source: Bank of America)

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