By GEOFFREY T. SMITH
The ECB will buy in the secondary market only government bonds with remaining maturities between one and three years without announcing any limits in advance, and as long as the government in question is under a program approved by the euro zone.
The measures will primarily benefit fiscally troubled countries like Spain and Italy, which are facing difficulties financing their budget deficits…
In the first five months of 2012, a total of €163 billion left the country, the figures [from the country’s central bank] indicate. During the same period a year earlier, Spain recorded a net inflow of €14.6 billion.
The outflow has resulted from domestic banks sending money abroad, foreign lenders pulling out cash and mostly non-resident investors dumping Spanish assets.
via Spain Capital Outflows Reach Record Levels in Euro Crisis – SPIEGEL ONLINE.
Interesting to get a view from within the ECB as to the state of the euro-zone crisis.
Benoît Coeuré, Member of the Executive Board of the European Central Bank:
On 29 June, the Euro Summit took a further series of steps to strengthen crisis management. They agreed that loans to Spain as part of its bank recapitalisation programme would not have a senior status, removing a key concern for investors about the programme and their continued purchases of Spanish government debt. They committed themselves to use the full range of EFSF and ESM instruments in a flexible and efficient manner. And most importantly, they decided that the ESM should have the ability to recapitalise banks directly, once a single supervisory mechanism is in place involving the ECB. These are all very significant developments. Let me elaborate.
First, the possibility for direct bank recapitalisation by the ESM is crucial to break the vicious circle between banks and their sovereigns that is at the heart of the crisis. It would allow for banks to be stabilised without increasing the debt level of the sovereign, thereby avoiding further damage to sovereign debt markets and banks’ balance sheets. This would move the euro area closer to the type of financial union we see in federations like the U.S. or Switzerland, where banking sector problems are dealt with at the federal level and have no implications on the finances of the federated units…..
Spain’s economy showed fresh strain as retail sales fell at a record pace in April, showing the government’s austerity program is strangling consumption and suggesting deepening recession. Data Tuesday from the National Statistics Institute, or INE, showed seasonally adjusted retail sales fell 9.8% on the year in April, compared with a 3.8% drop in March. The decline was the sharpest since INE started collecting the data in January 2004. Household spending is dropping as unemployment approaches 25% of the work force.
Michael Pettis: I think Spain [and all the peripheral European countries are similarly uncompetitive] will leave the euro because it seems to me that the country has already started on the self-reinforcing downward spiral that leads to a crisis, and there is no one big enough to reverse the spiral.
How does this process work? It turns out that it is pretty straightforward, and occurs during every one of the sovereign financial crises we have seen in modern history. When a sufficient level of doubt arises about sovereign credibility, all the major economic stakeholders in that country begin to change their behavior in ways that exacerbate the problem of credibility.
Of course as credibility is eroded, this further exacerbates the behavior of these stakeholders. In that case bankruptcy comes, as Hemingway is reported to have said, at first slowly, and then all of a sudden, as the country moves slowly at first and then rapidly towards a breakdown in its debt capacity.
Christian Rickens: So has Greece been rescued and financial markets been tamed? Is the euro crisis a thing of the past? Unfortunately not. With their successes in the last few days, euro-zone politicians have done little more than bought themselves time. They must use this window to brace themselves for the next wave of the euro crisis which is about to crash down on Europe.
It’s already clear that the Greek economy can’t survive with a government debt to GDP ratio that will — at best — still be at 117 percent in 2020, especially given the record pace at which the country’s GDP is contracting. There is still no coherent strategy for making Greece competitive again inside the euro zone, or for raising the capital for the huge investments needed — let alone for the wholesale revamp of the country’s entire public administration.
And so Greece is likely to report the next set of disappointing budget figures in a few months, and the wrangling over a new debt cut and a new rescue package will start shortly afterwards……
The other euro-zone governments have at most a few more months, perhaps only a few weeks, before the situation in Greece worsens again……That means that Portugal, Spain and Italy, the three other problem countries in the south of the euro zone, must perform the magic trick of stimulating growth while reducing their budget deficits. That can only succeed with a lot of pragmatism — austerity without growth is as pointless as growth without austerity.
Marc Chandler: The new fiscal compact had just been signed last week, which includes somewhat more rigorous fiscal rule and enforcement, when Spain’s PM Rajoy revealed that this year’s deficit would come in around 5.8 percent of GDP rather the 4.4 percent target. This of course follows last year’s 8.5 percent overshoot of the 6 percent target.
The problem that for Spain is that the 4.4 percent target was based on forecasts for more than 2 percent growth this year. However, in late February, the EU cuts its forecast to a 1 percent contraction. This still seems optimistic. The IMF forecasts a 1.7 percent contraction, which the Spanish government now accepts.
This will be the third year in 5 that the Spanish economy contracts. Unemployment stands at an EU-high of 23.5 percent in February. The strong export growth seen in recent years, the best growth in the euro area, is stalling. Domestic demand has been hit by rising unemployment and government austerity…..
According to analysts at Morgan Stanley, Spain could acquire the entire €176 billion pile of impaired real-estate assets at the 58% discount applied by Ireland’s bad bank, or a cost of €73.9 billion. This could be funded by swapping new government debt for the banks’ soured real-estate assets.
However, the state would have to raise sufficient funds from investors to provide the banks with an estimated €28.5 billion in new capital to absorb losses that the banks would take in selling the assets at a steep discount. In all, the cost of the plan to the Spanish state could be €102.4 billion, or around 10% of Spanish GDP.
via Spain Weighing a Fast, Costly Cleanup of Banks – WSJ.com.
Colin Twiggs: ~ Spain faces the same tough choice as the Irish: rescue its banks, by putting its own finances at risk, or endure a massive recession as the banking system implodes and the flow of credit dries up. The first choice may be the least painful but will mean many years of austerity in order to bring government debt back below 60% of GDP.
Just as the United States was not the only country posting a large current account deficit, so too it was not the only country that experienced asset price booms. Figure 2 shows that countries with large current account deficits in 2006 also tended to have larger house price increases. Of course, there are exceptions. For example, China has experienced rapid house price appreciation despite its enormous current account surplus. But, in general, house price appreciation and current account deficits appear to have been positively associated across many countries.
via FRBSF Economic Letter: Asset Price Booms and Current Account Deficits (2011-37, 12/5/2011).
Colin Twiggs: ~ There appears to be a general rule that large current account deficits lead to asset price booms. But to prove the rule researchers need to address why Japan experienced a massive asset price boom in the 1980s, and why China experienced a similar boom over the last decade, when both were running current account surpluses.
Deposit levels at five of Spain’s top six banks declined in the third quarter, while five of Italy’s largest lenders also reported declines, according to a report by analysts at Citigroup. In some cases, individuals pulling their money out of a bank are instead buying the bank’s bonds, which have offered hefty interest rates lately. But corporate clients, who find it relatively simple to move cash from one international bank to another, appear to have been especially aggressive in scaling back their deposits at southern European banks. Spain and Italy’s largest banks each reported declines of at least 10% in the quarter that ended Sept. 30.
