It looks like expecting wisdom from European leaders is not a sign of wisdom in itself. The European Council adopted a comprehensive package of measures to respond to the ongoing crisis, as well as to guard against such crises materializing in the future. Stated goal of the policy measures are to strengthen preventive and corrective mechanisms to address internal and external imbalances, in particular fiscal imbalances and competitiveness problems of individual Member States, well before they might pose systemic threats. In addition, the package includes the establishment of a permanent crisis management mechanism as an ultima ratio safeguard against imbalances in individual countries. It is foreseen that the new European Stability Mechanism (ESM) will enter into force on 1 July 2013, following an amendment to the treaty on the functioning of the European Union (the Treaty) and the signing of an ESM Treaty by the euro area countries.
The euro zone says the European Financial Stability Facility (EFSF) and ESM together can lend a further €700 billion (roughly $916 billion). But this full amount isn't available immediately. The EFSF has €248 billion remaining, which is available until June 2013, when the EFSF is due to close to new business. The ESM becomes active only in July 2012. The ESM will have a total subscribed capital of €700 billion, of which €80 billion will be paid-in capital and €620 billion callable capital. This capital structure has been put in place to ensure the highest possible credit rating AAA for the ESM, while also guaranteeing a lending capacity of €500 billion, the same as the combined lending capacity of the EFSM (60) and EFSF (440). Overall the effective lending capacity will not be more than €500 billion at any point of time as per latest scheme of things. It looks like a classic example of kicking the cane down the road, every time EU is in a desperate situation. After all market wants to see the money immediately available rather than waiting for 2013 and not half of the required amount. RBS pegs potential requirements for Italy and Spain, as well as any further aid for Greece, Ireland and Portugal at €1.1 -€1.2 trillion over the next three years.
I also do not understand the logic of charging an interest rate (200 to 300 bps) above the cost of funding of ESM. To be frank I will be surprised if ESM even with its AAA rating will be able to manage to keep its cost of fund below bund plus 100 bps which effectively means lending at 5 to 6%. Assuming there is no disruption in the market as these instruments in itself are untested and appetite of the market is unknown. Given the flaws in the fire wall, it might be the European Central Bank once again forced to play the role of unwilling firefighter.
“Lord, grant me chastity and continence but not yet” St. Augustine. It seems like European leaders are not taking any cue from the famous prayer. Spain, Greece and all these trouble nations are forced the austerity diet down their throat which is chocking their growth and worsening all the measures like debt to GDP. To make matters worse, these measures are affecting the political and policy environment given the Elections in France and Greece. Greece where the recession is turning into a depression – may vote to parties that favor immediate default and exit from the eurozone. Irish voters may reject the fiscal compact in a referendum. And there are signs of austerity and reform fatigue both in Spain and Italy, where demonstrations, strikes, and popular resentment against painful austerity are mounting. Simply speaking Spain with one fourth of the total population unemployed can’t afford the austerity, every logic and reason defies it. Though, if of any comfort to Spain things are equally worse in Greece and Portugal also.
The IMF's new analysis of 99 housing busts across 25 advanced economies over the past three decades found that housing crises preceded by large surges in household debt tend to be more severe, with an economic slump persisting at least five years. The pattern has played out around the world. At the end of a housing boom, indebted households cut spending, pushing down overall economic demand, employment and incomes. "That sets off a negative chain reaction with more defaults, banks being more worried about lending, and there can be long-term damage to the economy,".
Spain, which is well into that cycle, faces severe economic turmoil. In 2007, the end of a decade long boom in home construction pushed Spanish employment and spending down. The resulting budget woes are fanning fears the country will need a bailout, worsening the European debt crisis. Home prices in Spain have dropped more than 20% since 2007, but many analysts believe they need to drop at least 20% more. Spanish banks are still sitting on a pile of troubled loans.
| Unemployment Rate and Changes | ||||
| Rate | Level | |||
| Unemployment rate | Feb-12 Jan-12 Dec-11 | |||
| Austria | 4.2 | 4.1 | 4.2 | |
| Belgium | 7.2 | 7.2 | 7.1 | |
| Germany | 5.7 | 5.7 | 5.7 | |
| Finland | 7.4 | 7.5 | 7.5 | |
| France | 10.0 | 10.0 | 9.9 | |
| Italy | 9.3 | 9.1 | 8.9 | |
| Luxembourg | 5.2 | 5.1 | 5.1 | |
| Spain | 23.6 | 23.3 | 23.0 | |
| Ireland | 14.7 | 14.7 | 14.7 | |
| Portugal | 15.0 | 14.8 | 14.6 | |
| Netherlands | 4.9 | 5.0 | 4.9 | |
| USA | 8.3 | 8.3 | 8.5 | |
| Japan | 4.5 | 4.6 | 4.5 | |
| Lagging: 2-Mos | Dec-11 | Nov-11 | Oct-11 | |
| UK | 8.3 | 8.3 | 8.4 | |
| Greece | 21 | 20.6 | 19.7 | |
Source: Eurostat
Composite PMI output (March)
Ireland 52.4 11-month high (Expanding)
Germany 51.6 3-month low (Expanding)
France 48.7 5-month low (contracting)
Spain 46.0 2-month high (contracting)
Italy 45.6 2-month high (contracting)
Source: Markit
Policy fear as well as inevitable recession in the periphery is driving the Interest-rate spreads for Italy and Spain up again, while borrowing costs for Portugal and Greece remained high all along. Credit-default swaps on Spain rose to 498 bps, surpassing the previous all-time high closing price of 493, bps, signaling deterioration in investor perceptions of credit quality. The rate on Spain’s 10-year note touched 5.99 percent, at which Greece and Ireland turned to EU and IMF for bailout. Sovereign insurance costs also rose elsewhere, with the Markit iTraxx SovX Western Europe Index of default swaps on 15 governments climbing 4 bps to 278.5.
Meanwhile, the credit crunch in the eurozone periphery is intensifying: thanks to the ECB long-term cheap loans, banks there don’t have a liquidity problem now, but they do have a massive capital shortage. Faced with the difficulty of meeting their 9% capital-ratio requirement, they are trying to achieve the target by selling assets and contracting credit – not exactly an ideal scenario for economic recovery, along with some innovative but dangerous procedure called “balance sheet optimization”, which is assigning the lower risk weightage to assets on the balance sheet (Banks are allowed under Advanced Internal rating based approach). Added to this, are reports that Spanish banks raised their holding of government debt to €68bn under the LTRO, thus closely linking the health of the banking sector to the fate of the government’s debt. “Moody’s has highlighted that Spain will not be able to keep up with its redemptions and that is something that will keep Spanish banks locked out of the market for a prolonged period of time,”. Banco Popular’s five-year Cedulas is now trading at mid-swaps plus more than 280bps, having priced at plus 255bps in March, and the last senior deal, a five-year from Santander, is some 88bps wider than its mid-swaps plus 265bps level.
Overall, just austerity will make the crisis worse. What peripheral countries need is front loaded growth measures and postpone the austerity for medium to long term. I agree there are some moral since profligate member might forget learning from the crisis but that risk Germany has to take if it wants Euro zone to continue. Current situation in EU remind us what once woody Allen said, “One path leads to despair and utter hopelessness and the other to total extinction. Let us pray we have the wisdom to choose correctly”. Amen.
Below you find two link with some interesting data on Eurozone.
No comments:
Post a Comment