Spain Gets Closer to Requesting European Bailout of Banks

CNBC | MAY 29, 2012

Spanish 10-year borrowing costs neared the 7 percent danger level and Bankia shares hit record lows on Monday after the government, struggling to sort out its finances, proposed putting sovereign debt into the struggling lender.

Prime Minister Mariano Rajoy pinned the blame for the rising borrowing costs—the spread over Germany reached the highest since the euro’s launch—on concern about the future of the single currency.

He again ruled out seeking outside aid to revive a banking sector laid low by a property boom that has long since bust.

“There are major doubts over the euro zone and that makes the risk premium for some countries very high. That’s why it would be a very good idea to deliver a clear message there’s no going back for the euro,” Rajoy told a news conference. “There will not be any (European) rescue for the Spanish banking system.”

He gave no details of bank recapitalisation plans but backed calls for the euro zone bailout fund, which will be in place from July, to be able to lend to banks direct.

Government sources told Reuters Spain may shore up Bankia with sovereign bonds in return for shares in the bank and could use this method to prop up other troubled lenders—moves which would push the country’s debts above the 79.8 percent of economic output which had been expected this year.

“This method has been used by Germany and by Ireland in the past, it is perfectly valid,” a government source told Reuters.

The source said the ECB had not been specifically informed of the plans to inject state bonds into Bankia. A final decision had not yet been made on which option to take.

Bankia’s parent company BFA has asked for 19 billion euros ($23.8 billion) in government help, in addition to 4.5 billion the state has already pumped in to cover possible losses on repossessed property, loans and investments.

Investors increasingly believe weak banks, undermined by the collapse four years ago of a decade-long property boom, coupled with heavily indebted regions, could force Spain to seek an international bailout which the euro zone can barely afford.

Irish Economy Worsens. People leaving the Country

AP

Debt-burdened Ireland is talking with other European Union governments about how to handle its troubled finances, but denied they needed a bailout from an EU rescue fund as the continent’s debt crisis continued to challenge policymakers for a response that would calm market turmoil.

Greece, which has already received a financial rescue loan, had to revise its deficit figures upward yet again.

But the main focus was on Ireland ahead of a meeting Tuesday of eurozone finance ministers in Brussels, where they will look for ways to quell market fears of an eventual Irish default.

Those fears are driving up the borrowing costs of other EU nations saddled with red ink, notably Greece, Spain and Portugal.

Analysts said investors needed the finance ministers in Brussels to offer a clear path forward for Ireland to reduce its deficit and bear the costs of its enormous bank bailout.

Irish officials insisted they had no need to seek help because they have enough cash to avoid new borrowing until mid-2011. Still, speculation is mounting that other EU countries are pressing Ireland to stop the rout in bond markets by taking help from the eurozone’s euro750 million financial backstop put together with the EU executive commission and the International Monetary Fund.

“We have no reason whatsoever why Ireland should seek external support. Ireland is well funded,” the country’s minister for European affairs, Dick Roche, said in a telephone interview.

When asked if Ireland hoped to tap EU funds to boost the liquidity of its troubled banks, as opposed to the government, Roche said that was a matter for the European Central Bank in Frankfurt, not the EU’s emergency fund.

“There is no reason for us to trigger any mechanism,” Roche said. “There’s been no political discussions about triggering any mechanism. We don’t know how many times we have to say this, as a government, to stop all this inaccurate speculation.”

A senior Irish opposition politician, Michael Noonan of the Fine Gael party, said he believed that other European governments were determined to intervene soon to contain Ireland’s problems for the wider sake of eurozone stability.

“I think the Irish government are fighting a rear-guard action for appearances purposes, but … I believe that things will come to head in the next 24 hours,” Noonan said in reference to Tuesday’s meeting of 16 euro-zone finance ministers and Wednesday’s meeting of the ministers of all 27 EU members.

The Irish Department of Finance said in a statement it was pursuing “contacts at official level” but aides to Finance Minister Brian Lenihan emphasized Ireland has no need to tap the EU’s emergency fund.

But market turmoil, reminiscent of that which preceded the Greek bailout in May, won’t go away.

German Chancellor Angela Merkel in recent weeks has stressed her view that it’s not right to make taxpayers, not bondholders, solely responsible for bailing out governments and banks.

The markets reacted by dumping the securities of the most vulnerable EU members, not just Ireland but also Greece and Portugal and to a lesser extent Italy and Spain. EU nations slowed the sellof by clarifying that any default process would apply to debt issued after the current EU stability fund expires in 2013.

That eased bond market tensions a bit, but Ireland remains under serious pressure and there are fears the selloff could spread to debt of other countries.

Ireland is struggling to slash a deficit that has ballooned this year to a staggering 32 percent of GDP, a record for post-war Europe. While Greece spent its way to disaster, much of Ireland’s 2010 deficit involves the government’s euro45 billion takeover of five banks that ran into trouble following the 2008 collapse of the country’s real estate boom.

Adding to the pressure on eurozone finance ministers, the European Union’s statistics agency said Monday that Greece’s 2009 budget deficit and debt were significantly higher than previously estimated.

Greece’s revised budget deficit for 2009 of 15.4 percent of GDP will make it harder for the government to reach targets specified in its euro110 billion bailout agreement in May. While Greek officials had forewarned investors of a likely rise in its deficit, the news reinforced fears that the eurozone’s most debt-troubled members — Greece, Ireland and Portugal — wouldn’t be able to turn the tide of red ink.

The yield, or interest rate, on Ireland’s 10-year bonds fell Monday in expectation that other EU nations would intervene to ease its cash crisis. The yield rate opened at 8.14 percent and slid to 8.00 percent in afternoon trade.

High yields reflect weak market confidence in ability to pay. They also compound Ireland’s effort to reverse its gigantic deficits because it means higher interest costs on any new borrowing in the markets.

The yield peaked Thursday at a record 8.95 percent — before several key EU members, led by Germany, issued a statement stressing that they had no plans to make bondholders eat losses in event of an Irish bailout.

In Paris, Greek Prime Minister George Papandreou said Germany had been naive not to realize the impact its words would have on skittish investors.

He said the impact of the German proposal, if enacted, “could create a self-fulfilling prophecy. It’s like saying to someone: Since you have a difficulty, I will put an even higher burden on your back. But this could break backs. This could force people into bankruptcy.”

Ireland’s young flee abroad as economic meltdown looms (UK Guardian)

Many young people are seeking to emigrate rather than face a life of hardship as the republic lurches towards financial collapse.

Student Niamh Buffini works hard and plays hard. As Ireland‘s No 1 taekwondo martial arts practitioner – she is rated 12th in the world – her ambitions include winning Olympic gold for Ireland.

But by the end of this month her future will have been decided by forces not just beyond her control but seemingly those of her government also. Ireland is on the cusp of insolvency. Some economists argue that it already is.

Buffini will soon learn if her fees at the Institute of Technology in Tallaght, south Dublin, have climbed beyond her means. Her father is a self-employed builder, which has recently become a euphemism for “unemployed”.

“My class size will have dropped by 50% by next year,” Buffini said. “Even lecturers took part in the recent student protests over fees because society here is going to be left with very few educated people. My best friends have already left – they’re doing bar work in Spain and Australia.”

Last week was not a good week for Ireland. Speculation about a European Union-backed bailout pushed its borrowing costs to unprecedented heights.

At Buffini’s college on Friday, the day began with a protest by construction workers who were supposed to have been working on a new wing. Their paymaster Michael McNamara – the country’s premier construction firm – had been put into receivership under the weight of debts of €1.5bn (£1.27bn), leaving them jobless and out of pocket for work they had already completed.

So far the workers’ demonstrations have remained largely peaceful. Indeed, many Tallaght students seemed shocked by the violence they witnessed in TV reports from London involving their British counterparts. But that may change.

Economists are sought-after celebrities in Ireland at the moment and none is more famous than Morgan Kelly. His doom-laden words are lapped up by a nation addicted to Celtic melancholy.

Kelly, of University College Dublin, was laughed at, scorned and even threatened when he correctly predicted, as long ago as 2007, that Ireland’s property bubble was heading for a spectacular explosion.

Now he is forecasting mass mortgage defaults and an ugly popular uprising. The first stirrings are already visible, he says, with “anxiety giving way to the first upwellings of an inchoate rage and despair that will transform Irish politics along the lines of the Tea Party in America”, giving rise to a new “hard-right, anti-Europe, anti-traveller party”.

The fact that Kelly got it right last time means that his dire warnings are now being given serious consideration this time around, but so far there is no evidence that the Irish are turning into racist extremists.

Polish immigrants, whose arrival in Ireland less than a decade ago increased the workforce by an astonishing 20%, have left in orderly fashion and with no complaints about their treatment. More worrying is the trend for the young Irish to follow them abroad.

Mark Ward, president of Tallaght’s student union, says that 1,250 students are leaving Ireland every month. One in five graduates is seeking work outside the country. The Union of Students in Ireland believes that 150,000 students will emigrate in the next five years.

Ward, a 26-year-old marketing graduate, said: “The government’s to blame for bankrolling the banks who were lending to their property developer friends. They all thought the party would never end.

“Students shouldn’t have to pay for the mistakes of the government and their developer pals. It’s going to take years to sort this mess out and it won’t be just my generation which will be blighted big time.”

Is the social fabric of Ireland beginning to unravel? The Kingdom, one of the country’s much-loved local papers, recently reported that nearly 200 Gaelic footballers and hurlers have left Kerry to play in Britain, Australia and the US in the first seven months of this year. The true figure is probably double that.

The charity Barnardo’s said that children were asking it for food because there was not enough for them to eat at home. “Some of our services are being asked by children if they can take food home for later because there just isn’t enough,” said Carmel O’Donovan, a project co-ordinator with Barnardo’s.

And it’s not just the most vulnerable who are feeling the pinch. Greystones is a wealthy Wicklow seaside town whose most famous resident is Sean FitzPatrick, the former chairman of nationalised Anglo Irish Bank. Emer O’Brien, an interior designer, and her architect husband Killian are struggling to repay their mortgage.

“It is awful, a bit like waiting for a bomb to explode but simply not knowing when,” she said. “I don’t think anybody has any faith in any of the politicians to fix this problem. Over 70% of education and health spending goes on pay and pensions, so all the cuts in those departments are coming from front-line services.

“I hope I don’t get sick in the coming months because there’ll be nobody to tend to you in the hospitals. Of course, a lot of people would be heading across the Irish Sea or the Atlantic if only they could sell their houses, but we can’t do that either. So basically we’re stuck on the Titanic as it goes down.”

Next month the government will deliver its latest austerity budget with the aim of slashing a further €15bn from public spending on top of the €14.5bn it has already been forced to cut. But Kelly has argued that the public sector cuts are “an exercise in futility” when compared with the €70bn bill for Ireland’s bad banks. “What is the point of rearranging the spending deckchairs, when the iceberg of bank losses is going to sink us anyway?” he asked in the Irish Times last week.

Put at its starkest, for the next six to seven years, every cent of income tax paid by Irish citizens will go to cover the banks’ losses.

At the Capuchin Friary in Smithfield sausage breakfasts are being served to Dublin’s growing band of homeless and needy people. “There’s new faces arriving every day. At first they’re embarrassed to be here but we put them at their ease,” one of the volunteers said.

Gerry Larkin, the drop-in centre’s security manager, has noticed that occupants of the many neighbouring apartment blocks which were supposed to regenerate the city’s down-at-heel north side are now taking their places in the queue for food parcels.

He said: “Some of them have got into trouble with their mortgages and they’re asking me at the door: ‘Any chance of coming in, can you give me even a bit of food for the kids?’

“We’ve gone from 150 breakfasts during the boom years to 450 now and another 700 coming in for lunch.”

Five nights a week Niamh Buffini trains in her local martial arts club, nurturing her dream of winning gold for Ireland. “I’m always upbeat, but with my friends the chat about how bad things are is never ending.

“I’m an optimist by nature and I hope we can get out of this. The best I could say is I couldn’t see it getting any worse.”

 

Let’s talk European Double Dip

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RT

The US and Russia are gaining traction on an economic rebound, with China posting rudely healthy 1Q 2010 GDP growth. But its timeEurope double dip for Europe to get ready for Recession – the sequel.

Jean Claude Trichet is an urbane, intelligent and eminently reasonable man, and the ECB he leads has, as he rightly pointed out during Thursday’s Lisbon press gathering to announce a non rate movement, done a sterling job in defending the Eurozone against inflationary pressures for the better part of a generation.

Surrealism

But there was an air of surrealism that the late Luis Bunuel would have enjoyed. There were the press representatives all revved up for quick and punchy responses to the emerging contagion and what the ECB could offer. What they go was the ECB President languidly going on about Eurozone growth and inflationary pressures, and keeping the Eurozone budgetary house in order. He offered nary a word of substance about the fire which has broken out in its Greek kitchen, and even less in recognition of the potential for the curtains in its Mediterranean sunrooms to become part of the conflagration. It was sort of like a man reading out a weather report involving light breeze, some cloudy patches and fine and mild conditions in general – whilst on fire, and in heavily French accented English.

The truth be told, nothing more should be expected of him. His job is, as head of the ECB, to keep inflation rates at or about 2% first and foremost, issue warning about potential deviations from the inflationary comfort zone, and bend ECB monetary policy to maintaining or seeking it. He shouldn’t be expected to don red underpants and cape and try to be superman.

What he did say was that default wasn’t an option as far as he was concerned for Greece, but he also couched that by noting it was up to Greece, the nations lending to it, and the IMF to come to an arrangement to head that off. When asked directly about whether inflation or the Euro was the prime focus for the ECB, he was emphatic about the former.

Somewhere in the back of his mind however he must surely be countenancing the possibility of a further return to recession in Europe, and the likelihood that in the medium term he will need to cut rates once again in order to head off deflation rather than inflation, and to try again to get the Eurozone some traction on an economic recovery.

Borrowing costs heading north

For the simple matter is that the Greek debt, and the Eurozone response to it, is already starting to lift borrowing costs, and they could indeed jump considerably higher if the contagion he didn’t want to speak about yesterday were to, as appears increasingly possible, take hold in Spain, Portugal and Italy in particular.

This week already sees overnight and 3 month dollar LIBOR up, along with the LIBOR-OIS spread, as ‘Club Med’ CDS have widened sharply, and Greek Portuguese and Spanish government bond yields have pushed higher – to record levels for the latter two against the 10 Year German Bunds. A couple of screens away one can observe Greek three year bonds rising from 11-17% in a week, and other 3 year bonds from Spain and Portugal up a percent. Whilst it isn’t Lehman Brothers panic mode, there is still some way to go, and there is a faint whiff of counterparty risk coming from somewhere.

Lots of Eurozone debt

The reason for this is quite simple. A lot of Europe has far too much debt, and most nations have structural budget deficits adding to it. Greece might be out in front, but Portugal, Spain and Ireland are in the pack not far behind it, and the Italians are at best a half length behind them. The exposure of European banks to these nations is well over 2 trillion dollars. 2 trillion is also the total European debt rollover requirement of this year, with more than a trillion of that belonging to the Club Med watching their yield and CDS needs start to get pointy. Spain alone is mulling more than $550 billion.

Now at this point the first thought is that the Germans are the first logical place to look in terms of bailing all of this out and making sure that the liquidity keeps flowing. Notwithstanding the quite reasonable concerns of German taxpayers about bailing out what they see is profligate sun drenched laggards, and the pragmatic thought that German banks are amongst those where the money will end up, which is essentially socializing potential losses for them, with those same taxpayers picking up the tab, there is another fly in the ointment. Last year Germany passed a law limiting its federal government budget deficit to 0.35% of GDP from 2016. That means that opening the sluices now to help anyone too much could pressure that need.

This leaves – without wanting to point fingers of blame at anyone – a dysfunctional Eurozone large in any consideration of the future. And that counterparty risk starts to take a more overt shape.

Euro Banks bracing for a hit

Any possibility that Greece, and then possibly other nations, may either default, or restructure in some other way, is going to see the lenders – the banks – get less in the Euro than they are currently exposed for. That means potentially large writedowns. From there the next logical step for the banks is that they lend a lot less, and presumably jack up interest rates on what they have already lent. In the case of European banks there is an added issue in terms of their underlying capital base, which is in many cases less than their US counterparts. So that leaves the prospect of either a financial sector tightening due to higher borrowing costs for the state and major lenders, if not a financial sector tightening due to capital flight, a financial sector tightening due to banks having holes blown in their balance sheets, writedowns, or in the worst case, financial sector tightening due to banking collapses and corporate or state insolvencies.

With the increasing likelihood that Eurozone banks are likely to take a hit one way or the other, there isn’t a great deal the ECB can look to do. It could look to monetize debt by printing money, but that would let the inflation dog out of the bag and involve a lengthy negotiation process with a number of politicians from across the EU to get agreement on. It could look to buy any debt from banks and try and get banks in turn to buy sovereign debt, which would be the first step in taking over whole national banking systems and presumably would require a lot more lengthy political discussion – and Trichet did note at Thursdays press conference that the move to help Greece out this way announced last weekend had been arrived at as a one off. If the process of getting a game plan together for the Greeks together is any indication then any political approval process is likely to take time.

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