Without enormous input from the ECB by hoovering up lots of junk, tomorrow is going to be a tough day for peripheral EU debtor State bonds. The Jens Weidmann action against allowing Greek, Portuguese or Irish bonds as collateral has turned a difficult situation into a potential route.
Why should Spain suffer from this?
Well, Spanish bond yields have spiked again of late. Also its regional deficits accounted for 1.6 out of 2.5% deficit control slippage during the last fiscal year. Although new laws are planned to increase Madrid’s power, the currently autonomous regions are still outside central goverment control – and fiercely guarded. The recent loss of Andalusian elections by the Rajoy government is a bad sign. The Spanish trading deficit is smaller than most in the eurozone, but its economic collapse has been deeper: a quarter of all young people are unemployed, and probably the country needs stimulation more than most. This isn’t going to be forthcoming.
Largely unrecorded by the MSM, there has been much covert raiding of vital social, pension and health budgets. And Union opposition to labour reform is stronger than in most countries. All this has placed Spain firmly in the line of market fire.
Until now, the dubious pr of Mario Monti has kept Italy out of that position since he took over in Rome. But all that is about to change. Here too, a labour reform at the centre of Monti’s programme has encountered opposition, occasioning a parliamentary debate that will delay his plans becoming law, and most likely reduce its teeth. A poll this weekend found two-thirds of people opposing the idea – and a big drop in Monti’s support to 44% from a high of 62% as March opened.
Italy’s borrowing costs have risen again lately. It’s hard to see signs that this will reverse.
Meanwhile, Brussels is being – even for them – particularly dumb about Ireland. A major restructuring of the Irish promissory notes (worth circa 20% of Ireland’s GDP) would clearly aid the Irish in keeping its sovereign debt at sustainable levels. But the Irish got nowhere with the ECB last week: the answer was a firm no. Thus, doubts continue about whether Ireland can keep up its debt repayments without being cut some slack.
As if these pointers weren’t bad enough, with every week the generic nature of EU instability becomes clearer.
Although German Chancellor Angela Merkel at first declined French Presidential challenger Francois Hollande’s offer to meet, Berlin is increasingly resigned to the likelihood that, after May, it will be dealing with the Socialist leader. The Chancellery has begun forging tentative ties with Hollande’s camp, but this is going to be a prickly process: Hollande has already announced that as President he would immediately renegotiate parts of the fiscal pact. Merkel sees that as disastrous for her plans of a newly designed Fiscal Union….although the rationale for having debtor nations inside that Union makes less and less sense as time goes on.
But as Germany’s position and plans become increasingly muddled, its harsh approach to the debts of others in turn starts to look massively hypocritical. US investment guru Mark Grant recently put forward a well-evidenced view of Germany’s sovereign debt as close to 4.8 trillion euros – bigger than Britain’s, and representing 139.8% of gdp rather than the 81.8% suggested by official figures. On that basis, the Spanish State’s finances represent a model of responsible fiscal governance.
As I posted last Saturday, opinion leaders I rate among the EU’s market makers feel that the Bundesbank’s complete disavowal of Merkel’s faith in the ClubMeds has made a near-inevitable eurozone collapse something of a racing certainty. I fully expect this to be reflected in Monday’s eurobond trading results.