September 20 2012

Spain’s bond yields rise on fears over bailout delay. Euro-zone PMIs paint gloomy picture. UK retail sales better than expected. U.S. weekly jobless claims dropped 3,000 to a seasonally adjusted 382,000, above forecast…

Powered by article titled “Eurozone crisis live: Spain off the hook for now after successful bond auction” was written by Josephine Moulds, for on Thursday 20th September 2012 13.54 UTC


Nothing agreed at Greek talks over cuts

Over to Greece again where talks aimed at finalising nearly €12bn in spending cuts have ended. But, as our correspondent Helena Smith reports, it appears they are far from concluded.

Emerging form the prime minister’s office where the talks took place, Fotis Kouvelis, whose Democratic Left Party is one of the two junior parties supporting the governing coalition, announced what many feared: “nothing has been closed.”

The politician told reporters that talks would continue and implied that he and the socialist Pasok leader Evangelos Venizelos would meet prime minister Antonis Samaras next week.

Kouvellis called on officials representing the country’s “troika” of foreign lenders at the EU, ECB and IMF to stop “assailing” the fragile coalition – a veiled reference to demands that Athens further slash pensions and the pay packets of Greeks on low-incomes.

Sources in the prime minister’s office did not rule out a new round of talks taking place on Sunday given the time pressure Greece is under. “Once again the stumbling block were demands from the troika that further cuts be made to pensions in order to make up for the outstanding €2.5bn the government must find to close the package,” said one source. “The body of measures, around €9bn, have been decided.”


Meanwhile, Francisco González, chairman of Spanish bank BBVA has said Spain’s financial system has huge problems. He says Spanish banks need €70bn-€80bn in capital. He also says unvialbe lenders should disappear, prompting some to suggest he may be predicting his own bank’s demise.


Key event

Back to Spain, where Catalonian president Artur Mas held a meeting with Spanish prime minister Mariano Rajoy earlier today to ask for a new tax deal for the region.

Catalonia accounts for about 20% of Spain’s GDP and is one of the three regions that have asked to tap the €18bn credit line set up by central government. Mas argues that the Spanish government is imposing tougher adjustments on regions than the EU is imposing on Spain as a whole.

It seems the meeting did not go well. Mas said in a press conference afterwards:

Rajoy frankly told me that the government has no margin to negotiate greater tax autonomy for Catalonia. When the government tells you there’s no margin for negotiations, there’s no point insisting with talks.

He said he would have to think about what to do next. There has been a surge in calls for Catalonian independence, with between 600,000 and 1.5m people marching on the streets of Barcelona last week. Mas said yesterday:

From the bottom of my heart, I think a great opportunity to make Spain and Catalonia understand each other has been lost.


US economic data disappoints

There was more disappointing economic data out of the US this afternoon. The weekly jobless claims data shows the number of Americans applying for unemployment benefits dropped 3,000 to a seasonally adjusted 382,000, which remains stubbornly higher than analyst forecasts of a drop to 373,000.

US PMI, meanwhile, was flat in September at 51.5, rounding off the weakest quarter for three years. Chris Williamson at Markit said:

The principal cause of weakness remains the export market, with new export orders falling for the fourth successive month, and at an advanced rate of decline, reflecting the economic downturn in the Eurozone and slower growth in previously strong markets such as China and Japan.


Finland could lose triple-A if it deviates from reforms

Standard & Poor’s has put out a new report on Finland saying it could lose its triple-A rating, if the government deviates from its austerity plans. In a report called “Un-Finnished Business” (you can always rely on the rating agencies for a bad pun), the analysts write:

We think the risks to growth in 2012 and 2013 are rising. Finland’s vulnerability to external factors is threatening its recovery prospects. At the same time, we consider that domestic demand will provide little support to growth.

If the crisis leads the government to deviate significantly from its current path of fiscal consolidation without addressing the need for reforms, we believe it would increase the risk to the long-term sustainability of its finances, thereby putting downward pressure on our sovereign ratings on Finland.

The rating agency made no change to Finland’s rating of triple-A with a negative outlook.


More from Greece, as our correspondent Helena Smith says the finance ministry has announced that Stournaras will meet Greece’s IMF mission chief Poul Thomsen later this afternoon.

She writes:

The Greek finance minister will meet troika officials at 6 PM local time. The discussions come amid mounting tensions over what cuts Athens will make to plug the outstanding €2.5bn hole. There are reports in almost the entire Greek media today that there has been a parting of ways between the normally mild-mannered Stournaras and Thomsen over the measures, with the high-level IMF official demanding in no uncertain terms that he wants the cuts to come from further slashing of wages and pensions.

The Oxford-educated Stournaras is reported to have dug in his heels saying: “I cannot cut wages and pensions further.”
Net, the state-run TV channel, is holding a round-table of economists, analysts and professors who are debating whether “a social explosion” can be avoided when the measures are announced.


News in from Greece, where our correspondent Helena Smith says coalition government leaders have begun meeting in a last ditch attempt to agree on the bumper package of spending cuts international creditors are demanding in return for further rescue loans. Helena writes:

Prime Minister Antonis Samaras was joined by his junior coalition partners a little after 1pm local time for talks aimed at finalising the €12bn package of spending cuts. The Greek finance minister Yiannis Stournaras and labour minister Yiannis Vroutsis are also participating in the meeting, which got off to a rocky start as protesters, including policemen and military personnel, attempted to block the prime minister’s office. Policemen, army, naval officers and the fire brigade, will all be affected by the cuts.

The state-run television channel NET is reporting that in the event that there is no agreement before Sunday’s deadline, “it cannot be excluded that the outstanding amount will remain pending and the green light is given to the €9bn which has been found”.

Going into the meeting it remained far from clear if socialist Pasok leader Evangelos Venizelos and Democratic Left leader Fotis Kouvellis were in a mood to compromise. Both leaders, though not wanting to endanger what is already a shaky alliance, have put up stiff resistance to many of the measures. With Greek society at boiling point after successive rounds of tax hikes, pay and pension cuts over the past two years, the politicians worry that further cuts in pensions and social benefits – as foreseen by the package – would spark civil unrest.

But with Greek coffers fast running dry – following a three-month delay in the €31.5bn cash injection the country is due – the finance minister has repeatedly said that “time is running out.” The spending cuts must be agreed by Sunday so he can present them to visiting Troika officials next week, if Greece is to receive its next tranche of aid by November – and therefore have enough money to cover public sector costs, saving it from default.


Spain’s borrowing costs on the rise again

Back to Spain and its successful bond auction this morning. Although Spain managed to sell some 10-year debt at a good average yield of 5.67%, over in the secondary markets yields are rising again.

At last count, the yield on the 10-year debt (according to Tradeweb) had climbed to 5.78%.

The fear is that with another €4.8bn to play with, Spanish Prime Minister Mariano Rajoy will put off requesting another bailout. That means the ECB will not intervene in the bond markets to help bring its borrowing costs down.


Eurozone governments should not take advantage of the ECB’s bond-buying programme, ECB member Benoit Coeure said this morning.

He said the bond-buying was not quantitative easing, and did not pose a risk to the central bank’s balance sheet. He sees no signs of deflation that would justify QE.

He said countries benefitting from the so-called outright monetary transactions need to maintain at least some market financing.

And he warned that fears of a euro break-up have “enormous” destructive potential.

Full speech here.


Over to Madrid, where our correspondent Giles Tremlett considers the options open to Prime Minister Mariano Rajoy.

Can Spain wriggle its way out of a sovereign bailout? Rajoy obviously hopes so, as the political costs would be great – just ask the former prime ministers of Portugal, Ireland and Greece.

El País today details the latest potential escape route being considered by Rajoy’s team, which would involve using part of the €100bn already made available to Spanish banks.

Written into the banking bailout is an agreement that might permit Spain’s government, rather than its banks, to also tap the fund (at least in theory and with conditions).

Madrid, which has always claimed the needs of Spanish banks have been exaggerated, reportedly hopes that up to half the sum will be left.

The €50bn does not cover the estimated €300bn Spain needs over the next few years. But it could be enough to request a mini bailout, and sign a memorandum of understanding which would then allow ECB president Mario Draghi’s bond-buying scheme to be set into action.

The real hope, El País says, is that this serves as a sort-of confidence trick, in the best sense of the term. Markets would see the ECB lined up behind Spain, bond yields would relax and the country would borrow cheaply on the markets without taking the bailout money. Abracadabra!


Irish GDP disappoints

Irish GDP was flat in the second quarter, missing expectations of a 1% rise. That makes government targets of 0.7% growth this year look increasingly difficult to achieve.

Reuters highlights that gross national product – which strips out the earnings of Irish-based multinationals and is therefore considered a more accurate indicator of the state of the economy – rose 4.3% in the quarter, compared to forecasts of a 0.8% increase.

The news will send shivers through the eurozone, as Ireland was supposed to be the great bailout success story.


CBI survey shows brightening outlook for UK manufacturers

British businesses forecast a slight boost to output in the next three months, while order books improved from a dismal reading in August.

The CBI industrial trends survey shows 28% of the 425 manufacturers polled expect to increase their volume of output over the course of the next three months, while 21% expect output to fall.

There were still more businesses saying orders were below normal (28%) this month than those saying they were above normal (19%), but the balance of -8% was much better than August’s reading of -21%.

Anna Leach at the CBI said:

Domestic and overseas demand have improved in this survey following last month’s falls, providing a foundation for somewhat better output growth expectations. Manufacturers believe that there will be a modest rise in output over the coming months, driven largely by the chemicals and food and drink sectors.

But uncertainty is expected to build through the autumn – with key decisions to be made in the Eurozone and the approach of the US fiscal cliff – meaning that conditions are likely to remain difficult for UK manufacturers.


There’s a surprising reaction in the foreign exchange markets to the ‘successful’ Spanish bond auction.

The euro has actually dropped 0.8% against the dollar. One euro will now buy you $1.294, compared with $1.305 yesterday.

As Steve Collins at London & Capital Asset Management notes, the bond auction could just delay a bailout.

The markets are also reaction to the gloomy PMI data out earlier, which fueled concerns about a deepening recession in the region.


Reuters is reporting that Martin Blessing, chief executive of Commerzbank, says Greek creditors are likely to have to take another “haircut” – effectively accepting a loss on their bondholdings – in which all creditors would have to take part.

Greece avoided default in March this year, after a majority of bondholders agreed to a bond swap, which saw around 75% wiped off the value of their holdings and cut the country’s debt by about €100bn.


Chinese premier Wen Jiabao calls for end to EU arms embargo

Over to Brussels, where European Commission President José Manuel Barroso is hosting the annual EU-China summit attended by Chinese premier Wen Jiabao.

So far there has been the usual back-slapping, with Barroso trumpeting a 280% increase in trade in goods between the countries over the past 10 years, and a 380% rise in trade in services.

Wen also gave a lengthy list of achievements over the past 10 years in his opening speech. But he also called for the EU arms embargo against China – imposed in 1989 following the suppression of protests Tiananmen Square – to be lifted, and raised the thorny issue of the EU’s refusal to lift all tariffs on Chinese goods.

I have to be very frank in saying this … but the solution has been elusive over the past 10 years. I deeply regret this and I hope the EU side will take greater initiative to solve these issues.


There is muted applause for the Spanish bond auction among analysts. Elisabeth Afseth of Investec says the yield on the 10-year debt is “acceptable” but notes that the majority of demand was for the three-year debt, which is unsurprising as that’s where the ECB said it would buy bonds, if and when it is called to do so.

Spain sold €3.94bn of three-year debt, and €859m of the 10-year bond.

As Nicholas Spiro of Spiro Sovereign Strategy notes, there’s a surreal air to Spanish debt auctions right now.

The sales are well received mainly because investors expect Madrid to eventually request an ECB-backed bond-buying programme. The relative ease with which the Treasury issued bonds today, and 10-year paper at that, says much about the enduring “Draghi effect”. The ECB’s verbal intervention alone is, for the time being, shoring up Spanish debt. Not only did the Treasury exceed its target today but the covers were fairly decent and the yield on the closely watched 10-year bond fell markedly.

Nick Stamenkovic at RIA Capital Markets, meanwhile, says average yields were “pretty pleasing” but cautions that they will only come down further if and when Spain requests a full bail-out:

It seems to have proceeded pretty smoothly, they raised above the target, which is mildly pleasing. Overall the acutions today were taken comfortably but a sustainable decline in yields really depends on the Spanish government coming up to the plate and asking for a sovereign bailout.


France sells €8bn of bonds

France’s bond auction result also looks good. It sold two-year notes with a yield of 0.2%, compared with 0.54% at an auction in June. Average yields also came down on the four-year notes, to 0.53% from 1.05%.

But there was a slight rise in five-year notes, with average yields of 0.98%, compared with 0.86% at the last auction.

All in all, a good day in the bond markets. As Yannis Koutsomitis notes, the Spanish in particular, probably have the ECB to thank for its successful auctions.


Spain gets bond auction away successfully

Spain has sold €4.8bn of debt (in three and 10-year notes), with good demand at the 10-year auction.

Average yield on the 10-year bond was 5.67%, compared with 6.65% at the previous auction. 

The bid-to-cover ratio at the 10-year auction – a key metric that shows how great demand for the bonds were – was 2.8 times, compared with 2.4 times at the last auction.

All in all a good result, which will help Spanish Prime Minister Mariano Rajoy put off his request for a bailout a little while longer.


UK retail sales better than expected

Retail sales dipped in August, but less than expected. The Office for National Statistics said sales were down 0.2%, compared with forecasts of a 0.4% fall. Excluding fuel, sales dipped by 0.3%.

The ONS said the drop was driven by a slump in online sales. Britons were, apparently, too busy watching the Olympics to be shopping on Amazon.


Howard Archer of IHS Global Insight has a typically gloomy take on the “dismal” PMIs out of the eurozone, which he thinks could push the ECB to cut rates next month. He writes:

The eurozone manufacturing and services purchasing managers surveys worryingly and disappointingly showed deeper contraction in activity in September. The only real crumb of comfort was an easing in the rate of contraction in Germany.

The surveys heighten belief that the ECB will be cutting interest rates from 0.75% to a new record low of 0.5% sooner rather than later, with a move looking ever more likely in October.

The eurozone is having to battle against a serious tightening of fiscal policy in many countries, high and rising unemployment, limited consumer purchasing power, tight credit conditions and muted global growth that is constraining export orders.

Meanwhile, persistent serious sovereign debt tensions have magnified the eurozone’s problems by weighing down on already weak and fragile business and consumer confidence and adding to uncertainty about the outlook.


Eurozone PMI worse than expected

Eurozone business activity meanwhile, dropped in September at its fastest rate since July 2009, suggesting the ECB bond-buying plan failed to inspire confidence in European businesses.

Markit’s flash PMI for September fell to 45.9 from 46.3 in August.

Chris Williamson at Markit said:

The Eurozone downturn gathered further momentum in September, suggesting that the region suffered the worst quarter for three years.

We had hoped that the news regarding the ECB’s intervention to alleviate the debt crisis would have lifted business confidence, but instead sentiment appears to have taken a turn for the worse, with businesses the most gloomy since early-2009 due to ongoing headwinds from slower global growth.


German services sector picks up

Germany’s PMI, on the other hand, was better than expected, with the services industry showing a slight upturn in activity.

Overall, the PMI showed business activity was still contracting, but only slightly. The composite PMI improved to 49.7 in September, from 47 last month. Theservices PMI increased to a four-month high of 50.6, from 48.3 in August.

Tim Moore at Markit said:

Germany managed to shake off the summertime blues in September, with renewed services growth helping to stabilise private sector output as a whole.


French business activity slumps

France and Germany’s PMIs tell out this morning tell very different stories. First, the bad news.

Business activity in France slumped in September at its fastest rate since April 2009, as the country was hit by the deepening crisis in southern Europe. The flash PMI*, a preliminary estimate which covers services and manufacturing, slid to 44.1 in September from 48 in August. Any number below 50 shows the sectors contracting.

Chris Williamson at Markit said the numbers suggest France’s economy, which has been flat for the past nine months, could start shrinking in the third quarter.

* the purchasing manager’s index summarises the opinions of purchasing managers, who gauge future demand and adjust orders for materials accordingly.


Spanish bond auction a key test

The success or otherwise of Spain’s bond auction today could decide when the country asks for a bailout, writes Michael Hewson of CMC Markets.

He says one thing to watch for will be demand for the bonds. At the last auction there was a bid-to-cover ratio of 2.24, that means buyers bid for 2.24 times the amount of bonds that were eventually sold. He says the yield – effectively the interest rate – will definitely be lower than the 6.65% of the previous auction.

One thing is certain, if today’s bond sale gets away alright, then we could face a long wait until Spanish PM Rajoy feels compelled to seek help for Spain’s ailing economy.


Markets down on gloomy data out of China

The markets have opened lower on news out overnight that China’s slowdown continues. Manufacturing in China contracted for the 11th month in a row in September, suggesting the world’s second largest economy is still slowing down.

UK FTSE 100: down 0.75%, or 44 points, at 5845

Germany DAX: down 0.9%

France CAC 40: down 0.9%

Spain IBEX: down 1.1%

Italy FTSE MIB: down 1%


In the Wall Street Journal this morning Charles Goodhart and Sony Kapoor ask whether the eurozone crisis has turned a corner. No prizes for guessing their conclusion. They write:

To emerge once and for all from the euro crisis, three things would be essential: stronger intervention by the ECB to limit possible short-term damage, credible economic growth strategies for crisis-hit countries, and a longer-term plan that provides for macroeconomic adjustment and reforms to the functioning of the euro zone. Europe has one-and-a-half out of three at best.

They criticise the ECB’s insistence that its bond-buying programme to help bring down the borrowing costs of crisis-hit states comes with conditions, noting that, “a conditional floor is not a wholly credible floor”.

And they note that the strict conditions imposed in exchange for ECB support could cause the eurozone’s biggest problem, as austerity casts a shadow over growth. Their cheery sign-off?

Policy makers’ inability to remove a eurozone break-up from the realm of possibility, and the absence of any credible growth plans, mean that economic actors will continue to be motivated by fear more than greed or hope. In all likelihood the situation will continue to get worse before it gets better, if it gets better at all.


Today’s agenda

  • Germany producer prices for August: 7am
  • France flash PMI for September: 7.58am
  • Germany flash PMI for September: 8.28am
  • Eurozone flash PMI for September: 8.58am
  • UK retail sales for August: 9.30am
  • UK CBI industrial trends for September: 10am
  • US flash manufacturing PMI for September: 1.58pm

In the debt markets, Spain is raising €4.5bn in three and 10-year debt; France will be raising €7bn-€8bn of 2, 3 and 5-year debt; and €1.5bn-€2bn of longer-dated debt; and the UK will be selling £4.5bn of 5-year Gilts.


Good morning and welcome to our rolling coverage of the eurozone debt crisis. Spain will be in focus today, as it tries to raise €4.5bn with an auction of three-year and 10-year debt.

Yesterday evening, the Greek government made some progress in its negotiations with the troika, agreeing €2bn of new cuts. That leaves Athens seeking a further €2bn+ of savings. Today the leaders of the Greek coalition will meet again in an attempt to hammer out further cutbacks before Sunday’s deadline.

There’s some economic data out as well. In the UK, August retail sales figures should give a clearer picture of the impact the Olympics had on retail sales; while eurozone PMIs will give an indication of how the economy has fared in September. © Guardian News & Media Limited 2010

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