Don’t Believe Spain’s Deficit Numbers

March 4, 2013 Leave a comment

Last week, Spanish Prime Minister Mariano Rajoy gave investors and analysts a pleasant surprise, announcing that his country’s budget deficit had fallen to 6.7 percent of gross domestic product in 2012, far below the European Commission’s estimate.

Unfortunately, the lower number is probably wishful thinking on Rajoy’s part, because he excluded the costs associated with recapitalizing Spain’s banks. The European Commission’s estimate was much higher, at 10.2 percent of GDP, because it included them. Read more of this post

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Ireland Should Drop Model-Student Act and Get Help

January 24, 2013 Leave a comment

Talk to practically any investors in London and they will tell you Ireland is a shining example of a successful euro-area bailout program, a narrative that the country’s international creditors eagerly endorse.

So it might have come as a surprise when Finance Minister Michael Noonan said at a meeting with his euro-area counterparts this week that the Irish — and Portuguese — may get an extension on the maturities of some of their bailout loans.

This would help to reduce Ireland’s debt burden, of course. But why is it necessary if Ireland’s bailout has been such a success? The answer is simple: Ireland’s debt is not yet on a sustainable path, and the country needs more help to return to one if it’s to become the success story that many say it already is. Read more of this post

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Latest EU Bank Bailout Proposal Is a Dud

January 15, 2013 1 Comment

A European Commission proposal for bank rescues recently leaked to the Financial Times suggests that euro area officials may not be ready after all to break the destructive loop between banks and their sovereigns.

Why on earth was anyone surprised? Germany and its north European allies have never been willing to back a system in which they would have to accept risk for debts incurred by banks in other euro area countries. That’s unlikely to change soon. Read more of this post

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All is calm in the EZ…or is it?

November 5, 2012 2 Comments

All is relatively quiet in the eurozone these days – or at least that is what you might think, speaking to portfolio managers over the past few months. German chancellor Angela Merkel has visited Greece, Ireland has re-entered the bond markets and the ECB’s balance sheet is in play for Spain and Italy, so what is there to worry about?

Plenty. While the most disastrous possible risk – a complete, disorderly disintegration of the eurozone – has been greatly reduced by the ECB’s new bond-buying programme, Outright Monetary Transactions (OMT), the worst of the eurozone crisis is by no means behind us. Read more of this post

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EU Summit: Another Plan to Plan

October 20, 2012 Leave a comment

German Chancellor Angela Merkel set the stage for this EU summit by stating “this is not a summit where we will make decisions, but we will prepare decisions for December.” Unlike other EU summits in recent years, this one didn’t occur against a backdrop of high drama and rising sovereign bond yields. EZ policy makers still have their work cut out for them, with pressing issues to address—whether to release the next loan tranche to Greece, whether Spain should or will request assistance—as well as longer-term topics such as steps toward a banking and fiscal union. Some progress was made on determining next steps toward a banking union but the agreements reached at this EU summit were not all steps forward  and raise as many questions as they answer. Read more of this post

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What might debunk OMT euphoria?

October 9, 2012 Leave a comment

Last week rumors emerged that eurozone (EZ) policymakers were considering using the ESM to provide a first loss guarantee on Spanish government debt.  This news was leaked the same day that Mario Draghi reiterated at the ECB governing council meeting that the ECB would activate its shiny new Outright Monetary Transactions (OMT) program only once a country has submitted to EFSF/ESM conditionality. What struck me as puzzling was that EU policymakers seem to be trying to come up with plans to bolster the so-called firewall of official support they have built just as they are also insisting the firewall will be sufficient. While this certainly does not inspire confidence, are policymakers wise to be making contingency plans in case the OMT is insufficient? I think the OMT will absolutely help to buy some time for Spain (indeed it already has), but there are a lot of reasons to worry OMT euphoria will wear off and investors will shun Spanish and Italian debt once again. The following are a few potential triggers for investors to lose faith in policymakers’ abilities to stop the crisis before it completely engulfs Spain and Italy. Read more of this post

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German Constitutional Court Ruling Market Positive…Or Is It?

September 14, 2012 10 Comments

On September 12th, the German Constitutional Court deemed European Stability Mechanism (ESM) legal, paving the way for Spain and potentially Italy to request official support in the bond markets. The Constitutional Court’s ruling was not a carte blanche approval of the ESM’s original legislation, but rather the court demanded a few key changes to the ESM legislation, which could prove extremely important down the line. Read more of this post

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September Will be a Doozy Again this Year

August 8, 2012 4 Comments

Before you take off for your August holiday, you should probably be aware of what you’ll be coming back to in the eurozone (EZ) in September (warning: the following may make you decide not to come back). For the second September in a row, developments in the EZ have the potential to be highly dramatic, and this time not just in the weaker, peripheral countries. Read more of this post

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Spanish bailout inevitable, but not necessarily imminent

July 25, 2012 4 Comments

It is a rule of thumb among eurozone crisis observers that the more something is denied by officials, the more likely it is to happen. With Spain’s borrowing costs at euro-area record highs, its officials insist it will not need a full bailout programme. To most of us, however, it seems no longer a question of if, but when a bailout will come. Market panic this week seems to suggest it is imminent, but I think it will be put off as long as possible. Read more of this post

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EU Summit: Some Good Progress, But Any Game Changers?

July 1, 2012 6 Comments

This EU summit marked many firsts for eurozone crisis era EU summits: it was the first time Greece hasn’t been discussed in years, it was the first time Italy and Spain bonded together and it was the first time President Hollande attended an EU summit. By dinner time on Thursday, the EU summit seemed a colossal failure, with Spain and Italy refusing to sign off on a growth initiative without some short term measures to alleviate pressure on those two countries in the bond markets. EZ leaders went back to the negotiating chambers and emerged around 4am on Friday morning with a deal. The measures agreed exceeded market expectations, though based on Merkel’s pre-summit assertion that Germany would not be signing up to anything significant, expectations were not difficult to beat. The markets rallied, but was investor euphoria justified, or was this just another EU summit fudge? Some important steps were taken at this summit, but none of them game changers and a number of details have yet to be hashed out. Read more of this post

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