Breaking news – Olli Rehn has said that the EC is prepared to extend Spain’s deadline for bringing its budget deficit into line by a year.
To qualify, Spain must present a solid budget plan for deficit reduction in 2013-2014, If it can do that, Madrid will be given until 2014 to bring its deficit down to 3% of GDP.
This must be good news for Spain – given its rising bond yields today (see 11.32am). Worth remembering that the EC has also warned that Mariano Rajoy’s government needs to make more ambitious plans, and impose more indirect taxes
Reh, vice-president of the EC in charge of Economic and Monetary Affairs, announced the change of approach as he outlined the details of the EC’s new assessment of the European economy (as covered from 12.03pm onwards)
José Manuel Barroso appeared to take a pop at Austria, when asked about the concerns of countries who would pick up the bill for rescuing the eurozone.
Barroso pointed out that certain EU countries have done very well out of the single currency union, and should remember that when asked to contribute to it. As he put it:
Austria is probably the one country that has gained most through the enlargement of the Europan Union. Other countries have not benefitted as much as Germany and Austria.
Barroso added that Germany is the biggest net contributer to the EU, and that he is always keen to thank Germany and all net contributers for their efforts.
Austrias has taken as tough a line as any eurozone country on Greece. Two weeks ago, finance minister Maria Fekter was criticised for saying that Greece could be forced out of the EU by its financial crisis.
José Manuel Barroso began his press conference to outline today’s report on the European economy (see 12.03pm onwards) by expressing sympathy to the victims of yesterday’s earthquake in Italy.
Moving to economic issues, Barroso argued that Europe is moving in the right direction on public finances, and also moving towards “greater integration in the euro area”.
Barroso stuck to broad-brush issues (I think Olli Rehn will do the detail shortly), insisting that the euro had delivered benefits, and wasn’t the cause of this crisis – on the grounds that countries who aren’t in the euro have also been caught up in the financial turmoil.
here.The EC’s press release outlining the details of today’s reports on the European economy (with links to the details) is online
It explains that the EC has just one recommendation to Greece, Ireland and Portugal: to “implement the measures agreed under their programme.”
Our Madrid correspondent Giles Tremlett has digested today’s report card on Spain, which includes a warning that Spanish banks may need to make more provisions against bad debts.
Here’s Giles’s rapid analysis:
The Commission recognises that Spain has made a considerable progress in restructuring its financial sector. “The policy response in this area has been ambitious compared to earlier measures and is in line with the Council recommendation,” it says.
But it adds the following. “The worsening of the macroeconomic outlook might require an increase in provisions, which would have an impact on the profitability of the banking system.
In addition, given the risk of bank funding stress, further strengthening of the capital base of banks may be required. It is therefore of paramount importance that the banking sector be sufficiently capitalised and that the on-going restructuring continues.”
Spain’s banks have already been ordered to set aside €82bn euros against toxic real estate over the past three months alone.
Mariano Rajoy’s reformist, conservative government gets rapped over the knuckles on taxes, with the commission wanting fewer direct tax hikes and more indirect taxes. In other words, it wants lower business and income taxes and higher VAT.
“Measures adopted by Spain in this area are not in line with the recommendation,” says the commission.
“Direct tax increases lead to a higher tax burden on labour and capital, which is considered to be particularly detrimental for growth,” it says. “Other tax increases which are considered to be less detrimental for growth, i.e. further increases in indirect taxation, have been explicitly excluded by the government.”
Spain gets a good report card from the European Union on pension reforms, having pushed reitrement ages up, but is told that its poor growth neutralizes part of the reform and, so, leaves the pension system in danger in the longer term.
“Overall, the reforms adopted so far are ambitious compared to earlier measures and represent a significant step in the right direction,” the commission says.
“However, the worsening of Spain’s economic outlook is limiting the impact of the reforms on the projected increase in age-related public expenditure, which is still expected to remain higher than the EU average by 2060,”it adds. “Indeed, Spain appears now to be at medium risk with regard to the sustainability of public finances in the long -term.”
José Manuel Barroso, president of the European Commission, is presenting the details of today’s report now.
Olli Rehn, the European Union’s monetary affairs chief, is expected to speak afterwards.
The EC also had stern words for Spain’s economic situation, accusing Mariano Rajoy’s government of simply not going far enough.
The commission’s Spanish report card included the line that:
The policy plans submitted by Spain are relevant, but in some areas they lack sufficient ambition to address the challenges.
It called for more ambition on issues such as banking regulation, administrative reform, labour market changes, growth and competitiveness.
Today’s EC report on economic strategy gives Francois Hollande a clear warning that France needs to do more to bring its deficit down.
The EC calls budgetary consolidation “one of the main policy challenges” for the new government in Paris, as it gets down to work.
France’s deficit is expected to come in around 4.4% of GDP this year, and only fall slightly in 2013 — leaving it some way above the EC’s target of 3%. The EC warns that France risks losing the confidence of the financial markets, saying:
The high level of public debt poses a threat to the sustainability of public finances, and the recent rise in bond spreads suggests that markets are concerned about the country’s fiscal position.
The commission also said Hollande must specify new measures necessary to ensure that “the excessive deficit is corrected by 2013.”
The key message within the 1,000 pages of reports issued by the European Commission is that the eurozone risks imploding unless it uses the tools at its disposal to calm the crisis.
From Brussels, our Europe editor Ian Traynor reports:
The eurozone is confronted with the prospect of “financial disintegration” and should use its new bailout fund to recapitalise distressed banks directly while embarking on a transnational banking union, the European commission said today.
Delivering more than 1,000 pages of diagnosis and policy prescriptions on the dire condition of the European economy and how to try to end almost three years of euro crisis, the commission also talked up the merits of eurobonds or pooling of eurozone debt, a proposal gaining in traction but strongly resisted for now by the biggest economy, Germany.
The stock markets staged something of a recovery after the EU report was released. From a 104 point loss at 11.59am, the FTSE is now down just 60 points.
The proposal for closer banking ties across the eurozone, and particularly the idea that the European Stability Mechanism could be used to repair bank balance sheets, has been welcomed by the City — on hopes that Spain’s battered financial sector could be helped in this way.
But this reaction may be premature – the EC recommending something is not the same as Europe’s wealthier agreeing to it, and paying for it.
12.03pm for the topline):The EC’s assessment of the Europe’s economy is pretty bleak, in its new report on the region (see
The economic situation in the euro area deteriorated significantly over the last year. After contracting at the end of 2011 euro area GDP stabilised at the beginning of 2012. The loss of confidence due to the intensifying sovereign debt crisis, the oil price increases and the decelerating of world output growth have been weighing on growth.
While the risk of acute problems in the banking system has been eased by prompt policy action at the end of 2011, economic prospects remain sluggish.
The report also warns that the crisis could escalate, reigniting the “vicious feedback loop between the financial sector and the real economy”.
The European Commission’s report cards have just been released They’re packed with warning and recommendations, and there are some stern warnings for France over its budget deficit.
Here are some top-line recommendations:
The EC is recommending that the eurozone should move to a banking union. It also offers support for “joint debt issuance” (such as eurobonds?) saying it would help the eurozone through the crisis.
The EC is also recommending that stricken banks could be recapitalised through the eurozone’s bailout fund. That would be a BIG help to Spain.
On France, the EC is warning that it could miss its deficit targets for 2013 unless it takes “additional steps”.
More to follow!
Manufacturers and retailers across the eurozone grew more pessimistic about the state of the economy this month, according to data released this morning.
The European Commission’s economic sentiment index slipped by 2.3 points in the 17-nation euro zone to 90.6 — that’s the lowest level recorded since October 2009.
More details here.
Spanish 10-year bond yields have kept rising this morning above the 6.7% mark, edging closer to the 7% point which prompted Greece, Ireland and Portugal to take a bailout*.
According to data from Bloomberg, this puts the yield around the levels seen last November [update: it’s not quite clear if this counts as a new euro-era high – we may have to see where it closes tonight].
This graph shows Spanish 10-year bond yield over the last year (but alasdoesn’t show today’s spike to above 6.7%, sorry).
* – Italy, though, breached the 7% mark last November and survived.
details here), Sony Kapoor of the Re-Define think tank has come up with his own report cards for a few members of the Euro class of 2012.With 45 minutes to go until the official EU progress reports are released (
— Sony Kapoor (@SonyKapoor) May 30, 2012
Any suggestions for others? Britain could easily get “Lacks Team Spirit”.
The European Central Bank has issued a flat denial that it rejected Spain’s initial plan to recapitalise Bankia with sovereign bonds.
Here’s the official statement:
Contrary to media reports published today, the European Central Bank (ECB) has not been consulted and has not expressed a position on plans by the Spanish authorities to recapitalise a major Spanish bank.
The ECB stands ready to give advice on the development of such plans.
This is in response to the Financial Times front page story that the ECB had ‘bluntly rejected’ the scheme (as I blogged at 8.07am, it had more than a whiff of sovereign debt monetisation).
At the same time, Spain’s economy minister Luis De Guindos has announced that Bankia will be recapitalised through bonds issued by the Spanish bank rescue fund. So the original proposal appears to have been dropped (but the ECB insists they aren’t responsible…).
This morning’s worrying Italian bond auction (see 10.20am) is another signal that the crisis is worsening, and that the problems in Spain and Greece are having a knock-on effect on Italy.
As Nicholas Spiro of Spiro Sovereign Strategy commented:
While things are going from bad to worse in Spain, the uncertainty surrounding Greece’s membership of the eurozone is weighing heavily on sentiment.
At the end of the day, Italy is the market that matters most in the single currency area. It is all the more worrying, then, that it is the country that is the least shielded by the eurozone’s financial “firewall”.
Alessandro Giansanti of ING told Reuters:
Yields and spreads are back to January levels, and the indication are the market is going back to the danger zone.
There are reports in Spain today that the European Comission will today recommend that euro zone ministers give Spain one more year to meet its three percent deficit target for 2013.
Madrid correspondent Giles Tremlett has the details:
El País is reporting that Spain will be allowed to chop the budget more gradually, reaching three percent in 2014. Even then, the task is massive. Last year’s deficit was 8.9 percent. That means taking out an average of two percent of GDP from the deficit each year, rather than three percent.
In return, Brussels is recommending that Spain hikes sales tax, pays less to the unemployed, speeds up plans for later retirement and creates an independent budget watchdog.
Many commentators had considered the three percent target for 2013 impossible, despite government insistence that it would make it. But is it realistic to give Spain just one more year, or will it need more than that as it sinks back into recession and struggles with 24 percent unemployment?
El Pais has printed a draft (in Spanish) of the recommendations that Brussels is set to release today. It will be interesting to see if there are any changes.
Bad news for Italy – its borrowing costs have risen sharply at an auction of €5.73bn of long-term government debt today
In today’s auction, Italy sold 10-year Italian bonds at an average yield of 6.03%, up from 5.84% at the last auction of this type. Demand for the debt also fell, with the bid-to-cover ratio coming in at 1.4 (vs 1.8 last time).
It also sold five-year bonds at yields of 5.66%, sharply up from 4.86% in April.
The news has sent its bond yields surging in the secondary bond market, to levels not seen since January (6.12% as I type).
Stock markets are also falling further, with the FTSE 100 now down 76 points at 5314.
Amid the dash for safety this morning, the yield on UK 10-year gilts has fallen to a new record low of 1.709%.
German yields have also been hitting fresh record highs, as happens on an almost daily basis. It’s 10-year bund is yielding just 1.318%.
Spain’s cental bank governor has admitted that the country’s tax receipts could fall below target.
Speaking in Madrid, Miguel Ángel Fernández Ordóñez also warned that goverment spending migtht be higher than anticipated. That would result in Spain’s budget deficit coming in above the levels agreed with the EU.
Ordóñez, who surprisingly announced last night that he will leave his post in June, a month early, recommended raising VAT this year, rather than in 2013 as planned.
An update on the progress reports which the European Commission will release today, showing how the 27 members of the EU are performing.
The information will be released at noon BST, and European leaders including Olli Rehn will then brief the media in Brussels. Our Europe editor, Ian Traynor, is there.
The reports are a significant step towards closer fiscal ties within the EU. They will contain details of budgetary moves, structural changes and growth measures that the EU believes each country should take.
Brussels’ aim is that members who are scored badly in the ‘report cards’ could be forced to improve their performance, or be fined. New laws on budgetary discipline that were introduced at the start of this year gives Olli Rehn the power to ultimately impose fines of up to 0.2% of GDP on eurozone countries.
The New York Times points out that Brussels is struggling to keep pace with the eurozone crisis:
Between the adoption of the new budget enforcement rules last autumn and this incremental step, governments in Greece, Italy and France have fallen or been voted out of office. And Spain’s banking and debt crises are growing worse by the day
And AFP suggests that the Commission’s approach to France will show how serious it is about enforcing budget discipline:
The power to hit governments in the pocket is arguably the key tangible to arise from the two-year debt crisis, as the European Union tries to take active control of potential problems across the single market.
Spanish bond yields continue to climb this morning, with the 10-year yields now above 6.6% (data via Tradeweb).
This graph shows how Spanish yields are climbing towards the levels seen during last November, before the European Central Bank began buying debt issued by both Spain and Italy.
Higher yields indicate that Spain would have to pay dearly when it issues new debt, at a time when its borrowing costs are already a concern. As Peter O’Flanagan of Clear Currency pointed out:
The Spanish economy is five times the size of Greece which makes many think the struggling nation is too big to bail out.
More pain for Spain (sorry). The cost of insuring its debts against collapse has hit a new record high in the last few minutes.
The Spanish credit default swap jumped to 579 basis points this morning, a gain of 21 points.
In practice, that means it would cost €579,000 per year to insure €10m worth of Spanish bonds. A chunky rise in CDS prices generally means investors are pricing in a higher risk of default or debt restructuring.
Nobel-prize winning economist and Keynesian supporter, has weighed in on the Irish referendum over the EU fiscal compact, saying he would vote no.Paul Krugman, the
Speaking on the Today Programme on Radio 4, Krugman argued that Ireland could send a “helpful message” to Brussels by rejecting the proposal for closer fiscal ties across the eurozone, when they vote tomorrow.
Krugman also attacked the UK government’s austerity policy as “deeply destructive”, claiming austerity could drive Britain into a depression. Full story here
Last night, Krugnam criticised George Osborne’s approach to the crisis, arguing that the Britsh government should become play the role of ‘spender of last resort’.
In a speech at the London School of Economics, Krugman said increased government spending and ‘exotic’ monetary policy was the best way to rise out the crisis:
If you want to worry about debt and deficits, fine, but this is the time, to quote St. Augustine, to say ‘Oh Lord, make me chaste and continent, but not yet.'”
Italian government debt is also being hit this morning, which has pushed the yield on its 10-year bonds up above the 6% mark.
As this graph shows, Italian yields have been creeping higher since May, but we’re still away from the 7% levels seen last November before the collapse of Silvio Berlusconi’s government.
Alarming signals in the bond markets for Spain this morning, where the yield on its 10-year debt has risen to 6.55%.
That’s closer to the 7% ‘danger zone’ where countries have lost the confidence of investors. It’s also pushes the ‘spread’ between Spanish and German 10-year bond yields to a new record high of 5.17 percentage points.
The Spanish-German spread is rather significant — if it doesn’t drop soon, then clearing houses (who handle bond sales) could raise their margin requirements, making it more expensive to trade Spanish bonds
With stock markets and the euro also falling (see previous posts), the crisis appears to be entering another dangerous phase today:
The #Eurocrisis is now coming to a head now. Only this time, a fudge won’t work
— Sony Kapoor (@SonyKapoor) May 30, 2012
Eurozone fudge? Doesn’t sound terribly healthy.
The euro continued to fall in early trading — slipping to a new 22-month low of $1.24523 against the US dollar.
European stock markets have fallen across the board in early trading, as investors grow ever more worried over the Spanish banking crisis.
In London the FTSE 100 has fallen 55 points to 5336, down just over 1%, with every blued chip share losing value. The German, French and Italian markets are down by similar amounts.
In Spain, the IBEX has shed another 2.1%, on top of yesterday’s losses which sent it to a new nine-year low. Bankia’s shares were badly hit again, tumbling by 15%.
Traders fear that the eurozone crisis is heading close to the the point of no return, warned Andrew Taylor of GFT Markets:
With Spain’s banking system on the brink of collapse, trader’s nerves are being tested as there is there is no short term foreseeable solution.
Whilst the ECB sit on the sidelines it seems Spain is just going through the motions.
So why did the European Central Bank yesterday reject Spain’s cunning scheme to recapitalise troubled savings bank Bankia using its own bonds?
It appears that the ECB told Madrid that European rules outlawed the plan (under which Bankia would have cashed those bonds in at the ECB as collateral, in return for cash).
As the Financial Times reports this morning:
The ECB told Madrid that a proper capital injection was needed for Bankia and its plans were in danger of breaching an EU ban on “monetary financing,” or central bank funding of governments, according to two European officials.
But where else can Spain get the money from? The capital markets aren’t exactly desperate to lend to the country, with bond yields already close to the ‘danger zone…..
“This is like a game of poker now,” one government adviser told the FT, “and I don’t think Spain is bluffing”.
The ban on monetary finance is a cornerstone of conventional central bank thinking — governments rescue banks, not the other way around. But the sovereign debt crisis now so severe that some economists, such as Robin Bew of The Economist Intelligence Unit, believe monetisation of national debts may soon be the only way forward.
— Robin Bew (@RobinBew) May 30, 2012
Incidentally, the ECB bought up billions of euros of Spanish and Italian sovereign bonds through its Securities Market Programme (SMP) a few months back, so you could argue that its already pushing the bounds of non-monetisation.
Coming up today — the European commission will release new report cards on the budget plans of the 27 members of the EU. These progress reports are eagerly anticipated, as they will probably contain copious pages of recommendations from the commission on how countries can stay on the right path (or struggle back to it). We’re expecting them to be released at 11am BST (noon Brussels time).
Spain’s report will be particularly interesting, at a time when its banking crisis continues to blaze. With no clear plan for recapitalising Bankia, speculation over the help needed by the banking industry, and a central bank governor quitting his job early, the pressure on Madrid is unrelenting.
Also coming up, new eurozone economic confidence data will be released, and Italy is holding its third bond auction of the week.