By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.
Another melee won by the ECB overnight with the LTRO once again pushing sub 3 year sovereign auctions into a “happy place”.
Spain sold 12-month debt with a yield of 2.049% against a previous 4.05% in December along with 18-month paper at 2.399 percent, previously 4.226% Greece sold 1.625 billion euros of 91-day bills in an auction that saw a decline in yield to 4.64% compared with 4.68% at a slightly lower bid to cover.
Belgium was also in the action selling 1.76 bln euro worth of 3 month T-bills cover 2.24 vs 2.13 , yield 0.429% vs 0.264 % an Eur 1.2 bln of 12 mth t-bills cover 2.06 vs 2.21 , yield 1.162% vs 2.167 %. The EFSF was also in on the action with 1.501 bln of new 6 month bills and managed a yield 0.2664%, bid to cover 3.1.
So all good news. To add to the up side the German ZEW jumped from -53.8 in December to -21.6. The ZEW is a survey of German analysts and investors of their market sentiment. The big jump is seen as a direct result of the ECB’s action to stem the economic crisis. Although the result was good, I am not really sure why anyone was ever concerned about Germany. The problem for Europe at this point is not Germany’s weakness but its strength, the survey suggests that issue is going to get worse.
The last information on car registrations presents the growing imbalances of Europe nicely and matches much of what we have seen in the recent PMI data:
The European car market fell by 1.4% to 13.6 million vehicles in 2011, marking the fourth-consecutive annual decline, and the outlook for this year looks bleak as tough austerity measures are expected to eat into demand.
“In 2011, most of the significant markets declined,” the European automobile manufacturers association, or ACEA, said Tuesday in a statement.
The French market dwindled by 2.1%, the U.K.’s fell 4.4%, while new-car registrations in Italy contracted by 10.9% and in Spain by 18% year-to-year, reflecting the region’s economic woes, particularly in Southern Europe.
Still, Germany—Europe’s largest car market—posted an 8.8% increase compared to 2010, backed by a more robust economy and better consumer confidence
It would appear from the across the board yield drops, even in Greece which is rumoured to be on the verge of default, that the LTRO is now creating its own momentum and it is likely we are now also seeing some front-running action. Again this is all good news for sovereign yields as it appears banks are actually running the carry trade through the ECB. We need to wait until the end of February to get an understanding of the true size of that carry trade when the ECB offers the second round of extended maturity LTRO. I suspect we will probably see some more sovereign-bank bond issuance partnerships, as we did last time, in the lead up to next operation.
Although the news is good, it should be noted that it is still very early days:
European sovereigns and banks need to find Euro 1.9 trillion to refinance maturing debt in 2012, equivalent to around Euro 7.5 billion each business day.
Italy requires Euro 113 billion in the first quarter and around Euro 300 billion over the full year, equivalent to around Euro 1.5 billion per business day. Italy, Spain, France, and Germany together will need to issue in excess of Euro 4.5 billion every working day of 2012.
European banks, whose fates are intertwined with the sovereigns, need Euro 500 billion in the first half of 2012 and Euro 275 billion in the second half. They need to raise Euro 230 billion per quarter in 2012 compared to Euro 132 billion per quarter in 2011. Since June 2011, European banks have been only able to raise Euro 17 billion compared to Euro 120 billion for the same period in 2010.
The question also remains what happens after March 1st to keep the ball rolling? A new round of asset purchases perhaps?
Either way, the LTRO does appear to be helping both the sovereigns and the banks to re-capitalise which are both good outcomes. However, as I have stated over the last few weeks, the LTRO will do very little to help the real economies of the periphery for two reasons. Firstly the banks appear to be using the facility to re-capitalise while at the same time they shrink their asset base in order to meet capital requirements, and secondly, in a poor economy the appetite and/or desire for credit is low and the availability of credit-worthy customers is limited.
This is where the focus of the problem is now. I am not sure if it is just rhetoric at this stage but the Euro-elite seemed to have had an epiphany over the last few weeks that the austerity measures aren’t working as they expected. We are now seeing more and more speeches focusing on the need for employment growth such as that from the President of the European Council, Herman Van Rompuy:
In the meantime, we should re-focus on growth and job creation. Growth friendly consolidation and job friendly growth are what we need! Growth should be enhanced by strengthening supply and by stimulating demand. We must urgently put in place an anti-recession strategy, mobilizing means and efforts at the Union level and – most importantly – at Member States level.
We also need to stimulate demand. Restoring confidence in the euro zone will strengthen consumer confidence, which is key to enhancing private consumption. New trade opportunities and new markets are to be exploited to stimulate foreign demand and export. Recent exchange rate developments for the euro will help our competitive position. We need to push our trade and investment opportunities with our strategic partners. I will travel next month to Beijing and Delhi to promote trade and investment with these two countries.
But our foremost concern should be stimulating employment. We need more, better and new jobs. Today, over 23 million people are unemployed in Europe. The economic slowdown risks increasing this number. Many of them are young. Women are particularly affected. The young are Europe’s future and we need to give them hope and a decent perspective of joining the labour market.
Our focus in the European January summit should be on youth employment and lifelong learning. The recent “youth opportunities” Commission initiative offers perspectives for skills, training and job placements. Also our “green jobs” potential should be fully developed. In parallel, and during the semester, we need to foster strong labour demand. Hiring people should be easier and more attractive. The EU can help Member States in their efforts to reform labour markets, and to overcome the “skills mismatch” in supply and demand, and the “geographic mismatch” by facilitating mobility.
Oh the horrible irony. “Think of the children” indeed. Expect to hear more of this toff over the coming days in the lead up to the next summit. Hopefully we will get something more concrete from there, but obviously given past performances you should not hold your breath.
Also in breaking news, it appears Greece may have a PSI deal at 32%:
Greece is nearing a deal with private creditors that would give them cash and securities with a market value of about 32 cents per euro of government debt, according to Bruce Richards, a hedge-fund manager on the creditors’ committee.
“I’m highly confident the deal will get done,” said Richards, chief executive officer of New York-based Marathon Asset Management LP, in a telephone interview today with Bloomberg Businessweek.
Given that Fitch stated this yesterday:
Parker said that Fitch believed that even a voluntary agreement by private investors to take a haircut on Greek debt would constitute a default.
“We have said for a long time that we don’t think this PSI is the way to go and we would treat it as a default. It clearly is a default, however they try to spin it,” he said.
We await the initial fallout… and wonder what the Portuguese and Irish are thinking right now?