Europe Moving Beyond the LTRO

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.

So it appears, at least in the short term, that the ECB’s LTRO effect is starting to wear off as markets finally catch up on the story of the underlying economy’s of periphery Europe:

Euro zone bond markets Thursday received their first jolt since the Greek debt exchange was clinched earlier this month as Italian and Spanish bond yields soared with investors rushing to book profits ahead of the end of first quarter of 2012.

The sell-off in Italian debt pushed yields to their highest levels in a month, evaporating the gains made since the second of the European Central Bank’s three-year liquidity operations in February, where the ECB poured more than a half a trillion euros into the financial system. Italy had distanced itself from Spain in bond markets in recent weeks but Thursday’s rout sparked nervousness across financial markets and served a reminder that the crisis in the euro zone is far from over.

As I have been explaining over the last few weeks there is renewed market focus on Spain because it is becoming apparent that its economy continues to weaken. Overnight there have been nation wide strikes protesting against labour reforms and spending cuts. Spain’s economy contains massive private sector debt created by a now failed housing market, but Spain’s economy is also tightly coupled with Portugal which is another area of concern:

Portugal’s central bank said the economy will contract more than previously forecast in 2012 and won’t grow next year as consumer spending drops and export growth eases.

Gross domestic product will fall 3.4 percent this year after declining 1.6 percent in 2011, the Bank of Portugal said today in its spring economic bulletin. In January, the bank forecast GDP would decrease 3.1 percent in 2012, also a bigger drop than previously estimated, and predicted that the economy would expand 0.3 percent in 2013.

“The risks surrounding the current projection point to more unfavorable economic-activity developments,” the Lisbon- based central bank said in a statement. “These risks stem to a large extent from external-driven factors, in particular related to the sovereign-debt crisis in the euro area, which may constrain external-demand developments.”

Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of a 78 billion-euro ($104 billion) aid plan from the European Union and the International Monetary Fund. As the country’s borrowing costs surged, Portugal followed Greece and Ireland last April in seeking a bailout and now plans to return to bond markets in 2013.

Surely none of this is a surprise to anyone, as I have stated previously this should be a totally expected outcome. However, to add to the downside Moody’s cut the ratings of some Portugese banks:

Moody’s investors service has downgraded four Portuguese banks debt and deposit ratings by one notch, aligning their ratings at the same level or one notch below the ratings of the Portuguese government, which was downgraded to Ba3 from Ba2 on 13 February 2012. All ratings have a negative outlook.

According to the rating agency: “While none of these pressures are new, they continue to mount against the backdrop of the ongoing euro debt crisis. Positively, Moody’s recognises the supportive stance toward the Portuguese banking system by its government and the euro area authorities including the ECB. However, Moody’s has concluded that this supportive stance does not fully offset the aforementioned negative drivers.”

Sometimes, however, I get the feeling that presenting economic statistics to people really doesn’t give them an appreciation what is actually happening in these economies. For that I think you need the human story, unfortunately that too is fairly tragic:

Overnight Moritz Kraemer, head of sovereign ratings at Standard & Poor’s, also expressed “>some opinions on Greece that, although not unexpected, certainly isn’t helping the mood:

There may be “down the road, I’m not predicting today when, another restructuring of the outstanding debt,” he said at an event in London late on Wednesday. “At that time maybe the official creditors need to come into the boat.”

Speaking at the same event at the London School of Economics, Poul Thomsen, the IMF mission chief to Greece, said while the country has made an “aggressive” fiscal adjustment, it will take at least a decade to fully complete the country’s restructuring.

To Copenhagen then, where it appears the Eurozone finance ministers will be doing as I expected:

A draft agreement prepared for the finance ministers’ meetings reveals a plan to retain the €240bn (£200bn) rump of the European Financial Stability Fund (EFSF) until next year.

The move boosts the available bail-out funds to €740bn from this summer but falls far short of the €1 trillion firewall that international leaders have been calling for.

It marks a concession from Germany but is unlikely to stem fears over the advancing debt crisis, particularly in Spain.

On Thursday night Germany’s finance minister, Wolfgang Schaeuble, said the fund would be further boosted to €800bn, with help from the International Monetary Fund (IMF). He dismissed fears of countries leaving the eurozone as “nonsense”, and said that Spain must implement labour reforms or Europe would “never succeed” in solving the debt crisis.

Still, happy to be surprised on the upside, but it looks increasingly doubtful at this stage. The more things change, the more they stay the same.

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  1. Economic Maverick

    Me thinks that the summer “doldrums” could be quite acute this year. Spain’s is much bigger than Greece and it’s heavy private debt burden left over from the housing bubble seems harder to “address” in the way the Greek hole was “plugged”

  2. Richard Wilson

    Why can’t Spain (or Ireland or Greece) renounce all treaties with Brussels and Frankfurt, and go back to using its own currency, and establish its own public central bank like Brazil’s central bank? In the USA, why can’t all states have public central banks like North Dakota’s? Why must we borrow our national currency from private bankers, and pay interest on it, such that personal and national debt keep building forever? Why must we have a privately owned central bank cartel (e.g. the Fed) that is secret and unaccountable? Why can’t we have a public central bank that creates debt-free money as needed to keep the economy humming and balanced? Why can’t average people ask these questions?

    1. Fíréan

      Control. Those who control the purse strings control and dictate ALL other policy.

      Even your (USA) civil war was a battle by the confedrate states for financial independence from a central bank which was still subservient to foreigners.

    2. Jose L Campos

      You ask why and the answer is simple. Everything within you and outside you and me and everybody rots.
      The acropolises and the pyramids and the toughest oaks and battleships and everything else rots. But mankind has developed the idea that money should not rot that its value should be fixed and by that I don’t mean its price but its value, the aspect of money that enables.
      The how is that aim achieved is the content of history, every crime, every chicanery, every mystification, is addressed towards keeping the value of money intact.
      Universal rot is the fundamental fact of reality. Crimes are commited to hide that fact.

    3. financial matters

      Richard, your suggestions are exactly those of Ellen Brown’s in Web of Debt. Would be nice to get her as a guest blogger.

      More people are starting to understand money as a result of the recent crisis. But these concepts have been concealed from us for a reason.

      These policies benefit the current political/financial class. We have to start asking questions such as why billions can be found to bail out Countrywide Financial while medicare and social security need to be put on the austerity table…

      1. Richard Wilson

        Until we have public central banks, nothing will make any difference. Riots and protests will remain useless. All “reforms” will be maneuvers in the shell game. All political parties will remain shams. Poverty, debt, and unemployment will continue to rise.

        Shall the citizenry control the money, or shall a small cadre of private bankers?

        This is THE question in economics. Everything else is empty chatter.

    4. Yves Smith Post author

      The transition would be extremely painful and would almost certainly involve bank failures. Look at what happened to Iceland. Iceland had its own currency and repudiating debt was still traumatic. It would be even harder to go back to a separate currency.

      I’m not saying it’s not worth doing, but it is vastly more difficult than you suggest.

      1. financial matters

        Why fear bank failures? That is exactly what is needed. They need to be put into receivership and have their balance sheets revealed and their derivative positions unwound in a responsible manner and their top management prosecuted.

        They need to be made into public utilities to serve the public’s interest rather than being able to create money from nothing, speculate with it, generate huge bonuses for themselves and then be bailed out by taxpayers.

        And bankers shouldn’t be in charge of this process. Surely we can find some responsible people outside of the traditional political/financial class.

      2. F. Beard

        The transition would be extremely painful and would almost certainly involve bank failures. Yves Smith

        A universal bailout ala Steve Keen would fix everyone from the bottom up including the banks. And if the banks were forbidden from further counterfeiting (so-called “credit creation”) then the bailout could be done in a non-inflationary manner and the problem prevented from reoccurring too.

        A Modern Jubilee would create fiat money in the same way as with Quantitative Easing, but would direct that money to the bank accounts of the public with the requirement that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injection would have their debt reduced but not eliminated, while at the other extreme, recipients with no debt would receive a cash injection into their deposit accounts.

        The broad effects of a Modern Jubilee would be:

        Debtors would have their debt level reduced;
        Non-debtors would receive a cash injection;
        The value of bank assets would remain constant, but the distribution would alter with debt-instruments declining in value and cash assets rising;
        Bank income would fall, since debt is an income-earning asset for a bank while cash reserves are not;
        The income flows to asset-backed securities would fall, since a substantial proportion of the debt backing such securities would be paid off; and
        Members of the public (both individuals and corporations) who owned asset-backed-securities would have increased cash holdings out of which they could spend in lieu of the income stream from ABS’s on which they were previously dependent.

  3. IsabelPS

    That Portugal’s pain video reminds me very much of the videos posted by CalculatedRisk in 2009.

  4. Markar

    Speaking at the same event at the London School of Economics, Poul Thomsen, the IMF mission chief to Greece, said while the country has made an “aggressive” fiscal adjustment, it will take at least a decade to fully complete the country’s restructuring.

    That last word, restructuring, should be replaced with “looting”

    1. hermanas

      I read in the old days, restructuring was marked by miles of roadway bounded by pikes with heads on them.

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