European news again dominated headlines Wednesday—here’s a brief roundup of the major storylines.
Spanish Yields Soar; Germany at New Record Low
Italy, Spain Bonds Slump as Crisis Punctures Demand; Bunds Jump
While it’s near-impossible (in our view) to isolate any single story as the primary cause of one day’s market movement, one could certainly argue relatively higher Spanish and Italian yields were the primary source of Wednesday’s market jitters.
Italy auctioned €5.73 billion of 5- and 10-year bonds, less than the €6.25 billion target. Italy paid 6.0% on 10-year debt versus 5.8% in April (€2.43 billion sold versus €3.5 billion targeted). The bid-to-cover ratio was 1.4x versus 1.5x last month. On its 5-year debt, Italy paid 5.7% versus 4.9% last month at a bid-to-cover ratio of 1.3x, which was comparable to last month’s auction.
Spanish yields rose 15 basis points to 6.6%, seemingly tied mostly to continued uncertainty surrounding the details of a €19 billion bank rescue.
While incrementally higher rates are certainly a concern and worth watching, it’s important to keep in mind the significant progress Spain in particular has made toward funding its long-term debt this year. And, while undoubtedly higher, rates thus far remain below highs seen last year in both countries. Keep in mind, too, when Italy crossed the 7% threshold last year, some predicted a bailout would quickly follow—yet that proved unnecessary.
Which isn’t to say either country’s headed for smooth sailing imminently—just that the ominous outcome many have come to expect is by no means guaranteed, either.
EU May Extend Spain Deficit Deadline
EU Proposes Bank Union to Ease Burden
Meanwhile, European leaders continued discussing various options aimed at continuing support for struggling peripheral nations—namely (and understandably), Spain. Among the possibilities is a one-year extension on Spain’s deadline to meet European Union deficit targets to 2014—which, given Spain’s current difficulties, would no doubt be welcome. But of course such an offer isn’t string-free. And in this case, the strings include increasing Spain’s VAT—a move they’re hesitant to make (understandably, in our view).
Also on the table is the idea of a bank union, which would allow the eurozone to jointly shoulder the burden of individual struggling banks, as opposed to requiring governments to request additional funding and adding to their debt and deficits. Not shockingly, Germany, who’s consistently opposed introducing similar burden-sharing measures, is opposed. Presumably because of the moral hazard they introduce and the costs they could impose on relatively fiscally disciplined Germany.
Regardless of any ultimate restructuring or reforms, they’re likely not in the terribly near future—not only will they require multiple layers of approval, but they’ll probably require other amendments to overall European rules. If anything, they speak primarily to the immense effort European officials continue pouring into finding a workable, long-term solution to the current woes.
Why No Run on Greek Banks, Despite Its Fiscal Ills?
We leave you with some food for thought, amid continued laser-focus (in various iterations) on Europe. Namely, the seemingly puzzling fact we’ve yet to see a massive run on Greek banks. Why not, if an exit is truly looming (as many in the media speculate)? Greek deposit holders apparently disagree with that assessment—otherwise, they’d likely be pulling their funds for safer destinations. And that seems consistent with how Greeks feel about staying in the euro—overwhelmingly, they support sticking with the union, at least for now. We’ll see how that translates into parliamentary elections in about two weeks.