I am not going to put to much emphasis on last night’s equities, given the volatility lately I am not sure there is much point, however the market response would suggest that the latest summit managed to provide that “confidence” Mario Draghi spoke of for little more than 24 hours.
The ECB was forced to step into the SMP ring again last night buying short term debt after yields on Italian and Spanish debt spiked. Italy managed to auction off €7 billion worth of 12 month T-Bills at a yield of 5.95%, covered 1.92 times. This is down a little from a Euro area high of 6.09% paid back in early November, but it still a very high cost to pay for short term debt.
Despite the central bank’s intervention, Italian five-year bond yields moved above the 7%, while the ten-year yields spiked above 6.8%, and Spanish ten-year yields topped 6%. Those yields have now fallen back slightly. Sovereign CDS is once again heading in the wrong direction with climbs across the European board.
I finished my European post yesterday with the line:
Another “summit to end all summits” is guaranteed
It seems I am not alone in that assessment:
The European Union will need more summits to resolve its debt turmoil and time is running out, although last week’s deal was a significant step in resolving a “crisis of confidence,” the chief economist of S&P Europe said on Monday.
“Let’s not raise expectations too high, there will be more summits,” the ratings agency’s official Jean-Michel Six told a business conference in Tel Aviv. “Time is running out and action is needed on both sides of the equation, on the fiscal and monetary side.”
Interestingly Jean-Micheal Six was also quoted as saying:
There is probably yet another shock required before everybody in the euro zone reads from the same page, for instance a major German bank experiencing some real difficulties on the markets, which is a genuine possibility in the near term.
And Jean-Micheal would know because his agency and its brother-in-arms Moody’s are just about to provide that “additional shock”. Moody’s began that campaign overnight with the following media release:
In view of the continued absence of decisive policy measures despite the recent euro area summit, Moody’s Investors Service is reiterating its intention to revisit the ratings of all EU sovereigns during the first quarter of 2012. As Moody’s had stated in November, this is because the absence of measures to stabilise credit markets over the short term means that the euro area, and the wider EU, remain prone to further shocks and the cohesion of the euro area under continued threat.
Last Friday, European policymakers announced additional measures aimed at addressing the formidable challenges facing the euro area. Moody’s acknowledges that the announcement underlines the continued desire among euro area politicians to move towards centralised fiscal coordination and mutualisation of resources and risks. However, Moody’s believes that the announcement offers few new measures and points out that many are similar to previously announced ones. (Measures to strengthen oversight of excessive deficits were first announced in H1 2011, while the intention to strengthen national budgetary frameworks and improve coordination and cooperation was announced in October, as was the aim of leveraging the EFSF.)
Overall, Moody’s believes that the announced measures reflect the continuing tension between euro area leaders’ recognition of the need to increase support for fiscally weaker countries and the significant opposition within stronger countries to doing so. Amid growing pressures on euro area authorities to act quickly to restore credit market confidence, the constraints they face are also rising. The longer this remains the case, the greater the risk of adverse economic conditions that would add to the already sizeable challenges facing the authorities’ coordination and debt-reduction efforts.
The announced measures therefore do not change Moody’s previously expressed view that the crisis is in a critical and volatile stage, with sovereign and bank debt markets prone to acute dislocation which policymakers will find increasingly hard to contain. While Moody’s central scenario remains that the euro area will be preserved without further widespread defaults, the shocks that are likely to materialise even under this ‘positive’ scenario carry negative rating implications in the coming months. Moreover, the longer the incremental approach to policy persists, the greater the likelihood of more severe scenarios, including those involving multiple defaults by euro area countries and those additionally involving exits from the euro area.
The credit implications of these and further measures likely to be announced in coming weeks require careful consideration against the backdrop of decelerating regional economic activity, fragile banking systems, partly dysfunctional credit markets, and the varying degree of success of country-specific measures aimed at structural change and fiscal consolidation. But in the absence of policy initiatives in the near future that stabilise credit market conditions effectively, Moody’s believes that the system remains prone to further shocks, which would likely lead to selective rating changes. As a result, Moody’s intention remains to revisit sovereign ratings of euro area and EU countries during the first quarter of 2012.
In other words, the economic imbalances within the Eurozone persist and the longer that they do the worse the situation will become. If someone doesn’t pull their finger out and do something about addressing this fundamental problem then Moody’s will downgrade them all because the imbalances have lead to other significant issues within the European economies and financial system. Last week’s summit did nothing to address the issue because, as I stated yet again yesterday, the imbalances that lead to the current mess still exist today.
There is no better example of those imbalances, and the lack of action to counter them, than Greece which is currently receiving yet another probing from the Troika:
Even as Greece’s public workers continue to struggle under waves of pay cuts, tax hikes, slashed pensions and scores of thousands of layoffs the government said is necessary to satisfy international lenders and keep the country from going bankrupt, workers in private businesses could soon find themselves in the same boat. Representatives of the Troika of the European Union-International Monetary Fund-European Central Bank are in the capital this week to discuss more austerity measures, a possible write down of 50 percent of much Greece’s debt, but also are pressing for labor cost cuts at private businesses.
The newspaper Kathimerini reported that the Troika wants Greece to reduce holiday bonus payments and eliminate pay raises agreed upon under binding negotiations last year, effectively scrapping the legal rights of private workers, and letting their bosses decide pay rates. It’s already begun at some businesses. One woman, an English teacher at a private school, said the owner called her and said her pay was being cut immediately from $1585 a month to $1,057, a 33 percent reduction, while workers at other businesses said they were living in dread fear of being next.
I guess this is the sort of thing Moody’ are thinking of with the statement “the greater the likelihood of more severe scenarios, including those involving multiple defaults by euro area countries and those additionally involving exits from the euro area.”. With absolutely no end in sight to the Greek crisis and every single economic metric still travelling in the wrong direction, I do wonder at what point the citizens say “enough is enough , we’ll try plan B”.
In other Euro news. Finland still doesn’t seem happy with result of the summit and a former French PM has put his hat in the ring for presidency to challenge Sarkozy in what reads like a response to the Merkozy arrangement.