European officials travel to Washington this week seeking a bigger global war chest to combat the debt crisis as Spain’s government battles to quell renewed market turmoil over its finances.
Three weeks after European leaders unveiled emergency euro-area funding exceeding the symbolic $1-trillion mark, concerns about Spain’s position have ratcheted the nation’s borrowing costs to the highest levels this year. Crisis-fighting resources will dominate talks at the International Monetary Fund’s (IMF) spring meeting in Washington from April 20-22.
While the US insists that Europe can overcome the crisis using its own financial firepower, euro-area officials say they’ve done enough to trigger additional global assistance. The urgency was underscored last week as Spanish and Italian yields jumped, challenging assumptions among the region’s leaders that the worst of the fallout was behind them. “After three months that were calmer than expected, the euro crisis is back,” said Holger Schmieding, chief economist at Berenberg Bank in London. “The speed of the recent surge in yields has elements of a renewed market panic.”
Spanish stocks were lower, however, reflecting concerns about the country's ability to finance its deficit and debt with borrowing costs on the rise. Spain’s debt yields broke above six per cent today as investors worried about its Budget, knocking the euro and sending safe-haven German bonds to a record last set at the height of the euro zone crisis. Spain’s 10-year bonds were up 16 basis points at 6.15 per cent, five-year yields topped five per cent, while two-year yields rose to 3.7 per cent. Six per cent was last reached in December and is psychologically important for markets. The rise typically accelerates after that level, putting yields on course for seven per cent beyond which debt costs are seen as unsustainable.
The cost of insuring Spanish debt against default also hit record highs in early trading. Spain will auction 12- and 18-month Treasury bills and two-year and 10-year bonds on Thursday. Contagion fears also pushed Italian 10-year bonds higher. The euro fell below a key level at $1.30 on the concerns about Spain to hit $1.2995, its lowest in two months, before recovering to be down 0.4 per cent at $1.3010.
German bond prices gained and yields on the benchmark 10-year Bund, viewed as the euro zone's safest debt, hit a record low of 1.628 per cent. “We’re back in full crisis mode. It is looking more and more likely that Spain is going to have some form of a bailout," Rabobank strategist Lyn Graham-Taylor said.
The surge in borrowing costs prompted one of Spain’s deputy economy ministers, Jaime Garcia-Legaz, to call on the European Central Bank (ECB) to resume its direct intervention in the markets. Mixed signals from the European Central Bank (ECB) over its willingness to help the market by restarting a special bond buying program and news Spanish banks have been heavy borrowers of cheap ECB funds also undermined confidence.
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“They should step up purchases of bonds,” Garcia-Legaz said in an April 13 interview, wading into a debate that has split the ECB. While Executive Board member Benoit Coeure signaled on April 11 the ECB may buy up Spanish bonds, his Dutch colleague Klaas Knot said two days later that the ECB is “very far” from reactivating the measure.
Spanish Prime Minister Mariano Rajoy, who is pushing through an austerity agenda targeting spending on health and education, won backing from his party’s regional leaders over the weekend.
People’s Party chiefs from regions including Madrid, Valencia and Galicia agreed to streamline bureaucracy and write deficit targets into budget laws.
“We need to manage a reality that is very tough,” Maria Dolores Cospedal, the deputy party head and president of Castilla La Mancha, told reporters after a party meeting. Rajoy’s government has struggled to convince investors after last month saying it would not meet budget deficit targets set by the European Commission and the previous government.
Spanish auctions
European governments are banking on a bigger safety net to soothe markets as the crisis continues to simmer, with Spanish borrowing nearing the level that prompted Greece, Ireland and Portugal to seek bailouts. Sentiment will be gauged again on April 19, when Spain auctions two- and 10-year debt.
The Europeans’ appeal for funds may find more success after IMF Managing Director Christine Lagarde last week scaled back her request for $600 billion in new contributions. Lagarde said April 12 that she is hoping to make “real progress” at this week’s meetings. She said the IMF needs more cash to quell economic risks separate from Europe’s woes, such as higher oil prices and slowing US growth.
Her retooled strategy reflects international and particularly US reluctance to deliver more cash amid suspicion Europe isn’t doing enough to save itself. The IMF has less than $400 billion available to lend.
‘Non-European friends’
Bowing to international pressure to do more while stopping short of a bolder proposal, European governments agreed last month that euro 500 billion ($654 billion) in fresh money would be placed aside euro 300 billion already committed to create an euro 800 billion defense against contagion.
By also offering to give the IMF euro 150 billion, “European governments have done their part,” ECB Executive Board Member Joerg Asmussen said April 13. “I would now expect our non-European friends and partners to contribute their part to IMF resources.”
Foreign governments have been slow to rally, although emerging markets including Brazil and Mexico have indicated they are willing to participate.
Japanese Finance Minister Jun Azumi said April 11 that “if we’re asked if we’re 100 per cent satisfied with Europe’s efforts, I would say they need further efforts.” US Treasury Secretary Timothy F Geithner has already ruled out more support for the IMF from its largest shareholder, saying last month the lender already has “substantial financial resources.”
French Elections
After spending or committing at least euro 386 billion to bailing out Greece, Portugal and Ireland, Europe now has the money to fully finance Spain through the end of 2014 if needed, according to Schmieding at Berenberg Bank. Italy — with a sovereign debt of euro 1.9 trillion — is not so easily saved and would require the ECB to intervene if faced with an investor revolt, he said.
Added to the mix are the looming French presidential elections, with the first round due on April 22. EU officials and investors will be looking to see how the Franco-German partnership could be altered if Socialist candidate Francois Hollande beats President Nicolas Sarkozy in the second-round vote on May 6.
Both candidates addressed supporters in Paris yesterday after Hollande extended his advantage in a possible head-to-head race by two points to 56 per cent against 44 per cent, according to a TNS Sofres survey published April 13.
“France faces a highly intriguing election, which could add to market woes,” Jim O’Neill, chairman of Goldman Sachs Asset Management, wrote in an e-mailed note to clients.