European Crisis Live: Spanish Rescue Lifts Euro, Markets Ahead of Greek Elections
0900 BST: Italy shrinks
Italian GDP is confirmed to have contracted 0.8 percent in the first three months of this year, while the year-on-year contraction was marginally wider at -1.4 precent, according to the National Statistics Office.
0855 BST: What about us?
An interesting dimension to the Spanish bailout (I think most journalists are enjoying going “off message” in using this term) is the impact it may have on both Greece and Ireland.
The former, of course, faces critical elections this weekend in which the conditions on previous EU bailouts are central to the debate. Syriza, the left-leaning political party which promises to nullify terms of the existing EU agreements, may look to the deal cut by Spain (low interest rate, no conditions placed on the government beyond bank restructuring, no subordination) and feel its negotiating position may now be stronger than it was last week.
If the EU is easing its stance on austerity (given that it didn’t demand further public spending cuts alongside the Spanish loan commitment, even though Spain has snubbed demands for faster budget deficit reduction) Syriza could rightly campaign on the promise of arranging a new, slacker agreement with EU creditors. This tact could counter the principal electoral allegation of Syriza’s opponents (a vote for Alexis Tsipras is a vote to leave the Euro) and possibly help deliver a parliamentary majority for the charismatic leader.
Ireland, which has long argued for a reduction in its own EU/IMF bailout, may also feel slighted by the easy conditions placed on Spain, particularly given its unwavering commitment to painful austerity measures and deficit reduction in the face of a contracting economy. However, Ireland’s insistence on maintaining an ultra-competitive corporate tax rate of 12.5 percent may make renegotiation difficult.
0835 BST: Bond market relief … and quite a few questions
We’re seeing an immediate – if not dramatic – easing in bond market pressures for Spanish (and indeed Italian) debt this morning although not nearly to the degree you might expect given the sharp rise in European share prices. Research this morning suggests this is connected to the lack of detail in Spain’s request for funds over the weekend.
At present, it’s unclear as to whether existing holders of Spanish government bonds will rank “parri passu” (equal to) or below the new €100bn in loans that are expected to be given to the Spanish government. Under terms of the temporary bailout fund, the EFSF, bondholders are given equal rank to new loans (in other words, there’s no “subordination”). Under terms of the permanent bailout fund, the ESM, bondholders are pushed further down the queue (except in the case of Greece, Ireland and Portugal). Subordination is key in helping investors evaluate the risk premium they need to apply to the debt in the marketplace. The deeper the subordination, the higher the premium.
Markets seem to be assuming rules on subordination will apply on EFSF terms, given that the ESM has yet to receive full legal authority from its contributing members (more on that later) and are pricing Spanish debt accordingly: prices last seen show Spain’s benchmark 10-year government bonds trading at 6.05 percent, a significant improvement from “pre-bailout” levels. Credit default swap costs on Spain’s debt are also improving, falling 22 basis points, or €22,000, to 565 basis points (ie €565,000 each year for five years insures €10m Spanish government bonds from default).
Lending capacity is also a potential issue. To date, the EFSF has committed around €213.3bn in emergency loans. Once (if?) full authority is transferred to the ESM, lending capacity will rise to €700bn. Spain’s full request (we’ll know the amount after results of the 21 June audit of the banking system) will likely take committed loans to €313bn, leaving just under €400bn remaining, an amount that would barely cover Spain’s *minimum* financing needs out to 2014 (€370bn).
0805 BST: Solid gains
Investors are following Asia’s lead and lifting European markets across the board: London’s FTSE 100 added 1.8 percent in the opening minutes of trading this morning while traders built similar gains in France (2 percent) Germany (2.1 percent) and Italy (2.1 precent). Spain’s IBEX 35 looks the early standout gainer, adding 5.3 percent.