Spain Slides Closer to Bailout, Demands EU Action

Arthi Gupta
27 Jun, 2012
New York City

Pressure on European leaders intensified as Spain slides closer to a bailout as the recession deepens and government faces unsustainable cost of debt refinancing. Italy sold

[R]2:50 PM Frankfurt – Pressure on European leaders intensified as Spain slides closer to a bailout as the recession deepens and government faces unsustainable cost of debt refinancing. Italy sold €9 billion of 6-month bills at higher yields. French jobless rate forecasted to deteriorate this year.[/R]

European markets traded higher but pressures on political leaders intensified to offer a concrete plan to arrest the rising and unsustainable yields in the peripheral member nations.

Spain’s Prime Minister Mariano Rajoy warned that the nation “cannot finance” government debt for a long time at prices like those we are now paying” in a speech to Parliament.

On the eve of the European summit Rajoy offered a blunt warning to leaders of the region to take actions and bring down the unsustainable rates that Spain and other fragile nations are paying. In addition, the Bank of Spain said the recession is deepening and unemployment is expected to worsen in the next few months.

Spain is likely to force to accept a bailout in the next few months as bond markets exact interest rates that the government cannot afford to pay. Spanish economy is two times larger than the combined economies of Ireland, Greece and Portugal.

But the calls for the pooling of member nations debt in the shape of eurozone bonds to quickly relieve market pressure has met stiff resistance from German Chancellor Angela Merkel.

Merkel reiterated her position and urged member nations to cede more sovereignty to Brussels and manage their fiscal situation with prudence. She stressed, “Guarantees and controls must go together.”

However, investors were jittery after the rating on Germany was lowered to A+ with a 'negative' outlook from AA- by U.S. credit rating agency Egan-Jones on Tuesday.

Separately, European Central Bank said Cyprus government bonds have become ineligible as collateral in Eurosystem monetary policy operations after the country's credit rating fell below the minimum credit threshold.

Three rating agencies have downgraded Cyprus' rating to 'junk,' the Cypriot government securities does not meet the minimum creditworthiness requirement, reports said citing a statement from the central bank.

The Spanish government is considering increasing taxes, including property and sales tax according to a statement by Deputy Budget Minister Marta Fernandez Curras.

The country's budget deficit for the first five months of the year was €36.36 billion, equivalent to 3.41% of GDP and the year-end deficit target is 3.5% of GDP which is likely to be missed as the recession intensified.

The deficit increased to 3.4% in the five months from 2.6% in the period a year ago as the central government brought forward transfers to plug holes in government finances of 17 regions.

In a separate report, Spain's recession will deepen in the second quarter, the Bank of Spain said in its monthly bulletin today.

Greek Prime Minister Antonis Samaras appointed well-known economist Yannis Stournaras as the country's new finance minister ahead of the EU summit. Stournaras’s immediate task is to find the €4 billion of savings to meet the cuts demanded by international lenders.

In Paris trading, the CAC-40 Index gained 12.48 or 0.4% to 3,025.19 and in Frankfurt the DAX Index edged higher 17.36 or 0.3% to 6,153.84.

The yield on Spain’s benchmark 10-year bond was at 6.86%. Italian 10-year yield fell five basis points to 6.13%.

Italian Bond Auction

The Italian Treasury sold €9 billion of 6-month bills, in line with the target set by the treasury. The yield on the 6-month paper rose to 2.957% from 2.104% in the previous auction on May 29. The bid-to-cover ratio climbed to 1.62 from 1.61.

Separately, confidence among Italian businesses improved unexpectedly in June, data from the statistics office Istat showed today.

The seasonally adjusted confidence index for the manufacturing sector improved to 88.9 in June from 86.6 in May.

German Import Price Inflation Slows

Import price inflation in Germany eased to 2.2% in May from 2.3% in April, the Federal Statistics Office said.

From a month ago, the import price index fell 0.7% in May following a 0.5% decline in April.

French Jobless Rate to Deteriorate

Unemployment in France is likely to increase further this year, the statistics office Insee said.

The unemployment rate is estimated to reach 10.3% in France in the fourth quarter on weak economic growth, Insee said.

UK Retail Sales Rise, Mortgage Approvals Drop

UK retail sales balance rose unexpectedly to 42% in June, boosted by the Jubilee celebrations. The increase was the fastest since December 2010 and also stronger than forecast of 25%, a survey data from the Confederation of British Industry showed today.

Separately, the number of mortgages in the UK approved for home purchases fell to 30,238 in May from 32,103 in April, the British Bankers' Association said. The average home purchase mortgage approval was at £165,300.

Gainers & Losers

BHP Billiton Limited rose 0.6% to $61.65 after the diversified natural resources company said it was targeting copper production at Escondida of 1.3 million tons in fiscal 2015.

Bunzl plc climbed 0.3% to 1,023 pence after the distribution and outsourcing group said it expects six-month group revenue growth to be about 7% due to underlying revenue growth of about 4% and the impact from acquisitions and the disposal of the UK Vending business in August last year.

Separately, Bunzl reported the acquisition of the business of Service Paper Company in the United States.

Glencore International Plc slumped 3.9% to 290.90 pence after the integrated commodities producer and marketer confirmed that it has received a proposal from the board of Xstrata Plc in relation to certain amendments to the management incentive arrangements that are related to the merger.

Roche Holding AG climbed 0.6% to Sfr163.60 after the Swiss pharmaceuticals and diagnostics holding company said that it will close its U.S. site in Nutley, New Jersey and cut around 1,000 positions.

Standard Chartered Plc gained 1.3% to 1,352 pence after the banking and financial services company estimated income to grow at a high single-digit rate in the first-half over the comparable period a year ago.

The bank also said that local currency weakness is expected to drag income by over 2%, with the weakness in the rupee in India.