Yield on 10-year Spanish bonds remains stubbornly high near 7%, but yield on 2-year bonds is in the midst of a breathtaking crash.
click on any chart for sharper image
Spain 10-Year Government Bond Yield
Spain 2-Year Government Bond Yield
Of the two charts, the second is far more important. Spain will be rolling over short-term bonds, not 10-year notes.
As dramatic as that move in the 2-year yield has been, please note that German 2-year bonds yield a negative .05%.
Germany 2-Year Government Bond Yield
Monti Calls for More Crisis-Fighting Urgency
Bloomberg reports Monti Calls for More Crisis-Fighting Urgency in ECB Standoff
Italy’s Prime Minister Mario Monti warned of a potential breakup of Europe without greater urgency in efforts to lower government borrowing costs, as a standoff over European Central Bank help for Italy and Spain hardened.
Monti, in an interview with Germany’s Der Spiegel magazine published yesterday, said that disagreements within the 17- nation euro area are detracting from the policy response to the debt crisis and undermining the future of the European Union.
Spain and Italy, whose surging borrowing costs have shunted them to the heart of the turmoil in the euro area, are resisting pressure from ECB President Mario Draghi to formally request aid in return for strict conditions before the central bank will buy their bonds. Monti and Spanish Prime Minister Mariano Rajoy have both said they will await further details as the ECB works up its plan. The German government said for the first time today that Chancellor Angela Merkel supports Draghi’s proposals.
French President Francois Hollande is pushing Monti and Rajoy to request aid from Europe’s bailout fund to help ease markets and protect France from speculation, Italian newspaper la Repubblica reported, without citing anyone.
Italy Hung Out to Dry
“Italy has, to all intents and purposes, been hung out to dry,” Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd., said in an e-mailed comment. “As far as Rome is concerned any external assistance would be the kiss of death. This puts Mr. Monti in an untenable situation.”
Spanish Economy Minister Luis de Guindos told ABC newspaper at the weekend that his country awaits details of the ECB’s bond-buying proposals before deciding whether to request aid. Both Italian Bank of Italy Governor Ignazio Visco and Minister for Economic Development Corrado Passera said in separate newspaper interviews that the country doesn’t need a bailout.
Visco told La Repubblica that markets had initially misunderstood Draghi’s comments.
“Not only did the ECB not take any steps backward, but it took decisive steps forward to correct the functioning of monetary policy transmission, and therefore of the stability of the single currency,” he told the newspaper.
Sigh of Relief
For now, the markets are breathing a sigh of relief over lower yields in Spain. Draghi will likely wait now before announcing his plan, assuming he really has a plan other than to buy more time.
I suspect a key part of his plan is to hope he can placate the markets until the German constitution court gives a blessing on the ESM. The court rules on September 12.
Until then, Draghi has every reason to be purposely vague about what he will or will not do. Much will depend on the wording of the ruling. In the meantime, as we have seen previously, a month is a long time in Europe.
No Structural Problems Fixed
The market is cheering now, but no structural problems have been fixed. There has been no work rule reform in Spain, Italy, or Greece. Indeed, France has taken a major step in the wrong direction with president Francois Hollande’s proposal to make it impossible to fire workers.
Taxes have gone up across the board in struggling countries, certainly the wrong approach with the unemployment rate in Spain near 25%.
In simple terms, policy moves have been ass-backwards. Good luck with that.
Mike “Mish” Shedlock
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