7th September 2012
After following yesterday's events at the European Central Bank and the reaction then and indeed this morning I was reminded of something which I quote from below:
"This was rather extraordinary in the world's and particularly Europe's equity markets. There is a Dow Jones stoxx 600 index for Europe and it rose by 7.2%……European sovereign bond markets saw strong rallies too. However here there is a more cautionary note as there was a lot of talk that the ECB was pretty much the only buyer of these assets. Anyway the yield on Greek ten-year government bonds fell to 8.26%, Portugal's equivalent fell to 4.88%, Ireland's to 4.70% and Spain's to 4%."
You may have guessed from the numbers that whilst similar in principle to what has happened over the past day or so they are different. This is because they are ones I discussed on May 11th 2010 after the ECB'S first peripheral bond buying plan began. As you can see it began with a wave of what we might call Europhoria too.
Looking at the levels we find some perspective I think as even after the recent surges the Spanish ten-year bond yield is 5.73% now compared to 4% then. For those who think that Germany has always lost out in these exchanges there is food for thought in the fact that her equivalent government bond yield was 3% then and is 1.59% now. So as an antidote to the hue and cry analysis of the mainstream media we see that over the period of two and a half years Germany has been the winner on this measure. Interesting is it not? It gives a different view to the headline that Die Welt online went with:
"Financial markets cheer the death of the Bundesbank"
For all the hooping and hollering we have had over the currency in the meantime I note that the Euro was at 1.273 versus the US Dollar and is 1.267 now. Virtually unchanged.
What did change yesterday?
If we compare yesterday to back on May 10th 2010 then we open with yet more acronym inflation as OMTs or Outright Monetary Transactions emerged into the daylight. They will replace the SMP or Securities Markets Programme as the vehicle for ECB bond buying in the peripheral Euro nations.
It will hopefully no longer have the constraints on size that its predecessor had and I am glad that they avoided using the word unlimited:
"No ex ante quantitative limits are set on the size of Outright Monetary Transactions"
Also we see that in future the bonds bought by the ECB would take place in any restructuring or debt haircuts on government debt:
"it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries"
This of course comes too late for Greece which would have been helped considerably by such action and may even have started to look relatively solvent.
Also there will be more transparency:
"Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis."
Areas which are very unclear
As a likely sop to the German Bundesbank we were told this:
"The liquidity created through Outright Monetary Transactions will be fully sterilised."
What this means is that having put money into the system via the money used to buy the bonds they will take the same amount of money out again. I have never thought of this as full sterilisation but if we stay with this point we received no details as to how this would be done. If we recall the "No ex ante quantitative limits" from above we see that it could be required on a very large scale so how then?
Whilst there was a lot of talk about strict conditionality in return for the bail outs, in reality we saw this:
"Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases."
So as we add one more acronym to an ever inflating list we face the prospect of a bailout lite. If there is a bailout lite who will take the full plan? The Rajoy government in Spain for example seems set to choose the lite version if its previous actions are any guide.
Another danger is that if purchases take place this year and they are in the 1 to 3 year maturity range as indicated then there is the possibility of quite a squeeze when these bonds mature particularly if we recall that it may coincide with the one trillion Euro three-year LTRO of earlier this and late last year. So this particular can might be kicked into a very awkward future.
Meanwhile in the real economy
Spain and Portugal
If we look at today's Spanish industrial production figures we see this:
"The Industrial Production Index registered a year on year variation of -2.6% in July, more than four points above the June rate"
So whilst better than June's it is still falling at an annual rate of 2.6% and on a seasonally adjusted basis the fall is a deeper 5.4%. If we look into the detail for the underlying index we see that it is 82.8 where 2005=100.
If we move across the Iberian peninsular to Portugal we received these numbers yesterday:
"In year-on-year terms, Industry Turnover Index nominal change rate was -3.8% in July (-2.3% in the previous month). This evolution was due to the negative performance of the domestic market, which sales decreased 8.2% (reduction of 7.5% in June), while the external market index decelerated, moving from a year-on-year change rate of 5.3% in June to 3.0% in July.
Employment, wages and hours worked, adjusted for calendar effects, decreased by 4.8%, 5.2% and 5.3%, also in year-on-year terms."
I have quoted all the statistics there because they represent my view of Portugal's economy pretty well. Her export performance has improved but seems to be facing headwinds from the current European wide slow down. However her domestic economy is in dire straits indicated by the fall of 8.2% and we also see the impact on hours worked. Frankly this is "on track" for a Euro austerity pr
ogramme except the track is to an economic version of AC/DC's Highway to Hell.
If we also focus on the use of "nominal" in the release and look at Portuguese consumer inflation of 2.77% then we can see that the position in real terms is in fact worse than the already grim numbers shown above. One number not subject to that is the underlying one for employment which is at 81 where 2005=100.
This morning has seen the release of a services index:
"In the second quarter of 2012 the Services Turnover Index shows a decrease of 6.8%."
This is not a full service sector index but it does give us some insight as to what may be going on elsewhere too. After all booming economies rarely have even sub-sectors falling by 6.8%!
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