The Euro looks set to close down versus the dollar for a third day in a row as Europe’s problems are brought to the forefront again. Allegedly behind the scenes France is pushing Spain to ask for aid in order to take advantage of the positive market conditions post-Draghi’s bond buying announcement. The Spanish government is still reluctant to do so, partly because the pressure of the market has been lifted of its shoulders, partly because the aid comes with conditions.
In the meantime, Spanish data keeps disappointing. Tax receipts through August fell by 4.6% while government spending rose by 8.9%. Spain registered a budget deficit of 4.77% of GDP in this year’s January-August period, this compares to 3.81% a year ago. The deficit is 50.1 Billion Euros in nominal terms.
Spain will freeze government wages in the 2013 budget, according to union sources. Sources also said that the civil services hiring will also be restricted in the budget. Complicating matters for the Spanish PM is the situation with the Spanish region of Catalonia. The region announced that it will hold early elections on November 25. The region’s president Artur Mas called for the vote after his request for greater tax autonomy was rejected by Rajoy.
In a speech in New York where a lot of politicians are present for the United Nations general assembly, Rajoy said that the European project is irreversible. He added that the reforms he’s undertaking aim to make the economy more competitive, the reforms are needed to “strengthen Europe”. There are at least 3 more years of reforms ahead, he said.
In a speech to parliament 2 weeks ago the Spanish Prime Minister Rajoy said that he can’t decide on a bailout request until he knows the conditions and that it may not be necessary to ask for aid at all because of the improved market conditions.
Draghi yesterday repeated his stance that there will be no intervention without conditions, adding that such intervention would not be credible. He said that “we don’t need a United States of Europe” but later added that “exceptional times call for exceptions measures”. In his other comments, Draghi said that if the needed reforms are made there is a reason to be positive. He added that the Euro’s foundations are strengthening and claimed that the OMT program removed unfounded Euro fears. Governments should use the upturn to strengthen reforms he said, adding that deficits are falling in the Euro area and competitiveness is improving.
Draghi went on to claim that the diverging interest rates were caused by unfounded fears of Eurozone breakup. He has seen real money flows back in the Eurozone “as investors recognize the progress”.
He again reiterated his stance that the bond buying program is not a departure from the ECB’s mandate, adding that there is a greater risk to stability from inaction.
Renewed doubts emerged regarding the legality of ECB’s bond buying program. The German tabloid Bild claims that the ECB’s and Bundesbank’s lawyers are checking what scale and duration the program may reach before breaking EU treaties. The tabloid did not specify its sources. Bild claims that the issue may soon reach the European Court of Justice and the ECB and the Bundesbank wanted to prepare for this scenario.
The EUR/USD is trading at 1.2853 at the moment, down 45 pips on the day. But the real losers of the day are the peripheral bond markets. The Spanish 2 year government bond saw its yields increase by 29.3 basis points to 3.455%, a massive increase of 9.27% in percentage terms. The Spanish 10 Year saw its yield go up by 31.7 basis points to 6.064%, a gain of over 5%.
Italy’s bonds also suffered, its 2 Year saw its rates go up by 12.5 basis points to 2.454%, while the 10 Year’s rates went up by 11 basis points to 5.21%. Their stock markets were not spared in the selloff, Spain’s Ibex fell by 3.92% today, closing at 7,854. Italy’s MIB closed at 15,408, down 3.29% today.