Thing's don't matter until they do. Ireland finally matters. So does Portugal. The big event happens when Spain and/or Italy matters, and that is just a matter of time.
In the meantime, a huge feud is developing between European Central Bank President Jean-Claude Trichet, Bundesbank President Axel Weber (the likely successor to Trichet), and German Chancellor Angela Merkel.
European Central Bank President Jean-Claude Trichet is the buyer of only resort as the euro area’s bond market melts down.
Just six months after he threw out his rule book to prevent Greece’s debt crisis from splintering the euro area, the 67-year old Frenchman may again be the only policy maker able to prevent the collapse in Irish and Portuguese bonds from spreading. That may require him to ignore opposition from Bundesbank President Axel Weber to the ECB’s bond-buying program and expand purchases of sovereign assets, according to Citigroup Inc. and Royal Bank of Scotland Group Plc.
“The ECB’s lack of action is puzzling to say the least and begs the question as to whether it’s fulfilling its financial- stability mandate,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland in London. “The more the ECB waits, the bigger the purchase program will have to be.”
With Greece, Ireland and Portugal “now having virtually lost access to capital markets,” Cailloux said the ECB must “extend dramatically” its bond purchases. He called on it to buy Spanish assets to limit contagion and spend an additional 100 billion euros by the beginning of next year. So far, the ECB has spent a total of 64 billion euros.
One potential obstacle is Weber, a contender to replace Trichet as ECB president next year, who said last month that the central bank should terminate its purchase program.
Weber is not the only German publicly disagreeing with Trichet. Chancellor Angela Merkel has quarreled with the central bank chief, whose tenure runs out on Oct. 31, 2011, over the terms of a permanent rescue facility now being debated by the European Union.
Trichet says Merkel’s demand that bondholders be forced to share the cost of a future bailout risks undermining investor confidence. It was Merkel’s push for burden-sharing at a European Union summit last month that triggered this month’s sell-off, according to David Mackie, [chief European economist at JPMorgan Chase & Co.]
Spain’s economy stalled in the third quarter, the Bank of Spain estimated, as the deepest austerity measures in three decades undermined the recovery.
Gross domestic product was unchanged from the previous three months and expanded 0.2 percent from a year earlier, the central bank in Madrid estimated in its monthly bulletin today. The economy grew 0.2 percent from April to June, as consumers brought forward purchases ahead of a sales-tax increase in July.
Industrial production fell the most in seven months in September, a separate report showed today. Output contracted an annual 1.4 percent, compounding an annual decline of 12.7 percent in the same month last year, the National Statistics Institute said.
“This was an exceedingly poor outcome given that industrial output had fallen by 12.7 percent year-on-year in September 2009,” Raj Badiani, an economist at IHS Global Insight in London, said in a note. It “suggests the sector is struggling to regain its pre-crisis levels.”
Spain’s government, which expects GDP to fall 0.3 percent in 2010 in a second year of contraction, slashed public workers’ pay by 5 percent in June and raised value-added tax to 18 percent from 16 percent in July. The measures, passed as contagion from Greece’s debt crisis swept through the southern euro region in May, aim to cut the deficit to 6 percent of GDP in 2011 from 11.1 percent last year.
Efforts to contain the shortfall and restore growth may come under renewed pressure as the extra yield investors demand to hold Spanish debt rather than German equivalents climbs. As Irish borrowing costs rose to a euro-era high, the Spanish spread widened to a four-month high of 203 basis points from 194 basis points yesterday. It reached a euro-era high of 221 basis points on June 16.
Finance Minister Elena Salgado has repeatedly ruled out any contraction in quarterly GDP this year after the economy emerged from a recession in the first quarter. The government forecasts unemployment, at 19.8 percent in the third quarter, will fall to 19.3 percent in 2011.
Spain's finance minister can rule out whatever the hell he wants, but that does not make it so. With rising taxes, austerity measures, 20% unemployment, and falling industrial output, it is beyond silly to rule out a GDP contraction.
What's even sillier are predictions of a "smooth recovery". Nonetheless, the Bank of Spain said "It is to be expected that the stagnation in the third quarter is transitory. Once the one-off effects linked to the value-added tax increase have passed, the economy will return to the path of smooth recovery."
Nonsensical statements like that will send Spanish bonds soaring when the economy slips further. The finance minister and the central bank went out of their way to create unrealistic expectations that cannot possibly be met.
Right now Spanish spread widened to a four-month high of 203 basis points while Irish debt spreads hit a record 650 basis points higher than the equivalent German bond. Yields on Iris debt topped 9%.