Embattled Euro Zone Hunts for Plan B

europestormSpain is desperate, pleading and begging for help. Literally Spain said it does not have access to markets to refinance their debt. This is after the G7 decided to do nothing.

Spain said on Tuesday it was losing access to credit markets and Europe should help revive its banks, as finance chiefs of the Group of Seven major economies conferred on the currency bloc's worsening debt crisis but took no joint action.

Treasury Minister Cristobal Montoro sent out a dramatic distress signal about the impact of his country's banking crisis on government borrowing, saying that at current rates, financial markets were effectively off limits to Spain.

"The risk premium says Spain doesn't have the market door open," Montoro said on Onda Cero radio. "The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt."

Now Spain is up against it, testing the market with a bond sale, all in hope of avoiding a bail out, with all of the austerity demands that come with one.

Spain will try to raise between one and two billion euros in bonds on Thursday, a crucial yet cautious test of Madrid's ability to tap investors after a minister said the country was being cut off from the markets.

Analysts said Spain should be successful in raising the $1.25-2.5 billion, to be split between three bonds, largely because of the low target that was set for the auction.

But the sale of 10-year benchmark bonds will provide indications of confidence in whether Spain can avoid a bailout from the European Union as it struggles to prop up ailing banks and to pay the high interest rates it is being charged.

Spain has good reason to avoid asking for a bail out. Greece just announced they will need run short by euro;1.7 billion. Seems tax revenues and income have dried up. Austerity measures have squeezed Greece to the point businesses and citizens don't have anything left to give.

While Spain tries to avoid asking for a bail out, Germany and the EU are planning for one:

The European Commission proposed far-reaching powers for regulators to take control of failing banks, a first step towards a euro zone banking union. But the measure first has to be turned into law by EU governments and the European Parliament and may not take effect until 2015, too late to help Spain with its current banking crisis.

Sources familiar with discussions in Berlin and Brussels said intensive contingency planning was already under way for EU aid to Spain. Lawyers were examining the fine print of European treaties to see how Madrid could get money from the euro zone's rescue funds without the stigma of a full economic adjustment program, they said.

German officials said the aim was to avoid the embarrassment of Spain having to adopt new economic reforms imposed from outside and monitored by European and International Monetary Fund inspectors, as occurred with Greece, Portugal and Ireland.

With an IMF report on Spain's banking sector due next Monday, some sources hinted there could be intensive preparatory talks at European level at the weekend.

All of this is after the ECB did nothing beyond keep interest rates the same, 1%, and implied they are running out of options:

ECB President Mario Draghi yesterday stressed the limitations of his current policy tools, from standard interest-rate cuts to bond-buying and liquidity injections.

Yet the pressure to move is causing the ECB along with others to start drafting a plan for more Eurozone integration:

Draghi has joined European Union President Herman Van Rompuy, Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, and European Commission President Jose Barroso in drafting a program for deeper integration in the euro area. Van Rompuy said on June 4 that he will report on proposed “building blocks” at the next summit of EU leaders on June 28-29 in Brussels.

Numerous reports on the Eurozone's demise popped up last week, but guess who is pressuring to do something immediately, Obama:

Europe has weeks to save the euro and must create an "immediate" rescue plan, the United States and Britain plan to tell Germany Thursday, Britain said.

Such a rescue plan could involve Germany pledging to underwrite struggling countries' debt, officials said.

British Prime Minister David Cameron was to tell German Chancellor Angela Merkel in Berlin Thursday he and U.S. President Barack Obama believe an authoritative agreement that fully gets the job done must be reached this month -- and there are two crucial summits in which to do it, officials said.

Those meetings are the Group of 20 summit in Los Cabos, Mexico, June 18-19 -- when Obama, Cameron, Merkel and other leaders of 19 major-economy countries and the European Union get together -- and an EU leaders summit in Brussels June 28-29.

Why is President Obama urging action within a month now?  The never ending European financial crisis has been going on since 2008. Could it be elections?  The problems in Europe do affect the United States economy, primarily the free flowing, wheeling and dealin' financial sector. No surprise considering the jobs crisis, that being Obama's own job, suddenly the situation becomes dire and the Eurozone must act.

So, now all hopes are set on some nebulous prayer's hope of a plan.

The member states of the eurozone are pinning their hopes of saving the European single currency on the emergence of a clear plan for fiscal integration in the run up to a European Union summit at the end of this month (28-29 June).

The leaders of France, Germany, Italy and Spain will meet in Rome a week earlier (22 June) to outline their plan of action, which could amount to the most dramatic step forward for eurozone countries since they united their national currencies more than a decade ago.

Mario Draghi, the president of the European Central Bank (ECB), ratcheted up the pressure yesterday (6 June), saying that when they meet the leaders need to “clarify the vision” for the euro for the next ten years.

However, in raising expectations that they can make significant progress at the summit, leaders and officials are gambling with the financial markets which have been disappointed by successive EU meetings since the start of the eurozone crisis more than two years ago.

The plan is a banking union at minimum and already there is contention.

Halting contagion requires radical action. In recent weeks, as the crisis has flared up yet again, a consensus is forming that if the euro is to be saved it will require – at a very minimum – the creation of a banking union. Such a union would involve responsibility for regulating the euro zone banking system moving from the national level to the European. Banks would contribute to a common fund that would be used to insure their depositors. A menu of options, on these issues and others, was set out by the European Commission yesterday.

Supposedly this master plan will be revealed this month and it is feared to be really crafted by the banks themselves.

This same scenario keeps playing out, over and over again but usually the only plan is to restore consumer confidence, never some actual debt forgiveness, or something that stops the hemorrhaging, once and for all. Even a hint of letting the banks craft policy will assuredly put Europe into the toaster. In other words, they would be done.



Update: Spain's bond auction passes mustard:

The Treasury sold 638 million euros of a 2-year bond, 825 million euros of a four-year bond and 611 million euros of a benchmark 10-year bond.

The bid-to-cover ratios were higher than at recent auctions, with the 2012, 2014 and 2022 bonds covered 4.3, 2.6 and 3.3 times respectively.

The yields were higher than at recent sales. The 2014 bond was issued at a yield of 4.335 percent, the 2016 bond at 5.353 percent and the 2022 bond at 6.044 percent, a lower price than the 6.14 percent the same maturity bond trades at in the secondary market. ($1 = 0.8001 euros)


Update: Merkel proclaims Europe is ready to bail out Spain:

Chancellor Angela Merkel said Europe was ready to act to ensure stability in the euro zone as Spain's credit rating was cut by three notches on Thursday amid expectations it may soon seek EU help for banks beset by bad debts.

Spanish Prime Minister Mariano Rajoy said he would wait for the results of independent audits of the banking system before talking with Europe about how to recapitalise troubled lenders.

An International Monetary Fund report due out next Monday is expected to show Spanish banks need at least 40 billion euros ($50 billion), financial sector sources said.


Update: Fitch downgraded Spain from A to BBB.

Without waiting for a widely expected EU rescue, credit ratings agency Fitch cut Spain's sovereign rating to BBB from A with a negative outlook, saying Madrid was especially vulnerable to a worsening of the euro zone debt crisis.

Fitch estimated Spanish lenders need 50 to 60 billion euros in capital under their updated base case. However, the total fiscal cost to underpin the banks could rise as high as 100 billion euros or 9 percent of gross domestic product in a more extreme scenario similar to Ireland's bank meltdown, it said.

The implications for Spain means the hatchets of austerity are hovering over their necks as conditions of a bail out. This will push Spain's economy further into depression, as it has Greece, Ireland and Portugal. Spain would be the largest economy to be forced into austerity and is the 4th largest in the Eurozone.

Spain might be able to use the threat of contagion, for they are the 4th largest Eurozone economy, to get out of those bail out strings attached; the draconian cuts and punishments conditions demanded in to obtain bail out funds.

Update: Spain has succumbed and will be officially requesting a bail out this weekend. It's official and then there were four.



Soros gives very good description on how EU crisis happened

Total speech is here, below is an excerpt:

When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.

It took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default; but when they did, risk premiums rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. And that constituted the two main components of the problem confronting us today: a sovereign debt crisis and a banking crisis which are closely interlinked.