Are the Wheels Starting to Fall Off of European Cart?

July 24th, 2012
in econ_news, syndication

Econintersect Eurocrisis News Digest:  Spain's ability to borrow at reasonable rates hit a wall today with treasury auctions hitting near record levels for short term debt.  It's long term financing is already at record levels since Spain joined the Euro.

Follow up:

Spanish five-year government bond yields rose above 10-year yields which is an indication the market sees a growing default risk.  Contagion to Italy remains, but the big blow came from Moody's yesterday:

Moody's Investors Service has today revised to negative from stable the outlooks on the Aaa sovereign ratings of Germany, the Netherlands and Luxembourg. In addition, Moody's has also affirmed Finland's Aaa rating and stable outlook.

All four sovereigns are adversely affected by the following two euro-area-wide developments:

1.) The rising uncertainty regarding the outcome of the euro area debt crisis given the current policy framework, and the increased susceptibility to event risk stemming from the increased likelihood of Greece's exit from the euro area, including the broader impact that such an event would have on euro area members, particularly Spain and Italy.

2.) Even if such an event is avoided, there is an increasing likelihood that greater collective support for other euro area sovereigns, most notably Spain and Italy, will be required. Given the greater ability to absorb the costs associated with this support, this burden will likely fall most heavily on more highly rated member states if the euro area is to be preserved in its current form.

These increased risks, in combination with the country-specific considerations discussed below, have prompted the changes in the rating outlooks of Germany, the Netherlands and Luxembourg. In contrast, Finland's unique credit profile, as discussed below, remains consistent with a stable rating outlook.

Eurocrisis News Summary:

More bad news for the UK government as a larger than expected public sector deficit in June pushed the government's deficit reduction target for the year further out of reach.
MADRID (Reuters) - Spain paid the second highest yield on short-term debt since the birth of the euro at an auction on Tuesday, reflecting a growing belief that the country will need a full sovereign bailout that the euro zone can barely afford.
Italy's Monti rules out new EU crisis meetItalian Prime Minister Mario Monti on Monday ruled out holding another emergency EU summit on the eurozone crisis despite a new wave of market fears about Spain's ability to contain its debt.

UK inflation perceptions continued to drop steadily from the six-month high seen in March, according to the latest Markit survey of 1,500 UK households. The index measuring current living costs dropped from 85.1 to 82.9 in July. This was the fourth month in a row that the index had fallen, with the latest reading the lowest for almost two years...
US Treasury official to visit Athens, Rome this weekA senior US Treasury official will travel to the capitals of Greece and Italy this week to discuss efforts to achieve economic stability and growth in Europe, the Treasury announced Monday.

Germany's Hans-Werner Sinn is fighting desperately against the euro rescue. His controversial theories fill the pages of newspapers for days at a time, but his answers are often simplistic. A growing number of his colleagues are distancing themselves from the influential Munich economist.
Opening Market Commentary For 07-23-2012 Markets opened down as weekend news from Europe and poor earnings from McDonalds (MCD) pour in. INO reports Spanish government's borrowing costs hit an alarming 7.56 percent Monday for its 10-year bond and will soon find that it can't buy within affordable costs restraints...
The flash PMIs will give the earliest indication of how the global economy started the second half of the year. All will be watched closely by policymakers for growth, employment and price trends and will therefore provide a steer for future policy decisions.

Moody's says outlook for Germany negative

Moody's says outlook for Germany negativeMoody's on Monday warned the outlook for the economies of Germany, the Netherlands and Luxembourg was now negative, the first step toward a possible credit ratings downgrade.

Open Letters and Closed Minds?

Open Letters and Closed Minds?by Dirk Ehnts Hans-Werner Sinn and others have written an open letter (published at FAZ). They say that the banking union is not a good idea and that banks must be allowed to fail. They are against the socialization of bank debt. Their main argument is that bank liabilities in the euro zone are three times as much as sovereign (government) debt and, in the five countries in crisis alone, are in the trillions of euros...

OIL producers may not like it that prices for the black stuff remain well below their recent peaks. For refiners it is a welcome respite from a long spell of gloom. In Europe, margins for turning oil into fuel are at “windfall levels” according to UBS, a bank. What refiners pay for oil has fallen even as petrol and diesel stay pricey...
Spain's economy weakened further during the second quarter, hit by a sharp drop in domestic demand and by intense volatility in financial markets, the Bank of Spain said.
Eurozone debt crisis news today - Bangkok PostGlobe and MailEurozone debt crisis news todayBangkok PostBERLIN: The eurozone debt crisis took a fresh turn for the worse after Moody's threatened to cut Germany's coveted top credit rating amid fears the bloc's difficulties could tear it apart. MADRID: Spain's borrowing costs rose, heaping pressure on the ...

Global stock markets sagged and Treasury yields fell to fresh lows as investors fretted about the latest development in the European debt crisis.

BloombergNews: Greek PM Samaras seeks budget cuts ahead of euro officials' visit |

BloombergNews: Greek PM Samaras seeks budget cuts ahead of euro officials' visit |
FOREX-Euro down for 5th day on weak data, German ratings watch - ReutersAFPFOREX-Euro down for 5th day on weak data, German ratings watchReuters* German, euro zone PMI data weaker, dims euro outlook * Moody's changes German rating outlook to negative * Troika visits Athens to relaunch economic plan * Spain bailout fears grow as yields stay elevated By Gertrude Chavez-Dreyfuss NEW YORK, ...

US oil price sinks $3 on eurozone strainsWorld oil prices plunged on Monday as eurozone debt strains spelled weaker demand for the commodity.

After rising 0.8% on Thursday, up some 3.3% from the closing low seen on 12 July, the FTSE All World index is down 1.1% on Friday. In a day light on economic releases, markets appear to have turned their focus back to the Eurozone, which has hit risk appetite.


The Markit Eurozone PMI Composite Output Index was unchanged at 46.4 in July, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. The index therefore signalled that the private sector economy contracted for the tenth time in the past 11 months, with the rate of decline unchanged on June.
NEW YORK (Reuters) - Wall Street was set to tread water on Tuesday as traders remained focused on high bond yields in Spain and as cautious outlooks from Texas Instruments and United Parcel Service weighed on sentiment.
German businesses cut their output at the fastest rate in more than three years in July, and in the broader euro zone companies retrenched for the sixth straight month.
Moody's dimmed its outlook on Germany, further exposing the euro zone's fragility. The warning followed a dramatic flight by investors from Spanish bonds.
With millions of euros in debts and an inability to pay back its loans, the operator of Germany's fabled Nürburgring racetrack, home to many of the country's Formula One races, could declare bankruptcy next week. It may be the end of the legendary racecourse, which first opened in 1927.

Steven Hansen


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