View the article online at http://citywire.co.uk/money/article/a592006
Market Blog: Spain to fuel further market tension
Britain's FTSE manages small gains on Monday even as questions grow over the cost of supporting Spain's banking system.
16.47: To round up: Greece excused itself from the action today, handing relieved investors opinion-poll results in favour of austerity. Instead, Spain was bottom of the class, as bond yields soared and Bankia’s bailout fuelled questions over the future of the country's banking system.
John Higgins of Capital Economics said the pressure would remain on Spain:
‘In the absence of much more decisive action to boost confidence in banks, such as the sort of pan-eurozone deposit guarantee scheme now under discussion, it is therefore hard to see how market pressure on Spain – and on other troubled economies in the region with fragile banking systems – is likely to relent, especially if Greece decides to quit EMU soon.’
Despite Spain’s losses (see below), it was relatively uneventful elsewhere, with the US enjoying a public holiday.
In the UK, the FTSE closed up four points at 5,356.
16.23: The Spanish press is again slamming new president Mariano Rajoy (main article image) for failing to answer their questions and for refusing to investigate the causes of Bankia’s failure.
An editorial from the online version of Spanish newspaper El Pais says the president, who today fended off questions about the bailout for Bankia (see below, at 12:40), doesn't govern in the classic sense of the word.
Rajoy has been criticised for not attempting to find who is to blame in the case of Bankia. The El Pais editorial concludes: ‘If no one is to blame that €23.5 billion has had to be put into the bank, not even its managers, then what has happened? Only one possibility remains: it was bad luck, and bad luck doesn’t have to give explanations, nor assume responsibility.’
Meanwhile, the Spanish Ibex 35 share index is down 2%, with Bankia shares off 12%, and 10-year government bond yields are at 6.474%, nearing the 7% danger level.
Chris Scicluna of Daiwa Capital Markets said in a note that 'Spanish credibility [is] rapidly evaporating'. 'Coming just a couple of weeks after Spain’s government suggested that the entire banking system would require no more than €15 billion of public funds to meet its most recent provisioning demands, the eventual burden to be placed on the public finances by definitively cleaning up Spain’s banks is now anyone’s guess.'
15.37: Much of the news today is focused on which companies and organisations are prepared for a Greek exit from the eurozone.
A former member of the monetary policy committee at China’s People’s Bank says ‘China should have its own Plan B in case Greece has to leave the eurozone.’
Writing on the Project Syndicate website, Yu Yongding, president of the China Society of World Economics, warns:
‘After so many disappointments, China cannot accept at face value the assurances of European politicians, which even they themselves do not know whether they can redeem.’
His comments come amid growing concern about the strength of the Chinese economy, which has close trade ties with Europe.
‘Chinese officials should be under no illusion that the country will be immune to financial contagion. A “Grexit” would hit European banks that hold peripheral eurozone countries’ sovereign bonds. Shock waves from the deleveraging would, in turn, spread to emerging markets like China.
‘Although the exposure of Chinese banks and financial institutions to eurozone sovereign and banking-sector assets is negligible, post-Grexit capital flight from risky markets could rival, or even surpass, that in the weeks following Lehman Brothers’ collapse in September 2008. Compared to 2007 and 2008, foreign investors’ holdings in emerging markets are much higher, owing to these countries’ relative economic strength in recent years and rock-bottom returns on developed-market financial assets.’
Yu says the crisis in Europe means China’s government should 'not retreat' from efforts to transform the economy to more dependence on the consumer.
He adds that China should support the IMF in providing a firewall. But amid the debate about fuelling growth in the eurozone, Yu says Europe’s austerity-only approach is a ‘dead-end’.
Meanwhile, markets have let slip their gains. FTSE 100 was just positive 5,353; the Eurofirst 300 was down slightly at 983. There are no US market moves today as it is a public holiday.
12.40: Spain’s president Mariano Rajoy is speaking. He reiterates that ‘we aren’t going to let any autonomous community or bank fall because the country would fall’.
The government will help Spain’s indebted autonomous regions as long as they cut their deficits, he adds.
He doesn’t reveal exactly how Bankia is being recapitalised amid reports that Spain may recapitalise Bankia directly with Spanish government bonds.
- There will not be any rescue of the Spanish banking system by Europe.
- Investment in Bankia will not affect the country’s next budget.
- Europe must dispel any doubts about the euro and defend it 'as something irreversible'.
11.56: The debate over the need for eurobonds and the extent of austerity in the eurozone is ‘pointless’ if the banking system isn’t brought back to health, says Rob Kyprianou.
The Citywire columnist and former AXA Framlington chief executive, who has just returned from Athens, writes today:
‘The chances of a fiscally stretched eurozone being able to generate sufficient growth through infrastructure spending or pump priming to restore social cohesion and bring public finances back to health are at best slim. Without a functioning banking system it is dead in the water.'
He added that a run on the nation's banks could take the decision on Greece's place in the euro out of the politicians' hands:
‘A squabble over austerity is not the real risk to Greece’s membership of the euro. A bank panic may take this out of the politicians' hands. And the real risk of a Greek exit – forced or voluntary – is not to Greece. It is that deposit flight spreads to other member countries with troubled banks.’
Read the full article here.
Meanwhile, European markets remain higher, though Bankia’s share price losses have lessened. The bank is now 11% lower.
In the UK, FTSE 100 up at 5,398.
09.29: Spain and Greece are competing for the world's attention.
In Spain, shares in Bankia are down a whopping 24% on the Spanish index (which was down in contrast to other European markets), having been re-admitted after their suspension on Thursday.
The bank, Spain’s fourth largest lender, is to receive €23.5bn in state aid as part of the country's biggest-ever bank bailout.
This morning reports suggested that Spain may recapitalise Bankia directly with Spanish government bonds.
Spanish newspaper El Pais quotes analysts who reckon that Bankia shares could fall much further than today’s low of €1.15, down to as low as €0.20 or €0.30.
Spain’s problems are the cause of the record-breaking stat of the day: Spanish-German 10 year bond yield spread has widened to 507 basis points, that’s a record for the eurozone era and means investors want an even greater yield to hold the Spanish bonds rather than their German equivalents.
08.50: Shares in AIM stock Hargreaves Services (HASE.L) have tanked by 31% after an update on problems at its Maltby mine.
The coal supplier and transporter issued a downbeat statement saying that group profit in the year ending 31 May 2013 will be between £12 million and £16 million lower after difficulties at the group’s mine in Maltby, South Yorkshire, where work was suspended after the discovery of ‘unusual geographical conditions’.
Gerry Huitson, production division director, stated: ‘This is a very unusual situation and to our knowledge this has never happened before in Maltby's long 100 year history.’
Shares were down at 722p.
08:30 Goldman Sachs has joined other banks in sketching out potential scenarios for Greece's future. In a note just published it envisages three potential paths:
1. Muddling through
'In the most likely scenario, the new Greek government emerging from the June 17 election neither chooses to exit the euro nor agrees unconditionally to implement the existing EU/IMF programme.'
2. Fast exit; Greece walks away
'Were Greece to unilaterally exit and introduce its own currency, the ECB would presumably halt the flow of Euro liquidity to Greece. Greece would be cut off from capital markets, forcing the government to a primary cash balance.'
3. Slow exit; Greece is excluded
'There is no legal mechanism to force Greece out, but in practice it would be possible de facto by denying Greek banks access to ECB facilities.'
The third scenario would be most beneficial for equity markets, Goldman says. If 'the policy response was powerful' under that scenario, the GS team say markets could rally strongly.
In short though, like everyone else, they don't have a clue how things will turn out and their advice to clients seems to be sell to European assets and then sit tight til we know more.
08.18: Shares have started the week higher, as fears over Greece’s exit from the eurozone abate slightly on Greek opinion polls (see below).
The FTSE 100 was up 50 points to 5,402 in early trade. FTSEurofirst 300 0.6% higher at 991. The positive start follows gains in Asian markets (see our overnight report).
07.45: In what is one of the biggest news items this morning Reuters is reporting that Spain may directly recapitalise Bankia – the country’s fourth largest lender – with Spanish government bonds in return for shares in the bank, which last week asked for rescue funding of €19 billion. Shares in the bank are no longer suspended.
Greek opinion polls showed parties supporting the European Union’s bailout are increasingly getting voters’ support easing concern the country will exit the currency bloc. New Democracy, which supports the plan negotiated with international lenders, led by a margin of as much as 5.7% points over Syriza, the main party opposed to implementing the terms of financial aid packages, according to a poll by Kapa Research SA for To Vima newspaper.
Over the weekend the Sunday Telegraph reported that Lloyd's of London is preparing contingency plans for the possibility of the euro collapsing. Chief executive Richard Ward said the insurance market has reduced its exposure ‘as much as possible’ to the crisis-ridden continent.
And the Financial Times is reporting that the price of olive oil has dropped to a 10-year low in a blow to Spain, Italy and Greece.
But there were no scheduled blue chip company announcements in the UK, while there are public holidays in the US and several European countries.
See our preview of the week ahead here for a round-up of the main market moving events
Click here for our roundup of today’s newspapers.
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by Daniel Grote on Jul 31, 2015 at 16:51