Tuesday, December 20, 2011

Glad Tidings?

The new Spanish government got an early Christmas present in the form of a very successful treasury auction today and much lowered borrowing costs.  Their hopes to sell between 3.5 and 4.5 bn in short term (3 and 6 month) debt were wildly exceeded with total sales of 5.64 bn.  Even better was the sharp drop in yields with the 3 month bills down to 1.735% from 5.11% in November and 6 month debt down to 2.435% down from 5.227%.

In Germany, business and consumer confidence also rose in surveys out today, to the surprise of analysts. Good news from Spain and Germany sent markets and the Euro up today. 

However, there is not a wholesale shift of markets to optimism.  In terms of countries on the brink, Spain is pulling away from some of its neighbors.  The spreads on Spanish and Italian debt hit a record this past week with a premium to hold Italian debt. And Agios Vassilis is unlikely to bring much cheer in his bag to the Greeks this holiday season: today’s auction of Greek 3 month T-bills saw rates rise to 4.68%, almost three times higher than Spanish borrowing costs and up 5 basis points from the November auction.

Relatively greater confidence in Spain exists because it has a government and political situation that seem more under control and with the ability to carry out proposed reforms.  It helps that the new government was elected; while technocratic governments in Italy and Greece may have been the only option, they do not have the same legitimacy as Rajoy who won a decisive victory a few weeks ago.  Unlike Monti and Papademos, he is not faced with opposition parties jockeying for power as they look to new elections or, so far, rising threats of strikes and demonstrations. He will need to maintain that confidence. 

While Spain might look to be in better shape right now than other Southern European states, the New Year will bring huge challenges: the property market continues to take its toll on Spain’s economy and price declines are accelerating. Even more ominous, and to some extent a bit ignored in the day to day and week to week focus of the Eurozone crisis, Spain (like Italy) will need to roll over a mountain of debt in 2012, almost 120 bn, which is twice what they owed in 2011 and much more than what comes due in 2013.  Unless they can secure manageable interest rates, the fears of the last several months will seem pale in comparison.

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