Saturday, June 05, 2010

A ROUNDUP of articles on Europe's and Spain's economy:

Fortune: How the Union Made Europe's Weaklings Even Weaker
In the late 1990s, as the European Union touted its grand plan for a single currency, I called Milton Friedman at the Hoover Institution to ask the 20th century's most influential monetarist for his view of how the euro would transform Europe. It was no surprise that the frugal Friedman called me back collect. He always did.

But I was amazed when his answer seemed to deny the inevitable. After the operator chirped, "Will you accept the charges from Milton?" Friedman chuckled, then turned darkly serious. "There will be no single currency in Europe," intoned Uncle Miltie. "The U.S. is an appropriate zone for a single currency. Europe is not, because its countries are far too different in terms of productivity and inflation. The euro would be such a disaster that it will never happen."

Of course, Friedman's prediction that the euro would expire as a utopian dream proved spectacularly wrong: On December 31, 1998, the euro effectively replaced the deutschemark, franc and lira, and it now reigns in 16 countries from Austria to Ireland to Portugal.

But Friedman was right on the economics.

Wall Street Journal: Spanish, Belgian Bond Issues To Draw Attention In Massive Supply
After a subdued week, government bond supply will pick up in the euro zone next week as sovereigns still have to complete about half of their 2010 bond funding.

Belgium, the Netherlands, Austria, Germany, Portugal, Spain and Italy will issue up to EUR26 billion of bonds next week. The absorption of this amount will be cushioned by around EUR16 billion of German redemption and coupon payments.

The markets will closely watch Spain's launch of the new 2.50% October 2013 bond Thursday in its first test since Fitch Ratings cut the country's rating to AA+ from AAA in late May on expectations that Spain's debt load will slow its economic growth.

Spanish yield spreads over German bunds have widened nearly 0.40 percentage point since then, reaching a new high of 1.92 percentage points by Friday, as the bonds benefit less from the European Central Bank's bond purchases.

If a country's debt rating is downgraded, it faces higher financing costs. This is especially important now that many countries are seeking to lower their budget deficits and debt-to-gross domestic product ratios.

Wall Street Journal: Spanish Banks' CDS Widen, Sector Under Pressure
The price of insuring Spanish banks against default rose Friday as investor anxiety continued to escalate over the fallout from the ongoing restructuring of the country's savings banks.

Attention has focused on the Spanish banking sector in the past 10 days since the rescue of regional savings bank CajaSur, and the news that other cajas have agreed to merge.

Credit analysts say the high level of uncertainty about potential further losses in the country's banking sector is adding to investor nerves.

BusinessWeek: Spain, Italy ‘Candidates’ for ECB Bond Purchases
Spain and Italy are “potential candidates” for government bond purchases by the European Central Bank as yields increase, BNP Paribas SA said.

Spanish 10-year bonds fell for the fifth day today, pushing the yield four basis points higher to 4.58 percent as of 2:27 a.m. in London, the most since Feb. 4, 2009. The extra yield investors demand to hold the debt instead of benchmark German bunds widened 12 basis points to 196 basis points, the most since 1996, according to generic data compiled by Bloomberg. Italian 10-year yields rose two basis points to 4.30 percent.

“If the current situation persists, the ECB will have no choice but to support these countries, initially with a small buying amount ” Ioannis Sokos, a London-based interest-rate strategist at BNP Paribas, wrote in a research note today. “If this is not enough to prevent selling pressures, then the ECB could proceed with larger purchases. This means that the current situation will have to get worse before it becomes better.”