European Risk Is Back: CDS Surge, Spain 10 Year Back Over 6%, Germany Has Second Uncovered Auction In Three Weeks

Tyler Durden's picture

Remember when we said two months ago that one way or another the market will need to tumble to enforce the chain of events that lead to Spain demanding the bailout which has long been priced in, and (especially after yesterday's violent protest) Rajoy handing in his resignation? Well, it's "another." After nearly 3 months of suspending reality, in hopes to not "rock the boat" until the US presidential election, reality has made a quick and dramatic appearance in Europe, where after a day in which the EURUSD tumbled, events overnight have finally caught up. What happened? First, ECB's Asmussen said that the central bank would not participate in any debt restructuring, confirming any and all hopes that the ECB would ever be pari passu with regular bondholders were a pipe dream. Second, Plosser in the US said additional QE probably won't boost growth which has reverberated across a globe in which the only recourse left is, well, additional QE. Finally, pictures of tens of thousands rioting unemployed young men and women in Madrid did not help. The result: Spain's 10 Year is over 20 bps wider, and back over 6%, Germany just had a €5 billion 10 Year auction for which it only got €3.95 billion in bids, which means it was technically a failure, and the second uncovered auction in one month, and finally CDS across the continent, not to mention the option value that is the Spanish IBEX which may fall 3% today, have finally realized they are priced far too much to perfection and have, as a result, blown out.

  • Portugal 521 bps, +46
  • Spain 390  bps, +22
  • Italy 360 bps, +25
  • Germany 56 bps, +4
  • France 120 bps, +9
  • Ireland 307 bps, +20

Of all procyclical news, perhaps the second German bond auction failure in under a month was the most disturbing, reflecting the biggest problem with "capital markets" - a schism between what the secondary centrally-manipulated market indicates is fair value, and what end demand truly is. Confirming this was the German Finance Agency spokesman Joerg Mueller who said that the auction showed "weakening investor interest -- in a volatile market -- in bonds with a maturity longer than five years." Indeed it does. 

For the full update of overnight events we go, as usual, to DB's Jim Reid:

Rajoy does have a fair bit on his plate at the moment though and yesterday was a pretty bad day for Spain newsflow wise. Protestors clashed with riot police outside the national parliament as Spaniards rallied against earlier budget cuts. Estimates on the number of protesters varied from several thousand to tens of thousands. Earlier Spain’s government announced that the cumulative YTD central government budget deficit had widened to EUR50bn (or 4.8% of GDP) in August, wider than the deficit seen in the same month last year (3.8%). Meanwhile in the Spanish regions, the head of the Catalan regional government announced that early regional elections will take place on 25th November this year (rather than in 2014 as scheduled). In its latest communication, CiU, the centre-right nationalist ruling party in Catalonia, mentioned the possibility to "consult the population on sovereignty", without making it clear whether this consultation would take the form of a referendum or merely early elections. According to DB's European economists, it seems that the second solution has been chosen which is likely the least disruptive as it would offer more room for ambiguity on the issue of future relations with the rest of Spain. Also Spain's Andalucia region said it will study seeking a EUR5bn liquidity line from the central government’s regional liquidity fund. Spain's deputy PM confirmed that the fund is expected to launch this week. It seems that trying to be a national level European political expert is  necessary these days, but maybe Spain is showing that you also need to immerse yourself in regional politics too.

The negative tone to the European news was added to by the German, Dutch and Finnish finance ministers issuing a joint statement yesterday saying that while the ESM can take direct responsibility of banking sector problems that occur under a common banking supervision framework, “legacy assets should be under the responsibility of national authorities”. While the meaning of the statement was not entirely clear, the FT and WSJ took it to mean that the current plan to directly recapitalise Spain’s banks may be jeopardised. The WSJ added however, that a potential compromise could be reached where  national government remain responsible for bank bailouts in the interim, but the ESM would take over capital injections after a Euro-wide banking supervisor was in place, citing an unnamed EU official.

The joint statement weighed on sentiment late in the US session and the weaker tone has continued into overnight markets with the KOSPI (-0.7%) and Hang Seng (-1.0%) both trading in the red this morning. The Nikkei is underperforming (-2.0%) as a large number of stocks trade ex-dividend today. Yesterday’s downbeat statement from Maersk, the world’s largest shipping company, who announced capacity cuts on Europe-Asia routes is weighing on a number of exporters. In its third quarter policy meeting statement, the PBOC said it will maintain “prudent monetary policy” in line with signs that the growth is “stabilising at a slower pace”. On that same note, the PBOC pumped a record RMB290bn into the money markets yesterday via reverse repos in an effort to ease liquidity ahead of next week’s weeklong national holiday.

On a more downbeat note, the Philly Fed’s Charles Plosser, a non-voter, said that QE3 will not boost economic growth or lower unemployment and raises the risk of long-run inflation, in line with his hawkish stance. Plosser said that currently elevated unemployment rates are structural in nature and therefore not amenable to monetary policy solutions (Reuters). Monti’s statement that he would not be running in Italian elections next year also weighed on  sentiment late in the US session.

Returning to European headlines, speaking at a German industry conference in Berlin, Draghi said the ECB’s OMT program is a bridge to EU members rather than a solution to funding problems and that it was up to governments to follow through with "decisive actions". Draghi added that he expects the Eurozone to return to growth next year. Merkel's office issued a statement after the Chancellor’s meeting with Draghi in which the pair agreed considerable reform efforts by Eurozone governments were still needed to boost competitiveness and restore credibility. In Greece, the finance ministry said that the country will have a EUR13-15bn funding gap if Greece is given an additional two years to meet fiscal targets. The finance ministry added that Greece may seek a roll-over of bonds held by the ECB as one option to bridge the financing gap. (Reuters). Finally, German newspaper Bild said that lawyers at the Bundesbank were checking into the legality of the ECB's OMT program. The Bundesbank refused to confirm the report.

Turning to the day ahead, it should be a relatively quiet day in terms of data. In the European time zone, the key data releases to look out for will be German CPI, French consumer confidence and jobs data and Italian/UK retail sales. In the US, the August new home sales print is due. A number of leaders are scheduled to speak at the UN General Assembly including Italy’s PM and the EU’s Van Rompuy. Also worth noting is a joint conference with the Bundesbank’s Weidmann and Italian FM Grilli scheduled for the London afternoon.

Meanwhile, Greece’s two largest unions have called a 24-hour strike today.

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Cassandra Syndrome's picture

Nonsense. Europe is Fixed.

Ghordius's picture

I was reading in the FT that "fixing things" is a US "thing", and that europeans prefer to "manage a crisis". I find it fits

markmotive's picture

...and - unfortunately for the Spanish citizen - 79% of Spanish assets are in real estate. This is a self-feeding bust.

LongSoupLine's picture



"fixing" = lie via media propaganda

"manage" = lie via media propaganda

Ghordius's picture

remember that our "dear enlightened leaders" have to lie in French, Spanish, Portuguese, Italian, Dutch, German and so on. Some of them are even known for admitting that they sometimes lie - still shocking for some English-speaking commentators - though I suspect they are shocked by the admission, not by the lies. Sadly, the world wants to be duped.

matrix2012's picture

LIE.. LIE... LIE or LIES are on VERY HIGH INTENSITY of usages nowadays... one will find them from the politician mouths as well as the news networks, in particular the mainstream media, most --if not all-- of the times upon any issue that matters.

It's really a challenging task to sort out the facts/truths from the twists/lies!!!


"When it becomes serious, you have to lie." - Jean-Claude Juncker

"A lie told often enough becomes truth" -- Vladimir Lenin


"Present-day champions of the noble lie are (American) neoconservatives." –

Liberty Defined, org says, "The principle of lying and deception for the people’s ‘benefit’ is endorsed by each administration regardless of party. The lies are considered noble since a cohesive society is sought. Modern-day neoconservatives have been largely influenced by Leo Strauss, who studied and was influenced by Plato and especially by Machiavelli."

Herman Goering, second in command to Hitler, wrote this while in his prison cell in Nuremberg in 1946: "it is the leaders of the country who determine the policy and it’s always a simple matter to drag the people along, whether it is a democracy or a fascist dictatorship or a communist dictatorship…that is easy. All you have to do is tell them they are being attacked and denounce the pacifist for lack of patriotism and expose the country to danger. It works the same way in any country."

"I don’t believe the American people should ever be told any lies, publicly or privately [that is, by the government or by the movies]. I don’t believe that lies are practical. I think the international situation now rather supports me. I don’t think it was necessary to deceive the American people about the nature of Russia." – Ayn Rand on October 20, 1947 when she gave testimony to the House Un-American Activites Committee.


"An unexciting truth may be eclipsed by a thrilling lie." -- Aldous Huxley, author of 'Brave New World', 'Brave New World Revisited', 'The Doors of Perception', etc.


JackT's picture

Maybe all the unemployed Spaniards can come to the US and participate in our housing recovery that was announced again yesterday

HD's picture

Reality returns drunk and pissed off - kicks down the EU front door while smoking a cheap cigar and wielding an ax, "I'm back baby!"

Sudden Debt's picture

Strikes always do the trick...

I'm in the business of supplying parts for maintenance and repair for the metal industry and I can also tell you this month it's like all over Europe industry just stopped. It's down 19% since last years. Last month was also a big bummer when it was down 5%.

I don't think we'll make it untill the end of the year before we get our big crash.

LongSoupLine's picture

I agree...We'll make it to election results day.  Just ask the EU "leaders", they'll tell you.

Overflow-admin's picture

Nice insight; I personally enjoy access to another proxy which is asylum requests data... I let you guess in what country.

MiniCooper's picture

German bond auction failed because investors fear Germany willl no longer be in the Euro in 5 years time and hence beyond that horizon the risk is that you get repaid but with a very weak Euro currency.

Germany will not repay their bonds in new Deutschemarks at 1:1 with the Euro and that is for sure.

sessinpo's picture

Add another thought to that. Germany is the engine of growth for Europe. It is the backbone of all its failing peers.

Thus when doing a financial analysis of German, we are notjust talking about the German debt compared to its GDP or GNP, we are talking about Europe's debts compared to Germans GDP or GNP. I don't think this has sunken into the main stream. The process is slow.


It's like using California's GDP against the US debt.

gojam's picture

Very big protest in Athens today.

General strike there.................

sessinpo's picture

Been there, done that for 2 years plus. They still haven't figured it out.

asteroids's picture

The stock markets are broken because of long term intervention by central banks and a short circuited regulatory system. Don't play!  Retail has figured this out. The bond market gives a better picture of events.

Negro Primero's picture
...without making it clear whether this consultation would take the form of a referendum or merely early elections. "Artur Mas convene an independence referendum authorized by the State or not"


Google Trans:

Ted Baker's picture


LongSoupLine's picture

What?! one could have seen this one!

lolmao500's picture

Germany should set itself up like the US... their FED minions buying everything (primary dealers) buying what's not sold... that way, no failed auction, EVER!

sessinpo's picture

That would be the job of the ECB. The ECB is the equilavent of the Fed and Germany is just a state, such as California.

Shevva's picture

Calm down people Europe is a peace loving continent full of hippies.

And have you seen the price of molotov cocktails?

matrix2012's picture

Huxley in fact adored Europa, see what he referred to about that old continent...


"Europe is so well gardened that it resembles a work of art, a scientific theory, a neat metaphysical system. Man has re-created Europe in his own image." -- Aldous Huxley, author of 'Brave New World', 'Brave New World Revisited', 'The Doors of Perception', 'Island' (his last book), etc.


cognus's picture

not a problem.

The ECB will be along shortly to vaccuum up all available bonds, and not to be outdone, MORTGAGE tranches

waldo simon's picture

Who is John Galt?

NEOSERF's picture

Imagine a world where every week there are bond auctions for Federal and State bonds that increasingly don't represent road, bridge and school projects but simply to support interest payments on past expenditures which increasingly are not road, bridges and schools but paychecks for Federal and state employees.  We are there now and you are hearing the dismay of people like Gross and others who are disgusted by the "collateral" that these bonds theoretically support.  These are not physical assets that are creating bright young minds or speed trucks to manufacturing plants...these bonds are increasingly supporting non-growth generating activities.  The US has the flu and the rest of the world has Ebola.

Grand Supercycle's picture


Due to recent central bank intervention and short covering spikes, these daily charts are extremely overextended and significant correction expected very soon: