Overnight Sentiment: Europe Is Open, Bankia Is Plunging And Spanish Bond Yields Are Soaring
The US may be closed today but Europe sure is open. And while the general sentiment may be one of modest optimism in light of four highly meaningless Greek polls which fluctuate with a ferocious error rate on a daily basis, now showing New Democracy in the lead (and soon to show something totally different - after all Syriza had a 4 point leads as recently as Friday according to one of the polls), pushing equity futures higher, Spain has so far failed to benefit from either this transitory spike in optimism driven by record number of EUR shorts forced to cover (more below), with its yields touching a fresh record overnight, the 10 year hitting 6.50% and 450 bps in the spread to bunds, while re-re-nationalized Bankia, now with explicit ECB support plunging nearly 30% only to make up some of the losses and trade down 20% at last check. An earlier 2 year bond auction out of Italy did not help: the country raised the maximum €3.5 billion in zero coupon bonds, however the OID was high enough to send the yield soaring to 4.037% average compared to 3.355% just a month ago, while the Bid to Cover dropped from 1.80 to 1.66. In summary: Europe is walking on the edge right now, and the only thing preventing it from imploding this morning is some short covering as well as a furious statement out of Germany, which has to understand that its precious ECB is now directly funding nationalized banks: something Merkel and BUBA's Weidmann have said in the past is dealbreaker.
How is the ECB funding Bankia directly? Here's how:
Spain may recapitalise Bankia with Spanish government bonds in return for shares in the bank which last week asked for rescue funding of €19bn, a government source has told Reuters.
Bankia could use the sovereign paper as collateral to get cash from the European Central Bank, forcing the ECB to get involved with restructuring Spain's banking sector, laid low by lending to property developers in a boom that ended in 2008.
The state takeover of its fourth-largest lender, Spain's biggest bank rescue, has intensified fears that the rising cost of helping banks may force the eurozone's fourth largest economy to seek an Irish-style international bailout.
The Economy Ministry declined to comment on the matter on Sunday. European Union authorities are expected to sign off plans to recapitalise Bankia in June.
The Bankia rescue will affect Spain's public debt to gross domestic product ratio and the deficit at a time when the country has implemented growth-stifling austerity measures aimed at bringing state debt down to Europe-agreed levels.
ECB policymakers, who have pumped more than €1 trillion (£802bn) into Europe's financial system in recent months, are resisting pressure to do more to shore up the eurozone.
"The biggest problem here is that the ECB could object. That's a legal issue, but technically it is possible," said Jose Carlos Diez, economist at Intermoney Valores.
Of course, with bond charts looking as follows, none of the above actually matters: Spain is well on its way to a full blown PSI (remember: long foreign law, short local law bonds, sooner the better as even more LCH margin hikes are likely imminent).
Spain can mask its bond nationalization however it wants, but the truth is that once the confidence in the banking system is ruined, a system which now will see similar runs occurring at other distressed banks as we demonstrated on Friday, things will go from bad to worse in a hurry. Here is how Deutsche Bank summarizes Spain's dead end:
Time is running out. Spain has appointed two independent auditors (Oliver Wyman and Roland Berger) to assess the value of the real-estate related assets that are going to be transferred to ad hoc ?“defeasance structures?” against an additional provisioning effort. The conclusions should be published by the end of June. However, even before this exercise is conducted the news flow on this matter is clearly negative. According to El Pais on Friday, Bankia?’s board will call for government support of EUR 15bn on top of the nearly EUR 5bn already injected. This is more than what the government was communicating on (less that EUR 10bn). The same newspaper reported that three credit institutions which had been taken over by the state, which were supposed to be adjudicated back to the private sector, will actually be consolidated in one single public entity together with Bankia. This would control a loan-book of EUR 281bn, some 27% of GDP. If confirmed, Spain would be on the road to a ?“bad bank by stealth?”, an option it had rejected so far.
Good luck with getting Germany to pretend like the ECB is not bailing out a quarter of Spanish GDP in the financial sector.
Finally, those relishing the recent move higher in futures on Greek "polls" (read our prediction how this is the only headline indicator that matters in Europe right now from a week prior), it may be time to book meager profits. From Reuters:
The euro recovered from two-year lows on Monday as Greek opinion polls showed parties that favour sticking with the country's international bailout deal gaining support, leading investors to cut some of the record bearish bets against the common currency.
Most investors were pessimistic over how long the rebound would last, however, with many fretting about the lack of growth in Europe, the fragile health of Spanish banks and rising borrowing costs for peripheral euro zone countries.
These concerns have dragged the euro 5 percent lower so far in May and left it on track for its worst monthly performance since September.
Greek opinion polls pointed to victory for the conservative New Democracy party in the June 17 election, making it more likely the next Greek government will stick to bailout terms agreed with the European Union and the International Monetary Fund, enabling Greece to stay in the euro.
These expectations saw the euro climb 0.6 percent to $1.2585 , off Friday's trough of $1.2495, its lowest level since July 2010. It hit a session high of $1.2625 as stop-loss orders above $1.2620 were triggered, but robust offers layered at $1.2630/50 will check gains, traders said.
Volumes were on the lower side due to a holiday in some parts of Europe, with the U.S. also shut for Memorial Day.
"Investors have got a bit exhausted selling the euro in the absence of more negative news," said John Hardy, currency strategist at Saxo Bank. "So we are seeing some consolidation after the euro's sharp drop from $1.33 to around $1.25."
Indeed, speculators bolstered their euro bearish bets to record highs in the week ended May 22, while dollar longs rose to the highest since at least mid-2008, leaving ample scope for a correction as they cut positions and book profits.
"Heading into the Greek elections we'll fluctuate a lot. Because the market is very, very short euro, reactions to any positive news may be bigger than those to negative news," said Mitul Kotecha of Credit Agricole Corporate and Investment Bank.
"That said, even if we get some good news from Greece, the weight of bad news elsewhere is likely to keep any bounce in the euro short-lived," he said.
"Short-lived", that is, at least until the next Eurosummit. Which will fix everything this time. We promise.