Austerity to Trigger New EuroCrisis

Rajoy's austerity plan won the support of leaders from the 12 regions where his Peoples Party governs on Sunday.

The PP's regional Presidents pledged to cut public services, eliminate duplication between different levels of government and write deficit targets into their budget law

ECB officials are divided over the steps to tame the crisis in Spain on growing expectations that Spain will next to seek a European bailout.

Spanish banks' borrowings from the ECB rose almost 50% in March, data showed Saturday, as they took almost 33% of the longer-term lending offered to Euro-region institutions.

Prime Minister Mariano Rajoy is working hard to convince investors he can get Spain's finances under control after refusing to meet deficit targets set by the European Commission.

European officials travel to Washington this week seeking a bigger global war chest to combat the debt crisis as Spain's government battles to quell renewed market turmoil over its finances.

Three weeks after European leaders unveiled emergency euro- area funding exceeding the symbolic $1 trillion mark, concerns about Spain's position have ratcheted the nation's borrowing costs to the highest levels this year. Crisis-fighting resources will dominate talks at the International Monetary Fund's spring meeting in Washington from April 20-22.

While the U.S. insists that Europe can overcome the crisis using its own financial firepower, euro-area officials say they've done enough to trigger additional global assistance. The urgency was underscored last week as Spanish and Italian yields jumped, challenging assumptions among the region's leaders that the worst of the fallout was behind them.

Mr. Rajoy said on 12 April Spain will not need a rescue, credit-default swaps rose 17 basis points to 498 on Friday besting the all-time high closing price of 493.

The yield on Spain's 10-yr Bonds rose 16 basis points to 5.98%, edging closer to the 7% level that pushed Greece, Ireland and Portugal over the edge to the rescue nets.

Following on from the disastrous Greece Default, the ECB, IMF and World Bank are ready for the Sequel, Spain.

A poorly received Spanish bond auction early in the week continued to spread jitters around Europe, with economists warning Spain could become the latest flashpoint in the sovereign debt crisis.

The International Monetary Fund fanned those fears, saying Spain was facing severe challenges. It insisted that last week's strict budget must be put into practice to cut its deficit.

Clearly the challenges Spain is facing are severe. Market sentiment remains volatile, said IMF spokesman Gerry Rice.

The euro fell to a three-week low against the dollar on concerns about repercussions from problems in Spain, whose economy is twice the size of that of Greece, Ireland and Portugal combined.

Borrowing costs on Spanish and Italian bonds rose as investors moved into assets seen as less risky, including German and US government bonds.

European stocks fell for a third week, the longest losing streak since August, as Spain's rising borrowing costs boosted concern the euro-area has yet to contain its debt crisis, and the US Federal Reserve damped expectations for further monetary stimulus.

Banking shares led declines. Banca Popolare di Milano Scarl and UniCredit slid at least 12 per cent each this week. Peugeot dropped 10 per cent after a report showed US sales of light vehicles rose less than forecast. Cairn Energy Plc gained 3.7 per cent after agreeing to buy Agora Oil & Gas to expand in the North Sea.

Why Greece Might Become a Black Swan

On the eve of the Greek default I wrote regarding the possibility of the Greece action becoming a Black Swan, now it is clear that Europe is on the edge of a Black Swan Event.

As deleveraging pressures grew towards the end of 2011, European banks offered for sale a significant volume of assets, notably those with high risk weights or market prices close to holding values.

Offerings with high risk weights included low-rated securitised assets, distressed bonds and commercial property and other risky loans. Although some such transactions were completed, others did not go through because the offered prices were below banks' holding values.

Strong deleveraging pressures during the final quarter of 2011 were also associated with weak or negative growth in the volume of credit extended by many European banks. Credit extended by financial institutions in the euro area, for example, turned down during this period, with credit to non-bank private sector borrowers in the area falling by around 0.5%, while assets vis-àvis non-euro area residents declined by almost 4%. Outstanding loans to euro area non-financial corporations grew by just over 1% and loans to households for house purchases by around 2%, while consumer credit declined by just over 2%.

European banks also cut lending to emerging markets. Their consolidated foreign claims on emerging Europe, Latin America and Asia had already started to fall in the third quarter of 2011.

New syndicated and large bilateral loans from EU banking groups to emerging market borrowers then fell in the final quarter of the year. This was in contrast to lending to western Europe and other developed countries, which was essentially unchanged . At the same time, banks tightened terms on new loans to corporations and households in emerging markets. The more pervasive tightening in emerging Europe than elsewhere may have reflected the widespread ownership of banks in the region by EU banking groups. Reduced lending to emerging Europe may also reflect lower demand, however, as the region's economic growth forecasts fell by more than those for any other during the final quarter of 2011.

Spain is in extreme difficulty, Prime Minister Mariano Rajoy said April 4, raising the possibility of a bailout for the second time this week. The government has widened its budget deficit target to 5.3 per cent of gross domestic product from 4.4 per cent and warned on April 3 that public debt will surge to a record 79.8 per cent of GDP this year.

Spain sold 2.6 billion euros of bonds, near the minimum target for the sale on April 4. Borrowing costs rose in its first auction since the country said public debt will jump to a record this year. The Treasury had set a range of 2.5 billion euros to 3.5 billion euros for the sale.

In the US, the Federal Reserve is holding off on increasing monetary accommodation unless US economic growth falters or prices rise at a rate slower than its 2 per cent target, minutes released from a March 13 policy meeting showed on April 3.

The European Central Bank left its benchmark interest rate unchanged at a record low of 1 per cent on April 4. The euro-area's economic outlook remains subject to downside risks, President Mario Draghi said at a press conference later that day in Frankfurt.

The remaining tensions in euro area sovereign-debt markets are expected to dampen economic momentum, he said.

Euro-area services and manufacturing output contracted for a second month in March. A composite index based on a survey of purchasing managers in both industries dropped to 49.1 from 49.3 in February, London-based Markit Economics said on April 4. That's above an initial estimate of 48.7 on March 22. A reading below 50 indicates contraction.

Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.Read the Terms of Service