Chart 1: German Bund ETN
While infinite liquidity will delay the inevitable flight of capital from Europe, it will do nothing to entice the return of long-term, private capital to the PIIGS (Portugal, Ireland, Italy, Greece, and Spain). For example, liquidity may save the day for Italy, but weak, nonconfirming upside volume illustrates declining participation and gradual redirection of long-term capital flows (see chart 2).
Chart 2: Italian Treasury Bonds ETN
By Hugo Duncan
PUBLISHED: 10:40 EST, 16 April 2012 | UPDATED: 03:35 EST, 17 April 2012
Spain plunged deeper into crisis yesterday amid mounting fears that it will need an emergency bailout to save it from financial ruin.
Borrowing costs soared and the cost of insuring Spanish debt against default hit a record high as investors fretted about the health of the economy and banking system.
The bleak start to the week sparked warnings that Spain will be the fourth eurozone country to need a bailout following the rescues of Greece, Ireland and Portugal.
A report by the International Monetary Fund is today expected to warn that the eurozone faces recession this year with Spain and Italy among those economies worst hit.
‘We’re back in full crisis mode,’ said Lyn Graham-Taylor, a strategist at banking giant Rabobank. ‘It is looking more and more likely that Spain is going to have some form of bailout.’
Spain is suffering from a deep economic slump following a spectacular and bruising crash in its property market. Unemployment is the highest in Europe with a record 4.75million out of work. Half of Spanish youngsters do not have a job.
The government is battling to cut the crippling deficit and has embarked on one of the toughest austerity programmes in Europe.
But Madrid recently admitted that the deficit will fall from 8.5 per cent of national output last year to 5.3 per cent this year – more than the 4.4 per cent planned. Economy minister Luis de Guindos yesterday conceded that the country was back in recession.
He said the first three months of 2012 followed ‘a similar pattern to the last quarter of last year’ when output fell 0.3 per cent – resulting in two consecutive quarters of decline.
Spanish ten-year bond yields – the interest the government pays to borrow money – jumped above 6 per cent for the first time this year to 6.17 per cent.
That put Madrid firmly back in the danger zone with yields worryingly close to the 7 per cent level which triggered emergency bailouts in other countries.
Borrowing costs in Spain are now higher than in December when the European Central Bank flooded the eurozone banking system with cheap funds in a desperate attempt to prevent another credit crunch and ease pressure on countries such as Italy and Spain.
‘This artificial high from the ECB drugs has worn off and now we’re basically back to where we started,’ said Chris Scicluna, head of economic research at Daiwa Capital Markets Europe.
‘After three months that were calmer than expected, the euro crisis is back,’ said Holger Schmieding, chief economist at Berenberg Bank in London.
‘The speed of the recent surge in yields has elements of a renewed market panic.’
Despite the doom and gloom, European markets opened slightly up this morning.
The FTSE 100 started 0.26 per cent up at 5,681.19; France's CAC 40 is 0.30 per cent up at 3,215.03 and Germany's DAX is 0.48 per cent up at 6,656.77.
Asian stock markets also vacillated between gains and losses today as signs of a recovering U.S. economy offset Spanish fears.
Japan's Nikkei 225 index rose 0.2 per cent to 9,487.59 as the yen stabilised against the dollar.
But South Korea's Kospi index slipped 0.1 per cent to 1,990.29 and Hong Kong's Hang Seng fell 0.3 per cent to 20,558.38.
Australia's S&P/ASX 200 gained marginally to 4,305.90. Benchmarks in mainland China, Singapore and Taiwan fell while Indonesia and the Philippines rose.
A strong retail sales report in the US was not enough to counteract fears that the debt crisis enveloping Europe's smaller economies might morph into something even bigger.
'Eurozone stress, particularly in Spain continues to act as a weight on market sentiment, with equity markets ignoring a relatively strong US retail sales report,' said analysts at Credit Agricole CIB in Hong Kong.
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