Until we see a clear reduction in deficits, (which we might never see in true Danaides punishment or fashion), the ECB liabilities will indeed depreciate. Of course everyone is now awaiting the fateful Greek elections in June, to see if some of our European Danaides are ready to "expedite the divorce" or to whether our European Danaides will listen to their marriage counselors (the United States and the IMF) and go for "Shared Marriage Property". In the Greek legend, Hypermnestra (Germany) was the only Danaid to refuse to follow the orders of her father Danaus (European Commission) to execute her husband Lynceus (alter the ECB mandate) given that he had respected her on their wedding night. While the Danaides were punished in the underworld by being forced to carry water through a jug with holes, or a sieve, so the water always leaked out, Hypermnestra, however, went straight to Elysium.
It is time for a credit overview, focusing again on Spain and its financial woes as well as credit contraction in Europe, but before we do, we thought it would be appropriate to move back to the issue of circularity namely the Danaides punishment which we discussed in October last year. The issue of circularity we mentioned last year could not be clearer than the graph realised by Martin Sibileau in his post - "The EU must not recapitalize banks":
And as indicated by Martin Sibileau:
As far as the Danaides punishment/Circularity issues goes, the Spanish banking woes threaten to cancel out austerity benefits meaning that we will not see meaningful reduction of deficits due to this vicious circle and deflation trap Spain is victim of:
As far as the correlation between Sovereigns and Financials is when it comes to a widening trend - source Bloomberg.:
Spanish and Italian Financials 5 year CDS drifting wider - source Bloomberg.
The Itraxx CDS indices picture, a tale of ongoing volatility - source Bloomberg:
Meanwhile the price action in the European Bond Space has been worsening with Spain reaching new alarming levels rising 24 basis points on the day to 6.74 percent (closing on the fateful 7% level which triggered the rescue of both Ireland and Portugal), with Italy surging as well following a disappointing auction - source Bloomberg:
Interval of Distrust".
The 2 year German notes touching a record low of 0.002% against the 10 Year German bund - source Bloomberg:
That Japanese European feeling - 2 year German Notes evolution versus 2 making new lows versus 2 year Japanese Notes - source Bloomberg:
Moving back to Spanish banking woes it is similar to Ireland, given the cost of "Zombie Developers' Loans plaguing the balance sheets as indicated by Bloomberg - "Spain Fails to Count Cost of Zombie Developers’ Loans":
The game of extend and pretend is alive and well in the Spanish banking sector as indicated by the same article:
“The larger banks have been selling bits and pieces and can absorb the losses,” Manso said. “Smaller savings banks are acting in bad faith in their refusal to allow transactions and saying they can’t mark to market because there isn’t one.”
Santander, BBVA, Banco Espanola de Credito SA, Banco Popular SA, Banco Sabadell SA and Bankia, canceled 2.2 billion euros of debts owed by the Sanahuja family in return for about 55 percent of Metrovacesa and purchased a further 10.8 percent of the stock in a deal that valued the company at 57 euros a share. The banks now own about 96 percent of Metrovacesa.
Santander and its Banesto unit, which now own about 35 percent of Metrovacesa, value the stake at 772 million euros, or 2.24 euros a share, according to a spokesman for Santander, who declined to be identified citing company policy. In 2009 and 2011, they made provisions of 269 million euros and 100 million euros against their holding, according to a 2011 report by Santander’s auditor." - source Bloomberg - "Spain Fails to Count Cost of Zombie Developers’ Loans".
Metrovacesa trades at 39 cents a share from an original valuation of 57 euros...
Keeping the "Zombie" alive:
"In August, its lenders renegotiated the terms of 3.6 billion euros of its debt, extending maturities on 2.47 billion euros of obligations and granting a five-year grace period for interest payments on 1.12 billion euros of loans."
source Bloomberg - "Spain Fails to Count Cost of Zombie Developers’ Loans".
Applying the Irish "Zombie" treatment:
As we argued in our conversation - "Peripheral Banks, Kneecap Recap"
"We believe debt to equity swaps will likely happen for weaker banks as well as full nationalization for some."
As our good credit friend said in November 2011:
"The path will be very painful for both shareholders and bondholders."
As far as Spanish banks are concerned we agree with our good credit friend:
In relation to credit conditions, they have not been improving but in fact deteriorating. According to The Economist's credit-crunch index, credit is now tighter in the euro area than it was at the height of the financial crisis (five days moving average of six normalised indices on bank lending, Euribor-OIS spread, Euo-USD swap spread and five-year CDS for financial, industrial and sovereign sectors):
Nomura in today's Euro area April money and credit data survey indicated overall disappointing and worrying data for the ECB:
On a final note as far as Dr Copper is concern, it still spelling the D word, D for Deflation and Deleveraging:
Copper, used to make wires and pipes, has dropped along with other raw materials as the risk of faltering global growth eroded the outlook for demand. Expecting prices to rise is “irrational” given ebbing economic expansion, suggesting expectations will fall in coming months, said Nariman Behravesh, the chief economist at IHS Inc. and a former Federal Reserve official." - source Bloomberg.
"It's the irrational things that interest me."