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European Positions Update: Short Italy (EWI)

Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed down -0.4% week-over-week vs -2.4% last week. Bottom performers: Cyprus -15.4%; Greece -11.3%; Ukraine -9.8%; Romania -6.4%; UK -3.3%; Hungary -2.9%; Ireland -2.9%; Denmark -2.6%.  Top performers:  Spain +1.7%; Netherlands +1.4%; Slovakia +1.0%; Italy +90bps; Finland +80bps.  
  • FX:  The EUR/USD is down -1.15% week-over-week vs -1.23% last week.  W/W Divergences: PLN/EUR -1.11%, HUF/EUR -0.96%, SEK/EUR -0.74%, CZK/EUR -0.32%; CHF/EUR +0.02%, DKK/EUR +0.05%, NOK/EUR +0.19%, GBP/EUR +0.74%
  • Fixed Income:  Greece’s 10YR government bond yield saw the biggest gain of +396bps to 24.53% week-over-week. Spain gained +28bps to 5.98% and Portugal rose +13bps to 10.96%.

Weekly European Monitor: Moving the Goalposts, Again! - 11. YIELDS

In Review:

It was yet again another week in which Europe dominated the headlines, with Greece and Spain taking most of the attention. In the mix this week the Bank of England kept its interest rate and asset purchasing program on hold, as expected, and the European Commission revised down its growth targets for much of the periphery, while boosting Germany’s (more below under Call Outs). However, it was also a week in which Russia’s Vladimir Putin and Dmitry Medvedev were confirmed, switching roles to become President and Prime Minister, respectively. For those of you that missed it, Putin put on a show in an inauguration day hockey game. Here’s a link to the video: http://www.youtube.com/watch?v=sMpR1AQmGkQ&fb_source=message. Vlady, who recently learned how to skate, propelled his team to a 3-2 victory with two assists and the game winner (surprised?).

As Keith has mentioned, the Russian stock market is down -16.6% since March 14th (when most Global Equity markets topped for the year) and is a good example of why the USD Correlation Risk matters so much – Russia is a Petro Dollar market, so with the USD up for the 8th consecutive day (and the Petro snapping his $113.87 Brent line), this is not good.

A Greek Tragedy

This week saw each of the three main Greek parties (New Democracy, Syriza, and Pasok) try to form a coalition with each another, only to come up short each time. There’s new hope from some that Pasok leader Evangelos Venizelos can put together a unity government given a shift in stance on the part of Democratic Left leader Fotis Kouvelis, who has broken ranks with Syriza, which it had backed earlier in the week. (Syriza is thoroughly against the mandates of austerity, and may be the most divisive partner in a coalition build).

As uncertainties of the prospects for a coalition persist, the calling of another general election seems a very probable event, which could come as soon as June 10th or June 17th. Here it’s important to note that despite the unknown on the future shape of the Greek government, what’s key is the strong voice from the Greek people to stay with the EUR currency and in the Eurozone. So despite all the noise from headlines discussing a Greek exit from the Eurozone (example: a Bloomberg Global Poll recorded a 50% chance Greece exits the Eurozone this year), we do not see this as a probable event for Greece in 2012. We expect the future Greek government to play ball with Brussels (and Troika for its bailouts), with more concessions likely to come from Brussels (and consent from the Germans swinging the largest bat), as Eurocrats are determined to save the existing Union. Greece will likely moderate its austerity push in favor of growth strategies (at least rhetorically), but really to appease a population pushing back at the consolidation of government spending. We think the most relevant quote of the week expressing this view came from Germany’s Finance Minister Wolfgang Schaeuble:

“If Greece decides not to stay in the Eurozone, we cannot force Greece. They will decide whether to stay in the euro zone or not.”


Spain’s Shifting Pain

After Wednesday’s announcement that Bankia, the banking group with the most real estate on its books in Spain, was nationalized, today the Spanish government rolled out a number of provisions for banks, all of which are not easily digestible in the first gulp. While the measures show directional progress, the future findings of assets as risk (which are highly tied to real estate prices that we think could have another -30% leg down) could well be considerably larger than the €184 billion of assets which the Bank of Spain terms “problematic.”

The main points, according to Economy Minister Luis de Guindos’ speech today, include:

  • Spain will force banks to increase provisions against real estate loans by about €30 billion ($38 billion)
  • Spain will hire two auditors to value Spanish lenders’ assets
  • Banks will have to raise provisions on real estate loans that are still performing to 30% from 7% on average and the government will provide funds for those that need support
  • The state will inject less than €15 billion into struggling banks, and the funds won’t add to the budget deficit, according to Luis de Guindos
  • The government will also force all banks to move foreclosed real estate assets off their balance sheets into independently managed companies so they can be sold
  • Spain will boost provisioning on still-good land assets to 52% from the 7% level set for all types of real estate risk in February
  • Spain will raise the coverage level on loans linked to unfinished buildings to 29% and to 14% for finished homes and it will raise coverage for real estate assets to 45%
    • De Guindos said banks will have a month from today to say how they will meet the provisioning requirements, which come on top of the €53.8 billion of charges and capital ordered by the government in the previous cleanup effort in February
    • The state will step in through its bank rescue fund, known as FROB, to buy shares or contingent convertible bonds of banks that struggle to meet the requirements. Under the program, which Luis de Guindos said will be profitable for the government, banks that borrow will have to pay 10% interest and repay the aid within five years

In other news, the European Commission today estimated that Spain will have a budget deficit of 6.4% of GDP in 2012 and 6.3% in 2013 versus Spain’s pledge to bring its budget deficit down to 5.3% this year from 8.5% in 2011. It has also said that it will hit the EU-mandated 3% deficit target in 2013. The Commission also now expects Spain's economy to contract 1.8% this year versus its February estimate of a 1% contraction. While the Spanish government expects the economy will grow in 2013, the Commission forecast that it would still contract by another 0.3%.

The key point here to mention is the changing goal posts that the European Commission will have to make for Spain’s deficit consolidation, a case which may be mimicked across the periphery. All in, our point is that an additional bailout for Spain seems highly probable over the next months as we underweight the ability of the Spanish government to internally clean up its banks, create jobs for the some 24.4% unemployed (52% for youths), reduce its deficit, and grow the economy.

Call Outs:

European Commission:  forecasts 2012 Eurozone GDP to fall by -0.3% (unchanged from prior estimate) and return to growth of 1.0% in 2013. The report said Greek GDP should decline -4.7% this year and may stay unchanged in 2013; Italy will fall -1.4% this year and Portugal should contract -3.3% before both return to growth next year. It sees Spain’s economy shrinking by -1.8% this year and -0.3% in 2013. The report also Germany should grow at 0.7% this year and raised its out to1.7% next year; that France could miss its deficit target in 2013; and the Eurozone unemployment rate will probably average 11% this year, up from 10.2% in 2011.


Eurozone:  Eurogroup head Jean-Claude Juncker talking to broadcaster ZDF made it clear to French president-elect Francois Hollande that fiscal compact could not be renegotiated. However, he added that the while the treaty cannot be reopened, it is possible to add growth measures, something that is already under discussion.

France:  Fitch Ratings says that it will not comment on France’s AAA rating before 2013.

Germany: SEB Asset Management will liquidate its €6 Billion ImmoInvest portfolio, the largest German property mutual fund to be dissolved after failing to meet investor withdrawals. Several real-estate mutual funds, including funds owned by Credit Suisse Group AG and UBS AG, face deadlines this year to reopen or liquidate, according to Germany’s financial trade group, Bundesverband Investment and Asset Management.

IMF may limit lending to Europe: The Dow Jones, citing people familiar with the situation, reported that the IMF is drafting plans to protect it from potential lending losses, including proposals that could limit the size of loans to Eurozone countries. The article said that the proposals are being developed as the political turnover in Europe and growing austerity backlash has triggered concerns about another flare-up of the sovereign debt crisis. It added that another safeguard under consideration is the sequencing of procuring IMF funds, meaning that if Europe's recent $200B contribution is used for Eurozone loans before other countries' contributions, then Europe bears the risk if something goes wrong.

More than 50% predict euro exit: Bloomberg, citing its own global poll, reported that 57% of the 1,253 investors, analysts and traders surveyed said at least one country would exit the euro by year-end, up from 11% in January 2011. It added that 80% expected more trouble for Europe's bond markets. Highlighting contagion concerns, the article also pointed out that 47% said Spain is likely to default, the most since the survey started measuring this possibility in June 2010 and almost double the level from four months ago.

China's sovereign wealth fund says it has stopped buying European debt:  Bloomberg cited comments from China Investment Corp. President Gao Xiqing, who said that the sovereign wealth fund has stopped buying European government debt given the economic crisis on the continent. However, he added that the fund still has people looking for opportunities in Europe.

CDS Risk Monitor:

Week-over-week CDS was up across the main countries we track.  Portugal saw the largest gain in CDS w/w, +66bps to 1075bps, followed by Spain +39bps to 514bps, Ireland +28bps to 593bps, and Italy +19bps to 456bps.   

Weekly European Monitor: Moving the Goalposts, Again! - 11. CDS REAL A

Weekly European Monitor: Moving the Goalposts, Again! - 11. CDS A

Data Dump:

Eurozone Sentix Investor Confidence -24.5 MAY vs -14.7 APR


Germany CPI 2.2% APR Y/Y Final (UNCH)

Germany Exports 0.9% MAR M/M (exp -0.5%) vs 1.5% FEB

Germany Imports 1.2% MAR M/M (exp. 1.0%) vs 3.6% FEB

Germany Current Acct 19.8B EUR MAR (exp.18B) vs 11.7B EUR FEB

Germany Trade Balance 17.4B EUR MAR (exp. 14.3B) vs 14.9B EUR FEB

Germany Factory Orders -1.3% MAR Y/Y (exp. -2.8%) vs -6.0% FEB  [2.2% MAR M/M (exp. 0.5%) vs 0.6% FEB]

Germany Industrial Production 1.6% MAR Y/Y (exp. -1.2%) vs 0.0% FEB

Spain Industrial Output -10.4% MAR Y/Y vs -3.2% FEB   [workday adjusted y/y worse than expected (-7.5% versus estimate -5.3%) ]

Spain House Transactions -22.7% MAR Y/Y vs -31.8% FEB

Spain CPI 2.0% APR Y/Y Final (UNCH)

Italy Industrial Production NSA -5.9% MAR Y/Y vs -3.3% FEB

Greece CPI 1.5% APR Y/Y (exp. 1.3%) vs 1.4% MAR

Greece Industrial Production -8.5% MAR Y/Y vs -8.3% FEB

Greece Unemployment Rate 21.7% FEB vs 21.8% JAN

France Bank of France Business Sentiment 95 APR (exp. 95) vs 95 MAR

France Industrial Production -0.9% MAR Y/Y (exp. -1.3%) vs -1.4% FEB

France Manufacturing Production -0.3% MAR Y/Y (exp. -2.8%) vs -3.2% FEB

UK Industrial Production -2.6% MAR Y/Y (exp. -2.6%) vs -2.3% FEB

UK Manufacturing Production -0.9% MAR Y/Y (exp. -1.3%) vs -1.5% FEB

UK PPI Input -1.5% APR M/M (exp -0.9%) vs 1.7% MAR  [1.2% APR Y/Y (exp. 2.1%) vs 5.6% MAR]

UK PPI Output 0.7% APR M/M (exp. 0.4%) vs 0.6% MAR   [3.3% APR Y/Y (exp. 2.9%) vs 3.7% MAR]


Switzerland Unemployment Rate  3.1% APR vs 3.0% MAR

Switzerland CPI -1.1% APR Y/Y vs -1.0% MAR

Netherlands CPI 2.8% APR Y/Y (exp. 2.7%) vs 2.9% MAR

Netherlands Industrial Production 0.7% MAR Y/Y vs -2.7% FEB

Sweden Industrial Production -6.5% MAR Y/Y (exp. -2.6%) vs -7.1% FEB

Sweden CPI 1.3% APR Y/Y (exp. 1.4%) vs 1.5% MAR

Norway CPI 0.3% APR Y/Y (exp. 0.5%) vs 0.8% MAR

Norway Producer Prices Incl. Oil 2.5% APR Y/Y vs 6.6% MAR

Norway Industrial Production 2.4% MAR Y/Y vs 3.1% FEB

Finland Industrial Production -5.7% MAR Y/Y (exp. -2.2%) vs -3.3% FEB

Ireland CPI 1.9% APR Y/Y (exp. 2.3%) vs 2.2% MAR

Ireland Consumer Confidence 62.5 APR vs 60.6 MAR

Portugal Industrial Sales -1.3% MAR Y/Y vs 1.1% FEB

Portugal CPI 2.9% APR Y/Y vs 3.1% MAR

Hungary Industrial Production 0.6% MAR Prelim Y/Y vs -3.5% FEB

Hungary CPI 5.7% APR Y/Y vs 5.5% MAR

Czech Republic Retail Sales -0.3% MAR (exp. 0.2%) vs 1.6% FEB

Turkey Industrial Production 2.5% MAR Y/Y vs 1.6% FEB

Romania CPI 1.8% APR Y/Y vs 2.4% MAR

Latvia Unemployment Rate 12.9% APR vs 11.7% MAR

Interest Rate Decisions:

(5/9) Poland Base Rate HIKED 25bps to 4.75%

(5/10) BOE Interest Rate Announcement UNCH 0.50% (expected)

(5/10) BOE Asset Purchase Target UNCH 325B GBP (expected)

(5/10) Norwegian Deposit Rate Announcement UNCH 1.50% (expected)

The European Week Ahead:

Monday: Mar. Eurozone Industrial Production; Apr. Germany Wholesale Price Index; Mar. France Current Account; Apr. Italy CPI - Final

Tuesday: 1Q Eurozone GDP – Advance; May Germany Zew Survey Current Situation and Economic Sentiment; 1Q Germany GDP – Preliminary; Mar. UK Trade Balance; Apr. France CPI; 1Q France GDP – Preliminary, Non-Farm Payrolls and Wages – Preliminary; 1Q Greece GDP - Preliminary

Wednesday: Apr. Eurozone 25 New Car Registrations, CPI; Mar. Eurozone Trade Balance; BoE Inflation Report; Apr. UK Claimant Count Rate, Jobless Claims Change; Mar. UK Average Weekly Earnings, ILO Unemployment; 1Q Italy GDP - Preliminary; Mar. Italy Trade Balance

Thursday: 1Q Spain GDP - Final

Friday: G8 Leaders Meet Near Washington (May 18-19); Apr. Germany Producer Prices; Mar. Spain Trade Balance; Mar. Italy Industrial Orders

Matthew Hedrick

Senior Analyst