Watch out! The yield on the 10-year US Treasury bond slid nine basis points to 3.02%, the lowest since April last year. Greek 10-year yields jumped 0.23% to 10.71%, close to the highest level since the EU/IMF unveiled a €750 billion support package in May. Spanish 10-year yields rose 0.08% to 4.57%. It’s not just worries about the US economy driving US yields down, it’s fears of a credit squeeze or bank problems from the June 30 dropping of Greek sovereign bonds from various market measures and the July 1 ending of the year-long European Central Bank liquidity pool for banks. Banks in Greece, Spain, Portugal, Germany, Italy and Ireland have been using this facility. They can roll into a seven-day or three-month facility, but not all the money borrowed might be refinanced. Any squeeze or liquidity drain could be slow acting. US rates are falling because of the safe haven effect (even though the US was the cause of all the problems) and growing fears about deflation, especially later this year in America.
Spanish deadlines: Spain’s government is facing a large funding call for July. Spain has to finance a cash deficit of between €10 billion and €15 billion, plus €24.7 billion in redemptions. According to various brokers’ reports, depending on spending cuts already made, cash on hand, various other fiddles (and no further problems in the domestic savings banks), Spain could need €12 billion-€13 billion of new money next month. And if there’s no money from the markets because of cost or a lack of willing punters, the big commercial banks Santander and BBVA could chip in with a few billion. But if the ECB pool is reduced, could Spain join Greece on the European teat?
Spanish banks upset: Spanish banks are starting to sound desperate and going public with the concerns about the ending of the 12-month liquidity pool on July 1. According to the Financial Times, Spanish banks have accused the ECB of “absurd” behaviour. Banks across the eurozone, but in Spain in particular, (and Portugal) have found it hard in recent weeks to secure liquid funding in the commercial markets, with inter-bank money virtually non-existent. A special offer of six-day ECB liquidity will tide banks over from July 1 until the following week’s regular offer of seven-day funds. On Wednesday, the ECB will also be offering unlimited three-month liquidity, and further offers of three-month liquidity will keep banks going until at least the end of the year.
Greek hubris: Out of the blue Greece has confirmed that it will return to the financial markets next month with plans to raise about €4 billion in its first borrowing attempt since May’s bail-out by the European Union and the IMF. The government will attempt to roll over three-, six- and 12-month treasury bills maturing in July. The EU and IMF have approved the rollover of short-term debt in July and October this year under the terms of a €110 billion loan agreement with the Greek government. It’s a good thing they are not attempting to roll over more distant bonds. The 10-year bond is trading at a premium of more than 9% to German bonds.
Dates for your worry beads: But as to why the Greeks want to test the market in a month after what could be an very insecure start this week, has puzzled traders. They suspect Greece and some investors might be trying to pull another swifty to issue some high-yielding securities to give these investors an easy killing later on. If this rollover of debt fails, then Spain, Portugal and perhaps Italy might be forced by the market to fund more of their needs from the EU standby fund. Even if Greece manages to roll over the funds, it’s a question of how high the premium is and the eventual cost. Too high an interest rate will also trigger the return of the crisis. Greece can be its own worst enemy at times. The bond auctions are on July 13 and 20. But first let’s get through June 30 (when about $US100 billion nor more of Greek bonds drop out of bond indices) and then July 1, before worrying about Spain and Greek funding plans for next month.
Germany’s con: The Financial Times Wolfgang Munchau, a columnist and former editor of its German edition, said in a column yesterday: “I recently had an eye-opening experience appearing in the finance committee of the German Bundestag as a witness to testify on the proposed legislation to ban n-ked short sales. It turned out that the finance ministry could not produce the basic statistics on short selling, let alone provide even an anecdotal link between short selling and the bond crisis. I told the Bundestag that this cynical piece of legislation has contributed far more to the European bond market crisis than the n-ked short sales it purports to ban.” So why the ban if no evidence? Because it made sense for Angela Merkel’s government to bash speculators and not shoulder some of the blame for Europe’s financial fix and the euro’s problems (which benefit German exporters).
China laughs: And China has fixed the yuan exchange rate at its highest in years following the weekend meting of the G-20. The People’s Bank of China said it set the central parity rate — the centre point of the currency’s allowed trading band — at 6.7890 to the dollar, a touch higher than Friday’s 6.7896 (which was up 0.3% from Thursday). Since the first move last Monday under the new flexible system, the yuan is up 0.53% against the US dollar. It was the strongest level policy makers have set since China unpegged the currency in July 2005 and moved to a tightly managed floating exchange rate. So far the Chinese have won this argument, despite what loud mouth US Senators might think. Time for another cut in the central peg to keep the market off balance.
Note this: As BHP Billiton and Rio Tinto, plus all the other miners whine and moan about tax, spot iron ore prices have fallen 23% in the past two months. Prices peaked about $US182 a tonne in mid-April, but they have fallen to just under $US140 a tonne on Monday. Iron ore prices are still up nearly 85% over the past year on the back of strong demand from China, but that’s easing and Chinese mills say demand will soften in the third quarter, which starts on Thursday, and weaken again in the three months to December.
What joy! The Dodd-Frank Wall Street Reform and Consumer Protection Act (which is the basis for the forthcoming revamp of the US financial sector, is about 2300 pages in 1600 sections. If you are pressed for time see this 10-page summary. The final draft goes to Congress by Friday to be passed for President Obama to sign on Sunday, July 4. Oh, the symbolism of a piece of legislation that will do precisely nothing to stave off the next disaster.
Bad news? That legislation’s fate was put in doubt overnight by the death of legendary US Democrat Senator Robert Byrd at the age of 92. He was literally being wheeled in and out of the Senate to vote. The Democrats now might not have enough votes to block Republican delaying tactics (called a filibuster). Moderate Republican Senator Scott Brown is unhappy with some provisions, putting his support for the Bill in doubt. The House starts considering the 2300 page Bill tonight, and is expected to pass it tomorrow. The Senate is due to start Thursday, which is where the whole thing could founder.
A job anyone? Abrasive American Kirby Adams has quit as CEO of UK steelmaker Corus (owned by Tata of India) to return to Australia for personal reasons. Adams ran BlueScope Steel in Australia. He took over as chief executive of Corus in March last year, having never before worked in Europe. He was given the task of restructuring the company and restoring profitability. He cut thousands of jobs, upset unions and government. No news on what he will be doing in Australia.
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