As everyone knows by now the ECB can only act on its bond-buying rescue plan if a country first requests a rescue from the European Union, and in order to receive the rescue must impose strict austerity measures on its government and people to cut spending and bring its budget deficits under control.
And how is that working out?
Spain, the main focus of the plan, was reluctant to request a bailout prior to the plan’s announcement, saying it wanted to wait and see what the strict requirements would be.
And now that it knows what would be required, Spain is still reluctant to request a bailout. Spain’s Prime Minister Rajoy said yesterday that he hasn’t decided, that his administration is analyzing the situation.
One thing that has changed is that investors, apparently believing that Spain’s problems are over, have been pouring money into Spain’s bonds, which has driven yields down and prices up. It was the spiking cost of government borrowing (high bond yields) that moved Spain’s situation into crisis mode and prompted the ECB action.
So now with investors buying Spain’s bonds again, driving the yield down, Spain is no doubt asking itself why it needs the ECB to buy its bonds after all, and why it should accept harsh austerity measures to have that happen.
And so that game of chicken continues. Which side will blink first, the EU by slacking off on its austerity requirements to have Spain accept its rescue, or Spain by giving in and requesting the bailout?
The spillover effect of the ECB announcement has Italy’s bonds also selling well and yields falling. So Italy is denying it needs help with its debt crisis. No change there either.
Meanwhile Greece is struggling to comply with the austerity program it already agreed to in order to receive its bailout funds, and has requested leniency and an additional two years to work toward the requirements. The EU has said no.
The ‘Troika’ sent its financial inspection team to Greece to begin checking on how Greece is coming along in meeting the requirements. Both sides have admitted Greece is well short of compliance. The Troika said the review of a number of delayed overhauls and delayed programs to revamp Greece’s dysfunctional tax system will last for several more weeks.
And so the game of chicken continues there also, with the EU insisting that Greece meet the austerity program requirements and on time, while Greece, knowing how much the EU wants to avoid a Greece exit from the euro-zone, continues to drag its feet and play out the game in an effort to get itself some leniency.
And previously bailed out Ireland is back in the news, struggling again, seeking relief from the requirements of its bailout and 64 billion euro banking debt. The International Monetary Fund is urging the EU to use part of its new bailout fund to invest directly in Ireland’s banks.
Meanwhile, Europe’s economic slowdowns continue to worsen as the games of chicken continue. George Soros, who admittedly has become a bit of an alarmist lately, predicted this week that the recession in the euro-zone will spread to Germany within six months, pushing Europe “into a deeper and longer depression”. He said “This is no longer a prediction, but an observation.”
But markets, in Europe and the U.S. anyway, don’t seem at all concerned about economies, potential recessions, or the effect those usually have on earnings and stock prices. All that matters is if central banks will provide additional easing.
About those earnings.
From the Financial Times: “Even as the U.S. market hit a four-year high, year-on-year earnings growth for the S&P 500 slowed to just 0.8% in the 2nd quarter, and the consensus forecast among analysts is for growth to turn negative in the current quarter for the first time in three years [since the Great Recession]. Companies themselves are even more downbeat than the analysts. During the recent reporting season S&P 500 groups were three times as likely to say they would miss analysts’ forecasts going forward than beat them. That was the worst ratio since the final quarter of 2008, just after the collapse of Lehman Brothers.”
Subscribers to Street Smart Report: An in-depth U.S. Markets Update will be available tomorrow afternoon in the subscribers’ area of the Street Smart Report website.
To read my weekend newspaper column click here: Are Rescue Efforts Too Late To Prevent A Global Recession?