Austerity and growth. Although these words are not necessarily antonyms, they are hard to pair together when describing the economic situation in Spain. EU governments, with Germany at the helm, are demanding austerity. But the markets seem to be asking for growth. These markets, not seeing much evidence for growth in Spain and anticipating the impact of Prime Minister Rajoy's sharp spending cutbacks, have been engaged in a massive selloff of Spanish bonds. As a result bond yields are rising along with the Spanish risk premium.
Yesterday was no exception. Investors began a selling spree of Spanish bonds yesterday, which precipitated a spike in yields on Spanish 10-year notes. They settled above six percent on the day, which is the highest rate since November 30, 2011 and also a 52-week high. This yield level might be high enough for the European Central Bank (ECB) to think about reëngaging its program of buying debt from ailing peripheral countries after a one-month hiatus. "If the ECB doesn't want to throw away all the work it did during the past several months to contain the debt crisis and avoid a systemic collapse of the banking sector, now is the time for it to act decidedly and support the banks by buying treasury bonds of struggling countries on the secondary market," said a source from Link Securities.
Morgan Stanley estimated amounts of Spanish and Italian bonds that it thinks the ECB could buy. "The ECB has purchased relatively little debt so far, so we believe that they could acquire 200 billion euros in Italian bonds and another 70 billion in Spanish bonds. This is double what they have bought to date," indicate sources from the firm in a letter to clients, which was reported on by Bloomberg.
When will the ECB buy?
Although sources from Inversis think that six percent is a good time to buy Spanish bonds, it does not look like the ECB wants to do that quite yet. Last week Benoit Coeure, a member of the ECB Executive Committee, indicated that the institution is prepared to buy debt should that be necessary, but apparently that point has not arrived. Yesterday it was reported on that when the ECB failed to purchase a single euro of sovereign debt between April 9 and April 13, this period marked the fifth straight week that it has abstained from buying. So far it has purchased 224 billion euros since the program began in May 2010.
In light of the situation, people are starting to bet on when the ECB will decide to buy bonds. Bankinter assures that it won't buy unless Spanish treasury yields pass seven percent. "This is something we don't think will happen, incidentally," it said. But Natixis believes that it wouldn't matter much if the ECB resumes its program unless this is accompanied by economic recovery. "If economic forecasts don't improve, the ECB purchases won't be able to improve the outlook in Europe and risk premiums will remain high," said Philippe Waechter, a chief economist from Natixis. Deutsche Bank predicts that Spain will not grow until 2013, while Saxo Bank can't see growth resuming until 2014.
