Most of the bad news focused on Spain, who is supposedly “too big to bail”.
Italian Prime Minister Mario Monti said Spain could reignite the EZ debt crisis.
Spain’s ruling party losing a weekend regional election didn’t help the dour mood, and Spanish stocks sank while other EU indexes rallied on hopes for more US stimulus.
Spain reported a budget deficit of 20.7 Billion Euros for the year’s first two months, vs. 9.3 Billion last year.
That is 1.94% of Spain’s GDP, or an annualized pace of nearly 12% of GDP.
The Bank of Spain announced that Spain is again in recession after negative growth in Q1, which further complicated government efforts to meet an EU mandated deficit target of 8.5% of GDP.
Spanish stocks are again Europe’s worst performers of the day and drops 1.1%.
Citi Bank’s Chief Economist Willem Buiter forecast that Spain would need to seek troika aid this year, ignited further market anxiety.
Spain’s ‘Banca Civica’ was taken over by Caixabank, which wrote down the bank’s former book value of 2.8 billion Euros to a zero, due to the large proportion of bad loans on its books.
Banca Civica was considered one of the more stable regional banks, which confirmed the belief that troubled regional banks are hiding even worse problems.
Spanish stocks are Europe’s worst performers for the third day in a row, and are down 2%.
Yields on Spain’s benchmark 10-year bonds rose 11 bps from the start of the month.
The Wall Street Journal reported that the LTRO (Long-term refinancing operations) program, which was supposed to provide EU banks with three years of liquidity, “could evaporate in three months”.
Since low share prices prevent Spanish banks from raising capital, it may force them to sell their recently purchased Spanish government bonds and reignite a wave of reselling.
That would threaten a new spike in GIIPS borrowing costs that could force the ECB to buy up more shaky GIIPS bonds in order to stabilize their prices and prevent a contagion.
As of Thursday, Italian benchmark 10-year bond yields were back up to 5.25%, Italian stocks were diving over 3%, with trading suspended for one Italian bank.
Cumberland Advisors’ David Kotok reported that the situation in Portugal is “unraveling”, similar to what had happened earlier in Greece.
Specifically he cites runs on Portuguese banks, and that the cost of insuring Portuguese sovereign debt is soaring.
The reason is that investors may fear that a CAC (Collective Action Clause), that is in essence forces bondholders to accept losses, may be imposed on them as it was on Greek bondholders.
The use of the CACs as a retroactive rule change is a game changer.
The EU has officially bitten the hand that feeds it, namely the global credit market.
If EU governments are now more likely to reduce previously agreed upon returns, bond buyers will need higher returns to accept that added risk.
Recent ECB intervention has prevented yields from spiking thus far, but at some point that added risk will be reflected by significantly higher borrowing costs.
That’s all for now, when I get more news relevant for binary options trading, I will add them to the site…
Happy Trading and enjoy….