Europe was plunged into fresh market turmoil as the first call for bailout aid by a Spanish region sent borrowing costs surging, while Spain and Italy reinstated a ban on betting on stock declines.
Stocks and the euro fell as Catalonia joined a list of Spanish regions that may tap aid from the central government, spurring 10-year yields to rise to a euro-era record. Meantime, Greece’s so-called troika of international creditors -- the European Commission, the European Central Bank and the International Monetary Fund -- arrives tomorrow in Athens, rekindling concern the currency union will splinter.
“The problem in the region is profound, but the pace that it has been dealt with was slow,” said John Stopford, head of fixed income at Investec Asset Management, which oversees $98 billion. “The bank bailout for Spain is far from sufficient to deal with the country’s problems.”
After euro finance ministers failed to stanch a decline in the single currency with the approval of a 100 billion-euro ($122 billion) aid package for Spanish banks last week, the ban by the governments in Rome and Madrid reflected renewed concern that the currency union was far from resolving its crisis.
The euro slipped below its lifetime average against the U.S. dollar and to the lowest level in more than 11 years against the yen today, dropping to $1.2080 at 2:41 p.m. in Frankfurt. Spain’s 10-year bond yields rose as high as to 7.57 percent. The Stoxx Europe 600 Index dropped 2.4 percent at 3:45 p.m. in London.
The slump has been compounded as Spanish Prime Minister Mariano Rajoy confronts 15 billion euros of debt redemptions in regions in the second half of this year. In addition to Catalonia, the most indebted region, Castilla-La-Mancha, Murcia, the Canary Islands and the Balearic Islands may follow Valencia in seeking aid from Madrid, El Pais newspaper reported.
Spain’s Economy Minister Luis de Guindos will visit Berlin tomorrow for talks with German Finance Minister Wolfgang Schaeuble. No press conference is planned.
Italian Prime Minister Mario Monti, his country burdened by rising borrowing costs, said last week that unrest in Spain, where protesters derided the country’s 65 billion-euro austerity package, added to euro concerns.
Spain’s stock-market regulator, the CNMV, said it was banning short selling of all stocks for three months, amid “extreme volatility.” Italy’s Consob said its ban, scheduled to last a week, was introduced on some banking and insurance shares because of the “recent performance of stock markets.”
The measures resemble decisions in August last year by France, Belgium, Spain and Italy in their bid to stabilize markets after European banks hit their lowest since the 2008 credit crisis.
In Greece, troika officials will face down doubts that the country where the crisis began almost three years ago can meet its bailout commitments and reluctance among euro states to put up more funds should it fail. German coalition politicians over the weekend torpedoed the possibility of renegotiating the terms of Greece’s agreement.
“If Greece doesn’t fulfill those conditions, then there can be no more payments,” German Vice Chancellor Philipp Roesler told broadcaster ARD yesterday, adding that he is “very skeptical” Greece can be rescued and that the prospect of its exit from the monetary union “has long ago lost its terror.”
Greek Prime Minister Antonis Samaras yesterday compared the economy after five years of contraction to the 1930s.
Five years of recession “bring about bitter memories of the Great Depression in the United States,” Samaras said yesterday in comments to visiting former U.S. President Bill Clinton in Athens. “This is exactly what we are going through in Greece. It is our version of the Great Depression.”
The Greek government has struggled to stand by obligations tied to 240 billion euros of rescue funding over the past two years. The country is clamoring for more help as efforts to reduce its debt to 120 percent of gross domestic product by 2020 fall short.
The IMF, which indicated in March it won’t commit more money to Greece, will make a decision on its next disbursement in late August at the earliest based on the troika’s findings, said two fund officials familiar with the situation in recent days.
The Washington-based IMF has signaled to European officials that it will stop paying further rescue aid to Greece, bringing the country closer to insolvency in September, Der Spiegel magazine cited unidentified European Union officials as saying in this week’s edition, published yesterday. It’s “already clear” to the troika that Greece won’t reach the 120 percent target, Spiegel said.
The fund responded to the Der Spiegel report, saying today in a statement it is “is supporting Greece in overcoming its economic difficulties.”
Missing the targets means Greece would need between 10 billion euros and 50 billion euros in additional aid, a potential outcome that the IMF and several unidentified euro-area states are not prepared to accept, Spiegel said.
Once taboo, the possibility that Greece could exit the 17-member monetary union has been voiced this year by European officials who consider the fallout from such a scenario would be the lesser evil against a seemingly perpetual crisis.
Roesler, who is Germany’s economy minister as well as the chairman of Merkel’s Free Democratic coalition partner, told ARD that a curtailment of aid to Greece would lead to a sovereign default, which would in turn lead to “Greeks coming to the conclusion that it is probably wiser to leave the euro area.”
Spiegel reported that German officials were holding off on such a decision until the permanent bailout fund, the European Stability Mechanism, comes into operation in September. The 500 billion-euro ESM is on hold pending a decision by Germany’s Federal Constitutional Court, set for Sept. 12.
“For Greece, it’s long been five past midnight,” political columnist Hugo Mueller-Vogg said in Germany’s best-selling Bild newspaper today. The IMF, “by stepping on the brakes, makes it easier for creditor nations like Germany and the EU as a whole to also say: adieu Acropolis, it’s time to go.”