ECB inaction and doubts over recapitalization trigger risk premium

ECB inaction and doubts over recapitalization trigger risk premium

  • The risk premium, which closes at 461 points and with a 6% return, marks its highest record since the ECB announced it would buy debt.
  • The request from Germany, the Netherlands and Finland that states take on requests for aid, increasing public debt, worsens the picture.
  • International markets, including Wall Street, have the effect of political instability and social protests in Spain and Greece.
  • The stock market drops almost 4% and loses 8,000 points.
Bolsa de Madrid

The Madrid Stock Exchange screen, which reflects the Ibex-35’s price. Kote Rodrigo / EFE

Spain’s risk premium, which measures market misgivings vis- à- vis the country, has set its highest level since September 6 at 450 basis points , when the European Central Bank (ECB) announced its intention, which has so far not been met, of buying sovereign debt. The markets, and not only the Spanish, have negatively accused the effect of political instability and social protests in Spain and Greece.

Thus the performance of the national bond to ten years has again exceeded this Wednesday 6% . Specifically, shortly before 12 o’clock, the yield of the national ten-year bond stood at 6.012%, while its German counterpart fell to 1.505%. At the end of the session, the Spanish risk premium went up to 461 basis points and the 10-year bond at 6.07%.

It is not good news for Mariano Rajoy , who in an interview with the economic newspaper The Wall Street Journal (WSJ), explained that Spain has not decided whether to resort to European rescue funds, but that if the interests paid by the country Financing is still very high for a long time. “You can be 100% sure that you would ask for that ransom .”


Germany, Finland and the Netherlands make things difficult

According to analysts, the rise in the risk premium responds to the doubts that the attitude of Germany, the Netherlands and Finland , which have refused to the MEDE to finance the recapitalization of banks, has aroused in the market. it is each State that appears as guarantor of the money it receives and the one that assumes the possible losses, which will affect its public debt . That is to say, it will be the public money that will have to face the debts contracted by the banks-it is estimated that the bank rescue will cost between 40,000 and 60,000 million euros .

The losses on Wall Street intensified during the protests in Madrid

The claims of these three countries go against what the EU leaders agreed this summer, which agreed that the recapitalization should have a retroactive effect and stop being counted as a debt when the European financial supervisor comes into operation. It also implied that the countries that went to the ESM did not have to guarantee the losses.

This new turn of Germany has also been noticed in the Stock Exchange, which started the session falling by 2.34%, but that ended up losing 3.92% and standing at 7,881 units , the fourth largest fall of the year.

According to the analysis department of Bankinter, investor sentiment has weighed this morning the bad session on Wall Street, the worst of September, and the negative close of Asian markets.

In fact Wall Street is accusing the crisis of the European debt and even the climate of social discontent that suffers Spain , in fact the losses in the New York parquet flared up in the last hours of the hirings, coinciding with the escalation of the tension in the protests in Madrid against government austerity measures.

They also accuse the markets, including the Spanish, the situation of instability generated by the sovereignty claims of Artur Mas, spurred by the successful call of the Day , and the climate of tension and discontent of the rest of European countries that are applying hard measures of austerity, like Greece that this Wednesday lives another day of general strike.

But above all, the finance ministers of Germany, the Netherlands and Finland, who “reopened the melon of who must assume the costs of a future direct recapitalization of the banking by the European rescue fund, MEDE”.

No news from the ECB

On September 6, ECB President Mario Draghi assured that the entity will undertake an unlimited purchase program of sovereign debt of the eurozone countries with difficulties, called Outright Monetary Transactions, OMT, for its acronym in English).

The mere possibility that the ECB announced that it will buy sovereign debt managed to reduce Spain’s risk premium from around 500 points to 440, and once the body confirmed the announcement Spain’s country risk has evolved downwards to be around 400.

Either he will have to forcefully take the patient or let him die

However, the ECB has not yet proceeded to buy sovereign debt in the secondary market, and as confirmed on Monday, are already 28 weeks that have not made purchases.

To this must be added the doubts that the banking recapitalization process poses to the statements of the finance ministers of Germany, Finland and the Netherlands, which on Tuesday showed their support for the states to assume the request for help to recapitalize. banking, which will increase public debt.

Likewise, the country risk of Spain accuses the uncertainty about the formal request by Spain of aid to the European Union.

The chief economist of Saxo Bank, Steen Jakobsen, explains that if Spain refuses to take its medicine – the rescue that only comes with the “condition” of being formally requested -, or will have to “drug” the patient by force in the monetary plane or “let it die” (default).