Spotlight switches back to European issues as credit managers and dealers return from holidays.
Several senior Europe and US-based credit management opinion leaders contacted by The Slog over the weekend concurred in the opinion that the situation in the eurozone is once again critical. “There has been no improvement,” said one, “and so mathematically it means things are getting worse”.
Acutely aware of reality intervening, EUROPEAN Central Bank (ECB) head Jean-Claude Trichet said on Saturday that Greece leaving the euro zone and reverting to the drachma would be the “worst possible option”. And at the same Ambrosetti Forum on the shores of Lake Como, senior EU Commission financial expert Joaquin Almunia said Greece has been “dealing well with the strict austerity measures”.
“Sure it has,” agreed one of the Slog’s sources, “but the spreads are worse than ever.”
The latest data suggest that this view is accurate: the difference between the cost of borrowing for wobbly countries such as Greece and rock-solid Germany are returning with alarming speed to the crisis levels that preceded the Greek bail-out in late Spring 2010…although Athens has a two-year breathing space emergency loan facility to supposedly eliminate the possibility of default.
The bullish balm by top Eurocrats contradicted didn’t seem to cut it at the conference. Germany’s Hans-Werner Sinn also stressed that bond spreads were “crazy” again; and much space has already been given to US-based economist Nouriel Roubini’s conclusion that “a trillion- dollar bail-out has not patched things over”.
Another Slog interviewee concurred: “The bailout announcement was supposed to stop the debt crisis from spreading to, for example, Spain. I see no sign whatsoever that this is the case – in fact, the Spaniards are in deep, borrowing from Peter to pay Paul”.
Two other factors are also now in play: first, leading UK and continental European companies are increasingly shunning Spanish, Italian, French and even German banks because they regard the Europe-wide stress testing of banks a flawed process during which a false picture of their financial health was presented. “There is an element of whether the emperor has any clothes on and what to do if he doesn’t. The stress tests were a joke,” said the treasurer of a large European media company.
“What we are increasingly concerned about is credit risk,” said the treasurer of one of Germany’s largest industrial companies. “Even after the stress tests, we have to ask ourselves: are the banks healthy? The tests have opened up more questions than they have answered, especially here in Germany.”
Secondly, new bond issuance during September will be stepped up by the Clubmeds. Many opinion leaders are warning that some of the weaker candidates could fail to raise the amount of money they need as eurozone governments attempt to issue double the amount of debt this month compared with August. Here, a bright spotlight is settling upon Spain. Spain is expected to attempt to borrow €7bn in September compared with €3.5bn in August, according to ING Financial Markets.
“Spain is borrowing from Peter to pay Paul right now,” said one senior credit manager, “It’s eating its own capitalisation. The depth of the crisis there is not well appreciated.”
Italy also remains not so much a dark horse as the potential fourth horseman of the apocalypse.
“Berlusconi’s smiling PR has been smart,” alleged another source, “but the Italian finances are a mess….and the UK’s Barclays bank is in deep on that one.” (The Slog reported similarly on this topic recently).
The Slog 