The Spanish Crisis Deepens

Has a Spanish bailout become inevitable? Yields on the country’s 10-year bonds spiked above 6 percent on Sept. 26, after Madrid was convulsed by anti-austerity demonstrations and the head of its largest region, Catalonia, called for “self-determination” elections. Adding to the pressure, newly released data showed the economy contracting and budget deficits rising, while the finance ministers of Germany and other “donor” countries suggested Spain might need to pump more money into its troubled banks before getting help from the European bailout fund.

Prime Minister Mariano Rajoy until now has played coy about the question of a sovereign rescue, since in return for a rescue the Spanish would have to accept even harsher austerity measures than they already have. But Rajoy’s office, confirming remarks made in a Wall Street Journal interview, said Rajoy was “100 percent” ready to ask for a bailout if the country’s borrowing costs remained “too high for too long.” Those comments were “like a red rag to a bull in terms of the market needing to strong-arm Spain into accepting aid,” Richard McGuire, a fixed-income strategist at Rabobank International in London, told Bloomberg News.

Rajoy’s options appear to have narrowed sharply. The Bank of Spain reported on Sept. 26 that the economy contracted at a “significant pace” in the third quarter. The budget deficit during the period was almost 4.8 percent of gross domestic product, up from 3.8 percent last year. And on Sept. 25, the finance ministers of Germany, the Netherlands, and Finland said that the European Stability Mechanism—which Spain has been counting on to help recapitalize its banks—might not do so unless the Spanish government kicked in more money.

Violent protests in the capital and the self-determination push by Catalonia, Spain’s richest region, undermine the central government’s efforts to reassure investors. Catalan President Artur Mas has called early elections for Nov. 25.

The malaise in Spain is also weighing on the euro, which fell to $1.28, its lowest level in two weeks. “Markets are reacting to the negative news flow we’ve seen out of Spain,” Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London, told Bloomberg News.

Rajoy, who is spending the week at the United Nations in New York, also has been hit by a report that he and his staff drink heavily during flights on his official jets. The Spanish magazine Interviu reported that Rajoy and five staff members consumed seven bottles of wine and 10 beers with dinner on a flight back from a European championship soccer match, the day after Spain asked its European neighbors for €100 billion to recapitalize Spanish banks. A spokeswoman for Rajoy declined to comment on the report.

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Trichet Calls for Euro Finance Ministry as Crisis Deepens

June 02, 2011, 6:46 AM EDT By Christian Vits and Gabi Thesing

(Updates with bonds, euro in fifth paragraph.)

June 2 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said governments should consider setting up a finance ministry for the 17-nation currency region as the bloc struggles to contain a region-wide sovereign debt crisis.

“Would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the union?” Trichet said in a speech today in Aachen, Germany. He also favors giving the European Union powers to veto the budget measures of countries that go “harmfully astray,” though that would require a change to EU Treaties.

Trichet, one of the architects of the Maastricht Treaty that founded the euro, is setting out his vision for how the currency can be better managed just months before he retires and as European officials rush to put together a second bailout plan for Greece. Last year’s 110 billion-euro ($159 billion) rescue failed to prevent an investor exodus from Greece, which has been saddled with Europe’s highest debt load amid a three-year economic slump.

Ireland and Portugal also had to ask for European aid as borrowing costs soared on concern the countries wouldn’t be able to tame their budget deficits.

Ministry Functions

German government bonds fell, pushing the 10-year yield two basis-points higher to 3.01 percent, while Greek two-year notes erased a decline to leave the yield little changed at 24.54 percent. The euro rose more than a quarter cent to as high as $1.4486.

While any single finance ministry would “not necessarily” administer “a large federal budget,” it would “exert direct responsibilities in at least three domains,” said Trichet, whose eight-year term ends in October.

They would include “first, the surveillance of both fiscal policies and competitiveness policies” and “direct responsibilities” for countries in fiscal distress, he said.

It would also carry out “all the typical responsibilities of the executive branches as regards the union’s integrated financial sector, so as to accompany the full integration of financial services, and third, the representation of the union confederation in international financial institutions.”

Trichet has no formal power over government decision making and hasn’t said what he plans to do when he leaves the ECB.

He signaled that any new form of fiscal governance would need to be “decided by the people of Europe.” The EU president, the European Commission and the finance ministries of Germany and other countries are sure to have their own views, he said.

--Editors: Fergal O’Brien, John Fraher

To contact the reporters on this story: Christian Vits in Frankfurt at cvits@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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European Stocks Sink as Debt Concern Deepens; Ryanair Slumps

May 23, 2011, 12:12 PM EDT By Sarah Jones

May 23 (Bloomberg) -- European stocks dropped to a one- month low after Spain’s ruling party suffered its worst election defeat in 30 years and Standard & Poor’s warned it may downgrade Italy’s debt.

Banco Santander SA, Spain’s largest bank, and Italy’s Intesa Sanpaolo SpA led a selloff in financial shares, both falling more than 1.5 percent. Commerzbank AG plunged 5.3 percent after the German lender announced a 5.3 billion-euro ($7.4 billion) share sale. Airlines tumbled after Ryanair Holdings Plc reported earnings and a volcanic eruption in Iceland threatened to disrupt trans-Atlantic flights.

The benchmark Stoxx Europe 600 Index dropped 1.6 percent to 275.08 at the 4:30 p.m. close in London, erasing its gain for the year. The gauge fell last week after Greek 10-year bond yields climbed to a record and Fitch Ratings cut Greece’s credit rating to B+, four notches below investment grade.

“Whilst the euro-area outlook deteriorates, the general buoyancy of financial markets has also disappeared in the last few days,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “It seems this week will be pivotal to the immediate future of the structure of euro-zone debt, with announcements and further downgrades possible through the week.”

The Euro Stoxx 50 Index of shares in the euro zone retreated 1.9 percent to 2,799.38, for its biggest two-day drop since March.

Euro Declines

The euro touched a record low against the Swiss franc and reached its lowest in a week against the dollar after Spain’s Socialist Party suffered a defeat in local elections as voters punished Prime Minister Jose Luis Rodriguez Zapatero’s party for soaring unemployment and spending cuts.

The 17-nation currency also fell after S&P on May 20 cut Italy’s credit-rating outlook to negative from stable, citing slowing economic growth and “diminished” prospects for a reduction of government debt. Italy’s Treasury said in a statement from Rome that it will “intensify” structural changes in the economy and push ahead with measures to balance the budget by 2014.

Italy’s FTSE MIB Index tumbled 3.3 percent, the largest drop of the 18 western European benchmarks, as 27 companies including Eni SpA and Intesa Sanpaolo traded without the right to their latest dividend. Spain’s benchmark IBEX Index retreated 1.4 percent, while Ireland’s ISEQ Index lost 1.7 percent.

European Markets

National benchmark indexes retreated in all 18 western European markets. The U.K.’s FTSE 100 Index lost 1.9 percent and France’s CAC 40 Index dropped 2.1 percent, dragged lower by Total SA as the oil company traded without the right to its latest dividend. Germany’s DAX Index retreated 2 percent.

European services and manufacturing growth slowed more in May than economists had forecast, a report from London-based Markit Economic showed today, suggesting that the region’s economy is struggling to maintain momentum amid surging energy costs and tougher government austerity measures.

Santander declined 1.7 percent to 7.77 euros in Madrid. Intesa, Italy’s second-biggest bank, dropped 2.8 percent to 1.69 euros. Bank of Ireland Plc retreated 5.4 percent to 20.3 euro cents in Dublin.

Credit Agricole SA sank 3 percent to 10.53 euros after S&P downgraded the counterparty credit rating for France’s third- largest lender to A+/A-1 from AA-/A-1+, saying the bank has a “significant sensitivity” to Greece’s creditworthiness and economic prospects.

Commerzbank lost 5.3 percent to 3.74 euros in Frankfurt after announcing plans to raise capital by selling new shares to help repay state aid. Germany’s second-biggest bank will sell 2.44 billion new shares at 2.18 euros apiece. Shareholders will be allowed to subscribe to 10 new shares for every 11 already held from May 24 to June 6, the company said.

Icelandic Volcano

Ryanair retreated 5.3 percent to 3.36 euros as Europe’s biggest discount airline said it will cut capacity for the first time in its history next winter as higher fuel costs threaten to render swathes of the network unprofitable.

The airline said annual profit will be “similar” to last year’s amid slower growth in demand. The airline still reported a 26 percent jump in full-year adjusted profit after taxes to 401 million euros.

Airlines also retreated as Britain’s weather agency said that ash from the volcanic eruption that began on May 21 under Europe’s largest glacier, Vatnajokull, may reach the U.K. as early as tonight, threatening trans-Atlantic air traffic.

Predictive charts on the U.K. Met Office website show ash from the Grimsvotn volcano stretching south from Iceland as far as the western isles of Scotland by midnight tonight, mainly at lower altitudes.

Air France, EasyJet

Air France-KLM Group slumped 4.5 percent to 11.46 euros in Paris trading, while EasyJet Plc lost 4.9 percent to 345.1 pence. Lufthansa, Europe’s biggest airline by sales, sank 3.5 percent to 15.03 euros.

Anglo American Plc and Royal Dutch Shell Plc led a selloff in commodity producers as base metals fell in London and crude oil tumbled in New York. Anglo American declined 4.1 percent to 2,830.5 pence, Antofagasta Plc lost 3.9 percent to 1,160 pence and Shell dropped 2.3 percent to 2,095 pence.

Copper, Metals Slide

Copper dropped the most in two weeks on the London Metal Exchange as figures showed weaker manufacturing growth in China, the world’s biggest consumer of the metal. Crude oil fell after the dollar rose to a nine-week high against the euro.

British Land Co. declined 2.8 percent to 576 pence. The U.K.’s second-largest real-estate investment trust posted a 26 percent drop in full-year profit to 840 million pounds ($1.4 billion) after the company’s shopping centers and office buildings appreciated at a slower rate.

Ericsson AB lost 3 percent to 91.95 kronor after BofA Merrill Lynch Global Research lowered its recommendation to “underperform” from “neutral,” which said expectations for earnings in coming quarters may be too high.

Pandora A/S, the Danish maker of charm bracelets, extended last week’s drop, sinking 11 percent to 178 kroner. The stock fell 22 percent on May 19 after first-quarter sales missed most estimates, hurt by weakness in Australia and Germany.

--With assistance from Alexis Xydias in London. Editors: Will Hadfield, Andrew Rummer

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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