The pain in Spain: yesterday the Spanish government and a major Spanish banker confirmed that the country’s financial sector and industrial groups were finding it very tough to raise money on global markets. Locked out was the bottom line from the comments. Today we had an explanation as to why that hasn’t caused a credit freeze inside Spain, so far. The country’s banks are now the biggest borrowers from the European Central Bank. In fact they are borrowing at record levels.

Spain’s financial drip: the latest ECB figures show Spanish banks borrowed €85.6 billion ($US105.7 billion) from the ECB last month. This was double the amount lent to them before the collapse of Lehman Brothers in September 2008 and 16.5% of all net eurozone loans offered by the central bank. This is the highest amount since the launch of the eurozone in 1999 and is up from €74.6 billion in April, or 14.4%  of the net liquidity pumped by the ECB into the eurozone financial system. It’s clear that without this, Spain would have been in the midst of credit freeze months ago and in a depression.

Greek haircut: besides bankrolling Spain, the ECB has decided to enforce its previously stated policy of forcing lower-rated countries more to be bailed out out. The central bank said it will charge an additional 5% (known as a haircut in banking) on the Greek government bonds it accepts as collateral for loans after Moody’s cut the country’s credit rating to Ba1 (which is non-investment grade. Their highest rating is now BBB — from Fitch, but that’s not enough to prevent the haircut from happening.

Greek crew cut? the ECB eased the standards for collateral it accepts in its refinancing operations after Lehman Brothers failed in September 2008 and then further reduced its standards earlier in the year to accept bonds rated BBB minus instead of A minus. But it said it would impose an additional 5% haircut on securities rated BBB minus. And with this week’s downgrade from Moody’s, it came to pass: Greek banks borrowing money from the ECB will now only get 95% of the face value of the bonds they are selling. The Moody’s downgrade also saw $US200 billion of Greek bonds excluded from various indices around the world, and will also force many holders to sell. The only buyer will be the ECB.

Meowww, thud: markets around the world cheered and surged last night with the Standard & Poor’s 500 erasing its 2010 losses. That’s despite a poor home-builder sentiment survey, a very sharp fall German investor confidence in June and the equally sharp downgrading of BP’s credit rating from AA to BBB by the Fitch ratings. The Aussie dollar climbed back over 86 US cents (now where are those sages who last week told us the dollar as sold off because of the mining tax?) and the euro rose past $US1.23; gee, it was only at a four-year low of $US1.188 a week or so ago. Confidence is back, gloom has gone, Europe is safe, despite the faltering Spanish banking system Was that yet another dead cat bounce overnight?

Germany: the fall in the investors’ confidence index — it slumped to 28.7 from 45.8 in May — was notable because it was so large (the index aims to predict developments six months ahead). That’s the biggest decline since October 2008 following the collapse of Lehman Brothers, and much steeper than the market forecast. But the gauge of current conditions rose sharply, so there’s an internal paradox, isn’t there? Or is it showing that despite the current confidence, the outlook is not looking all that hot, a bit like the ECRI leading indicators index for the US we brought you yesterday, which is pointing to a slowdown later this year as well?

Britain: relief in the Old Dart at the fall in inflation in May to an annual 3.4% from 3.7% in the year to April. It vindicated the Bank of England’s calmness when the surge in April was revealed and is being driven by the former government restoring the VAT to its 17.5% rate. Will next week’s cuts and taxes push it up again? The news again undermines all those inflationists who chant, “we’ll be rooned” at every poor or average short-term number. By the way, US import prices fell 0.6% in May and export prices rose 0.6%. No inflation worries there, as we will find tonight with the PPI and tomorrow night with the CPI, both for May. There might even be a bit more deflation in the US figures, which will set the chorus off again: “we’ll be rooned”.

US: Wall Street ignored a nasty warning in the quarterly figures for Best Buy, the country’s biggest electricals retailer. Yes, the shares did fall 6%, but investors didn’t wonder what the result means for the sector. The result was for the quarter ended May 29, which is the first two months of the current second quarter for most US retailers. The bottom line was that Best Buy didn’t star profit-wise. In the quarter ended May 29, net profit from US and international sales rose to $US155 million, from $US153 million, on sales that rose 7.9% to $US10.8 billion (for the US and offshore), while same store sales rose 2.8%. However, that was boosted by a stronger offshore performance where sales were up 11% (and about 30% in China) US sales were up just 5% and same store sales by 1.9%. The message from this result is that US retailing is not looking good and the outlook is for more of the same, with unemployment high, consumer borrowings falling and spending concentrated on food and other necessities.

Cars: the world is in a car boom, sort of, even in the US. Thanks to rising sales in China, India and Brazil, global new car sales are expected to rise 7% this year to 68 million units despite an expected 10% slide in Europe. A study overnight from AlixPartners research group predicts US sales will be up 12% this year and Chinese sales will reach a huge 20 million within the next five years. Now it will take an awful lot of iron ore, coal, energy and other commodities from Australia and elsewhere to produce that many. The study predicts world sales will hit 87 million units a year by 2014. Now that will also be a very, very large carbon footprint.

US debt: guess who’s back buying US government and agency debt? China, of course. Remember all those wise sages last year who opined that America was in trouble as China looked like it was diversifying its holdings (for its obscenely large $US2.4 trillion of foreign reserves)? China’s purchases of gold set off a similar rush of guff. Europeans and others preened as they claimed the Chinese favoured them instead of the greenback.

Debt too: well, guess who’s had the last laugh? At the first sign of the euro’s weakness and Europe’s problems this year, back went the Chinese into the US government debt market. Figures out overnight showed that China’s $US5 billion of purchases in April pushed its direct holdings of government and agency debt past the $US900 billion mark for the first time since last September. Japan, the UK and oil exporting nations such as Venezuela, Iraq, Iran and Saudi Arabia also boosted their holdings. All in all foreign holdings of US bonds and notes rose $US76 billion in April. And China’s figures, in particular, are direct holdings and don’t include the tens of billions held out of London and other financial centres by its agent banks. It was the second monthly increase for China in a row.

Peter Fray

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