Wonkbook: The pain in Spain falls harder on the bond yields

July 23, 2012

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RCP Obama vs. RomneyObama +1.2%; 7-day change: Obama -1.2%.

RCP Obama approval47.1%; 7-day change: -0.2%.

Top story: The euro crisis is back. Back again.

Spain's bond yields hit a new euro-era high. "Spain’s borrowing costs reached a new euro-era high on Monday as fears about the country’s wilting economy and government finances outweighed the eurozone’s approval of loans to help Madrid recapitalise its banks. The yield demanded by lenders on benchmark 10-year debt issued by Madrid reached 7.530 per cent, above the 7.285 per cent peak touched earlier in the crisis, according to Bloomberg data. There were records across the yield curve, with Spain’s two-year notes yielding 6.478 per cent and its 5-year borrowing costs touching 7.334 per cent." Robin Wigglesworth and Alice Ross in The Financial Times.

The euro and stocks are sliding. "A resurgence of eurozone angst is pushing stocks and commodities into the red and forcing the single currency to a fresh two-year low versus the dollar. The euro has also dropped to a near 12-year trough versus the yen and investors are rushing into the perceived haven of US Treasuries, pushing yields to all-time lows, as fears mount that Spain may be the next eurozone member to need a bailout. The market’s switch to 'risk-off' is unequivocal. The FTSE All-World equity is down 0.8 per cent, after the Asia-Pacific region slumped 1.8 per cent and the FTSE Eurofirst 300 opens with a slide of 0.8 per cent." Jamie Chisholm in The Financial Times.

Brad Plumer explains why this matters: http://wapo.st/LGMQOC.

Bloomberg's Spanish bond yields tracker: http://bloom.bg/MDyUew.

@RobinBew: Spain bond yields surge to unsustainable levels despite bank bailout plan. Starting to wonder how we're ever going to get out of this?!

@bankcustomers: Spanish 10 year bond yields now at 7.51% and notice how the EU & EZ is very quiet. They know that Spain went over the cliff last friday.

@tylercowen At this point, what is the eurozone even going to pretend to try next?

Spain expects to stay in recession. "Spain's government said Friday it anticipates that the country will remain in recession next year amid stepped-up austerity measures, as one of the largest Spanish regions said it will tap a newly-created emergency fund due to problems refinancing its debt. Speaking in a press conference, Budget Minister Cristobal Montoro said the gross domestic product of the euro zone's fourth-largest economy is now likely to contract by around 0.5% in 2013, compared to a previous forecast of 0.2% growth, presented earlier this year." David Roman and Ilan Brat in The Wall Street Journal.

Spain wants ECB action. "The Spanish government, confronted by growing antiausterity protests, now sees the European Central Bank as the only institution with the ability to change the course of the country's financial crisis. 'Somebody has to bet on the euro and now, given the architecture of Europe isn't changed--who can make this bet but the ECB,' Spain's Foreign Minister José Manuel García Margallo said Saturday. The ECB so far has bought around €214 billion ($260 billion) of government debt with its Securities Market Program, but hasn't actively used this tool for months. In the interim, Spain has had to pay dearly to continue attracting investors to its bond auctions." Ilan Brat, David Roman, and Charles Forelle in The Wall Street Journal.

@Pawelmorski: Spain bailout this week I think. Hopefully without some idiot detour where they suggest 'new austerity package'

Talk of a Greek exit is back. "Greece retakes its position at the heart of the European debt crisis this week as its creditors assess how far off course the country is from bailout targets, raising again the specter of its exit from the euro. Greece’s troika of international creditors -- the European Commission, the European Central Bank and the International Monetary Fund -- will arrive in Athens tomorrow amid doubts the country will meet its commitments and reluctance among euro-area states to put up more funds should it fail. '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.'" Patrick Donahue in Bloomberg.

Greece is seeking more cuts. "Greece's newly elected government is seeking billions of euros of additional budget cuts--and looks poised to announce the first steps toward streamlining the country's bloated public sector--ahead of the return of a troika of international inspectors to Athens this week...The Greek government is expected to announce this week the merger and closure of some 20 state agencies--for example, merging two state-owned trade-fair organizers with Greece's export-promotion agency--the first wave of some 200 organizations it promises to streamline by the end of August. It has identified roughly two-thirds of some €11.5 billion ($14 billion) of budget cuts Greece must make over the next two years to meet the terms of its latest European-led €173 billion bailout." Alkman Granitsas in The Wall Street Journal.

TAYLOR: Talk of a Greek exit risks a self-fulfilling prophecy. "To understand the impact of a potential Greek exit from the euro zone, imagine an operating theatre inside a betting shop. As surgeons prepare to amputate a gangrened foot to prevent infection spreading to healthier parts of the body, gamblers on the sidelines lay bets on which limb will be next for the chop. Talk of a possible Greek exit has already sapped investors' confidence in the 17-nation single currency area and contributed to higher borrowing costs for Spain and Italy. It is making a planned return to market funding next year harder for Ireland and Portugal, which are implementing tough bailout programs." Paul Taylor in Reuters.

EVANS-PRITCHARD: European policymakers are to blame for Spain's woes. "The reason why Spain is spiralling into deeper depression is because EMU policy settings are contractionary. The European Central Bank caused the Spanish money supply to collapse last year by tightening policy. Real M1 money was falling at double digit rates by mid-2011. The economic damage we are seeing now was baked into the pie. Fiscal policy has since become maniacal. The latest EU-imposed cuts, passed by the Cortes on Thursday as a condition for Spain's €100bn bank rescue, entail further tightening of 6.7 pc of GDP over three years. It is a ruinous for an economy already contracting, with unemployment of 24.3pc, in the grip of ferocious deleveraging by firms and households." Ambrose Evans-Pritchard in The Daily Telegraph.

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Top op-eds

1) LUCE: Eminent domain is a welcome tool to fight foreclosures. "Congress has forsworn further stimulus, and export growth is tapering off, it is unclear where the next phase of America’s recovery will come from. When they peer through their glass darkly, the experts only see paralysis. Which is why the bankrupt Californian cities of San Bernardino and Stockton offer such a bracing jolt to Washington’s passivity. Where the Obama administration has largely failed to ease the foreclosure crisis, the two cities recently announced plans to seize loans on 'underwater' homes (those valued at less than the mortgages). The two were driven to bankruptcy largely by mass foreclosures, which shut down communities and killed economic activity. In despair at banks’ reluctance to renegotiate mortgages, they plan forcibly to buy and restructure them." Edward Luce in The Financial Times.

@morningmoneyben: Wall Street does NOT like the idea of govt using eminent domain to seize mortgage loans. http://bit.ly/Mi5BJU

2) BAROFSKY: TARP hasn't been used to preserve homeownership. "Part of the current economic malaise can be traced directly to Treasury’s betrayal of its promise to use TARP to 'preserve homeownership.' The Home Affordable Modification Program has brought little meaningful improvement, with fewer than 800,000 ongoing permanent modifications as of March 31, 2012, a number that is growing at the glacial pace of just 12,000 per month. In June 2011, Treasury appeared to take a tentative step toward holding the mortgage servicers accountable for the widespread misconduct in the program by pledging to withhold the incentive payments to three of the largest banks -- Wells Fargo (WFC) & Co., Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) -- until they came into compliance with HAMP’s rules. Treasury couldn’t even keep this modest commitment." Neil Barofsky in Bloomberg.

3) KRUGMAN: Large-scale damage from climate change is here. "The great Midwestern drought is a case in point. This drought has already sent corn prices to their highest level ever. If it continues, it could cause a global food crisis, because the U.S. heartland is still the world’s breadbasket. And yes, the drought is linked to climate change: such events have happened before, but they’re much more likely now than they used to be...Will the current drought finally lead to serious climate action? History isn’t encouraging. The deniers will surely keep on denying, especially because conceding at this point that the science they’ve trashed was right all along would be to admit their own culpability for the looming disaster. And the public is all too likely to lose interest again the next time the die comes up white or blue. But let’s hope that this time is different. For large-scale damage from climate change is no longer a disaster waiting to happen. It’s happening now." Paul Krugman in The New York Times.

4) PEARLSTEIN: Grown-ups are finally showing up for the budget debate. "Some grown-ups who have been noticeably absent from this conversation have been the heads of the country’s major corporations, who talk a good game about deficit reduction but haven’t invested the time, money and political capital necessary to jolt the political system from its dysfunctional equilibrium. That’s about to change. Last week, the first battalion of CEOs showed up in Washington, reporting for duty...The group, calling itself Fix the Debt, went public at a news conference urging the president and Congress to embrace a deficit-reduction plan along the lines suggested by the bipartisan Simpson-Bowles Commission, which included reforms of a tax code that produces too little and entitlement programs that spend too much." Steven Pearlstein in The Washington Post.

5) FUKUYAMA: Conservatives should embrace government again. "The model for a future American conservatism has been out there for some time: a renewal of the tradition of Alexander Hamilton and Theodore Roosevelt that sees the necessity of a strong if limited state, and that uses state power for the purposes of national revival. The principles it would seek to promote are private property and a competitive market economy; fiscal responsibility; identity and foreign policy based on nation and national interest rather than some global cosmopolitan ideal. But it would see the state as a facilitator rather than an enemy of these objectives." Francis Fukuyama in The Financial Times.

6) SILVER: Presidential polls don't break towards challengers. "There are certainly some good reasons to think that the polls could break toward Mitt Romney. For instance, many polls out now were conducted among registered voters; when pollsters switch over to likely voter polls instead -- which assess each voter’s probability of actually casting a ballot on Nov. 6 -- it is likely that Mr. Romney will gain a point or two. And Barack Obama obviously has a lot of weight to bear from the lukewarm economic recovery. But one hypothesis you should find less persuasive is the notion that the polls will break toward Mr. Romney just because he is the challenger. It is often asserted that this is the case -- that the polls move toward the 'out-party' candidate rather than the incumbent. But in my view the empirical evidence -- although it is somewhat ambiguous -- mostly argues against this idea." Nate Silver in The New York Times.

@fivethirtyeight: One thing that would help election geeks is more polls in NON swing states. Helps us to understand how popular vote is distributed.

Top long reads

Frank Rich on America's infatuation with decline:"The wave of nostalgia for Andy Griffith’s Mayberry and for the vanished halcyon America it supposedly enshrined says more about the frazzled state of America in 2012 and our congenital historical amnesia than it does about the reality of America in 1960. The eulogists’ sentimental juxtapositions of then and now were foreordained. If there’s one battle cry that unites our divided populace, it’s that the country has gone to hell and that almost any modern era, with the possible exception of the Great Depression, is superior in civic grace, selfless patriotism, and can-do capitalistic spunk to our present nadir. For nearly four years now--since the crash of ’08 and the accompanying ascent of Barack Obama--America has been in full decline panic. Books by public intellectuals, pundits, and politicians heralding our imminent collapse have been one of the few reliable growth industries in hard times."

'90s nostalgia interlude: Soul Asylum plays "Runaway Train" on Later with Jools Holland.

Got tips, additions, or comments? E-mail me.

Still to come: Tax loopholes make deficit reduction hard; birth control mandate challenges pile up; cybersecurity heads for the floor; phasing out energy loans gets back on track; and the view from the ISS.

Economy

Prosecutors are close to making arrests over Libor. "Prosecutors and European regulators are close to arresting individual traders and charging them with colluding to manipulate global benchmark interest rates, according to people familiar with a sweeping investigation into the rigging scandal. Federal prosecutors in Washington, D.C., have recently contacted lawyers representing some of the suspects to notify them that criminal charges and arrests could be imminent, said two of those sources, who asked not to be identified because the investigation is ongoing." Matthew Goldstein, Jennifer Ablan, and Philipp Halstrick in Reuters.

Tax loopholes are standing in the way of deficit reduction. "As a member of the 'Gang of Six,' Senator Mike Crapo of Idaho has emerged as something of a hero among advocates of bipartisanship, one of three conservative Republicans working with three Democrats to cut the deficit by closing loopholes that allow businesses and households to avoid paying taxes. Yet earlier this year, the senator made sure that a $3 billion loophole -- protecting 'black liquor,' an alcoholic sludge used as fuel in timber mills and factories -- remained open in the negotiations over the highway bill that President Obama signed this month. Many budget experts criticize the loophole as a tax dodge because it allows the sludge to qualify for an energy subsidy created to wean the country off imported oil for vehicles, which black liquor does not do...The back-room actions on black liquor point to just how difficult it will be to lower the budget deficit through painless changes in the tax code." Jonathan Weisman in The New York Times.

Some companies are passing up tax deductions. "Executives, particularly at small and medium-size companies, complain that many of the tax deductions are either too cumbersome or too confusing. In some cases, the cost of obtaining the tax benefit is greater than the benefit itself--a wrinkle that has helped spawn a cottage industry of tax-credit consultants. Also problematic is the threat of pushback from the Internal Revenue Service. The result: many companies are saying 'no, thanks' and are likely paying more taxes than legally required. And corporate breaks that Washington hopes will boost the economy often prove ineffective." John McKinnon in The Wall Street Journal.

The Senate will take up middle class tax cut extension this week. "After a bruising week for Senate Democrats in which Republicans blocked progress on two bills, next week promises more partisan fighting, as the Senate is expected to consider the Democrats' tax plan. The Middle Class Tax Cut Act, proposed by Majority Leader Harry Reid (D-Nev.), is a one-year extension of the Bush-tax rates on annual incomes of less than $250,000. Reid’s plan, S. 3412, would also set a top rate of 20 percent for capital gains and dividends, and extend expansions of the child tax credit and the earned income tax credit." Ramsey Cox in The Hill.

A pre-election deal on the sequester is unlikely. "The rhetoric on pending cuts to the Pentagon intensified this week, but the chances of a pre-election deal to avert those spending reductions and others appear unlikely...Most Republicans and Democrats do not want the cuts through sequestration, roughly $500 billion to both defense and non-defense spending over the next decade, to occur. Yet, they have generated little movement in the past 11 months toward finding alternative deficit reduction since sequestration was included in the Budget Control Act last year as a punitive measure." Jeremy Herb in The Hill.

Pressure is increasing for more Fed action. "The US will make little progress tackling high unemployment before 2014 unless the Federal Reserve eases policy further, one of the central bank’s leading officials has warned in the run-up to a meeting next week where the option of 'QE3' will be on the table. The comments by John Williams, president of the Federal Reserve Bank of San Francisco, show how the weak economy is pushing the central bank towards action to support growth...Mr Williams is regarded as close to the centre of gravity on the rate-setting Federal Open Market Committee, of which he is a voting member this year. The FOMC will conclude its next meeting on August 1." Robin Harding in The Financial Times.

BLINDER: The Fed should reduce the reward for holding excess reserves. "The basic idea is simple. If the Fed reduces the reward for holding excess reserves, banks will hold less of them--which means they will have to find something else to do with the money, such as lending it out or putting it in the capital markets...First, test the waters by cutting the interest on excess reserves (in Fedspeak, the 'IOER') to zero. Then, if nothing goes wrong, drop it to, say, minus-25 basis points--that is, charge banks a fee for holding their money at the Fed. Doing so would provide a powerful incentive for banks to disgorge some of their idle reserves. True, most of the money would probably find its way into short-term money-market instruments such as fed funds, T-bills and commercial paper. But some would probably flow into increased lending, which is just what the economy needs." Alan Blinder in The Wall Street Journal.

The view from space interlude: The view from the International Space Station at night.

Health Care

Legal challenges to the birth control mandate is piling up. "Challenges to President Obama’s birth-control mandate are piling up in court. Twenty-four lawsuits have been filed against the federal birth-control mandate so far, mostly from religious groups that view the policy as a dangerous erosion of religious freedom...Most of the 58 plaintiffs in the 24 lawsuits are Catholic dioceses, colleges and charity groups...On Tuesday, a federal judge dismissed a lawsuit from seven states, ruling that they did not have standing to sue over the birth control policy because it does not go into full effect until next year." Elise Viebeck in The Hill.

Same-sex partners' children will get health benefits. "The Obama administration is giving a new health benefit to same-sex partners -- and it’s built on one of the most popular provisions of 'Obamacare.' On Friday, the administration published a proposed rule that would extend one of the health care law’s best-known provisions -- allowing children to stay on their parents’ health plans until age 26 -- to same-sex partners of federal workers. The rule would extend eligibility in the Federal Employee Health Benefits Program to the children of an enrollee’s same-sex partner. It also would extend coverage in the federal employees’ dental and vision insurance programs." Jason Millman in Politico.

Domestic Policy

The cybersecurity bill will hit the floor this week. "It’s make-or-break time for cybersecurity legislation in the Senate. Senate Majority Leader Harry Reid (D-Nev.) will likely move to Sen. Joe Lieberman's (I-Conn.) cybersecurity bill this week once the upper chamber finishes up votes on taxes, an aide said. That could come as early as Wednesday or Thursday, while a procedural vote to move the bill to the floor is expected the following Monday." Jennifer Martinez and Brendan Sasso in The Hill.

Harry Reid may use the 'constitutional option' to change filibuster rules. "Reid has vowed to do away with filibusters on procedural votes if Democrats hold the majority in the November elections. Senate Republicans oppose the idea, and in particular they take issue with Reid’s threat to change the rule through a majority vote of just 51 Senators. Changes to the Senate rules typically occur on a two-thirds, or 67-vote, threshold, but the chamber’s rules allow for changes to be made with the consent of 51 Members if those changes are voted on at the beginning of the Congressional session." Humberto Sanchez in Roll Call.

How to interlude: How to make bicycle handlebars that light-up.

Energy

A bill to phase out clean-energy loans is back on track. "A behind-the-scenes fight among House Republicans over the Energy Department’s loan guarantee program appears to be largely quashed after some GOP lawmakers took fire from conservatives for straying from the national party’s Solyndra messaging...Rep. Ed Whitfield (R-Ky.) announced that Republicans were postponing a vote that was planned for Thursday in the Energy and Power Subcommittee on the No More Solyndras Act so lawmakers would have enough time to review the 15 amendments to the bill...The subcommittee rescheduled the vote for Wednesday. Whitfield said he feels confident the bill has enough Republican support to pass the subcommittee." Andrew Restuccia and Darren Goode in Politico.

@bencasselman: Lower oil prices hitting U.S. drilling activity? Oil-directed rig count down 13 last week, down two of past three weeks.

LEONHARDT: Investment in clean energy may be the best hope for the planet. "Over the last several years, the governments of the United States, Europe and China have spent hundreds of billions of dollars on clean-energy research and deployment. And despite some high-profile flops, like ethanol and Solyndra, the investments seem to be succeeding more than they are failing...The successes make it possible at least to fathom a transition to clean energy that does not involve putting a price on carbon -- either through a carbon tax or a cap-and-trade program that requires licenses for emissions...The clean-energy push has been successful enough to leave many climate advocates believing it is the single best hope for preventing even hotter summers, more droughts and bigger brush fires." David Leonhardt in The New York Times.

@DLeonhardt: In reporting today's piece on climate, I enjoyed this @drgrist post on massively wrongheaded energy predix: http://bit.ly/Q7VFZz

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

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