As the chart displays, the curves are becoming flatter outside of 3 years, where the LTRO wasn’t focused.
Yesterday, Sober Look offered the following chart showing the similarities between Spain and Portugal's 10-year yield spread to Germany. As the post notes:
On April 1st, 2011, Portugal's 10-year spread to Germany went above 5% for the first time. Two weeks later Portugal formalized its request for assistance from the EU/IMF.Spain’s 10-year spread to Germany surpassed 5% for the first time on Monday and today reached 5.5%.
Without any imminent promise of further easing by the ECB or stimulus from the EU, it appears investors are not waiting to test the Troika’s limits. Even if the ECB were to attempt another LTRO, many of the European banks are already heavily underwater from their sovereign debt purchases in the first couple go a rounds. Will the banks be willing to triple down on the same risks?
Apart from the severe costs of bailing out Spain, which may require more funds than previous bailouts combined, the decision also removes Spain from the group of countries promising capital to back the ESM/EFSF. Without Spain’s contributions, the burden of the bailout mechanisms will fall even more squarely on Germany. France and Italy will also see their shares increase, which the latter can ill afford at this moment.
It is unclear exactly what conditions must be met for a country to officially request a bailout from the Troika, however Spain seems to be moving rapidly in that direction. If two weeks is a reasonable estimate, than it appears highly unlikely the EU can come together on an alternative option in such a short time. The events of the European crisis are speeding up and have finally reached countries that are seemingly too big to fail and too big to bail out. Risks of a larger fallout are finally being priced into the US stock market, though it remains significantly detached from Treasuries, the dollar and commodities. Which direction the crisis will turn next is anyone’s guess, but either way it should be a bumpy ride. Related posts:
Pain in Spain is Only Beginning
Nouriel Roubini - Get Ready for the Spanish Bailout
Private Debt Continues to Drag Down Europe