"Yes, we have no bananas" - Charts of the week

It has been almost 3 weeks now that the European bail-out plan (750 bio eur) has been announced to calm markets. What has been achieved since then ?

1) The ECB has been actively bying Euro-zone government bonds in trouble.

2) Spain : Has announced austerity measures with 5% public wage cut and public pensions age extension being the main ingredients

3) Portugal : Public sector wage cuts and VAT increases should ensure the budget deficit to reach 4,6% end 2011.

4) Italy : 24 bio eur austerity measures, divided over public sector and the battle against fiscal fraud. Surprise because early this month, the Italian government declined to taking "big" measures ; Italy also wants to make the 3% Maastricht cut before the end of 2012

5) Ireland : Announced measures last year in December (4 bio eur in spending cuts) with public sector wage cuts ranging from 5 to 15%.

The charts below sum up the market reaction since the European sovereign debt crisis re-ignited beginning of April with a peak on Friday 07/05, the prelude to the 750 bio eur weekend. In order to find out where we stand, the euro-block was split into two parts, ie core europe and the periphery in trouble (PIIGS). The spread evolution is expressed in basis points risk premium (100 bp = 1%) above the German benchmark. Let's start with core Europe :

All in all no big changes with some even improving their funding cost expressed as premium above Germany. Finland - and Scandinavia as a whole - now function as new alternative benchmark, closely followed by the Netherlands, France and Austria. Despite some rumors hurting Belgium, our national sovereign debt weathered the storm quite well and is almost back where it started. Finally, we apologize to our friendly southern neighbors from Luxembourg for not being incorporated in the analysis : 14% public debt ratio and a deficit in 2009 of -0,7% of GDP. Their 2 emissions of 2 bio eur each (2013 & 2020) hardly moved.

Turning now to the other countries, we first need to adapt our scale on the x-axis.

Main conclusions from the chart above :

1) For the PIIGS, the situation is worse than since the crisis accelerated (green against red)

2) For 3 countries the situation improved since the peak (green against yellow), for Spain and Italy we have a status quo. It most likely reflects the efforts of the ECB in buying up sovereign debt with a focus on Greece, Portugal and Ireland. However, these are also the most easy markets to move because of their relative size, meaning, it's much more difficult for the ECB to move the big markets such as Italy and Spain.

So markets have taken notice from the measures put into place but apparently are not impressed : "Yes, we have no bananas". There are still a lot of question marks to be filled like the Spanish bank problem and the road to structural improvement of budgets world-wide. Next to the financial credibility of the plan, it also carries some important hidden messages for politicians in the upcoming weeks and months, this on the credibility side of electoral promises. The Italian commitment for example says enough. Its budgetary improvement through "increasing efforts against fiscal fraud, better collection of revenue" - and of all people Berlusconi announcing this - rings a bell. The intention of fighting fiscal fraud, honorable as it may be, usually has a different side connotation. It usually means that the government discussed the matter of savings, couldn't come up with structural measures and finally decided to shift the problem to the future. If the month of May proved something, it is that you no longer can sell these kind of stories to the market.