SCOREBOARD: Spanish floodlight

The finer details of Spain's bailout request will be the next big market signpost, ahead of Europe's summit.

Friday’s bounce back on Wall Street suggests that Aussie equities should have a decent session today. Beyond that? Well that all comes down to Europe and of course this growing sense that the world economy is slowing again.

Now don’t forget that Spain is set to formally request aid today – well, tonight for us. This aid is just some of that €100 billion they were already granted, and as it turns out, don’t even need. So it’s not such a big event, but nerves are frayed and so the actual announcement could rock markets again. As to how much of that €100 billion they’ll ask for, I haven’t read anything as yet. The capital shortfall that two independent consultants suggested they needed was well below that – €16 billion to €25 billion in the base case scenario. And that’s over three years.

Technically then it could be for a very small amount of money – a few billion that this point – but what would the audience think of that? "Grossly inadequate” is what the economists rolled out for such an occasion. The ratings agencies would immediately come out and downgrade someone. Although these days just one or two banks/countries doesn’t cut it. It doesn’t make the headlines. You gotta do things in groups of 10 or 15.

The conditions attached to Spain’s aid will be more interesting I think. People are suggesting that Spain will be required to restructure its banking system – to do what other countries did – creating bad banks to dump ‘toxic’ assets into etc, only to sell at a massive profit at a later stage when the hysteria dies down. But why this wasn’t quietly done in the first place is the bigger mystery. Why the theatrics?

I guess there is a lot more in the way of theatrics to come and certainly the EU summit this week – which starts on Thursday, I believe – is not to be missed. Spain will no doubt be discussed, but so will Greece. The discussion here will revolve around what concessions Greece should get and concessions are certainly the best bet. I think the EU will want to be seen to be rewarding Greek citizens, or at least showing some empathy.

Greece for its part is seeking a two-year extension of its fiscal targets and wishes to scrap some of the harsher measures required under austerity, such as the 150,000 cuts to the public service. As to the boarder conversation, what about using bailout funds to lower Spain and Italian yields? Who knows. The French, Italians and Spanish are obviously very keen but Germany remains reluctant so far. It will certainly be discussed. Other than that, €130 billion (or 1 per cent of GDP) has so far been allocated to boost European growth – mainly though infrastructure.

As to those concerns over the global economy, nothing will likely be resolved this week. Data is very light for Australia and there is only a little bit more in the US. There's nothing that will really get the market out of this 'growth is collapsing' rut. Specifically, we get new home sales (May) tonight along with some manufacturing indices from Chicago and the Dallas Fed.

On Tuesday we see some house price data, consumer confidence and another regional manufacturing survey from the Richmond Federal Reserve bank. Then on Wednesday night we get durable goods orders (for May), while on Thursday night we see the final estimate of first-quarter US GDP (1.9 per cent expected) and initial jobless claims. Finally on Friday, personal income and spending data is out alongside the PCE deflator. Those figures are all for May. Other than that there is a little bit of Fed speak – from Cleveland Fed’s Sandra Pianalto (voter) and Dallas Fed President Richard Fisher (non-voter) on Thursday and then St Louis Fed president James Bullard (non-voter) on Friday.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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