ECB Buying Spanish Debt

At least according to reports in a couple of leading Spanish newspapers. For what it's worth, I think the market evidence shows their could be some credibility to these reports. For example, whilst Italian debt yields continue to rise...

....Spanish yields have mysteriously come down a bit...

However, I think it is really not enough to fight sentiment at this stage. Frankly, there is little that Trichet and the ECB can do with the EFSF. The EFSF has 30% of its guarantee commitments coming from Italy & Spain and the idea of the EFSF issuing debt in order to loan Italy & Spain money is too ludicrous to contemplate.

The key to understanding the market panic comes from a cursory view at the debt exposure of European banks to Italian debt...

 ...it's not hard to see that if Italy continues on an unsustainable debt path then the consequences could be dire for European Banks and they will have to raise capital. Taxpayers need to brace themselves although I doubt Bob Diamond will be taking a pay cut.

As to the country specific exposure to Italian and Spanish debt, I have tabulated some data here from the Bank of International Settlements (BIS). Firstly, Italy...

 

Claims on Italy Debt (m)	France	Germany	UK	USA	Non-Europe
Public Sector	105,045	50,982	12,734	14,380	48,144
Banks	49,088	52,516	9,188	16,121	21,390
Non-Bank Private Sector	256,105	61,434	46,949	13,564	23,391
Total	410,238	164,932	68,871	44,065	92,925

and then Spain...

Claims on Spain Debt (m)	France	Germany	UK	USA	Non-Europe
Public Sector	32,581	29,389	8,629	6,060	19,101
Banks	36,473	69,149	14,974	24,696	30,936
Non-Bank Private Sector	77,031	79,321	77,199	27,162	39,065
Total	146,085	177,859	100,802	57,918	89,102

 ...so the problem is substantial and I can't quite understand why investors are piling into bunds and French debt because Italy and/or Spain really are too big to fail. If this all ends up with the creation of a 'Eurozone bond' and a movement towards fiscal union, then German and French yields will have to rise to  price in the adoption of risk over peripheral debt. Bunds aren't as safe an option as most investors think!

Source:

EFSF Guarantee Commitments

BIS data