For your pre-holiday reading enjoyment.
Archive for the ‘European Commission (EC)’ Category
Reactions to the Results of the EU Summit Meeting
This is an extremely long post with complete articles from the Financial Times, the Economist, the Guardian, Spiegel Online, and the Centre for European Reform (a British think tank). So as to avoid inserting my own slant on the outcome of the summit meeting, I decided not to post shortened, edited versions.
The articles are below the fold.
Lousy German bond auction:
Germany saw one of its poorest debt sales on Wednesday in what was seen as a failed auction by many market participants amid fears the eurozone’s debt crisis is spreading all the way to Berlin. Marc Ostwald, at Monument, said “I cannot recall a worse auction … If Germany can only manage this sort of participation, what hope for the rest. Yields are at completely the wrong level.” Mr Oswald said the bid-to-cover ratio was only 0.65 times as the German debt agency sold just €3.644bn of its new 10-year Bund of the €6bn targeted. The Bundesbank retained a massive €2.356bn, which it will plan to sell over the coming days in the hope market sentiment improves. If the Bundesbank retention is included, the bid-to-cover ratio was a modest 1.1 times. Many market participants consider this an auction failure although some say technically it is not, as by retaining its own bonds the Bundesbank has pushed the bid-to-cover ratio above 1.0 times. The average yield for the 10-year bonds was 1.98 per cent.
Lousy eurozone economic indicators:
Eurozone industry saw the biggest one month fall in orders in almost three years in September, as worries about the region’s escalating debt crisis hit demand. New orders plunged by 6.4 per cent compared with August, according to Eurostat, the European Union’s statistical office. It was the biggest month-on-month fall since December 2008, when the global economy was reeling from the collapse of Lehman Brothers investment bank. Then, orders dropped by 10.2 per cent.
The data suggested the region’s debt crisis had undermined economic confidence even more than feared, resulting in business and consumers cutting back investment and spending. Earlier this week, the European Commission reported its index of eurozone consumer confidence had fallen in November for the fifth consecutive month to the lowest level since August 2009.
With orders data providing an early indication of trends in economic activity, September’s figures added to evidence that the eurozone has fallen into recession. Italy, where the eurozone debt crisis intensified from August, saw the biggest drop in industrial orders – of 9.2 per cent – between August and September. But France and Spain saw drop of 6.2 per cent and 5.3 per cent respectively, and Germany saw a 4.4 per cent contraction in orders.
Eurozone purchasing managers’ indices for November, also published on Wednesday, indicated overall economic activity is contracting at a significant pace – although the rate of decline appeared to have stabilised. The “composite” index, covering manufacturing and services, rose from 46.5 in October to 47.2 – the third consecutive month below the 50 level, which divides an expansion in activity from a contraction.
In a forceful speech to the Bundestag lower house of parliament, Chancellor Angela Merkel issued one of her starkest warnings yet against fiddling with the central bank’s strict inflation-fighting mandate . . . “The European currency union is based, and this was a precondition for the creation of the union, on a central bank that has sole responsibility for monetary policy. This is its mandate. It is pursuing this. And we all need to be very careful about criticizing the European Central Bank,” Merkel said. “I am firmly convinced that the mandate of the European Central Bank cannot, absolutely cannot, be changed.”
The European Commission has released the “Green Paper on the feasibility of introducing Stability Bonds,” the draft of which I included in one of my Monday posts.
German Chancellor Angela Merkel slapped down a new European Union push for bonds issued jointly by the 17 euro nations, saying Tuesday that they wouldn’t resolve the debt crisis and now is the wrong time to discuss them. Merkel dug in on her resistance to calls for an instant solution to the crisis hours after the EU’s top economic official tried to sell a skeptical Germany on Brussels’ new drive for so-called “eurobonds,” which the EU’s executive Commission is now calling “stability bonds.” Merkel has staunchly opposed anything resembling eurobonds, which the Commission’s head argues would be an effective way to avoid disaster as many countries’ borrowing costs spiral higher in the debt crisis.
The chancellor noted in a speech to Germany’s main employers’ association that so-called eurobonds “have just come very much back into fashion.” But she was unbending in her opposition to introducing them, saying that what’s important is to address shortcomings in the construction of the eurozone. “If at all, this discussion belongs at the end — so I don’t find it particularly fitting that we are now once again conducting it in the middle of the crisis, as if it were the answer to this crisis,” Merkel said. “In the long term, it isn’t.”
Merkel also underlined her resistance to mounting pressure for a major bond-buying campaign by the European Central Bank as a way of relieving pressure on other countries’ borrowing costs. She said of hopes of an immediate solution to the crisis: “I say yet again: there won’t be one.”
The EC Green Paper is one part of the EC’s “package enabling new action for growth, governance and stability” announced today:
- Press release
- The 2012 Annual Growth Survey: FAQ
- Economic Governance
- Speech by President Barroso
- Annual Growth Survey
- Regulation on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area
- Regulation on the strengthening of economic and budgetary surveillance of Member States experiencing or threatened with serious difficulties with respect to their financial stability in the euro area
This post is a veritable potpourri of worries. Be warned.
With the landslide victory of Mariano Rajoy’s center-right Popular party, the government of the Spanish Socialists has become the fifth victim (after Ireland, Portugal, Greece and Italy) of the eurozone crisis. As have the leaders of the other recently-installed governments, Mr. Rajoy has promised to enforce budgetary austerity.
No matter. Despite the Popular party’s victory, yields on Spanish sovereign debt rose today; the ten-year bond yield reached 6.6 percent. Yields on the sovereign debt of other “peripheral eurozone” countries also jumped, as did the yields on “core” countries debt.
Undoubtedly, a report from Nomura — “Currency risk in a Eurozone break-up — Legal Aspects” contributed to today’s indigestion in the eurozone bond markets. The report deals with a subject — “redomination risk” — that has evidently not previously been on market participants’ radar screens: not knowing which euros will stay euros.
It is now obvious that the widespread electoral success of parties committed to fiscal rectitude isn’t sufficient to ameliorate, much less bring to a halt, the crisis by improving investor confidence. That this has become self-evident further undermines confidence, as what was once thought to be a solution has turned out not to be. More than ever, all eyes are turned toward the European Central Bank, with the hope that the ECB will, at long last, overcome its reticence and become the eurozone’s lender of last resort. As yet, there’s no evidence whatsoever that the ECB will undertake what would be an about-face of epic proportions; last Friday, the ECB’s president said that the crisis required a political solution and that the ECB wouldn’t bailout anybody. This situation will persist unless and until Germany performs its about face. But that isn’t happening; if anything, the Germans are digging in their heels.
No wonder, then, that commentaries on the crisis are becoming increasingly strident and downright panicky.
Wolfgang Munchau, writing in the Financial Times, uses the words “insane” and “depression”:
The consensus view in Brussels and Berlin is that the crisis can be solved by technocratic governments imposing structural reform and austerity. That proposition is, in my view, insane . . . We have gone way beyond the point at which this crisis is solvable by standard instruments of economic policy. The survival of the euro will now depend on whether Ms Merkel or Mr Draghi, or both, will blink.
This may yet happen, but not right away. The ECB is facing more formidable legal constraints than those who call for an intervention acknowledge. The bank is technically allowed to engage in secondary bond market purchases, but not with the aim of helping governments incur deficits or roll over debt. Article 123 of the Treaty for the Functioning of the European Union says the ECB shall give no overdrafts to governments. Clearly, the euro was sold on the grounds that the ECB would never do what it is being asked to now. Such a law is testimony to a lack of realism, especially given what we know about the history of financial crises.
[...] The eurozone has already entered a recession, driven by three factors, each serious on its own and lethal in combination: a slowdown of the global economy; pro-cyclical fiscal austerity programmes; and a much larger than expected deleveraging of the financial sector. If present policy prevailed, the eurozone would be in danger of falling into a depression.
[...] In present market conditions, a leveraged EFSF is unrealistic. So how long can this policy vacuum be sustained? So far, the speed of the crisis has exceeded the speed of the political response. The next political turning point will come at the European Council meeting in December, which will need to decide something more substantial than previous summits.
If that does not happen, we will be getting closer to the point where member states – confronted with an unsustainable funding position – could rationally conclude that the political and financial costs of staying in the eurozone may well exceed the costs of an exit. This is not a proposition anybody would want to test. Once the eurozone goes down that road, it will not come out of this crisis in one piece.
The moment will arrive, probably sooner rather than later, when Mr Draghi and Ms Merkel will have to blink simultaneously. The odds of that happening are neither low nor high. They are indeterminate. It is the worst kind of uncertainty imaginable.
George Soros describes the current situation as “a perfect vicious circle”:
The current turmoil in the eurozone bonds markets shows striking parallels to the situation in autumn 2008. Then, bank depositors had lost confidence in the stability of the institutions holding their assets, and the threat of a bank-run could only be avoided by comprehensive government guarantees for all banks. Today, we are observing a bond-run: a self-fulfilling crisis of confidence in the stability of most eurozone sovereign borrowers. This is driving long-term rates up, so that for more and more countries a temporary liquidity problem is becoming a permanent solvency problem. As regulators still treat government bonds as the safe core of the financial system, this vicious circle threatens the stability of financial institutions not only in the eurozone but also in the rest of the world. It intensifies the recessionary tendencies in the global economy so that in turn the financial situation of governments becomes worse. It’s a perfect vicious circle.
Lurking in the background and greatly adding to the difficulty of finding a solution to the crisis are the issues of sovereignty and democracy. That these issues are rapidly gaining traction on both the Right and the Left is a measure of their potential potency.
From the Right, Michael Burleigh writes in the Telegraph:
Technocracy has suddenly become all the rage amidst the debt crisis of the eurozone. In Greece, prime minister George Papandreou was ousted in favour of the unelected former central banker Lucas Papademos, after he had the effrontery to call the referendum that never was. In Italy, Mario Monti, the unelected former EU commissioner, has anointed a cabinet of academics, bankers and an admiral, without a single representative of Italy’s political parties.
[...] we are now witnessing the displacement of elected politicians by men and women who, as their careers reveal, are au fait with the jargon of the European Union, although they too will be wondering “when do we get the money?”
[...] Men like [Italy's] Monti, who is steeped in EU lore, are not going to suddenly disinvest in a utopian project they have devoted their lives to. They are part of the same arrogant and remote Euro elite that botched together the project to start with.
The technocratic train is also likely to hit the buffers sooner than they may imagine. The people are still represented by politicians in national parliaments, even if such unelected bodies as the EU Commission or the European Court of “Human Rights” have massively subverted their powers.
These politicians represent local communities, or at least networks of needy political clients if we are talking about southern Europe. When the technocrats decide to retire tens of thousands of public sector workers, they will run into the brick wall of politicians who owe their election to such interests.
[...] if it is the case that politicians have no power vis a vis unelected international bureaucrats and technocrats, then we might as well acquire some who do. The logical question to ask is: if politicians do not trust their own people – see Merkel and Sarkozy in the case of the Greeks – then why should people trust politicians? That is where rule by technocrats takes us, and it is not a good place to be.
Another article in the Telegraph deals with a leaked German government document describing an “intrusive European body with the power to take over the economies of struggling nations”:
The six-page memo, by the German foreign office, argues that Europe’s economic powerhouses should be able to intervene in how beleaguered eurozone countries are run.
The confidential blueprint sets out Germany’s plan to tackle the eurozone debt crisis by creating a “stability union” that will be “immediately followed by moves “on the way towards a political union”.
It will prompt fears that Germany’s euro crisis plans could result in a European super-state with spending and tax plans set in Brussels.
The proposals urge that the European Stability Mechanism (ESM), a eurozone bailout fund that will be established by the end of next year, should be transformed into a version of the International Monetary Fund for the EU.
The European Monetary Fund (EMF) would be able to take full fiscal control of a failing country, including taking countries into receivership.
The leaked document, “The Future of the EU: Required Integration Policy Improvements for the Creation of a Stability Union,” comes as David Cameron meets Angela Merkel, the German chancellor, in Berlin today [November 17] to talk about treaty changes and the eurozone crisis.
The German plan begins with a proposal to create “automatic sanctions” that could be imposed on euro members spending beyond targets set by the European Commission. Germany is demanding that if euro rules are “consistently violated”, it should be able to demand action from the European Court of Justice.
Germany, Finland, Austria and the Netherlands would be able to ask EU courts to impose sanctions, from fines to the loss of budgetary sovereignty, to protect the euro.
The memo states the EMF would be given “real intervention rights” in the budgets of euro members who have received EU-IMF bailouts.
Over the weekend, the Financial Times obtained a draft version of a European Commission document that will be released this Wednesday. Titled “Feasibility of Introducing Stability Bonds” — with “Stability Bonds” being synonymous with “eurobonds,” the document may or may not bear some relationship to the leaked German government document.
The key paragraph in the document’s summary is as follows:
While common issuance has typically been regarded as a longer-term possibility, the more recent debate has focused on potential near-term benefits as a way to alleviate tension in the sovereign debt market. In this context, the introduction of Stability Bonds would not come at the end of a process of further economic and fiscal convergence, but would come in parallel with and foster the establishment and implementation of the necessary framework for such convergence. Such a parallel approach would require an immediate and decisive advance in the process of economic, financial and political integration within the euro area.
From the Left, Andy Robinson writes in The Nation:
There appear to be two basic reasons for the failure of the European left to benefit from the spontaneous popular protests. First is the crisis of sovereignty, as key decision-making is shifted from the national arena to Brussels, Berlin, Paris and Frankfurt. The extraordinary events in Greece are the most extreme example. First Papandreou proposed holding a referendum on the October 26 Brussels agreement, in which Greece will receive further Troika financing, with a negotiated default on 50 percent of its debt. In return, a further round of savage austerity was demanded, including dismissal of 150,000 public sector workers over three years, more new taxes and probable dismantling of collective bargaining agreements. The plan also set up a “monitoring capacity,” in which a team of euro technocrats will “advise and offer assistance in order to ensure the timely and full implementation of the reforms.” This challenge to national sovereignty could not but evoke the humiliating experience of 1893, when Greece defaulted on its external debt and later had to accommodate inspectors from Germany and other Northern European creditor countries, who made sure taxes were used to pay off debt and not for the national budget.
The threat that Troika crisis management poses for democracy and national sovereignty is only beginning to emerge. Opinion polls show that two-thirds of Greeks oppose the Brussels agreement. Yet when Papandreou announced a referendum, the response from Brussels and Berlin was furious intolerance for democratic rights. Finland’s Olli Rehn, the EU economic and monetary affairs commissioner, called the planned plebiscite “a breach of confidence” and demanded that all Greek political parties sign a document committing to the Brussels accord. German Chancellor Merkel and French President Sarkozy—now known scornfully in Southern Europe as Merkozy—warned that Greece would be expelled from the euro if the people rejected the austerity plan.
[...] “The stance by Merkel and Sarkozy was a blatant violation of European law and of our constitutional right to self-determination,” said George Katrougalos, a leftist law professor at Demokritos University in Athens. “I was amazed that the left did not support the referendum; we can’t support direct democracy only when we know we’ll win.” The split on the referendum was just one example of the difficulty of organizing anything more than mass protest when decision-making power is shifting to unaccountable technocrats. A fitting end to this chapter of Greece’s via crucis was the formation of a provisional government in November charged with implementing the Brussels agreement. It is made up of technocrats under the supervision of interim Prime Minister Lucas Papademos—former vice president of the Troika’s ECB.
The current issue of the Economist includes a not-to-be-missed special report on Europe. There are eight articles in the report. Here are their links:
- Staring into the abyss
- A very short history of the crisis
- Destructive creation
- In theory
- Beyond the fringe
- The Nico and Angela Show
- Look at it this way
- Making do
In the regular part of the Economist, these articles on Europe are worth reading:
- Addio Silvio
- Rushing for the exits
- That sinking feeling
- A case of the sniffles
- Tomorrow and tomorrow
- The belt-tightener in chief
- Europe against the people?
- Drought warning
- The road to self-deception
A subscription to the Economist is worth every dollar (or euro).
The European Commission has released its new European Economic Forecast. To say that this 248 page document makes for sober reading is an understatement. To give you its flavor, here are excerpts from Director General Marco Buti’s editorial, the Overview, and the first chapter (“The EU Economy: A Recovery in Distress”):
The global economy is in danger zone again. This time, the euro area is the focus of concern. In spring, itlooked as if Europe’s sovereign-debt troubles remained contained. Moreover, there were signs of domestic demand taking over as the engine of a moderate recovery of the European economy, despitefiscal tightening and weakening global economic conditions. These hopes were dashed. Uncertainty has increased, and doubts about the future path of growth in the advanced economies have grown. Stress in the banking sector – simmering since the collapse of Lehman Brothers – escalated, and investors and consumers switched back into precautionary modus. Increased public debt concerns are weighing on bank balance sheets with negative repercussions on credit and real growth going forward, further clouding the outlook for public finances. Compared to our 2011 spring forecast, we revised down our growth projections for 2012, for both the EU, euro area and the world economy, and remain cautious in our outlook for 2013. We do not expect a recession in our baseline scenario. But the probability of a more protracted period of stagnation is high. And, given the unusually high uncertainty around key policy decisions, a deep and prolonged recession complemented by continued market turmoil cannot be excluded.
The outlook for the European economy has taken a turn for the worse. Sharply deteriorating confidence and intensified financial turmoil is affecting investment and consumption, while urgent fiscal consolidation is weighing on domestic demand and weakening global economic conditions are holdingback exports. Real GDP growth in the EU is now expected to come to a standstill around the end of this year, turning negative in some Member States. Only after some quarters of zero or close-to-zero GDP growth, a gradual and feeble return of growth is projected in the second half of 2012. The uncertainty related to the sovereign-debt crisis is expected to gradually fade over the forecast horizon, provided the necessary policy measures are implemented. Nevertheless, growth is likely to be held back by more difficult financing conditions, ongoing deleveraging and sectoral adjustment. Growth will be insufficient to deliver an overall reduction of unemployment within the forecast period.
Uncertainty has increased since the summer and is now extremely high. Accordingly, the downside risks have become very strong. If left unchecked, negative interactions between debt concerns, weak banks and slowing growth are likely to lead to a relapse of the EU economy into recession.
The EU Economy: A Recovery in Distress
The EU economy is moving in dangerous territory. The recovery has already come to a standstill and a slew of forward looking indicators paint a rather gloomy picture. Financial market turmoil is intensifying as sovereign debt and banking sector concerns are becoming increasingly interrelated. Pulled down by elevated uncertainty, business and consumer confidence is plummeting, delaying spending decisions, thereby weighing on domestic demand and economic growth. Interactions between developments in the financial sector and in confidence are impacting negatively on economic activity. And the weaker-than-expected global recovery limits the hope for relief from the external side, while the broadening of economic growth towards domestic demand is not materialising. Sluggish economic growth begets market volatility that dampens confidence further, worsens the creditworthiness of sovereigns and erodes the value of assets held by financial institutions. At the current juncture, any further bad news could amplify adverse feedback loops pushing the EU economy back into recession.
The deterioration of the economic situation in the EU is associated with developments that had been incorporated as downside risks but not in the central scenario of the spring forecast. They include mainly a substantially worse development in financial markets, including sovereign debt concerns and banking sector issues, and a weaker-than-expected global recovery. As these developments will ripple through the EU economy, significant revisions to the spring forecast are inevitable. Their size depends crucially on assumptions about responses to the sovereign debt crisis and contagion effects. Despite progress made at European summits, recent developments suggest that it will take more than a few months to cope successfully with the formidable policy challenges. Steering a course between excessive optimism and pessimism, a realistic timeline for seeing turmoil disappearing and confidence returning would span over well into next year. This timeline is assumed in the central scenario of the forecast.
The ongoing loss of growth momentum pulls parts of the EU economy into periods with contracting economic activity. The return to the recovery path is only expected for late 2012, but economic growthwill remain subdued. Real GDP in the EU and the euro area is expected to grow at annual rates of 1½% this year, to slow next year to ½%, before slightly regaining momentum in 2013 (1¼-1½%). The deterioration in the growth outlook keeps unemployment rates close to current levels (9½-10%), while it helps alleviating inflationary pressures. This year, reflecting sharp increases in commodity prices in the first half of the year, inflation is expected to stay at elevated levels (2½% in the euro area, 3% in the EU). But in 2012 and 2013 inflation rates should be about a full percentage point lower in both areas.
The central scenario comes along with substantial risks to the growth outlook that are considerably skewed to the downside, even more than before. By contrast, the risks to the inflation outlook appear now to be balanced.
Other documents released today:
The G20 Meeting: Much Ado About Nothing
The excruciating twists and turns that European leaders have gone through over the past two weeks in their vain efforts to gain control of the sovereign debt emergency have raised the question of whether the eurozone is institutionally incapable of managing the crisis.
Sony Kapoor, head of Re-Define, an economic consultancy, said:
“The divided and sometimes distorted incentives facing EU institutions, their fragmented powers and slow-moving decision- making structures may be fundamentally incompatible with the scope and speed of action needed to contain a crisis of this magnitude. EU institutions were designed for peacetime, not crisis management – and it shows.”
[See, also, Kapoor's article in The American Prospect]
On Friday, Commerzbank became the first to state that it aimed to meet higher capital targets by scrapping lending outside its main German and Polish markets. It is saying what everyone thinks other banks are doing: under intense political pressure to maintain the flow of loans to domestic small businesses, money is funnelled to home markets.
The interconnectedness of the eurozone means this intensifies the risk of a credit crunch, tentative signs of which are visible in money markets. It also knocks another hole in the deal by European leaders at their summit a week ago, which agreed banks would be prevented from taking such action.
Worst of all, it suggests that even if the politicians pull together – and there is little reason to think they will – Europe’s economy has big problems ahead. Slower growth produces a nasty feedback loop of more sovereign debt, weaker banks and thus slower growth. That realisation, at the end of a week when politicians finally acknowledged that the eurozone could break up, confirmed there is little reason for mirth in Europe.
The Group of 20’s latest summit failed to live up to its central ambition to create “strong, stable and balanced” global economic growth. The G20 all but admitted that the so-called “Doha round” of trade talks, launched in December 2001, was dead; it produced an action plan for growth and jobs that committed countries to almost nothing they were not already pursuing; and left the international monetary system almost unchanged.
Throughout Thursday night officials tried to agree on support to increase the firepower of the €440bn European financial stability facility or boost the resources of the International Monetary Fund, but eurozone leaders went home empty-handed. The G20 statement said only that finance ministers would again discuss the issues at their next meeting, in February.
Some ideas were comprehensively ditched at Cannes. IMF chief Lagarde made it clear the IMF would not lend money to the EFSF, because the fund “lends money to countries, not to legal entities”.
Instead of providing firepower or helping to channel bilateral support, the IMF’s role in helping to resolve the eurozone crisis will be one of policing Italy’s existing commitments to reduce its borrowing and provide more rapid credit to non-European countries caught in the fallout from the eurozone woes.
Other ideas – including a plan that countries such as China or Brazil would lend to a new special vehicle, seeded with money from the EFSF – were also played down.
- Editorial, “In God’s name, go!“
The spreads between Italian and German 10-year bonds have doubled over the summer. Yesterday, they reached a euro-era record of 463 basis points and would have probably been higher if the European Central Bank was not buying Italian bonds. Although Rome can sustain high interest rates for a limited time period, this process must be halted before it becomes unmanageable.
Having failed to pass reforms in his two decades in politics, Mr Berlusconi lacks the credibility to bring about meaningful change. It would be naive to assume that, when Mr Berlusconi goes, Italy will instantly reclaim the full confidence of the markets. Clouds remain over the political future of the country and structural reforms will take time before they can affect growth rates. A change of leadership, however, is imperative. A new prime minister committed to the reform agenda would reassure the markets, which are desperate for a credible plan to end the run on the world’s fourth largest debt. This would make it easier for the European Central Bank to continue its bond-purchasing scheme, as it would make it less likely that Italy will renege on its promises.
George Papandreou survived a crucial vote of confidence in parliament on Friday night, but his position as Greek premier will remain at risk as a group of senior socialists have called for a government of national unity to be formed quickly under a new leader. Mr Papandreou on Friday night signalled he may stand down as premier after forming a coalition government to take the country to elections early next year.
Berlusconi said on Friday that he had refused the offer of an IMF loan, arguing that Rome did not need one even as its borrowing costs remained at near-unsustainable levels. Berlusconi instead agreed to accept highly intrusive IMF monitoring of his government’s promised reforms – an unprecedented concession by a eurozone country that has not received a bail-out.
Yields on Italy’s 10-year bonds surged to euro-era highs after Mr Berlusconi said he had declined the offer of a low-interest IMF loan. At 6.4 per cent, they are near the level at which Greece, Ireland and Portugal were forced into IMF-European Union bail-outs. Italy must refinance €300bn ($413bn) in borrowing next year.
The rise in borrowing rates came despite reports from traders that the European Central Bank was purchasing Italian bonds to try to drive yields down. The ECB has bought an estimated €70bn in Italian bonds since panicked selling began in August.
The addition of IMF monitors, who will publish quarterly reports on Italy’s progress, makes the mission almost identical to so-called “troika” teams of Commission and IMF evaluators who conduct reviews of the eurozone’s three bail-out countries.
- Charlemagne’s notebook, “Berlusconi burlesgue“
Christine Lagarde, the IMF’s boss, said she would be reporting quarterly, in public documents, on Italy’s progress. This is what she had to say:
“We will be checking the implementation of the commitments that have been made by Italy under the 15-page commitment that it has made to the members of the euro zone a couple of weeks ago. So it’s verification and certification, if you will, and implementation of a programme that Italy has committed to. As far as I’m concerned, I might be laborious I might be demanding, I might be rigorous but I will be looking at the commitments that have been made to confirm the implementation.
The problem that is at stake, and that is what was clearly identified both by the Italian authorities and by its partners, is a lack of credibility of the measures that are announced. Therefore, to attest the credibility of those measures, in other words their implementation, the typical instrument that we would use is a precautionary credit line. Italy does not need the funding that is associated with such instruments. The next best instrument is fiscal monitoring.”
- Charlemagne’s notebook, “Sympathy, but no money“
The Europeans had been hoping to winkle out some more tens of billions of euros from, or through, the IMF. Three options were under discussion:
• Increase contributions to the IMF, particularly from the bigger emerging countries, such as China. Europe might then be able to draw on a larger pool of funds.
• Get the IMF to generate more of its reserve asset known as Special Drawing Rights, a sort of virtual gold, that Europeans could pool, turn into real currency and pump into the EFSF
• Ask the IMF to establish and supervise a trust fund for the euro zone, into which countries could contribute.
These matters remained contentious until the end of the summit. José Manuel Barroso and Herman Van Rompuy, presidents of the European Commission (the EU’s civil service) and European Council (representing leaders) rashly came out before the end of the meeting to declare that one or all of these measures would almost certainly be approved.
But next door, Angela Merkel, the German chancellor, had stopped pretending. There was no deal on the IMF, she said, and hardly any country was prepared to put money to boost the euro-zone’s bailout fund. The final communique made only a generic promise to provide the IMF with more resources, in a manner to be discussed by finance ministers in February. The key passage said:
“We will ensure the IMF continues to have resources to play its systemic role to the benefit of its whole membership, building on the substantial resources we have already mobilized since London in 2009. We stand ready to ensure additional resources could be mobilised in a timely manner and ask our finance ministers by their next meeting to work on deploying a range of various options including bilateral contributions to the IMF, SDRs, and voluntary contributions to an IMF special structure such as an administered account.”
Council on Foreign Relations
- Ben Steil, “ECB Limitations in Addressing Eurozone Crisis“
European Central Bank President Mario Draghi’s statement that the ECB will not act as a lender of last resort to governments may come back to haunt him. “If the markets are concerned that the ECB will not at least provide a political backstop for the eurozone leadership” he cautions, “that could lead to a total boycott of Spanish and Italian government debt, which could be a catastrophe.” However, Steil emphasizes the ECB’s limitations in solving the eurozone crisis. “Although the ECB does have a lot of ammunition in that it can print money, it doesn’t have unlimited ammunition,” he says. “The European Central Bank is not a power of its own that can manufacture a solution to this debt crisis. It will take leadership in Europe, it will take contributions, further contributions, from the German taxpayer.”
This week, the French bank BNP Paribas announced that it had slashed its holdings of euro-zone government bonds, including €2.62 billion worth of Greek debt.
But it wasn’t just bonds from Athens that the bank dumped. BNP Paribas also indicated that it had drastically reduced its holdings of Italian debt. In the three months prior to the end of October, the bank sold off €8.3 billion worth of bonds issued by Rome, reducing its exposure by 40 percent.
Italian borrowing costs soared earlier this week, with interest rates on sovereign bonds rising to 6.4 percent, perilously close to the mark which triggered emergency Italian bond purchases by the European Central Bank in August. Analysts consider a rate of 7 percent to be the level at which investors stop buying sovereign bonds.
Several former Berlusconi loyalists published an open letter in the Italian daily Corriere della Sera on Thursday calling for a change at the top. One of the parliamentarians indicated that a rebellion could be mounted as early as next week, during a budgetary vote on Tuesday. Reuters reported on Thursday that Berlusconi told European leaders in Cannes that he would call a confidence vote within two weeks.
- The World from Berlin, “The Common Currency Endgame Has Begun” — These editorials from the German press were written after Greek Prime Minister Papandreou rescinded his call for a referendum. Fear that the “European Project” may collapse is widepsread.
|Handelsblatt||"No matter who takes over the rudder in Athens, Europe shouldn't expect much. Rather, it should prepare for even greater chaos."
"Instead of simply accepting the aid package ... offered, thus demonstrating political leadership, Papandreou suggested to his countrymen that they had a choice. The bitter truth, however, is that there is no choice -- a truth the Greek prime minister heard with perfect clarity from Merkel and Sarkozy on the French Riviera, where he had been summoned to appear. Either Greece accepts European help, was the message from the EU crisis summit in Cannes on Wednesday night, or Greece has to leave the euro zone."
"With this unprecedented ultimatum from EU leaders, the common currency endgame has begun. Even if the referendum does not take place, the damage has been done: For the first time since the founding ff the currency union, the exit of a member state is no longer mere speculation, it is an official alternative."
"(Were that to happen), the effects would not just be felt in an impoverished Greece, rather in the EU as well. Were Greece to be the first 'sinner' to leave the euro area, despite years of assertions to the contrary, attention would immediately move on to the next weak link in this chain. Were Italy and Spain to become endangered, an uncontrollable domino effect could begin -- which may in the end reach France."
"Whether the Greeks leave the euro zone in the end or not -- neither alternative will calm the situation."
|Die Welt||"At the end of the eventful day, the redemptive message came: Papandreou would withdraw his referendum because conservative Greek opposition leader Antonis Samaras declared he was ready to vote for the aid package with the government and take part in an interim national unity government. At the very last minute, and after two years of refusals, the opposition party (ND) finally showed a sense of responsibility."
"But the reasons behind this welcome development did not lie in Athens, but in Cannes. There, Merkel and Sarkozy beg the house when they took the Greek prime minister to task. They didn't just say that payments to Greece would stop until the Greeks made it clear they would hold up their end of the bargain. They also insisted that the Greek referendum would essentially be a vote on Greece's membership in the euro zone -- the really big question. The politicians in Athens decided they'd rather not take the risk."
|Frankfurter Allgemeine Zeitung||"Until Thursday ... one thing had never been questioned -- namely whether an overly indebted euro zone member, regardless what happens, would still belong to the currency union. The subject of a withdrawal or expulsion was always a taboo. The fact that the European treaties neither envisioned the one scenario or the other was the very least of the reasons for that."
"But this taboo doesn't exist anymore. The German chancellor, the French president and the Luxembourgian chief of the euro group no longer rule out what only a short time ago wasn't even allowed to be considered: that Greece will have to leave the currency union if it can't adhere to its agreements on consolidating its budget. Merkel, Sarkozy and Juncker appear to have run out of patience. The predicament Athens is clear to them and they do not underestimate what the Greek people are having to cope with. But their own voters are breathing down their necks."
"Regardless of whether the (inevitable) breaking of a taboo serves as an effective intimidation strategy or not, European politics have arrived on virgin soil. From now on, the order of the day will no longer be increasing the number of member states and transferring ever more competencies to the EU. From now on, the dismantling of institutions and duties will no longer be ruled out -- either because the voters will it or because objective contradictions exist that can no longer be simply resolved with existing methods. The dangers therein are obvious. It could become a slippery slope and once things start moving it may be hard to stop them. Still, this massive Project Europe, a unique undertaking of organizing peace and prosperity under the shared exercise of sovereignty, is experiencing a major crisis of confidence. Perhaps it is now time to give a radical signal with the goal of protecting it in its entirety from greater damage."
|Berliner Zeitung||"The rescue of the euro zone has failed epically. The conditions (Merkel and Sarkozy) have imposed on the Greeks show just how dramatic the situation has become. No more money will flow (to the country) until it is certain that the savings program will be carried out. If it doesn't? Then the euro will collapse and Greece will have to exit the currency union. Would Europe then collapse, too?"
"Regardless how the Greek drama ends, it has been clear since Wednesday night that confidence in the euro has been further seriously damaged. This is because the message sent by Merkel and Sarkozy in their urgency was that the euro zone is not only not going to cover the debts of its members -- but that the euro has not been planned for the long run."
"The countries seeking to rescue the euro need to be considering now how they will solve the euro zone's main problem: how they will restore trust. More is needed to accomplish this than just the bailout tools approved on Oct. 26. They won't even suffice to nurse the consequences of an orderly insolvency of a euro country. To save the entire euro, much more is necessary: euro bonds, common taxes -- something that will send a strong message of political confidence to angst-riddled investors that the rest of the euro zone wants to remain together and wants to become even more tightly bound."
|Süddeutsche Zeitung||"Neither Europe nor the euro will go down because of Greece alone. The fact is that the fate of the community will be decided in its founding nations. As all the spectators look spellbound towards Athens, the real finale in the European debt crisis has already begun a few hundred kilometres away: Independent of the Greeks, the Italians will determine whether the euro and the union survives. As painful as it might be for Europe, it could still withstand a (provisional) departure of Greece. But beautiful, proud Italy, on the other hand, has much more decisive dimensions: 60 million inhabitants, the third-largest economy in the euro club and €1.2 trillion in debt. The club would not be able to shoulder an Italian insolvency --neither politically nor economically."
"The crisis in Italy is acute and dramatic. Blame can be squarely cast on the disastrous Berlusconi government. Amidst the chaos in Greece, the fact has almost been lost that Italian Prime Minister Silvio Berlusconi has only partly recognized his country's need to conduct austerity and reform measures. He may have admitted out of necessity recently that the Italians live a little bit beyond their means, but that apparently hasn't given the bustling politician any reason to act. He presented an austerity plan in the summer and he brought a few pages with a handfull of proposals to the euro summit last week, but financial industry executives were quick to say what they thought of them: nothing. When Rome floated a bond last week to finance its debt, its interest rates rose to record levels."
"That is fatal. Already highly indebted Italy is having to take out ever greater loans in order to payback the old ones. The vicious cycle has begun and it will get faster and faster so long as Berlusconi doesn't save and reform."
|Die Tageszeitung||"How do you create a 'firewall' in Europe? How do you protect Italy and Spain from being driven to a state of bankruptcy? This question is unbelievably explosive -- particularly if you look at recent news, as unlikely as it may seem at first glance. On Thursday, the major French bank BNP published its quarterly report and disclosed that it had sold a large share of its Spanish and Italian bond holdings -- despite the enormous losses of capital and write downs that entailed. The Paribas action made clear that, by now, Italian government securities are considered to be junk bonds that must be dispensed with quickly."
"The development suggests that Italy is close to bankruptcy given that the country has a national debt of €1.9 trillion that must be regularly refinanced. But what bank is going to buy Italian government bonds if its competitors are selling them?"
"This danger is far greater than some theoretically conceivable development, as climbing risk premiums being demanded for Italian government bonds show. The euro zone is facing a crash -- and it may come now rather than at some point many years down the rode. It is entirely inconceivable that the euro would survive if Italy and Spain topple."
"So what can be done? One thing is certain: Despite its recent €1 trillion in leveraging, we can forget about the EFSF backstop fund. Investors don't have faith in it; otherwise they wouldn't demand constantly increasing interest rates on Italian and Spanish bonds. The last thing remaining for a rescue is the European Central Bank. Like the US Fed, it could purchase unlimited amounts of government bonds until the panic among investors quiets down. That's precisely what Obama proposed during his meeting with Chancellor Merkel in Cannes."
"The chancellor has declined because she knows most Germans wouldn't accept having the ECB 'print money'. But the chancellor and Germany need to know: That is the cheapest solution. A crash of the euro would be infinitely more expensive."
I’ll be gathering reactions for the rest of the day. Check back here periodically for additions.
World Bank president Robert Zoellick said:
It’s a very welcome and an important step because we have seen the ripple effects. I compliment the leaders of the European Union for facing and making difficult decisions. Of course problems like this can’t be solved by waving a magic wand, and the implementation of the three core elements will require follow through to ensure that with the market reactions, the banks can function more effectively and to ensure that euro zone countries are able to roll over their debt.
I’m hopeful that this first important step will lay the foundation for a broader approach that will focus on helping the world economy resume growth, overcome joblessness, and support the innovations so we can get the world economy back on track.
Canadian Prime Minister Stephen Harper said:
I see as positive steps, the actions taken by our European friends just a few hours ago,” Harper said in the Australian city of Perth, where he will attend a summit of Commonwealth country leaders.
Of course, we still await the elaboration of further details and successful implementation, as we approach the G20 summit (next month).
UK Chancellor of the Exchequer George Osborne said:
We are not going to contribute to the eurozone bailout, but we are members of the IMF … We aren’t turning our backs on the IMF. The agreement last night did not say the IMF was going to put additional resources into the eurozone.
We will only contribute to resources that are available to all members of the IMF around the world, we will not contribute to a fund that is hypothecated, that is directly linked to the eurozone.
We are not going to contribute to a special purpose vehicle that is set up to attract sovereign wealth funds or the Chinese government – in other words, people with large surpluses. We’ve got a large deficit.
Holger Schmieding, chief economist at Berenberg, Germany’s biggest private bank, said:
The deal tries to fix the mistakes eurozone leaders had made in July. At the time, they had agreed to restructure Greek debt without putting up a firewall to protect Italy against contagion risks. This time, the focus was very much on Italy. The fact that there is an enhanced deal is a positive.
Leveraging the EFSF up to €1tn yields an impressive amount of money. However, we are not convinced that – in case of a severe crisis – a first-loss insurance on sovereign bonds of 20-25% would really be sufficient to entice investors to buy newly issued Italian bonds, especially in the wake of a 50% haircut on Greek debt.
In our view, the role which the ECB will or will not play remains crucial. Without ECB support, the chances of this deal putting an end to the euro debt crisis now are probably below 50%. If the ECB were to signal a willingness to act as a backstop of ultimate resort by buying bonds, the chances that the deal could put an end to the euro debt crisis would be well above 50%. The summit statement leaves the role for the ECB’s bond purchasing open.
Many details still need to be fixed, including details of the 50% debt relief for Greece (by the end of the year) and of the two precise leverage options for the EFSF (by early November).
At the 3/4 November G20 summit in Cannes, international support through the IMF and direct contributions from emerging markets can be discussed.
In the short-term, continued austerity and bank deleveraging may have negative effects on the euro area economy. However, Europe continues on the path to fiscal rebalancing and is staying ahead of the other advanced economies in this respect.
Simon Lewis, chief executive of the Association for Financial Markets in Europe said:
The recapitalising of Europe’s banks will not in itself solve the sovereign debt crisis. However, this plan is set within a timeframe that should enable them to determine how best to strengthen their capital positions in ways that treat all stakeholders fairly and allow the banks to fulfil their role in supporting Europe’s economic recovery.
Alan James, strategist at Barclays Capital, said:
The results of the summit appear to provide a framework that can offer a degree of stabilisation over the medium term if efficiently implemented, but without significant positive surprises relative to market expectations. The details and timetable for implementation of most measures remains vague.
While the official statement suggests the leveraging mechanisms could potentially multiply the firepower of the EFSF by four to five times, the efficacy of the structure is far from certain. On Greece, it remains unclear whether the €30bn from member states is new money, while even if this process is completed without further detail, there is still potential for it to be designated as a default trigger event, albeit today’s agreement appear to have reduced this probability somewhat.
On bank recapitalisation, most of the €76bn estimated need outside of Greece is likely to come from the private sector, with Spain already indicating it does not expect state aid to be required. The initial market reaction of modest relief appears appropriate, in our view, but an extended normalisation rally is far from certain without more details on implementation.
El Pais (English edition)
Spain’s big banks on Thursday ruled out having to tap the markets to meet the new European-wide solvency requirements being imposed.
The European Banking Authority (EBA) late Wednesday calculated Spanish banks would require an additional 26.161 billion euros to meet the new core capital ratio of nine percent of risk-weighted assets they will need to pass the stress test to be carried out by the EBA in June of next year.
The tests will include the premise of a writedown in the value of Spanish government bonds held by the banks in their books of under three percent. According to EBA calculations, marking the value of sovereign debt in the portfolios of Spanish banks will cost them 6.29 billion euros.
Of the total required of Spanish lenders, 82 percent correspond to Spain’s two biggest banks, Santander and BBVA.
Local banks, which reckon the figure they require is only 13.5 billion euros once convertible bond issues and other adjustments are included, have informed the National Securities Commission (CNMV) that they rule out capital increases or state funding to meet the new requirements. They believe they can do so by generating additional capital internally from their earnings by June of next year.
Economy Minister Elena Salgado said the banks have the capacity to obtain funds for recapitalization on their own and do not need help from the state. “Of course, state funding is available, but the banks are going to do everything possible not to have to ask for it.” Salgado was following the same line taken earlier Thursday by Prime Minister José Luis Rodríguez Zapatero.
The Bank of Spain also issued the same message. “Bearing in mind that the figures published by the EBA are provisional, with the final calculations only available around the middle of November when the definitive figures for capital and exposure to sovereign debt as of the end of September are available, from the information offered by the banks it can be seen that they intend to meet the indicated requirements though their own ability to generate capital, with the understanding it will not be necessary for the public sector to take stakes in them,” the central bank said in a statement posted on its website.
Santander and other lenders also said they can meet the new requirements without changing their dividend policies.
A deal struck by euro zone leaders on Thursday to contain the region’s dangerous debt crisis was greeted skeptically in the two countries most in the firing line, Greece and Italy, with some saying politicians were dreaming.
Italian Prime Minister Silvio Berlusconi submitted an ambitious set of reforms intended to boost growth and cut debt as part of the deal, but analysts questioned the ability of his fractious coalition to implement the plan.
In Greece, opposition politicians and citizens feared further painful belt-tightening and years of recession, showing little enthusiasm for a plan for banks and insurers to accept a 50 percent loss on their Greek government bonds.
Berlusconi’s pledges include raising the retirement age and making it easier for firms to lay off staff but few expect a scandal-ridden government with a poor track record of pushing through reforms to be able to do so while battling for survival.
“It’s hard to believe that yesterday’s intentions can really be transformed into the biggest plan of market reforms Italy has ever put on paper,” Antonio Polito wrote in the Corriere della Sera daily, pointing to coalition tensions and lack of faith in the government.
An editorial in the left-leaning La Repubblica daily described the plan as a “book of dreams.”
In a sign of the challenges Berlusconi faces, Italy’s biggest trade union CGIL responded by pledging to fight the reform plans and called on smaller unions to unite against “targeted attacks” on Italian workers.
“We’re ready to propose unified action,” CGIL secretary Susanna Camusso told La Repubblica.
The Institute of International Finance (IIF)
Dr. Josef Ackermann, Chairman of the Board of Directors of the Institute of International Finance and Chairman of the Management Board and the Group Executive Committee of Deutsche Bank AG, today confirmed his full support for the voluntary agreement reached last night between Euro Area leaders and the IIF on a new Greek debt deal.
Dr. Ackermann stated: “We are very pleased with the agreement reached. It was appropriate for all parties to move on the July 21 decisions in light of the changed circumstances. The Greek economy has weakened considerably since that time and the different parties are taking additional difficult measures to lay the basis for stabilization and renewed growth. European leaders are also doing more, and as all parties have recognized that not only the future of Greece but the future of Europe was at stake. The outcome is a good one for Greece, Europe and the investors, and we look forward to its early implementation.”
Mr. Charles Dallara, IIF Managing Director, said, “This voluntary substantial reduction in Greek debt by the private sector, along with additional official support, provides an historical opportunity for Greece to revitalize its economy and reap the benefits of the difficult measures the Greek people have undertaken. We look forward to work with the Greek and European authorities to translate this framework into a concrete agreement that can deliver an early reduction in Greece’s debt and place it squarely on a path toward debt sustainability. Throughout the process we have enjoyed strong support from the IIF’s Board of Directors and from many leaders of other financial institutions.”
Wall Street Journal (no links)
- “Europe’s Not-So-Grand Plan”
Previous Grand Plans unraveled within days under the glare of market scrutiny; the best hope is that this deal buys a little more time . . . The euro zone is gambling the market will judge the sum of the parts to be greater than the whole. But there is no new money on the table, while the crucial issue of who will bear the losses of the debt crisis has still not fully been answered. That may not matter so long as Ireland, Portugal, Italy and Spain’s difficulties can continue to be treated as problems of liquidity not solvency. But that requires an urgent revival in confidence and economic growth: That may be asking too much of this deal.
- “European Banks Look to Reassure on Capital Needs”
Spanish, French and Italian banks need around €50 billion in fresh capital . . . several large banks from the countries early Thursday said they won’t have to turn to shareholders for the money, and analysts affirmed that many banks should be able to accrue capital by retaining earnings and disposing of assets.
EU banks supervisor the European Banking Authority said around 70 banks in the 27-country bloc must add roughly €106.4 billion to their capital reserves to reflect price declines in the Greek and other sovereign debt they hold, and to generally bolster capital held against their assets. Final shortfall estimates will be released next month and banks will have until the end of the year to tell domestic regulators how they plan to come up with the money.
Bank have until the end of June 2012 to improve their ratios. Many have previously said they won’t turn to shareholders, but will instead retain earnings, pursue asset sales and otherwise shrink their balance sheets. The EBA stressed, though, that banks will be limited in the deleveraging they can do, for example by cutting off business lending, in order to protect the broader economy. Banks needing new capital will also be expected to withhold dividends and bonuses, the EBA said.
[European leaders] agreed to increase the firepower of their €440bn bail-out fund by providing “risk insurance” to new bonds issued by struggling eurozone countries – a scheme designed for potential use in Italy – but they did not specify the amount of losses that would be covered by the insurance.
Both Ms Merkel and Nicolas Sarkozy, the French president, said it would increase the size of the fund “four or five times”, but a final number could not be calculated because it was unclear how much money was left in the fund. Most analysts estimate about €250bn will remain after the second Greek bail-out, putting the fund’s new firepower at more than €1,000bn.
Although the details of the deal as outlined by both European leaders and the Institute of International Finance remained vague, officials said that €30bn of the €130bn in the government bail-out money would go to so-called “sweeteners” for a future bond-swap, which would be completed by January.
Charles Dallara, the IIF managing director who served as the bondholders’ chief negotiator in Brussels, said in a statement that the net present value of bondholders’ losses had not yet been determined. He added that his consortium would need to continue to work with authorities “to develop a concrete voluntary agreement”.
“The specific terms and conditions of the voluntary [haircuts] will be agreed by all relevant parties in the coming period and implemented with immediacy and force,” Mr Dallara said.
Some elements of the package appeared to be based on optimistic assumptions. Under the terms of the deal, Greece agreed to put €15bn it aims to raise from a vast privatisation programme back into the European Financial Stability Facility, the eurozone’s €440bn rescue fund. International monitors have already acknowledged that Greece will struggle to raise the €50bn in privatisation cash it promised earlier this year, but the €15bn is supposed to come on top of previous commitments.
- Wolfgang Munchau, “Half measures and wishful thinking do not a solution make“
The deal with the Institute of International Finance is for a “voluntary” 50 per cent haircut on Greek debt on behalf of their member banks . . . I do not believe this is going to work. First, the agreement with the IIF is not binding on the banks. The IIF has yet to deliver the voluntary participation. Many banks would be better off if the haircut was involuntary, given their offsetting positions in credit default swaps. The whole point of a CDS is to ensure creditors against an involuntary default. By agreeing a voluntary deal, the insurance will not kick in. In other words, there is a significant probability that we will end up with an involuntary agreement – which is precisely the outcome the eurozone governments, except perhaps a small group of northern countries, had sought to avoid.
On the EFSF, the leaders reached political agreement to leverage it up to about €1,000bn. Herman van Rompuy, the president of the European Council, made a revealing comment following the meeting when he said that banks have been doing this forever. Why should governments not do so as well?
The reason is simple. Banks can only do this because central banks and governments act as ultimate guarantors of the financial system. There exists an implicit insurance of unlimited liability. In the case of the European financial stability facility the very opposite is the case: there is an explicit insurance of limited liability. Germany wants its exposure capped to a maximum of €210bn. I doubt that global investors will rush into the tranches of the special purpose vehicle through which the eurozone wants to leverage the EFSF. I struggle to see how this structure can lead to a significant and sustained fall in bond spreads.
Leveraging can work, but only if the eurozone were willing to provide an unlimited backstop. This would be either in the form of an explicit lender-of-last-resort guarantee by the European Central Bank, or through a eurobond – or ideally both.
Now that is something I would consider to be a comprehensive agreement. It may yet happen, but not for a long time. The crisis, meanwhile, continues.
- Gavyn Davies, “EMU summit leaves €1,000 billion to be raised“
The deal does not, and was not intended to, have any effect on the core problems facing the eurozone. There is still an urgent need to restore growth to economies which are hamstrung by uncompetitive business sectors, and continuous fiscal tightening. Recession still looms, especially in the southern economies.
What the deal is intended to provide is adequate medium term financing for sovereigns and banks which have been facing urgent liquidity problems. On that, it is notable that the summit has not really raised any new money, apart from an increase in the private sector’s write-down of Greek debt by some €80bn.
All of the remaining “new” money, including €106bn to recapitalise the banks and over €800bn to be added to the firepower of the EFSF through leverage, has yet to be raised from the private sector, from sovereign lenders outside the eurozone, and conceivably from the ECB.
There is no guarantee that this can be done. The eventual out-turn of this summit will depend on whether this missing €1,000bn can actually be raised.
. . . the Greek headache has not been definitively solved, and probably will not be until there is a significant write-down of official debt.
There will now be an anguished debate on whether this restructuring can be described as “voluntary”, and whether a default will be declared in the CDS market. The euro summiteers, who frequently announce that water can flow uphill, claim that it is indeed voluntary. Common sense says that it is not.
The attention of the markets will now turn to two main issues: whether new money can be raised from China and other sovereigns outside the eurozone; and how the ECB behaves under the new leadership of Mario Draghi.
- FT Alphaville, “So. Many. Bailout questions“
First, the Greek debt deal:
1) Greece’s debt will remain 120 per cent of GDP a decade hence, even under the 50 per cent bondholder haircut. (As the debt sustainability analysis by the Troika warned.) Does that look like a safe number to you? Say, providing a good buffer to any external shocks that Greece might face over that period? Does it look like it rules out subsequent bondholder haircuts?
2) The huge disparity between haircuts and actual debt reduction is a creature of Greece’s reliance on official loans (plus the ECB’s getting made whole on its Greek bond holdings). This deal will chuck another €100bn on the fire. Again, if a subsequent debt reduction is needed, we’re getting to the point of either completely wiping out bondholders, or official lenders have to write down.
3) Official sources will also provide €30bn of credit enhancement to bondholders in the debt swap. We don’t know what this really boils down to, and probably won’t for some weeks. It might be that EFSF collateral attached to the restructured Greek debt is offered, purely because that’s how the first swap proposal worked (and, it appears, banks really wanted it again this time round). Of course there were proposals yesterday to give bondholders cash upfront. We strongly desire to know about other possible features that we just don’t know about so far, such as the legal status of the new bonds (would they be governed under English law?).
4) How is Greece going to raise more money from privatisations? A further €15bn is targeted in the new agreement, but this is coming after the Troika already took a strange, fingers-in-ears-la-la-la approach to what is already acknowledged to be a difficult task of raising €50bn.
Four points in, and hopefully you can see that a) very critical details remain to be decided, and b) the room for manoeuvre on Greek debt might actually be decreasing with this new offer. That is, a subsequent haircut might be harder to execute (even if debt levels are still high enough to argue that it should happen).
5) Let’s get the inevitable Greek CDS question out of the way. What are the bondholders going to do, and what’s the ISDA determination committee going to determine? [Here are a couple of possibilities.] Assuming everyone agrees that the haircuts are sufficiently voluntary not to trigger a credit event — what does that mean for sovereign CDS? And indeed, for bond yields, as we pondered last week.
What we really need is evidence of whether, or how, Greece might “punish” and bind bondholders who don’t take part in the swap — providing crucial evidence for the ISDA committee. This could be anything: a clear statement of intent to service the new bonds over unrestructured debt, exit consents by the participating bondholders which bind the holdouts in some way. Again, more detail is needed. Doubtless however, a few lawyers must be leafing through the ISDA definitions for credit events this morning…
On to our second set of questions — the EFSF part of last night’s deal.
6) Is China going to stump up for the EFSF SPV? Sarkozy is calling Hu Jintao at midday on Thursday to speak to him about this, and Klaus Regling, the head of the EFSF, is travelling to China on Friday. But even if China agrees, there could be some complications.
7) How will the EFSF bond insurance plan pan out, particularly in terms of existing bondholders? Last night’s statement said that “providing credit enhancement to new debt” would be included. What form of enhancement in particular? The statement mentions investors can “purchase” insurance. This is very sketchy but this seems to exclude Spain or Italy buying collateral off the EFSF (a la Brady bonds) and handing them over to investors as a free gift with every bond issue. Rather, it sounds like investors buy credit protection. To put it all another way, it sounds like the EFSF sells protection (or “CDS”).
How likely is it that we’ll see the level of fiscal integration alluded to in the agreement? A commitment to “consultation of the Commission and other euro area Member State before the adoption of any major fiscal or economic policy reform plans with potential spillover effects,” sounds like a big deal, and a sign of some determination to get at the root of the problem (or, one of them) by really deepening fiscal integration.
Or, it could just be aspirational hot air.
But is it a good deal? This was, after all, the third “comprehensive solution” devised by the euro zone so far this year. With each “unprecedented” effort, the problem has only worsened (see chart 1). Sadly, this latest deal promises to be no more enduring. At best, it will buy time before the next round of panic. At worst, it may push the euro zone into catastrophe.
The next paragraph from the Economist refers to the following from the Euro Summit Statement:
“The Private Sector Involvement (PSI) has a vital role in establishing the sustainability of the Greek debt. Therefore we welcome the current discussion between Greece and its private investors to find a solution for a deeper PSI. Together with an ambitious reform programme for the Greek economy, the PSI should secure the decline of the Greek debt to GDP ratio with an objective of reaching 120% by 2020. To this end we invite Greece, private investors and all parties concerned to develop a voluntary bond exchange with a nominal discount of 50% on notional Greek debt held by private investors. The Euro zone Member States would contribute to the PSI package up to 30 bn euro. On that basis, the official sector stands ready to provide additional programme financing of up to 100 bn euro until 2014, including the required recapitalisation of Greek banks. The new programme should be agreed by the end of 2011 and the exchange of bonds should be implemented at the beginning of 2012. We call on the IMF to continue to contribute to the financing of the new Greek programme.” [My emphasis]
The bond exchange is billed as “voluntary”, but it is not clear that the International Swaps and Derivatives Association (ISDA), a trade body, will agree. If it judges that a “credit event” has taken place, then payouts will be triggered on credit-default swaps (CDSs), insurance contracts against default on government bonds. This is something that the governments and the ECB had been determined to avoid, fearing it would lead to financial catastrophe, rather as the bankruptcy of Lehman Brothers did in 2008. There is no clarity about who the biggest issuers of default insurance on Greece are. The net exposure on Greek CDSs is thought to be less than €4 billion, though this is likely to be unevenly distributed, with some banks big winners and others big losers.
The ISDA today updated its Greek Sovereign Debt Q&A:
“The determination of whether the Eurozone deal with regard to Greece is a credit event under CDS documentation will be made by ISDA’s EMEA Determinations Committee when the proposal is formally signed, and if a market participant requests a ruling from the DC. Based on what we know it appears from preliminary news reports that the bond restructuring is voluntary and not binding on all bondholders. As such, it does not appear to be likely that the restructuring will trigger payments under existing CDS contracts. In addition, it is important to note that the restructuring proposal is not yet at the stage at which the ISDA Determinations Committee would be likely to accept a request to determine whether a credit event has occurred. “
Bankrupting the banks?
Even if the euro zone succeeds in avoiding CDS payouts, this could prove a Pyrrhic victory. If losing half the face value of a bond does not amount to a default, what does? Undermining the value of CDS insurance could deeply distort the market. If banks or other investors lose faith in their ability to hedge risks, they will be tempted to cut back on risk or demand higher yields. So, perversely, sparing a CDS payout on Greece could push up the borrowing costs of other countries.
That said, the danger of contagion is real. If holders of Greek bonds can incur losses on what they once thought were safe investments, what of holders of Italian or Spanish debt? The initial deal on Greek debt in July was followed in August by the dumping of Italian and Spanish government bonds.
One of the obvious channels of contagion is the banking system. So the 27 governments of the EU—both in and out of the euro zone—agreed to force banks to take on more capital to reduce the risk of collapse. The new recapitalisation package will oblige banks to reach a minimum core Tier-1 capital ratio of 9% (somewhat higher than current requirements) by the middle of next year, after recalculating the value of their bond holdings at market prices. That would mean writedowns of Italian and Spanish bonds and gains on German and British ones. This will push much of the burden of raising new capital onto Spanish and Italian banks while leaving British and German ones largely unscathed.
The criteria are suspiciously kind to France. Its banks have been battered in the markets in recent months, and the government is alarmed by the prospect of losing its AAA credit rating. The recapitalisation will be reckoned according to bond prices on September 30th, when French ten-year bonds were still yielding 2.6%. Since then the price has fallen, and the same bonds are now yielding 3.1%. In all, banks will have to come up with €106 billion in extra capital. That sounds like a lot, yet it is at the lower end of many estimates, largely because it will not include a “stressed” scenario that models the impact of a recession. That may be a mistake, given the slowdown in Europe’s economy.
A far bigger mistake is in the plan’s timetable. Banks are being given almost nine months to reach the targets, ostensibly to allow them to raise capital themselves through cutting dividends or bonuses and selling shares. Yet few investors are willing to buy bank shares, cheap as they may seem, given the perceived risks of a series of sovereign defaults in Europe. This means that the burden would fall first on national governments and then on the increasingly stretched resources of the European Financial Stability Facility (EFSF), Europe’s main bail-out fund.
Given too much time, moreover, there is the risk that banks will, in fact, shrink their balance-sheets to bolster their capital ratios. Their first strategy will be to trim economically essential but capital-intensive businesses such as trade finance or lending to small businesses. Huw van Steenis, an analyst at Morgan Stanley, reckons that European banks may go on a “crash diet” and cut their balance-sheets by as much as €2 trillion by the end of next year. They may also sell government bonds of peripheral countries, worsening the bond-buyers’ strike that afflicts Italy and Spain.
Capital is only one issue facing banks. A second is their own ability to borrow. The ECB can step in for short-term funding, but long-term markets are frozen. European banks have, to all intents and purposes, been unable to issue bonds since the start of July. Governments could reopen the market by guaranteeing bonds issued by banks, but they are wary of putting their own public finances at risk; this was the path that led to Ireland’s ruin. In any case, few investors would trust guarantees from Italy or Spain.
All this suggests that an essential part of shoring up Europe’s banks is to restore faith in government bonds. That means protecting countries, such as Italy and Spain, that are solvent but have lost the confidence of bond investors. Even fundamentally solvent countries can quickly go bust if their borrowing costs rise too fast.
This is where the EFSF comes in. It was designed to protect smaller peripheral states. European policymakers insisted it should have a gold-plated AAA credit rating, lowering its costs but limiting its capacity. It is now too small to shield the bigger economies. The EFSF can lend €440 billion (see chart 2). But given its commitments to Ireland, Portugal, Greece and, perhaps, the recapitalisation of the banks, it may have as little as €200 billion for future contingencies. And yet in the next three years Italy and Spain will have to refinance about €1 trillion-worth of bonds, not counting additional borrowing to finance their deficits.
Countries guaranteeing the EFSF’s funds do not want to increase their burden, not least because some cannot afford to do so. France’s AAA rating is already at risk. What is more, France and the EFSF are like tottering drunks holding one another up. If France is downgraded, the EFSF will be close behind.
How to conjure a bigger EFSF without more taxpayers’ money? The answer is “leveraging” through financial engineering of the sort that helped cause the global crisis in the first place. “If you want leverage, you can always find it,” says one senior policymaker disdainfully. “Just get two or three investment bankers in a room.” Herman Van Rompuy, the president of the European Council, who chaired the summit, sounds even more cavalier. For centuries, he says, banks have taken deposits and used them to multiply money.
The favoured option is to get the EFSF to insure government bonds, acting, in effect, as the issuer of the much-maligned credit-default swap. By guaranteeing to take, say, the first 20% of any loss on government bonds, the EFSF could, in theory, support €1 trillion-worth of Italian and Spanish debt.
A second option is to set up SPVs, or Special Purpose Vehicles. These would seek to attract funds from private investors or sovereign-wealth funds in Asia and the Middle East, again by offering to take the first losses in sovereign defaults. In effect they would be creating something that looks a lot like the collateralised-debt obligations (CDOs) that became infamous during the subprime crisis. How much leverage each vehicle would take on, and which countries they might apply to, are questions that still have to be resolved over the next few months.
Many wonder why any investor would put money into such vehicles when they can buy bonds directly at a discount or get the insured version. One reason may be that the direct-insurance version may breach “negative pledge clauses” in contracts governing some bonds. These prohibit countries from doing anything that would set holders of new classes of debt above those of the old.
A difficulty with the leverage scheme is that those insuring the debt of euro-zone issuers would themselves be grievously weakened if a neighbour defaulted. How credible can their insurance policy be? “We have really struggled to find investors who want to buy the ‘part-insured’ government bonds, for fear the insurance is so highly correlated to the risk,” says a banker.
An even bigger problem is that levers can work both ways. Leverage may enlarge the size of the fund, but it can also concentrate greater risk onto the sovereigns that guarantee it. If the EFSF were simply to buy the debt of a vulnerable country such as Italy, it would expect to get back more than half of the money even if there were a default with a relatively high haircut of, say, 40%. If, on the other hand, it promised to cover the first 20% of losses on the bonds, then a haircut of just 20% on the value of the insured bonds could wipe out all the money pledged by the EFSF as insurance. So instead of assuaging market fears, leveraging may yet become a mechanism that transmits panic and weakens the sovereigns, above all France. That is why, in practice, the EFSF could probably support Spain or perhaps even Italy, but not both.
Debtor, save yourself
The new weapons for the euro zone come with a political price: closer monitoring of national budgets and economic policies, particularly in the case of states that need the greatest help. After a dressing-down from Mrs Merkel and Mr Sarkozy at the first summit, Italy’s prime minister, Silvio Berlusconi, came back with a long letter setting out his promises to reform the economy (see Charlemagne). In December European leaders will consider whether they need to change the EU’s treaties to allow more integration. And there is pressure for greater harmonisation of taxes. But even if a re-engineering of the euro zone is possible, such measures are for the longer term, to avoid a repetition of the crisis in the future. The priority must be to deal with the present.
The euro’s crisis boils down to this: national treasuries do not have enough spare cash both to guarantee outstanding debt and maintain their own credit ratings. Even mighty Germany cannot stand alone behind the whole euro zone.
Some hope that more money can be found from non-European creditor countries, such as China, by convincing them to invest in SPVs. Or perhaps the IMF could do more, particularly if China increases its contribution to the fund. But even if the Chinese were game, this raises a serious political question: does the euro zone want to be so obviously in hock to China just as it is fretting about Chinese firms buying up European ones? “If the Chinese are going to chuck money into an SPV or the IMF there will be a price,” says a European diplomat. “The Chinese want two things: one is greater voting rights in the IMF, the other is market-economy status.” Such status, which is granted by the EU, would make it harder for the trading block to impose anti-dumping duties on imports from China.
There is a better answer: use the unlimited liquidity that only the ECB can provide by dint of its power to print money. The ECB could credibly stand ready to buy debt of a country like Italy. As such, it would be treating a sovereign almost as it would a bank suffering a run. The danger is that this will stoke inflation. Germany, in particular, has a deep aversion to anything that looks like printing money, an orthodoxy forged in the experience of the Weimar Republic’s hyperinflation.
The ECB guards its independence, but has not entirely kept to these rules; it has already gone into the markets to buy distressed bonds, ostensibly to ensure that a country’s bond yields do not stray too far from the interest rates the bank sets. Having seen off France’s attempt to get the ECB to lend to sovereigns indirectly, through the EFSF, Germany removed even a passing exhortation for the ECB to keep buying bonds from the summit communiqué. “We have no demands and we have nothing to request,” said Mr Van Rompuy.
In private, though, most hope the ECB will not withdraw from bond-buying. Its incoming president, Mario Draghi, who takes over from Jean-Claude Trichet on November 1st, has signalled his willingness to buy bonds to ensure the transmission of monetary policy. “The blanket prohibition against directly lending to governments is a complete idiocy,” says Willem Buiter, chief economist at Citigroup, and a former member of the Bank of England’s monetary-policy committee. “That is what central banks do. Just because it can be mismanaged does not mean you have to throw the tool away. You can drown in water, but it does not mean you cannot have a glass when you are thirsty.”
I’ll wait for those more experienced at deciphering communiques to do their jobs before I comment.
Here it is:
European leaders reached a deal with Greek debtholders on Thursday morning that would see private investors take a 50 per cent cut in the face value of their bonds, a deep haircut that officials believe will reduce Greek debt levels to 120 per cent of gross domestic product by the end of the decade.
The agreement, made just before 4am after nearly 11 hours of talks at a summit of eurozone leaders, includes a new €130bn bail-out of Greece by the European Union and the International Monetary Fund.
“Debt sustainability for Greece can only be established if the private sector participates in a substantial way,” Angela Merkel, the German chancellor, said after the deal was reached. “The world had its eyes on us today.”
The Greek deal proved the most difficult and intractable of all the elements of a three-pronged rescue plan that European leaders hope will reverse their escalating sovereign debt crisis.
They agreed to increase the firepower of their €440bn bail-out fund by providing “risk insurance” to new bonds issued by struggling eurozone countries – a scheme designed for potential use in Italy – but they did not specify the amount of losses that would be covered by the insurance.
Both Ms Merkel and Nicolas Sarkozy, the French president, said it would increase the size of the fund “four or five times”, but a final number could not be calculated because it was unclear how much money is left in the fund. Most analysts estimate about €250bn will remain after the second Greek bail-out, putting the fund’s new firepower at more than €1,000bn.
Although the details of the deal as outlined by both European leaders and the Institute of International Finance remained vague, officials said that €30bn of the €130bn in the government bail-out money would go to so-called “sweeteners” for a future bond-swap, which would be completed by January.
Some €35bn in such “credit enhancements” were included in the original July deal with the IIF. In that deal, the money was used to back new triple A bonds that would be traded in for debt holder’s current bonds.
Whether the new programme would be organised in a similar fashion remained unclear. Such factors as the interest rates and maturities for new bonds are critical to determining how valuable the swap will be for private investors.
Charles Dallara, the IIF managing director who served as the bondholders’ chief negotiator in Brussels, said in a statement that the net present value of bondholders’ losses had not yet been determined. He added that his consortium would need to continue to work with authorities “to develop a concrete voluntary agreement”.
“The specific terms and conditions of the voluntary [haircuts] will be agreed by all relevant parties in the coming period and implemented with immediacy and force,” Mr Dallara said.
Some elements of the package appeared to be based on optimistic assumptions. Under the terms of the deal, Greece agreed to put €15bn it raises from a vast privatisation programme back into the EFSF. International monitors have already acknowledged that Greece will struggle to raise the €50bn in privatisation cash it promised earlier this year, but the €15bn is supposed come on top of previous commitments.
Asked whether adding €15bn to Greece’s already faltering €50bn privatisation programme was feasible, Yves Leterme, the Belgian prime minister, distanced himself from the proposal, saying: “This element was not a necessity for Belgium.”
“We all know there is a flaw in the implementation of Greece’s privatisation programme,” he added, stressing the need for more EU experts to help Greece meet its divestment targets. The €15bn should be available “in the next four or five years,” he said.
Still, despite the uncertainties that remained, European leaders hailed the package as a milestone in their efforts to tackle the crisis. “I believe this is a global, ambitious and credible response to the crisis,” Mr Sarkozy said.
Pierre Gave, head of research at Gavekal, a Hong Kong-based research group, said the Greek deal was “big on words but short on detail”.
“To me it seems like we don’t really have a lot of detail. What is this the 14th meeting in the last 20 months? I think it’s just more of the same,” said Mr Gave. “Europe is going to continue to muddle through but we won’t know the end-game until a year or two from now, whether we will move towards a full-scale fiscal federation or whether we will move to a break-down of the euro experiment.”
Wall Street Journal (no links)
- “Dour Europe Data Stoke Recession Fears”
The euro-zone’s private sector contracted at a faster pace in October, highlighting a growing risk that the region could slip back into recession, Markit’s preliminary October purchasing managers index showed on Monday. Concerns over the region’s sovereign-debt crisis are now affecting Germany and France as well as the region’s smaller southern European states. The preliminary composite PMI for the euro zone fell to 47.2 in October, the lowest level since July 2009 and from September’s 49.1. The October manufacturing PMI slid to 47.3 from September’s 48.5, and the services PMI fell to 47.2 from 48.8 over the same period, according to Markit’s data.
The French composite PMI fell to an almost two-and-a-half-year low of 46.8 in October as service-sector activity slumped sharply. Business confidence also tumbled, with a further decline in new orders adding to the weakening outlook, Markit said. And while the composite PMI for Germany rose to 51.2 in October, that masked a steep drop in the manufacturing sector. Once again new orders fell in October and by similar levels across both the services and manufacturing sectors.
- Simon Nixon, “Crunch Time for Franco-German Relations”
For the past year, tensions between France and Germany have hampered a decisive response to the euro crisis. At issue is who should bear the ultimate losses should a euro-zone government become insolvent. Germany believes those losses should be borne by euro-zone government bondholders, bank shareholders and the citizens of the countries that ran up the debts. France argues the damage to euro-zone credibility from failing to stand behind its governments and banks will ultimately cost taxpayers far more than supporting them with bailouts and liquidity facilities, including access to the unlimited firepower of the European Central Bank’s balance sheet. The situation is complicated by the ECB itself, which agrees with France that sovereign defaults will trigger contagion and slump, but concurs with Germany that providing profligate governments with a blank check will fuel moral hazard.
. . . the July 21 deal that imposed “voluntary” 21% haircuts on holders of Greek government bonds appeared to confirm investors’ fears that they would bear the costs of the euro crisis. The result has been an institutional run on the entire European banking system, first by U.S. money-market funds, then by long-term bond investors. This has left the euro zone facing a severe credit crunch that threatens to tip the continent back into recession, worsening its sovereign debt crisis. European banks have €1.7 trillion ($2.36 trillion) of debt maturing in the next three years; there is very little chance of the bond markets reopening while doubts remain over sovereign debt.
. . . Greece’s economy has performed far worse than anyone expected . . . To restore Greek debt to sustainable levels, all its creditors—both private- and public-sector—would need to accept losses. A coercive deal that triggered credit-default swaps would worsen contagion; there are an estimated €79 billion of gross outstanding CDS on Greek debt.
But if this is the moment of truth for the euro zone, which will prevail: Germany or France? Both claim the moral high ground. Germany argues that socializing the costs of the crisis—whether through further bailouts, ECB liquidity support to governments and banks, or debt forgiveness—will reward irresponsible governments, creating moral hazard. Besides, European treaties forbid ECB financing of government debt and the bailing out of countries. And as the euro zone’s richest member, Germany is only too aware France’s approach would require German taxpayers to pickup the lion’s share of the costs of the bailouts; France’s approach also appears self-serving, since its banks are among the most highly leveraged and most heavily exposed to euro-zone debt.
But France rightly argues the crisis has exposed severe shortcomings in the euro-zone framework and that, in a highly interlinked currency union, there is no way to ring-fence the problems of one member state without marshalling the full resources of the bloc. Simply recapitalizing the banks isn’t sufficient; there is no realistic amount of capital that would reassure markets the euro-zone banking system could withstand an Italian default. Only the ECB can remove the uncertainty over the euro zone’s commitment to support its struggling sovereigns and banks. That may carry the risk of moral hazard, but there is nothing moral about triggering a global depression.
From the market’s perspective, a French victory would clearly be the best outcome. But this seems unlikely since, even if Germany relented, the ECB doesn’t want to put its balance sheet at risk. Worst would be a disorderly Greek default without a massive bank recapitalization and increase in bailout facilities. Instead, what euro-zone leaders appear to be inching toward is yet another fudge: a Greek deal that avoids default but still falls short of putting debt on a sustainable basis; a bank recapitalization that’s not sufficient to withstand multiple defaults and an expanded bailout fund that isn’t big enough to restore the confidence of sovereign and bank debt markets. That would send a worrying signal that the rift between Germany and France hasn’t been mended. And the longer they leave it, the wider it is sure to grow.
- Brussels Beat, “Tussle Over EFSF Far From Over”
Euro-zone governments are being pulled in two directions at once. They want to make a splash with a big headline number for the fund. But they are also constrained by the fact that the increase in its firepower must also be credible and effective. The more they try to bulk up the fund, the greater the risk that those guarantees will be called and in full. The bigger the splash, the more the guarantees look like risky equity.
That has important potential consequences for the guarantors, chief among them France, whose triple-A rating balances on a knife edge. If credit-ratings companies decide that France’s €158.5 billion of guarantees to the EFSF are really at risk with a bulked-up fund, then the likelihood of a French downgrade increases sharply.
With that, the EFSF, which depends on its triple-A guarantors, also unravels. France’s banishing from the elite triple-A club would at a stroke slice the EFSF’s usable guarantees by 35%.
- The World from Berlin, “EU Summits Won’t Rescue Euro, Will Only Buy Time”
The center-left Süddeutsche Zeitung writes:
“It is crystal clear now that the historic task of saving the world’s second-biggest currency can’t succeed with the bit-by-bit approach of politicians taking their own national interests into account.”
“The report by the inspectors of the troika of International Monetary Fund, European Commission and European Central Bank reads like a horror story. It calls into question all the the previous rescue attempts launched by the Europeans.”
“Beyond Greece, far greater problems are emerging, posing the fundamental question of who remains in a position to help whom, and how.”
“The EFSF might as well give up unless it is fundamentally rebuilt. The fund is too fragile in its construction and too slow because the decisions on its use are political. Every euro country can veto decisions, and the rating agencies have tremendous influence. If they take the triple-A rating away from heavyweights like Germany, the fund itself would see its creditworthiness downgraded, which would in turn deter investors. Many of them don’t even understand the complex structure to begin with.”
“The weekend summit has also made clear that the EFSF can only survive if its resources are increased. The question is no longer whether a risky system of financial leverage is necessary. Given the Greek debts and the fragile situation in southern European countries, the question can only be how the fund can be expanded.”
“Regardless how much money is mobilized in the end — it won’t rescue the euro. It will only buy time to solve the fundamental problems. The economic drifting apart of the 17 euro nations must be stopped; solid economizing is required. Because time is becoming increasingly expensive, the summit on Wedesday will have to launch real changes. That includes the installation of a powerful independent budget commissioner, as many countries are demanding. Berlin, which is insisting on first changing the EU treaty, is risking allowing the euro’s slide to turn into a collapse.”
The Financial Times Deutschland writes:
“At least everyone agrees on one issue: the banks will play a key role. They will have to make greater sacrifices for a Greek debt cut. Whether that will be 40, 50 or 60 percent, they won’t be able to avoid writing down a large part of their sovereign debt holdings. German banks will be able to cope with that, French banks less so, Greek banks not at all. That is why there will have to be state guarantee for them, regardless of whether that be via the EFSF or another emergency source.”
“It would have made sense to provide bank-issued bonds with state guarantees from a European fund. If banks have to hold more equity capital, they will lend less — and there will be a risk of a credit crunch. The European Investment Bank could have helped to shore up banks unable to raise capital in the market. After the Lehman collapse this worked with some German publicly owned Landesbanken regional banks via the German bank rescue fund Soffin. But for some unknown reason this idea didn’t survive the EU summit.”
“Now ailing banks will probably be reliant on national guarantees. The question is whether Portugal’s banks will still be able to borrow money if the Portuguese government guarantees the repayment.”
The conservative Frankfurter Allgemeine Zeitung writes:
“Government leaders are now referring to a ‘bazooka’ with which they want to blast the crisis into oblivion. It’s a further mystery of the EU’s crisis management how a word like bazooka can help to instil confidence. In Germany at least, the bazooka awakens memories of the last stand, of the ‘Volkssturm’ (‘People’s Storm’) of old men and children who were meant to turn around a lost war, but bled to death instead.”
“The EU hasn’t reached May 1945 levels yet. But, staying with the military metaphors, the front at times looked as if it were about to collapse in recent days. It took a lot of effort to get the ranks just about closed again. It would be easy, but cheap just to blame the government leaders for this. Most of them are doing their best grappling with this murderous program — within the confines set by the European political system which has been exposed in a merciless light by the crisis. Diverging interests, situations, historical experiences, mentalities and styles of government are clashing here. The row between Paris and Berlin about the rescue fund is just one of many examples of this.”
“The dispute gives a taste of how difficult it will be to develop the EU into a ‘political union.’”
The conservative Die Welt writes:
“Anyone hoping that the EU summit will deliver a Big Bang to solve the European debt crisis will probably be disappointed once again. It can’t happen because the governments involved have completely divergent opinions of what the new, better Europe is supposed to look like. The French president fought bitterly to give the European rescue fund unlimited access to the money printing press of the European Central Bank. For the Germans with their inherited inflation phobia, that’s a horrifying scenario.”
“After a year and a half of fruitless rescue efforts, Europe is finally approaching a Greek debt restructuring. Anyone demanding that a year and half ago was labelled anti-European, even by the German government. The rescue of the over-indebted country was pronounced to be a matter of war and peace. But the currency union needs clear crisis management, not grand speeches, to survive. It is disastrous that this is no longer about solidarity between the strong and weak states. The EU has also been subsidizing the borrowing of the Italians and Spanish, who have plenty of their own reserves to get to grips wth ther homemade problems. If rescuing southern European and French banks is now also to become a common task, this has nothing to do with appropriate solidarity.”
“The German government is determined to solve the crisis with ‘more Europe.’ Fiscal union or even political union are the buzzwords. But the nations still have far too little in common in terms of monetary and fiscal policy for that to be possible. If some countries want to print money instead of making their economies viable through unpopular reforms, the others will always have to foot the bill. The confidence of the publc and of markets will only return when all euro members follow the stability rules — or leave the club.”