Marc Schulman on finance, economics & politics
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.
Continue reading ‘Opinions and News on the Eurozone Crisis, No. 46’ »
While you (and I) were having Thanksgiving dinner (and napping afterwards), the eurozone crisis didn’t take the day off:
Wall Street Journal: The ECB will definitely not become the eurozone’s lender of last resort — Meeting in Strasbourg, Merkel, Sarkozy, and Monti pledged to present a package of proposed changes to the European treaty by Dec. 9 that aim to integrate euro-zone economic policies, but quashed suggestions that the European Central Bank should play a greater role in fighting the region’s protracted debt crisis.
Trying to quell a rift with Germany over whether the European Central Bank should take more-decisive steps to solve the debt crisis, Mr. Sarkozy said he and Ms. Merkel agreed to abstain from making demands on the Frankfurt-based bank. Sarkozy said:
“In the respect of the institution’s independence it’s essential that we abstain from making either positive or negative demands on the ECB.”
German Economics Minister Philipp Rösler, in comments made ahead of the reiterated his strong rejection of common euro-zone bonds, while top government lawmakers didn’t completely rule out their introduction. Rösler made clear the euro zone must first change EU treaties and integrate economic and fiscal policies far more deeply. One lawmaker said some discussions on euro bonds may be continuing, but ruled out their introduction during the current government.
In a budget debate, asking Germany’s lower house of parliament to signal its rejection of the collective bonds, Mr. Rösler said:
“We don’t want euro bonds, because we don’t want interest rates to rise dramatically in Germany.”
Wall Sreet Journal: ECB considers longer bank loans — The ECB is considering offering longer-term loans to commercial banks that are having trouble securing funding in private markets, as officials scramble to keep the debt crisis from freezing new lending.
Officials may extend loans to banks at maturities of two or three years, according to people familiar with the matter. The longest maturity at present is 13 months. The ECB will make that 13-month loan available next month, meaning banks that need it will have secure funding through 2012.
Notwithstanding the agreement reached in Strasbourg, new loans at two to three-year maturities would mark an escalation in the ECB’s role as lender of last resort to Europe’s banks. Despite repeated warnings by top officials of the danger that banks could become “addicted” to central bank credit, the ECB has repeatedly made these funds available on an unlimited basis.
Rising German yields may therefore reflect a growing belief in the introduction of euro bonds; indeed higher yields may make common bond issuance more palatable for Germany. A renewed decline in yields could signal increasing fear of a break-up or widespread defaults, although this again might lead to renewed rearguard action to save the euro.
Financial Times: Lex, “Eurobonds: moral hazard ahead“ – If eurozone nations cannot borrow separately, perhaps they can borrow together. That is the logic behind the common debt issuance idea – eurozone bonds – being mooted by the European Commission. Those in favour could cite Wednesday’s other, more scary development – investors turning their backs on a German bond issue – to bolster the case that more liquid collective debt would help to trump countries’ individual difficulties. It is the very crisis the region is trying to fight, however, that makes the joint bond concept look like whimsy.
Moral hazard, for starters. By offering the likes of Greece or Italy such rewards, eurozone bonds could remove these countries’ incentive to regain lost competitiveness. Nor would these bonds reduce the stock of existing debt. Unless there was a degree of fiscal union and budgetary enforcement in the eurozone that trampled on national sovereignty, investors would rightly be sceptical about buying such instruments. If the yield on eurozone bonds was to become significantly higher than that on debt of the bloc’s triple A states, the project would crumble.
And then there is the clinching argument – that Germany will not accept them. An ersatz form of eurozone bond issued by the European Financial Stability Facility already exists. Anything more ambitious is a non-starter until the crisis has abated.
Financial Times: Sebastian Mallaby, “Germany is the real winner in a transfer union“ – Over the past 18 months, Germany has tried every trick to limit its contribution to the euro bailouts. It has pushed self-defeating austerity onto bankrupt countries. It has called in the International Monetary Fund. It has tried to pass the hat to China. It has discovered an improbable and futile taste for leveraging up the European Financial Stability Facility. But now these tricks have uniformly failed, and the continent approaches the abyss – with Germany itself suffering the humiliation of a failed bond auction. It is time for Germany to decide once and for all: how much will it pay to save Europe?
Germans can reach the sensible answer only if they discard the myth, widely cherished in northern Europe, that peripheral southern countries are the undeserving beneficiaries of a charitable transfer union . . . The truth is that Germany derives myriad benefits from the currency union. It should pay more to save it.
[...] the currency union that makes adjustment in the periphery so excruciating is the very same currency union that handed Germany its export boom. Rather than condemning lazy southerners, the Germans should share the loot.
[...] As the issuer of Europe’s remaining reserve assets, Germany has enjoyed a flood of capital inflows from the periphery, driving its 10-year government bond yield down to around 2 per cent, this week’s auction notwithstanding. The resulting monetary stimulus arrived just when slowing global growth made it most welcome; this is Germany’s version of the flight to quality that the US enjoys thanks to the dollar’s status. Countries that benefit from international monetary arrangements should be prepared to invest in preserving them.
[...] the Germans have it right: Europe’s currency union does indeed involve transfers. But it is not true that these transfers flow only one way. Germany pays out via bailouts and intra-regional transfers; but it also receives benefits via trade and monetary channels. If only Germany could accept this truth, it might yet muster the will to rescue the euro – and salvage a generation of efforts to build an integrated Europe.
Financial Times: Sharon Bowles, “Time for sovereigns to swallow their medicine“ – Just as structured investment products such as collateralised debt obligations were tainted post-Lehman, so too is sovereign debt. There are other parallels too – just as regulatory reliance on ratings contributed to sleeping on the job over complex products, so too have regulatory exemptions and zero risk weightings removed the brakes from the sovereign debt wagon.
Financial Times: Mohamed El-Erian: “Europe’s banks must be forced to recapitalise now“ – Given this week’s developments, there should be no doubt in anyone’s mind that what started out as a dislocation in the periphery of the eurozone has now decisively breached the firewalls protecting the outer core and is seriously threatening the inner core . . . In the eyes of the markets, the capital cushion of Europe’s banking system as a whole is no longer sufficient to support its balance sheet. This concern is not limited to the markets. Judging from their eagerness to dispose of assets, bank managements also believe that balance sheet delevering is key to the institutions’ survival and well being.
One of the most often talked-about solutions to the Greek financial crisis is to have the European Central Bank issue eurobonds. Such bonds would carry a lower interest rate than does the sovereign debt issued by the Greek government. This would make it easier for Greece to climb out of the financial hole in which it now resides.
So far, so good. But what about the potential spillover effects of eurobonds?
In an article titled “U.S. Treasury Holders Grin and Bear It,” the Wall Street homes in on China — the largest holder of U.S. government debt. After noting, as have many others, that self-impact considerations make it highly unlikely that the Chinese will decide to dump our securities, the articles says China
has few other options on where to park the bulk of its cash. The key lies in the mainland’s continued reliance on an export-driven growth model, supported by an undervalued yuan. China’s trade surplus is shrinking, yet it was still $46 billion in the last quarter. And in order to keep the yuan stable against the dollar, China’s central bank still has to buy up every cent that enters the country.
Once it has those surplus dollars, the options for investing them anywhere other than U.S. Treasurys are limited. A debt deal in Europe is good news on that front, but the sovereign-debt market remains fragmented, meaning there is no comparably liquid, high-quality euro bond available. [My emphasis]
The linkage is clear: if and when a liquid, high-quality eurobond market comes into existence, the Chinese would have an attractive alternative to U.S. government securities in which to invest. Thus, it is possible that the most desirable solution to the eurozone financial crisis would drive up U.S. interest rates.