AMERICAN FUTURE

At the rate things are going, there will be a 500th installment of this tragic soap opera — if the euro and my fascination with the death spiral of a critical component of the world’s economic and financial systems last that long.

The pace of events is obviously accelerating. The following comes from articles in the Wall Street Journal (no link) and the Financial Times:

• The euro dropped below $1.30 for the first time since January.
• Rates that banks charge each other for short-term borrowing in dollars continued to climb, hitting their highest level since July 2009. Also since July 2009, the cost of borrowing dollars for three months in the London interbank market reached a new high.
• Foreign-owned banks operating in the US have suffered their largest six month fall in deposits on record in what some analysts have described as a “flight to safety” from European banks to domestic institutions.Cash on deposit at foreign-owned banks fell $291bn, or 25 per cent, to $879bn from the end of May to the start of December, the first time deposits in the sector have fallen for six consecutive months since 2002, according to Federal Reserve data.
• A dozen banks tapped the European Central Bank for one-week dollar loans, the ECB said on Wednesday, borrowing a total of $5.1bn. That is more than the $1.6bn tapped by five banks last week. Demand at the last offering of three-month dollar loans also surged, with 34 banks borrowing $50.7bn from the central bank after it began offering the liquidity at a new and cheaper rate. But, despite the central bank facilities, the cost of obtaining dollar funding in the private market continues to soar, pointing to a dollar funding squeeze as Europe’s banks head into their all-important year-end reporting period.The three-month euro-US dollar basis swap dropped to as low as -150 basis points on Wednesday, meaning banks would have to pay an extra 1.5 per cent premium to swap their euros into dollars for a three-month period. The premium has not been persistently below the -140bps region since late 2008, during the depths of the financial crisis.
• Long-term Italian government bond yields jumped back above 7%, a level that would crimp Italy’s ability to borrow in the future.
• Crédit Agricole SA, France’s third-largest bank, said it will exit 21 of the 53 countries in which it operates to help shore up its finances. In announcing its plans to retreat from various markets, it said it will boost reserves, cut costs and trim its reliance on market borrowing.
• Commerzbank AG, struggling to avoid accepting a bailout by the German government, is in negotiations to transfer suspect assets to a government-owned “bad bank.”
• Fitch Ratings lowered its ratings on five big banks from Denmark, Finland, France and the Netherlands.
• German Chancellor Angela Merkel reiterated that creating such a bond would be no solution to the turmoil.
• Jens Weidmann, president of Germany’s Bundesbank and member of the ECB governing council, said he remained vehemently opposed to the ECB printing money.
• In Sydney, Westpac Banking Corp. warned Wednesday that Europe’s debt woes will impact the price and possibly the availability of credit to Australia’s banks. Westpac Chief Executive Gail Kelly said “term markets around the world are effectivelyclosed.”

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.

Continue reading ‘Opinions and News on the Eurozone Crisis, No. 46’ »

The British prime minister defends his position in a video interview with the Telegraph:

In 1914, an economically healthy Europe was divided into armed camps. In the 1930s, an economically destitute Europe was divided into armed camps. Now, an economically unhealthy Europe is again divided into camps. This time, a military confrontation is thankfully not in the cards, but the handwriting is on the wall for economic and financial warfare. Every time Europeans leaders get together, hope soon gives way to despair. The lesson is that no matter how bad things are, they find a way to make things worse. Who would have thought that this time it would be the Brits who, fearful that agreements brokered by the Germans and French would weaken The City (London’s Wall Street), would escalate the crisis to a new and more dangerous level?

From Reuters at 10:08 EST:

The European Union failed to secure backing from all 27 countries to change the EU treaty at a summit Friday, meaning any deal will now likely involve the 17 euro zone countries plus any others that want to join, three EU diplomats said.

An agreement at 27 fell through after British Prime Minister David Cameron demanded concessions that Germany and France were not willing to give, one of the officials said.

During nearly 10 hours of talks that lasted into the night, EU leaders did manage to reach agreement on a ceiling for the size of the euro zone’s permanent bailout fund, the ESM, saying it would be capped at 500 billion euros.

That figure will be reviewed in July next year, when the ESM is due to come into force, the diplomats said.

The leaders also agreed to explore the idea of providing bilateral loans to the International Monetary Fund totalling 200 billion euros, with 150 billion of that coming from the euro zone , to bolster IMF resources to tackle Europe’s debt crisis.

If market participants ignore this development, I’ll be forced to conclude that they’ve taken leave of their senses.

[An earlier report providing background from The Guardian]