Eurointelligence – 3Agosto2011. Remetido por Domenico Nuti

 

The domino effect: A short crisis update

 

This is not a full newsbriefing, just a short crisis update, with some details of the latest developments on eurozone bond markets, the likely implications, and a news story according to which Herman van Rompuy might take over as the eurozone’s primary spokesman. Our regular briefing will resume August 15.

 

In the last few days, the eurozone bond markets experienced extreme price movements on little trading volume. The rise in Italian and Spanish yields – and fall in German yields – continued this morning.

 

In terms of 10-year spreads, Italy and Spain are now in the position where Portugal and Ireland were just before they applied to the EFSF. Belgium is what Spain used to be a month ago, and France is where Belgium used to be. The dominos in the eurozone are falling. And the threat is reaching deep into the core.

 

 

Previous Day Close

Yesterday’s Close

This morning

France

0.701

0.768

0.807

Italy

3.551

3.838

3.890

Spain

3.755

3.890

4.049

Portugal

10.448

10.560

10.621

Greece

12.571

12.693

12.76

Ireland

8.631

8.406

8.515

Belgium

1.932

2.026

2.097

Bund Yields

3.245

2.416

2.364

 

Source: Reuters

 

If those levels of bond yields were to persist, Italy and Spain would be insolvent.

 

There are now five possibilities how the situation might resolve.

 

1.      The ECB resumes its programme of bond markets purchases, and sets a floor to all eurozone bonds. (We think this is not likely, at least not without option 2 in place.

2.      The EU increases the volume of the EFSF, but this cannot be done on individual country guarantees, as this would overextend France in particular, leaving too much weight on Germany. A higher lending size would require that the EFSF’s bonds are joint and several. That, however, would be tantamount to a eurozone bond – and might not pass in all national parliaments.

3.      Italy and Spain remain in the eurozone, but default on part of their debts.

4.      Italy and Spain leave the eurozone.

5.      The situation reverses with only minimal policy action (another austerity or reform programme).

 

In the tradition of complacency and wishful thinking, the EU is clearly pursuing option 5, when they should be pushing for option 2. Various crisis meetings are held in Rome and Madrid today. Zapatero has postponed his holidays, and Berlusconi will address the parliament.

 

The best comment to read this morning is Willem Buiter’s gloomy piece in the FT. He no longer believes that a fiscal union is a likely outcome. Instead, he thinks that the eurozone is converging towards a default union, with Greece falling into a default rating several times, as well as Ireland and Portugal. The only support from the other member states consists of net present value losses on their guarantees. It is the one time fiscal transfer that will happen – the price to pay for a lack of readiness to deal with this crisis. A default union won’t be pretty but it can be durable, he argues, providing the institutions are in place to deal with the impact on the financial sector.  

 

 

Von Rompuy to replace Juncker as the eurozone’s spokesman


Reuters, picking up on a story from Le Monde, reports this morning that Nicolas Sarkozy wants to give Herman Van Rompuy the role as coordinator and spokesman for the eurozone. France and Germany will make a joint proposal to strengthen the euro zone governance later this month, as part of which Jean-Claude Juncker will be further sidelined. The idea is to end the cacophony. The article quotes various EU sources confirming the story. One person is quoted as saying that the eurogroup was a dysfunction unit, adding that Juncker was disorganised and tired.”

 

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Website: http://sites.google.com/site/dmarionuti/
Blog “Transition”:  http://dmarionuti.blogspot.com/

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