The meltdown continues
This has been another dramatic day for the eurozone with the news that the Merkel government is ready to contemplate a Greek exit from the eurozone, and that she may not have her own coalition majority for the EFSF vote after all. Italian spreads shot back up at 3.7%, and equities down 5%. Let’s take these news items in turn.
Greek exit from the eurozone is no longer a taboo for Merkel’s coalition According to Financial Times Deutschland a Greek exit from the eurozone is no longer a taboo for Angela Merkel’s coalition. The paper quotes Merkel from her meeting with CDU and CSU deputies last night where they discussed the disruption of the troika talks with the Greek government due to the lack of delivery on the agreed consolidation package. Merkel denied that a Greek exit was an option but according to FTD she did so in a less categorical manner than previously.
Merkel may be short of votes in her own coalition on the EFSF decision Angela Merkel may be short of a majority within her own coalition when the enhanced EFSF will be decided. In a test vote last night 12 CDU and CSU deputies voted against the proposed law, 7 abstained, according to Süddeutsche Zeitung. Within the FDP parliamentary group 2 voted no and 4 abstained. Should the deputies stick to their voting pattern, Merkel will not have her proper majority in Bundestag which is of 19 votes. The law will pass nevertheless because the opposition SPD and Greens have already announced they would vote for beefing up the EFSF. But political analysts are certain that not having her own majority may be a fatal blow for the German chancellor and her ruling coalition.
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The Financial Markets are now gripped by panic Concern over the possibility of a Greek exit, and the latest attempts by the Italian government to water down the reform package have led to a panic attack in financial markets, as part of which European equities fell by over 5% (as measured by the Eurostoxx index). Italian 10-year spreads are now reaching crisis levels of 3.762%, with Spanish spreads up at 3.521% – levels that are not consistent with continued eurozone membership of either country. The rise in spreads presumably follows a let-up of ECB bond buying. The markets are now clearly sensing that the eurozone has no further weapons in its arsenal, as governments are hitting their political speeds limits.
Draghi puts pressure on Berlusconi not to water down his reform pledges Mario Draghi used a common appearance with Jean-Claude Trichet to urge Italy to deliver on its reform- and consolidation promises. The ECB president designate insisted that governments should not take the central bank’s bond purchasing program for granted, nor should it use its protective shield to “circumvent” basic principles of budgetary discipline. The ECB is upset because Silvio Berlusconi first promised tough reforms, saving plans and new taxes in a quid pro quo for the ECB buying Italian debt. Once the central bank had started doing so, he bowed to pressure from within his coalition and watered down the promises given previously. The ECB yesterday revealed that it last week bought government bonds from the euro crisis countries in the magnitude of €13.3bn, the double of the previous week’s €6.7bn. Altogether the ECB now holds bonds from Greece, Ireland, Portugal, Spain and Italy in the magnitude of €129bn on its balance sheet.
Comments: The most important, and contrasting, comments to read this morning are both in the FT, by Wolfgang Schäuble and Barry Eichengreen. While the American is determined the safe the euro, the German is hell-bent to destroy it, at least in its current form.
Wolfgang Schäuble Wolfgang Schäuble has a revealing article in the Financial Times, in which he expresses the view that the eurozone needs austerity now, and should pay the pay the price of lower growth in the short run to achieve higher growth in the long run. He also dismisses any notion of a eurobond, saying this went against the grain of European integration, which did not proceed in leaps, but in small steps. His bottomline is that some progress has been achieved, but more needed to be done.
(His comment certainly reflects the prevailing view in Berlin, and is indicative of Germany’s increasingly certain rejection of eurobonds – even under a scenario of extreme distress. The pro-cyclical nature of his economic prescriptions plus the rejection of joint and several liability is not consistent with the survival of the eurozone in its current form. The only conclusion we draw from this article that Schäuble finally see a good moment to implement his “core Europe” ideas from the 1990s.)
Barry Eichengreen Barry Eichengreen, one of the few US academics who has consistently taken a pro-euro line, is becoming extremely alarmed by recent events, and argues that the only hope for the eurozone survival lies in external help. He calls on the IMF, the US and Asia to get more heavily involved in the eurozone rescue, and use the leverage they already have on the process – through the existing IMF involvement and the Fed’s dollar swaps. In particular he wants the IMF and the G20 to subject European financial institutions to standardised accounting treatment of their sovereign exposures. He also urged modifications to the Greek rescue plan. Reliance on zero-coupon bonds at a time of low interest rates was too expensive. He favours a model of credit enhancements through the IMF.
Hollande leads the presidential polls in France Francois Hollande is currently the frontrunner for France’s 2012 presidential election, Le Figaro reports. A poll done by LH2 for Yahoo shows Hollande getting 37% of the intended votes compared to Nicolas Sarkozy with 25% and Marine Le Pen of the extreme right Front National with 11%. If Martine Aubry, Hollande’s main competitor, was to run she would 30% in the first round of the election compared with 27% for Sarkozy.
Milliardaire Nicolas Berggruen launches pro-European think tank The billionaire investor Nicolas Berggruen yesterday launched a new resolutely pro-European think tank and he explains in an interview with Frankfurter Allgemeine Zeitung his motives. He wants to use the crisis to promote the United States of Europe and a fiscal union with strongly enhanced rights for the European Parliament. In support for his project he lined up European elder statesmen like Gerhard Schröder, Felipe Gonzalez and Guy Verhofstadt.
Spreads, Forex and ZC Swaps Just look at those awful spreads – and the collapse in bund yields. Risk aversion has never been so extreme. Also look at those inflation-target undershooting zero-coupon interst rate swaps. The ECB clearly has lots of room for manoeuvre.
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