A slow motion train wreck
We normally try to avoid metaphors, but the slow-motion train wreck is a very fitting description of this stage of the crisis. We are hearing that several market participants are already preparing for the break-up of the eurozone, as the two remaining crisis resolution proposals – a firm ECB commitment for unlimited bond market support and eurozone bonds are now firmly ruled out.
Yesterday, the situation deteriorated once again, with the warning by Moody’s that the increase in French yields would have negative consequences on the French fiscal outlook, and its rating. “A 100bp increase in yields roughly equates to an additional €3bn in yearly funding costs. With the government’s forecast for real GDP growth of a mere 1 per cent in 2012, a higher interest burden will make achieving targeted fiscal deficit reduction more difficult,” Moody’s said. This would have an effect on the French ratings outlook, though immediately on the French rating itself.
Spanish and Italian 10-spreads were heading back towards 5 per cent. The markets have responded extremely negatively to the victory of Mariano Rajoy in Spain, as they fear another round of austerity and depression – which would severely increase the probability of a Spanish exit from the eurozone. The fact that Rajoy seems to have no immediate anti-crisis strategy in place does not help. But for the most part, this market reaction is not really about Spanish politics, but what happens in Brussels, Frankfurt and Berlin. The markets are sensing that the political will to save the eurozone has evaporated. Angela Merkel’s predictable reaction to the European Commission’s proposals for a eurozone bond is a case in point.
Merkel’s „Nein“ to Barroso’s eurobonds Angela Merkel yesterday made it clear that her opinion on eurobonds had not changed, according to Handelsblatt. Her spokesman Steffen Seibert said the chancellor had already repeatedly ruled out such an idea and that “nothing had changed” in her position. The secretary general of chancelllor’s coalition partner FDP Christian Lindner said: “We don’t want any interest rate socialism in Europe”. Instead Merkel continues her push for amending the EU treaty by starting a new European convention very soon. In an amendment to protocol 14, she wants to enshrine that euro members in breach of the budgetary rules can be brought to the European Court of Justice and be forced to change their budgetary policies. The chancellor’s office yesterday said Merkel had spoken yesterday to the Spanish prime minister elect Mariano Rajoy on the topic. But discussion were also under way with non euro countries such as the UK, Sweden and Denmark. The chancellor is confident to get her plans accepted because no solution of the current debt crisis seems possible without the cooperation of Germany, the paper notes. The commission however may be tempted to use the acceptance of the Eurobonds by Germany as a quid pro quo for the other euro members accepting Germany’s tougher budget rules.
Rehn wants toughter controls of the euro member’s national budgets Talking to Financial Times Deutschland Olli Rehn said the Commission wanted to considerably extend its control over euro member’s national budgets. “That concerns all member states and means enhanced possibilities to examine budgetary plans in advance”, he said referring to the Commssion’s euro governance package to be presented on Wednesday. “The necessity to do so is the most pressing in those countries, where rules are broken.” The economics commissioner insisted that the eurozone’s functioning should be improved by better coordination and tighter budgetary control. However, contrary to the views in Berlin, he does not think a treaty change is indispensable. “We don’t exclude treaty changes but first we need an analysis of what is really necessary.”
Barroso, a man in a fight against a dramatic loss of relevance, according to Frankfurter Allgemeine Zeitung At the occasion of the commission’s greenbook on Eurobonds, Frankfurter Allgemeine Zeitung has a scathing portrait of José Manuel Barroso. “He wants to encourage the lingering debate and put pressure on members states like Germany which are opposed to Eurobonds”, the paper writes. “One reason for this is that Barroso likes to play the role of the saviour, or to be exact in the role of the person who distributes other people’s money.” But the paper points out a second motive is even more important for Barroso. “The commission chief tries once again to counter the dramatic loss in relevance which he has suffered in recent years. The EU commission and its president have been systematically disempowered since the debt crisis erupted”, FAZ explains and points out that Angela Merkel has no longer any patience for the advice and the ideas of Barroso.
Austria’s central bank places limits on credits to central and eastern Europe Der Standard reports that the Austrian central bank has limited the credit volumes of Austrian banks in central and eastern Europe by demand that they cap credits to 110% of deposits. The article says Erste Bank’s ratio were between 130-150% in various countries, which would imply a significant cut-down in credit. This is the mechanism through which the eurozone crisis percolates to the rest of Europe. Der Standard writes that Austrian banks had a total of €266bn of credit in the region The new rule does not affect existing credits – thus banks are not forced to call in credit prematurely. But it means that banks which have already exceeded their limits will now have to stop lending immediately.
Paul Krugman on the real Austria Paul Krugman makes the observation in his blog that Austria has a better fiscal performance than Germany, has a current account surplus, yet its bond prices have tripled, and are now close to those of France, with 10-year yields now close to 3.5%. He wonders whether markets were already pricing in a break-up of the eurozone.
King suspends decision on Di Rupo’s resignation
Elio di Rupo offered his resignation to King Albert II, after marathon budget talks failed to get the six parties to agree on how to reduce the budget deficit for 2012, but King Albert II suspended his decision whether to accept it. The king will receive the six negotiating party leaders for consultation during the coming two days, according to Le Soir. “The king asks each negotiator to take some time for reflection in the coming hours, consider the consequences of a failure and actively seek a solution,” according to the palace’s statement. “He reminds” them “about the gravity of the current situation.” Belgium may face fines as early as next month for failing to tackle a budget deficit. The yield spread over German Bunds widened 9 basis points to 290, Bloomberg reports.
Eurogroup to decide on six tranche for Greece end-November Euro-zone finance ministers will meet Nov. 29 to decide whether to release a next slice of aid from the country’s bailout programme, though the final decision could still hang on whether New Democracy leader Antonis Samaras gives his written support for the current agreement, Kathimerini reports. After this, Greece would begin talks on the country’s fresh €130bn aid package.
Greek parliament expected to vote on new €130bn deal early January Speaking to the finance committee in parliament, Finance Minister Evangelos Venizelos said he now expects Greece’s parliament to vote on the new €130bn deal–which also envisions a 50% write-down in the debt Greece owes private creditors–by early January, rather than by the end of the year, according to Wall Street Journal.
Venizelos said Central Bank guarantees are to be doubled Finance Minister Evangelos Venizelos also said that state guarantees to Greece’s central bank are to be doubled from €30bn to €60bn in order to secure liquidity. Latest data showed that Greek banks have borrowed some €26bn from the Bank of Greece under a special liquidity assistance facility since August this year. The Greek government now wants to raise the level of guarantees it provides to the central bank to €60bn. Greek banks have been facing a dire liquidity crunch amid declining deposits and after being effectively frozen out of the European interbank market.
Bundesbank attacks Schäuble’s lack of ambition in consolidating the German budget In its monthly report, the Bundesbank attacked Wolfgang Schäuble’s lack in ambition to get Germany’s budget on a sounder footing, Financial Times Deutschland writes. “With the budget 2012 there is a notable renunciation of the decisions to consolidate as of June 2010”, the German central bank criticizes. In June 2010 the coalition decided to consolidate the budget by €81bn until 2014 via cuts in expenditure and new taxes. But instead of decreasing the government’s net borrowing, Schäuble increases it from €22bn to €24bn this year to €26bn next year. The Bundesbank’s report is an embarrassment for Schäuble and Angela Merkel, who spend their time lecturing their euro partners about fiscal rectitude and who praise their own country as the “stability anchor” of the currency union.
Spreads, Forex, and ZC Swaps Notice the increase in spreads and the simultaneous increase in German bunds. This means that interest rates are rising across the board. Italy’s 10-year yields are now back close to 7%, and French yields over 3.5%.
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