The run on the eurozone has started
The problem with European governments is that they have never bothered to study the financial crises of other countries. If they had, they would have acted a long time ago. Yesterday, a bund auction flopped for the first time in living memory – as a result of which the entire eurozone no longer has a viable bond market. The flop was a major global event. It sent share price tumbling. Financial investors are now heavily betting on the break-up of the eurozone. Having held up well during most of the crisis, the euro declined to $1.33. Despite the 200bp jump in German yields, Italy’s 10-year spreads rose back above 500bp, and Belgium’s are now at 350bp.With every day of complacent and ignorant political announcement, especially from Berlin, the crisis deteriorates, and the cost of crisis resolution increases.
Jose Manuel Barroso warned yesterday the euro would be “difficult or impossible” to sustain without further economic integration. German newspapers this morning produced a whole string of poisonous comments about the European Commission’s proposals for Eurobonds. The eurozone is now in a position where crisis resolution requires a much firmer political commitment than member states had expected to provide.
The FT writes in its main news coverage this morning that investors were suddenly beginning look at German government bonds as a risky asset. Ewald Nowotny, the Austrian central bank governor, talked about an “alarm signal”, and investors were talk about a “tipping point”. Clearly, the much feared run on the eurozone has started, and once such a run starts, it can escalate very quickly.
(In our view, the European Council should consider bringing forward the date of the December 9 summit, and adopt proposals for a Treaty Reform for a fiscal union and Eurobonds right away. Without this, there will be no crisis resolution. At this rate of market panic, it is not clear that the eurozone will otherwise make it until December 9.)
German could accept Eurobonds under certain conditions Taken at face value the German opposition against Eurobonds seems to be as strong as ever and most German papers such as Süddeutsche Zeitung and Handelsblatt report on the topic in these terms. Nevertheless, the resistance against the Commission is less categorical than it appears, Financial Times Deutschland writes. Angela Merkel did not rule out Eurobonds but rather said the timing of José Manuel Barroso’s proposal was “inappropriate”. Among the condition she enumerated were changes of the EU treaties and a much stronger commitment of member states to condolidate. Norbert Barthle, the budgetary spokesperson of Merkel’s CDU/CSU parliamentary group, told FTD: “We never say never. All we say is: no Eurobonds under current conditions”. As a result there is scope for a deal at the EU summit December 9. “If we get real tough sanctions accepted in the eurozone, we could in exchange be more open to the Eurobond topic”, Barthle said. Significantly also the ECB, which so far had been frankly hostile against Eurobonds for fear they would lessen market pressure on countries to consolidate, signalled for the first time sympathy in principle for the idea. “Even if they are clearly seen as an unrealistic prospect, euro bonds, from the pure perspective of the international monetary system, would be useful as a reserve asset for the world economy”, ECB vice president Vitor Constancio yesterday said in London.
(While Angela Merkel herself may be infinitely flexibile, she has whipped up so much negative sentiment against Eurobonds within her party and the country at large that it will be hard to rally public opinion, the Bundestag, and the media behind the project in such a short period of time. Even a quid-pro-quo in the form of compulsory balanced budget amendments would probably not be enough , given the general atmosphere of distrust. )
Gerald Braunberger warns Germany of exaggerated self confidence After yesterday’s failed bund auction Frankfurter Allgemeine Zeitung’s Gerald Braunberger warned Germans not to be overly self confident. “The unexpected low demand for a 10 year bund is no reason to panic but a clear signal of the market, that even a country considered to be safe haven in the crisis like Germany cannot allow itself everything”, he writes. “A yield of barely 2% for a 10 year bond is just not enough in those uncertain times even if Germany is among the most highly regarded debtors in the world. On top of that markets understand that even Germany does not follow a determined consolidation policy.”
Wolfgang Münchau on why it is probably too late to solve the crisis In his column in Spiegel Online, Wolfgang Münchau says there is now a great risk that the EU will not get on top of this crisis. The problem is that political narratives in member states have drifted too far apart. What makes crisis resolution particularly difficult is the German narrative, which is based on two lies. The first lie is what he calls the fiscalisation lie – the reduction of the causes of the crisis to fiscal indiscipline. This was only the case in Greece, but not in most countries now affected. Angela Merkel’s Treaty change proposals build on this lie, but will have no effect whatsoever on sentiment of investors, whose narrative of the crisis is very different. The second is the inflation lie – that historical experience has turned Germans cautious about central bank money printing. Münchau says Germans have a tendency to block the 1930s, including the early 1930s, and the Great Depression, with its disastrous political consequences. The German historical experience with depression and deflation were, if anything, worse than those of other countries.
Mark Schieritz on Hitler and inflation Mark Schieritz also picks up on the inflation debate, and makes the point that the hyperinflation of the early 1920s directly produce the hard-currency strategy of the later 1920s and 1930s. In other words, it was not inflation that led to the rise of Hitler, but the policies Germany adopted as a result of inflation. He produces a number of interesting graphs showing the correlation in the rise of unemployment and the Nazi votes.
Henry Kissinger is convinced Europe will overcome the crisis Talking to Frankfurter Allgemeine Zeitung Henry Kissinger said he was convinced Europe would somehow overcome the current crisis. “I don’t know how but the Europeans have to make it and they will. I cannot be that Europe does not solve the problems it created. If you compare the current situation with 1950 you can observe huge progress. Why should Europe not defend that. Much has been created out of nothing, it would be absurd to abandon all that.”
Political crisis continues in Belgium King Albert II asked Elio di Rupo to continue his mission. Caretaker prime minister Yves Leterme, meanwhile, appealed to Belgian citizens to buy government bonds to help the government financing Belgium, Le Soir reports. The rise in spreads of 30bp to 50bp could cost the government €1.8bn more, according to calculations of L’Echo.
Samaras sends the letter but reiterates his reservations Antonis Samaras sent a letter to Greece’s international lenders backing a new bail-out programme, but he repeated his insistence that more needed to be done to support growth. “We believe that certain policies have to be modified, so as to guarantee the programme’s success,” he wrote. “This is more so, since according to the latest European economic forecasts, Greece in 2012 will be the only European country with five consecutive years in recession,” he added. There are no official reactions yet and it is still unclear whether his pledge would be enough to persuade the EU to release the €8bn aid payment for Athens. Reuters has the full text of the letter.
Letter may cause unrest inside Samaras conservative party Samaras letter seems to have done little to calm the mood in his own party as some members continued to question the decision to provide written guarantees, Kathimerini reports. ND sources suggested that the party would have to brace for internal unrest. Failos Kranidiotis, an informal adviser to Samaras, suggested that EU officials’ statements about Greece not getting its 8-billion-euro loan tranche without a written guarantee from Samaras were “empty threats.” Kranidiotis also suggested that PASOK may have been behind the demands for Samaras.
Budget missed target in first 10 months The hole in the 2011 budget, meanwhile, is growing ever bigger as revenues in the first 10 months of the year falls short of the revised target set by the Finance Ministry by €2bn. At the same time expenditure is soaring, as it has exceeded the budget’s revised provisions by €1.1bn, according Kathimerini. Greek spreads jumped overnight from 29.939 to 36.64.
Portugal braces for general strike A 24-hour strike in Portugal has grounded flights and halted public transportation in protest against proposed austerity measures. The protests comes on the one-year anniversary of the country’s first general strike since 1988, which was held after the previous government announced austerity measures that failed to avert the bailout in April.
Finland’s finance minister says ECB must step in if everything else fails If the latest decisions by political leaders fail to solve the euro zone’s debt crisis, the role of the European Central Bank and the International Monetary Fund should be reconsidered, Finland’s finance minister told the German weekly Die Zeit. Jutta Urpilainen said that Finland backed in principle the German position to do everything necessary to secure the ECB’s independence. “But if all else fails, we have to reflect on the role of the ECB or a larger role for the IMF”, Urpilainen told the paper. The finance minister reiterated that the Finish government was against the idea of common euro zone bonds as this would be another step towards a collectivisation of debt.
Spreads, Forex, and ZC Swaps The euro falls to $1.335, German bund yield up almost 200bp. Italian spreads are up to over 5%. Note also the massive increase in Greek spreads. Belgium spreads are now at 3.5%.
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