http://m.irishtimes.com/newspaper/breaking/2010/1201/breaking26.html?via=bbreakingYesterday, European Central Bank (ECB) chief Jean-Claude Trichet tried to damp down mounting turmoil in the euro zone, saying he knows of nothing that would threaten the stability of the single currency in a fundamental way.
Mr Trichet told MEPs that the situation was “very, very difficult” as markets endured yet another rocky day, but said the determination of the EU authorities to overcome the crisis should not be dismissed.
Reflecting global concerns about the euro zone crisis, the US Treasury announced late yesterday that it would dispatch Undersecretary for International Affairs Lael Brainard to Europe this week to discuss the turmoil.
Ms Brainard will visit Madrid, Berlin and Paris to discuss "economic developments in Europe" and the "shared agenda on strong and sustainable growth", the Treasury said.
G20 sources said deputy finance ministers from the group of major rich and developing nations had discussed the financial situation in Europe on Monday in a previously arranged conference call, although they described the call as routine.
http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=2971&tx_ttnews[backPid]=901&cHash=9c4118578f
Only Trichet can save us now – ECB about to monetise peripheral debt
We find it very strange that the EU finds the idea of a common bond too radical, but seems to have no qualms at all about monetising trillions of banking debt and peripheral eurozone sovereign debt. With his hint that more ECB bond buying was under way, financial markets rallied, and analyst expressed expection that the ECB would sanction a €1000bn to €2000bn bond purchasing programme. Put in context, the bond purchase so far were a mere €60bn, fully sterilised.
Extremely overwhelmed politicians were very quick to jump on the bandwagon. According to Reuters, Barroso said he had “confidence in the European Central Bank and was sure it would take whatever action is needed to protect euro zone stability.” And Olli Rehn said the ECB was key to stability. They are saying that the politicians have run out of ammo. Only a broad-based monetisation of debt can help.
(In our view there are insurmountable problems with this thesis. The first is that it does not resolve the problem. The financial markets are panicking despite the setup of the EFSF. So they are not concern about liquidity, but about solvency. The ECB’s bond purchasing programme will almost certainly be geared towards the reduction of interest rates, but it will not be so large as too change the fundamental solvency concerns for the eurozone periphery. The second problem is that a large purchasing programme of the kind demanded by analysis is almost certainly a breach of European law, and German constitutional law.)
Irish banks most exposed to euro periphery
This is an interesting story showing the extreme degree of connected of the European financial sector, and one of the reasons why contagion is spreading so fast. The FT has news from the Bank of International Settlements, according to which Irish banks are extremely exposed to borrowers in Greece, Spain and Portugal, as a result of which the contagion of the crisis to those crisis is reverberating back to Ireland. Irish banks are also the fifth largest global lender in Italy. One German bank, Depfa, an Irish-based subsidiary of HRE, accounts for much for the lending that goes on between Germany, Ireland, Italy, and Spain.
Portugal angry at Commission’s recommendation to reduce dismissal costs
The European Commission chose a great moment to suggest Portugal changes in dismissal laws and a substantial reduction in redundancy payments, Jornal de Negocios reports. The Portuguese prime minister Jose Socrates reacted angrily, saying that the Portuguese government does not need suggestions from anyone. Labour market reforms will be on the policy agenda but only after the Budget 2011 debate. And the focus will be on employability rather than dismissal, in dialogue with trade unions and employers.
The FT’s solution set for the crisis
The FT looks at five scenarios of how the crisis could develop.
1. Monetisation. It is interesting that people see this as a solution, as this still does not answer the question the markets are most concerned about – the solvency of the European periphery. A big bond purchasing programme would ease the pressure, but would not make any solvent, who is not solvent now.
2. Increasing the size of the EFSF. Ditto. More bailouts.
3. A single bond
4. A fiscal union
5. Break-up
The scenarios are not of the same category. A single bond in a sense constitutes the core of fiscal union, so the two points are essential one. And it would be a structural solution to the Eurozone crisis, while the two first would be liquidity measures that would postpone the need for action – and ensure that the crisis will continue for much longer. But this is still the framework we are dealing with here. We think the EU will settle for a combination of 1 and 2, which will calm markets for a while, until the next growth numbers come in, which will show that everybody has been far too optimistic.
Bonds and Forex
Getting better, except Greece.
10-year sovereign spreads (against 10 year German bunds)
..................Previous Day / Close Yesterday’s / Close This morning
France 0.550 / 0.528 / 0.523
Italy 2.066 / 1.879 / 1.860
Spain 2.971 / 2.627 / 2.590
Portugal 4.500 / 4.108 / 4.108
Greece 9.461 / 9.341 / 9.80
Ireland 7.026 / 6.666 / 6.525
Belgium 1.434 / 1.308 / 1.264
Euro bilateral exchange rates:
..............€ at last Briefing / This morning
Dollar +1.3040 / +1.3095
Yen +108.93 / +110.10
Pound +0.8374 / +0.8393
Swiss Franc +1.3087 / +1.3160
Issing says German bondholder plan right in principle, but unworkable
Otmar Issing writes a thundering comment in the FT, in which he supports the principles of Germany’s bondholder bail-in proposal, but criticises the agreement itself. "Which authority will judge that the debt position of a country is unsustainable and that a process of restructuring has to be started? Such a regime would lack credibility and predictability. It would be based on discretionary decisions and set the stage for future political tension, uncertainty and volatility,"
Barry Eichengreen is very, very angry
This is a piece from Handelsblatt, via the Irish economy blog. In it, Barry Eichengreen says that he is the most pro-euro economist in the US, but he is losing his patience with the utterly incompetent handling of the issue in European capitals. He said the Irish rescue package is a disaster. It has not solved a single issue. The interest rate will cripple Ireland. He compared the situation with Versailles.
“But European officials are scared to death not just by their banks but by their publics, who don’t want to hear that public money is required for bank recapitalization. It’s safer, in their view, to kick the can down the road in the hope that something good will turn up – to rely on ‘the luck of the Irish’.”
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