Panic Hits Germany – Europe On Fire

German chancellor Angela Merkel’s extraordinary complacency abruptly ended yesterday, when the European “Brothers In Arms,” Jean-Claude Trichet and Dominique Strauss-Kahn, persuaded her that further procrastination would add dramatically to the cost of the crisis, and that the future of the euro zone is now at stake.  But it might be too late as the European debt crisis is dramatically spreading.

“This is like Ebola. It’s threatening the stability of the financial system.”

OECD

The seriousness of the situation was underlined by a credit downgrade of Spain, from AA+ to AA with negative outlook, by Standard & Poor’s. The rating agency concluded that Spain’s would be facing years of private sector debt deleveraging and low growth, which would lead to a significant deterioration in the quality of public finances.

It also became clear that Spanish banks were no long able to borrow on capital market, which saw their share prices drop sharply, the eurointelligence.com writes.

Standard &Poor’s shocked the financial markets Wednesday, when they estimated that bondholders will ultimately only recover between 30-50% of their investments in Greece – which is tantamount to a very serious default.

However, most estimates for haircuts have been  significantly lower.

Putting Out Fire With Gasoline

Having risen briefly to the level of 26%, Greek two-year bonds recovered on the news that the IMF is preparing a full three year package.

In a conversion with German MPs, that was already being leaked while it was taking place in the Bundestag, Dominique Strauss Kahn outlined some of the details:

· The package would be in the order of €100-120bn for three years, during which Greece would be taken off the market. (Germany ‘s economics minister said that Germany contribution would be €8.4bn each year for three year running, with a risk on the upside. The Germans had apparently thought that the €45bn would be the total size of the package)

· The package will contain no element of restructuring and rescheduling

· The loans will be junior to those of the existing bondholders.

These are three extremely tough pills to swallow for MPs who were preparing to vote on a much smaller package of super-senior loans with a haircut from the bondholders.

The opposition parties announced yesterday that they would reject the package on the grounds that Merkel had misled the German people throughout this entire process.

And there is also opposition within the coalition about the size of the plan.

European Wildfire

The news, and the figures, have been getting more dramatic overnight. European policy makers may need to stump up as much as €600bn if they are to stamp out the region’s spreading fiscal crisis,

Bloomberg quotes economists at JPMorgan Chase and Royal Bank of Scotland. The economists urge policy makers to come up with unprecedented measures.

“It is perhaps time to think of policy options of the last resort in the current sovereign crisis,” says David Mackie, chief European economist at JPMorgan in London. “It may now be time for the euro area to do something much more dramatic in order to prevent the stress from creating another broad-based financial crisis which pushes the region back into recession.”

“This is like Ebola,” Organization for Economic Cooperation and Development Secretary General Gurria told Bloomberg Television yesterday. “It’s threatening the stability of the financial system.” The World Health Organization calls Ebola “one of the most virulent viral diseases known to humankind.”

Other steps could see governments guaranteeing bonds and the ECB abandoning collateral rules or reviving unlimited lending to banks.

A front-page editorial in FT Deutschland launched a severe attack on Merkel, criticizing a total loss of reality by ignoring the problem, and saying that her procrastination is adding to the cost of the crisis.

Martin Schulz head of the Socialists faction in the European Parliament said that the aid should have been decided a long time ago. He accused Merkel of Greek bashing, as she tried to benefit politically from the rising anti-Greek sentiment in Germany.

The Italian economist Tito Boeri said that each days of this crisis would cost the German taxpayer dearly.

A Collapse of Confidence

Yves Smith, of Naked Capitalism, made the important point that if government are being seen insolvent, their bank guarantees are no longer credible, as a result of which customers are withdrawing funds. Greece is now effectively subject to a quite bank run.

Probably one of the most concise observation of this crisis, is being presented by the Financial Times’ Lex column.

“The interminable agonizing over a rescue package for Greece has allowed a severe but manageable peripheral crisis to morph into a wider crisis of confidence for the bloc itself. The lack of solidarity among euro zone leaders has reached the point where only the International Monetary Fund now has the credibility to lead the bail-out.”

Greek Protests – Portuguese Surprise

The Greek newspaper Kathimerini reports that IMF/EU/ECB sought to cut the 13th and 14th salary, but labor minister Andreas Loverdos says that this is not acceptable to the Greek government.

Pushing retirement age and job cuts in the public sector are other sensitive issues.

The government still expects to end negotiations on Sunday and to get aid by May 19.

Strikes are likely to continue until the summer, but the hard part only starts later.

Portuguese employers expressed surprise over the downgrade of Portugal, though admit that the economic situation is not good for Portgual, Jornal de Negocios reports.

They call on restraints in wage negotiations, cuts in public investment and if necessary tax increases.

Many consider the downgrade as unfair, exaggerating the verdict over Portugal.

Yesterday, Prime minister Socrates met with opposition leaders to agree on deficit reduction measures including changes in unemployment and social benefits.

European Markets Snap Shots

EUR/USD:


EUR/GBP:

EUR/JPY:

German Stock Market

DAX Index:

GOLD:

Related by the Econotwist:

Euro Area Under Massive Speculative Attack

“Germany Is Unfit For The Euro”

Greek Crisis Force Germany To Put Help For Unemployed On Hold

The Great Greek Soap Opera

Markets Still Don’t Trust Europe’s Greek Aid Pledge

Germany Forced To Accept Greek Bailout


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