E.U. Ministers Fail To Agree On Bailout Details; Run On Euro?

Euro area finance ministers meeting in Brussels on Monday evening failed to make much headway on the detailed operation of the recently agreed €750 billion support mechanism. The tension is growing, amid the perceptions of continued German foot-dragging. The euro is back under heavy pressure, in spite of (or maybe because of) some support from the European Central Banks.

“What we are currently experiencing is almost like a run on the euro.”

Ulrich Leucthmann

The ECB revealed yesterday that it has bought €16.5bn government bonds. The scale of intervention is at the low end of market expectations. According to Financial Times, the ECB will on Tuesday launch a “sterilization” operation to absorb €16.5bn into one-week fixed-term deposits – withdrawing the liquidity it has injected via its bond purchases – to offset the inflationary impact.

The euro is right now trading in the range between 1,235 and 1,237 against the dollar.

Some technical indicators, like the On-balance Volume, shows an increasing sales pressure during the day, but it’s now decreasing again.

Still, it’s unclear to what degree other European Central Banks have been supporting the euro trade.

On Monday the euro fell to its weakest level against the US dollar since March 2006 in spite of the €750bn international support package and central bank intervention.

The euro has fallen 14% against the dollar this year.

The scale of the ECB’s intervention was at the low end of analysts’ expectations.

But the move has broken new ground for the guardian of the euro currency, which had previously resisted buying government bonds outright.

A Drachma In Disguise

David Bloom, global head of foreign exchange strategy at HSBC, says:

“Prior to the current crisis the euro was deemed to be the Deutschemark in disguise. But the rise in sovereign risk has changed this perspective. It now seems that people think it is a drachma in disguise.”

Ulrich Leucthmann, head of foreign exchange research at Commerzbank, says:

“What we are currently experiencing is almost like a run on the euro.”

(Source: Financial Times)

Hysterical Germans

Several politicians and commentators are pointing to the almost hysterical fear on hyperinflation among the Germans.

Frankfurter Allgemeine displays the hysteria in Germany with an editorial in its business pages, according to which the ECB has opened the floodgate to inflation.

The policy is now determined in the financial markets, not in the ECB, the newspaper writes.

The editorial indirectly calls on the ECB to raise interest rates as a bull-work against future inflation.

Ewald Nowotny, ECB council member and Austria’s central bank chief, highlights the tension by saying he was astonished at the “hysteria” in Germany about inflation pressures.

The ECB president, Jean-Claude Trichet, says that the Central Bank’s action is different to quantitative easing by the U.S. and U.K., which sought to reverse the economic downturn.

The failure to agree on the operational details of the €750 billion support mechanism resulted in Mr Juncker calling another euro-group meeting of the 16 finance ministers this Friday, the EUobserver reports.

Another Week Of Uncertainty

Speaking after the meeting, EU economy commissioner Olli Rehn said “the principles are clear” but that “the technical and legal details remained to be clarified.”

Part of the discord appears to stem from a demand from Berlin that German parliamentary approval be granted before countries can tap the support package, with German finance minister Wolfgang Schauble citing national constitutional requirements.

Mr Schauble also raised the prospect of mimicking Germany’s constitutional spending brake across the euro zone.

Last year, the country enshrined in its constitution a law forbidding the federal government from running a deficit of more than 0.35 percent of GDP by 2016.

Mr Juncker explained after the meeting that it remained to be seen how much support such a measure would command, with the majority of EU states failing to comply with the more modest demand’s of the bloc’s Stability and Growth Pact which limits deficits to three percent of GDP.

Berlin is due to provide greater details on the idea this Friday, when European Council President Herman Van Rompuy hosts the first meeting of a task force set up to decide rules for greater E.U. economic governance by the year’s end.

The frustration over Germany’s unwillingness to get the new stabilizing mechanism in place as soon as possible, is being expressed by the Belgian interim prime minister, Yves Leterme:

“We finalized an agreement to defend the euro. We cannot, like Madame Merkel, put into question its feasibility,” Mr Leterme says.

Market Snap Shots

This is Tuesday’s development in the forex market, by 18:15pm (CET):





Related by the Econotwist:

Euro: $1,22 – Panic In Brussels

The Safest Bet During Uncertain Markets

The Euro Is Going Down; Now Trading Below $ 1,24 (Update)

Killing My CDS Softly

Breeding New Watchdogs

ECB Announces Bailout Program

Europe Is Cracking Up

Norway’s Central Bank Ready To Help E.U.

Bailout Euphoria Is Evaporating

Scandinavian Reactions To E.U. Measures: “We Are Not Safe”

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