Tag Archives: Brussels

Goodbye Eurobonds! (Or Hello?)

It could have been a part of a possible solution to prevent a collapse of the European monetary system – the eurobonds. But as pointed out in numerous articles here at EconoTwist’s, it is not possible for the euro zone governments to agree on anything fundamental as long as there’s no real union of Europe. Some of you may be familiar with the term “Tragedy of the Commons” – the story about the eurobonds turns out to be yet another illustration of this human imperfection.

“Eurobonds are an appealing concept in theory, but cannot be implemented in today’s Europe characterized by a large debt overhang, and the absence of a credible system to enforce even the weak elements of economic governance we have now.”

Daniel Gros

“The current upheaval in financial markets has reinforced the voice of those who call for the introduction of Eurobonds as the only way to end the euro debt crisis.  However, August 2011 might well be remembered as the month during which the idea of eurobonds was murdered by the Italian political system,” Director of the think tank CEPS in Brussels, Daniel Gros, writes in commentary article at www.eurointelligence.com.

Well, if the Italians didn’t do it, somebody else would have…

The idea of introducing a new financial instrument – another way to issue more sovereign debt – might have provided the European banks with another temporary source of income.

But that’s about it…

Besides, the practical issues related to an implementation of such bonds is not possible to solve in today’s political environment in Europe.

Maybe the eurobonds belongs to the future. But for now it’s just another nice thought – much like the very basic idea of the “United States of Europe“.

Director of the think tank CEPS in Brussels, Daniel Gros, does a pretty good job explaining the details in the following article, syndicated by www.eurointelligence.com:

The basic facts of the Italian drama are well-known: in early August, when interest rates on Italian government debt soared and the Italian banking system got under pressure, the ECB started buying Italian debt on the understanding that Italy would quickly adopt a multiannual program to reduce its deficit and promote growth.

This understanding was made explicit in a letter send by the present and future presidents of the ECB to the Italian government.

Initially it appeared the country would react in a matter of days. 

But as the pressure from financial markets abated somewhat the government, under pressure from different parts of the ruling coalition, continued to change its mind on what taxes to increase and what expenditure to cut.

Growth enhancing measures went out of the window and the revenues assumptions underpinning the budgets plans became ever more shaky.

The ECB had thus little choice, but to stop buying Italian bonds, whose yields then soared again.

This finally convinced the Government that it had no choice but to toughen the budget again so as to ensure renewed support by the ECB.

Given this experience it is instructive to speculate what might have happened if Eurobonds had already been implemented by early 2011.

What variant of Eurobonds?

Imagine first, that Italy could still have issued substantial amounts of Eurobonds.

In this case the Italian government would have continued to defend its position that Italy’s fundament position was sound (relatively low deficit and strong domestic savings); and that there was therefore no need to implement a strong fiscal adjustment now.

There are always valid arguments to delay action. 

The Italian government might even find a Nobel prize laureate who would support the notion that any attempt to implement a fiscal adjustment now would be self-defeating because it would depress demand so much that in the end the deficit would not improve.

Defenders of Eurobonds would say that ‘the EU’ (i.e. the eurogroup of finance ministers) might have imposed the adjustment anyway.

This is possible, but not likely, because in the absence of a clear market signal the need for action can always be disputed.

But what would have happened even if “the EU” had ordered Italy to do a fiscal adjustment now?

It is quite possible that the government might not have been able to find a majority in Parliament.

What then? Fines?  Why would the prospect of fines, which only embarrass the government, suddenly produce a consensus on reforms?

What if Italy had already exhausted its allocation of Eurobonds (or the EU had not allowed it to issue any more)?

In this case the price of all the Italian “non eurobonds,” i.e. those Italian bonds not guaranteed by its partners, would have tanked even more as financial markets would perceive that these bonds would be first in line in case of trouble.

Total Italian government debt is about 1.800 billion euro.  If one assumes that eurobonds might have been issued for about one half of this one would still be left with 900 billion euro, enough to drive large parts of the EU’s banking system into insolvency should the country default on it.

With or without Eurobonds, the ECB would have faced the same unpleasant choice: intervene in the secondary market or risk a collapse of the European banking system.

The Italian “summer theatre” of 2011 illustrates once more that the problem is not that a government will openly defy its euro zone partners, but rather that its parliament is so divided that the government cannot push through the measures that are required.

Greece has already shown that countries default not because they deliberately choose to, but because society at large is so divided that it is impossible to make the necessary adjustment to ensure orderly debt service.

This leads to the final thought: What would happen to the “eurobonds” issued by a country which does not comply with conditions set in Brussels or Frankfurt? 

Would financial markets really believe that Germany would honour its guarantee if the country concerned had not abided by its own obligations?

The German government might well argue that the country had destroyed the essential elements (‘Geschäftsgrundlage’ in German) for eurobonds.

Depending on the exact legal basis for Eurobonds, i.e. what jurisdiction would apply, this uncertainly could very well lead to significant yield differentials between the Eurobonds issued by different member states.

Eurobonds are an appealing concept in theory, but cannot be implemented in today’s Europe characterized by a large debt overhang, and the absence of a credible system to enforce even the weak elements of economic governance we have now.

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Daniel Gros is Director of the think tank CEPS in Brussels.

 

So, the confusion continues…

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The Week Ahead: Hold On To Your Hats!

When it comes to the global economy, it seems like the fun is just getting started: Regulators are now  calling for extra capital to be imposed on the largest banks, Bank for International Settlements urge economic growth to slow down in order to curb inflation, central bankers are screaming for rate hike and Greek deputy prime minister warns that rebels may block new economic reforms.

“You can’t ask for more taxes in an already overtaxed country, in a market that has been sucked dry, with economic activity at zero and a huge recession.”

Antonis Samaras

Yup! Just when you thought the Chinese was going to save the day, it turns out that it’s not that easy after all. No matter what the bureaucrats of Brussels asks for; the people of Greece may very well give them the middle finger. But that’s not all. The central bankers – who have declared the worst is over  every other week for two years – has suddenly discovered that it’s probably not.

Right now rather disturbing news reports are pouring in.

Here’s some of the headlines of the financial press at the moment:

FINANCIAL TIMES

REUTERS

AP

THE WALL STREET JOURNAL

  • French Banks Seek Greek Debt Rollover. French banks have proposed a plan to reinvest half the proceeds from maturing Greek governments bonds ahead of a meeting of key players, in efforts to encourage private investors to contribute to a new bailout for Greece.
  • Nokia, Siemens fail to secure investors. Nokia Corp and Siemens AG failed to secure a deal for investors for a controlling stake in their unprofitable joint venture.

DER SPIEGEL

THIS WEEKS NUMBERS

Well, I have a feeling we might get a surprise or two, also, during the week.

When it comes to the economic data, European investors will look closely at the PMI surveys, that will indicate whether global soft-patch continued into June.

Th week also sees a raft of data on inflation, the US housing market and consumer trends, plus business conditions in Japan.

Monday
A week in which market attention will remain firmly set on Greece starts with the publication of Italian wages data before attention shifts across the Atlantic to the US, where personal income and outlays numbers will be used to gauge the strength of the consumer sector.

 

 

 

 

Tuesday
Greece’s Parliament is scheduled to vote on its new package of austerity measures on Tuesday. The reforms are a requirement for the next tranche of the IMF/EU loans to be released in time for the funding of bonds in mid-July.
The day also features a number of key data releases, starting with Japanese retail sales numbers for May, Gfk consumer confidence in Germany, plus business confidence and producer price numbers for Italy.
In the UK, final gross domestic product (GDP) numbers for Q1 are released, as well as current account data. According to official estimates, the UK economy expanded at only a modest rate of 0.5% in the first quarter of 2011.
After cooling in May, German consumer price inflation is expected to quicken from an annual rate of 2.4% to 2.6%.
Weekly US Redbook store chain sales are published before the release of the S&P Case-Shiller home price index takes centre stage. The index of home prices in the nation’s largest cities fell below its April 2009 low towards the end of Q1, raising worries about a double-dip in house prices.

The US Conference Board publishes its June barometer of consumer sentiment. Confidence waned in May amid rising fuel and oil prices and concerns about the employment situation. This apprehension among consumers likely continued in June.

Wednesday
Preliminary industrial production numbers for Japan will be eagerly anticipated after trade data showed exports falling at a faster-than-expected rate.
French GDP data (final) for Q1 are released in advance of UK consumer credit, mortgage lending/applications and money supply numbers.
European Commission economic sentiment figures for June follow.
Weekly US mortgage applications data are released, as well as pending homes sales numbers, which plunged in April. However, there is evidence to suggest that temporary factors, such as bad weather, were behind the severity of the decline.

Thursday
The Gfk consumer confidence survey for the UK is published ahead of the Markit/JMMA Manufacturing PMI™ for June. The PMI™ pointed to renewed output growth in May, as easing supply chain pressures enabled firms to restart production lines.
Euro zone inflation comes under the spotlight with producer price data for France and the preliminary estimate of consumer price inflation for the single currency area as a whole. After dipping unexpectedly in May, a further easing in the rate of inflation will make a rate hike later in the year less likely. German unemployment numbers are also published for June.
The usual US weekly jobless claims date are accompanied by the Chicago PMI, which will be watched closely due to its good track record with the ISM manufacturing index, published Friday.

Markit’s release of Manufacturing PMIs for Asia follow, notably final data for China, where the flash HSBC PMI™ survey pointed to a stagnation of output and easing price pressures across the sector. HSBC PMI™ releases for South Korea and Taiwan will be monitored for trends in global trade flows.
The Markit Euro Zone Manufacturing PMI™ data follow last week’s flash estimate, which showed the region’s economic growth surge losing momentum at a worrying rate.
The publication of the Markit/CIPS UK Manufacturing PMI™ follows shortly after. May data signalled that manufacturing moved from rapid expansion to near-stagnation.
Italy publishes final GDP numbers for Q1 and jobs numbers before the unemployment rate for the euro zone is released.
The week ends in the US, where the University of Michigan consumer confidence index will shed light on consumer spending patterns. Construction spending numbers follow.

However, the ISM Manufacturing PMI will be the key release in the US; the headline index posted its lowest reading for 12-months in May, reflecting a marked slowdown in output and new order growth.

Friday
Friday starts with the release of unemployment, consumer price inflation and household spending numbers for Japan, plus the Bank of Japan’s quarterly survey of business conditions.

Now, hold on to your hats, and trade with attitude!

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EU Council Press Conference: LIVE Here

Press conference by the President of the European Council, Herman Van Rompuy, is about to start in Brussels.

You can follow the press conference by clicking on the picture below.

See also: 

Problems Mounts as EU Leaders Gather in Brussels – Again

Related by the EconoTwist’s:

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