Posted by: David Tweed on January 23, 2012
Euro zone finance ministers meet in Brussels today and it looks as though they're certainly listening to one of Italy's two Marios.
European Central Bank President Mario Draghi suggested after the bank's January meeting that it would be "highly welcome" for European leaders to quit dithering and get the proposed fiscal-compact treaty on fiscal discipline and balanced budgets signed by the end of January.
A couple of days later Germany's new ECB representative Jörg Asmussen, after catching sight of a treaty draft, warned against moves afoot to water it down. If the pact was to be a basis for a fundamental shift toward fiscal union, then it needed credible rules, with limited opt-outs.
Lo and behold, last week a new, stricter treaty surfaced, one with rules that will automatically fine countries breaching their budget-deficit targets, except in the direst of circumstances.
So momentum is gathering. But even if the compact gets a political blessing this month, will that be enough to put an end to the European sovereign debt crisis?
"Probably not," said Michala Marcussen, head of global economics for Société Générale (GLE:FP). "The really big issue is getting more money on the table."
Enough money to convince investors that the EU can and will come to the aid of an economy the size of Italy if necessary. And keep Greece out of the bond market until it can generate a budget surplus, which could take years.
Which brings us to the other Mario, Italian Prime Minister Mario Monti, who has called on Germany to cut Italy some slack and bring down its borrowing costs.
How? With the ECB averse to becoming the ultimate lender to distressed governments, Germany's Chancellor Angela Merkel may be forced to increase the size of the permanent rescue fund from the proposed €500 billion and create a credible firewall—with all the political risk that entails.
For today, as well as the fiscal compact, finance ministers also must prepare a response to Greece's efforts to convince private bond holders to take losses and assess its second financing package ahead of the Jan 30 leaders' summit.
One step at a time. As Merkel is wont to say: this crisis won't be solved with one big bang.
Photograph by John Thys/AFP/Getty Images
Posted by: Linda Yueh on January 18, 2012
The IMF has asked for as much as $500 billion, including approximately $200 billion from euro countries, to address an estimated $1 trillion funding need in the next few years. So the IMF, intent on protecting economic growth, may provide the firewall that the euro-zone rescue fund, the European Financial Stability Facility, is struggling to create. This may be more timely than ever after S&P;'s rating cut threw the EFSF's borrowing costs into doubt. But would the IMF fund be enough to stem the euro crisis?
The IMF won't discuss the options for funding until it has completed full consultations with all of its member countries. Still, based on its funding increase in 2009, when its resources were tripled in response to the global financial crisis, the possible avenues are clear. Then, the G-20 met in London and agreed to add $500 billion to the IMF'S lending capacity, raising it to $750 billion. This was funded in two ways: $500 billion via bilateral loans from member countries and $250 billion in so-called special drawing rights. SDRs are essentially a basket of currencies comprising the U.S. dollar, euro, sterling and yen. Increasing SDRs is like a form of global QE or cash injection. In theory, boosting SDRs could ensure the IMF has enough funds, but in practise, amounts over $250 billion face political opposition in the U.S., which effectively has a veto in the IMF.
In 2009, the rest of the IMF's funding increase came via bilateral loans, including from European national central banks. The European Union contributed $178 billion, the U.S. and Japan $100 billion each, China as much as $50 billion, with a number of other countries chipping in $10 billion or less. Countries tend not to count these loans as adding to their fiscal deficits—they are generally viewed as shifting foreign reserves to the IMF. This is also why a G-20 official told Bloomberg they were pushing for China, India, Brazil, Russia, Japan and oil-exporting countries to be the top contributors.
Even so, there may be a price to pay.The last time developing countries were asked to increase their contributions, their voting rights also rose as they asked for a bigger say in the running of the IMF in return. More than 6 percent of the quotas shifted to developing countries, making the BRIC countries among the top 10 shareholders in the Fund at the cost of European nations trimming their stakes. China's share will more than double to 6.4% following the reforms. If they pitch in this time, what will be the cost? This is especially relevant as the U.S. has said that it won't contribute. The U.K. and Japan have said they won't either, unless the G-20 reaches an agreement at its meeting in Mexico on Feb. 24-25.
The IMF may have the potential to stem any liquidity crisis, but politics and concern the euro zone faces solvency problems may mean the fund won't be big enough to be an effective firewall.
Photograph by David Ramos/Getty Images
Posted by: Ben Vickers on January 16, 2012
Spanish Prime Minister Mariano Rajoy's month-long tenure has been characterized by quiet. He has avoided making public pronouncements about his plans to cut the country's deficit and for structural and labor reform, delegating all that to his ministers. This strategy of saying as little as possible appears to have served Rajoy well—indeed, his deafening silence may have saved the country a tidy sum of money: The yield on Spanish bonds has declined to the lowest since the November election when Rajoy's Popular Party swept the governing Socialists from power. In comparison, the yield on Italy's 10-year bond is almost flat over the same period.
Those expecting Rajoy to break his silence and give the media and the markets more details of his intentions today, when he held his first press conference since taking office on Dec. 21, were disappointed. Rajoy appeared along with French President Nicolas Sarkozy, who is visiting Madrid, and they held the floor for 45 minutes. In that time Rajoy gave away nothing further about his strategies.
He said tax rises already announced are "enough." He urged European Union members to do their "duty." He said Spain will reduce government spending and implement the labor reform "soon." He noted that bond spreads "haven't reacted much" to Standard & Poor's decision to cut the country's debt rating by two notches on Jan. 13.
That's right. Well, they did move today: The yield on both the 10-year and the 2-year bonds fell below their closing level on Friday. One of Rajoy's most worthwhile policies may be not to say much about his policies.
Photographer: Eric Feferberg/AFP/Getty Images
Posted by: Linda Yueh on January 13, 2012
Markets will be digesting yesterday's news from the European Central Bank, which offered a great deal of detail on its unprecedented three-year loans to banks and the outlook for the euro zone.
ECB President Mario Draghi said that the record 489 billion euros of three-year loans to euro-zone banks has prevented a credit contraction from worsening. The cash has, after all, flowed into the real economy, even as deposits of cash at the ECB reached a record high of 489.9 billion euros overnight today. Amidst criticism that the money loaned out to banks was just being hoarded at the ECB, Draghi revealed that the banks that borrowed the cash are different from the ones that made the deposits.
"We really see evidence, signs that this money doesn't just stay in the deposit facility... We have other signs that this money is actually flowing in the economy... by and large, the banks that have borrowed the money from the ECB are not the same as the ones that are depositing the money at the ECB."
The loans reduced liquidity risk for the banks and gave time to those that needed to sort out their balance sheets. And, Draghi said it was "comforting to see some opening in unsecured bank-bond markets," referring to the concern that smaller banks had been shut out of markets and the larger ones had been issuing record amounts of more costly covered bonds to raise funding. Nevertheless, he expects demand to be high when the ECB offers three-year loans again at the end of February.
Still, the risk of a credit crunch has implications for the real economy. To counter this, and in view of what Draghi calls "substantial downside risks" to growth and "balanced risks" to inflation, monetary policy could be loosened. This is the why the 1% interest rate may not be a floor. In fact, Citigroup, JPMorgan and Morgan Stanley expect rates to fall to a new record low of 0.5% by mid-year, though the median forecast is for rates to stay at 1% through mid-2013.
The alternative to rate cuts would be to undertake quantitative easing like the Fed and Bank of England. Draghi avoided answering whether former ECB Council Member Lorenzo Bini-Smaghi was right in saying that QE was possible should there be deflation and that QE could be "tailor-made" for the euro zone. So, for now, that leaves further interest-rate cuts.
One obstacle in this course is that the euro zone, unlike three years ago, faces substantial deleveraging. The International Monetary Fund estimates that total private and public debt was 440 percent of GDP in the euro area in 2011, higher than the 376 percent of GDP in the U.S. Deleveraging could lead to deflation—this is what led the Fed to do QE once rates couldn't be lowered further than 0 percent. The euro zone experienced deflation in 2009, when prices fell as much as 0.7 percent. If this happens again with recession looming and rates close to zero, then a tailor-made QE programme may not sound like such a bad idea.
(Corrects to say deflation in sixth paragraph.)
Photograph by Daniel Roland/AFP/Getty Images
Posted by: Andy Reinhardt on January 12, 2012
There's no way the euro zone crisis was going to help Europe's image in the rest of the world. But exactly how much reputational damage has occurred was highlighted in the victory speech given by Republican presidential candidate Mitt Romney after he won the New Hampshire primary on Jan. 10.
Romney used the opportunity of his speech (seen here on PBS via YouTube) to besmirch the Old World—and tie President Obama to its woes. Of course, some of this is standard Republican rhetoric: The GOP has played the patriotic and nativist cards for decades, appealing to the sense of American exceptionalism and love of the free market.
Thus, it was hardly out of character among right-wing politicians when Romney declared 6 minutes and 35 seconds into his speech:
He [Obama] wants to turn America into a European-style social-welfare state. We want to ensure that we remain a free and prosperous land of opportunity.
Nor when, 13 seconds later, he declared:
This president takes his inspiration from the capitals of Europe. We look to the cities and towns across America for our inspiration.
Being an admirer of anything European is anathema to red-blooded Americans, smelling as it does of effeteness and elitism. Truth is, Obama does not plan to turn the U.S. into a European-style social welfare state. And while the President might enjoy a nice dinner out in Paris with Michelle, he doesn't appear to be taking his lead from Nicolas Sarkozy or Angela Merkel or David Cameron.
In any case, these oratorical flourishes from Romney—who served as a Mormon missionary in France as a youth—reflect the old view of Europe. The new one, courtesy of the sovereign debt crisis, crept in near the end of the speech when Romney urged his listeners,
I want you to remember when our White House reflected the best of who we are, not the worst of what Europe has become.
Ouch.
No question, the U.S. carries a huge burden of sovereign debt, equal to more than 94 percent of GDP, according to the IMF. Which occupant of the White House is responsible for getting America to that point is open to some debate, but the Republican one before Obama clearly bears part of the blame. As for what Europe "has become," it's worth noting that among the troubled peripheral nations (aka the "PIIGS") only Greece and Italy have government debt burdens significantly higher than that of the U.S., while those of Ireland and Portugal are roughly comparable and Spain's is far lower, at 60 percent.
A Jan. 11 Bloomberg View column by Clive Crook suggests a more nuanced mutual understanding. In "Europe Learns From U.S., So Why Not Vice Versa?," Crook spells out some of the differences between the U.S. and Europe economic systems and asserts that Democrats "do want to move the U.S. in a European direction." But, he adds, that's not necessarily such a bad thing. "Europe has things to teach the U.S.—and the U.S. has plenty to teach Europe. Looking abroad for guidance is no cause for shame."
Americans might not want to seize upon Greece as a model of fiscal rectitude or look to Spain for labor laws. But last summer's near-disaster in Congress over extending the U.S. debt ceiling (a game of "political brinkmanship" in the words of Standard & Poor's, as it cut the country's AAA credit rating for the first time) demonstrates that neither Europe nor the U.S. has mastered the complex intersection between politics and budgets. Were Romney to be the next U.S. president, he'd no doubt find managing America's fiscal problems as challenging as Obama has. In that regard, there's nothing unique about America.
Photograph by Justin Sullivan/Getty Images
