The past week has seen investors shun an auction of German government bonds, or bunds, while the country’s cost of borrowing has risen and at various points during the past few days has surpassed that of the UK. Underlying all this is the rapidly crumbling assumption in the markets that Germany is willing, and more importantly able, to underwrite the euro.
Once the credit rating agencies catch on to the market’s nervousness, then a downgrade, or threat of one, becomes more likely. It has happened to the US and France is being threatened too. There is no hiding place from the bond vigilantes, not even in Berlin, as this past week has shown.
Received wisdom is that the German fiscal position is unassailable. It’s true the annual budget deficit there is just 4.3pc of GDP but total debt will rise to 83.2pc of GDP this year, not far off Portugal at 93.3pc and already ahead of France (82.3pc) and Spain (61pc). The German economy, and its management, is seen as being too strong to allow its debt position to get out of hand. But on Tuesday the Bundesbank reminded us that such assumptions are prey to unforeseen events – notably the central bank’s decision to downgrade its forecast for German growth next year to just 0.5pc. (Full article here).
And some reading on Monti’s problems…
The Greek Finance Minister, Ioannis Papandoniou, described it has an historic day that would place Greece firmly at the heart of Europe.
But the president of the European Central Bank, Wim Duisenberg, warned that Greece still had a lot of work to do to improve its economy and bring inflation under control.
In 1999, Greece was left out of the eurozone for failing to meet the EU’s economic criteria.
To qualify for euro membership, the Greek Government had to adopt a tough austerity programme, making deep cuts in public spending.
“We all know that our inclusion in EMU (European Monetary Union) ensures for us greater stability and opens up new horizons,” he said. Full article here.
The IMF is preparing a recue plan wort 600 billion Euros to help (save) Italy. La Stampa reports today, citing IMF sources. IMF’s “generous” loan would buy Italy up to 18 months, in order to get the budget cuts and start the economic recovery. IMF would guarantee interest rates between 4-5%, far lower than the rates the market is “forcing” Italy to pay. How they will pull this money, is to be seen, but the IMF won’t be able to do it “solo”. The ECB will most probably need to get involved…
“This scenario is because resistance from Berlin to a greater role for the ECB in helping states in difficulty — starting with Italy — could be overcome if the funds are given out under strict IMF surveillance,” the report said. Monti needs to move quickly, as the market is getting increasingly nervous about the Italian future. One thing is sure, Berlusconi will use this situation, and will return, stronger than ever.
Full article in Italian here.
The Euro seems to be facing the same faith as Titanic. All ingredients are there, including the band playing the violin concert, while the clever people were jumping on to the life boats. The Economist on the sinking Euro;
THE designers of the good ship euro wanted to create the greatest liner of the age. But as everybody now knows, it was fit only for fair-weather sailing, with an anarchic crew and no lifeboat. Its rules of economic seamanship were rudimentary, and were broken anyway. When it struck a reef two years ago, the water flooded one compartment after another.
“The situation is extremely serious, more so perhaps than at any point in the last 18 months,” José Manuel Barroso, the European Commission president, said this week. He announced two last-ditch initiatives to avert doom. One is a “green paper” on options for joint Eurobonds. To balance this mutualisation of debt, he also proposed stronger monitoring of national budgets by Brussels, including the right to recommend changes before they are submitted to parliaments, and fiercer oversight of countries “in severe difficulties”. (Full article here)
Despite the hole in the ship, and all the problems the Euro and eventually the EU are facing, there might be one possible solution to the problems. It is called the ECB. If Italy goes further into the abyss, and the ECB doesn’t step up as the lender of last resort, we are probably looking at the full disaster scenario, and a break up of the Euro. The Economist on the possible solution to the EZ crisis;