Posts Tagged ‘bonds’
Hey look, what’s that? Is it… the European Central Bank (ECB) taking up a central role in solving the euro crisis? But that’s unheard of! Weren’t budget cuts in Mediterranean countries going to accomplish that?
The ECB may not be issuing eurobonds or print money, but out of the public eye, they’ve definitely taken up a central role. They do this by providing banks with almost interest-free emergency capital. And those banks have come to the rescue of the governments that couldn’t sell bonds for very high interest rates a few months ago. So, as was argued for by a lot of people back then, the ECB, albeit not straightforwardly, has started to act like all other central banks around the world. Only they will not tell us this. And it seems that the eurozone now, unlike a month ago, is not teetering on the brink of collapse.
The question is now: will it be enough?
Throughout the month, countries caught in the eye of the European financial storm, including Italy, Spain and France, have repeatedly defied expectations, selling big batches of bonds to the public at interest rates significantly lower than investors demanded at the height of the euro crisis late last year.
The surprisingly successful auctions owe little to improving economic data around the region. On the contrary, many of the countries that use the euro as their currency appear to be confronting a renewed recession, and pessimism about their growth prospects remains abundant. Just last week, Standard & Poor’s stripped France of its coveted AAA rating for the first time in recent history and downgraded eight others.
Instead, most of the credit seems to go to the European Central Bank, which in late December under its new president, Mario Draghi, quietly began providing emergency loans to European banks — hundreds of billions of dollars of almost interest-free capital that the banks have used to come to the rescue of their national governments.
The central bank, based in Frankfurt, used typically understated and technical language to describe its actions, but it appears to have done what its leadership said throughout 2011 that it would not do: namely, flood the financial markets with euros in a Hail Mary attempt to make sure that the region’s sovereign debt crisis does not lead to a major financial shock.
Though on a smaller scale and in a subtler manner, it has in many ways taken a page from the United States Federal Reserve’s playbook for the 2008 financial crisis, which has been roundly criticized in Europe as a reckless bailout that risks setting off uncontrolled inflation. And, at least for now, the effort has worked. Spain’s 10-year bonds carry interest rates that hover around 5.5 percent, compared with 7 percent and higher in November, and Italy’s five-year bonds are approaching 5 percent, down from nearly 8 percent at their peak.
There have been moments before when European leaders declared the crisis contained, only to see it return with renewed fury. But the central bank’s incentives, combined with a push from the private banks’ home governments, seem to have convinced investors that this time may be different, and financial markets in Asia, Europe and the United States have responded with strong gains this year.
As I’ve blogged before, I’m kinda tired of writing about the eurozone debt crisis. The results of the once again ”crucial” European summit that starts today are fairly predictable: announcements of more, even radical, fiscal discipline and sanction mechanisms across the European Union (or the eurozone), a further integration of tax and labour market policies, and no hopes whatsoever for an expanded role of the ECB in the form of it acting as lender of last resort or as issuer of eurobonds. Everything that Germany wants, happens.
In other words: in order to please the financial markets, only one of the structural deficiencies of the eurozone is being addressed: the disparity in budgetary policies across member states. The other ones - the existence of separate bonds markets and the absence of a true central bank, which leads to Europe’s heightened exposure to the judgment of financial markets and credit rating agencies - are not addressed at all. All this because of Germany’s fear of inflation.
The European debt crisis is now starting to become a democratic crisis as well. This is happening on two levels. First, in order to please the financial markets, “reforms” and budget cuts are being imposed on southern European countries at huge social and economic costs without the population having any say in it. Elected politicians are removed not by elections or the people on the street, but replaced by so-called “technocrats” under pressure of the financial markets. Moreover, across the entire eurozone radically tightened fiscal discipline, which will have a huge bearing on social and economic policies, is being imposed without the population having any say in it; once again, to please the markets. The German, i.e. the conservative/(neo-) liberal policy solution for everything – fiscal discipline, budget cuts and market reforms - is imposed throughout the eurozone by Diktat.
Whether you like this particular economic policy package or not (I’m personally not against it), there’s no escaping the fact that the past months we’ve witnessed a huge shift in sovereignty from democracy to the market. Financial markets dictate what must be done; and it is reinforced by those policy-makers in charge who happen to walk in tune with those markets.
The second level at which democracy is under attack is in the transfer of powers from the national level to the European one. It is by now accepted that the only solution for the eurozone is a further federalization of fiscal, social and economic policies. The European Commission (EC) is likely the institution that will benefit the most from this. Yet, whether you are in favour of the European project or not, the EC is ultimately a technocratic institution; it is a super-regulator that issues “directives” and “regulations” to be imposed uniformly across member states without interference of national parliaments. The European Parliament (EP), the only European institution that is truly democratically legitimized (but only by a minority of voters), does not have the right of initiative; it is the barely legitimized EC that is the one policy ”motor” of the European Union. This situation will only be exacerbated by the current eurozone crisis.
In short, there’s a double crisis of democracy going on: one in the shift of decision-making power from the political sphere to the market, and a second in the transfer of powers from the national level to a barely legitimized European one. In between, the voice of the people is crushed. Particularly worrying is the talk, to be heard here and there, that “democracy” really is just one way to govern a country, that it was a nice experiment, but that it doesn’t really work in an age of globalized financial markets and much-needed technocratic European governance. Have we now really entered a 1930s-style “crisis of democracy”? Is the democratic principle itself being questioned?
To me, the need for a more unified Europe if the single currency is to be saved is clear. But the democratic deficit is getting painful. German solutions mean a half-hearted attempt to create a fully functioning economic zone, but an almost complete transfer of fiscal discretionary powers to an incompletely legitimized supra-European entity. Is that what we want? Do we have any say in that? In my view, the democratic level of the European Union is to be deepened if any of this is the result of current talks. This would mean a broadening of the powers of the EP to become a fully-fledged representative body with legislative powers, as well as finally some concerted effort on the part of European and national policy-makers to promote European democratic institutions amongst the populace. The ECB should also really be allowed to function as a central bank.
Otherwise, the result will be something we have now, but even more overbearing. A soft kind of technocratic regime, composed of an intricate byzantine web of committees, networks, councils and summits and a super-regulator, governed by one particular budgetary philosophy, all the while constricting national discretion to formulate policies, that is whipped from here to there by the financial markets. Even if this solution is, for now, accepted by those financial markets, I don’t think it will hold in the future. And there is no place for democracy in it either.
Minister De Jager (r) measuring up the size of the ECB’s new role.
And now Merkel is alone. Even the Dutch government (along with the Finnish) now grudgingly supports a bigger role for the ECB in solving the debt crisis (if any solution other than a grand eurozone conflagration is still at hand). They call it a ’last resort’, but you don’t put messages like this out in the open if you’re not seriously considering it – or even have already committed to it. Of course, this role can vary from buying up state bonds in larger amounts to introducing the much-called for eurobonds.
Finance minister De Jager’s message is spun differently by some Dutch news outlets, by the way (but similarly by others).
My bet is on the 60 percent option: creating eurobonds covering a maximum of 60 percent GDP. Beyond that it’s lousy national bonds for profligate nations. Combine this with a stringent system of fiscal discipline (also advocated by the Dutch government for a while now) and maybe some solution is there. Although a system totally consisting of eurobonds might be better (but has its own drawbacks, such as added costs for taxpayers in some countries).
But to be honest: I think it’s too late anyway.
Jan Kees de Jager, the Dutch finance minister, endorsed a more active role for the European Central Bank “as a last resort” to contain the eurozone debt crisis ahead of a meeting in Berlin with his counterparts from Germany and Finland.
In a hearing of the Dutch parliament’s finance committee, Mr de Jager said that the other firewall measures seem to be failing, with European countries unwilling to contribute more funds themselves to the European Financial Stability Fund, and private investors uninterested in the plan agreed to by European leaders on October 26 of leveraging the fund up to an effective capacity of €1,000bn.
If neither of those measures succeed, leaving ECB intervention the only plausible course, then “in the end, something has to happen”, Mr de Jager said.
On Wednesday, the Finnish finance minister, Jutta Urpilainen, also moderated her stance, saying, “If all else fails, we have to reflect on the role of the ECB.”
The Netherlands and Finland have until now hewed close to Germany’s position of opposing major intervention by the ECB as part of a firewall against the spreading eurozone debt crisis but appear to be taking a more pragmatic line.
The Dutch share German scepticism that any ECB firewall would merely “fight the symptoms” of the debt crisis, and say that the top priority is creating a strict Europe-wide budget authority to force Greece, Italy, Spain and other at-risk eurozone countries to cut their deficits and implement economic reforms.
But as the urgency mounts, many voices in the Dutch economics and business community are pressing the government to take a more assertive tack.
On Sunday, a group of four top Dutch economists wrote to Mark Rutte, prime minister, urging him to press European leaders to commit to contributing more directly to the EFSF and to supporting an ECB role. The group included Lex Hoogduin, who stepped down this year as the number two official at the Dutch central bank.
“I hope the Dutch authorities, who are very close in their philosophy to Germany, can convince the Germans that there is a role for the ECB,” Mr Hoogduin told the Financial Times. He said markets had lost faith that European leaders will come up with the funds to support southern European countries, even if those countries do comply with budget-cutting and governance reforms.
One of the most worrying articles I’ve read so far on the ongoing European debt crisis. The Economist is seriously discussing the prospect of imminent bank runs in the eurozone. In fact, in one country, Latvia, this has already happened with a mid-sized bank. That’s the first time I read something about this most scary of economic malfunctions (although Paul Krugman was there first, I’m informed).
With the debt crisis spreading and deepening further to the core of the eurozone – France and Austria are defending their triple-A ratings, Belgium, the Netherlands and now Germany are having bonds issues – and politicians unable (and unwilling) to do something about it, banks are more and more exposed to great financial risks. These stem from the drying up of funds to these financial institutions, which could ultimately lead to one or more of them going down. One of the most worrying signs of this is corporate institutions withdrawing their money from banks. And that’s exactly what’s happening now in Italy, Spain, France and Belgium.
I believe articles like these are called “bearish” in the financial world. Still frightening nonetheless.
- Edit: CNBC is on it as well, referring to the same Economist article. Their message: hoping that customers don’t notice that every other source of bank funding is depleting is not a wise strategy.
ONE can almost hear the gates clanging: one after the other the sources of funding for Europe’s banks are being shut. It is a result of the highly visible run on Europe’s government bond markets, which today reached the heart of the euro zone: an auction of new German bonds failed to generate enough demand for the full amount, causing a drop in bond prices (and prompting the Bundesbank to buy 39% of the bonds offered, according to Reuters).
Now another run—more hidden, but potentially more dangerous—is taking place: on the continents’ banks. People are not yet queuing up in front of bank branches (except in Latvia’s capital Riga where savers today were trying to withdraw money from Krajbanka, a mid-sized bank, pictured). But billions of euros are flooding out of Europe’s banking system through bond and money markets.
At best, the result may be a credit crunch that leaves businesses unable to get loans and invest. At worst, some banks may fail—and trigger real bank runs in countries whose shaky public finances have left them ill equipped to prop up their financial institutions.
To make loans, banks need funding. For this, they mainly tap into three sources: long-term bonds, deposits from consumers, and short-term loans from money markets as well as other banks. Bond issues and short-term funding have been seizing up as the panic over government bonds has spread to banks (which themselves are large holders of government bonds). This blockage has been made worse by tighter capital regulations that are encouraging banks to cut lending (instead of raising capital).
Markets for bank bonds were the first to freeze. In the third quarter bonds issues by European banks only reached 15% of the amount they raised over the same period in the past two years, reckon analysts at Citi Group. It is unlikely that European banks have sold many more bonds since.
Short-term funding markets were next to dry up. Hardest hit were European banks that need dollars to finance world trade (more than one third of which is funded by European banks, according to Barclays). American money market funds, in particular, have pulled back from Europe. Loans to French banks have plunged 69% since the end of May and nearly 20% over the past month alone, according to Fitch, a ratings agency. Over the past six months, it reckons, American money market funds have pulled 42% of their money out of European banks. European money market funds, too, continue to reduce their exposure to France, Italy and Spain, according to the latest numbers from Fitch.
Interbank markets, in which banks lend to one another, are now also showing signs of severe strain. Banks based in London are paying the highest rate on three month loans since 2009 (compared with a risk-free rate). Banks are also depositing cash with the ECB for a paltry, but risk-free rate instead of making loans.
That leaves retail and commercial deposits, and even these may have begun to slip away. “We are starting to witness signs that corporates are withdrawing deposits from banks in Spain, Italy, France and Belgium,” an anlayst at Citi Group wrote in a recent report. “This is a worrying development.”
With funding ever harder to come by, banks are resorting to the financial industry’s equivalent of a pawn broker: parking assets on repo markets or at the central bank to get cash. “We have no alternative to deposits and the ECB,” says a senior executive at one European bank.
So far the liquidity of the European Central Bank (ECB) has kept the system alive. Only one large European bank, Dexia, has collapsed because of a funding shortage. Yet what happens if banks run out of collateral to borrow against? Some already seem to scrape the barrel. The boss of UniCredit, an Italian bank, has reportedly asked the ECB to accept a broader range of collateral. And an increasing number of banks are said to conduct what is known as “liquidity swaps”: banks borrow an asset that the ECB accepts as collateral from an insurer or a hedge fund in return for an ineligible asset—plus, of course, a hefty fee.
The risk of all this is two-fold. For one, banks could stop supplying credit. To some extent, this is already happening. Earlier this week Austria’s central bank instructed the country’s banks to limit cross-border lending. And some European banks are not just selling foreign assets to meet capital requirements, but have withdrawn entirely from some markets, such as trade finance and aircraft leasing.
Secondly and more dangerously, as banks are pushed ever closer to their funding limits, one or more may fail—sparking a wider panic. Most bankers think that the ECB would not allow a large bank to fail. But the collapse of Dexia in October after it ran out of cash suggests that the ECB may not provide unlimited liquidity. The falling domino could also be a “shadow” bank that cannot borrow from the ECB.
Spanish bond rates are soaring, and now even The Netherlands (!) are not considered a safe haven anymore. The debt crisis thus is spreading to the eurozone core, which includes France and Austria as well. So as predicted here last week (and downplayed by commenters), the solutions of Merkel, Germany and other northern countries – merely insisting on “reforms”, “budget cuts” and “austerity” in southern Europe as the one way to get out of this crisis – are not working. The financial markets, for one, are not buying it.
The question is: will political leaders continue on this road to nowhere, and ultimately be responsible for the break-up of the eurozone? Or will true reform finally be made, and the ECB be allowed to act as lender of last resort? We’ll find out soon enough.
The turmoil in the eurozone has taken a troubling turn in recent days, with anxiety spreading from Europe’s periphery to its “core” countries. Even as Italy’s Mario Monti readies his economic agenda to be presented today, investors are looking at France, the Netherlands and Austria with increasing unease and wondering whether the ECB might yet ride to the rescue. Over in Greece, today is the anniversary of 1973′s mass student protests – with demonstrators once more planning to take to the streets. And the bond markets are showing ever more strain, with today’s Spanish bond auction souring sentiment still further.
It is make your mind up time for Angela Merkel. Not next year. Not even next month. But this week. The financial markets were ugly on Tuesday, flashing a loud and consistent message: the crisis in the eurozone is no longer confined to the weak Club Med countries but is spreading to the core.
Germany has to decide whether to drop its visceral opposition to the European Central Bank acting like a true lender of last resort, or face being blamed for the break-up of the single currency.
This is a tough call for Merkel, but what happened in the markets on Tuesday was significant. The loss of confidence in Greece, Italy, Spain and Portugal was old news. The new development was that investors were also increasingly wary of lending to those countries that would, along with Germany, form the nucleus of a hard-core euro in the event of a break-up.
Interest rates on Belgian, Austrian and French debt rose sharply. There was even pressure on Dutch bonds, traditionally seen as the second safest in the eurozone after German bunds. Bond dealers reported a full-scale run on French bonds.
By contrast, Switzerland – the safe haven of choice for nervous investors at present – sold six-month bonds at an interest rate of -0.3%. Investors, in other words, were paying the Swiss government for the privilege of being allowed to lend money to a country seen as rock solid. This is simply a posh way of hiding money under the mattress.
The financial markets understand just how critical the situation is, even if the pfennig has yet to drop in Berlin.
Symmetrical reflation is the best option for restoring growth and competitiveness on the eurozone’s periphery while undertaking necessary austerity measures and structural reforms. This implies significant easing of monetary policy by the European Central Bank; provision of unlimited lender-of-last-resort support to illiquid but potentially solvent economies; a sharp depreciation of the euro, which would turn current-account deficits into surpluses; and fiscal stimulus in the core if the periphery is forced into austerity.
Unfortunately, Germany and the ECB oppose this option, owing to the prospect of a temporary dose of modestly higher inflation in the core relative to the periphery.
The bitter medicine that Germany and the ECB want to impose on the periphery – the second option – is recessionary deflation: Fiscal austerity, structural reforms to boost productivity growth and reduce unit labour costs and real depreciation via price adjustment, as opposed to nominal exchange-rate adjustment.
The Guardian schrijft dat er al maanden gesprekken gaande zijn om de eurozone toch maar op te breken. Nu de rente op Italiaanse obligaties torenhoog is, en er zeker geen kans is op een bail out van Italië door het Europees noodfonds, komt een ’herstructurering’ van Italiaanse schulden (d.w.z. een half bankroet) in zicht. Dat treft de Franse financiële mega-conglomeraten hard, betekent een monsterrecessie, en waarschijnlijk het einde van de euro.
Wtf! Opbreken van de eurozone? Say what? Het lijkt erop dat de negatiefste voorspellingen van commentatoren stuk voor stuk uitkomen. De totale ellende is inmiddels niet meer te overzien.
Het lijkt er ook steeds meer op dat er een realisering ontstaat dat het door Merkel, de ECB en het IMF voorgeschreven programma van “bezuinigen” als panacée voor alle problemen niet de weg is. Je kunt bezuinigen wat je wil, maar speculanten op de financiële markten geloven er toch niet in. Sterker nog, ze hebben er belang bij als de boel onderuit gaat. Bovendien wordt landen onder curatele stellen en de hele verzorgingsstaat wegbezuinigen op een gegeven moment ook ondemocratisch; wat dat betreft is het jammer dat dat Griekse referendum er niet gekomen is, dan konden ze tenminste kiezen.
Wilders heeft gelijk gehad: Griekenland had bij het begin van de crisis al uit de eurozone gekickt moeten worden, i.c.m. schuldherstructurering en een terugkeer van dit land naar een eigen monetair systeem. Zoals een LSD-reaguurder schrijft:
Misschien een interessant alternatief voor het hameren van Merkel en de ECB op een uitgebalanceerd huishoudboekje voor Griekenland, met als gevolg elkaar versterkende opeenvolgende bezuinigingen en hemeltergende werkloosheidscijfers enkel om de schuldeisers te plezieren: laat Griekenland de weg van Argentiniė volgen! Dus een gecontroleerd bankroet en herstructurering van schulden (plus een vertrek uit de euro), zodat het land weer kan investeren en ja, ook werk maken van hervormingen en een minder gestoord belastingsysteem opzetten. Hebben ze ook geen vaste wisselkoers meer. Voorheen alleen de positie van de PVV en SP, nu hoor je het vaker.
Een klein landje kan zich terugtrekken uit de financiële markten, zich minder afhankelijk maken van speculanten en geld bijdrukken, zodat er weer geïnvesteerd kan worden i.p.v. alle economische groei op recept van het IMF en Noord-Europese liberalen kapotbezuinigen. Wellicht dat de crisis dan niet was verspreid naar Italië. Maar nu is het te laat voor deze optie (al kan het nog steeds als de hele euro uit elkaar klapt).
Het enige alternatief nu? De ECB staatsobligaties laten opkopen, en instellen als lender of last resort. Dat wil zeggen dat de ECB gaat functioneren zoals de centrale bank doet in normale economieën. De eurozone is een mislukt project gebleken, omdat landen met uiteenlopende economieën én aparte obligaties niet kunnen functioneren onder een regime dat één munt hanteert. Amerikaanse economen roepen het al maanden, en misschien wordt het tijd dat dit ook eens doordringt in Europa. De EMU in haar huidige vorm kan niet bestaan.
Dat betekent dus “meer Europa”. Want als je dat doet, moet je je economische systeem ook verder integreren. Duitsland wil geen ECB als lender of last resort, omdat ze bang zijn voor inflatie. Maar het is dit, of het opbreken van de eurozone. De heilloze weg van het voorschrijven van bezuinigingen, leidend tot nieuwe vertrouwenscrises en weer nieuwe landen die de prooi worden van speculanten (Frankrijk?) moet in ieder geval verlaten worden.