Yesterday and today, lots of ‘authoritative’ newspapers and journals once more published gloomy articles about the coming end of the eurozone, largely due to the perceived inaction of leading (German and other northern European, notably Dutch) politicians. Particularly their refusal to set up the ECB as lender of last resort and/or let it buy state bonds on large scale and/or let it issue eurobonds, and their continued insistence on austerity and budget cuts as the only “solution”, now leading such esteemed organizations as the OECD to condemn their inaction. France is threatened with a credit rating downgrade, as a matter of fact the entire eurozone is threatened with a downgrade, the stability fund doesn’t have nearly enough funds, and… oh well.
I’m getting kinda tired writing about this so maybe I’ll quit doing it, but here goes once more (my bet is on the end of the eurozone before New Year’s Day, by the way)…
Bloomberg (‘The Euro Area Is Coming To An End’, written by the former chief economist of the IMF):
Investors sent Europe’s politicians a painful message last week when Germany had a seriously disappointing government bond auction. It was unable to sell more than a third of the benchmark 10-year bonds it had sought to auction off on Nov. 23, and interest rates on 30-year German debt rose from 2.61 percent to 2.83 percent. The message? Germany is no longer a safe haven.
Since the global financial crisis of 2008, investors have focused on credit risk and rewarded Germany with low interest rates for its perceived frugality. But now markets will focus on currency risk. Inflation will accelerate and the euro may break up in a way that calls into question all euro-denominated obligations. This is the beginning of the end for the euro zone.
Germany is the only country in Europe that can act to save the eurozone and the wider European Union from “a crisis of apocalyptic proportions”, the Polish foreign minister warned on Monday in a passionate call for more drastic action to prevent the collapse of the European monetary union.
The extraordinary appeal by Radoslaw Sikorski, delivered in the shadow of the Brandenburg Gate in the German capital, came as the Organisation for Economic Co-operation and Development called on European leaders to provide “credible and large enough firepower” to halt the sell-off in the eurozone sovereign debt market, or risk a severe recession.
The OECD’s comments came as the organisation slashed its half-yearly forecasts for growth in the world’s richest countries, warning that economic activity in Europe would grind to a near-halt.
Yet their calls were met by a stubborn insistence in Berlin that only EU treaty change to forge a “stability union” in the eurozone would revive confidence in the markets.
Wolfgang Schäuble, German finance minister, rejected calls for the European Central Bank to act as a “lender of last resort” in the eurozone, and for the introduction of jointly guaranteed eurozone bonds to relieve the pressure on the most debt-strapped members of the common currency such as Greece and Italy.
Financieel Dagblad: eindspel om euro is begonnen:
De eurocrisis is in een eindfase gekomen, in beleggerstermen: het eindspel. De ontwikkelingen gaan nu razendsnel, en de tijd dat de sterke eurolanden de zwakke konden redden, is voorbij. Volgens veel economen is het een kwestie van weken, misschien van dagen, en dan moet er iets op tafel liggen om het uiteenvallen van de euro te voorkomen.
Over negen dagen houden de Europese leiders nog maar eens een ‘top der toppen’. Er was er al een op 21 juli, op 23 oktober en op 26 oktober. Maar nu leeft meer dan ooit het gevoel dat het erop of eronder is. De reeds geplande Brusselse top van vrijdag 9 december is inmiddels uitgebreid met een werkdiner op de avond ervoor. Er is immers veel te bespreken.
Columns in de Financial Times en commentaren in The Economist waarschuwen inmiddels dat de euro snel verleden tijd kan zijn. Jean Pisani-Ferry, directeur van de gerenommeerde Brusselse denktank Bruegel, stelt onderkoeld dat er ‘een nieuwe situatie in Europa’ is ontstaan. Met iets meer gevoel voor dramatiek schrijft de Vlaamse econoom Paul De Grauwe: ‘De euro heeft nog enkele weken om zichzelf te redden, terwijl verschillende instituties zich al voorbereiden op de klap.’
Wat de situatie nu zo wezenlijk anders maakt dan enkele weken geleden? Verreweg het belangrijkste signaal is dat zelfs Duitsland meer moeite heeft om zijn staatsleningen in de markt kwijt te raken. En opvallend, direct na de half mislukte emissie van vorige week verloor de euro in een tel 0,72 eurocent in waarde. Voor centrale bankiers een serieuze aanwijzing dat de munt zelf het volgende doelwit zal zijn.
Het is bijna tragisch dat de ministers van financiën vanavond alweer naar Brussel moeten afreizen om over het noodfonds te praten. Nog altijd zijn de afspraken van 21 juli (uitbreiding van noodinstrumentarium) niet in werking getreden, en nu zwoegen ze op de deal van 26 oktober (vergroting slagkracht). Het fonds heeft nog ongeveer € 250 mrd beschikbaar, maar niemand gelooft meer dat daar € 1000 mrd van te maken is, zoals een maand geleden werd beloofd.
Inmiddels is duidelijk dat het beleggers helemaal niet meer uitmaakt dat de betrouwbare technocraat Mario Monti als premier is aangetreden. Net zomin als zijn bezuinigingsplannen nog indruk maken. Het is de les van twee jaar eurocrisis: paniek en wantrouwen slaan niet met enkele ferme politieke daden om in volledig vertrouwen. Voor België dreigt hetzelfde lot. Verrassend genoeg reageerden beleggers maandag positief op het nieuws dat er na anderhalf jaar eindelijk een regering komt. Maar de aanstaande premier Elio Di Rupo kan de snel opgelopen rentelasten voor België waarschijnlijk niet zomaar ongedaan maken. Ook hij zal ervaren dat eenmaal afgehaakte beleggers niet snel tevreden zijn.
De euro is een misgeboorte en had beter niet ingevoerd kunnen worden. Dat zegt oud-AFM-topman Hans Hoogervorst in een aflevering van het geschiedenisprogramma Andere Tijden, die op 11 december wordt uitgezonden.
Hoogervorst zegt daarin: ‘De enorme problemen die we nu hebben op de kapitaalmarkten en de enorme risico’s die worden gelopen, als we dat tevoren hadden geweten, dan denk ik niet dat iemand bij zijn volle verstand eraan was begonnen.’
Volgens Hoogervorst kan de munt ‘wel als mislukt’ kan worden beschouwd.
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.