The Dreaded Summiteering Resumes

Today, Mrs. Merkel and the soon-to-be-ex-president of France, Mr. Sarkozy, will meet again to presumably find new ways of stoking the crisis again … no, sorry, of 'fixing' the crisis once and for all.

As the first such meeting in 2012 it deserves some attention, if mainly for its innate capacity to roil the markets. By the time you're reading this, the press conference may already have been held (it is planned for 1:30 p.m. Central European time).

A Barclay's economist noted ahead of the meeting:


“They urgently need to formulate and clearly communicate a vision for a sound and stable euro area that deserves the name fiscal compact,” Thomas Harjes, senior European economist at Barclays Capital in Frankfurt, wrote in a note on Jan. 6.“


Alas, what can they possibly say that is not just going to sound like yet another empty phrase? Allegedly, they will work out the 'rules' governing their planned fiscal compact, but again, one must keep in mind that there are already existing rules. Making these existing rules tougher – which was the message from the last summit in 2011 – isn't going to be conducive to making them easier to enforce.

As we have opined previously, any agreement to tougher rules and specific enforcement procedures by euro area member states can not be regarded as a firm, hewn in stone commitment to actually play by the new rules. All of this will be contingent on economic and political realities – and that will remain the crux, no matter what anyone says or signs.

If one wants to be fiscally disciplined, all one has to do is to stop spending after all. Signing long-winded agreements is not going to help with this fundamental task.

Besides, none of these debates tackle the fundamental problem that private investors are no longer willing to finance the current account deficits of the euro area members that have become uncompetitive as a result of the preceding credit boom and the rigid exchange rate.

These nations either acquiesce to falling prices and wages for a good while, or alternatively the Bundesbank's 'TARGET-2' claims will just keep growing like a weed. In fact, these balances are now beginning to grow rather quickly at the central banks of Finland and the Netherlands as well, so the publicly funded vendor financing scheme of the 'PIIGS' is spreading beyond Germany. Via the German site 'Querschüsse', below is a selection of recent charts of these imbalances within the euro system (prior to the crisis, these balances tended to more or less flat-line).



TARGET-2 claims of the German Bundesbank – click chart for better resolution.



TARGET-2 claims of the central bank of the Netherlands – click chart for better resolution.



TARGET-2 claims of the Bank of Finland – click chart for better resolution.



The obverse of the coin: TARGET-2 liabilities of the Bank of Spain – click chart for better resolution.



As Bloomberg reports:


“Borrowing costs for sovereign debt have increased. Spanish 10-year yields rose by the most in almost 17 years last week, leading bonds of the region’s most-indebted countries lower, on concern that they will struggle to cut budget deficits amid the economic slowdown. Spain, Italy, the Netherlands, Austria and Germany plan to sell bonds this week, offering a gauge of market confidence.”


Actually, this is not quite true, the auctions themselves will hardly be a 'test of market confidence'. Auctions are always preceded by rising yields, as buyers seek concessions. In addition, the only government bond auctions in the euro area that occasionally fail are apparently the German ones. This has not kept German yields from continuing to decline rather precipitously, in fact going even negative at the front end of the curve. By contrast, the bond auctions of governments standing with one foot in the fiscal grave always tend to 'go well'. No doubt this is owed to the fact that the bonds can be pawned off to the ECB the same day.

So the 'test of market confidence' will be in what happens after the auctions, not before or during them. 

Proving that Greece's debt negotiations are going nowhere – negotiations that are a farce in view of the fact that the public sector lenders will escape a haircut completely and have thus subordinated private sector holders of the remainder of Greece's debt – the IMF's Olivier Blanchard (normally a dyed-in-the-wool inflationist and deficit spender) noted that:


“[…] debt reduction for Greece “could have to be larger” and the numbers will have to be worked out.

“The numbers are not good” for Greece, Blanchard said on CNBC television. “There’ll have to be substantial haircuts.”


Say what? These numbers have been 'worked out' three times already! In short, no matter what the eurocrats tell us about 'one-offs' and whatnot, not a word of it is credible. 


Adding One Monti

Bloomberg further reports on the inevitable inflation of meetings and summits:


“The meeting will be followed by a round of talks among euro-area leaders before the next summit meeting in Brussels on Jan. 30. Italian Prime Minister Mario Monti also will visit Berlin this week, and Sarkozy and Merkel will both travel to Rome on Jan. 20 for negotiations with the Italian government.


Bringing the Italian premier into the fold contrasts with the tendency by Merkel and Sarkozy to hone a Franco-German position on crisis matters. It may mark a vote of confidence in the unelected Monti, who has pushed through budget cuts demanded by the EU after the resignation of Silvio Berlusconi.

Comments by Sarkozy and Italian Economic Development Minister Corrado Passera suggested a joint push for a greater European Central Bank role, a move Merkel has resisted.

Europe must have a “real central bank with the tools to do the job on stability and liquidity in the markets,” Passera said at a conference in Paris last week. Sarkozy said “all EU members and institutions must meet their responsibilities.”


(emphasis added)

This suggests an image of Sarkozy and Monti ganging up on the ever-present shadow of Jens Weidmann who presumably goes wherever Merkel goes (the shadow, not Weidmann himself). We doubt it will be moved by renewed entreaties, but then again, the name of the new chief economist of the ECB surprisingly is not Jörg Asmussen. The Belgian Peter Praet has succeeded Jürgen Stark, who resigned over differences with the governing council regarding the SMP bond market interventions (in spite of the fact that they are fully sterilized).

This means Germany has one vote less at the ECB – perhaps this is meaningful, we will have to wait and see (it's not as if the ECB didn't print like crazy anyhow). Still, the French and German alternative candidates haven't exactly disappeared. As the European Voice reports:


The Belgian economist Peter Praet has been given the influential economics portfolio on the executive board of the European Central Bank, breaking with a tradition that has seen a German in the role since the ECB's creation.

Praet, who has been on the ECB's board since June 2011, takes over from Jürgen Stark, who resigned last year in opposition to the ECB's expanded sovereign bond purchasing programme.

Praet, a former executive director of the National Bank of Belgium and chief of staff to Belgium's finance minister in 1999-2000, was not widely tipped for the chief economist role, which was announced on Tuesday (3 January).

His appointment is seen as a compromise, with Mario Draghi, the ECB's president, deciding against two leading candidates – Jörg Asmussen, a German, and Benoît Cœuré, a Frenchman.

The ECB announced that Asmussen would be responsible for international relations. He will represent the ECB at international meetings and at the Eurogroup Working Group, and so will be heavily involved in decisions affecting the eurozone crisis.

Cœuré will be responsible, as of 1 March 2012, for market operations, taking over from José Manuel González-Páramo, a Spaniard, who remains on the board in charge of research, statistics and risk management. When Cœuré appeared before the European Parliament on 12 December, he suggested that the ECB's bond-buying programme could be expanded further.”


So the guy who 'suggested that the bond buying program could be expanded further' is now responsible for open market operations. One could see this as a hint.

In connection with the above suggested image of Monti and Sarkozy wrestling with the invisible presence of Weidmann, Sarkozy had this to say:


“Monti’s courage inspires confidence,” Mr. Sarkozy said Saturday in Paris after the 2 met. “France and Italy share identical views on Europe’s future and how to resolve crisis of confidence.”


Inspiring 'confidence' in the middle of a yet-to-be-resolved crisis of confidence is no small feat, presumably. As to their common ideas about how to resolve it, it is clear what is meant: using the ECB's printing press.



Merkel, Sarkozy and Monti share a joke.

(Image source: DPA)



Regarding the various planned and stuck on the runway bailout vehicles, Merkel's political base remains adamant that there will be no more money – not even a single cent:


“There won’t be 1 cent more,” Markus Ferber, a European Parliament lawmaker from the Merkel-aligned Christian Social Union, said at a party meeting in the Bavarian town of Wildbad Kreuth on Jan. 5. Hans Michelbach, the ranking CSU member in the German parliament’s finance committee, said in an interview that “you can’t keep throwing more money at the problem, and that’s what increasing the ceiling would mean.”


We agree with the good man's comment about the futility of throwing more money at the problem, but that does make one pause and wonder about what will happen to Greece.


Sarkozy Still Has His Priorities Straight

Can they really be this obtuse? Apparently Sarkozy is so in love with the idea of introducing a new tax that the EU's own economic researchers have deemed as being as useless as it is harmful, that he just can't let go of it – even it means creating an unnecessary competitive disadvantage for the euro area's financial markets (one would think that is the last thing anyone wants).

We refer of course to the 'Tobin tax' (an economist who has a tax named after him should be regarded as extremely suspect), or financial transactions tax. It seems Sarkozy is so enamored of this tax that he is even prepared to let France suffer it alone. The Irish Times reports:


“France hopes to secure German support for a contentious financial transaction tax by the end of the month, but may proceed alone to “set an example” for the rest of Europe.

The idea, strongly resisted by Britain, will be discussed by French president Nicolas Sarkozy and German chancellor Angela Merkel when they meet in Berlin on Monday to prepare for an EU summit on January 30th.

A senior adviser to Mr Sarkozy, Henri Guaino, said France would “lead on the issue” and decide by the end of the month whether to go it alone. “It’s better if Germany is involved. I hope we can do it with Germany. We will keep discussing it in the coming days and weeks, but France is ready to lead by example on this front and hopes it can bring others along,” he said.


Here's hoping they 'won't bring anyone along'. Luckily UK prime minister Cameron has the good sense to continue to speak out against it in no uncertain terms – and insists he will veto it at the EU level:


Prime Minister David Cameron said on Sunday he would veto a European-wide financial transaction tax unless it was adopted globally, deepening a confrontation with European Union heavyweights France and Germany.

He said France should be free to go it alone and introduce a financial transactions tax if it wished. Paris and Berlin want an EU-wide tax on financial transactions but Britain is resisting, fearing it will damage the City of London, a global financial centre where much of the tax would be raised.

Cameron's threat to block the tax comes after he angered EU partners last month by vetoing a new EU treaty on greater fiscal integration in the euro zone, aimed at defusing the euro debt crisis. Critics said his move risked leaving Britain isolated from the EU's 26 other members.

"The idea of a new European tax, when you're not going to have that tax put in place in other places, I don't think is sensible and so I will block it," Cameron told the BBC.

"Unless the rest of the world all agreed at the same time that we are all going to have some sort of tax then we are not going to go ahead with it," he said. EU-wide tax measures need approval from all 27 member states.

French President Nicolas Sarkozy vowed on Friday to push ahead with a new tax on financial transactions, also known as a Tobin tax, even without France's EU partners. A senior French official said on Sunday his country could table a parliamentary bill for a new tax as soon as February.

"If the French themselves want to go ahead with a transaction tax in their own country, then they should be free to do so," Cameron said.

Cameron said a transaction tax that applied only in Europe would cost jobs and tax revenues, drive lots of financial institutions elsewhere and be bad for the whole of Europe.


Cameron is of course perfectly correct. His veto should ensure that this tax can only be introduced on a country-by-country basis, and not simply by fiat from the Brussels eurocracy. This will lead to others waiting for how the example of France works out before they shoot themselves in the foot as well. The biggest danger is in Cameron's qualification 'if the whole world does it, we'll do it too'. This tells us something about him: it is not the desire not to heap yet another unnecessary tax on his subjects that produces his opposition. He is not in principle against a new tax. He merely wants to avert its competitive consequences.

Speaking of useless measures lowering the efficiency of capital markets, does anyone remember the Italian/French/Danish short selling ban on bank shares? As we noted at the time of the introduction of these bans, historical experience suggests that they usually produce the exact opposite effect of that hoped for.



The crash in Unicredito's shares continues. The loss from the February 2011 high is now approaching 90%. In just four trading days, about two thirds of its market cap have been wiped out. Due to the crash in Unicredito's share price, the discount existing shareholders will enjoy if they exercise their rights has shrunk from 69% to only 26%. The capital raising exercise blows up the share count from 2 billion to 5.8 billion shares, so the plunge in the price is not exactly a big surprise. It is highly unfortunate that no-one was able to short this piece of you-know-what due to the shorting ban. At least someone would have made some money out of it then. As things stand, everybody loses and the underwriters are probably beginning to wonder what they were thinking.

Today trading in the stock was once again suspended after another 7.3% fall. Meanwhile, the share price stood almost 80% below the stated book value per share even before this recent debacle, which goes to show how little the market trusts the balance sheets of euro area banks these days. If analyst estimates of Unicredito's earnings per share are to be believed, it's prospective 2012 p/e ratio would be a mere 3.5 – click chart for better resolution.



In closing, we would be remiss not to mention the delusions plaguing EU president Herman van Rompuy.


Europe is “slowly but surely” mastering the debt crisis, even if a solution has taken longer than hoped, European Union President Herman Van Rompuy told Belgian broadcaster RTBF.

“We’ll put this crisis behind us, but it has taken longer than we hoped for,” Van Rompuy said yesterday. “We often acted a bit late and our decisions were often a bit too weak. But in most cases, we’ve worked in the right direction.”


Of course the mastering of the debt crisis is happening more more slowly than surely. Whether a further centralization of the euro area's political dispensation amounts to going in the 'right direction' is highly questionable. It's definitely not the idea of the EU's future harbored by its founders. Whether there is any hope of it ever working is even more questionable. Alas, Rompuy always seems to be taking a big hit from the hopium pipe shortly before he gives interviews. His job is potentially on the line after all.



We recently came across this chart that sums up the balance sheets of the Fed, the ECB and the BoJ as a percentage of the total GDP of these nations. In case our readers haven't already seen it elsewhere, we decided to show it, as it sums up neatly what the crisis has wrought so far in terms of monetary policy reaction.



Fed, ECB and BoJ balance sheets as a percentage of the GDP (in USD) of all three countries; below, the size of their respective balance sheets in $trillion – click chart for better resolution.




Charts by: Bloomberg, BoJ, Querschüsse,





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4 Responses to “Summit Time – Batten Down the Hatches”

  • geoblis:

    I do not know if you understand French. But here is what Mr Sarkozy said about the Tobin Tax in 1999!

  • LRM:

    May have to start to add China to this mix. After all it is a larger economy than Japan and it must have some unexpected consequences to the rest of the globe when it eases its monetary policy.
    would these 3 CB’s make up close to 50% of global GDP?

    • Yes, I think about 50% of global GDP is correct – and I agree, one should keep an eye on China and add it to the mix – its money supply is huge, and so are its money supply growth rates. The closed capital account lessens the effects on the rest of the world a little in some respectes, but magnifies them in others.

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