Not what you want, but what you need

Orlando, FL 4/25/12 (StreetBeat) -- So the Euro Zone has a problem with debt; you know all about it.

Great efforts have been expended by the countries that use the euro, the broader EU, the ECB, and others, in an attempt to make the trouble go away. Despite it all the problem persists. Try as they might Greece is now the home of the largest sovereign default in history. But Greece is small potatoes when compared to Spain, the current poster child for European debt woes. Almost two years removed from the first rescue plan it is now possible to have a polite discussion about a reduction of the single currency membership list; not something that was acceptable at the onset of the process. Will a country abandon the euro? Maybe not, but possibly so; in any case it is part of the conversation. But if so; who?

The solution to Europe’s debt problem is not clear; if it was then it is likely it would have been found by now. Then again it could depend on who you ask as to whether or not there is a solution in plain sight and whether or not it is just the will to enact it that has been elusive. In a speech delivered late last month, Bundesbank President Jens Weidmann suggested that the time for dithering is over and the time for real decisions on the future path of the Euro Zone has arrived; “The time has come to move from containing the crisis to resolving it. If we have the will to make the right choices, we will be able to rebalance Europe and lay the foundation for a stronger, more stable monetary union.” In order to resolve its deficit problem, says Weidmann, Europe is in need of stricter rules, rigorously applied. Of course Bundesbankers have long believed that monetary union cannot survive without a political union; either members go all in, with union interests above national interests, or the odds of success are greatly reduced. In his speech Weidmann acknowledged that “member states have made it clear that they want to retain their autonomy in fiscal policy,” so therefore, he says, rules must be stiffened in an attempt to make a less than optimum solution effective.

But there is clearly resistance, throughout the continent, periphery to core, on signing up to a vision that has the Bundesbank as its chief architect; the French election results and Dutch budget squabble reinforce the existence of that reluctance. Therefore, it appears the Bundesbank will get even less than their reduced expectations in regards to fiscal rectitude. Right or wrong; pro growth or favoring austerity, it is fair to say that the Bundesbank will not get what it wants. While Weidmann may not yet have developed a nervous tick over the prospects for Euro Zone fiscal sobriety in the long term, there may be a way to measure the likelihood that he will eventually be inflicted with one. The TARGET2 imbalance at the Bundesbank is up to EU615 billion as of the end of March, up more than ninety percent from last year and up EU152 billion in the first three months of 2012. Yeah, we all know this is collateralized and not solely the responsibility of the Bundesbank, even if things go badly for the Zone; there is not yet any official sweat on the brow over the situation. But what will be the mood in Frankfurt if this imbalance hits EU1 trillion? Does the Bundesbank have a TARGET2 stop in mind, while also keeping in mind that collective will to reverse the imbalance is less than Teutonic? Is there a point at which this arcane data point captures the imagination of the German street and forces the hand of Berlin? The key question; is it possible that Germany is the first to bail out of the single currency? Maybe not, but possibly so; it is, in any case a topic that can be brought up in polite conversation and that, in and of itself is important.

You can trade Euro Zone sovereign debt, but aside from Germany, you can’t invest in it. The Financial Times reports that “bankers estimate that EU100 billion has been taken out of French, Italian and Spanish government debt markets in the past two years as many investors have lost faith in the single currency zone.” I would add that not only has there been a divestment of this debt but there is no fresh buying, except from banks that are beholden to their national central banks for their continued existence. For institutional investors, the natural buyers of fixed income such as insurance companies, pension funds or banks, there is nowhere else to turn but the German debt market and the US Treasuries. It is not a matter of fundamentals, such as the spread above or below inflation; it is a matter of what is available to purchase that can pass the mustard of an investment committee review. There is even a hoarding instinct at work. Reliable, well rated collateral is at a premium. This is made all the more acute by the increased use of covered bonds, which prohibit the reuse of the pledged securities, and because of an unintended consequence of the LTRO. While this ECB strategy may have ensured that banks will not run out of liquidity, the collateral that has been pledged to the central bank to secure those funds could mean that banks will run dry on collateral the next time push comes to shove.

The bid in German and US debt that has driven the yields down to, or close to, record lows, is not a matter of chasing what you want, it is just a matter of securing what you need. And until the question of the Euro Zone’s future can be confidently answered, it is hard to imagine the situation changing.

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1-800 Europe

Palm Beach, FL 11/30/11 (StreetBeat) --Henry Kissinger, the US Secretary of State in the mid-1970s, famously said something to the effect, “When I call Europe, who will answer the phone?” Well, he didn’t say back then; I guess that would have taken some of the pithiness out of the pointed quip. But I wonder who would take the call today; let’s give it a shot.

Hello, this is Europe, how may I direct your call?

I’d like to talk to the person in charge, please.

Sorry sir, you’ll have to be more specific if you could. Do you want to speak to a representative of the European Parliament, or someone from the Council of Ministers? Maybe Mr. Von Rompuy, head of the European Council, will be able to answer you inquiry, or it could be the President of the European Commission, Mr. Barroso, who will best serve your interests.

Hmmm, I’m not sure; I’d like to talk to the person responsible for solving the European debt crisis, please.

Oh, but of course; I’ll connect your call straight away.

Oui…Guten Tag.

To whom am I speaking?

I’m Sarkozy, she’s Merkel, and together we are Merkozy. (tee hee, I love doing that.) Who’s this?

Never mind, I have my answer.



“France and Germany are urgently preparing contingency plans to jump-start tighter eurozone economic governance should treaty change prove too difficult…” says the Financial Times. This sort of bi-lateral negotiation has become a tradition when Europe feels the pressure of a ticking clock as yet another deadline approaches; this time it’s the December 9 gathering of EU heads of state that has them feeling the pinch. The previous all important summit meeting was in late October and that one too was preceded by a furious round of shuttle diplomacy between Paris and Berlin. But the further the can gets kicked, the closer it comes to the fork in the road; either the euro zone countries become more intertwined or they splinter apart in some fashion. It appears that time is running short and fundamental decisions, not just bailout plans, must be made. However it is possible that the process is just as crucial to the outcome as are the options that come to the table; that’s because the currency union has seventeen members, not two.
France and Germany are the biggest countries in the euro zone. France feels the weight of history as the beating heart of the union and the originator of the entire project to unite the continent. Germany, however, holds all of the aces in this hand and France knows it. So in an attempt to prevent a complete reshuffle of the euro zone deck France wants to influence, as much as it can, how Germany plays its cards. So Sarkozy and Merkel go one on one while fifteen others wait on the sideline. Someone has to make the decisions, but idea of the Lisbon Treaty was for a majority to be a number greater than two. “The problem is that this new-found euro governance by France and Germany may be necessary by want of any other governance structures, but democratic it is not,” said a euro zone diplomat to the Financial Times a couple of weeks ago. There would seem to be a difference between a country and its people agreeing to an austere future for the greater good and being told what it has to do by the paymaster. The outcome might be the same, but the manner in which it is enacted might be a factor in deciding to take action inside or outside of the union.

The “principle of subsidiarity” is enshrined in Article 3b of the Treaty of Lisbon. This concept means that the Union shall act only if an objective cannot be sufficiently achieved by the member states. It is in essence a principle that protects the sovereignty of the currency members from intrusion of the Union. It can be said that the boundary provided by this principle has been crossed in relation Greece, but this was at the insistence of the group. It might be a more difficult pill to swallow if the agenda is seen to be set by just one country or even a handful. If the “principle of subsidiarity” proves too flexible to depend upon then so too is it unknown what amount of sovereignty will be sacrificed in the future, which may be an issue for the populace before it is for the leaders of a particular country.

Germany says it wants to embrace the euro and the euro zone, but there is a concern that what they mean is more akin to a bear hug than it is a cuddle. Germany does not want the single currency to become a singular disaster. Chancellor Merkel says it is time to move together, but she insists it be done on her terms. It would be difficult for an outside observer to refute her argument. The Stability and Growth Pact was supposed to ensure that member countries followed the fiscal and budgetary guidelines, but it didn’t. The euro was sold to the German people as a shield, but instead they have been asked to pay for a ring fence to surround some of the overly indebted members. The ECB was supposed to be like the Bundesbank, but now there is an effort to get the central bank to fire up the printing press. “German officials insist their top priority is securing treaty change by the end of 2012, which gives clout to more stringent budget rules,” says the Financial Times, “But there is a growing realization in Berlin that a deal endorsed by all 27 member states may take too long. This helps French officials pressing for a rapid intergovernmental pact, between willing eurozone countries and implemented through new institutions.” But therein lays the rub. I think the German drive for tougher and enforceable budget rules should be viewed as long term goal, but although it is not unrelated to the next rescue plan it should be viewed as distinct from the short term need to keep the Greece, Italy, et al, from falling off the cliff. But if they decide to pursue the French strategy, then these agreements would likely be made one at a time, and with, I guess, no guarantee of uniformity. So, even a solution to the near term may not make clear the path forward into the longer term. Therefore, says the FT, “The prospect of a breakaway coalition of willing fiscal hawks has stoked concern in Brussels and among some weaker eurozone states, who fear it is a distraction from fighting the crisis. Some European officials are also doubtful that Paris and Berlin have overcome big differences over details of fiscal integration, given France’s opposition to strict automatic penalties for breaking budget rules.”

So, as it turns out, rescuing today does not necessarily explain the future or even if this Merkozy thing is a relationship or just a fling.


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