Ask a money manager from London to New York when the crisis will be done and they will tell you within the next two years, with the most dire saying that it will end only when France is in the spotlight with all her mega government debt, as bad or worse than Italy’s.
When will it end? Nobody’s knows! But it won’t end this year, and probably not next year either.
Far all it’s faults many outside of the EU seem to see clear as day, the European Union has a lot of moving parts. Solving this is a 10,000 piece jigsaw puzzle. The border is done. A few trees and brook’s along the countryside are clearly done. But there are still a few gaping holes to put together.
ReplyDeleteOver the weekend, Italian Prime Minister Mario Monti said he feared the euro could still break up. Monti voiced concerns that tensions sparked by the eurozone crisis have already turned countries against each other and must not be allowed to rip Europe apart.
“The pressures, which have accompanied the eurozone in recent years, already bear the traits of a psychological breakup of Europe,” Monti said in a Der Spiegel article to be published on Monday. “We must work hard to contain it.” He also warned that if the euro broke up, the foundations of the European Union would be destroyed.
“If governments were to let themselves be bound completely by the decisions of their parliaments without maintaining their own scope for negotiation, Europe is more likely to break up than see closer integration,” he said in Der Spiegel.
Ah, yes. We thought that worrying about the Middle East ganging up on each other was bad for the world. Imagine the French and Germans and Italians going at each other’s throats. Of course, no one is predicting Europe to start flinging missiles at one another. Not on our lives.
But if there is one thing that can be said about the euro, it has unified a part of the world known to blow things up with reckless abandon. A unified Europe has been great for the world’s economy and for world peace.
Nevertheless, investors should take Monti’s end-timer comments with a grain of salt. Just last week, he said Italy was doing much better handling its public debts and said he even saw a light at the end of the tunnel. Monti is a classic example of why the markets are so schizophrenic about Europe. Here’s what he told Radio Anchio in Italy on July 31.
“We and the rest of Europe are getting closer to the end of the tunnel. There’s light at the end of the tunnel. The decisions we took … on June 28 and 29 are very important (and) … now we are seeing the consequences, in terms of greater willingness on the part of European institutions and governments to put them into action,” Monti said.
Another Italian, Mario Draghi, the head of the European Central Bank (ECB), let markets down last week when he failed to outline just how the ECB would stop the bloodletting in the peripheral bond markets, and come up with a long term solution to the sovereign debt crisis.
Over the weekend, the ECB broke new ground with hints that it could start unlimited buying of southern European bonds to drive down their crippling borrowing costs. What does that mean exactly? As investors dump government debt of places like Spain and Italy, the lackluster demand means prices fall. When bond prices fall, their interest rates rise. When interest rates rise, it means countries like Spain and Italy have to find money from somewhere to pay the interest on their loans. So in order to backstop those falling bond prices, the ECB will come in like a gigantic vacuum cleaner and buy that debt from the market — whether it’s a rich Spaniard, or Goldman Sachs. Anyone looking to unload that debt will have a willful buyer, supposedly, in the ECB. This will keep bond prices from depreciating in those countries, and therefore keep interest rates from rising. And that means those aforementioned countries that have been the bain of every fund manager’s existence since late 2009 will be spared from having to find money under mattresses to pay their lenders, which of course include the big global banks, other countries, and mama and papa who own government debt to collect interest in their golden years.
Many analysts were more encouraged by Draghi now, especially after his remarks late Thursday.
ReplyDeleteNow Draghi is saying that the central bank might intervene directly in the bond markets under their Securities Market Program, or SMP, to help the southern European countries manage their debt burden. He also said the ECB might consider additional measures to calm markets which have driven borrowing costs for Italy and Spain back near to levels that forced Greece, Ireland and Portugal to seek massive bailouts.
In theory, if the ECB convinces bond investors that it is providing a reliable safety net for them, it may lure more investors back into these markets and keep prices and interest rates stable. So in that case, the ECB may not have to accumulate as much of that debt as they might have to otherwise.
But who knows?
Markets are fickle.
Greece, where all this began, held talks with its international lenders on Sunday about its spending cuts it plans to adopt in order to secure a 31.5 billion euro aid package from the International Monetary Fund. That IMF cash is needed just to keep Greece solvent at this point, and avoid a default and a potential walking-away from the euro.
Greece’s Finance Minister Yannis Stournaras said in comments published ahead of the meeting that the new government was committed to reforms aimed at boosting the economy and avoid the so-called “Grexit” scenario. He also said the next few weeks were crucial for Greece’s future, as the so-called troika of creditors — the European Union (mainly Germany), IMF and the European Central Bank – determines whether to unlock the aid package next month. Markets will be watching this closely.
The new conservative government of Prime Minister Antonis Samaras was formed only recently in June with a pledge to renegotiate the EU-IMF bailout deal and place more emphasis on growth over austerity. Yet, Germany has warned Greece from trying to persuade the IMF for more concessions because its budget reforms are already months behind.
Meanwhile, with German politicians having their feet held to the fire, there are mixed signals coming out of Berlin and from Bundesbank president Jens Weidmann. On Friday, investors already were seeing some signs that Germany was bending on the issue. Vice Chancellor Phillip Roesler, once a clear opponent of the bond buying policy, said that the policy did fall within the ECB’s mandate.
Elmar Brok, an executive-committee member of Angela Merkel’s Christian Democratic Union party, even went so far as calling the program a way to take the “wise middle ground.” Draghi at the ECB will pursue the program even without Germany’s support at this point, because he knows how bad it is, and investors wonder — if Draghi is doing this without Germany’s blessing, it must be really bad.
That means the ECB will step in and Germany will bless it with their Holy Water.
Until the water runs dry again…