Category Archives: Germany

Franco-German Spat on Role of ECB Renewed

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Not long ago France would have conducted a nuclear test to make the point.
Today, it takes a core meltdown to make the point:

Franco-German Spat on Role of ECB Renewed

By Tony Czuczka and Mark Deen

November 18 (Bloomberg) — The failure of European leaders to end the debt crisis with their broadest effort yet has revived a Franco-German dispute over theEuropean Central Bank’s role and fueled investor concerns over policy makers’ economic impotence.

ECB chief Mario Draghi today slammed governments for failing to implement policy commitments as holders of Greek debt began talks in Athens on structuring a 50 percent writeoff that was the cornerstone of a deal pieced together last month at an all-night summit. Officials in Berlin and Paris yesterday swapped barbs and European borrowing costs outside of Germany rose to euro-era records.

The discord highlighted markets’ brushoff of a package that included a scaled-up rescue fund, proposed guarantees of sovereign debt and a bid to attract more international loans. The accord, which finance ministers aim to implement next month, was at least the fourth plan billed as a comprehensive strategy to end the crisis born in Greece in 2009, none of which provided a lasting fix.

“Where is the implementation of these long-standing decisions?” Draghi said in a speech in Frankfurt today. “We should not be waiting any longer.”

Stocks slid, dragging the MSCI All Country World Index to a six-week low. The Stoxx Europe 600 Index decreased 0.7 percent. The premium France pays over Germany to borrow for 10 years jumped to a record 200 basis points yesterday, as yields on bonds of countries from Portugal to Finland, the Netherlands to Austria also rose relative to Germany.

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Trading Desk reports “mayhem” in the AAA Eurozone markets

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I just received this.
Seems money managers with fiduciary responsibility are holding off on buying any euro member securities since the 50% Greek haircuts were announced.

Our Trading Desk reports “mayhem” in the AAA Eurozone markets
– France 11bps wider
– Netherlands 6bps wider
France now 178bps over Germany
Increasing talk/fear of Eurozone break up and capitulation trades in AAA markets are widespread.
We are seeing no real demand for anything – even Germany.
Tomorrow’s Shatz auction looks a big ask with a yield of 30bps and no risk appetite out there.

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Merkel comments

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*DJ Merkel: “Euro Zone Solidarity Must Be Combined With Sound Budget Measures”

To make sure unemployment never comes down and unit labor costs stay down.

*DJ Merkel: Italy Will Put Through Planned Austerity Measures Soon

Also to make sure unemployment never comes down and unit labor costs stay down.

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Talk still cheap – ECB writes the check again

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Lots of talk, particularly from Germany about the ECB not writing the check, due to (errant) inflation concerns.

But to no avail. In fact, with the Rubicon crossing decision to haircut Greek bonds 50% for the private sector’s holdings, expect the check writing to continue to intensify.

And expect economies to continue to slow under the pressure of continuing austerity demands that also work to make their deficits higher.

From today’s headlines:

Italian Bonds Advance as ECB Purchases Debt; French, Belgian Spreads Widen
A Successor, Picked by a Tainted Hand
EU Lowers Euro-Region Growth Forecasts
Italy’s Senate Speeds Austerity Vote
Merkel’s Party May Adopt Euro-Exit Clause in Platform, CDU’s Barthle Says
Greek President to Meet Party Leaders as Unity Aim in Disarray

Italian Bonds Advance as ECB Purchases Debt; French, Belgian Spreads Widen

By Paul Dobson

November 10 (Bloomberg) — Italian government bonds rose as the European Central Bank was said to purchase the securities and after the nation sold the maximum amount of one-year bills on offer at an auction.

The advance pushed the yield on 10-year securities below 7 percent. Italy’s senate is set to vote tomorrow on a package of austerity measures designed to clear the way for establishing a new government and restore confidence in Europe’s second-biggest debtor. The nation sold 5 billion euros ($6.8 billion) of bills at an average yield of 6.087 percent, up from 3.570 percent on similar-maturity securities sold last month.

“Together with reported ECB buying, this auction result should support further Italy outperformance,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate and Investment Bank in London.

The yield on two-year Italian government notes slid 55 basis points to 6.66 percent at 9:43 a.m. London time. The 2.25 percent securities due November 2013 rose 0.915, or 9.15 euros per 1,000-euro face amount, to 92.205.

The ECB bought Italian government bonds, according to five people familiar with the transactions, who declined to be identified because the deals are confidential. It also bought Spanish securities, two of the people added. The ECB was not immediately available for comment when contacted by telephone.

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German “wise men” (classic oxymoron) warn ECB is risking credibility

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German “wise men” warn ECB is risking credibility

By Alexandra Hudson

November 9 (Reuters) — Germany’s “wise men” panel of economic advisers warned the European Central Bank it risks losing credibility by buying the bonds of heavily-indebted euro zone states, and that monetary and fiscal policy are becoming worryingly blurred.

The group, which advises the German government, said in a report published on Wednesday: “The bond buying program dismantles market discipline without establishing any political discipline in its place.”

What about the Stability and Growth Pact? And what other choice do they offer?

In blurring monetary and fiscal policy, the report said, “the ECB is jeopardizing its credibility, because it is falling under the suspicion of monetizing sovereign indebtedness.”

Meaningless in the context of fiat currency and floating fx policy.

Germany strongly objects to the bond-buying strategy but the ECB’s new president Mario Draghi has signaled the bank is ready to carry on buying bonds of troubled euro zone governments.

The wise men said they expected the bank to make a further cut in the key euro zone interest rate to 1 percent by the end of 2011, and that rates would remain at this level throughout 2012.

The silver bullet!

In the report, the panel suggested a different method for increasing the euro zone’s capacity to prevent contagion from the debt crisis, should the 440 billion-euro European Financial Stability Facility (EFSF) not suffice.

In what the “wise men” said would be a departure from current models of securing debt with ever more borrowing, they advised setting up a “European Redemption Pact.”

This would involve countries with sovereign debt above 60 percent of GDP pooling their excess debt into a redemption fund with common liability. They would commit to reforms and see their debts repaid over 20-25 years.

Within a few years the redemption fund could have a volume of 2.3 trillion euros worth of bonds, the study said.

Back to standing in a bucket and picking yourself up by the handle.

Germany, the euro zone’s largest economy and growth engine of the last two years, is expected to see economic expansion stutter in coming quarters as the euro zone debt crisis saps business and consumer confidence and export markets shrink.

Including exports to the other euro members as their economies continue to slow as well.

The “wise men” forecast economic growth of 0.9 percent in 2012, slightly below the 1.0 percent forecast by the government, which last month almost halved its estimate from a previous 1.8 percent.

Growth this year was seen at a healthy 3 percent.

Thanks to ECB supported funding for Greece and the others used to buy German goods and services.

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Weidmann comments for MMT on Zero Hedge

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ECB’s Weidmann Spoils The Party: Says Leveraging EFSF Violation Of EU Treaty, Warns Of Hyperinflation

By Tyler Durden

November 8 (Zero Hedge) — Trust the Germans in the ECB (those who have not yet resigned that is) in this case Jesn Weidmann, to come in and spoil the party:

  • Weidmann, speaking in Berlin, says hyperinflation shows why monetizing debt wrong
  • Prohibition on monetary financing an important achievement.
  • Euro treaty rightly forbids monetary financing
  • Stable prices should be key goal of ECB
  • Leveraging EFSF with currency reserves prohibited
  • Says monetary analysis may gain importance at ECB


    • And for all our MMT friends:

  • “One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press:” Weidmann
  • Prohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and “specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I”


    • Summary from Bloomberg

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    Merkel is seeking to make it easier for the German arms industry to export weapons

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    Merkel Seeks to Ease German Arms Exports

    November 8 (Spiegel) — Chancellor Angela Merkel is seeking to make it easier for the German arms industry to export weapons. In a position paper sent to Brussels recently, Berlin asked that “economic interests” be “adequately considered” when it comes to export controls on arms shipments.

    On a similar theme, ThyssenKrupp looking to distance itself from its joint venture with Ferrostaal – the Munich public prosecutor’s office has accused Ferrostaal of paying millions of euros in bribes to Greece related to the purchase of 214-class submarines.

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    News recap comments

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    The news flow from last week was so voluminous it was nearly impossible to process. For good measure I want to start today’s commentary with a simple recap of what happened.

    On the negative side –

    · Greece called a referendum and threw bailout plans up in the air taking Greek 2yrs from 70% to 90% or +2000bps.
    · Italian 10yr debt collapsed 40bps with spreads to Germany out 70bps. The moves were far larger in the 2yr sector.
    · France 10y debt widened 25bps to Germany. At one point spreads were almost 40 wider.
    · Italian PMI and Spanish employment data were miserable.
    · German factory orders plunged 4.3 percent on the month.
    · The planned EFSF bond for 3bio was pulled.
    · Itraxx financials were +34 while subs were +45.
    · Draghi predicted a recession for Europe along with disinflation.
    · The G20 was flop – there was no agreement on IMF involvement in Europe.
    · The US super committee deadline is 17 days away with no clear agreement.
    · The 8th largest US bankruptcy in history took place.
    · US 10yr and 30yr rallied 28bps, Spoos were -2.5%, the Dax was -6% and EURUSD was -3%.
    · German CDS was up 16bps on the week.

    On the positive side –

    · The Fed showed its hand with tightening dissents now gone and an easing dissent in place.

    Too bad what they call ‘easing’ at best has been shown to do nothing.

    · The Fed’s significant downside risk language remained intact.

    Downside risks sound like bad news to me.

    · In the press conference Ben teed up QE3 in MBS space.

    Which at best have been shown to do little or nothing for the macro economy.

    · US payrolls, claims, vehicle sales and productivity came in better than expected.

    And the real output gap if anything widened.

    · S&P earnings are coming in at +18% y/y with implied corporate profits at +23 percent q/q a.r.

    Reinforces the notion that it’s a good for stocks, bad for people economy.

    · Mortgage speeds were much faster than expectations suggesting some easing refi pressures.

    And savers holding those securities saw their incomes cut faster than expected.

    · The ECB cut 25bps and indicated a dovish forward looking stance.

    Which reduced euro interest income for the non govt sectors

    · CME Margins were reduced.

    Just means volatility was down some.

    · There was a massive USDJPY intervention which may be a precursor to a Swiss style Japanese policy easing.

    Which, for the US, means reduced costs of imports from Japan, which works against US exports, which should be a good thing for the US as it means for the size govt we have, taxes could be lowered to sustain demand, but becomes a bad thing as our leadership believes the US Federal deficit to be too large and so instead we get higher unemployment.

    · The Swiss have indicated they want an even weaker CHF – possibly EURCHF 1.40.

    When this makes a list of ‘positives’ you know the positives are pretty sorry

    · The Aussies cut rates 25bps

    Cutting net interest income for the economy.

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    Euro Bailout Fund Chief Sees No Quick China Deal

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    Now it all starts unraveling. It’s all talk- another ‘optical illusion’ with no operational reality I sight. The China participation isn’t a done deal. The 50% haircut isn’t a done deal either as they haven’t yet figured out how to actually do it without a default event. The EFSF contributions aren’t a done deal either.

    What they have done is further frightened investors to the point where the ECB will find itself buying a lot more bonds to keep member nation funding in check, while ‘negotiations’ drag on with no resolution, meaning, as previously discussed, this is the resolution.

    Hoping i’m wrong…

    Euro Bailout Fund Chief Sees No Quick China Deal

    By Reuters

    October 28 (CNBC) — The head of Europe’s bailout fund said on Friday he does not expect to reach a conclusive deal with Chinese leaders during a visit to Beijing but expects the surplus-rich country to continue buying bonds issued by the fund.

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    Euro Zone Strikes Deal on 2nd Greek Package, EFSF

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    The markets like the announcement. Of course they also liked QE2…

    Unfortunately, as previously discussed, without the ECB the EFSF isn’t sustainable. It’s like trying to lift up the bucket by the handle when you are standing in it.

    Nor is it cast in stone yet, but all subject to details.

    Also, the positive market response, if it continues, only encourages the continuing austerity measures that are weakening the euro economy and forcing already unsustainable deficits higher.

    And, again, it’s a case of ‘the food was terrible and the portions were small.’

    Starting with the 50% private sector loss on Greek bonds-

    Presumably that ‘works’ if it indeed brings Greek debt down to 120% of GDP from 160% by 2020. But that implies the austerity measures won’t continue to reduce GDP and cause the Greek deficit to increase, as continues to be the case.

    It presumes the 50% haircut will be considered sufficiently voluntary to not be a credit event that triggers a variety of global default clauses.

    The rest of the ‘package’ presumes markets won’t reduce the presumed credit worthiness of member nations who fund the EFSF.

    It presumes private sector funds will recapitalize the banks that lost capital on the write downs.

    It presumes the EFSF won’t be needed to fully fund Portugal, Spain, and Italy.

    It presumes banks and other investors required to be prudent and financially responsible to shareholders will continue to buy other euro member nation debt even after seeing the euro zone members allow Greece to default on half of their obligations.

    That is, how could any bank now buy, for example, Italian debt, in full knowledge that euro zone policy options include a forced write down of that debt. And not in extreme, unforeseen circumstances, but under current conditions.

    And how can prudent investors invest in the banks when they’ve just seen euro zone remove some 100 billion euro in equity by decree?

    The problem is, it takes a presumption of general improvement to presume additional losses will not be incurred by investors.

    And it takes a presumption of general improvement to presume the EFSF will be successful.

    And that requires the presumption that continued austerity measures will result in a general improvement.

    Even as all evidence (and most theory) is showing the opposite.

    Euro deal leaves much to do on rescue fund, Greek debt

    By Luke baker and Julien Toyer

    October 27 (Reuters) — Euro zone leaders struck a last-minute deal to limit the damage from the currency bloc’s debt crisis early on Thursday but are still far from finalizing plans to slash Greece’s debt burden and strengthen their rescue fund.

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