Only Germany can save EMU as contagion turns systemic

 German Chancellor Angela Merkel warned there will be no 'spectacular step' at the EU meeting on Thursday Photo: AP

"We are heading towards fiscal union or break-up," said David Bloom, currency chief at HSBC. "Talk is no longer enough as the fire threatens to leap over the firebreak into Spain and Italy.

"What the market is worried about is Germany's long-term committment to the euro project. If we see unreserved and absolute backing from the political establishment of Germany, that will be a soothing balm."

Chancellor Angela Merkel seemed in little hurry on Tuesday to convey such a message. There will be no "spectacular step" at the Justus Lipsius building on Thursday; just a "controlled process of gradual steps and measures", she said with unflappable calm. Given the simmering wrath from top to bottom of German society, it may be impossible for her to do much more.

Jens Weidmann, the Bundesbank's president, has made her task that much harder by telling the eurosceptic Bild Zeitung that "nothing would destroy the incentives for a solid budget policy more quickly and more permanently than joint liability for national debts. European and especially German taxpayers would have to answer for the entire state debt of Greece. That would be a step toward a transfer union."

Days earlier he shot down proposals for issuance of eurobonds or use of Europe's rescue fund to buy Spanish and Italian bonds on the open market, crucial steps to prevent Italy and Spain being drawn into the maelstrom. "It has a high cost, limited use, and dangerous secondary effects," he said, departing radically from the script of the European Central Bank.

Such scathing words from the Bundesbank tie Dr Merkel's hands, just as she is tied by a Bundestag motion five weeks ago that imposed strict limits on further bailouts. Above her head hangs a Sword of Damocles, a ruling by her consitutional court in September that may curb or even block German participation in the EU's rescue machinery. The further she goes on Thursday – the further she breaches the "no bailout" clause of the Lisbon Treaty – the greater the risk of a negative ruling.

In essence, this is a soul-searching drama within Germany over its own national destiny and place in Europe, echoed in the Netherlands, Finland and even France. Europe's confusion reflects the schizophrenia of its ancient tribal nations, each faced with the fateful choice of crossing the Rubicon to an EU Treasury and joint government or letting the EU project unravel after half a century.

EU leaders would like to confine their summit to the details of debt buy-backs or "selective defaults" for Greece, or cuts in the penal rate on rescue packages, but the crisis is once again a step ahead of politicians. Fear that Italy and Spain may be tipping into double-dip recessions as global growth falters has changed the landscape, threatening the debt dynamics of both countries.

The International Monetary Fund said there is now "serious risk" of eurozone contagion with "large" potential knock-on effects worldwide. "Market participants remain unconvinced that a sustainable solution is at hand," it said.

Suki Mann from Societe Generale caught the mood in a note to clients, asking whether it is "all over". "Eurozone politicians don't – or don't want to – understand that the eurozone as we know it is on the precipice. Greece appears beyond repair, Italy is on the brink, and the chances are that the euro might be no more very soon," he said.

RBS fears that Europe is on the cusp of "system-wide convulsion" after yields on Spanish 10-year bonds reached post-EMU records of 6.34pc this week, and Italian yields topped 6pc. "We believe that Spain has entered the danger zone for yield levels," said Harvender Sian, the bank's credit strategist, who fears the "point-of-no-return" may be 6.5pc. "Given that Spain [and likely soon Italy] has entered this territory, there is a growing risk that a large systemic risk event is plausible in the near term and if not then in a matter of weeks."

The bank has called for a bail-out fund with €2 trillion of full lending power to stabilise the system, even if this risks pushing German debt levels above 110pc of GDP and causing apoplexy in the Bundestag.

The bond fund Pimco has its own idea: throwing Greece, Ireland and Portugal to the wolves, and concentrating €1 trillion in "overwhelming force" to defend Spain and Italy. That major players should utter such thoughts shows how fast events are moving.

For 18 months the EU has treated the serial crises on the EMU margins as liquidity headaches. It hoped that time would slowly lift the distressed debtors off the reefs, while the penal terms of "Ultima Ratio" attached to bailout loans would deter other EMU states from seeking help. "Shock and Awe" rhetoric would do the rest.

The strategy has failed because it did not acknowledge that the deeper crisis is a North-South structural gap that has left half the eurozone with variants of 1930s debt-deflation, a condition that cannot be solved by austerity measures or by any one country alone.

"We are approaching the endgame for this part of the European sovereign crises: the number of cans that now need kicking down the road would challenge the left foot of Lionel Messi," said Gary Jenkins from Evolution Securities. "The chances are that the EU will only take the step of fiscal union or common bond issuance at one minute to midnight on a weekend when it is clear that the system is close to collapse."

The EU has a long history of muddling through existential crises – though none quite as threatening as this – so it may find some way to fudge fiscal union with a formula that assuages German hawks and lawyers. If all else fails, it can still cajole or order the ECB to undertake mass bond purchases and usher in fiscal union by the back door.

But there is a larger question: does Germany really want to pay the costs of monetary union any longer?

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Saudi shares hit 20 months down fears of contagion of protest

The Saudi benchmark lost 20pc since reaching its 2010 high, there are market bears territory Photo: Reuters

The Tadawul all indexes reference share fell 6 8pc 5,539 points, with Saudi Arabia Basic Industries, manufacturer of petrochemicals most, 7 8pc of landslide.

The index has lost 20pc since reaching its 2010 high, taking into bear market territory.

"Reports of certain arrests of a cleric caused gout." It is now a great fear of contagion in Saudi, said Haissam Arabi, Chief Executive and Manager Gulfmena Alternative Investments funds. "However, things are not all in clear fact that continuing the fall in stocks." There is no clear answer at this time. »

Saudi authorities detained a clerc of Shi'ite in the Eastern Province after he called for a constitutional monarchy and of ending corruption and discrimination, human rights activists said Reuters Tuesday.

Minority of Shi'ite of Arabia, believed be 10pc-15pc of the Saudi population, 18 m has long complained of discrimination, a charge denied by the authorities.

"It is sell all levels." There are several rumors out there and it seems that investors of all the class and type are drawing a line on the markets, says Nadi Bargouti, head of asset management at the Shu'a Capital in Dubai.

"No single person, without unique portfolio can move markets to this extent." It is a complete shock. »

On 17 February, the Prince Talal Bin Abdul Aziz Al Saud, Member of the Royal family of Saudi Arabia, said that the Kingdom may see protests unless King Abdullah proposes reforms, according to the BBC Arabic TV.

The King has increased spending on housing by riyals (£ 7bn) on 23 February. It has increased the budget of the social security of billion riyals, ordered the creation of 1 200 jobs and make a cost of living allowance 15pc permanent employees of the Government.

Saudi Arabia is the world's biggest exporter of oil and the largest Arab economy. Gross won 0 9pc $97.81 US per barrel to 8 pm in e-commerce on the New York Mercantile Exchange.

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Saudi Arabia contagion raises the rout of the Gulf

My Mushaima said Wednesday that demonstrators had "the right to appeal using the Iran" If the Saudi military units to interfere in the fight. Tanks were seen crossing the roadway of 17 miles from Saudi Arabia to Bahrain on Tuesday.

"These were supposed to be Bahrain tanks, returning from Kuwait: this is not a credible story," said Siras Abi Ali, an expert in the Gulf at the level of the risk analysis Exclusive group.

He said that the result at Bahrain will set the model for events across the border. "There is no positive consequence of this for Saudi Arabia." If Bahrain offer of concessions, the Shia Saudi demand similar concessions. Are they cracking down, they could uplift. These people do not want to live in the House of Saud, "he says.

Saudi Arabia activists have called on Facebook for a "day of Rage" on 11 March, despite the lashing sentence to protest Street. An appeal similar to arms in Syria fact long fire because people were afraid, and the security forces the stifled in the egg. "We will closely monitor how many people are, and how far to go, their requirements, see", said Mr. Abi Ali.

Saudi King Abdullah has little latitude. Its own legitimacy comes from members of the Wahhabi clergy, who refuse any compromise with the Shiites. It is 87 and in poor health, raising the prospect of a fight of favourable looming succession within the line hard Minister Prince Nayef. It would crush any protest. The monarchy sought to save time by spending an additional amount of $36bn (£ 22bn) on welfare and wages, but political patronage may hit the wrong note at this stage.

Whatever hope in the West, Mr. Abi Ali said the Middle East is now in the vortex of several revolts to create turmoil for years and destabilize the supply of oil for a long time. "The Arab world will begin to behave like the Swiss," he said.

Slide in the Libya in the civil war has already reduced deliveries of oil by 1 m barrels per day (BPD), cutting in the margin of safety of the world. The International Energy Agency (IEA) said that the Saudis had covered the short-fall even if Saudi Arabia heavy oil is a poor substitute for the "sweet" of the Libya crude oil.

However, analysts suspect the Kingdom had already increased profitability 9 m before barrels of disturbances in Libya and did not add much net offer. There is a debate is raging about whether if the Saudi oil giant aramco can increase yields by 3 m bpd if necessary, as claimed. While the two new fields came flow adding 2 m bpd since the oil shock of 2008, "attrition" on old fields has offset this. "We believe that they are nearly at full capacity,"said an analyst."."

Global reserve capacity may in fact be less than 4 m bpd and perhaps as low as 2 m. during this time, the demand for oil from China alone increased by 850 m bpd last year.

HELIMA Croft at Barclays Capital said the longer Libya, the most damaging crisis continues it would supply to long term. Foreign companies have evacuated staff and may be reluctant to restart operations until the dust settles.

The rebel leaders of Benghazi are considering to investigate oil contracts, reserving the right to renegotiate the conditions in accordance with the "will of the people in the street".

Ms. Croft said foreign oil companies will not sink large sums of money in Libya until it is clear, what will emerge from the cauldron of tribal divisions. A plan for $billion of investments of oil by BP, Shell, Oasis and others over the next three years is in ruins. "With the disintegration of a stable political regime in Libya, we consider the major part of projects as being extremely unlikely to proceed at the time, or even not at all," she said.

Fatih Birol, the IEA Economist ' schief, warned that investment in fresh fields across the Middle East "may be delayed for years." The era of cheap oil is gone. »

The Libyan crisis presented an oil crunch which was likely to occur within three years, given the relentless decline in non-OPEC output in the North Sea and the Mexico.

While the world can cope with the loss of Libyan crude for now, the stakes will be rise sharply, if a country more succumbs and explode off the coast of graphics if the monarchies of the Gulf are losing their grip.

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Saudi Arabia contagion triggers Gulf rout

My Mushaima said on Wednesday that protesters have “the right to appeal for help from Iran” if Saudi military units interfere in the struggle. Tanks were seen crossing the 17-mile causeway from Saudi Arabia to Bahrain on Tuesday.

“These were supposed to be Bahrain’s tanks returning from Kuwait: that is not a credible story,” said Firas Abi Ali, a Gulf expert at the risk group Exclusive Analysis.

He said the outcome in Bahrain will set the template for events across the border. “There is no good outcome from this for Saudi Arabia. If Bahrain offers concessions, the Saudi Shia will demand similar concessions. If they crack down, they risk an uprising. These people do not want to live under the House of Saud,” he said.

Saudi activists have called on Facebook for a “Day of Rage” on March 11, despite the penalty of lashing for street protest. A similar call to arms in Syria fizzled because people were frightened, and the security forces nipped it in the bud. “We will be watching closely to see how many people turn up, and how far their demands go,” said Mr Abi Ali.

Saudi King Abdullah has scant leeway. His own legitimacy stems from Wahabi clerics, who refuse any compromise with the Shia. He is 87 and in poor health, raising the prospect of an imminent succession struggle that favours the hard-line interior minister Prince Nayef. He would undoubtedly crush any protests. The monarchy has sought to gain time by spending an extra $36bn (£22bn) on welfare and salaries, but patronage politics may strike the wrong note at this stage.

Whatever the hopes in the West, Mr Abi Ali said the Mid-East is now in the vortex of multiple uprisings that will create turmoil for years and destabilise oil supply for a long time. “The Arab world is not going to start behaving like the Swiss,” he said.

Libya’s slide into civil war has already cut oil shipments by 1m barrels per day (bpd), slicing into the world’s safety margin. The International Energy Agency (IEA) said the Saudis had covered the short-fall, though Saudi heavy oil is a poor substitute for Libya’s “sweet” crude.

However, analysts suspect the kingdom had already boosted output to 9m bpd before disruptions in Libya, and has not in fact added much net supply. There is a raging debate over whether the Saudi oil giant Aramco can raise output by 3m bpd if needed, as claimed. While two new fields have come on stream adding 2m bpd since the 2008 oil shock, “attrition” on old fields has offset much of this. “We think they’re close to full capacity,” said one analyst.

Global spare capacity may in reality be less than 4m bpd, and perhaps as low as 2m. Meanwhile, oil demand from China alone rose by 850,000 bpd last year.

Helima Croft at Barclays Capital said the longer Libya’s crisis continues , the more damage it will do to long-term supply. Foreign companies have evacuated staff and may be reluctant to restart operations until the dust settles.

Rebel leaders in Benghazi are planning to investigate oil contracts, reserving the right to renegotiate terms in accordance with the “will of people in the street”.

Ms Croft said foreign oil companies will not sink large sums of money into Libya until it is clear what will emerge from the cauldron of tribal divisions. A plan for $10bn of oil investments by BP, Shell, Oasis and over others the next three years is in tatters. “With the disintegration of a stable political regime in Libya, we view the bulk of the projects as being extremely unlikely to proceed on time, if at all,” she said.

Fatih Birol, the IEA’schief economist, warned that investments in fresh fields across the Middle East “may be deferred for years. The age of cheap oil is over.”

The Libyan crisis has brought forward an oil crunch that was likely to happen within three years or so, given the relentless decline of non-OPEC output in the North Sea and Mexico.

While the world can cope with the loss of Libyan crude for now, the stakes will rise sharply if one more country succumbs, and explode off the charts if Gulf monarchies lose their grip.

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Mid-East contagion fears for Saudi oil fields

 Saudi Arabia's main oil pipeline. 'The Shia are 10pc of the Saudi population. They are deeply aggrieved and marginalised, and sit on top of the kingdom's oil reserves' Photo: GETTY

"Yemen, Sudan, Jordan and Syria all look vulnerable. However, the greatest risk in terms of both probability and severity is in Saudi Arabia," said a report by risk consultants Exclusive Analysis.

While markets have focused on possible disruption to the Suez Canal, conduit for 8pc of global shipping, it is unlikely that Egyptian leaders of any stripe would cut off an income stream worth $5bn (£3.1bn) a year to the Egyptian state.

"I don't think the Egyptians will ever dare to touch it," said Opec chief Abdalla El-Badri, adding that the separate Suez oil pipeline is "very well protected". The canal was blockaded after the Six Days War in 1967.

There has been less focus on the risk of instability spreading to Saudi Arabia's Eastern Province, headquarters of the Saudi oil giant Aramco. The region boasts the vast Safaniya, Shaybah and Ghawar oilfields. "This is potentially far more dangerous," said Faysal Itani, Mid-East strategist at Exclusive.

"The Shia are 10pc of the Saudi population. They are deeply aggrieved and marginalised, and sit on top of the kingdom's oil reserves. There have been frequent confrontations and street fights with the security forces that are very rarely reported in the media," he said.

The Saudi Shia last rose up in mass civil disobedience in the "Intifada" of 1979, inspired by the Khomeini revolution in Iran. Clashes led to 21 deaths. Mr Itani said it is unclear whether the Saudi military could cope with a serious outbreak of protest in the province.

Saudi King Abdullah is clearly alarmed by fast-moving events in Egypt and the Arab world. In a statement published by the Saudi press agency he said agitators had "infiltrated Egypt to destabilise its security and incite malicious sedition".

The accusations seem aimed at Iran's Shia regime, which has openly endorsed the "rightful demands" of the protest movement. There is deep concern in Sunni Arab countries that Iran is attempting to create a "Shia Crescent" through Iraq, Bahrain and into the Gulf areas of Saudi Arabia, hoping to become the hegemonic force in global oil supply.

Goldman Sachs said the Mid-East holds 61pc of the world's proven oil reserves – and 36pc of current supply – which may compel global leaders to make "concentrated efforts" to stabilise the region. The bank said high levels of affluence should shield Saudi Arabia and the Gulf's oil-rich states from "political contagion".

However, a third of Saudi Arabia's 25m residents are ill-assimilated foreigners and the country faces a "youth bulge", with unemployment at 42pc among those aged 20 to 24.

Nima Khorrami Assl, a Gulf expert at the Transnational Crisis Project, said Shi'ites have been "stigmatised as a result of excessive paranoia since Iran's Islamic Revolution" and face systemic barriers in education and jobs. "Should the Gulf states do nothing or attempt to preserve the status quo, social unrest becomes inevitable. The current situation is inherently unstable," he told Foreign Policy Journal.

Exclusive Analysis said Egypt's revolt had gone beyond the point of no return as protesters plan a 1m stong rally on Tuesday, with president Hosni Mubarak likely to be ousted within 30 days.

John Cochrane, the group's global risk strategist, said the regime has so far refrained from ordering the army to crush protesters knowing that many officers will refuse to obey. "If asked to use lethal force, it is questionable whether the army's cohesion will hold together," he said.

The Muslim Brotherhood, the best-organised of the diffuse protest movement, has reached out to the military, praising its "long and honourable history", but it has also begun to set up its own populist militias to protect the streets.

A future government – with the Brotherhood pulling some strings – is expected to renationalise parts of industry, shifting away from "free-market" policies used to weaken the labour unions and steer contracts to an incestuous elite. Ezz Steel and other parts of the business empire of Ahmed Ezz may be seized, as well as infrastructure assets linked to corrupt ministers.

The Brotherhood's "old guard" has so far controlled its hotheads but the organisation is close to Hamas in Gaza. Israel may soon find that it can no longer count on a secure southern border, even if Egypt's peace treaty remains in name.

The outbreak of Arab populism vindicates claims by US neo-conservatives that the region is ripe for change, but this is not what Washington had in mind. "US interests are the first casualty," said Mr Itani.

Fairly or unfairly, America is tarred with the Mubarak brush. Cairo may switch allegiance to the rising powers of Turkey, India, and above all, China.

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Spain orders drastic caja clean-up to win confidence and fight off EMU debt contagion

 The Spanish media reports that the cajas have yet to come clean on 80bn euros of exposure to property loans Photo: AFP

The weaker banks, or "cajas", must raise Tier 1 core capital to 10pc by September if they depend on wholesale capital markets for more than a fifth of their funding or if less than a fifth of their shares are in private hands. If they fail to do so, the government will seize control through the state bailout fund (FROB).

The demands are even tougher than the broad-brush plans unveiled last month and shows the determination of the authorites to cut out any cancers rather than allowing the sort of drift that bedevilled Japan in the 1990s.

The move comes after yields on Portuguese 10-year bonds punched to a post-EMU high of 7.66pc, renewing fears of a spill-over into Spain. The European Central Bank intervened on Thursday to restore calm but it is clear that Euroland euphoria over Chinese purchases of Portuguese debt has not lasted long.

Jose Manuel Campa, Spain’s economy secretary and the architect of the financial overhaul, acknowledged that the most vulnerable cajas are unlikely to find private investors. "It will be a challenge. They have not taken part in the equity markets for some time," he told The Telegraph.

Only five of the 17 cajas meet the 10pc rule. Caixa Nova is 6.0, Unnim is 6.22, Caixa Galicia 6.43 and Catalyunia Caixa 6.6. Even the giant Caja Madrid with €328bn (£277bn) of assets has core capital of just 7.1, though it is already preparing a stock listing.

Mr Campa is hopeful that cajas will be able to raise "a big chunk" from investors given the strides made in cleaning up their books. He said fresh capital of €20bn will be enough to restore the caja industry to health, disputing claims by City analysts that €40bn to €80bn will be needed. "These high numbers are based on very stretched scenarios, with a fall in house prices by 50pc and land prices by 70pc," he said.

Madrid is basing its estimates on bank stress tests last July that included a severe double-dip recession, with a 3pc fall in GDP over the two years of 2010 and 2011. Since the economy in fact contracted by just 0.1pc last year, it would take a dire relapse at this point to exhaust the safety buffer.

However, there is a risk that Spain may have missed a chance once again to "get ahead" of the crisis. A report this week by the world’s Financial Stability Board (FSB) said the sheer scale of Spain’s property bubble had overwhlemed the country's seemingly tough rules on loss provisions.

While the FSB praised Spain’s latest efforts to strengthen its banking system, there was a sting in the tail. "Such determined actions became necessary partly because of the delay in addressing earlier the structural weaknesses of savings banks," it said.

The Spanish media reports that the cajas have yet to come clean on €80bn of exposure to property loans, and are under fresh scrutiny by central bank inspectors.

Mr Campa blamed the renewed eruption of the bond crisis last Autumn on Franco-German talk of haircuts for holders of EMU sovereign debt, coupled with the failure of the Irish authorities to carry out rigorous stress tests of their banks. "That really hurt us. We had made huge efforts to be transparent, but the Irish crisis devalued the quality of the tests for everybody."

The fate of the cajas is inseparable from the Spanish property market. Mr Campa said construction has fallen from 700,000 homes year during the bubble to around 200,000 until well into the next decade, helping to clear an overhang of properties estimated by consultants RR de Acuna to be as high as 1m.

The uber-bubbles were in the Madrid suburbs and parts of the tourist belt on the coast, but the market is much closer to balance in the rest of the country.

Mr Campa, a free market economist who taught at New York’s Stern School of Business with arch-bear Nouriel Roubini, was brought in to restore Spain’s credibility in world finance after the crisis was in full swing.

He advises astute investors that right now may prove to be the optimal moment to buy a house in Spain. "The Germans are coming back. We need the English, too," he said.

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