"What investors want to know is whether the ECB is ready to stand behind the bond markets because it is not clear who else is going to buy €350bn of Italian debt over the next year," said Hans Redeker from Morgan Stanley. "If we had seen a credible government in Italy six months ago it might have turned market sentiment, but it may be too late now.
"What is really dangerous is that the market is losing confidence in France even though Paris is delivering a €65bn austerity package. We are nearing the point where French bond yields will force rating agencies to downgrade France," he said.
The Swiss bank Pictet said Europe is sliding into a catastrophic slump with its policy mix of fiscal austerity, a credit crunch, and the lack of any lender of last resort. "The German recipe for solving the crisis is geared towards deleveraging all economic agents simultaneously. This is utopian. This policy will brutally depress aggregated demand. It is the route that led towards the Depression of the 1930s," it said.
Mr Weidmann is unrelenting. He said that the ECB is prohibited by treaty law from acting as a lender-of-last resort for states, whether directly or covertly through the International Monetary Fund.
What chilled markets most was his comment that Italy's bond yields are "no big deal" and that the country must sort out its own problems. "Monetary financing will set the wrong incentives. Fixing an interest rate for a country is certainly not compatible with our mandate," he said.
Many investors had assumed the ECB would step in to cap Italian yields once Silvio Berlusconi had the left office, giving Mr Monti a "dowry" of lower borrowing costs to help him shake up the labour markets as demanded the EU authorities.
"The markets want a quick win and the ECB is not willing to give it to them," said David Bloom from HSBC. "It is going to take us to the edge the abyss first. There is a lot of 'Game Theory' going on. But this can go awry if the debt cancer spreads."
Mrs Merkel is giving mixed signals. She said Europe was facing its "hardest hour" but there was no hint that Germany is ready to shoulder further debt risks. Days earlier she shot down proposals from Germany's five "Wise Men" for a temporary sinking fund to mutualise €2.3 trillion of eurozone bonds.
Mrs Merkel's version of "Fiskalunion" is not what is meant in the rest of Europe. It is essentially a "stability union" where Brussels acquires greater powers to police the deficits of sinner states.
Berlin wants limited EU changes under the Lisbon Treaty's "ratchet clause"– avoiding the need for ratification – to make it easier to impose discipline, including an EU "austerity commissioner" with powers to administer delinquent nations.
Mrs Merkel may wish to go further – and her finance minister Wolfgang Schauble is a diehard integrationist – but her hands are tied by Germany's Basic Law, the anchor of German democracy, and the constitutional court. The judges ruled in September that the fiscal powers of the Bundestag may not be transferred to EU bodies.
"There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit... then Germany must give itself a new constitution. A referendum would be necessary," said chief justice Andreas Vosskuhle.
The pro-European wing of the CDU is floating plans for changes to the Basic Law to allow for a quantum leap to a European superstate. This is vehemently opposed by Bavaria's Social Christians, and part of the CDU itself. It would require a two-thirds majority in both houses of parliament. There is a high likelihood that German voters would reject the plan. It would in any case take two or three years to push through.
Yet the crisis is escalating by the day. Moody's said it is not clear whether Europe's EFSF bail-out machinery can "fund itself in the markets at low cost", raising doubts about its ability to contain the debt crisis. The rating agency said plans to leverage the EFSF to €1 trillion have come to little, leaving it with just €266bn after funding Ireland, Portugal and Greece. "This limits the EFSF's role as an important pillar of the euro area crisis management strategy," it said.
There is nothing yet standing behind the system as Europe spins wildly into the eye of the storm.
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