We are now stampeding towards god knows what in Europe. There is still absolutely no consensus on what, who or how the Greek issue is going to be resolved, and still absolutely no one is talking about the fact that without a full monetary and fiscal union, the issuance of true Euro bonds , or some productivity inducing medicine from out of space that the underlying issues get worse by the day and contagion continues to slowly push through the EU nations. Reuters reports again on the move into France.
France is increasingly under fire in the market sell-off that has deepened Europe’s sovereign debt crisis, judging by the poor performance of its stock and bond markets so far this month.
French stocks are down some 7 percent so far in July closer to the 8-9 percent fall seen in the euro area’s other highly indebted countries than a 2-percent dip in Germany.
Yields for its bonds, long viewed alongside Germany as benchmarks for European government borrowing rates, have jumped to as much as 74 basis points above Berlin’s 10-year paper.
Analysts say the fall is likely to deepen because of the country’s exposure to Italy, the euro zone’s third-largest economy. France will also have to bear the burden of further financial assistance to Greece, which needs a second multi-billions bailout package, and potentially others like Portugal and Ireland.
While investors have been clamouring for such an outcome, the countries who foot the bill are expected to suffer.
France “is being meshed into the contagion,” Philip Lawlor, investment strategist at Smith & Williamson in London, said.
“The sting in the tail could be that the last thing that the market wants to see is France and Germany commit enormous amount of fiscal transfer. Given that the French economy is not doing fantastically well …, I wonder whether credit ratings agencies will then turn around to France and say, I am not sure that your triple-A rating is as robust, and put a warning on it.”
France’s public debt will peak at 86 percent of national output next year, the government forecasts. Meanwhile IMF data provided by Lloyds Bank shows a forecast structural deficit of 4 percent of GDP this year, compared with 3.2 percent for the Netherlands and 2.1 percent for Germany.
Last night we saw Italian and Spanish bond spreads reaches new euro area highs before falling on the words of the ECB’s Nowotny.
European Central Bank council member Ewald Nowotny suggested the bank may compromise and allow a temporary Greek default as officials scramble to fix a sovereign debt crisis that’s spreading to Italy and Spain before a leaders’ summit in two days.
As Spanish financing costs surged at a 4.45 billion euro ($6.31 billion) treasury bill auction today, policy makers are trying to ease a split that’s pushed interest rates on Spanish and Italian 10-year debt above 6 percent for the first time since the euro debuted 12 years ago. The ECB has until now argued that any Greek default could spark a new financial crisis, derailing a German push to make investors help foot the bill for a second bailout of the country.
Those words now seemed to have been retracted.
European Central Bank Governing Council member Ewald Nowotny is in “complete agreement” with ECB President Jean-Claude Trichet on Greece, his spokesman said on Tuesday, after earlier Nowotny comments suggested he held a different view on the issue.
Nowotny had told CNBC in remarks aired on Tuesday that a solution to Greece’s debt crisis could involve a “selective default” without major consequences.
“(Nowotny) stands in complete agreement with the position of Jean-Claude Trichet and the ECB,” Nowotny’s spokesman said in a statement.
“As clearly said in the CNBC interview, it is about avoiding any option that would make it impossible for the ECB to continue to accept Greek sovereign bonds as collateral.”
It is yet to be seen how the bond markets fully respond to that retraction, but the whole episode just show how utterly unplanned this whole crisis is and the sort of short-term “quick win” mindset that is in place to deal with a problem that is anything but. As the wall street journal reports
Investors remained on edge Tuesday as euro-zone officials attempted to prepare an agreement on private-sector involvement in a new funding package for Greece ahead of a meeting of the currency bloc’s leaders Thursday.
The markets were encouraged early by hints of a compromise between the European Central Bank and euro-zone governments over a second bailout package for Greece, but divisions remained and several options continued to be floated over how to get the private sector to share part of the cost.
A levy on banks, the latest idea being discussed among euro-zone officials, could contribute at least EUR20 billion over the next two to three years to a new aid package, a person familiar with the matter said, but this plan comes with its own set of risks.
Italian and Spanish bonds rose Tuesday after ECB Governing Council member Ewald Nowotny hinted that the ECB may be able to accept some ideas to solve the Greek debt crisis that could include “selective default,” potentially removing a stumbling block that has marred discussions so far and put the euro region’s fate in jeopardy.
“There are some proposals that deal with a very short-lived default situation that would not really have major negative consequences,” Nowotny told CNBC in a recorded interview broadcast Tuesday. “But these are really highly technical aspects.”
However, Nowotny appeared to be backtracking from his earlier comments, with his office later putting out a statement saying he is “in complete agreement with the position represented by ECB President Jean-Claude Trichet,” who has consistently rejected any solution involving even a brief period of default.
Trichet reiterated his position of “no credit event, no selective default, no default,” in an interview published in three newspapers in central and eastern Europe.
Nowotny’s statement acknowledged that “it is important to avoid any constellation that would make it impossible for the ECB to accept Greek government bonds as collateral.”
Politicians want private bondholders to foot a share of the next Greek bailout. But the major rating firms have said the methods proposed thus far would constitute a default, something the ECB has said it is keen to avoid.
Some took Nowotny’s comments as a sign that the ECB may be bending its resistance to at least some options on the table.
“The ECB has lost the battle on avoiding a restructuring or a selective default to the politicians,” said Richard Kelly, head of European rates and foreign-exchange research at TD Securities. “The ECB will have to find a way to provide credit to Greek banks.”
Agreeing on a new aid package for Greece is pivotal to prevent contagion because a further rise in Italian and Spanish bond yields will test the firefighting capabilities of the euro zone’s EUR750 billion bailout facility. Italy is the bloc’s third-largest economy and its government bond market is the largest in the world after the U.S. and Japanese markets.
Despite Nowotny’s apparent backtracking, the yield on the benchmark 10-year Italian bond Tuesday eased further to 5.72%, having surged to a euro-era high of 6.01% on Monday. The yield on the corresponding Spanish bond fell to 6.10% from a euro-era high of 6.33% on Monday.
I have no idea why bond yields are falling because nothing that really matters is actually being addressed. The short term game is still about who will blink first and it is still anyone’s guess, but that is all that will be addressed on Thursday. I personally think the ECB has little choice but to start accepting whatever it takes as collateral because their jawboning doesn’t seem to be cementing any sort of holistic political approach to solving the underlying issues which is what is actually required, in fact it seems to be making those issue worse. But even the ECB strategy is obviously weak and wavering, in their latest bulletin they state that “the ECB’s liquidity support for the banking sector cannot replace the measures that need to be taken by national governments, regulatory bodies and the financial sector itself to ensure the solvency of individual banks.” Realistically, however, that is all bluff the ECB is already holding €2 trillion ($2.8 trillion) worth of Spanish, Portugal, Italy and Greek debt.
It just gets worse for Europe and I can’t for the life of me understand why anyone thinks any differently.