I find it odd how equity markets move. The credit markets have been continually screaming about Europe for weeks and if you have been reading you would know that the economic system in Europe has been slowly collapsing inwards on the ECB’s balance sheet. None of this should have been a surprise to share markets, but yet again last night we see an event as if all of this was all some huge surprise.
Oh well, as long as you have been reading along with me over the last months you would have been fully aware that this was all coming to a crescendo and you invested appropriately.
Let’s recap the major points of the “European mess” I have been talking through.
- The “periphery” nations (including France) have an competitiveness issue that is exacerbated by the single currency and macroeconomic imbalance plays a major part in the accumulation of periphery debt.
- Without some form of compensating mechanism austerity will make the issue worse because debt was the major driver of production. Remove the debt and the economies will collapse.
- Europe was slowly creeping towards an event that required decisive action. Either the macroeconomic model is adjusted or one group of countries will be forced to leave the union.
- Whatever the outcome, strong leadership is required because either way there is going to be a huge mess to clean up .
- The longer the Euro-Elite dithered about the worse the crisis is becoming, slowly morphing from a sovereign debt crisis of a single nation into a full blown banking crisis.
So the real question all along has been whether all of leaders of European nations accept that they need to create something that resembles a fiscal union in order to overcome the macroeconomic imbalances within Europe, or will they need let one group of countries leave the union.
Over the last 48 hours we got a glimpse of the answer, after Finland secured a concession from Greece on its bailout contribution.
Finland reached an agreement with Greece on receiving collateral to cover its bailout contribution as the Nordic nation rejected any form of joint regional liability such as selling common euro bonds.
The “next weeks are very decisive in that we will see how other countries will respond to this collateral arrangement,” Finance Minister Jutta Urpilainen said yesterday at a press conference in Helsinki. “Finland has been critical of joint euro bonds and our stance is that every country is liable for its own debts.”
Finland’s collateral demands were included in a July 21 agreement by euro area leaders after the AAA rated nation fought for extra assurances it won’t lose money on its bailout contribution. The 17-member currency bloc is split on how far members should go to support its most indebted nations. German Chancellor Angela Merkel and French President Nicholas Sarkozy rejected euro bonds at a meeting yesterday and said they would first press for closer economic integration with tougher deficit rules.
Urpilainen said steps toward joint liability, such as euro bonds, would undermine the founding principles of the common currency and risk creating a transfer union.
“Finland’s stance remains that there should be no more joint liability,” she said. “We want to adhere to the founding treaties and the principle that every country is liable for its own debts.”
And now the important part:
Finland’s agreement with Greece allows the Nordic country to “recycle other euro members’ money to use as collateral as the funds Greece deposits must come from the bailout loans,” Reijo Heiskanen, chief economist at OP-Pohjola Group in Helsinki, said by phone. “Finland is a free-rider, letting others bear the risk. This isn’t a course available for all euro countries.”
As you can imagine as soon as the other nations found out they wanted in:
Austria and the Netherlands, both rated AAA, and Slovenia and Slovakia will probably pursue collateral arrangements after the northernmost euro member was able to strike an agreement with Greece this week, the countries said today.
“It always was our position in the council that if there is a collateral setup, Austria will participate,” Harald Waiglein, a spokesman for Austria’s Finance Ministry, said in a telephone interview from Vienna. The Netherlands “will demand collateral, just like Austria,” Finance Ministry spokesman Niels Redeker said by phone from The Hague today.
Finland’s collateral demands were included in a July 21 agreement by euro-area leaders to provide a new 159 billion-euro ($229 billion) aid package for Greece and grant broader powers to the region’s rescue fund. At the summit, AAA rated Finland fought for extra assurances it won’t lose money on its backing for the European Financial Stability Facility. The July 21 agreement needs to be ratified nationally.
Slovenia will “use its right to secure its part of the collateral within the general frame of the group,” Finance Ministry spokeswoman Irena Frkulj said in a phone interview out of Ljubljana today. A collateral deal “is one of Slovakia’s conditions,” Patricia Malecova, a spokeswoman at the Bratislava-based Finance Ministry said in an e-mailed statement. Still, Slovak Finance Minister Ivan Miklos told reporters that bilateral agreements are no solution.
Followed by a statement from Greece that everyone else would need to say “Yes” to the deal for Finland:
Greece’s bilateral deal to put up collateral for Finland’s share of loans in a new bailout package agreed last month has to be cleared by the rest of the euro zone, Greece’s finance minister said on Thursday.
“The funding scheme which we have agreed in our talks with the Finns is subject to approval by the rest of the euro zone’s member countries,” Finance Minister Evangelos Venizelos said in a statement.
His comment came after Austria, the Netherlands and Slovakia also said they want collateral on loans to Greece.
And then a rebuttal from Finland:
Minister of Finance Jutta Urpilainen (SDP) is expecting the other euro countries to take a stand on the agreement reached between Finland and Greece on monetary collateral that Greece should provide for Finland’s loan guarantees. Officials of the ministries of finance of the euro countries will discuss the Greek bailout in Brussels on Thursday and Friday.
Although the implementation of the agreement requires the approval of the other euro countries, Finland is adamant that it will not discuss any changes to the package. Jussi Lindgren, Financial Secretary at the Finnish Ministry of Finance says that if the agreement does not suit the other countries as is, then Finland cannot take part in guaranteeing the bailout loans for Greece.
As Finland sees it, participation in the guaranteeing of the loans of the temporary European Financial Stability Facility and the agreement between Greece and Finland are two legally distinct matters. According to Finland, other countries cannot interfere in a legal agreement between two independent countries.
Finance Minister Urpilainen says that she has kept close contact with her European colleagues in the matter. However, she adds that Finland has not sought advance approval for the agreement.
“There is no information on how the other countries will act”, Urpilainen said on Wednesday during preparations for the next national budget. Austria has said that it cannot accept the special conditions negotiated between Finland and Greece, and that it wants the same kinds of considerations if the deal is accepted by the eurozone countries
FT alphaville this morning raised the question whether these changes in collateral positions were in fact something that should be a CDS credit event and that is certainly a story worth following
But the bigger one for me is this…
Does that sound to you like a unified Europe about to embark on a ambitious journey towards fiscal unification?
No, me neither, and once again it must be remembered that this is a squabble over payments to fix a symptom of the real problem. Nothing is being done about the actual problem.
So even after another night of equity market collapse, rises across all European CDS markets and the banking sector continuing and ever growing dependency on the lender of last resort, the Euro-elite still can’t come to a single unified decision on a single loan that has already been pre-arranged. As far as I can determine they have managed to muster the leadership skills of a group of 3 year olds squabbling over the last cookie in the jar.
So as far as I am concerned that is the nail in the coffin for Europe. There is no leadership, and therefore there is no real solution.
Oh ,and I would just like to point out the Sydney Morning Herald’s brilliant coverage of the European crisis. Just 1 hour ago they put up this story as “breaking news”. It was an event I covered yesterday morning and actually occurred nearly 36 hours ago.