Another crazy 24 hours for Europe. It would seem that Angela Merkel is trying to muster some form of actual leadership and set a direction for Greece. Her first step was to tell her counterparts in German parliament to stop talking to the media because every time they do the market blows up. Her second was to inform everyone else that Greece was doing its job and that Germany would support them on that path because Europe couldn’t afford anything else.
German Chancellor Angela Merkel sought Tuesday to calm market fears that Greece is heading for a chaotic default as Europe struggles to contain a crippling financial crisis.
Merkel rejected the notion that a Greek bankruptcy – a possibility raised a day earlier by her deputy that spooked markets – would provide a quick solution to the eurozone debt crisis.
She argued that Europe instead needs to stick to its efforts to cut budget deficits and improve its competitiveness, and that resolving the crisis would be “a very long, step-by-step process.”
Her comments came ahead of a teleconference Wednesday with French President Nicolas Sarkozy and Greek Prime Minister George Papandreou.
Fears of an imminent Greek default pushed interest rates on the country’s 10-year government bonds up Tuesday to a new record of over 24 percent, although Merkel sounded optimistic regarding Greece’s chances of getting the next batch of bailout cash from the so-called troika – the European Commission, the European Central Bank and the International Monetary Fund.
Representatives from the three organizations are due back in Athens soon.
“Everything that I hear from Greece is that the Greek government has hopefully understood the signs of the time and is now doing the things that are on the daily agenda,” Merkel told rbb-Inforadio. “The fact that the troika is returning means that Greece has started doing some things that need to be done.”
Merkel also sought to defuse comments by Vice Chancellor Philipp Roesler that there should be “no bans on thinking” in the euro crisis. By raising the specter of an “orderly insolvency” at some unspecified point, Roesler’s comments Monday reinforced concerns that Greece will default.
The tone of that message is encouraging, it suggests that Merkel will stand by Greece as long it continues to enact the austerity budget and, if it does, the next tranche will be paid. Obviously I have a problem with the logic, but it is a more positive message than the one we have heard recently. The same cannot be said for the Finance Minister who continues to make it abundantly clear that he is trapped in an ideology that means that Greece and other periphery nations must continually punish themselves in order to meet an unreachable goal:
German Finance Minister Wolfgang Schaeuble Thursday reinforced a warning that Greece would be denied the next instalment on its 2010 financial aid package unless it complies with its reform agreements to the letter.
“There is no way around this,” Schaeuble said in German parliament. “This must be adhered to and will be, in keeping with the payment of every tranche.”
Schaeuble emphasized the link between approval of the EFSF expansion and the stability of the euro, but that such aid would only “buy time” to allow indebted countries to make more structural reforms in their monetary policy.
Last Friday, bailout fund talks between Greece and its international creditors, the EU, the IMF and the European Central Bank, were suspended after a dispute over reconciling austerity measures with economic growth.
Schaeuble said the resumption of the talks was necessary for further Greek aid.
“As long as [the troika] cannot confirm that Greece has met its requirements, the next tranche for Greece cannot be paid,” he said. “The situation in Greece is serious, given the interruption of the troika talks and there can be no illusions about that.”
The finance minister said Germany was willing to provide funds that would help Greece, but that countries embroiled in debt “must also learn to help themselves.”
“We can help member states to buy time to solve their problems, but the root of the problems must be solved by member states themselves” he said.
The US market also lost ground when it was reported later that he had said that Greece should not get any additional aid beyond what has already been agreed upon. So much for keeping quiet.
Also in the markets, Greek bonds shot ever higher with the 1yr hitting 136.5 overnight.
Turning to Italy and the rumour mill is in full swing. Yesterday it was China who was coming to save Europe, the latest is Russia and Brazil. Whoever it is they didn’t bother to turn up for the latest auction:
Italian borrowing costs jumped at a 6.5 billion-euro ($8.8 billion) bond auction as contagion from Europe’s debt crisis leaves investors shunning the region’s most-indebted nations.
The Rome-based Treasury sold 3.9 billion euros of a new benchmark five-year bond to yield 5.6 percent, up from 4.93 percent when similar-maturity securities were sold on July 14. Demand was 1.28 times the amount offered, down from 1.93 times at the last sale. The Treasury, which fell short of its maximum target of 7 billion euros, also sold 2.6 billion euros of bonds maturing in 2018 and 2020.
The European banks also had a bit of a rally after the CEO of SocGen gave an interview claiming the bank has sufficient capital and liquidity, and that its balance sheet is solid. Whether that is true or not will surely be tested in the months to come, but it did completely fly in the face of a report from the Wall street journal which quoted someone from BNP Paribas saying the exact opposite.
‘We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore,” a bank executive for BNP Paribas, who declines to be named, told me last week. “Since we don’t have access to dollars anymore, we’re creating a market in euros. This is a first. . . . We hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore.”
As I said, it was a bit of a crazy 24 hours.
The Greek Prime Minister George Papandreou is reportedly scheduled to hold a meeting today with Angela Merkel and French President Nicolas Sarkozy. Given Ms Merkel’s renewed vigour I am hopeful that we will see something a little more constructive than the last meeting between heads of state.