Yesterday’s farcical display of media leak brinkmanship provided some pretty good evidence that the latest European crisis had once again become bogged down in the usual nationalistic politics that we have come to expect from Europe.
These games continued overnight with a report from an “unnamed source” via Financial Times Deutschland that Wolfgang Schaeuble told lawmakers in Berlin that the firepower of the European Financial Stability Facility may be increased to a maximum of 1 trillion euros. This report was then denied via Bloomberg a few hours later from a named finance ministry spokesman who stated “German Finance Minister Wolfgang Schaeuble hasn’t specified how much additional firepower the European bailout fund may have”.
This sort of thing isn’t new, I noted the same behavior last month, but the level of desperation certainly seems to have reach fever pitch and it is fairly clear that any deal, if it even existed in the first place, is starting to get the wobbles. The level of hype from the French camp is certainly at an all time high with Sarkozy warning that European unity is at risk if Eurocrats failed to take action to tackle its sovereign debt crisis this weekend. President Sarkozy is reported to have said “an unprecedented financial crisis will lead us to take important, very important decisions in the coming days”. That certainly wasn’t the message from Merkel who, as I warned, was busily talking down this weekend’s outcome.
If I didn’t know any better I would say that the French were attempting to create an environment of confusion, fear an anxiety that unless they have access to a leveraged EFSF then there will be an imminent and disastrous collapse of their banks that will bring down Europe. By doing so they are trying to push Germany into a corner where they must roll-over on their position. This is why we are continually seeing reports in the international media that a “deal” has been done even though these supposed deals contain many elements that have repeatedly been knocked back by Germany.
But let’s be clear, there is no evidence that the Germans are going to humour the French on any of this, if anything they have been ramping up the rhetoric over the past month that private sector write-downs will need to be greater and that any resolution will be a long process. The ECB has also been very clear that this is a far as it is willing to go.
So, as I stated yesterday, that leaves France in a very vulnerable position. From Bloomberg:
French President Nicolas Sarkozy heads into decisive talks on Europe’s debt crisis handicapped by concern that France’s top credit rating is at risk. While Sarkozy’s banks have the most to lose if a potential Greek default triggers contagion, moves to expand rescue efforts or recapitalize banks at government expense add to pressure on French finances. A rating cut may also hinder Sarkozy’s re- election bid in 2012.
“It’s a classic trap of contagion that is now closing in on France,” Philippe Martin, an economics professor at the Institute of Political Studies in Paris, said in an e-mail yesterday. “This is very dangerous. Everyone in the government has insisted that everything they do is with the objective of keeping the triple-A. If they lose it, it’s a disaster.”
The latest warning from Moody’s about the potential for a downgrade is certainly not helping that situation. But I have been warning about France for months and I am personally quite surprised that the country hasn’t been downgraded already. There is nothing in its macro-economic statistics that tells me it is in any better position than many of the periphery nations and the crisis is Europe is simply exposing that fact to the world. If the ECB and/or the Germans are unwilling to budge on their position then the French will have little choice but to immediately enact their own austerity budget and suffer the economic consequences. If that becomes the case then I expect the rating agencies to be very swift in marking down France.
It may well be some brinkmanship of their own in an attempt to wriggle out of nationalisation, but the European banking system looks as if it has already set course for economic deflation across Europe with plans for some austerity of their own:
European banks, assuring investors they can weather the sovereign debt crisis by selling assets and reducing lending, may not be able to raise money fast enough to prevent government-forced recapitalizations.
Banks in France, the U.K., Ireland, Germany and Spain have announced plans to shrink by about 775 billion euros ($1.06 trillion) in the next two years to reduce short-term funding needs and comply with tougher regulatory capital requirements, according to data compiled by Bloomberg. Morgan Stanley predicts that amount could reach 2 trillion euros across Europe as banks curb lending and sell loans and entire businesses.
It seems obvious that banks will struggle to sell assets (physical and financial) with so many banks attempting to off-load them at the same time, but the more concerning thing to note is what happens to an economy when the private banking system restricts lending at a time when the public sector is also attempting to deleverage. Although I am highly sceptical about these “plans”, if true, then the outcome for the real economy will not be a positive one for Europe, and more specifically France.
With the on-going tit-for-tat media leaks over the last two weeks highlighting that there are growing issues around the “plan for the plan” it was really only a matter of time before the news broke that the negotiations were tripped up over some immovable object:
Plans to tackle the euro zone debt crisis have stalled with Paris and Berlin at odds over how to increase the firepower of the region’s bailout fund, French President Nicolas Sarkozy said on Wednesday.
Sarkozy told French parliamentarians the dispute was holding up negotiations. He then flew to Frankfurt to talk with German Chancellor Angela Merkel in an attempt to break the deadlock ahead of a make-or-break European leaders’ summit on Sunday.
A French presidency source said the French and German leaders were meeting other euro zone policy chiefs and International Monetary Fund head Christine Lagarde on the sidelines of an event mark the end of Jean-Claude Trichet’s presidency of the European Central Bank.
But it isn’t just the French who are making a play for the EFSF. The Irish government is also giving it a go:
The [Irish] government is hoping that the French banking crisis could pave the way for Europe’s bailout fund to take over the State’s stakes in AIB and Irish Life & Permanent, potentially cutting the national debt by more than €20bn. But sources in Europe last night gave a cool reaction to the Irish aspirations, saying that the Irish banks’ bailout had been “dealt with” already and seemed unlikely to be re-opened.
Sources in Ireland also stressed that any proposals are at a “very early” stage. It is understood that the Government has not yet talked to the banks themselves or taken detailed advice on the proposals.
The general concept is for the European Financial Stability Facility (EFSF) to take over the Government’s €20bn investment in AIB and its €2.7bn investment in Irish Life & Permanent, so the fund would essentially replace the taxpayer on the institutions’ share register.
The irony that the Irish government is being refused access to a sovereign bailout fund while European banks are about to dip into the same fund is certainly not lost on me. But this story once again highlights the nationally focussed list of demands that all the European financial ministers will take with them to this weekend’s meeting. The “plan for the plan” already looks under pressure with only two parties involved and I find it fairly difficult to believe that the addition of ministers from nations such as Finland and Austria is going to smooth those waters.
But we can live in hope I guess.
In the meantime Spain was once again downgraded by Moody’s and they left the door firmly ajar for another one in the future, there seems to be a political paralysis occurring in Italy around selecting their next head central banker as Mario Draghi moves to the ECB, UniCredit was raided for tax evasion with 245 million euros worth if assets seized, and finally the Greek PM pushed through additional austerity measures as his country marked the beginning of 2 days of strikes with a 70,000 strong protest.