Well that was exciting…
European equities went a little mad overnight. As far as I can tell this is all due to the latest arrangements I discussed yesterday. Given the euphoria, I can only assume that the equity markets have linked this new plan with the idea that Germany is capitulating on the role of the ECB and the use of supra-European debt instruments:
Germany spurned investor calls to maximise financial firepower to calm markets, saying its fast- track proposals for European Union treaty change are key to solving the euro-area debt crisis.
Chancellor Angela Merkel will deliver a speech on the crisis to the lower house of parliament in Berlin on Dec. 2, previewing a Dec. 9 summit of European leaders that is due to discuss proposals for treaty change, Merkel’s chief spokesman, Steffen Seibert, told reporters today.
Germany is working with “an ambitious timeline because we believe that Europe can’t wait for this forever, but that it should also be possible to put such limited change into effect in what for some is a surprisingly short time,” Seibert said in Berlin.
As the largest contributor to euro-area bailouts, Germany is stepping up its demands for treaty change to lock in tighter budget controls for the 17 euro member states as the chief means of tackling the debt crisis and restoring market confidence. Michael Meister, parliamentary finance spokesman for Merkel’s party, has said that fiscal integration is a precondition for any German rethink of its opposition to “joint liability.”
Although the equities markets surged ahead, other markets were far less enthusiastic. The Italian 10yr bond is still above 7% and there is little sign that liquidity is easing. In fact, the TED spread ticked up again over night. Perhaps those markets were reading some other news:
Speaking at a regular government news conference, Chancellor Angela Merkel’s spokesman said, “Germany has solidarity with its European partners and has already deployed enormous resources. But we also have debt to deal with.
“We are on a good path to doing this… but we too do not have unlimited financial resources,” added the spokesman, Steffen Seibert.
….
“We in Europe can’t pretend we have financial means that we don’t really have… we are strong in Europe. Germany is strong, but we are not strong to an unlimited degree. That is true also for the federal republic,” he added.
There was “no other solution than the one the federal government is arguing for,” said the spokesman.
He insisted the countries of the eurozone must concentrate on reducing their debt piles, cutting spending in their budgets and boosting the competitiveness of their economies.
He also reiterated Berlin’s denial of an earlier press report that Germany was open to pooling the sovereign debt of the six countries with a top AAA credit rating.
And from the German Finance Minister:
Treaty change is necessary to give veto power over member- state budgets to the EU Commission, Schaeuble said in the interview broadcast late yesterday. “We can do that quickly and this will send an important signal to markets that the euro is and remains a stable currency,” he said.
So, as far as I can tell nothing has changed.
Germany and France look to be trying to start a new coalition of Eurozone members that would commit to some form of treaty on greater fiscal discipline outside of the existing framework of treaties. It is far too early to determine exactly what this could look like, although I did mention previously that it could lead to a smaller Eurozone. Either way, this supposedly would give the markets more “confidence”, but I can only assume this is code for “Germans would let the ECB off its leash a bit more”. The ECB has already purchased €200bn of sovereign bonds which hasn’t been enough to halt contagion and I am not too sure exactly how long the markets think the German leash will be. At this point, however, this appears to be an idea for a plan for a plan.
Moreover, as I said yesterday, none of this does anything to address the banking crisis, which will only be made worse by a new round of forced austerity. I will therefore be waiting for some more details in the coming weeks to determine exactly what the plan is to attempt to keep the banking sector alive while deflationary policy is applied to economies of Europe.
Italy is looking to raise €8bn from bonds sales tonight in 3yr and 10yr issuances, with Spain and France running on Thursday. If these auctions go poorly I suspect we will see equities retrace, and I am wondering exactly what form the rumours will take in an attempt to front-run tonight’s auction given that the one about the IMF fell apart with one day (not that it didn’t deliver first!).
In other news Moody’s has warned about everything European, Greece aims to sell more stuff , the IMF have denied anyone new has asked them for help and finally, the OECD claims Europe is the biggest threat to the global economy.