Germany versus Greece

The second night of three for Italian bond issuance this week and once again the results weren’t great. Italy issued €7.4bn worth of longer term bonds with 3yrs at 5.3%, up from 3.9% in May, 7yrs at 6.1% up from 5.21 in April and 8yrs at 6.13% up from 5.33%.

Spanish yields also continue to climb with 10 year bonds hitting 6.998% overnight before falling back a little. They now sit at 6.916% but are  still up 0.162 in the session.

Once again, as we tend to see at time of heightened market stress, the European day was filled with conflicting news stories full of claims and counter-claims.

Francois Hollande met with Mario Monti in Rome to discuss, amongst other things, the economic crisis. Both leaders repeated their calls for more growth focussed policy and joint funding mechanisms for Europe:

French President Francois Hollande called on Thursday for the euro zone to adopt bold new mechanisms to insulate member states and their banks from market turmoil, such as a joint fund to pay down debt, putting him on a collision course with Berlin.

After a meeting with Italian Prime Minister Mario Monti in Rome, Hollande said he would urge EU leaders at an end-June summit to adopt a series of measures to strengthen economic growth and financial stability in the euro zone and deepen economic integration.

Hollande said he had submitted details of his proposals to European Council President Herman Van Rompuy.

“We need imagination and creativity to find new financial instruments,” Hollande told a joint news conference with Monti.

“To deepen financial union, there are many options such as a financial transactions tax and joint debt issuance, including euro bonds, euro bills or a debt redemption fund,” he said.

But Angela Merkel, addressing the German parliament, was once again steadfast in her rebuke of any such talk:

Merkel, addressing parliament in Berlin, rejected “miracle solutions” such as issuing joint euro bonds or creating a Europe-wide deposit guarantee scheme, backed by other leaders such as new French President Francois Hollande and Italian Prime Minister Mario Monti.

Such proposals were “counterproductive” and would violate the German constitution, she said.

Instead, she called for gradual steps towards the “Herculean task” of building a European political union.

“It is our task today to make up for what was not done (when the euro was created in 1999) and to end the vicious circle of ever new debt, of not sticking to the rules,” Merkel said.

She warned against overstraining the resources of Europe’s biggest economy, saying: “Germany is putting this strength and this power to use for the wellbeing of people, not just in Germany but also to help European unity and the global economy. But we also know, Germany’s strength is not infinite.”

As I’ve noted previously very few countries actually stuck to the “rules”, and there is a fair bit of hypocrisy in any comments from the Germans about violations. That point aside, as I stated earlier in the week, these arguments echo back to the basic chicken and egg problems we have seen throughout the European economic crisis.

Economically weaker nations want joint tools for fighting the immediate crisis but are unwilling to takes step to relinquish political power to what they see as a German-centric Europe; Germany agrees in principle to shared responsibility but requires political movement first. Given Germany is still receiving considerable economic benefit from the eurozone arrangement it has time on its hands. As long as the crisis does not lead to a true existential breakout  in which its financial obligations ( EFSF, TARGET2 etc ) suddenly become realisable debt then Germany can let the crisis continue placing pressure on other European nations to agree, or get to a point where they have no choice but to agree, to the German path.

Of course, it is the weekend of the latest Greek election and the euro may face the beginnings of an existential issue in the coming weeks. This is personally not my base case, all Greek parties want to stay with the euro even if they don’t truly understand what that implies, they just have varying degrees of issue with the unsustainable austerity programs. There is already some news leaking out that Europe maybe considering some adjustments to the Greek program and, in my opinion, if push came to shove I believe we would probably see some concessions from Europe. It must be remembered that the euro is a political exercise first and a monetary experiment second.

Having said that, you never know what it going to happen when it comes to elections so we really have to wait until after the count ( hopefully we will know by Monday’s Australian market open). In the meantime it maybe prudent to get yourself acquainted with the economic programs proposed by Greece’s SYRIZA party. If the latest unofficial polls are correct then they maybe leading Greece as of Monday morning and you’re probably going to hear a whole lot more about them.

SYRIZA Economic Programme

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  1. I think “you never know” is the key for Greece.

    I found the ERF in a paper from Goldman Sachs, and on pg 9 they show the outcome initially, but what a lot of messing about rather than having a banking and fiscal union and do this debt re-structure in the normal CB way.

  2. Some great remarks about the European political situation there. It’s a stand-off and whoever blinks first loses.

    I think “beggars can’t be choosers” is probably fitting to what is going on. I agree with Germany’s stance that access to easy credit to battle the “immediate crisis” will only lead to less pressure to reform and many member states reverting to their unsustainable expenditure… until the next crisis comes along.

    • If beggars can’t be choosers, then throw the beggars out of the Euro. There isn’t any point in keeping the beggars in an economic straitjacket and beat them up.

      Debt that can’t be repaid, won’t be repaid. What we see now isn’t a bailout of Greece, but a bailout of creditors that lent to Greece.

  3. Surely the Greek election results are going to be more or less the same as the one the other month. No coalition will be able to be formed, and we’ll be in exactly the same place we are now.

    • Ronin8317MEMBER

      The difference is that Greece will run out of money in June, and you cannot make any ‘deals’ with the EU without a government.

    • Nah there’s always consolidation around major parties in the 2nd round, people do realise they need a govt sometime soon.
      There’s a Eurogroup on the 21st and an EU Summit on the 28th, things will happen quickly.

  4. I sometimes wonder if germany is letting the TARGET2 liabilities build up (all the while enjoying the reduced currency adn increased exports) such taht when they do go back to the DM they’ll have an excuse to print in order to debase teh curency from its astronomical highs.

    Obviously well against the BB charter but who knows?

    • Cant say I fully understand Target balances… my understanding so far was that it is a way of measuring accumulated flows between countries. Do they represent actual liabilities that become payable in the event of a currency break up?

      • pretty much its a way of maintaining the amount of money in any given country via printing money at the repsective national bank (technically a loan from the target country) when it is moved to another country.

        SO when you pull your money out of a greek bank and into a german bank then the bundesbank ends up with a TARGET2 liability to the greek central bank.

        This si my gerneal understanding of it. So if the EU breaks up the german central bank will be left with (billions?) trillions in loans which will be defailted on by the other country (ie greece)