Europe’s descent into crisis mode accelerates, with one meeting after another as things get worse.
But Angela Merkel says there’s no German cash coming for a new bailout fund, or if it happens, it’ll be over her dead body.
We’ve got another eurozone collapse scenario, more details on the Cyprus bailout, more Spanish downgrades and a Spanish austerity vow, signs of a worsening Italian crisis, Danish money worries, a crackdown on Britain’s poor as the country’s economy weakens, Germany floating more debt, and a last stab at a transaction tax.
Europe’s plight grows grimmer
And by grim, we mean really grim.
Consider the lead from a roundup by Spiegel’s Konstantin von Hammerstein, Ralf Neukirch and Christoph Schult:
Everyone knows what is at stake. “If the euro fails, Europe will fail,” German Chancellor Angela Merkel said in a May 2010 speech in the western German city of Aachen. Since then, the Europeans have held summit after summit and pledged bigger and bigger sums of money in a bid to get the situation under control. But it’s only become worse.
Hardly anyone today would be willing to bet that Greece can remain a member of the euro zone for much longer. Spain, the fourth-largest economy in the euro zone, is on the verge of financial collapse, and it’s only a matter of time before it too is forced to ask for a bailout, as Greece, Ireland, Portugal and now Cyprus have already done. On Monday, the Spanish government officially asked for EU help for its struggling banks.
This means that almost a third of the euro zone’s 17 members can no longer finance themselves by borrowing money on the markets. The situation is so dramatic that Italian Prime Minister Monti is already predicting that the fate of the euro will be decided within 10 days.
Merkel: Bonds only over my dead body
The prime beneficiary of the European economy has been Germany, and with the crisis at its peak, folks from other European countries are throwing money at German bonds, even though they pay no interest.
So Germany’s able to borrow money for free — while a growing number of other EU eurozone countries can’t borrow at all.
But the Iron Chancellor says Germany simply won’t help the other countries to assist those notions which did so much for her own nation.
From Szu Ping Chan of the London Telegraph:
Angela Merkel has firmly rejected the use of eurobonds ahead of a crucial summit in Brussels this week, ruling out jointly guaranteed eurozone debt for “as long as I live”.
The German Chancellor’s comments were met with applause as she briefed MPs from the Free Democrats party, her junior coalition partner, at an assembly meeting on Tuesday.
One official told AP that the crowd “reacted with applause to hearing that the Chancellor does not want a joint debt liability,” while one participant reportedly shouted: “We wish you a long life!”
Several eurozone leaders, including French President Francois Hollande and Italian Prime Minister Mario Monti have called for the 17-nation bloc to draw-up plans to issue jointly-guaranteed debt in order to reduce borrowing costs for struggling eurozone nations.
So Merkel, who said that the death of the euro mean the death of Europe, says she’ll do nothing to save Europe if it costs money.
Glad we got that straight.
And just how bad would that eurozone collapse be?
Here’s a scenario from a very big Dutch bank, reported by Spiegel:
Economists with the Dutch bank ING have calculated that in the first two years following a collapse, the countries in the euro zone would lose 12 percent of their economic output. This corresponds to the loss of more than €1 trillion. It would make the recession that followed the bankruptcy of investment bank Lehmann Brothers seem like a minor industrial accident by comparison. Even after five years, say the ING experts, economic output in the euro zone would still be significantly lower than normal.
The consequences would also be catastrophic in Germany, as the German Finance Ministry concluded in a study commissioned by Finance Minister Wolfgang Schäuble, a member of the center-right Christian Democratic Union (CDU). The recovery and economic miracle would abruptly come to an end, and instead banks and companies would start collapsing like dominoes, after having to write off receivables and investments.
The German Finance Ministry’s prognosis is even grimmer than that of the ING experts. According to their scenarios, in the first year following a euro collapse, the German economy would shrink by up to 10 percent and the ranks of the unemployed would swell to more than 5 million people. The officials were so horrified by their conclusions that they kept all of their analyses under lock and key, for fear that the costs of rescuing the euro could spin out of control. “Compared to such scenarios, a rescue, no matter how expensive it is, seems to be the lesser evil,” says one Finance Ministry official.
According to a scenario by the major Swiss bank UBS, if the financial risks resulting from the decline in exports, the necessary bank bailouts and the company bankruptcies are added together, the total cost to the German economy could amount to a quarter of Germany’s gross domestic product — well over €500 billion.
And this doesn’t even reflect the biggest financial risk, which remains hidden. In the last two years, the ECB has bought up more than €200 billion in sovereign debt from crisis-ridden countries. It would have to write off some of that debt in the event of a euro crash, which would also spell losses for the ECB’s largest shareholder, Germany’s Bundesbank central bank.
Merkel’s all-power-to-Brussels scheme takes shape
While the German chancellor has some differences with the French president about cash layouts, they’re of one mind when it comes to transferring sovereign state power over national budgets to eurocrats of Brussels.
European leaders will discuss specific steps towards a cross-border banking union, closer fiscal integration and the possibility of a debt redemption fund at a summit on 28-29 June, according to a document prepared for the meeting.
Two officials familiar with the 10-15 page document, drawn up over the past month and which is still being revised ahead of the summit, said it sets out in detail the four “pillars” required for a strong economic and monetary union which leaders believe is necessary to secure the currency project’s future.
As well as progress towards a banking union, the paper discusses the need for a more integrated budget policy, steps required for deeper economic integration, and how to retain “democratic legitimacy” if countries give up some sovereignty.
The document has been drafted by European Commission President José Manuel Barroso, European Council President Herman Van Rompuy, European Central Bank chief Mario Draghi, and Jean-Claude Juncker, head of the Eurogroup countries using the euro.
The plan for closer banking and fiscal integration will come on top of a €130 billion short-term stimulus package to revive growth, agreed by the leaders of Germany, France, Spain and Italy on Friday.
The ECB had a pre-meeting announcement, sounding the now-familiar theme.
With the European Union facing its biggest crisis in 60 years, Brussels proposed Tuesday taking “a big leap forward” to save the troubled bloc by setting up a single banking union.
The suggestions to be put to a summit on Thursday and Friday were made public after being delivered to the bloc’s 27 capitals by EU president Herman Van Rompuy, European Commission president Jose Manuel Barroso, European Central Bank chief Mario Draghi and Eurogroup head Jean-Claude Juncker.
A report from the four titled “Towards a genuine economic and monetary union” suggests EU leaders agree that a pan-European banking authority be put in place and give Brussels the final say over national budgets in the eurozone.
“We need a banking union, a fiscal union and further steps towards political union,” Barroso told a conference.
“The first of these building blocks that can be achieved quickly without treaty change is an integrated financial framework, a banking union,” he said
And there’s a pre-meeting meeting too, involving the only ones who matter.
The eurozone crisis fire-fighting continued on Tuesday as the finance ministers of the region’s four biggest economies – Germany, France, Italy and Spain – were due to hold unscheduled talks.
The finance chiefs, meeting in Paris, were to discuss coping with the crisis in the short term, and closer long-term fiscal and banking integration.
The talks come as Cyprus – with large exposure to Greece’s problems – joined Greece, Ireland, Portugal, and Spain – in asking for emergency funding from its eurozone partners.
The financial markets are nervous, but the new French Finance Minister Pierre Moscovici was upbeat, despite the deepening crisis: “Francois Hollande’s election really changed things in Europe. A 120 to 130 billion euro growth package has been adopted, with our propositions. These are the right steps. There’s also a bank package with mechanisms for bank recapitalisation to address the banking system’s difficulties. And there is integration – which in the long term – will lead to the euro obligations that we’ve talked about.”
Ahead of a full EU summit on Thursday, the meeting is supposed to nail down agreement, particularly between its two biggest members, Germany, which wants financial discipline, and France, which wants the emphasis on measures for growth.
But skeptics says the pact won’t work
Zhang Danhong of Deutsche Welle has a summary of critical views of the proposed fiscal union pact, and there are plenty of informed folk who think the plan is basically unworkable or irrelevant.
“The fiscal pact’s credibility on the markets is next to zero,” Deka-Bank Chief Economist Ulrich Kater said at a meeting of the Center for European Economic Research (ZEW) in Mannheim, Germany. He argues that the perception on the markets as to what the new European fiscal cooperation can achieve is different from what policymakers think it is.
The pact imposes fiscal regulations which are tougher than those included in the Maastricht treaty, the founding accord of the single currency union. Under the new fiscal pact, which comes into effect in 2013, signatories will only be allowed to increase their borrowing by 0.5 percent of the Gross Domestic Product a year, compared with a maximum of 3.0 percent at present.
So has the German policy of budget consolidation become an export hit? Far from it, says Clemens Fuest of Oxford University, who advises the German Finance Minister, Wolfgang Schäuble.
“The advantage of the fiscal pact was extremely short-lived: it just meant that people could talk about something other than eurobonds,” Fuest argued.
Cyprus bailout in the works
Meanwhile, the Cypriot bailout is all but decided, and two legs of the nototious troika are packing up for a visit to the island and a sit-down with the island’s government.
From Athens News:
European Commission and European Central Bank officials will head to Cyprus early next week to start work on the island’s bailout programme, a eurozone official said on Tuesday.
Cyprus is the fifth eurozone country to turn to Brussels for emergency funding. It may need a bailout of up to 10 billion euros, over half the size of its economy, officials said on Tuesday.
“The exact number has not been decided yet. It was to be 6 billion for the state financing and 2 billion for the banks, but that is optimistic – it is more likely to be seven and three – up to 10 billion euros in total,” one eurozone official said.
A second official confirmed the amount was likely to be up to 10 billion euros, a massive bill for the third smallest economy in the eurozone after Malta and Estonia.
Moody’s does mass Spanish bank downgrade
Somebody’s got to start running a downgrade scorecard, because they’re coming so fast and furious these days it’s getting hard to the track.
That latest comes from Moody’s, and the target is [surprise] Spain, adding yet more impetus for the full-scale Spailout.
From Deutsche Welle:
Moody’s has cut its credit ratings for 28 Spanish banks. The move came just hours after Madrid formally asked the European Union for a rescue loan of up to 100 billion euros for its troubled banking sector.
Moody’s Investor Service said on Monday that the weakening financial condition of Spain’s government had contributed to the downgrade of 28 of 33 Spanish banks by one to four notches.
The ratings agency said the banks face rising losses from Spain’s busted real estate bubble. It also cited a cut to Spain’s sovereign rating to just above junk status earlier this month.
In a statement it said Madrid’s lower creditworthiness “not only affects the government’s ability to support the banks, but also weighs on banks’ stand-alone credit profiles.”
The leading bank, Banco Santander, fell two notches from A3 to Baa2, classed as a “medium grade.” Meanwhile the second bank, Banco Bilbao Vizcaya Agentaria, dropped three levels from A3 to Baa3.
More from Bloomberg’s Esteban Duarte:
Spain is poised for a downgrade to junk by Moody’s Investors Service, according to investors who sent the cost of default insurance for the nation’s biggest banks and companies close to record highs.
Credit-default swaps on Banco Santander SA (SAN), the country’s biggest bank, jumped 23 percent this quarter to 454 basis points, compared with an all-time high of 474 in November. Banco Bilbao Vizcaya Argentaria SA (BBVA) rose 26 percent to 477, approaching May’s record 516, while phone company Telefonica SA (TEF) surged 70 percent to a record 540 basis points.
Moody’s downgraded 28 Spanish banks yesterday including a two-step cut for Banco Santander and a three-level reduction for BBVA, a week after it lowered Spain’s rating to Baa3, on the cusp of junk. The country remains on review for another cut by New York-based Moody’s after it sought a 100 billion-euro ($125 billion) international bailout for its banks and on speculation losses from its real estate industry will worsen.
“There’s more to come if Moody’s downgrades the sovereign as we expect in the next few weeks,” said Suki Mann, a credit analyst at Societe Generale SA in London. “A one-notch move to Ba1 will likely see all the country’s banking system in junk territory, with the possible exception of Santander.”
Spain’s prime minister sings the requisite response
It’s the Merkel chorus, full of discipline and promises of austerian order, with the people of Spain paying the price for the recklessness of banksters and sundry investors in search of quick euros.
The Spanish Prime Minister, Mariano Rajoy, has said that measures to be introduced by his government will be “tough” and will arrive “soon”, after holding talks yesterday with business figures. The Spanish government, Rajoy said, “will correct what needs to be corrected and reform what needs to be reformed” in a bid to ensure “a future in the euro” and to tackle the country’s banking and sovereign debt crisis.
The Spanish media has today that the Prime Minister’s comments show a readiness to implement measures requested by the troika in exchange for the aid granted to the banking sector. These could include a new wave of privatisations, cuts in public sector wages and a rise in VAT on certain products.
Once again, that most regressive of taxes, is trotted out, the value-added tax — or what folks on this side of the pond call a sales tax.
Sales taxes hit hardest at those in the lowest income brackets, who have to spend a larger percentage of their incomes on life’s necessities.
But there’s more to Rajoy’s austerity
Especially when combined with all that sovereignty-stripping at the core of Merkel’s agenda.
From Luis Miranda of The Real Agenda:
Now that Spain is in the bag, European leaders like Herman Van Rompuy, Jose Manuel Barroso, Jean-Claude Juncker and Mario Draghi are proposing to establish a system where there is complete centralized control over the financial sector in each of the countries which will include the economic and budgetary matters. In Spain, economists and TV commentators are already analysing the implications of such a decision, since Spain has no longer anything to say about what is done with its finances. The Prime Minister Mariano Rajoy has said on national television that new and more difficult measures are still to come. Those measures include a 10 percent increase in the sales taxes, which will reach 18 percent. This increase is surely to affect the prices and food and other basic needs.
After the increase in the sales tax or IVA, Spain will have to ‘reform’ its pension system, which will mean that Brussels will also take control over the retirement of millions of Spanish people. Those who have contributed into the retirement system, will have to retire later and take a significant haircut to their benefits once they decide to stop working. That is if they receive any retirement benefits at all. Additionally, the government will also propose a cut in the salaries it pays to workers in the public sector and a considerable reduction in the number of people it will employ once Brussels recommendations are effective.
Although the details of Spain’s bailout are not fully disclosed to the public or the media, leaks provided to some economists in that country detail that the country will have to take care of the bankers’ debt for at least the next quarter of a century while paying an interest rate of between 3 and 5 percent. Spain’s incapacity to meet its obligations was the caused cited by Moody’s for its most recent downgrade, Meanwhile, and as a consequence of such downgrade, Spain will have to continue paying higher interest rates at bond auctions. This situation would get even worse of Spain needed another financial bailout in the near future.
Italian recession strikes deeper
It’s a virtual certainty that Italy will be the next country to undergo a further round of austerian discipline.
With the country already under the thumb of a troika-imposed unelected prime minister and unemployment soaring, what more bad news could there be?
Istat gave another indication of how hard the recession is hitting the Italian economy on Tuesday when it said retail sales were down 6.8% in April compared to the same month in 2011, the biggest year-on-year fall since January 2001. The national statistics agency added that retail sales were 1.6% down in April compared to March this year.
Food sales slumped in April, with a 6.1% drop on the same month in 2011, the biggest fall in 11 years. The national statistics agency said small shops suffered particularly badly, with retail sales as a whole declining sharply, posting a 8.6% year-on-year fall, compared to 6.8% for the whole retail sector.
The big retail networks were hit with a 4.3% drop and even discount food supermarkets, which up to now had fared well during the recession, saw sales diminish by 3%.
More warning signs for Italy: Bond rates soar
Even worse, the bonds were inflation-indexed, meaning that the Italian public could be on the hook for a lot more if that inflation rate keeps ticking upwards.
From Agence France-Presse:
Italy had to pay investors higher rates of return at a bond auction on Tuesday, reflecting increasing unease over risk of contagion and scepticism over whether an upcoming EU summit can stem the debt crisis.
The government sold a total of 3.9 billion euros ($4.86 billion) worth of bonds, including 2.99 billion euros in zero coupon notes due to mature in 2014 at a yield of 4.712 percent compared with 4.037 percent on May 28.
It sold 626 million euros in Treasury inflation-indexed bonds set to expire in 2016 at a rate of 5.20 percent compared with 4.39 percent on May 28.
The Treasury also borrowed 290 million euros in inflation-indexed bonds due in 2026 at a rate of 5.29 percent, the Bank of Italy said.
Italy has come back into the debt crisis line of fire, despite Prime Minister Mario Monti’s efforts to calm markets — including a promise to get a labour reform adopted this week ahead of a Brussels summit on June 28 and 29.
The higher yields reflect a lack of confidence among investors that the crucial meeting between EU leaders will produce concrete measures to put out the debt-crisis flames which are threatening to engulf weaker countries.
Another Italian red flag: A bank bailout
And there’s no older bank on earth than the one just bailed out by Prime Minister Mario “Three-card” Monti’s government.
From Agence France Presse:
The Italian government said Tuesday it will provide struggling Banca Monte dei Paschi di Siena, the world’s oldest bank, with up to €2bn to cover a capital shortfall.
The government has adopted “urgent measures to raise BMPS’s capital funds”, it said in a statement, as Italy struggles to stave off debt crisis contagion.
The aid was necessary because the bank had admitted it was “impossible” to find private investors to boost its funds owing to “currently highly volatile market conditions” as the eurozone crisis intensifies, the government said.
The financial lifeline will allow the Tuscan bank, founded in 1472, to bring its core tier one capital ratio to 9pc of total assets, thereby conforming to the rules of the European Banking Authority (EBA).
On top of the aid, Rome will substitute a loan it gave the bank in 2009 with a new loan, bringing the total amount of aid channelled into BMPS to a maximum of €3.9bn (£3.1bn).
BMPS will issue new bonds reserved for the state up to that amount, which will be similar to “Tremonti Bonds”, the government said.
Even the Danes are getting worried
As evidenced by the fact that they’re salting away ever more of their money in banks in accounts that pay almost no interest.
Call if saving for a rainy day after the storm warnings have already been issued.
From Politiken.dk in Copenhagen:
At a time when interest rates on deposits are close to zero, Danes are nonetheless putting their money in the bank, according to the latest figures from the central bank.
Private depositors currently have some DKK 814 billion in banks, equalling half of Denmark’s GDP.
In May alone, some DKK 4.2 billion was banked, no doubt early retirement contributions freed up by the government’s early retirement reform.
“It’s certainly not the interest rate that makes people put their money in the bank as the sort of account they are putting it in will normally have an interest rate close to zero. A lot of people are probably thinking about what to do with the money,” says Danske Bank’s Las Olsen, adding most of the funds will end up as savings rather than consumption.
Tory cracks down on the British poor
From The Independent’s Oliver Wright in a story headlined “End of ‘compassionate Conservatism’ as David Cameron details plans for crackdown on welfare”:
David Cameron today signalled the end of “compassionate Conservatism” with plans for a crackdown on welfare spending for the young, the jobless and those with large families.
In a speech in Kent, which appeared designed to appeal to the Tory right, Mr Cameron demanded an end to what he called Britain’s “culture of entitlement”.
- Removing or restricting some benefits from out-of-work families with large numbers of children. This could include cuts to child benefit;
- Scrapping housing-benefit payments to 380,000 under-25s, worth an average of £90 a week, forcing them to support themselves or live with their parents and saving the Government £2 billion a year;
- Making the long-term unemployed carry out full-time community work or lose all their benefits.
And the motive for Cameron’s decompassioning?
That would be a major falloff in tax revenues as the crisis hits harder at the Sceptered Isle.
From the London Telegraph:
The outlook for the UK economy has worsened over the past few weeks due to turmoil in the eurozone, Bank of England governor Mervyn King has said.
The news came as the country’s public sector net borrowing rose much more than expected in May on a 7.3pc fall in income tax receipts.
“We are in the middle of a deep crisis, with enormous challenges to put our own banking system right and challenges for the rest of the world that they are struggling with,” Mr King told parliament’s Treasury Committee.
“In the last six weeks… I am very struck by how much has changed since we produced our May Inflation Report.
“I am pessimistic [about the eurozone outlook]. I am particularly concerned because over two years now we have seen the situation in the euro area get worse and the problem being pushed down the road,” he said.
Germany required to sell more debt
But relax. With those zero-interest bonds, it won’t cost them anything.
From Deutsche Welle:
Germany will have to borrow billions of euros more than originally envisaged for the third quarter of the year in order to meet new bailout fund requirements. Still it can do so at historically low interest rates.
Europe’s biggest economy will have to take on more debt than originally planned, Germany’s Federal Finance Agency admitted on Tuesday.
It said it would issue a total of 71 billion euros ($89 billion) in fresh borrowing from July to September, three billion euros more than first envisaged. The agency argued the move had become necessary to meet the financial requirements of the planned European Stability Mechanism (ESM), a permanent rescue fund for ailing economies on the continent.
“Due to the increase of the net borrowing requirement decided with the supplementary federal budget, Berlin will adjust its issuance program in the third quarter of 2012,” the Federal Finance Agency said in a statement.
Cash heads home as crisis deepens
Unless it’s cash that’s headed of to park in tose zero-interest German bonds.
The European banking shock and its aftermath have sent finance and investment running for home, a process that could hurt world growth, globalization and developing economies for years to come.
“There has been massive deleveraging with some home bias, not just in our region but in general. We see a clear and present danger,” said Piroska Nagy, director for country strategy at the European Bank for Reconstruction and Development, which monitors private sector financing across the former communist countries of central and eastern Europe.
Global lending by banks fell by a whopping $799 billion in the fourth quarter of last year, or 2.5 percent, the biggest fall since the drop seen after the collapse of U.S. investment bank Lehman Brothers three years ago, Bank for International Settlements data showed earlier this month.
The drop was led by deleveraging euro zone banks, who cut loans by $584 billion, or 4.7 percent and the lion’s share of the pullback was from French, German and Spanish banks who all cut lending by about 5 percent.
The process intensified within the euro zone itself in the first quarter of this year and European Central Bank data shows euro zone banks’ cross-border holdings of the bloc’s government and corporate bonds fell to their lowest in a decade.
A transaction tax — or not
While we don’t like the VAT, there’s nothing wrong with the TT — a transaction tax on equities trades.
High-speed trading has enabled brokers to capitalize on computerized trades conducted in microseconds to reap profits on minuscule price changes, thanks to software designed by the finest mathematical brains our finest uni versities can churn out — and precipitating the occasional flash crash.
Britain, which has also kept its own currency, also dismisses the idea of a transaction tax, which would trim a small sum from the vast profits of the traders of The City.
Nonetheless, proponents of the tax are pushing for its adoption across the continent.
From Agence France-Presse:
The European Commission said on Tuesday it was ready to move quickly to implement a financial transactions tax if a sufficient number of member states decide to push forward with the idea.
“I believe that if there is the political willingness and a strong cooperation … we can do it very quickly,” said Algirdas Semeta, the EU commissioner responsible for taxation issues.
“If member states act very fast, we can work with them,” he said at a news conference in Paris.
Certain EU states might decide to move forward with the financial transaction tax at a two-day EU summit opening on Thursday where they will consider measures to deepen integration to resolve the eurozone debt crisis.
At least nine countries would need to express support for a group of EU nations to move forward under “enhanced cooperation” rules.