Did You Hear About The Time Germany Broke All The Eurozone Debt Rules And Then Begged For A Rule Change?

Joe Weisenthal 

 Dec. 6, 2011

 4:30 AM 

Just a little perspective from Dan Greenhaus at BTIG, who talks about the stability pact and anti-deficit rules contained within the original Eurozone treaty.:

If you woke up today, you would think that Germany and France were the strongest adherents to this principle. However, we would once again remind clients that thanks to poor economic performance, including several negative quarters for GDP early in the previous decade, both Germany and France found themselves with deficits larger than the 3.0% limit. In fact, by 2003, just a few short years after the beginning of the Euro, France, Germany, Portugal, Greece and Italy had all violated the pact. Naturally, the Germans and the French got their house in order to demonstrate their commitment to the project, no?

In fact, they “bullied” the Ecofin Council into ignoring the transgressions and subsequently adjusted the pact so that deficits could exceed the target “temporarily.” Imagine what would have been.

Along these lines, it's important to bring up a couple of good charts recently showing how all these countries got into so much debt trouble.

The first is this IMF chart (via A Fist Full Of Euros) showing why the public debt expanded for various countries over the last several years.

As it turns out, Germany has been the big fiscal stimulator and bank bail-outer. Italy has done very little, and almost all of its worsening debt can be associated to the rise in interest rates.

And then this chart from Krugman explodes the myth that countries got into deep debt thanks to their aggressive welfare spending.

As you can see, there's basically no connection between the welfare spenders, and who is in debt trouble these days.

Bottom line: Everyone's been a cheater, and looking for some moral explanation of why so and so is in trouble, and why so and so isn't, will not get you very far.

Why This Is Going To Be The Week From Hell In Europe

Joe Weisenthal 

 Dec. 4, 2011

 6:19 PM

Image: Woodleywonderworks at Flickr

If you haven't been paying close attention to the European crisis, now would be a really excellent time to start, as next week is going to be pivotal and exhausting, and potentially hellacious.
What's happening?

Basically it all leads up to a big December 9 (Friday) summit, which might result in some kind of new economic/stability framework for Europe, wherein the players agree to cede some budget sovereignty with the assumption that if they do this, the ECB will provide a funding backstop for Europe.

However, before Friday there are other big days, including Monday, when Merkel and Sarkozy are expected to produce some kind of stability framework to prepare for Friday's summit.

Then on Thursday, the ECB will make its second interest rate decision since Mario Draghi took over. Right now, a cut in rates (reversing Trichet's disastrous hikes) is expected. The big question is whether or not Draghi will signal some future ECB role in ending the crisis in exchange for action on the fiscal front.

Every week in Europe has been tense, but because of the magnitude of the discussions -- namely serious changes in Economic oversight and the role of the ECB- this week is a biggie.

Credit to Lorcan Roche Kelly, the Chief Europe Strategist of Trend Macrolytics for identifying this as the "Week From Hell."

Why December 9 Could Be One Of The Biggest Days In The History Of Europe

Simone Foxman

Image: NASA

If you're watching Europe, then the biggest date on your mind is probably December 9.

That's when EU leaders meet for their next big summit in Brussels. Investors and journalists appear convinced that this meeting will be a make-it-or-break-it moment for the euro area, and for three good reasons:

• Rising German bond yields
• The fragility of France's credit rating
• The impending disbursement of the next tranche of Greek aid

If EU leaders are going to embrace radical action now is the time to do it.

The eurozone crisis is clearly infecting the core, with Germany, France, and Belgium feeling the heat of rising bond yields. That was probably some of the biggest news to come out lately; it suggests that the crisis is putting even German credit at risk.

We're continuing to see positive German economic data—like the drop in unemployment to 5.5% in October. But even the slight effect the crisis has had on rising sovereign yields (not to mention common sense) suggests that if euro area economy continues to deteriorate it's really just a matter of time until data beats become misses.

Next, speculation that France's sovereign credit rating is up in the air has turned into a real threat. In the last week, all three of the major ratings agencies have reiterated warnings that the country's AAA is on shaky ground and, again, it's only a matter of time before this fear materializes. If they lose the triple A, then the euro area may no longer be able to bail itself out.

The next $11 billion in troika aid waits for a vote in the Greek Parliament on the country's 2012 budget. Likely, disbursement wouldn't take place until after the summit, so this is essentially EU leaders' last chance to throw Greece to the dogs. If their fiscal compact entails kicking a country or two out of the currency (Greece and Portugal would probably top that list), this is their last chance not to waste taxpayer money on another round of aid for Greece.

Even so, expectations that EU leaders will live up to the kind of endgame that investors are talking about is probably overblown. German Chancellor Angela Merkel spat on those hopes today when she likened the crisis to a marathon, saying that will come after "years of difficulties," not a "single effective blow." Germany has time and again opposed ECB intervention or eurobonds without substantial change—the kind of change that would only come with revisions to its Constitution, and at the end of the day any decision in the EU will require Germany to be on board.

More than anything, markets are looking for a long-term commitment to fixing the crisis and tackling the problems at its core. Instead of a quick fix, we'll probably see a long-term outline of the measures leaders are going to pass and the criteria for an expansion of the ECB's powers in the medium term. Markets will gauge their reaction upon how credible this plan is, and how far it goes towards truly resolving the problems of the EU currency union.

Buffett Sums Up The Euro Crisis In A Few Sentences

Cullen Roche

 Pragmatic Capitalism

Nov. 29, 2011, 5:16 AM

In a CNBC interview yesterday, Warren Buffett summed up the Euro crisis in just a few sentences.

 Basically, ceding monetary sovereignty by eliminating currency issuance and the linkage between the central bank and treasury (which doesn’t exist in Europe) is a very bad idea:

“The system as presently designed has revealed a major flaw. And that flaw won’t be corrected just by words. Europe will either have to come closer together or there will have to be some other rearrangement because this system is not working,” Buffett said in an interview.

“17 countries in the world gave up the right to issue bonds in their own currency. That is 100 degrees away from being able to issue them in your own currency like the United States,” he said. “The situation there is fundamentally different.”

It’s so simple to see that these countries are currency users and not currency issuers. Yet we continue to see politicians and self interested people trot out the USA is Greece myth on a daily basis. It’s sad.
NB – Buffett also said he was bullish on European equities, but was fairly vague.

The Clearest Sign Yet That Europe Has Entered A Dangerous New Phase Joe Weisenthal|Nov. 24, 2011, 12:06 PM|2,929|14 AAA inShare.14 Great chart from Morgan Stanley, showing that for the first time, German yields are moving up along with everyone else's. If this trend continues it's a huge deal, since it means that Germany is no longer a special intra-Europe safe-haven, where yields improve when everyone else's get worse. The fact that yields have been moving higher strongly suggests that yesterday's German bond auction failure was not merely a technical matter, but rather a reflection (even if only a little bit) that credit risk is creeping into Germany, which would be: a big deal. Image: Morgan Stanley Also, for what it's worth, Morgan Stanley FX Pulse crew deserves big credit for flagging several days ago that German bund yields had stopped falling, even as peripheral yields were widening.

The Clearest Sign Yet That Europe Has Entered A Dangerous New Phase

Joe Weisenthal

Great chart from Morgan Stanley, showing that for the first time, German yields are moving up along with everyone else's.
If this trend continues it's a huge deal, since it means that Germany is no longer a special intra-Europe safe-haven, where yields improve when everyone else's get worse.
The fact that yields have been moving higher strongly suggests that yesterday's German bond auction failure was not merely a technical matter, but rather a reflection (even if only a little bit) that credit risk is creeping into Germany, which would be: a big deal.

Image: Morgan Stanley

Also, for what it's worth, Morgan Stanley FX Pulse crew deserves big credit for flagging several days ago that German bund yields had stopped falling, even as peripheral yields were widening.

A Crucial Point On The Legality Of The ECB Buying Up Sovereign Debt

Image: AP/Riccardo De Luca

Contra some pundits, Nomura argues that it would absolutely be legal and mandate consistent for the ECB to use a bazooka to stop the crisis.

To pick up on the last point, the ECB would appear to have more legal authority to take radical action to quell the eurozone crisis than many would assume, particularly if the very existence of the euro is under threat.

 It is often represented that the ECB has a sole mandate of pursuing price stability, as if that puts the shackles on it and relieves it of wider eurozone responsibilities. But this is wrong. Article 105(1) of the Treaty on the Functioning of the European Union states that “The primary objective of the European System of Central Banks [the ESCB] [at the top of which lies the ECB] ... shall be to maintain price stability.

 Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union” (EU).

Among these objectives is to “promote economic, social and territorial cohesion, and solidarity among Member States”. 

Among the “basis tasks” assigned to the ESCB (and therefore to the ECB) are “to promote the smooth operation of payment systems”, as well as to “contribute to the smooth conduct of policies pursued by the competent authorities relating to ... the stability of the financial system” [emphasis added throughout].