It Looks Like Saving Europe Will Once Again Depend On The Taypayers

EconMatters 

 Dec. 12, 2011

Exactly 20 years to the day after the creation of the European Union (EU) and the Euro currency, German Chancellor Angela Merkel successfully secured an historic agreement from all 27 current members of the EU, except Britain, forging a deeper economic integration in the euro zone on Friday, 9 Dec.

The Euro crunch summit also came away with an agreement to provide up to €200 billion ($268 Billion) in bilateral loans to the International Monetary Fund (IMF) to help it tackle the crisis, with 150 billion euros of the total coming from the euro zone countries.

The date that the European Stability Mechanism (ESM), capped at €500 billion ($666 billion), operation was also pushed up, the pledge to make private investors absorb losses in any future bailout for a euro nation is also to be scrapped.

While this new pact might be better to prevent future such sovereign debt crisis, others (including the US, and the IMF) view is that the summit has failed to adequately address the more immediately and urgent issues.

Ticking Euro Debt Bombs

Euro zone has to repay or roll over more than 1.1 trillion euros, around $1.5 trillion, debt due in 2012, with about €519 billion, or $695 billion, of Italian, French and German debt maturing in the first half alone, according to Bloomberg.  (See Graphic below from Spiegel with a shorter time frame sans Germany).

 

Graphic Source: Spiegel.de, 29 Nov. 2011

With Euro Zone sovereign bond yield spiking to record levels, probability is quite low for Italy and Spain to refinance next year at a sustainable rate going forward as there's not an effective backstop firewall

Germany, France would most likely need to pay a much higher interest rate due to this debt crisis contagion.  Belgium is no GIIPS yet, but its sovereign bond interest rate is closing on the 7% threshold that could require external bailout aid.

 

Graphic Source: Spiegel.de, 29 Nov. 2011

European Banks Need $153 Billion in Fresh Capital


There are also problems at the heart of the European banking system.

According to the European Banking Authority (EBA) in London (from BusinessWeek),

"....Banks in the European Union must raise €114.7 billion ($152.8 billion) in fresh capital as part of measures introduced to respond to the euro area’s sovereign-debt crisis."

Back in July, eight European banks failed the regularly scheduled stress tests with a combined capital shortfall of €2.5 billion. And things have deteriorated since then.  The updated figures from EBA take into account bank's sovereign holdings through the end of September.

Step-by-step Is Killing The Euro Zone

Europe, even with the aid from the IMF, would have a very difficult time covering between the sovereign debt rollover and shoring up the banks capital structure.  Essentially, the 'step-by-step' crisis solution as described by Merkel is a killing the Euro Zone.

The European Union of course is fully aware that markets are unlikely to be in the forgiving mood without some 'bazooka'.

The inaction could suggest

1. The actual 'hole' is a lot more substantial than figures floating in public out there.  Kicking the can down the road as far as possible is probably the only viable option in the short-to-medium term
2. Politics truly trumps economics as Germany could be using this crisis as a cudgel to gain power and control over the EU and on the global stage.  This also seems to indicate Germany has plenty of resource for this step-by-step waiting game.  

Another Backdoor Taxpayer Bailout Across the Pond?

Germany is reportedly still against the idea of a collective Euro Bond (although Italy's Monti seems confident that Germans would eventually see the light), and does not like the European Central Bank (ECB) embarking on large-scale bond purchases, like the U.S. Federal Reserve have been doing, either.

One of the messages out of the crunch summit is that private investors would not 'absorb losses in any future bailout for a euro nation,' which could suggest banks would get 100 cents on the dollar of the future troubled sovereign debt of Italy and  Spain, etc.

So we could also be looking at yet another backdoor taxpayer bailout of the banks -- similar to the U.S. Fed's '$1.2 trillion secret loan to banks, with repayment optional) --so banks would support buying the European sovereign bonds, while keeping the banking financial system afloat.

Somebody, somewhere has to put up the money and take the loss of the Euro Zone, and it does not look like EU would rise up to the occasion.  Eventually the markets would get past the Euro crisis and the world would move on.  But it seems the European taxpayer, just like their American counterpart, could end up being the last hero standing saving the global financial system, along with the world as we know it.

Here's Everything That's Happened So Far In The EU Summit

Simone Foxman 

 Dec. 9, 2011

 7:29 AM

Image: AP/Michel Euler, Pool

EU leaders met until the wee hours of the morning today in the first of a series of meetings that continue today.

So far, euro area countries appear to be making progress towards a "fiscal compact" that would pave the way for financial integration in the eurozone.

 Meanwhile, the U.K. looks continually more isolated from any involvement in the process as the only country to be left off the most recent draft (via @finansakrobat) of the statements that came out of the EU summit today.

Here's the rundown of what leaders' have decided to do so far:

• Enact a "fiscal compact" replete with balanced budget stipulations and enforcement mechanisms to control spending.
  
• Annual structural deficits for sovereigns are not to exceed 0.5% with a firm ceiling of 3%, after which economic sanctions would go into effect.
  
• Commit to working towards a "common economic policy," whatever that means.
  
• Rapid implementation of EFSF leveraging plans, via first loss guarantees for bondholders on issuances of new debt and a common investment fund to be supported by the IMF and other foreign investors.
  
• Thrown out initial private sector involvement clauses initially enshrined in plans for the European Stability Mechanism (Finland initially had a bone to pick with this).
  
• Leaders will consider expanding the €500 billion ($667 billion) in funding available to the ESM in March 2012.
  
• The ESM will now hold an emergency clause that will allow it to act with the approval of only 85% of members lending, and will go into effect when it has the approval for 90% of its funds.
  
• The EFSF and ESM will run simultaneously from the time the ESM goes into effect (likely next July) to the EFSF's expiration in mid-2013.
  
• Decide in the next 10 days to lend up to €200 billion ($267 billion) in additional funding to the IMF in bilateral agreements.

Everyone except the U.K. appears to be on board with the plan, however since debates are currently taking place behind closed doors, we could see some alterations to this agreement before the day is out.

For some reason, everyone now appears to be waiting on the European Central Bank to do something more. But with bank reaffirming a €20 billion ($27 billion) cap on bond-buying according to Reuters, that seems somewhat far-fetched.

Read more: http://www.businessinsider.com/heres-everything-thats-happened-so-far-in-the-eu-summit-2011-12#ixzz1g2vR0Yhx

These Are The 10 Big Issues At The Heart Of The Euro Crisis

Simone Foxman 

 Dec. 8, 2011

 9:14 PM 

Image: YouTube

It used to be the Greece, then it was the PIGs (Portugal, Ireland, and Greece), then it was the PIIGS (Portugal, Italy, Ireland, Greece, and Spain), and now it seems that the entirety of the eurozone is at risk.

Right now, EU leaders are trying to agree on a solution that is legal based on the terms of individual states constitutions and the EU treaties and one that actually fixes the major problems at the heart of the crisis.

But most of all, they're looking for a plan that their voters will go for.
As you can imagine, they're not doing so hot right now.

1. The costs of sovereign borrowing could spiral out of control.

Image: Scott Barber via Twitter

Yields on Italian sovereign bonds rocketed to record—

and arguably unsustainable—yields last month.

 In the secondary markets, yields on 10-year bonds topped 7.3%,

and sub-par bond auctions have made everyone wonder if Italy has become illiquid.

But this is not just happening in the PIIGS anymore—borrowing costs rose sharply in

 France, Belgium, Austria, and even Germany at the end of last month,

 suggesting that no country is safe from the effects of the crisis.

2. Contagion from Italy and Spain.

Image: BIS

The Italian and Spanish economies are too big to fail and too big to save. Italy's 120% public debt-to-GDP ratio second in size only to Greece among euro area countries, and Spain's public debt is rapidly expanding to prop up an overly leveraged private sector.

If one country falls it affects bond yields elsewhere in Europe and lending throughout the banking system via contagion. These effects would be particularly strong if the failing country were Italy or Spain. EU leaders must find some way to reassure markets that both countries' debt issuances are truly risk-free in order to stem rising borrowing costs that could render finding funding in the open market impossible.

3. The euro rescue funds.

The European Financial Stability Fund (a temporary fund) and the European Stability Mechanism 

(the permanent version) are the rescue funds meant to provide funding for Greece,

 Portugal, and Ireland, to construct a firewall around Italy and Spain to prevent contagion from spreading,

 and to serve as the ultimate backstop for troubled EU banks.

The problem is that neither of these funds appear to be large enough to truly backstop Italy 

and Spain as they stand, let alone if France gets downgraded.

 The current incarnation of the EFSF has a 440 billion euro ($590 billion) lending capacity,

 some of which has already been devoted to Portugal, Ireland, and Greece. 

The ESM has been capped at 550 billion euros.

Now EU leaders are considering allowing both funds to function simultaneously for a year after the

 ESM goes into effect in July 2013.

 That would nearly double funding available to helping Europe. Germany is objecting to that plan.

4. Private sector involvement in getting the crisis under control.

Since this crisis seems to be exacerbated by a lack of market confidence,

 EU leaders need to act in a way that will restore faith in sovereign borrowing.

 Doing this is difficult when EU leaders also want creditors to take 50% haircuts on their holdings of Greek debt

 (since it turned out to be a poor investment choice).

German Chancellor Angela Merkel and French President Nicolas Sarkozy are struggling 

to reassure investors that Greece is the only place where the private sector will have to deal

 with debt restructuring—but the fact they will have to stomach losses of 50% on their debt holdings 

does not bode well for investment in other struggling sovereigns.

This issue is at the heart of technical debates about the future European Stability Mechanism, 

the permanent bailout fund that leaders want to adopt by July 2010.

5. Greece.

Image: AP

Even with the prospect of massive debt restructuring, there is little hope that the country will be able

to return to the markets for funding in the foreseeable future.

What's more, drastic austerity measures have taken an axe to growth and 

have caused massive strikes and riots in Athens.

 Without heavy currency deflation that would make exports cheap once again,

Greece is unlikely to pull itself out of its hole of debt.

6. The European Central Bank's role in the crisis...and in the monetary union.

Image: Wikimedia Commons

The ECB is not like the Federal Reserve or most normal central banks.

 It only has a single mandate—the commitment to ensuring price stability—

and cannot purchase bank debt or sovereign debt on the primary markets.

But now investors are praying that the ECB will step in and stand behind the

 sovereign debts of Italy and Spain, not to mention Portugal, Ireland, and Greece.

 It could do this through financing the ESM, EFSF, 

or IMF in lending directly to sovereigns or by buying up vast quantities of their debt in a bid to cap 

or stem rising bond yields.

However, ECB President Mario Draghi told reporters today that 

the bank won't step in without the go-ahead from EU leaders, 

which would need to be enshrined in treaty change.

 It doesn't yet look like EU leaders are willing to step up to the plate and ask the ECB 

to step in, and even if they did treaty change will be time-consuming.

7. Eurobonds.

Image: RetroVintageModStyle

Jointly issued eurobonds would allow strong EU sovereigns to back 

the debt of struggling sovereigns in part or in whole.

Both the Council of Economic Experts and the European Commission

 have been studying options for eurobonds, some of which could avoid 

the time-consuming treaty change likely needed for broader changes to

 the role of the ECB in general EU governance.

However Germany is adamant that eurobonds are only something that

 can be considered very far down the road, and should not be included in the current debate.

8. IMF involvement.

The IMF is already participating in the bailouts of Greece, Ireland, and Portugal.

 EU and IMF leaders have talked about expanding the fund's role in the bailout effort.

 It even announced a plan that would allow sovereigns to borrow up to 1000% 

of the quota of funds they contribute to the fund for one to two years.

However, the IMF's current lending capacity is too small to provide for the funding needs of Spain or Italy. 

The U.S. is highly unlikely to agree to any plans to expand the capacity of the IMF,

 regardless of the fact that other countries (in particular the BRICs) have said 

they would contribute to an IMF-led effort to bail out Europe.

9. Political divide.

Image: YouTube

And you thought the U.S. was bad.

Relations between the fiscally sound Germany, Finland, and the Netherlands and the rest of Europe 

 led by France are heating up. Germany is objecting to many of the proposals that France

 and the periphery are advocating, and Finland is against giving up its right to a veto on any proposals

 (it is objecting to most).

These debates underscore a greater problem in the euro area.

 Lack of enforcement mechanisms let eurozone countries violate the Stability and Growth Pact in the first place,

 resulting in the excessive debts at the root of this crisis. 

The lack of adequate taxation and power-sharing mechanisms

 impedes passage of joint guarantee mechanisms, too. Finally, 

without a more comprehensive central government, 

states struggling with excessive debt will have a hard time ever returning to growth.

10. Euro versus non-euro.

Image: UK Prime Minister's Office

The European Union ties 27 countries together, only 17 of which use the euro.

The divide between the euro- and non-euro countries is deepening, 

with German Chancellor Angela Merkel and French President Nicolas Sarkozy announcing that

 they will try to include all 27 countries in a new EU treaty, 

but will go ahead with plans even if they can only get 17 to approve it.

In particular, tensions appear to be escalating between the U.K.

and Germany/France over financial regulations and a financial transaction tax.

 Whether or not these issues deepen, it is clear that euro states have less and

less in common with the rest of the EU.

10 Things You Need To Know Before The Opening Bell

Mamta Badkar 

 Dec. 9, 2011

 

Image: Shuttershock

Good morning. Here's what you need to know.

• Asian markets were down in overnight trading with the Hang Seng falling 2.73%. Europe is mixed after 17 euro members made progress towards a new plan to save the euro, and U.S. futures are higher ahead of the market open.

• EU officials met in Brussels yesterday and failed to get all 27 members to back a change to the EU treaty that would call for fiscal coordination. UK prime minister David Cameron refused to back a new treaty, a move that could isolate Britain from the continent. Cameron asked for regulatory exemptions for the UK which were considered unacceptable. Meanwhile, Germany rejected some key points from a plan drafted by EU leaders, to save the euro. Germany maintained its opposition to eurobonds and a plan to give the ESM a banking license that would allow it to borrow from the ECB.

• Officials are back today for the second day of the EU summit. Ireland may need to hold a referendum on building a fiscal union. Meanwhile, Hungary, has said it will consult with its parliament about a new treaty. Now here's everything that's happened so far in the EU summit >

• The ECB has capped purchases of euro zone sovereign bonds at €20 billion a week and is not considering a bigger action in response to an EU summit decision to create a fiscal union, according to a Reuters report. 

• Moody's  cut the long-term debt rating of three French banks. BNP Paribas and Credit Agricole's long-term debt rating was cut by one notch to Aa3. Societe Generale's long-term debt rating was cut by one notch to A1. Moody's attributed the cut to the increasing difficulty in raising capital and the deteriorating economic outlook. 

• Texas Instruments cut Q4 guidance and now expects revenue in the range of $3.19 billion to $3.33 billion, down from previous guidance of $3.26 billion to $3.54 billion. EPS guidance was also slashed to $0.21 to $0.25 per share. The company attributed the reductions to lower demand. 

• Chinese CPI grew 4.2% year-over-year in November, down from 5.5% the previous month. Food prices were up 8.8% from a year ago, but eased 0.8% from October. Meanwhile, Chinese producer price inflation rose 2.7% in November. 

• Toyota sharply lowered its earnings forecast for the fiscal year. The company now expects a net profit of 180 billion yen ($2.3 billion), down 54% from its August projections. It also expects leaner revenue of 18.2 trillion yen ($234.36 billion) down from 19 trillion yen. Toyota attributed the drop in earnings to flooding in Thailand and a strong yen.

• Web security provider Blue Coat Systems Inc. is being acquired by private equity firm Thoma Bravo for $1.3 billion. Blue Coat shareholders will receive $25.81 in cash for each share, representing a 48% premium on the share's closing price yesterday.

• International trade data for October will be released at 8:30 AM ET and consumer sentiment for December will be released at 9:55 AM ET. Consensus is for a rise in the trade deficit to $43.4 billion and a rise in consumer sentiment level to 66.

The Real Problem Is, Nobody Takes European Politicians Seriously

Ken Maguire, GlobalPost | Dec. 8, 2011, 1:53 PM 

Image: AP/Markus Schreiber

Over the next two days, leaders struggling to save the euro are holding yet-another summit to end all summits.

German Chancellor Angela Merkel and French President Nicolas Sarkozy will be in the spotlight, attempting yet again to forge a robust solution to the euro zone’s debt crisis.

They have proposed bold changes to the way the euro zone governments spend money, with tough oversight they hope will ensure fiscal stability. The French president has tried to speak convincingly of guaranteeing “the future of Europe.”

More: Can Germany save Europe? Will it?

If successful, the leaders will be hailed as saviors. But will this really be their finest hour? Will they finally manage to achieve the overarching goal of restoring confidence in the battered euro, saving Europe and the world from another devastating recession?

Many political observers are pessimistic. For nearly two years, summit after summit has failed to produce a solution, in large part because of weak leadership, they argue. Unlike the towering visionaries who created the common market and its currency, Merkel and Sarkozy just don’t seem to be up to the task, they say.

“They’re not outright disasters but they’re not great leaders and visionary strategists,” Klaus Larres, a German who is professor of history and international affairs at the University of Ulster, said of Merkel and Sarkozy.

A ‘tear down this wall’ moment would go a long way toward rallying support, Larres said. Passion and charisma have been missing from past summits, in which euro zone leaders have focused on technical solutions to the crisis – boosting bailout funds, and enacting austerity measures, for example.

But ultimately, the crisis is fueled by rising bond yields on government debt, which reflect the lack of confidence in leaders’ willingness and ability to do what’s needed. Europe has many trillions of dollars worth of debt to pay back; of course it needs adequate economic backstops. But the markets must also be convinced that this marriage of 17 disparate countries (or 27, when the non-euro countries are included) can make tough decisions in a crisis, and unanimously support them.

Europe debt crisis: Sorry, South Carolina and Utah

“This has been a case of very poor leadership,” said Roberto Castaldi, an international relations lecturer at Sant’Anna School of Advanced Studies of Pisa.

Castaldi, in a paper published shortly after Greece received a $150 billion bailout in May 2010, argued the response showed a “complete lack of European leadership.” He wrote there is “glory waiting around the corner” for European leaders who create a true fiscal union and European treasury.

The current Merkel-Sarkozy proposal doesn’t strive for such financial unity. After meeting Monday in Paris, the two leaders said that they’ll push for a new or revised EU treaty that imposes penalties on governments that violate debt and budget limits. They also want the changes written into state constitutions.

Sarkozy, who faces a reelection fight next year, is reluctant to relinquish sovereignty to a fiscal union favored by Merkel. The German leader, meanwhile, opposes Sarkozy’s desire to unleash the European Central Bank as a lender of last resort.

“Merkel is on the right path but doesn’t see the urgency,” Castaldi said. “Sarkozy sees the urgency but he’s on the wrong path.”

As if they needed more pressure, Standard & Poor’s credit ratings agency warned late Monday that it may downgrade euro zone countries, including Germany and France, if there’s no progress. It later said it may also downgrade the EU’s top rating.

World leaders have exerted extreme pressure on Merkel, in particular, for a solution. She’s the head of Europe’s largest and strongest economy. Any fix needs the support of Germany. But her failure to act has made things much worse.

What began as a comparatively small debt problem in Greece — which accounts for just 3 percent of all euro zone public debt — has become a crisis threatening to decimate the global economy.

Most economists agree that the ECB could save the euro by acting as a lender of last resort to indebted governments shunned by the bond market. Mario Draghi, the ECB president, hinted last week -- in central banker-speak -- that if there’s a “fiscal compact” that “other elements might follow.” The bank’s governing council meets Thursday in Frankfurt.

But Merkel, who warns that an ECB buying spree would spark inflation, said last Friday that the solution is more akin to a marathon than a sprint. A quick fix wouldn’t address “fundamental flaws in the construction of the euro,” she said, alluding to a monetary union that lacks a treasury.

Of course, things didn’t end well for the original marathoner. The Greek messenger who ran to Athens to deliver news of the Athenian victory over Persians at the Battle of Marathon dropped dead after completing his task, legend has it.

More: Requiem for a euro zone bailout

The euro may await a similar fate unless leaders quickly agree on a blueprint for a fiscal union and treasury, argues Castaldi. Broad support now for this long-term goal would be enough to calm market fears, he said, adding he agrees with German reluctance about inflation because it’s “the worst of the taxes. It punishes the poor.”

Still, the “Merkozy” plan for constitutional changes and tougher budget oversight is “better than the current situation,” he said, and it’s “promising” that they set a March deadline for treaty changes.

And Larres is confident that “a solution will be found. One wonders if it could have been found earlier in the crisis.”

Despite the criticism, Merkel and Sarkozy are seeing better poll numbers at home. Sarkozy’s numbers are up several points to 37 percent, according to French media reports. That still leaves him far behind Socialist challenger Francois Hollande in May’s election, however.

In Germany, a recent poll for ZDF Television showed 56 percent of respondents said Merkel is handling the crisis well, and 78 percent believe the euro will survive.

But do Merkel and Sarkozy possess the charm and persuasiveness needed to sell a plan to potentially skeptical peers?

“An aura of personal gravitas always helps,” said Larres, author of a book about Winston Churchill’s leadership skills. “That is lacking in Merkel and Sarkozy.”

Great leaders guide public opinion rather than follow it, Larres said, noting that Merkel has been criticized “for looking too much at the opinion polls.”

“To be fair, she doesn’t incorporate that strong pro-European outlook that Helmut Kohl and other leaders have had,” Larres said. “It’s not in Angela Merkel’s blood.” Merkel, the daughter of a Protestant pastor, grew up behind the Iron Curtain in east Germany. She speaks Russian.

Castaldi adds that Sarkozy and Merkel “are from a younger generation.”

“They are not those who have seen the war, which has always been the basic inspiration and reason for European integration,” he said.

The euro, he said, “is not their history and this was not their battle. They are there, though and they cannot choose. They have the crisis and the only positive answer is to go for more Europe, to go for a political union.”

More: Should the Fed intervene in the euro zone's debt crisis?

Earlier this year, Kohl criticized Merkel in the German media, saying there can be “no excuse for having no view or idea where you belong and where you are going.”

The revered former chancellor who led Germany through reunification and later into the euro used his aura of gravitas to successfully advocate for his ideas despite public resistance.

“It was very difficult to convince the Germans that they had to give up the Deutsche mark, but he did it, with good reasons and good arguments,” Castaldi said.

“It would have been much better,” he continued, “if Ms. Merkel had taken the lead at the beginning. We would not be here in the first place.”

Specifically, when Greece sought aid to avert bankruptcy in early 2010, the greatest fear was that debt concerns would spread to other weak euro nations. Europe’s plan was simple: Fix Greece and the crisis is contained.

But Merkel’s government held out until the last minute before approving its share of a $150 billion bailout. Paying Greece’s generous pensions was deeply unpopular among Germans. Merkel was accused of stalling to avoid a backlash in a regional election, which her party lost anyway.

In a dramatic speech in Berlin last week, Polish Foreign Affairs Minister Radek Sikorski told German leaders that it is up to them to fix the problem.

“Because of your size and your history you have a special responsibility to preserve peace and democracy on the continent,” he said. “I fear German power less than I am beginning to fear German inactivity. You have become Europe’s indispensable nation. You may not fail to lead.”

Future generations “will judge us by what we do, or fail to do,” he said.

“As a Pole and a European, here in Berlin, I say: The time to act is now.”

FACE THE FACTS: There's Only One Solution To The Eurozone Crisis That Can Work Right Now

Simone Foxman

 

Image: YouTube

Let's face the facts: the only plan that EU leaders are going to be able to agree to that would keep the eurozone together is eurobonds.

German Chancellor Angela Merkel and French President Nicolas Sarkozy can say what they like about this being the wrong time for the jointly guaranteed debt issuances, but there appears to be no other credible solution at the moment that does not require treaty or constitutional change to move forward.

The European Financial Stability Facility is the current, temporary fund in place that is meant to stem the crisis, but it's simply too small to create an effective firewall around Greece, Ireland, and Portugal or stem rising borrowing costs for Italy. Even with leverage, estimates peg its available capital around €600 billion (just over $800 billion) whereas analysts are estimating that the fund would need something closer to €3 trillion ($4 trillion) to provide an effective bulwark to contagion.

Leaders would have to mount even bigger hurdles to pass the European Stability Mechanism, a fund that is meant to be the EFSF's permanent successor. Like the EFSF, the fund's planned €500 billion ($670 billion) will not properly backstop the sovereign debts of Italy and Spain.

But that's not even the worst of it. Merkel and Sarkozy said Monday that they would go ahead with plans to push forward implementation of the ESM to July 2012, and get around dissent from countries like Finland by seeking an 85% majority vote rather than unanimity. But AFP reports that Finland's Parliament today rejected this possibility, saying that it violated the Finnish constitution.

The Finnish public harbors deep distaste for the ESM as it uses their taxpayer money to help bail out other countries. Finnish politicians are also pushing for clauses that mandate private sector involvement in future debt restructurings, something that we argue is absurd because it will make sovereign debt even more risky.

Without eurozone countries voting voluntarily to contribute more money to these funds, leaders must rely on either the European Central Bank or foreign funds.

The G20 has decided that they will only support the eurozone bailout as part of joint IMF action. However, the IMF's current funding capacity is too small to provide an adequate backstop for a country like Italy or Spain, even if it is combined with funds from the EFSF or ESM. What's more, the U.S. has rejected attempts to increase the IMF's funding, essentially ruling out that outlet in the near term.

Nor will the ECB swiftly jump in to fill the void. This morning ECB President Mario Draghi denied speculation that the bank would expand its bond-buying in a major way to keep borrowing costs down for Spain and Italy, and he argued that ECB support of the ESM or IMF in bond-buying or funding efforts as it would violate the "spirit" of the EU treaty. In sum,the ECB will not act unless EU leaders can change the treaties, at best a process that will take months.

Finally, the first steps towards the "fiscal compact" leaders are currently suggesting could be adopted quite quickly, but this compact will do nothing to reassure investors that countries at risk right now will be provided for. Further, the meaty central governance pieces of that compact will only be accomplished through relatively lengthy treaty changes.

There is simply no alternative left to some kind of plan for eurobonds. This is the only solution that can be adopted in short order, because a temporary fund that would issue joint bonds—like the one proposed by the German Council of Economic Experts—would not violate the EU treaties. While eurobonds have moral hazard, they could be adopted alongside the beginnings of the "fiscal compact" mentioned above, which would impose automatic sanctions on government budgets.

With investors flipping out about the riskiness of sovereign bonds, EU leaders lack time to pass a new EU treaty. The way things have been going—remember the end of November?—Italy and/or Spain could very well be illiquid by March, and that's the earliest date EU leaders are citing for new treaty approval.

But workable proposals for eurobonds have already been floated, both by the European Commission and the German Council of Economic Experts.

So come happily or come kicking and screaming, EU leaders have to face the facts—there is simply no longer an alternative to eurobonds so long as the eurozone remains together in its current form.

STOCKS GET SLAMMED AFTER BIG ECB DISAPPOINTMENT: Here's What You Need To Know

Sam Ro 

 Dec. 8, 2011

 4:00 PM

Image: Flickr

Day four of Europe's hell week came with some volatility as investors moved on Mario Draghi's every last word.
First, the scoreboard:

Dow: -198.7 pts, -1.6%
S&P 500: -26.7 pts, -2.1%
NASDAQ: -52.8 pts, -2.0%

And now, the top stories:

• The European Central Bank (ECB) cut rates by 25 basis points to 1.00% this morning.  ECB President Mario Draghi said the bank would extend the maturities of its refinancing operations to three years and also ease collateral requirements.  Markets spiked instantly on those words. But, they quickly turned after Draghi said he made no commitment to do more bond buying. 

• The European Banking Authority released the results of the EU bank stress tests.  In total, banks will be forced to raise €114.7 billion, or around $153.8 billion.

• Also this morning, the Bank of England held rates at 0.5% and kept its asset purchase program limited at £275 billion or $430 billion.  No surprises here.

• Initial jobless claims fell to 381k, beating the estimate of 395k.  However, this good news was dominated by headlines coming out of the ECB.

• The fear trade was back on with the 10-yr Treasury yield falling below 2%.  As usual with bad news out of Europe, the U.S. financial sector led stocks lower.  Morgan Stanley fell 8.4%. Citigroup sank 7.0%.  Goldman Sachs, JPMorgan Chase, and Bank of America each fell around 5%. 

• The energy sector also fell in today's sell-off.  However, there was some resilience in stocks exposed to shale gas. Goldman Sachs analysts published a bullish note on the energy niche and put Halliburton and Helmerich & Payne on its Americas Conviction Buy List.

• Ford's board of directors reinstated the company's quarterly dividend after halting it back in 2006.  Investors can now expect a 5 cent quarterly cash divided, which translates to a 2% yield.

• Tesla shares tanked following a downgrade by Morgan Stanley.  The firm slashed its price target from $70 to $44 citing less than stellar electric vehicle adoption. The stock closed down 9.7%.

• In a research note to clients, Citigroup analyst Richard Gardner said the next Apple iPad would be launching February.  Shares climbed 0.4% today, closing at $390.66. 

EU Leaders Are Considering Doubling The Euro Bailout Fund At The Last Minute

Simone Foxman 

 Dec. 7, 2011

 7:43 AM

Image: rheeks via flickr

The FT reports that EU leaders are considering permitting the temporary European Financial Stability Facility to continue running once the €500 billion ($670 billion) European Stability Mechanism—the EFSF's permanent successor—gets up and running around the middle of next year.

 
Continuance of the €440 billion ($590 billion) EFSF would essentially double the firepower the ESM would have available, not to mention the estimated €160 billion ($214 billion) leaders think they can add to the EFSF through leverage.

FT cites "senior European officials" for the information.
At least on the surface, this plan would amount to a slightly more potent form of the policy to date. While it would significantly expand the funds available to backstopping PIIGS borrowing, this move would show no ideological deviation from EU leaders' current policy response.

Not to mention that the ESM appears to violate constitutional law in Germany, or that both the temporary EFSF (and probably its predecessor, the ESM) will be crippled if France loses its AAA rating, which we think is highly likely at this point.

From what we can tell, we expect that such a proposal would do little to reassure markets that EU leaders are making sufficient progress towards fixing the crisis.

British Eurosceptism Might Just Ruin The EU Treaty Talks For Everyone

AP 

 Dec. 6, 2011

 3:50 PM

Image: AP

BERLIN (AP) — Plans by France and Germany to save the euro through closer European unity faced a serious challenge Tuesday from Britain, as deep divisions emerged between the 17 EU nations that use the euro and the 10 others that don't.

Threatened by fears their joint currency may not survive, German Chancellor Angela Merkel and French President Nicolas Sarkozy had forcefully demanded changes to European Union treaties to tighten controls over spending and borrowing for all who use the embattled euro.

Their comments reinforced market expectations that EU leaders at a Friday summit would finally contain, through tighter financial rules, the 2-year-old debt crisis that has engulfed the continent and threatens the entire global economy.
Enter David Cameron, the prime minister of Britain, a European nation that does not use the euro, who said he would be heading to the Brussels summit "to defend and promote British interests."
"Eurozone countries do need to come together, do need to do more things together — if they choose to use the European treaty to do that, Britain will be insisting on some safeguards too," he declared Tuesday. "As long as we get those, then that treaty can go ahead. If we can't get those, it won't."
Cameron is the leader of Britain's Conservative party, which resists transferring more sovereign powers to EU institutions in Brussels. Many party members have long wanted to ditch the EU altogether.
On the other hand, Cameron is wary of losing power with the 27-nation bloc if France and Germany create a tighter club of eurozone nations with tough rules for national budgets and automatic sanctions for those who stray.
The safeguards cited by Cameron included the importance of keeping a single EU market of some 500 million consumers and making sure that any eurozone moves don't threaten London's status as a global financial center.
Cameron recognized that Britain had a huge vested interested in seeing the eurozone resolve its problems, since a significant amount of British exports go to fellow EU nations.
"The most important British interest right now is to sort out the problem in the eurozone that is having the chilling effect on our economy," he said.
Adding to the pressure, Standard & Poor's warned it could downgrade 15 eurozone nations as well as Europe's bailout fund if European leaders don't act. And U.S. Treasury chief Timothy Geithner began a three-day European tour on Tuesday to prod eurozone nations into action.
If the bailout fund, which has already rescued Ireland, Portugal and Greece, is downgraded, it could have to charge higher rates to lend to other countries in the future, making it tougher for them to recover. The bailout fund depends on the top Triple-A credit ratings of Germany and France.
Many have already dismissed the bailout fund as too small to rescue a country like Italy, the eurozone's third-largest economy. Help from abroad also seemed unlikely — Geithner said the Federal Reserve has no plans to give money to the International Monetary Fund to bolster Europe's bailout fund.
German Finance Minister Wolfgang Schaeuble said the S&P ratings warning may not be all bad, since it could spur action at the summit Friday billed as the meeting "to save the euro."
"We take this assessment as further reassurance to do everything to achieve a good result on Dec. 9," he said in Vienna.
Markets have been jittery because of fears that the euro might disintegrate, causing recessions in Europe and the United States and sending tremors through the entire global economy.
In recent days, investors have put huge faith in European leaders' ability to produce a lasting plan to the crisis. Stock markets, bond markets for Italy and Spain, and the embattled euro all shrugged off the S&P's downgrade threat. The euro bounced back Tuesday to $1.3413 — buoyed in part by a massive rebound in German industrial orders.

The reforms pushed by Merkel and Sarkozy will likely take months — if not years — to implement, but European leaders hope they will impress the European Central Bank or the International Monetary Fund enough to persuade one or both to step into the breach quickly with more financial aid.

The proposals included introducing an automatic penalty for any government that allows its deficit to exceed 3 percent of GDP; requiring countries to promise to balance their budgets; pledging that any future bailouts would not require private bond investors to absorb a part of the costs, as was the case for the Greek bailout; and reiterating a promise not to criticize the ECB.
While there is a sense that leaders are simply scrambling to come up with the formula that induces the ECB to act, Moritz Kraemer, S&P's head of sovereign ratings for Europe, cautioned that central bank action just by itself would not save the AAA credit ratings of Germany, France and the bailout fund.
Kraemer told reporters Tuesday that a credible plan to solve the crisis also needed to be put in place. He noted that S&P's warning targeted all eurozone countries — with the exception of two whose bonds are already rated very low — because the agency is concerned about a paralysis in European decision-making that cripples all of its economies, no matter how robust.
"The crisis in the eurozone has now reached a level that systemic stresses become more tangible and a bigger threat near-term," he said. "It has become a crisis of eurozone governance and crisis management."
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Kirsten Grieshaber and Martin Crutsinger in Berlin, David Stringer in London, Raf Casert and Gabriele Steinhauser in Brussels contributed to this story.