Monday, May 10, 2010

Early Views On Euro Defence Package

On CNBC. European Union Strikes $670 Billion Crisis Deal

  • The European Union agreed on a 500 billion-euro ($670 billion) emergency fund in the early hours of Monday to protect highly indebted eurozone countries from the "wolfpack" of financial markets.

On AP: EU ministers agree on euro defense package

  • "We are placing considerable sums in the interest of stability in Europe," she said after marathon 11-hour talks in an emergency finance ministers' meeting. The talks were called on Friday night after a eurozone summit in Brussels amid concerns that the financial crisis sparked by Greece's runaway debt problems had begun to spread to other financially troubled eurozone countries such as Portugal and Spain.

    The EU's monetary affairs commissioner, Olli Rehn, said the agreement
    "proves that we shall defend the euro whatever it takes."

    "We are facing such exceptional circumstances today and the mechanism and the mechanism will stay in place as long as needed to safeguard financial stability," the ministers said in a statement.
From Yves: Is the Eurozone Shock and Awe Enough?

  • There are several layers of complicating factors, however. The first is that the German electorate has signaled its unhappiness with bailouts, presumably restricting future action if this measure falls short. From the Wall Street Journal:

    In Germany, projections showed Ms. Merkel’s center-right alliance Sunday lost a crucial regional election amid a voter backlash against aid for Greece. That means her government is set to lose its majority in Germany’s upper house.

    Second, even though the rescue is intended for the 16 eurozone members, it requires approval of the EU, which includes 11 non-eurozone members like the UK (presumably, that is for the €60 billion EU loan). The message from the UK seems to be that it will support this deal, but don’t expect any future help.

    But what is most striking is the European Central Bank’s silence, at least for now. As we noted earlier, EU banks are experiencing sharp rises in bond spreads and short term funding costs due to worries to about exposures to risky sovereign debt, as well as other dodgy assets sitting on their balance sheets. A large group of banks was petitioning the ECB for it to buy sovereign debt from them to provide relief. The ECB may be hoping that these rescue measures may prove sufficient to alleviate pressure on the banks, but my correspondents were skeptical. As one noted, “But it looks like it’s all coming from euro zone governments. I suppose since nobody is really questioning solvency of France or Germany, that might help, but how do Spain, Portugal and Italy contribute? And God will it be DEFLATIONARY if it’s not ECB money.”

    The last point is key. If deflation kicks in within the countries at risk (forget Greece, the eurozone ought to be in triage mode) the debt burden become worse.
    All the rescue operation has done is buy breathing room while making the eventual outcome worse. While having the ECB support the operation may offend some tender sensibilities, it can offset the deflationary pressures and make Portugal and Spain more viable short term.

    But the real problem is that there appears to be no impetus towards a longer term solution. How do solve imbalances within the eurozone? Without a plan to develop a plan on that front, this simply rearranging the deck chairs on the Titanic.

From Ambrose Evans-Pritchard: Europe prepares nuclear response to save monetary union

  • Nor is this rescue fund any more than chemotherapy for the cancer eating away at the foundations of monetary union. It is not a cure. The rot set it when the South joined EMU before it was ready to cope with ultra-low interest rates or match German wage-bargaining. The ECB made matters worse by gunning M3 at an 11pc rate during the bubble. Club Med lurched from credit boom to bust. It is now trapped in debt deflation at an over-valued exchange rate, like Argentina with its dollar peg in 2001 until air force helicopters rescued President De La Rua from the roof of the Rosada.

    The answer to this -- if the objective is to save EMU -- is for Germany to boost its growth and tolerate higher `relative' inflation. This would allow the South to close the gap without tipping into a 1930s Fisherite death spiral. Yet Europe will have none of it. The weekend deal demands yet more belt-tightening from the South. Portugal is to shelve its public works projects. Spain has pledged further cuts. As for Germany, it is preparing fiscal tightening to comply with the new balanced budget amendment in its Grundgesetz.

    While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union. Stephen Lewis from Monument Securities says Europe's leaders have forgotten the lesson of the "Gold Bloc" in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal. We all know how it ended.

From Mish $645 Billion Boondoggle to Defend the Euro from the "Wolfpack"

  • I do not know what tomorrow or even next week brings, but what I do know is you cannot defend the Euro by printing 440 billion of them.

    So Trichet did not like it when the Euro was at 1.33 and he was furious when it hit 1.60. Now that it is back to 1.27 he wants to defend the Euro.

    Is this clown ever happy?

    As I said before, all this talk about defending the Euro is nonsense. The EU is defending a piss poor decision to let Greece into the EU. Now, under guise of "defending the Euro" they are willing to print 440 billion of them.

    No doubt the finance ministers will be cheering tomorrow. Let's see for how long.