Stocks Rally on Dead-on-Arrival Eurobond Proposals, Rumors, and Patches...
... More ECB Emergency Funding; Why a Breakup of the Eurozone is Likely
The ECB stepped in today to provide emergency liquidity to at least two banks (without specifying the banks). The implication of course is that all banks are suspects.
Meanwhile, rumors of China buying significant amounts of debt of Italy has been denied by China's premier, clearly overruling meaningless statements made by Zhang Xiaoqiang, a vice chairman of the National Development and Reform Commission.
Also in the news today is a meaningless statement by European Commission President, Jose Barroso, who will "soon present options for the introduction of euro bonds"
Dead-on-Arrival Eurobond Proposals
The Financial Times as have sever others reported several days ago the Eurobond idea is Dead following the German court ruling that allowed some of the Greek bailout ideas to continue. Please consider Stop rejoicing. This was no victory for the eurozone
As an advocate of eurozone bonds, I have to admit their prospect looks grim after last week's ruling of the German constitutional court. The court upheld the European financial adjustment facility, the crisis mechanism. This was, undoubtedly, good news. But after I read the whole ruling, which ran to 29 tightly written pages, I realised that this judgement was not a victory for the eurozone at all. On the contrary, it categorically rules out any policy option beyond what has been agreed so far. I cannot see how it can be consistent with the survival of the eurozone, given the policies of member states and the ECB.
Much of the language in this document is opaque constitutional jargon. But on the issues that matter, the ruling is surprisingly, and depressingly, clear. It says the German government must not accept permanent mechanisms - as opposed to the EFSF, which is temporary - with the following criteria: if they involve a permanent liability to other countries; if these liabilities are very large or incalculable; and if foreign governments, through their actions, can trigger the payment of the guarantees. If I were a plaintiff in this case, I would regard that statement as an open invitation by the court to bring a new case against the European stability mechanism.
If the ESM is a borderline case under German constitutional law, there can be no such doubt about a eurobond. The court's verdict leaves me no alternative but to conclude they are indeed unconstitutional.
Moreover, you cannot get around this unfortunate fact with an ingenious combination of eurocratic trickery and financial engineering. The court, quite cleverly, did not mention eurobonds. It talked about liabilities. The Bundestag is not precluded from giving money to Greece, but it cannot empower a third party, such as the EFSF or ESM, let alone a hypothetical European Debt Agency, from usurping sovereign power. Sovereignty can be delegated in small slices, but not permanently.
A eurobond is, of course, a permanent mechanism. It also involves a permanent loss of control. Its size is very likely to be substantial. There would not be any point in issuing a small eurobond - it would not resolve the crisis. And unless member states were to transfer some of their sovereignty to Brussels, all the inherent risks in the structure would come from non-compliance by national governments or parliaments. In other words, a eurobond perfectly matches the conditions set by the constitutional court for an arrangement that violates the German constitution.
Why a breakup of the euro zone is likely
Edward Harrison writing for Credit Writedowms thinks the issue seals the fate and a breakup of the euro zone is likely
In June, I wrote that the chances of a euro zone breakup are now increasing, giving background for the current political turmoil surrounding Greece. My conclusion was "the policy decisions that governments and the EU are making cannot be maintained politically in the periphery or in the core".
A few days later, Nouriel Roubini wrote a very good note explaining then why the Eurozone could break up over a five-year horizon. We both stated that the key to maintaining the euro zone at all was the potential for closer integration of the member states. But the German Constitutional Court decision makes this nearly impossible.
German Court Bans Fiscal Union
Ambroze Evans=Pritchard at The Telegraph comes to the same conclusion in German court curbs future bail-outs, bans EU fiscal union
Germany's constitutional court has at last delivered its Solomonic judgment on Europe's rescue machinery.
"The Bundestag's budget responsibilities may not be transferred through open-ended appropriations to other actors. In particular, no financial mechanisms can lead to meaningful fiscal burdens without prior approval," said the opinion.
"No permanent treaty mechanisms shall be established that leads to liability for the decisions of other states, especially if they entail incalculable consequences," it said.
The ruling is "a clear rejection of eurobonds", said Otto Fricke, finance spokesman for the Free Democrats (FDP) in the governing coalition.
Above all, the court ruled that the Bundestag's fiscal sovereignty is the foundation of German democracy and that Article 38 of the Basic Law prohibits transfer of these prerogatives to "supra-national bodies".
By stating that there can be no further bail-outs for the eurozone without the prior approval of the Bundestag's budget committee, the court has thrown a spanner in the works and rendered the EFSF almost unworkable.
Politicians Can't Take No For An Answer
Clearly, Eurobonds are dead-on-arrival, regardless of how the proposal is worded. Even disregarding the German court ruling, the likelihood that Austria, Finland, and all 17 countries need to change the treaty would agree to allow Eurobonds is zero.
Nonetheless, Bloomberg reports Barroso Vows Euro-Bond Options
European Commission President Jose Barroso said he is close to proposing options on joint euro-area bond sales, putting officials in Brussels on a collision course with Germany over steps to contain the debt crisis.
"The commission will soon present options for the introduction of euro bonds," Barroso told the European Parliament in Strasbourg, France, today, prompting applause from lawmakers who have backed the idea. "Some of these options could be implemented within the terms of the current treaty; others would require treaty change."
The idea of bonds sold jointly by the euro area's 17 nations remains alive because unprecedented bailouts by governments and the European Central Bank have failed to stamp out debt concerns that began in Greece almost two years ago and rattled markets in AAA rated France last month.
Let the Euro Die
The Eurobond idea may be alive in the minds of fools who do not understand the ruling of the German court or the court of public opinion which is decidedly against more bailouts.
Elections are coming up and the leaders of Germany, Italy, Spain, and France may all go down in flames. Voters are fed up with all of them.
French President Nicholas Sarkozy may be bumped by a candidate running on a "Let the Euro Die" platform. Please see Europe Out of Time; Differences Impossible to Untangle; Merkel's Mind is Fried; Eurozone Breakup Inevitable; "Let the Euro Die" for details.
Stubborn, Foolish Arrogance
So, is this latest Eurobond idea stubborn arrogance by fools or an purposeful attempt to placate the markets, buying more time?
Occam's Razor suggests the first: stubborn foolish arrogance rather than a purposeful conspiracy to delay things.
Geithner Weighs in on "Political Will"
German Chancellor Angela Merkel, French President Nicolas Sarkozy and Greek Prime Minister George Papandreou will hold a conference call at about 7 p.m. today Athens time to discuss developments in Greece and the euro area.
European authorities "need to do whatever they can do to calm these pressures," Geithner told Bloomberg Television Sept. 9. "They have to demonstrate they have enough political will."
Political Will Cannot Overrule Market Forces
Geithner is yet another politician who thinks political will can overrule market forces, common sense, and in this case a German court ruling as well.
Temporary Liquidity Patch
More liquidity (and solvency) issues are on the front burner today as the ECB Lends Dollars to European Banks
The European Central Bank said it will lend dollars to two euro-area banks tomorrow, a sign they are finding it difficult to borrow the U.S. currency in markets.
The ECB allotted $575 million in a regular seven-day liquidity-providing operation at a fixed rate of 1.1 percent. It's the first time since Aug. 17 that a lender requested dollars from the ECB. The spot rate was $1.3625. An ECB spokesman declined to comment on which banks borrowed the funds.
Expect the ECB at some point to offer "Unlimited Liquidity".
That will not work either because the crisis is a solvency issue, not a liquidity issue. The ECB's stopgap measures do nothing to solve the issues at hand:
- Banks are overleveraged as well as undercapitalized
- Taxpayers do not have sufficient money to bail out the bondholders yet again
- Neither the German court nor the court of public opinion will allow more bank bailouts even if taxpayers did have a sufficient pool of funding to tap (which they don't)
So why are the markets rallying on news that is meaningless and proposals that cannot possibly happen?
The answer is short-term sentiment is too bearish, even if long-term sentiment is not. Things do not move in a straight line and dip-buyers fail to understand the severe implications of the German court ruling.
This is not a good time to "buy the dip".