Spiegel - Sarkozy's solo suggests that they're going to agree to disagree on the Transaction Tax. The german line remains that it should be introduced EU-wide - requiring UK agreement (which will presumably never happen). Other areas of disagreement. Both france and italy want more emphasis on growth. "The first meeting of the year between German Chancellor Angela Merkel and French President Nicolas Sarkozy. The pair held talks in Berlin at which they discussed the new 'fiscal compact' that they hope will hold the eurozone together." We could be forgiven for thinking that yet again this is completely the wrong agenda. The predictions have come true, the economic disaster foretold is upon us. Spanish near 25% unemployment levels are at those of the 1930s, so there is little to lose and everything to gain from drastic measures such as e.g.Spain leaving the euro unilaterally. It beggars belief that Spain, Italy etc are not actively and publicly discussing this. Where is the risk, what is the downside, mass unemployment? It has already arrived. German Chancellor Angela Merkel has been busy today. After an earlier jaw-jaw in Berlin with French President Nicolas Sarkozy, and a speech in Cologne at the annual meeting of the German civil service federation, 380 miles worth of journeys later, Merkel has been speaking in Düsseldorf on stimulus and economic growth, saying that government stimulus cannot be relied upon as the sole means of boosting growth: We cannot always create growth with economic stimulus packages [...] We also need structural reforms. Merkel said in a speech to the German chamber of commerce and industry. OVER THE WATERWAYS - Atlanta Fed President Dennis Lockhart has been speaking on the US economy and eurozone crisis. The Atlanta Fed’s outlook anticipates a moderate pace of improvement but real progress on most fronts [...] At the same time, I think slow progress toward full employment justifies continuing consideration of whether more can and should be done. So for me as a policy maker, now is not a time to lock into a rigid position. Mr Lockhart said, adding that he expects “modest” GDP growth of between 2.5pc and 3pc “if there are no surprises from Europe or elsewhere.” Mr Lockhart added that the Fed would not rule out more money printing even if steady growth and "acceptable" inflation made it harder to justify: Steady even if unspectacular growth accompanied by inflation in the neighborhood of 2% justifies some reluctance to change, in either direction, the (central bank's) accommodative policy [...] At the same time, I think slow progress toward full employment justifies continuing consideration of whether more can and should be done. On European sovereign debt exposure, he said: American financial institutions have reduced their exposures fairly substantially, particularly to peripheral countries. Mr Lockhart becomes a voting member of the Federal Open Market Committee (FOMC) which decides on US interest rates and monetary policy this year.
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Good morning, and welcome to another day of rolling coverage of Europe's financial crisis.
Today's main event is the first meeting of the year between German Chancellor Angela Merkel and French President Nicolas Sarkozy. The pair are holding talks in Berlin at which they will discuss the new 'fiscal compact' that they hope will hold the eurozone together.
The meeting begins this morning, with a press conference scheduled for lunchtime.
Conveniently, industrial trade data for Germany is released today along with German and French trade data, which should show how both economies are faring.
We'll also be watching the financial markets, where the euro slumped badly last week. Several countries are auctioning short-term debt today, including Hungary -- which was forced to abandon an auction late last month. But surely a sale of six-week bills should fly?....
Merkel insisted that no country should be forced out of the eurozone as Sarkozy stressed that the "fiscal compact" would be ready to allow a new treaty to be signed on 1 March.
The German leader, facing the prospect that the eurozone is falling back into recession, also stressed that growth was on the agenda. She said: "Budget consolidation is one of the legs Europe's future must be built on, but of course we need a second leg and that is ... the question of economic growth, jobs and employment."
The markets are awaiting news of any downgrade of France's triple-A debt rating, which is also crucial for the rating of the European Financial Stability Facility – Europe's bailout fund. Analysts at BNP Paribas noted that by 17 January, Moody's has to decide whether to change its outlook to "negative" on France. Its fellow rating agencies Standard & Poor's and Fitch have already warned of the risk of a downgrade.
Official data showed that Germany's trade surplus rose in November, demonstrating that the country was still able to keep its export market buoyant. France was also able to report higher exports in November, although imports were flat, shrinking its trade deficit.
Jane Foley, currency expert at Rabobank, said: "Better than expected German trade data is a reminder that for the eurozone the softer euro exchange rate is not all bad news".
Sarkozy called the situation in the eurozone "very tense" after his first meeting with Merkel in 2012 and ahead of crucial meetings in Italy before the full EU summit on 30 January. "The situation is tense, perhaps more so than ever in the eurozone's history," he said.
Record amounts of deposits are being lodged overnight with the European Central Bank as banks continue to seek a safe home for their cash amid continued anxiety about the health of the eurozone financial system.
Much of the focus remains on Italian bank UniCredit whose shares on Monday slumped another 13% on the first day of trading of its €7.5bn (£6.2bn) cash call. The fundraising has hit its share price hard and raised concerns about the likelihood of any other banks raising cash from investors.
"The share price is down more than 40% in the past five days. For any other European banks that were considering raising new equity via the markets, the performance of UniCredit must have severely put them off," said Louise Cooper, markets analyst at BGC Partners. "Although UniCredit is guaranteed to gets its €7.5bn as the issue is fully underwritten, this is not helping the bank's reputation."
If investors shun the cash call, as market experts fear, 27 banks underwriting the issue will be left holding the shares.
UniCredit needed to raise the cash following stress tests last year by the European Banking Authority. It had the second biggest shortfall among the banks tested – the biggest was Santander. Santander insisted it had found the €15bn required through a series of measures that have enabled it to avoid tapping investors for cash.
Data released by the ECB showed that overnight deposits have reached a new high of €464bn, which means banks are prepared to earn lower interest on their deposits than they would from lending to each other. The Bank of Italy admitted that funding from the ECB for its lenders had risen to nearly €210bn in December from €41.3bn in June. There are also reports that cash-rich companies are lending to cash-strapped banks.
So, we have established now for certain that this is not a sovereign debt crisis (bar Greece) but a bank crisis. Governments are safe, private banks are not.
The cause of this is austerity which will bring the strong down with the weak via recession. It is nothing to do with prolificate spending as Spain and Ireland ran budget surpluses proir to the crash.
The Euro will survive the year the same way it survived the last one. The Eurozone will bawl loudly "debt cannot be monetised" and "no bailouts for the feckless" Whilst monetising debt and bailing out the 'feckless" anyway.
looks like a fun year doesn't it?
Just to remind everyone .... its now 47 days since Eurogeddon was predicted by the Telegraph Taliban.
On 26th Jan (just 17 days away), "Dribbler" will have to cruelly take a hammer to his piggy bank to extract £20 to post off to moi. Unless...... the big bang comes in the next couple of weeks.
Exciting times.
As we write this, the ECB has not been able to keep the Italian 10 year bond from going above 7% and today they did not prevent Italian bank stocks from being halted-- again and again.
Very soon, the moment of truth will arrive. When it does, I expect The Bernank to save the day.
I don't find the negative yield on German Bonds all that Earth-shattering, given that the US has already had some auctions that produced the same result.
Probably what we are watching is the result of a shortage of authentic AAA Bonds to invest in. Even in a recession people continue to pay insurance premiums and pension contributions, so there is a constant flow of fresh money looking for super-safe investments to buy.
And with yields so close to zero everywhere, you have to watch exchange rate risk more carefully that in the past, so - I speculate - money for investing in sovereign debt is going to tend to stay in its home currency market.
A lot of Euro debt has been downgraded already, and France could be next, so for the super-cautious, greater Germany is pretty much the one game in town.
And will the Euro break up? Well, they are already issuing the usual threats to Greece, and Greece's attempts either to sell state-owned assets, or negotiate voluntary haircuts with its creditors have all failed. So I think Greece either becomes a German protectorate for real, or it leaves the Euro.
Then the crisis moves on to Italy and Spain.
Same basic question every day...how are you going to pay back the 31 trillion debt? There are no answers for socialists because they like to please everybody as all they understand is how to spend. So....we wait for our future generations money to run out in the form of bonds. They should be shot.
how are you going to pay back the 31 trillion debt?"
My understanding is that a pound loaned to HMG after WW II was worth 2p by the mid 1990s. Inflation was used to dig ourselves out of war debt and socialist over-spending and it will surely be used again. The savers and the prudent will suffer.
We won't know for sure whether the single currency will keep on muddling
through until eurozone policymakers face up to their predicament – that
sustaining the euro requires more or less indefinite transfers of money from
richer to poorer regions."
This has always been the key point, regularly and loudly predicted since the early 1990s. To get an idea of the size of such annual transfers one needs to look no further than the USA. There the automatic annual fiscal transfers amount to a sum equivalent to almost 30% of GDP.
But the dollar is only just made to work as a single currency with very significant annual migration between states, of unemployed Americans seeking new jobs. Such a safety valve is not available to the eurozone on anything other than a tiny fraction of the equivalent USA numbers for reasons of language and cultural diversity between European states. Without these two tools, huge transfers of money from north to south and of people in the other direction, the depressed peripheries have only one effective option: the steady reduction of wages to make themselves more competitive.
Mass long-term unemployment, hopelessness, frustration, anger, civil strife and maybe civil wars lie ahead as impoverished voters realize they are powerless to elect or sack those who govern them, sovereignty having been handed over by their political leaders in a binge of duplicitous spinning at the time of Maastricht. At best, widespread pain, a destabilized continent and a damaged global economy will be the result of what Lord Lawson recently called "the most dangerous and irresponsible piece of diplomacy since WW II".
The obstacles to such solutions are as daunting as ever. According to the last IMF Fiscal Monitor, euro area governments have €1.6 trillion of debt to issue over the coming year, and that's on the heroic assumption that deficit reduction targets are met"
"The ECB finds itself on thin ice, too. Already, it has a larger balance sheet as a proportion of GDP than either the US Federal Reserve or the Bank of England. What's more, the composition of this balance sheet, stuffed to the gunnels with dodgy sovereign debt, and increasingly, even dodgier banking assets, is plainly much higher risk"
These two pieces to the current financial puzzle encourage even the most optimistic observer to scream and run. With the exposure of German and French banks we can sum this all up [hopefully not double counting] to hear of some 2.4 trillion and must [who else? China? The Fed??] accommodate the deficit spending debts of 1.6 more?
Funding this on a probably aggregate EU GDP of only 1-2% and same for the US gives a grave image of the devastation that is hatching.
This will not end well
"Even the Bank admits that the effect [of buying gilts] has been to depress gilt yields by a full percentage point. "
Well, it's actually a little more complicated than that. The Banks says that there were several occasions on which QE affected yields, and most had quite a small affect, but more interestingly the biggest effect was in March 2009 when the QE program was *announced*.
That's interesting because it means that it was partly investor reaction to the announcement that caused a drop in yields, not the actual flow of money.
What that really means is that investors quickly figured out that *if* BoE actions had the effect of bringing down yields, then prices would rise by a corresponding amount, so they piled into the market and *caused* the rise in price they were anticipating. No surprises there; that's how markets work.
The other interesting thing the BoE Bulletin shows is the evolution of purchases of Gilts by foreign owners. Eyeballing the chart (chart 2), it looks as if BoE ownership of Gilts rose to L200bn and then leveled off, while foreign ownership went from about L25bn in 2008 to around L175bn in late 2011.
Oh, and of course an estimate that rates came down by 1% due to QE, really isn't evidence that there has been some huge market rigging operation, or that the Gilts market has been "saved from collapse" as some would have it. As the bulletin explains, if you buy in Gilts, you reduce the supply and increase the amount of fresh money looking for somewhere safe to sit, so a small fall in yields is only to be expected.
The phrase "a full percentage point" makes it sound like a huge move, but ten year Gilts were yielding 5.8% in September 1999, so they had already come down by quite a bit before QE even began
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