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ParticleMan

Eurobunds And The Race To The Bottom

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For those not up to speed on their history, there's a rather nice infographic over here :-

emu_stages_en.jpg

What it doesn't state however is why we set sail on this most celestial of marriages in the first instance - and for that, thumb back no further than very European response to the well reported (if little understood) failure of the ERM.

A failure in its root (for the benefit of those who did not trade the event) triggered by a dawning realisation within the market that pegging the currencies of member states lacking political unity, with wildly varying attitudes to risk, and wildly varying volatility in (let alone absolute levels of) productivity measures was a profit taking opportunity made in heaven.

Simply put, seemingly-inexhaustable taxpayer support of these currency pegs made the Fx world rain gold - albeit for an all too brief interval.

Fast forward to the present day - with ein union, ein currency, ein spot rate there's no way to take a short view when prices in member states skid giddily outside the most optimistic rose-tinged view one can take of day to day reality...

... no way that is apart from selling the gilt...

Cue the present distress in the bond markets - prices of emerging market Euro debt is collapsing at a truly impressive rate.

And with all the recent talk of "bondholders" "sharing" in the pain, so too are prices of the more senior members.

German long-dateds for instance - while all the world's been waving their hands over the Irish mess, these too have been "yield improving" (a pretty euphamism for building runaway momentum, pricewise, to the short side).

So as the failure of ERM was predetermined then actualised in the spot Fx market, the failure of ERM II is presently blaring from the minarets in the gilt market.

Now I don't know about you (individually or collectively), but if there's one thing that standing rather too near the rear end of the mule I call reality has taught me, it's that when the same individuals are challenged by the same stresses in life, their responses tend to be broadly predictable.

So here's a bold prediction.

ERM II's failure will trigger the harmonisation of all European debt issues - no more sovereign debt.

Ein union, ein gilt, ein futures market (certain member states are practically begging for this as it is - "terrible, terrible freedom!" the worker ants cry).

And here's another.

Those exporters presently enjoying a weak euro will soon be permitted to enjoy the fruits of unexpectedly rapid deleveraging.

There may be plenty of demand for all manner of output at a buck twenty.

But good luck keeping your factory going when your capital costs move with the direction and speed of the underlying gilt...

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So here's a bold prediction.

ERM II's failure will trigger the harmonisation of all European debt issues - no more sovereign debt.

Bold indeed! But smart :-)

This would take about ten years wouldn't you say? Assuming Europe goes through the current crisis intact?

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That's an interesting prediction but I find it a bit optimistic.

I do not feel the Germans have the capacity, let alone the will to impose fiscal discipline on the Latins and Irish.

So even if we do have ein this, ein that and ein the other, it won't last.

There are loadsa people all over claiming unemployment benefit who are working and in Greece, apparently, lots of people claiming salaries that aren't.

There aren't enough people to check the dodgy numbers that the gamers from the fringe are sending in.

The dudes on the edge are just not going to discover and abide by Teutonic rectitude, which sure has its sham side too, just because some Herman in Frankfurt tells them he'll take the money away if they don't.

It's a house built on sand and the rains are coming.

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That's an interesting prediction but I find it a bit optimistic.

I do not feel the Germans have the capacity, let alone the will to impose fiscal discipline on the Latins and Irish.

So even if we do have ein this, ein that and ein the other, it won't last.

There are loadsa people all over claiming unemployment benefit who are working and in Greece, apparently, lots of people claiming salaries that aren't.

There aren't enough people to check the dodgy numbers that the gamers from the fringe are sending in.

The dudes on the edge are just not going to discover and abide by Teutonic rectitude, which sure has its sham side too, just because some Herman in Frankfurt tells them he'll take the money away if they don't.

It's a house built on sand and the rains are coming.

Yes. If you're going to centralise the debt then I assume you have to centralise the issuance of debt. In other words the collective decides how much debt each country can issue. That's effectively yielding fiscal control.

In the short term the centralisation will push up the cost of German borrowing and reduce the irish cost. Of course Germany is a much bigger economy, but still the net effect is that the germans will bail out the irish by having to pay an increased price for their debt.

Can't see either the Germans or the PIGS going for it. The PIGS won't be able to agree on a debt issuance level that keeps their people happy and the Germans happy and vice versa.

it will be the people that decide this now not the politicians.

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That's an interesting prediction but I find it a bit optimistic.

I do not feel the Germans have the capacity, let alone the will to impose fiscal discipline on the Latins and Irish.

On your first point, a quote I came across today:

"I am worried that Germany's authorities are slowly losing sight of the European common good," said Jean-Claude Juncker, chair of Eurogroup finance ministers.

Understatement? :unsure:

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On your first point, a quote I came across today:

"I am worried that Germany's authorities are slowly losing sight of the European common good," said Jean-Claude Juncker, chair of Eurogroup finance ministers.

Understatement? :unsure:

From the EU's english dictionary:

European common good:

(1) German taxpayers paying for systematic southern state deficit spending and workers' wage rises

(2) German politicians keeping quiet while banks rape and pillage European economies

(3) As per the excerpt below:

Richard Burrows, the former boss of Bank of Ireland, is a lucky man. While his counterparts at other big Irish banks during the boom years are now facing ignominy, bankruptcy or both, Burrows has landed a top job as chairman of British American Tobacco.
As corporate jobs go, it is a nice little earner: he collects around £525,000 a year for two days' work a week.
Up until the summer of 2009, he was governor of the Bank of Ireland, whose financial position is now so dire the Irish government is poised to raise its stake from 36% to well over 50%.
It seems Burrows got out at the right time – before things went from bad to desperate. "Unlike many of his counterparts, he is not really on the radar screen these days," says Stephen Lyons at Davy's stockbroker in Dublin.
Edited by _w_

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http://ftalphaville.ft.com/blog/2010/12/03/417746/eurobonds-are-among-us/

Eurobonds are here!

The ECB’s Ewald Nowotny gave some support on Thursday, but the idea has long been on the back-burner based on German objections over whether it would just encourage more deficit financing by peripheral governments.

But actually, in a weird way we already do have eurobonds now, and few have realised it. But with huge implications for future debt restructuring.

More in the legal than credit sense, but still — eurobonds de facto. And ironically enough, it’s thanks to Germany and its insistence on haircuts alongside future peripheral bailouts, now embodied in a new mechanism to replace the current bailout funds after 2013.

It basically comes back to the way in which the post-EFSF European Stability Mechanism will implant aggregate collective action clauses (CACs) for new eurozone government bonds issued after 2013, as the main means for activating haircuts. Also, as we currently understand the process — the CACs will be enforced via EU directive. That could turn out to be critical in making these new bonds ‘eurobonds’ in a key way.

We’ll go back to this legal basis in second. But first, the ESM’s aggregate CACs are not simply a route to restructuring peripheral bonds overall. They are also a route away from a particular type of restructuring at the national level.

:

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http://www.ft.com/cms/s/0/540d41c2-009f-11e0-aa29-00144feab49a.html

E-bonds would end the crisis

By Jean-Claude Juncker and Giulio Tremonti

Published: December 5 2010 19:38 | Last updated: December 5 2010 19:38

In spite of recent decisions by European fiscal and monetary authorities, sovereign debt markets continue to experience considerable stress. Europe must formulate a strong and systemic response to the crisis, to send a clear message to global markets and European citizens of our political commitment to economic and monetary union, and the irreversibility of the euro.

This can be achieved by launching E-bonds, or European sovereign bonds, issued by a European Debt Agency (EDA) as successor to the current European Financial Stability Facility. Time is of the essence. The European Council could move as early as this month to create such an agency, with a mandate gradually to reach an amount of outstanding paper equivalent to 40 per cent of the gross domestic product of the European Union and of each member state.

That would bring sufficient size for it to become the most important bond market in Europe, progressively reaching a liquidity comparable to that of US Treasuries. But to ensure this happens, two further steps must be taken. First, the EDA should finance up to 50 per cent of issuances by EU members, to create a deep and liquid market. In exceptional circumstances, for member states whose access to debt markets is impaired, up to 100 per cent could be financed in this way. Second,the EDA should offer a switch between E-bonds and existing national bonds.

The conversion rate would be at par but the switch would be made through a discount option, where the discount is likely to be higher the more a bond is undergoing market stress. Knowing in advance the evolution of such spreads, member states would have a strong incentive to reduce their deficits. E-bonds would halt the disruption of sovereign bond markets and stop negative spillovers across national markets.

In the absence of well-functioning secondary markets, investors are weary of being forced to hold their bonds to maturity, and therefore ask for increasing prices when underwriting primary issuances. So far the EU has addressed this problem in an ad hoc fashion, issuing bonds on behalf of member states only when theiraccess has been seriously disrupted. This week the European Central Bank took further steps to stabilise the secondary market. With a single European market, primary market disruptions are in effect precluded, reducing the necessity for emergency interventions in the secondary market.

A new market would also ensure that private bondholders bore the risk and responsibility for their investment decisions. In this way, the E-bond proposal usefully complements recent decisions aimed at providing clarity about a permanent mechanism to deal with debt restructuring. It would help to restore confidence, allowing markets to expose losses and ensuringmarket discipline. Allowing investors to switch national bonds to E-bonds, which might enjoy a higher status as collateral for the ECB, would help to achieve this. Bonds of member states with weaker public finances could be converted at a discount, implying that banks and other private bondholders immediately incurred the related losses, thus ensuring transparency about their solvency and capital adequacy.

An E-bond market would also assist member states in difficulty, without leading to moral hazard. Governments would be granted access to sufficient resources, at the EDA’s interest rate, to consolidate public finances without being exposed to short-term speculative attacks. This would require them to honour obligations in full, while they would still want to avoid excessive interest rates on borrowing that is not covered via E-bonds. The benefits from cheaper, more secure funding should be considerable.

A liquid global market for European bonds would follow. This would not only insulate countries from speculation but would also help to keep existing capital and attract new flows into Europe. It should also foster the integration of European financial markets, favouring investment and thus contributing to growth.

Ultimately the EU would benefit too. Profits from conversions would accrue to the EDA, reducing effective E-bond interest rates. As a result EU taxpayers, and those member states currently under attack, would not have to foot the bill. All these benefits could be extended to member states that remain outside the eurozone.

We believe this proposal provides a strong, credible and timely response to the ongoing sovereign debt crisis. It would endow the EU with a robust and comprehensive framework that not only addressed the issue of crisis resolution but also contributed to the prevention of future crises by fostering fiscal discipline, supporting economic growth and deepening European integration.

The writers are prime minister and treasury minister of Luxembourg and Italy’s minister of economy and finance

Edited by ParticleMan

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Tremonti is a "ladro" and Goldman's bitch - how convenient that this crisis plays into the federalist's hands.

Well, yes, quite, just like the ERM debacle that preceeded it.

But that's the European perspective - recency bias manifest (the "solution" to internecine rivalries of the 30's and 40's is evidently to fix trading ranges).

The dawning realisation that currency union may indeed imply fiscal union hence in turn require political union is a deep irony in this context, and one I'd wager lost on few.

Edited by ParticleMan

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Well, yes, quite, just like the ERM debacle that preceeded it.

But that's the European perspective - recency bias manifest (the "solution" to internecine rivalries of the 30's and 40's is evidently to fix trading ranges).

The dawning realisation that currency union may indeed imply fiscal union hence in turn require political union is a deep irony in this context, and one I'd wager lost on few.

I'm probably missing something because find your posts very difficult to understand, but interested in your opinion on the following q's:

- is your view that people haven't yet woken up that "currency union may indeed imply fiscal union hence in turn require political union" ? IMO this is driving current market events and I don't think it's lost on anyone, esp in the EU political class.

- who do you think holds more weight in deciding the outcome: the likes of Juncker, or the likes of Schauble ?

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- is your view that people haven't yet woken up that "currency union may indeed imply fiscal union hence in turn require political union" ? IMO this is driving current market events and I don't think it's lost on anyone, esp in the EU political class.

It's my view that although the mathematic certainty of this was predicted from (perhaps even predicated by) the get-go, that such views were dismissed pre-ERM II as being the ravings of ECU (and then Euro) anti-Federalist detractors.

And admittedly the calculus of it all was an easy broom-handle to beat the pro-Union types with, and used to that end.

All that's happening here is the unwinding of a simple equation - differing (perhaps even opposing) attitudes toward risk handcuffed through currency union will play out in the fiscal sphere, and the stresses will build until one or the other gives (the currency union fails or fiscal union is achieved).

- who do you think holds more weight in deciding the outcome: the likes of Juncker, or the likes of Schauble ?

I see both as mere actors and fairly unimportant (they're just lables we can use to assign to the various stresses, hopes, and fears of the citizenry).

To answer your question differently, let me go on to suggest two things :-

1/ Saying "no" is a standard negotiating tactic in Germany (and has been used to very, very good end in improving his claim throughout what will be later known as ERM II's unwind)

2/ The fear of the recent past, the real race to the bottom - the 30's and the 40's - will ensure the Eurozone does indeed arrive at some form of fiscal union once the politics are done (ie once Germany has finished improving his ASK in this most gruesome auction of national assets)

Edited by ParticleMan

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Thanks , Particle Man. Interesting views.

It's my view that although the mathematic certainty of this was predicted from (perhaps even predicated by) the get-go, that such views were dismissed pre-ERM II as being the ravings of ECU (and then Euro) anti-Federalist detractors.

Totally agree with that.

And admittedly the calculus of it all was an easy broom-handle to beat the pro-Union types with, and used to that end.

All that's happening here is the unwinding of a simple equation - differing (perhaps even opposing) attitudes toward risk handcuffed through currency union will play out in the fiscal sphere, and the stresses will build until one or the other gives (the currency union fails or fiscal union is achieved).

And that. I’ve been banging on this point all year – that finally the (only really valid) question is being asked : are these states jointly and severally liable, or not? If so, it’s full union time. No idea on timeframes etc in which this plays out, but things have now irreversibly moved on in that you can actually ask the question without someone berating you for being a loony little Englander.

Quote

who do you think holds more weight in deciding the outcome: the likes of Juncker, or the likes of Schauble ?

I see both as mere actors and fairly unimportant (they're just lables we can use to assign to the various stresses, hopes, and fears of the citizenry).

Sure, wasn’t meaning the individuals necessarily but more what they represent ie federal european interests vs sovereign interests

To answer your question differently, let me go on to suggest two things :-

1/ Saying "no" is a standard negotiating tactic in Germany (and has been used to very, very good end in improving his claim throughout what will be later known as ERM II's unwind)

2/ The fear of the recent past, the real race to the bottom - the 30's and the 40's - will ensure the Eurozone does indeed arrive at some form of fiscal union once the politics are done (ie once Germany has finished improving his ASK in this most gruesome auction of national assets)

I differ here; I think national interests will ultimately prevail, although short term (next 3-5 years) there may be an attempt at closer union. I do think the discrepancies between economies and countries are too great to overcome though in the end, especially where the glue that holds it together comes from desperation (“do this or we’ll all die burning in debt”) rather than a genuine idealogy which is generally accepted by citizens, as in the US.

Also think that if the most likely way to bring a repeat of the past is a full federal Europe. It has to be a recipe for what I suppose in a federal Europe would be called civil war. But that’s for later. Suspect to suggest that now would mean being labelled as that eurosceptic loon again......

Edited by FallingKnife

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Thanks , Particle Man. Interesting views.

It's my view that although the mathematic certainty of this was predicted from (perhaps even predicated by) the get-go, that such views were dismissed pre-ERM II as being the ravings of ECU (and then Euro) anti-Federalist detractors.

Totally agree with that.

And admittedly the calculus of it all was an easy broom-handle to beat the pro-Union types with, and used to that end.

All that's happening here is the unwinding of a simple equation - differing (perhaps even opposing) attitudes toward risk handcuffed through currency union will play out in the fiscal sphere, and the stresses will build until one or the other gives (the currency union fails or fiscal union is achieved).

And that. I’ve been banging on this point all year – that finally the (only really valid) question is being asked : are these states jointly and severally liable, or not? If so, it’s full union time. No idea on timeframes etc in which this plays out, but things have now irreversibly moved on in that you can actually ask the question without someone berating you for being a loony little Englander.

Quote

who do you think holds more weight in deciding the outcome: the likes of Juncker, or the likes of Schauble ?

I see both as mere actors and fairly unimportant (they're just lables we can use to assign to the various stresses, hopes, and fears of the citizenry).

Sure, wasn’t meaning the individuals necessarily but more what they represent ie federal european interests vs sovereign interests

To answer your question differently, let me go on to suggest two things :-

1/ Saying "no" is a standard negotiating tactic in Germany (and has been used to very, very good end in improving his claim throughout what will be later known as ERM II's unwind)

2/ The fear of the recent past, the real race to the bottom - the 30's and the 40's - will ensure the Eurozone does indeed arrive at some form of fiscal union once the politics are done (ie once Germany has finished improving his ASK in this most gruesome auction of national assets)

I differ here; I think national interests will ultimately prevail, although short term (next 3-5 years) there may be an attempt at closer union. I do think the discrepancies between economies and countries are too great to overcome though in the end, especially where the glue that holds it together comes from desperation (“do this or we’ll all die burning in debt”) rather than a genuine idealogy which is generally accepted by citizens, as in the US.

Also think that if the most likely way to bring a repeat of the past is a full federal Europe. It has to be a recipe for what I suppose in a federal Europe would be called civil war. But that’s for later. Suspect to suggest that now would mean being labelled as that eurosceptic loon again......

+1

The assumption all along has been that monetary union would lead to economic union then fiscal union and ultimately political union, and that logic is still the standard view in much of the politcal and financial establishment. Unfortunately history rather suggests that the process works the other way round with military conquest driving political union that then leads to fiscal, monetary and economic union. This is certainly how the Roman Empire was built, the United Kingdom was created and even how the modern US arose after its Civil War. Indeed, even successful voluntary unions such as the creation of the modern German state in 1871 carried out political unification at exactly the same time as creating a single German currency. The EU is still trying to move with the cart well and truly in front of the horse. I may live to see a united Europe but the current growing political and economic tensions mean that it is not likely to arise voluntarily or without some form of serious struggle. It is certainly going to require more than common Eurobond issuance to create it.

Edited by realcrookswearsuits

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....the well reported (if little understood) failure of the ERM.

Why do you think the ERM failed? The idea of the ERM was to harmonise a basket of currencies and hold their exchange rates level long enough to allow the introduction of a new currency - the Euro. Here we are in 2010 with a functioning Euro adopted by many of the EU member states. I can only conclude therefore that the ERM worked and achieved its stated goal.

The stability and growth pact has not worked because the various governments in the EZ have acted in a way that is contrary to the regulations governing the currency union. The bailout of Greece, for example, is certainly outside the spirit, if not indeed the actual letter of the Euro agreements. The EZ now faces a crisis of political making due to the corruption of the finance sector and the complicity in that matter by its member governments. This, IMO, bears no relation to the ERM.

The ERM allowed a number of governments to join together and build the new currency. Some of those governments "fudged" their PSBR in order to qualify for membership - a "dishonesty" that now comes back to haunt them. Others, like France, put their debts "off balance sheet" and will, I am sure, come to regret that too. One government which tried that same trick and failed was the UK government of 1992. The UK is an odd case given that its government claimed that it did not wish to join the Euro but joined the ERM. Leaving aside the rather obvious fact that the UK government of that era lied about everything it ever did (as did its replacement and indeed the current administration) also leaving aside the fact that the UK government of that time was financially hopeless and inept and indeed leaving aside the fact that the UK government of that period was driven by a lunatic ideology that has subsequently brought global capitalism to the brink of total apocalyptic collapse, one really has to wonder if the UK did in fact both want to join and indeed intend to join.

leaving the basket case UK aside, the ERM seems to me to have facilitated the Euro and therefore succeeded. Whether the Euro holds up over the coming years is another matter given the magnitude of the bank fraud that now threatens virtually every developed country in the world.

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Why do you think the ERM failed?

I don't think it failed - that it did fail is an undeniable historical footnote documented in all its unholy glory on ticker-tape feeds of the European spot market starting roughly in July '92 (somewhat considerably earlier if you allow me the embarrassment of highlighting the IPE's de-pegging from Sterling).

It blew up most spectacularly, coming under fire (somewhat infamously) on the GBPDMK cross but also on the Finnish, Italian, Spanish, Portuguese, and Norwegian pairs (even the IEP got a kick or two, that time through).

The idea of the ERM was to harmonise a basket of currencies and hold their exchange rates level long enough to allow the introduction of a new currency - the Euro.

Some latter-day revisionists espouse this, but it doesn't make it any truer.

The ERM was founded in a knee-jerk reaction to the failure of Bretton Woods - the goal was to continue the mathemagical nonsense of fixing the relative values of European currency crosses to the same levels as they'd been under the previous regime of direct pegs (and full dollar convertibility) (the goal being stability - a reduction in volatility, not unity, or even convergence).

The point that's often lost on those who did not live through this (or did, but with their eyes shut and ears closed) is that the ERM was a permissible trading band a member currency might enjoy around a weighted basket (the ECU).

Baked in to the very crust of the ERM are the notions of national issuance, fixed relative value, and, free-float against the dollar (which are the very reasons why in turn it "surprised" us by having the teremity to fail a mere decade and a half later)

In short ERM-era European currency pairs behaved somewhat similarly to the DX contract, and this was not at the time intended to be a transitory state.

The talk regarding currency union starts later with the Delors report - itself a byproduct of the pro-Federal interests' frustration with a lack of progress toward their goals in half a decade or more - where it's tacitly recognised that ECU-denominated issuance and deposit taking (which have been ongoing since '79 or so) open the door for a currency union (even if both have, left to their own devices and market forces, effectively stalled).

It's interesting to note the way in which the ERM's failure was conflated into a case for the pro-(currency)unionists - cognitive dissonance at its best (instead of questioning why ECU-denominateds stalled and why pegging the relative value of dissimilar economies was a nonsense, instead - like reluctant fois gras geese - we got more of the same)

And much like, one is tempted to note, the manner in which the third failure (of the ongoing attempts to weld these economies into a single whole despite clear market signals regarding the futility of such) is being misdirected through talk of "fixing" a broken currency union via fiscal union (or in the very least, thrusting the ECB into the role of market-maker for emerging debt - which nets to the same thing, in the end).

Edited by ParticleMan

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http://noir.bloomberg.com/apps/news?pid=20601110&sid=aenSMQasfoM8

Dec. 10 (Bloomberg) -- A proposal to sell joint euro-region debt has emerged as a new flashpoint among European leaders running out of options to stabilize bond markets.

With a European Union summit set for next week in Brussels, officials from Italy, Luxembourg, Belgium and Greece said the proposal should be explored, prompting resistance from Germany, France and Austria. Economists and analysts from Goldman Sachs Group Inc., Morgan Stanley and HSBC Holdings Plc said it may end the euro-region debt crisis.

The plan would establish a European Debt Agency to sell bonds to finance as much as 50 percent of EU member borrowing, climbing to as much as 100 percent for countries unable to lure investors. Opponents say the proposal would raise interest rates for stronger nations. The weighted-average five-year borrowing cost for the 16 euro-region nations was 3.05 percent yesterday, compared with 1.95 percent on German debt, data compiled by Bloomberg show.

It’s very important that negotiations continue on the path of some kind common bond issuance and a more centralized fiscal policy,” said Steven Major, global head of fixed-income research at London-based HSBC. “We can’t go on like this with the ECB doing the heavy lifting. We need a more sustainable solution.”

A joint euro bond may be the first time one country has issued debt on behalf of another. In 1989, so-called Brady bonds were issued by nations, including Colombia, Brazil and Venezuela, backed by the U.S. government. The bonds are named after former Treasury Secretary Nicholas Brady, who helped create the program.

Credit Agricole

The European Financial Stability Facility, the 440 billion- euro bailout fund set up by the EU after the Greece rescue, plans to sell bonds in January to pay for aid to Ireland. While backed by most of the same nations that would be involved in a euro bond, it has attracted a AAA rating through a number of credit enhancements and would therefore likely attract lower yields than a euro bond, according to analysts at Credit Agricole Corporate & Investment Bank.

Politicians are tabling ideas to tackle the euro-region’s fiscal crisis after the European Central Bank was forced to step up its buying of government bonds when a bailout of Ireland last month failed to defend the region’s bond markets against investors betting on a breakup of the euro.

Irish bonds fell after the nation said Nov. 21 that it had asked for a bailout, with the 10-year yield reaching a record 680 basis points more than benchmark German bunds on Nov. 30. Yields have declined since the ECB stepped up purchases of bonds from Ireland, Portugal and Greece on Dec. 1, reducing the Irish- German spread to 503 basis points yesterday.

‘Intellectually Attractive’

Luxembourg Prime Minister Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti put forward a plan for selling joint bonds in a Financial Times commentary on Dec. 6, heightening the current debate. The idea is “intellectually attractive,” EU Economic and Monetary Affairs Commissioner Olli Rehn said the same day, while Greek Prime Minister George Papandreou said it’s time to “seriously discuss” it.

Juncker, who chairs meetings of euro-group finance ministers, took a swipe at the German opposition, prompting a riposte from a key ally of German Chancellor Angela Merkel.

Germany rejected his proposal to create euro-region bonds too quickly and has shown “simple” thinking on the matter, Juncker said on Dec. 8, Die Zeit reported citing an interview. Germany is dealing with European matters “in an unEuropean way” and the bond proposal was dismissed before Germany had examined it properly, the German newspaper cited him as saying.

The Debate

Michael Meister, the senior finance and economy spokesman for Merkel’s Christian Democratic bloc, shot back in an interview later that day.

“We can’t put any more on the table,” Meister said in an interview. Juncker and Tremonti “can surely say what they want. They can go ahead with joint bonds if they want,” he said.

The objections may not be final, Major said. Merkel opposed bilateral loans to Greece on the same grounds, before joining euro-region nations and the International Monetary Fund in providing 110 billion euros of loans to the debt-stricken nation. Merkel also backs a change in the European Union treaty that allows for the creation of a permanent crisis mechanism.

Merkel’s stance is “a negotiating position,” Major said. “The worst-case scenario would be more expensive for Germany” than issuing common bonds, he said.

The creation of common bonds or bills for the euro area may help bring an end to the region’s fiscal crisis by deepening market liquidity, according to Sander Schol, a London-based director at the Association for Financial Markets in Europe.

‘Optimal Risk Sharing’

The AFME’s European Prime Dealers Association wrote a research paper for the European Parliament on the potential for a common European Issuance Program. It found “smaller liquidity premiums, more effective hedging and the removal of the market- making obligation would lead to lower interest rates,” Schol said.

Such bonds might be the “optimal risk-sharing scheme,” Goldman Sachs rate strategist Francesco Garzarelli and economist Natacha Valla said yesterday. Designed correctly, a joint bond program would create a financial incentive for fiscal prudence and reduce moral hazard, Arnaud Mares, an executive director at Morgan Stanley and former senior vice president at Moody’s Investors Service, said on Dec. 6.

Compelling theory is unlikely to bring the plan to fruition anytime soon, according to said Michael Leister, a fixed-income analyst at WestLB AG in Dusseldorf.

“For Germany or France it wouldn’t be at all attractive, because they would end up paying a higher yield,” he said. “This isn’t a concept you can sell to the German electorate right now, and probably the same in Austria and France.”

As I said, saying "no" is a standard German negotiating technique... this issue, like the Federalists, won't go away.

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The rim countries are giving the Germans a choice between either,

"You go bankrupt because we go bankrupt,"

Or,

"You go bankrupt because you pay for us not to."

I think it's pretty clear which of those the Germans are gonna say "no," to.

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The rim countries are giving the Germans a choice

Either way a basic straddle (a mid or long dated swap on Bunds vs a mid or long dated swap on say Italian or Spanish sovereigns) is a very easy way to pyramid into this trade, and proving to be a fairly lucrative strategy (for the moment, at least).

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As good a place as any to resume this thread - the below may as well be the agenda for Thursday/ Friday's meetings.

http://noir.bloomberg.com/apps/news?pid=20601110&sid=a_9G0sqSK.Ds

Dec. 15 (Bloomberg) -- Germany stiffened its opposition to expanding government-financed aid for debt-plagued euro nations, leaving the European Central Bank to shoulder the bulk of the burden of fighting the crisis.

With Chancellor Angela Merkel ruling out an increase in the euro area’s 750 billion-euro ($1 trillion) emergency fund, Germany yesterday put the spotlight on the ECB by endorsing a possible boost in its capital.

Discord between Merkel and ECB President Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker on the eve of a European Union summit evokes the tensions during the first phase of the debt crisis, when Germany held out for more than two months before consenting to a loan package for Greece.

“The consequence is a stalemate that leaves us with a familiar sense of déjà vu,” Ken Wattret, chief euro-area economist at BNP Paribas SA in London, said in a note to investors. “Market tensions are likely to resurface, as governments remain very publicly divided on the appropriate way forward.”

The euro weakened after Moody’s Investors Service said today it may cut Spain’s Aa1 credit rating. The country lost its top rating in September. The currency declined 0.5 percent to $1.3312 at 7:35 a.m. in London.

The review is “not good for spreads or the euro,” Charles Diebel, head of market strategy at Lloyds TSB Corporate Bank in London wrote in an e-mailed note.

Spreading Contagion

Evidence that core countries in Europe are also at risk mounted yesterday when Standard & Poor’s cut the debt outlook for Belgium, which is stuck with a caretaker government six months after inconclusive elections. Belgian bonds fell, pushing the risk premium against comparable German notes up 2 basis points to 102 basis points.

“The main risk to economic recovery and the main risk to market performance in 2011 is the euro zone,” Andrew Popper, chief investment officer at SG Hambros Bank Ltd., said on Bloomberg Television’s “On The Move” with Francine Lacqua. “The euro zone will be the dominant problem.”

Merkel will lay out Germany’s position in an 11 a.m. speech to parliament in Berlin today. EU leaders start a two-day summit at 5 p.m. in Brussels tomorrow with the focus on the permanent crisis-fighting system to be launched in 2013.

Proposals facing German resistance include using EU money to buy distressed governments’ bonds directly or in the secondary market, boosting the fund’s size or redrafting guarantee rules to make more of the money available.

Fund’s AAA Rating

The need for a cash buffer to maintain an AAA credit rating puts the bailout fund’s effective lending capacity as low as 230 billion euros. Abandoning the top rating isn’t up for discussion, an EU official said yesterday.

Leaders of the 16 euro governments continue to be prodded by Trichet and the International Monetary Fund, contributor of 250 billion euros to the European rescue packages.

Trichet said euro-area governments need to put more money on the table to halt the crisis instead of depending on the central bank to soothe markets by buying the bonds of distressed governments.

“We’re calling for maximum flexibility and maximum capacity, quantitatively and qualitatively,” Trichet told reporters in Frankfurt in remarks released yesterday.

The ECB settled 2.667 billion euros of bond purchases last week, a 23-week high for a program without unanimous support on the bank’s council. With 72 billion euros of potentially loss- making bonds now on its books, the ECB may ask national central banks for more capital, an official with knowledge of the situation said yesterday.

Unlimited Loans

The ECB’s other main crisis-fighting step is to provide unlimited liquidity for commercial banks, a policy it extended on Dec. 2 into the second quarter of 2011.

Germany, Europe’s largest economy and biggest contributor to aid packages for Greece and Ireland, is against tinkering with the 440 billion-euro European Financial Stability Facility, set up in May and underwritten by euro-area governments, a German official told reporters in Berlin yesterday.

Ireland on Nov. 28 borrowed 17.7 billion euros from the facility as part of an 85 billion-euro package to plug the fiscal holes from the bursting of its property bubble and near- collapse of its banking system.

“These instruments are far from exhausted,” European Commission President Jose Barroso told the European Parliament in Strasbourg, France yesterday. “If need be, they can be improved and adapted much more quickly than any alternative.”

IMF Pitch

IMF Managing Director Dominique Strauss-Kahn told euro-area finance ministers on Dec. 6 that they should disburse aid preemptively instead of waiting for a last-ditch request as happened with Ireland, an official familiar with the debate said yesterday.

In a side battle with a onetime ally, Merkel is also trying to muzzle proposals by Juncker for joint euro-region bond sales to create a more liquid market.

Juncker, head of the panel of euro-area finance ministers, called for European governments to pool borrowing for debt up to 40 percent of gross domestic product.

To provide an incentive to keep debt down, each country would have to finance borrowing above that limit on its own, incurring penalty interest rates, Juncker and Italian Finance Minister Giulio Tremonti proposed last week.

If you want to play along at home, simultaneously buy and sell the Eurex GBL future (buy the front month and sell the longest dated you can find), and do likewise with the recently listed BTP product.

When they diverge, shoot the losing legs of the trade.

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Does anyone know why Spain should be under so much pressure now,

"Spain faces threat of debt downgrade"

http://uk.finance.yahoo.com/news/Spain-faces-threat-debt-tele-3142147350.html;_ylt=AnnYLt_txuAgVjnWV1urRZTSr7FG;_ylu=X3oDMTE4OXZvcXU1BHBvcwMyBHNlYwN5ZmlUb3BTdG9yaWVzBHNsawNzcGFpbmZhY2VzdGg-?x=0

When their national debt is some 45% of GDP, compared to say Portugal, 75% and Belgium 99%?

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http://noir.bloomberg.com/apps/news?pid=20601110&sid=afAZpxciEnG0

Dec. 16 (Bloomberg) -- European Union divisions widened over how to contain the debt contagion that threatens the euro, limiting a summit starting today to agreeing on a crisis- management mechanism that takes effect in 2013.

German Chancellor Angela Merkel balked at boosting or making more flexible use of the EU’s 750 billion-euro ($1 trillion) emergency fund, as leaders neared an accord on the tool to contain future debt shocks.

Strife among Merkel, the European Central Bank, Luxembourg Prime Minister Jean-Claude Juncker, and the German domestic opposition intensified on the eve of the Brussels summit, marring confidence in Europe’s handling of the fiscal woes that forced Greece and Ireland to fall back on financial handouts.

“There is a situation of European gridlock again with Germany blocking actions to make progress,” said Nick Kounis, chief euro-region economist at ABN Amro NV in Amsterdam and a former U.K. Treasury official. “There is a high risk of the crisis re-escalating and maybe now it’s the quiet before the storm in markets.”

Portuguese, Greek and Spanish bonds slipped today. The extra yield that investors demand to hold Spanish 10-year bonds over German counterparts rose 4 basis points to 246, one day after Moody’s Investors Service warned about a possible credit downgrade. Spain aims to raise as much as 3 billion euros in a bond sale today. The euro rose 0.2 percent to $1.3238.

‘Last Resort’

EU governments are close to agreeing on a two-sentence amendment to the bloc’s Lisbon Treaty foreseeing a “mechanism to safeguard the stability of the euro area as a whole” with financial aid for distressed governments “subject to strict conditionality,” EU officials told reporters in Brussels yesterday.

Germany has failed to get a reference to possible costs for bondholders enshrined in the treaty and is virtually alone in pushing for the amendment to say that any financial assistance will only be offered as a “last resort,” the officials said.

Last overhauled a year ago, the treaty is the EU’s equivalent of a constitution, binding on EU institutions in Brussels and on national governments’ handling of European affairs. All 27 countries, including the 11 outside the euro region, would need to ratify the amendment.

German insistence on cutting bond values when countries get into trouble in the future triggered the latest phase in the debt crisis, culminating in an 85 billion-euro support package for Ireland on Nov. 28.

‘Common Future’

Merkel yesterday laid out a nine-point set of demands that don’t need to be embedded in the treaty, which won backing from euro finance ministers last month. In a retreat for Germany, the plan foresees only “case by case” writedowns for bondholders in accord with IMF practices.

“For me it’s important that financial aid will, also in the future, be granted only as a last resort,” Merkel told parliament in Berlin yesterday. “We will gain more stability, and this gives us more security for the future. The euro is our common fate and Europe is our common future.”

The summit starts at 5 p.m. Brussels time with EU President Herman Van Rompuy likely to announce interim results in the late evening after dinner and a round of talks. The gathering is slated to end around 1 p.m. tomorrow.

Away from the constitutional debate, Portuguese Finance Minister Fernando Teixeira dos Santos said International Monetary Fund experts are in Lisbon on a routine inspection trip. He said Portugal is taking the right deficit-cutting steps so it doesn’t have to ask for an EU financial lifeline.

ECB Buying

Merkel continued to hold out against calls by ECB President Jean-Claude Trichet to put more money into the aid fund. The ECB has bought 72 billion euros of weaker countries’ debt since May under a policy without unanimous support on the bank’s council.

A “back-of-the-envelope calculation” indicates the ECB may lose money on the emergency purchases, David Owen, chief European economist at Jefferies International Ltd. in London, said yesterday. The ECB may tap national central banks for more capital, an official with knowledge of the matter said Dec. 14.

Driven by a German public outcry against aiding fiscally reckless countries, Merkel also ruled out retooling the support facility to buy troubled governments’ bonds and opposed further entwining Europe’s economies by consenting to joint borrowing.

Luxembourg’s Juncker, the promoter of the joint bond-sale proposal, said it won’t go anywhere at the summit. Juncker told Luxemburger Wort newspaper that Germany is “allergic” to the idea, fearing it would push up German borrowing costs.

German Costs

Joining forces to borrow could cost German taxpayers an extra 13.4 billion euros in interest payments annually by harming Germany’s credit rating, the Munich-based Ifo economic research institute said on Nov. 23.

German opposition leaders seized on the debate over the bonds to criticize Merkel. Joint borrowing in the “medium term” could be the kernel of a more integrated European economy, former Finance Minister Peer Steinbrueck and former Foreign Minister Frank-Walter Steinmeier wrote in yesterday’s Financial Times.

“Our leaders face a choice: extend the crisis by stumbling through, or regain momentum to end it,” the two Social Democrats wrote. “Much will depend on the German chancellor.”

Still plenty of room left to do a little looting*...

If you want to play along at home, simultaneously buy and sell the Eurex GBL future (buy the front month and sell the longest dated you can find), and do likewise with the recently listed BTP product.

When they diverge, shoot the losing legs of the trade.

... and I'm more convinced than ever before that the political impossibility of this situation will turn what's obviously a pan-European sovereign liquidity issue into a a pan-European, 30's-esque depression.

I'm also quite convinced that the Stability and Growth pact is a gonner** - there's no public support in either nation for yielding to a political union, so the Germans will scream for control of policy, and the French will scream for control of the finances before we're done here,

(* If you go read the post-ERM-failure texts on how the currency markets took truly astonishing profits from the European reserves, and substitute "reserve bank bond" for "spot currency" in any of them, you'll be handed a how-to playbook of your very own; what are you waiting for, a written invitation?)

(** Germany already contested their side, and had to go home empty handed - France and the Benelux nations refused point blank to cede to demands for automatically triggered sanctions, neutering Frankfurt's ability to threaten irresponsible member states with any sort of stick at all)

Edited by ParticleMan

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  • 142 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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