The German document said “collective action clauses” (CAC) should be introduced into all EMU bonds issued from next year. These clauses open the way for creditor haircuts in cases where countries need a rescue.
The planned date is even sooner than the 2013 target announced by EU leaders in October’s summit, which itself came as a nasty shock to the bond markets. It gives the eurozone’s struggling debtors far less time to clear up their public finances. The plans will be aired at the EU summit in December.
Elena Salgado, Spain’s finance minister, warned Germany that the proposal risked making matters worse at a delicate moment. “We don’t think this idea is quite appropriate right now, including after 2013,” she said.
GR: Elena Salgado fears for her position. That is all. The delicate moment she refers to is nothing but public anger slowly rising which, from a political point of view, means that a politician’s position is at stake. Ms. Salgado obviously finds that shutting off the spigot of fiat money simply means she, and her party along with her, will be booted out of power. There are absolutely no other considerations in her line of thinking; certainly there are no fiduciary duty considerations.
Mrs Salgado said there was “an abyss” separating her country from Ireland and Greece. “We have a solid financial sector. Austerity and reforms are producing exactly the results we forecast,” she said, insisting that the country was the victim of a “speculative attack”.
However, iFlow data from the Bank of New York Mellon shows a major withdrawal of foreign funds from Spanish debt markets, mostly coming from “real money” investors. “The flows look rather similar to what we saw in Greece,” said Neil Mellor, the bank’s currency strategist.
GR: I had taken the other side of the bet on this issue a few weeks back. Had the Spanish prime minister taken the bet then, once again, I would be a rich man.
Portugal had the added strain on Wednesday of a near total shutdown of its airports, harbours, trains and buses as unions launched their first general strike in 22 years, protesting against the latest austerity budget and wage cuts of 5pc for public workers.
“Sacrifices by workers is not the way out of the crisis,” said Manuel Carvalho da Silva, of Portugal’s CGTP union, echoing a refrain now heard in a string of European countries.
Jürgen Michels from Citigroup said Germany’s haircut proposals would make it much harder for struggling Club Med states to raise money, risking a self-fulfilling crisis. “Portugal and Spain would be probably forced to tap the current European Financial Stability Facility, which could bring the facility to its limit and even exceed it,” he warned.
Mr Michels said the results would be so destructive that Germany is unlikely to win EU backing for the idea.
However, Chancellor Angela Merkel has already announced that she will “not back down” on demands for creditor pain. In an odd statement this week she said investors had made money “speculating on the bankruptcy of countries” and must now share the burden of rescue costs.
Critics say Mrs Merkel seems unwilling to acknowledge the difference between two vastly different types of players: hedge funds who are “short” eurozone debt and therefore stand to benefit from her policy; and the pension funds, life insurers and savers (many of them German) who bought southern European and Irish debt in good faith and now stand to lose.
GR: Pension funds and life insurers would not have purchased sovereign debt had it not been falsly graded investment grade by the rating agencies. Rating agencies that are working for and are sponsored by the banks I might add. So, having already been duped (very often willingly because of political favor) over the years, now pension and insurance funds should throw even more money after bad? This is a problem created by the politicians with the assistance of the bankers. It is time we cut the funds off to them. Whatever is lost is lost anyway. We should not give them even more.
There is confusion in the markets over how different types of debt will be treated. The Irish government has already enforced an 80pc haircut on the junior debt of Anglo Irish Bank but insists that senior debt is sacrosanct. That guarantee is now worthless since Fianna Fail is certain to lose the election in January.
GR: From the legal point of view there is nothing sacrosanct about senior debt. Quite the contrary. That’s the role they are suppose to play by law; i.e. take the losses. Senior bond holders reap the profits when things go well. They should shoulders the losses when things don’t go well.
Opposition leaders have not clarified how they will handle the issue. However, it is becoming ever harder to explain to the Irish people why they should suffer austerity in order to ensure that foreign holders of damaged Irish bank debt should lose nothing. The country’s Labour Party already favours burden-sharing. The concern is that once Ireland cracks on senior debt, the dam will break across Europe.
Greg Gibbs from RBS said the European Central Bank (ECB) had helped cause the latest eurozone eruption by draining liquidity too soon and signalling that it aimed to end the “addiction” of struggling Irish and Club Med banks to its cheap funding window sooner rather than later.
“This tough stance is reigniting a eurozone debt crisis. The ECB needs to rethink its plans,” he said. The RBS team said the central bank should dramatically increase its purchase of eurozone debt, especially Spanish debt, starting with €100bn sovereign and corporate bonds.
José Luis Martínez Campuzano, Citigroup’s economist in Spain, also faulted the ECB for letting matters get out of hand. “We have a situation where bodies that should be playing a key role are sitting on the sidelines repeating messages that have little to do with reality and the true risks ahead. That is the case with the ECB,” he said.
However, it is unclear whether the ECB has the firepower – or the legal mandate – to carry out the sort of bond purchases seen in the US, where the US government stands behind the Federal Reserve.”
GR: What is clear whether in the US or in Europe is that monetary policy has lost traction. It has been gradually losing traction over many years but it has now pretty much reached the point of least effect if at all. Doing more of the same in the clear absence of a demand driver anywhere in the world only serves to obliterate the currency.