It isn’t going too well is it ?
Last night Spain sold 3.563 billion euros in 10 yr bonds at a bid to cover 1.54 with an average yield 6.975% . France offered 6 billion euros worth with various maturities. They will pay an average yield of 1.85pc on €950m of new bonds maturing in 2013, up from 1.31pc, €1.069bn in bonds maturing in 2015 at 2.44pc, up from 1.96pc in October, and €3.3bn maturing in July 2016 is up to 2.82pc from 2.31pc.
Equities were unhappy with the result and fell while CDS on both countries pipped up.
Although Italy wasn’t in the market last night it wasn’t spared the bad news as Fitch ratings re-iterated that the country was on negative watch:
“Italy is likely already in recession and the downturn in activity across the euro zone has rendered the task of the new government much more difficult,” the ratings agency said in a statement.
Fitch, which downgraded Italy to A+ from AA- with a negative outlook last month, warned it would cut the country’s ratings to the low investment grade category if it were unable to borrow at sustainable rates on the markets.
“Sustaining political and public support for structural reforms and austerity will be challenging in the face of rising unemployment. Convincing investors that the reforms will be effectively implemented and will boost economic growth over the medium term will be equally if not more challenging,” it added.
“In the event that the Italian government loses market access — not Fitch’s base case — the ratings would be lowered, likely to the low investment grade category.”
As I said yesterday, once the the contagion starts lapping at France then expect the screaming for ECB to get louder. We are now seeing that playing out:
German Chancellor Angela Merkel rejected French calls to deploy the European Central Bank as a crisis backstop, defying global leaders and investors calling for more urgent action to halt the turmoil.
As the crisis sent borrowing costs in core economies outside Germany to euro-era records, Merkel listed using the ECB as lender of last resort alongside joint euro-area bonds and a “snappy debt cut” as proposals that won’t work.
“I’m convinced that none of these approaches, if applied right now, would bring about a solution of this crisis,” Merkel said in a speech in Berlin today. “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.”
Up until this point, the ECB has resisted calls for greater action. The ECB has one clear mandate and that is price stability. It has never had a mandate for fiscal policy either of a single nation or at a supra-european level and under European treaties fiscal operations are the domain of elected governments. The ECB’s stance on this is that they should go no further because it is the responsibility of individual countries to make decisions on fiscal policy. i.e, if the European governments want to help each other out then they have the power to do it themselves via transfers, the ECB does not need to play any part in that.
Obviously the issue is that at this stage their is not the political will for that to occur. The Germans have hinted a number of times that they are willing to move towards a more unified Europe but that will require nations to give up some of their sovereignty. I mentioned earlier in the week that I thought Germany was preparing for this in allowing Eurozone members to leave if they wanted to. Angela Merkel also re-iterated her position on this yesterday as she visited Ireland claiming that her own country would be “prepared to give up a piece of national sovereignty” over its budget. The Irish PM, however, didn’t seem happy with the idea.
Given that the French are levelling up the rhetoric about the use of the ECB suggests they aren’t on-board with the plan either. This certainly isn’t the first time Germany and France have disagreed on how to re-balance Europe, back in early 2010 the then French finance minister, Christine Lagarde, made it pretty clear what she thought the problem was:
“(Could) those with surpluses do a little something? It takes two to tango,” she told the Financial Times newspaper. “Clearly Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labour costs.”
Though Germany recently lost its crown as the world’s leading export nation to China, Europe’s largest economy still has a positive trade balance with most of its immediate neighbours. And eurozone members can no longer devalue their currencies to compensate for Germany’s surplus as they frequently did before the introduction of the euro.
“I’m not sure it is a sustainable model for the long term and for the whole of the group,” she said. “Clearly we need better convergence.”
But Chancellor Angela Merkel’s spokesman on Monday refuted Germany was the problem.
“We are not a country that sets salaries or consumption by decree,” he said. “It is better to think about a growth strategy together rather than obliging some to hold back artificially.”
I will ignore the irony of the now IMF head making disparaging remarks about Germany’s trade surplus, but it does highlight the historical context around the current disagreement.
The French see Germany’s economic model as part of the problem but can do nothing about it and are therefore demanding ECB action, the ECB believes it is the national governments issue to work out between them and is resisting while Germany thinks that it has a plan for resolution but France, along with many other parts of Europe, don’t appear to like it.
Something has to give. Who will blink first?