Spanish and French bond auctions occurred overnight. With yesterday’s central bank interventions and the corresponding market euphoria the results were fairly good given the circumstances:
Madrid’s cost of borrowing – ranging from around 5.19 to 5.54 percent on the 4–, 5- and 6-year paper – was the highest at a government sale since before the launch of the euro, but far below yields around 7 percent widely held as unaffordable.
That reflects improvement in markets over the past week which has seen Spanish rates come down around 60 basis points to a full percentage point below Italy’s and France moves out of the immediate line of fire in the debt crisis.
France saw good demand at the sale of 4.35 billion euros of long-term bonds, with yields falling on both 10- and 15-year issues compared with previous auctions. The 10 year yield stood at 3.18 percent and the premium investors charge for holding its bonds over German bonds fell to 93 basis points, its lowest in a month in response.
In the short term we are seeing lower yields across the board, except Greece. CDS is showing a similar pattern. For Europe’s sake I hope this can last because there is still lots to come:
Only 8 days to go before the world is supposed to hear what Europe’s latest “plan” is. On Dec 9 the markets are expecting to hear how exactly the euro area is going to be re-integrated under tighter fiscal rules and, as I said yesterday, a credible plan to make the transition from the current mess to something sustainable without the whole thing collapsing in a heap.
Not to disappoint, just as in the lead up to the October summit, members of the Bundestag are busily sending mixed messages:
The leaders of Chancellor Angela Merkel’s centre-right coalition agreed on Thursday that Germany’s opposition to common euro zone debt issuance was non-negotiable, Economy Minister Philipp Roesler, said on Thursday.
Roesler, also head of the Free Democrats, told reporters he had spoken to Merkel and Horst Seehofer, leader of the conservative Christian Social Union (CSU), on a conference call and they were united in a flat rejection of euro bonds to help solve the debt crisis.
“We are not prepared to buy into changes to the (EU) treaty in exchange for rules that other European countries want, for example euro bonds,” he said at a news conference in which he outlined proposals for treaty change.
“The three of us clearly and expressly reject this,” he said, adding that a debt union would be the wrong path.
It will be interesting to see if the Bundestag could be convinced to support the European redemption pact from the German council of economic experts, which I interpret as the eurobond your having when your not having a eurobond.
Angela Merkel is pressing ahead with her own plans, but as yet is still not giving any clues as to how exactly Europe is going to handle its existing debts under deflationary government budgeting:
German Chancellor Angela Merkel is set to snub investor pleas to back an expanded European Central Bank role in solving the debt crisis, as she pushes her demand for tighter economic ties in Europe as the only way forward.
In the days before a speech to German lawmakers tomorrow outlining her stance for a Dec. 9 European summit, Merkel has repeated her push to rework European Union rules to lock in budget monitoring and enforcement and seal off the ECB from political pressure. That risks a showdown with fellow EU leaders and extends her conflict with financial markets looking for immediate measures to end the contagion.
The ECB President, Mario Draghi, also seems to be on board with the latest plan however he does appear to be trying to lower expectations:
“A new fiscal compact” is “definitely the most important element to start restoring credibility,” Draghi said in an address to the European Parliament in Brussels today. “Other elements might follow, but the sequencing matters. It is first and foremost important to get a commonly shared fiscal compact right.” Draghi didn’t specify what more the ECB could do and said the central bank’s bond purchases “can only be limited.”
Interestingly the ECB president also made some acknowledgement that, once again, increased central bank liquidity was doing nothing to kick start private sector credit issuance in what appears to be, at least to me , a softening up for a European recession:
“The ECB has created an enormous amount of liquidity, and we see now that this liquidity is being redeposited with the ECB deposit facility,” Draghi said. “Which means it is not so much the amount of liquidity that is the matter, but it’s the fact that this liquidity is not actually circulating.”
The most important thing for the ECB to do is restore the flow of credit to the economy, he said.
“We have observed serious credit tightening in the most recent period, which combined with the weakening of the business cycle doesn’t bode at all well for the months to come,” Draghi said.
That point was made clear by the banks themselves who parked 304 billion euros at ECB yesterday compared to the year-to-date average of 81 billion euros. FTAlpahville also noted that Draghi has made comments about the limited availability of eligible collateral and that the ECB maybe forced to follow the RBA with some invisopower! of its own.
Overnight Sarkozy gave a televised speech to his country outlining his plans for the French economy:
This new (economic) cycle is different to the previous one. The next cycle will be a cycle of reducing debt that will be accompanied by an adjustment for which all economic policies of developed countries will have to be confronted.”
Sarkozy may be willing to hand over some fiscal control in order to support that new plan, but the man who could potentially replace him at the up and coming French elections doesn’t sound as if he is on board at all:
Socialist Francois Hollande, who polls show could defeat Sarkozy in the 2012 election, said while in Brussels to meet EU officials and set out his own position that he would not tolerate handing over control of national budgets.
“I will never accept that, in the name of control of national budgets or coordinating budget policies, the European court of justice could be the judge of a sovereign state’s spending and receipts,” Hollande said.
A senior Hollande ally, Jerome Cahuzac, head of the National Assembly finance committee, accused Sarkozy of “abandoning” sovereignty to the markets and credit ratings agencies.
“If this is about agreeing to hand sovereignty to a supranational body or a European government, we no longer follow him on this subject,” he told Europe 1 radio, noting France’s high debt had left it at the mercy of the financial sector.
“That France is obliged to accept this scheme that Germany has cooked up to run Europe proves that our country has been considerably weakened at the heart of the euro zone,” he said.
Many critics say Sarkozy has given up too much to Merkel and got too little in return after he agreed a truce with the chancellor last week in his push for the European Central Bank to come to the rescue of troubled euro zone states.
Hardline Socialist Arnaud Montebourg said Merkel was destroying the euro. “The moment has come to confront Germany and defend our values,” he told the Public Senate TV channel.
I guess that isn’t as harsh as the Polish opposition who have claimed that their foreign minister committed treason by giving a speech asking for Germany to lead Europe.
So once again we are seeing confusing mixed signals in the lead up to the latest “meeting to fix everything”. I still can’t see anything that resembles a credible plan for transition, because as yet I can’t see anyone accepting a plan that addresses the dual issue of existing debts and deflationary economic policy. However the leaders do seem to have agreed on one thing, Europe’s future economic growth over the next decade is not going to be like that of the past one.