The ECB’s Forked-Tongue Policy To Save The Euro

Πηγή: Testosterone Pit
June 10 2013

In theory, Germany’s Federal Constitutional Court could throw a monkey-wrench into the efforts to keep the Eurozone duct-taped together; it could rule against the ECB’s money-printing and bond-buying mechanism, lovingly dubbed Outright Monetary Transactions. It was launched with fanfare last September. Actually, not with fanfare but with a few vague words, uttered by ECB President Mario Draghi himself, including the magic one, “unlimited.”

A word so powerful that it would bail out speculators and banks that had bought crappy Spanish and Italian debt at steep discounts. Bonds and stocks surged – as did unemployment and other problems, but what the heck, OMT wasn’t about curing sick economies. It was about a central bank promising to bail out speculators.

During oral arguments on Tuesday and Wednesday, the Court weighs if OMT violates the constitution’s requirement that budget matters be controlled by Parliament, but a ruling will be delayed until after the general elections on September 22. If the Court, which has no authority over the ECB, rules that aspects of OMT are unconstitutional in Germany, it could forbid the Bundesbank from participating in the one measure that has kept the Eurozone together. The Eurozone as we know it would unravel.

In practice, the Court would never do that. Given how it has ruled on euro-related issues so far, it will find a way out of the debacle, regardless of what it says in the constitution. And if it really wants to throw the book at the ECB, it could nod with an impish frown, impose some stipulations, and rubberstamp the rest.

But that hasn’t kept the mess from ballooning beautifully out of control in Germany where the ECB’s efforts to save the euro and itself – without euro there would be no ECB – are viewed with a decided lack of enthusiasm: 48% of the Germans side with the 37,000 plaintiffs, believing that the Court should stop the ECB’s whatever-it-takes-to-save-the-euro approach;only 31% believe that the plaintiffs are wrong; and despite the dense coverage in the media and in every corner of the internet, 21% still have no opinion.

Bundesbank President and ECB board member Jens Weidmann lambasted OMT from day one as “equivalent to funding governments by printing money,” warned of the risks of these measures, and questioned their legality under German law. He claimed that the ECB had overstepped its mandate by promising to fund the deficits of teetering countries, ultimately exposing German taxpayers to the risks and costs of bailing out speculators in foreign debt.

At the hearing, Weidmann faces a former associate and now antagonist, Jörg Asmussen, member of the ECB’s executive board, who’d praised OMT last week as “probably the most successful monetary policy measure undertaken in recent times.” Then, just before the hearings, he counter-attacked in the mass-circulation tabloid Bild:

"When we announced the program, the Eurozone was near uncontrolled disintegration. Important companies and banks began to prepare for it. At that time, the ECB was the only European institution capable of taking action, and it had to make clear to every speculator, ‘Do not mess with the ECB.’ The euro will be defended. The markets have learned the lesson.”

Draghi and his ilk must be getting cold feet. Over the last few days, a 52-page document that the ECB submitted to the Court in defense of its policies surfaced. In it, the ECB declared that its “unlimited” purchases of debt were suddenly not unlimited at all, but were in fact limited to €524 billion!

It had to do with internal limits. The OMT program could only purchase debt that would mature in 1-3 years. As of December 2012, Spain had €143 billion of this type of debt outstanding, a mere 26% of its total debt, and Italy €343 billion, or 32% of its debt. The ECB assured the court that it actually wouldn’t even go that far.

The message should have been a deafening alarm for the market; it should have sent speculators scrambling for the exits. Well, some scrambled alright. But the slick calculus wasn’t meant for them. It was meant for the justices of the Court, perhaps to fool them, perhaps to offer them a fig leaf. And market participants already know that the ECB doesn’t have to stick to these internal limits, or any limits; it has already figured out how to get around treaty limitations against buying sovereign debt.

And on Monday, Draghi said in an interview on German TV that the ECB would suddenly not use its OMT program to save bankrupt countries – or as he said more politely, “we will not intervene to ensure the solvency of the countries if they are profligate.” So profligate countries would be allowed to go bust. But – and there his tongue split in two again – “if there is a confidence crisis in the euro which is threatening the solvency of the countries not beyond what their fundamentals are, then we are ready to intervene.”

The plaintiffs, who want to keep the Bundesbank from participating in these interventions, were not impressed. Eternal euro-critic and Member of Parliament Peter Gauweiler (CSU)assured his fellow citizens that OMT would turn the ECB into an “uncontrolled power.” In exchange for giving up control, Europeans could live “in a brave new Huxley-world of the unlimited debt,” a world where “money is no longer earned but printed.”

So the Eurozone debt crisis remains “solved,” and there is nothing to worry about, other than a few cosmetic details, for example that the ECB, in order to keep the monetary union glued together, has one message for the Court and another for the markets – based on its forked-tongue policy.

Just when you thought the concept of universal justice was dead, a courageous Spanish judge did what no other judge in the Western world, bar Iceland, dared to do.

Euro Zone Economy Shrinks for a Second Quarter

Πηγή: New York Times
By JACK EWING
Nov 15 2012

FRANKFURT — The euro zone economy shrank for a second quarter in a row, according to official data released Thursday, eliminating any doubt about whether the region was in recession and signaling that a long road to recovery still lay ahead.

Gross domestic product in the euro zone fell 0.1 percent in the three months through September compared with the previous quarter, according to Eurostat, the European Union statistics agency. The downturn was slightly less severe than in the second quarter, when growth contracted 0.2 percent. But it was the fourth quarter in a row of zero growth or worse.

Perhaps more worrisome, the data showed that Spain, Portugal and several other countries remain far from the kind of recovery that would bring increased tax receipts and help them overcome their debt problems. European leaders, who have benefited from a tenuous calm on financial markets in recent months, are likely to face additional pressure to ease the government austerity programs that have undercut growth in Southern Europe.

Economists at Nomura warned of “a depressionary environment in a growing share of the region.” In a note to clients, they said, “This negative loop has the potential to threaten the stability of the whole system.”

Some analysts had forecast a bigger decrease in output. But France registered a surprise uptick in growth and the Italian economy shrank less than expected, moderating the pace of decline across the region. Considered along with sagging factory output and business sentiment, though, the numbers Thursday reinforced expectations that the euro area as a whole could remain in recession well into next year.

“An end to the recession in the euro zone is still out of sight,” Christoph Weil, an economist at Commerzbank in Frankfurt, said in a note to clients.

Germany, which has the largest economy in the euro zone, continued to defy the crisis. The country grew 0.2 percent in the third quarter, slowing from a rate of 0.3 percent in the second quarter.

But data on exports, domestic demand and business sentiment indicate that growth in Germany will slow in future quarters because of falling demand from its neighbors.

A recession is often defined as two quarters in a row of falling output, though many economists say it is important to take other data into account. But with unemployment in the euro area at 11.6 percent and nearly 26 million people out of work, few would dispute that the region is in a deep downturn.

“Leading indicators suggest that the euro zone recession will broaden and deepen in the current fourth quarter,” said Martin van Vliet, an economist at ING Bank.

The European Union, which includes the 17 countries in the euro zone plus 10 more countries primarily in Eastern Europe, managed to return to growth in the quarter as several countries, including Latvia and Lithuania, recovered strongly. Growth for the Union as a whole was 0.1 percent compared to the previous quarter, after a decline of 0.2 percent in the second quarter.

But in Western Europe the economic decline spread to Austria and the Netherlands, which had been growing in previous quarters. The Austrian economy contracted 0.1 percent, while the previously healthy Dutch economy plunged 1.1 percent, catching economists off guard.

One reason for the decline was that Dutch consumers cut back purchases of cars, illustrating how the crisis in the European auto industry is having a broader effect. Slower export growth and a decline in construction also had an effect, according to Statistics Netherlands, the official data provider.

France grew more than analysts forecast, at 0.2 percent, because of increased exports and higher consumer spending. The Italian economy shrank 0.2 percent, which was less than expected and a less severe decline than in previous quarters. Foreign demand compensated for a decline in household spending in Italy, economists said.

There had been some signs in recent months that the euro zone, now in its third year of crisis, was beginning to stabilize. The exodus of money from Spain had stopped and borrowing costs for Spain and Italy have dropped out of the danger zone, thanks to a promise by the European Central Bank to intervene in bond markets. Exports from some of the troubled countries have risen, as companies put more emphasis on foreign markets to offset poor demand at home.

Mario Draghi, the E.C.B. president, said last week that although growth would continue to slow through the end of this year, he expected a slow recovery next year. The data Thursday could raise expectations that the E.C.B. will cut its benchmark interest rate, already at a record low of 0.75 percent, when its policy makers meet next month.

But the E.C.B. has already stretched its mandate to fight the crisis, and the burden may now fall primarily on government leaders. Germany could face added pressure to ease its insistence on drastic budget cuts by Spain, Greece, Italy and Portugal, especially after large protests in those countries this week.

Euro zone finance ministers are expected to meet next week to consider whether to release the next installment of aid for Greece, which it needs to avoid defaulting on its debt. Next month, European heads of government will hold a summit meeting to continue working on ways to make the common currency area more resilient, for example by pooling supervision of banks.

“It is essential that the period of relative calm on financial markets is preserved,” said Marie Diron, an economist who advises the consulting firm Ernst & Young. “This will necessitate further quick progress on key reforms, including securing Greece’s financing and moving towards a comprehensive banking union.”

But disputes remain on the future shape of the euro zone, and there is a risk that leaders will not move fast enough. Economists said that much of the slowdown in business activity reflected uncertainty among managers, who do not want to invest until they are more confident of a recovery.

“The confidence shock will therefore continue to hinder investment and hiring decisions,” Mathilde Lemoine, an economist at HSBC, said in a note.

Hedge funds tiptoe back into Greece

Πηγή: FT
By Robin Wigglesworth and Sam Jones
Oct 8 2012

Greece is a country where investors fear to tread. The economy is mired in a deepening depression, the government coffers are empty and the threat of a cataclysmic expulsion from the euro still looms over Athens.

Yet some intrepid hedge funds have tiptoed back into Greek government bonds. The country’s benchmark 10-year bond, for example, has more than doubled in price since the nadir in late May – to just above 30 cents in the euro.

Although there are still worries over Greece’s ability to meet its obligations, the current price is the highest since the restructuring of €200bn worth of private sector debt in March produced the new 10-year benchmark. The US dollar-denominated bond maturing next May has rallied to more than 50 cents in the dollar, the highest since November last year.

The rally has been largely caused by the promise of Mario Draghi, the European Central Bank president, to keep the euro area from unravelling, and has been led by hedge funds, bond traders say.

“A lot of Greek bonds have found their way into New York-based hedge funds,” says Gabriel Sterne, an economist at Exotix that covers the country. “Now that the chance of a near-term exit has faded, it’s a tolerable risk to take.”

One of the hedge funds that has recently bought Greek bonds is Third Point, managed by Dan Loeb, the activist investor who muscled himself on to Yahoo’s board this year.

In the third quarter, Third Point bought positions across Greece’s restructured bonds at an average price of about 17 cents in the euro, the fund revealed in a recent letter to investors.

In the letter, Mr Loeb said the price of the Greek bonds overstated the likelihood of a euro exit, and said that on a recent visit to Athens the hedge fund’s European analyst had “discovered several ‘green shoots’ emerging in the Greek fiscal position which also appear to be widely ignored by the broader market”.

Among the aspects giving investors comfort is that Greece’s bonds rank equally to those of the eurozone in any eventual second restructuring, and are drafted under international law. This offers better protection to creditors than the local Greek law.

This is still a risky punt. For the foreseeable future, the only way for Greece to meet its fiscal commitments is through further aid from its “troika” of lenders – the European Commission, the ECB and the International Monetary Fund – and tensions remain high.

Buying Greek bonds is fundamentally a straightforward bet that the rest of the eurozone estimates that it is better served by paying the price to keep Greece in the currency union than risking the turmoil that could be caused by an exit.

Although Greece is still locked in bruising negotiations with the troika on getting its bailout programme back on track – and unlocking a vital €31bn dollop of overdue aid – there is a growing feeling that the country could still have a future in the euro.

“Given all the work that is going into fixing the situation, seeing Greece haemorrhage and exit the eurozone doesn’t make sense,” says Shahid Ikram, chief investment officer at Aviva Investors in the UK. “If it leaves, it would have an instant domino effect, so better to pay the price to keep it in.”

This has also fed some optimism among domestic investors, who have started to return to the stock market. The Athens Stock Exchange remains 85 per cent below its 2007 peak, but it has gained more than 70 per cent since the trough in early June. One Greek company executive says the exchange is still grievously undervalued. He says the more aid that is released to the Greek government and the more funding Greek banks get from the ECB, the more it would cost the eurozone to cut Athens adrift.

“If you put aside the political rhetoric, the eurozone has stuck with us,” the executive says. “The longer we stay in, the deeper the European countries are committed to us.”

However, many investors and economists caution that the willingness of creditor countries in northern Europe to bankroll Greece is finite. They say the eurozone could cut off further aid when the more important stricken members are safely dealt with and no longer at risk from the contagion of a Greek exit.

“I wouldn’t recommend investors look at Greece at this stage,” says Alain Bokobza, head of global asset allocation at Société Générale. “The chance of a ‘Grexit’ has receded, but has the potential to rise again once Spain is under control.”

Geithner, Schaeuble Hail Euro Plan As Greece Gets No Word

U.S. Treasury Secretary Timothy Geithner, right, talks to German Finance Minister Wolfgang Schaeuble on the German North Sea island of Sylt, northern Germany, on Monday. 

Πηγή: Bloomberg
By Rainer Buergin and Ian Katz
July 30 2012

U.S. Treasury Secretary Timothy F. Geithner and German Finance Minister Wolfgang Schaeuble backed a commitment by European leaders to do everything needed to defend the euro area while failing to mention its weakest link, Greece.

In a joint statement issued after they held talks on the German North Sea island of Sylt today, Geithner and Schaeuble “took note” of comments made last week by European leaders to “take whatever steps are necessary to safeguard financial stability” in the 17-nation currency area.

The two officials welcomed Ireland’s sale of bonds and Portugal’s “continued success in meeting program commitments” and discussed the “considerable efforts” made by Spain and Italy “to pursue far-reaching fiscal and structural reforms.” They didn’t refer to Greece, where international creditors are reviewing the government’s progress.

The talks signaled U.S. endorsement for European Central Bank President Mario Draghi as he seeks a game changer in the battle against Europe’s sovereign-debt crisis almost three years after it surfaced in Greece. Geithner is due to conclude his one-day trip to Germany later today by meeting with Draghi in Frankfurt. An ECB spokeswoman declined to comment when asked whether the ECB would release a statement after the Draghi meeting.

‘Fundamentally Solvent’

Greece’s absence from the Treasury’s “very carefully worded” statement reflects the view that the other countries mentioned are “fundamentally solvent,” while Greece is “a fundamentally insolvent economy,” Domenico Lombardi, a senior fellow at theBrookings Institution in Washington, said in an interview.

“The main purpose of U.S. strategy at this moment is pushing the Europeans -- that is, Germany -- toward supporting a bolder and more aggressive stance by the ECB, which is really believed to be key at this juncture to avoid a meltdown of the euro,” Lombardi said. Geithner is trying to reach “ a consensus among key euro area countries” to support a bolder ECB approach.

Spanish bonds extended a rally, and European stocks rose to the highest level since April amid speculation that Draghi will succeed in building consensus among governments and central bankers for a plan to ease borrowing costs in Spain and Italy before ECB policy makers convene on Aug. 2. The euro fell against the dollar for the first time in four days.

Draghi’s Proposal

Draghi’s proposal involves Europe’s rescue fund buying government bonds on the primary market, buttressed by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, two central bank officials said July 27 on condition of anonymity. Further ECB rate cuts and long- term loans to banks are also up for discussion, one of the officials said.

Leaders in Berlin, Paris and Rome have already tacitly endorsed Draghi’s approach, echoing his language in saying they will do what’s needed to protect the euro. Draghi must now deliver or face a renewed selloff on bond markets where Spanish and Italian yields reached euro-era records this month, fueling speculation the monetary union could fall apart.

“We have reached a decisive point,” Jean-Claude Juncker, who heads the group of euro-area finance ministers, told Germany’s Sueddeutsche Zeitung in an interview. “The world is talking about whether there will still be a euro zone in the next few months. We have to make abundantly clear with all available resources that we’re completely determined to guarantee the financial stability of the currency.”

Temporary Fund

Juncker confirmed that the temporary bailout fund, the European Financial Stability Facility, is working with the ECB on a plan to reduce borrowing costs, adding “we have no time to lose,” the newspaper reported.

In Athens, representatives of Greece’s international creditors -- the ECB, the European Commission and the International Monetary Fund -- may extend their visit until the government has completed work on a two-year, 11.5 billion-euro ($14 billion) budget plan, a Greek Finance Ministry official said yesterday.

Prime Minister Antonis Samaras and his coalition partners, Evangelos Venizelos of Pasok and Fotis Kouvelis of Democratic Left, are meeting again today to try and determine the savings required to receive the funds pledged under Greece’s two rescue packages totaling 240 billion euros.
Euro Drops

The euro fell 0.6 percent to $1.2258 at 2:40 p.m. in New York. The shared currency gained 1.4 percent in the two days after Draghi’s July 26 pledge to do whatever is necessary, ending last week at $1.2322.

Spain’s bond market staged its biggest rally in seven months, sending the 10-year yield down to 6.74 percent from a euro-era record of 7.75 percent reached on July 25. The rally continued today, with Spain’s 10-year rate dropping to as low as 6.57 percent and Italy’s to 5.88 percent.

While the ECB’s willingness to act is necessary to buy time, the central bank can’t solve the debt crisis alone, Moody’s Investors Service said today.

German Chancellor Angela Merkel’s coalition partners voiced concern about renewed ECB bond purchases, underscoring the domestic difficulties she faces to win support for new measures.

“These conflicting remarks illustrate the diverging views that have dogged the euro-area authorities’ policy development and significantly contributed to the depth of the crisis,” Moody’s said in its Credit Outlook today.

Bundesbank Hurdle

The biggest hurdle may be the Bundesbank, which last week reiterated its opposition to ECB bond buying, saying it blurs the line between monetary and fiscal policy. The ECB shelved its bond-purchase program in March.

Draghi has also scheduled talks with Bundesbank President Jens Weidmann, the two central bank officials said on July 27. A Bundesbank spokesman declined to say yesterday whether a discussion has taken place. An ECB spokeswoman reiterated that it’s not unusual for Draghi to speak with council members and declined to comment further.

Europe is “burning because of deep concerns about political will” in the region to resolve the crisis, Geithner said in a July 23 interview on the “Charlie Rose” show broadcast on PBS and Bloomberg Television.

In their statement today, Geithner and Schaeuble emphasized “the need for policy makers to adopt and implement all reform steps required to deal with the financial crisis and crisis of confidence,” the U.S. Treasury and Germany’s Finance Ministry said. “Both expressed confidence in euro-area member states’ efforts to reform and move towards greater integration.”

The U.S. and Germany “will continue to cooperate closely with their partners when advancing the policy agenda in autumn to further stabilize global and European economies.”