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Friday 30 September 2011
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German bailout vote is 'too little, too late' Germany's Bundestag has voted overwhelmingly to boost the scope of the EU's rescue fund but implicitly capped its firepower at â?¬440bn, leaving it no clearer whether Europe has the means to halt debt contagion to Italy and Spain.11:30PM BST 29 Sep 2011
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Chancellor Angela Merkel won her "own majority" for the bill, narrowly averting the collapse of her government, but only after pledging that there was no grand plan committing Germany to vast and unlimited liabilities.
Horst Seehofer, leader of Bavaria's Social Christians CSU, said his party would go "this far, and no further", insisting any expansion of the rescue machinery was out of the question. "The financial markets are beginning to ask whether Germans can afford all this help. We must not risk the creditworthiness of the German state," he said.
Norbert Lammert, the Bundestag's president, said lawmakers felt they had been "bounced" into backing far-reaching demands and warned that Germany's legislature would not give up its fiscal sovereignty to any EU body.
Finance minister Wolfgang Schäuble said reports of a secret plot to boost the guarantees of the fund (EFSF) were scurrilous. "It will not be raised. There can be no debate about this. These suspicions are indecent," he said, acknowledging only that the money will deployed as "efficiently as possible".
Officials in Berlin say Mr Schäuble has been careful not to rule out use of leverage. The finance ministry has no specific plan to lever the fund but is aware of six or seven options "floating about" â?? pushed by France and Brussels â?? that might offer a solution.
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29 Sep 2011One variant would be to guarantee a 20pc slice of debt in countries needing help. This would allow the fund to lever up to â?¬2 trillion, the tradeable public debt of Italy and Spain. This resembles the structure of US subprime debt securities. It could go horribly wrong if the crisis deepens.
Italy struggled to roll over debt on Thursday, paying 4.68pc for â?¬3.1bn of three-year debt, up 81 basis points from last month. Rome announced plans to sell â?¬30bn of state assets, mostly property. It may include â?¬10bn of CO2 emission rights â?? a form of debt reshuffling to gain time.
Silvio Peruzzi from RBS said the rescue fund is too small to stabilize the eurozone, leaving the European Central Bank (ECB) with the unwelcome task of propping up the system
"There is no choice. The ECB will have to keep buying bonds, moving ever closer to debt monetisation. If this firewall is removed, contagion will accelerate dramatically," he said.
"We think the eurozone is falling into recession and this is a big risk. It will call into question the budget consolidations of Italy, Spain and even France."
The EU's index of economic sentiment fell sharply in September, following a collapse in August. Howard Archer from IHS Global Insight said the falls match declines after the Lehman crisis in late 2008. "It is clearly very worrying," he said.
French president Nicolas Sarkozy hailed the vote as an "important step", calling on others to ratify the measures quickly. Slovakia will be last in mid-October.
Yet the package merely enacts the EU summit deal agreed in July, which empowers the EFSF to buy bonds pre-emptively and recapitalise banks. The landscape has changed radically since then as the global downturn plays havoc with debt trajectories.
The bond crisis spread to EMU's "soft core" in August, pushing Spanish and Italian 10-year yields above the danger level of 6pc. The ECB stepped into the breach and has been buying their debt ever since to stop the crisis spiralling out of control, despite bitter protests from the Bundesbank. This is politically untenable over time. Yet the revamped EFSF is not up the task either. "The EFSF in its current guise is too little, too late," said Suki Mann from Societe Generale.
China is unlikely to come to the rescue. Jin Liqun, head of China Investment Corporation, told an Economist forum that Beijing is worried about the "unravelling of the situation" in Europe. "China cannot be expected to buy into high risk in the eurozone without a clear picture of debt workouts. Sorry if I have ruffled feathers," he said.
Stefan Homburg, head of Germany's Institute for Public Finance, said the EMU crisis had already gone beyond the point of no return. "The euro is nearing its ugly end. A collapse of monetary union now appears unavoidable. The Chancellor should have no illusions about this," he said.
"The eurozone's leaders and the ECB have breached all the stability rules, the debt ceiling, and the ban on bond purchases. This isn't the rule of law, it's the rule of the jungle," he said.
Meanwhile, the International Monetary Fund has approved an additional $675m under a standby arrangement for Romania.
The IMF said Romanian authorities â??have indicated that they will continue treating the arrangement as precautionary and therefore do not intend to draw under itâ?.
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