In Between Days

by CC November 27, 2011 9:48 pm • Commentary


U.S. stock futures jumped in early electronic trading on Sunday on the latest round of proposals out of Europe designed to corral the growing euro zone debt crisis.

U.S. stocks suffered their worst week in two months last week. The lack of a credible solution to Europe’s debt crisis kept investors away from risky assets and downgrades of Belgium and Hungary added to the gloom.

Germany and France are exploring radical ways to integrate euro zone countries in order to impose tighter budget control. In addition, media reports that the International Monetary Fund was preparing a rescue plan for Italy bolstered sentiment.


Prime Minister Mario Monti faces a testing week seeking to shore up Italy’s strained public finances, with an IMF mission expected in Rome and market pressure building to a point where outside help may be needed to stem a full-scale debt emergency.

Monti is expected to unveil measures on Dec. 5 that could include a revamped housing tax, a rise in sales tax and accelerated increases in the pension age. But pressure from the markets could force him to act more quickly.

One source with knowledge of the matter said contacts between the International Monetary Fund and Rome had intensified in recent days as concern has grown that German opposition to an expanded role for the European Central Bank could leave Italy without a financial backstop if one were needed.

The source said it was unclear what form of support could be offered, such as a traditional standby arrangement or a precautionary credit line, if a market selloff on Monday forced immediate action.

The IMF inspection team is expected to visit Rome in the coming days but no date has been announced.

An unsourced report in Italian daily La Stampa said up to 600 billion euros could be made available at a rate of between 4-5 percent to give Italy breathing space for 18 months.

Such a sum would be beyond the IMF’s current capacity and would need new measures such as the issue of new special drawing rights (SDRs) or intervention by the ECB, it said.

The Fund’s total lending capacity is currently around $400 billion.


BERLIN—Euro-zone leaders are negotiating a potentially groundbreaking fiscal pact aimed at preventing the currency bloc from fracturing by tethering its members even closer together.

The proposal, which hasn’t yet been agreed to, would make budget discipline legally binding and enforceable by European authorities. Officials regard the moves as a first step toward closer fiscal and economic coordination within the currency area. That would mark a seminal shift in the governance of the 17-nation euro-zone.


BERLIN—Euro-zone countries are weighing a new plan to accelerate the integration of their fiscal policies, people familiar with the matter said, as Europe’s leaders race to convince investors they can resolve the region’s debt crisis and keep the currency area from fracturing.

Under the proposed plan, national governments would seal bilateral agreements that wouldn’t take as long as a cumbersome change to European Union treaties, according to people familiar with the matter. Some German and French officials fear that an EU treaty change could take far too long. That has prompted the search for a faster option.

Credit Writedowns

The time for this idea has apparently arrived.  Die Welt provides more confirmation of what I have seen in two different accounts, first in Austrian daily Der Standard and then on the Spanish website Cinco Dias: Eurobonds are a potential solution.

Translation from German:

The Bundesbank no longer rules out emission of common European bonds – so-called Eurobonds. Prerequisite, however, is closer financial integration for the euro countries. “This means joint control over the budgets of the member countries, including intervention rights if individual countries should violate the agreed rules,” said Bundesbank President Jens Weidmann  to the “Berliner Zeitung”.

Whether Eurobonds would be introduced, would be a political decision. “You’d be well advised, however, to think about it only at the end of an integration process,” said the Bundesbank chief.

In Brussels fear or hope is rife, depending on whom you ask, Merkel’s people driving policy or those who accuse Germany of blocking solutions. By the next European Council meeting, the Summit of Heads of State and Government at the end of the first week of December, the Chancellor could have negotiated a deal. Whereby their agreement could involve Eurobonds or a stronger commitment from the ECB in exchange for a promise from everyone in Europe to put their economies on a more sustainable path.

Merkel increasingly isolated

What makes it no easier for Merkel: she is increasingly alone. Yes, Sarkozy refrained from making a direct attack on ECB monetary policy while in Strasbourg, but he stressed the “different histories of both countries” in this question.

And the most loyal allies of Merkel are leaving the post. Dutch Finance Minister Jan Kees de Jager, also master of a healthy budget and a proud member of the club of Triple-A countries, wanted, before a meeting with Finnish Ministry colleague Jutta Urpilainen and German Finance Minister Wolfgang Schaeuble on Friday, not to rule out a more “active role” for the ECB.

“Where the ECB is concerned, our position is very close to the German or nearly the same,” he said. But: “In a crisis nothing should be ruled out. In the end, something must happen.” And Urpilainen stated in a newspaper interview: a bigger role for the ECB is still preferable to joint Eurobonds.

This article also speaks of German MPs in the European Parliament in favour of greater ECB engagement as well as José Manuel Barroso’s proposal for Eurobonds. Die Welt also writes that Merkel will propose a European treaty change to allow high deficit countries to be sued in the European Court of Justice. The foreign minister from Luxembourg Jean Asselborn warns against betting too much on treaty changes though. He believes that once you open up the Pandora’s box of treaty change, other changes would suddenly appear on the table as well – and the whole thing would get quite messy, especially with referenda necessary in both Ireland and France.

The Wall Street Journal is also reporting that the euro zone is considering bilateral agreements instead of treaty changes as a speedier way to get to fiscal integration. Afterwards, ECB intervention and/or Eurobonds should not be ruled out.

The formula here is:

  1. Cobble together some semi-credible form of fiscal integration quickly
  2. Only then back this up with ECB lender of last resort role or Eurobonds

It looks like things are breaking toward monetisation and/or Eurobonds. Expect to get one or the other after a fiscal agreement by 9 December.

The rationale for this jury-rigged way of approaching the crisis is to protect the existing principles laid out for Euroland which call for an independent central bank and fiscal discipline. See my underlining in the the relevant articles of the Lisbon Treaty for the sovereign debt crisis. Moreover, if this policy path holds, the ECB can say that it adhered to its principles despite acting in a quasi-fiscal manner. And politicians can go back to their voters and say they did so as well.


The Week Ahead

This is a big week for economic data. The most important will be Friday’s employment situation report. Jobs remain at the core of investor and popular concern as well as a key economic indicator. The big question about the report is how well it captures the current picture.

On Thursday we get the ISM index, perhaps the most widely misperceived indicator, as well as the next installment of initial jobless claims. The jobless claims are not part of the survey period for the employment report, so this report actually provides even fresher data.

Wednesday we have Chicago purchasing managers, a predictor of ISM, and the ADP employment report, which might actually be better than the official data. We also get the Fed’s Beige Book, a look at the anecdotal economic evidence that will be in front of the FOMC at its next meeting. The Fed is probably on hold with the current position, so this should not be a big factor.

We will also get Case-Shiller and FHFA home price data early in the week, along with updates on pending home sales as well as the Conference Board’s version of consumer confidence.