In April and May of 2010, crisis arose over both the value of the Euro and the financial stability of European financial institutions, and as a result governance changed. Jolted by a continuing slide in the Euro, FXE, soaring sovereign debt bond yields, and soaring credit default swaps, the EU Finance and State Leaders convened the Eurozone May 2010 Summit and announced European Economic Governance, seigniorage aid for Greece, and called for a Monetary Union with seigniorage authority to issue eurobonds, and in so doing they effected a bloodless coup where they waived national sovereignty. Sovereign nations are a principle of a bygone era. One is no longer a citizen of a nation-state; rather one is a resident in a region of global governance.
An Interview With Jean-Claude Trichet, ECB President by Eurasia review provides the timeframe of developments:
Q: Why did you wait until 10 May 2010 to intervene in the secondary market for sovereign debt by purchasing Greek bonds and those of other countries? If you had done so earlier, you would have tripped up the speculators.
A: We acted because we saw a serious and unprecedented malfunctioning of the financial markets of certain euro area countries in the afternoon of 6 May and on Friday 7 May. At that moment in time and not before, we judged that we had a very serious problem with regard to the transmission of our monetary policy in part of the euro area, and that we had to contribute to re-establish a more normal functioning of the markets in question. Our aim was not to change our monetary policy, which is to maintain price stability for our 330 million fellow European citizens. Inflation is a tax on the poor and most vulnerable.
I … Ambrose Evans-Pritchard in Telegraph article Europe Prepares Nuclear Response To Save Monetary Union writes that the walls of fiscal and economic sovereignty are being breached. The creation of an EU rescue mechanism with powers to issue bonds with Europe’s AAA rating to help eurozone states in trouble — apparently €60bn, with a separate facility that may be able to lever up to €500bn — is to go far beyond the Lisbon Treaty. This new agency is an EU Treasury in all but name, managing an EU fiscal union where liabilities become shared. A European state is being created before our eyes.
For now, the world has avoided a financial cataclysm that would have been as serious and far-reaching as the collapse of Lehman Brothers, AIG, Fannie and Freddie in September 2008, and perhaps worse given the already depleted capital ratios of banks and the growing aversion to sovereign debt
Bond risk on European banks as measured by the iTraxx financial index reached even higher levels late last week than in the worst moments of the Lehman crisis. The safe-haven flight into two-year German Schatz was flashing the most extreme stress warnings since the instruments were created forty years ago.”We’re seeing herd behavior in the markets that are really wolf pack behavior,” said Anders Borg, Sweden’s Finance Minister.
There is a difference between quantitative easing by the US Federal Reserve and the Bank of England for liquidity purposes, and use of this policy to soak up the debt of governments dependent on external finance to cover structural deficits. The lines are of course blurred. One purpose can leak into the other.
But whatever the objections of the Bundesbank, it seems that Europe’s elected leaders pulled rank this weekend — and high time too says the French Left. The reaction in Germany already been fierce. “The ECB is going crank up the printing presses,” said Anton Börner, head of Germany’s export federation. “In five to ten yeas we will have a weak currency, with rising inflation and higher rates of inflation that will act as a break on growth.”
don’t agree with Mr Börner. The M3 money supply is contracting in the eurozone, pointing to the risk of a Japan-style slide into deflationary perma-slump, although the panic response to that down the road may well be to call in the printers. But there is no doubt that Mr Börner represents German opinion.
The EU is invoking the “exceptional circumstances” clause of Article 122 of the Lisbon Treaty, arguing that the euro is subject to an “organized worldwide attack”. This is a legal minefield. A group of professors has already filed a case at Germany’s Constitutional Court, claiming that the Greek bail-out is illegal and that the EMU is degenerating into a zone of monetary disorder.
The judges have denied an immediate injunction on aid to Greece, saying that it would to be too “dangerous” to take such a step on limited facts, but it has not yet decided whether to hear the case. The battle has escalated in any case. The new EU rescue mechanism is to be permanent and no longer just bilateral help, if Mr Sarkozy is right. The professors have been given an open goal. One almost suspects that the Kanzleramt in Berlin is so weary of this dispute that it has given up worrying about lawsuits. If the judges block an EU debt union, be it on their heads.
Nor is this rescue fund any more than chemotherapy for the cancer eating away at the foundations of monetary union. It is not a cure. The rot set it when the South joined EMU before it was ready to cope with ultra-low interest rates or match German wage-bargaining. The ECB made matters worse by gunning M3 at an 11pc rate during the bubble. Club Med lurched from credit boom to bust. It is now trapped in debt deflation at an over-valued exchange rate, like Argentina with its dollar peg in 2001 until air force helicopters rescued President De La Rua from the roof of the Rosada.
The answer to this — if the objective is to save EMU — is for Germany to boost its growth and tolerate higher `relative’ inflation. This would allow the South to close the gap without tipping into a 1930s Fisherite death spiral. Yet Europe will have none of it. The weekend deal demands yet more belt-tightening from the South. Portugal is to shelve its public works projects. Spain has pledged further cuts. As for Germany, it is preparing fiscal tightening to comply with the new balanced budget amendment in its Grundgesetz.
While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union. Stephen Lewis from Monument Securities says Europe’s leaders have forgotten the lesson of the “Gold Bloc” in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal. We all know how it ended.
II … European James G. Neuger and Meera Louis report in Bloomberg article EU Crafts $962 Billion Show of Force to Halt Crisis that policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to stop a sovereign-debt crisis that threatened to shatter confidence in the euro. Stocks surged around the world, the euro strengthened and commodities rallied.
Jolted by last week’s slide in the currency and soaring bond yields in Portugal and Spain, European Union finance chiefs met in a 14-hour session in Brussels overnight. The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.
The rescue package for Europe’s sovereign debtors comes little more than a year after the waning of the last crisis, caused by the U.S. mortgage-market collapse, which wreaked $1.8 trillion of global credit losses and write-downs. Under U.S. and Asian pressure to stabilize markets, Europe’s governments bet their show of force would prevent a sovereign-debt collapse and muffle speculation the 11-year-old euro might break apart.
“A very thick line has been drawn in the sand,” said Andrew Bosomworth, Munich-based head of portfolio management at Pacific Investment Management Co. and a former ECB official. “This is all in. What more could they have done?”
A 110 billion-euro bailout package for Greece approved last week by the EU and IMF failed to reassure investors, prompting yesterday’s renewed bid to bolster the euro.
How to Pay
“It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation,” said Venkatraman Anantha- Nageswaran, who helps manage about $140 billion in assets as global chief investment officer at Bank Julius Baer & Co. in Singapore.
The MSCI World Index climbed 2.6 percent to 1,128 at 12:15 p.m. in Brussels. Standard & Poor’s 500 Index futures rallied 4.4 percent. The euro appreciated 2 percent to $1.30. Crude-oil futures gained 3.4 percent.
“The message has gotten through: the euro zone will defend its money,” French Finance Minister Christine Lagarde told reporters in Brussels early today after markets punished inaction last week.
ECB policy makers said they will counter “severe tensions” in “certain” markets by purchasing government and private debt, and the bank restarted a dollar-swap line with the Federal Reserve.
“This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion,” Marco Annunziata, chief economist at UniCredit Group in London, said in an e-mailed note. “This is Shock and Awe, Part II and in 3-D.”
Treasuries tumbled on investors’ increased appetite for risk, with yields on benchmark 10-year U.S. notes rising to 3.57 percent from 3.43 percent at last week’s close. German bunds also declined, sending 10-year yields up 18 basis points.
The steps came after failure to contain Greece’s fiscal crisis triggered a 4.1 percent drop in the euro last week, the biggest weekly decline since the aftermath of Lehman Brothers Holdings Inc.’s collapse. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent.
The ripple effect in the U.S., including a brief 1,000- point drop in the Dow Jones Industrial Average on May 6, prompted President Barack Obama to call German Chancellor Angela Merkel and French President Nicolas Sarkozy to urge “resolute steps” to prevent the crisis from cascading around the world.
Under the loan package, euro-area governments pledged 440 billion euros in loans or guarantees, with 60 billion euros more in loans from the EU’s budget and as much as 250 billion euros from the International Monetary Fund.
“They will have bought themselves a significant amount of time to do the right thing,” said Barry Eichengreen, an economics professor at the University of California, Berkeley.
In a step that skirts EU rules barring direct central bank lending to governments, the ECB said it will conduct “interventions” to ensure “depth and liquidity” in markets. The purchases will be sterilized, meaning they won’t increase the overall money supply in the financial system.
“This sets a precedent for the rest of the life of the Central Bank and will have likely surprised even the most seasoned observers,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “While the ECB’s intervention might attract bad press regarding its mandate and independence, we believe that this was necessary to short-circuit the negative feedback loop which was getting more and more threatening for the global economy. ”
Central Banks Buy
Central banks in Germany, France and Italy all said they began buying government bonds today. None provided further detail.
The ECB also reactivated unlimited fixed-rate offerings of three-month loans, a key tool in the ECB’s efforts to fight the credit crisis.
In Brussels, finance ministers from the 16-nation euro region — joined by ministers from the 11 EU countries outside the euro — raced against time to weld the contingency lending arrangements before markets opened in Asia.
Inability to craft a convincing package in time would have left deficit-plagued countries at the mercy of the “wolfpack behavior” of speculators, Finance Minister Anders Borg of Sweden, a non-euro member, said as the meeting began.
The new war chest would be used for countries like Portugal or Spain in case their finances buckle. Deficits are set to reach 8.5 percent of gross domestic product in Portugal and 9.8 percent in Spain this year, above the euro region’s 3 percent limit. Both countries pledged “significant” additional budget cuts in 2010 and 2011, which will be outlined in May, an EU statement said.
The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds fell from euro-era highs. The premium on 10-year government bonds plunged to 343 basis points from as high as 973 basis points for Greece. It fell to 201 basis points from 354 for Portugal and to 94 basis points from 173 for Spain.
Europe’s financial leaders sought to master the euro’s stiffest test since its debut in 1999 without wheelchair-bound Finance Minister Wolfgang Schaeuble of Germany, Europe’s largest economy, who was rushed to a hospital soon after the meeting started due to an adverse reaction to new medication. Interior Minister Thomas de Maiziere got on a last-minute flight to Brussels to take his place.
As Merkel’s cabinet held a late-night meeting in Berlin on the euro rescue, her party unexpectedly lost control of Germany’s most populous state in a regional election, potentially costing her a majority in the upper house of the federal parliament.
Goaded by Germany, the ministers made a fresh commitment to closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules.
The vow to push budget shortfalls below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. The euro region’s overall deficit is forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011.
Britain, the EU’s third-largest economy, won’t contribute to a euro rescue fund, though it backs efforts to restore stability, Chancellor of the Exchequer Alistair Darling said.
“When it comes to supporting the euro, that is for the eurogroup countries,” Darling told Sky News.
III … My Commentary:
At the Eurozone May 2010 Summit, a European region of global governance, an EU debt union, and an EU Treasury with the authority to sell debt and buy ailing sovereign debt was formed by Leaders’ Announcement. The leaders have effected an Europe wide bloodless coup. The effect is that the age of sovereign nation states is history; the age of global governance has commenced. Some 440bn in loans or guarantees from Euro-area governments and €250bn from the IMF has been made available; the package is in addition to the €110bn rescue plan for Greece. The ECB stands ready to buy government bonds in secondary markets. To assure liquidity, the ECB also reactivated unlimited fixed-rate offerings of three-month loans, and will also reactivated dollar swaps with the Federal Reserve.
III. It had earlier been reported by The Telegraph on April 12, 2010 that the European countries pledged €30bn and the International Monetary Fund €15bn to bail-out Greece.
After a frantic weekend of negotiations, the 16 countries that share the euro agreed to offer Greece the money in three-year loans at about 5pc interest – cheaper than would be available to the country from private investors. The amount that fellow euro members, including highly indebted Spain and Ireland, contribute will be based roughly on their economic size. Germany and France are likely to shoulder the majority of the burden.
The scale of the bail-out surprised markets sent the euro up more than a cent in Monday morning trading. Greece’s debt has presented European Monetary Union with the severest test in its short history. Fellow members of the euro will be hoping the package restores investors’ confidence in Greece and the viability of the single currency more generally.
IV … Paul Amery in Seeking Alpha on May 7, 2010 article Europe’s Credit Crashes Again provides a chart article showing key Markit iTraxx indices rising.
V … Writing in Le Figaro, columnist Yves de Kerdrel questions the EU’s entire approach to the debt crisis, arguing that the turmoil “has not prevented our beloved Eurocrats from carrying out a velvet coup d’état during the last days. They have decided on the sly that we need ‘better governance’ of the euro…Have we realised that we are going to leave the keys of our budgetary policy to some Brussels-based Eurocrats who are not accountable to anyone, and who could just keep on making mistakes, as they have been doing with the regularity of a metronome during the last decade?” He concludes: “This European coup d’état has been masterly finalised using as its only argument: ‘if we don’t strengthen the rules now, the euro will fall into pieces’. Fear can silence people”. Le Figaro FT: Chaffin WSJ: Stelzer FT: Leader WSJ: Editorial Telegraph: Warner
VI … Finfacts Team reported on March 26, 2010 Eurozone Leaders Agree Rescue Plan For Greece With IMF involvement
VII .. WSWS.org reports European Summit Proposes Bailout And Austerity Plan For Greece
VIII. Church Of God News reports EU President’s Plan To Control The European Economy
IX. Various media sources Europe Agrees To Massive Aid Package For Eurozone Crisis
X. iMarketNews reports The Declaration Of Eurozone Summit Is To Do What is Necessary to Defend the Euro relating that “consolidation of public finances is a priority for all of us and we will take all measures needed to meet our fiscal targets”.
XI. Gary Dorsch in article Euro-zone Credit Crunch provides a history of the European Sovereign Debt Crisis in article Euro-zone Credit Crunch.
XII. Bruno Waterfield and Melissa Kite in The Telegraph article British Taxpayers Ordered To Bail Out Euro http://tinyurl.com/386tgqo All 27 EU finance ministers have been summoned to Brussels on Sunday to sign up to a European stabilisation mechanism. Britain will be unable to veto this as it will be put through under the “qualified majority voting” system.
The deal, effectively to shore up the euro, was denounced as a “stitch-up” last night after it emerged Nicolas Sarkozy, the French President and Angela Merkel, the German Chancellor, had devised it behind closed doors and were attempting to push it through at a time when there is no clear government in Britain. It was declared a “done deal” by the 16 euro zone leaders who met in the early hours of Saturday morning.
Alistair Darling, the Chancellor, will fly to Brussels for the meeting after promising to keep George Osborne and Vince Cable, his Tory and Lib Dem counterparts, informed. EU finance ministers have been given the deadline of midnight tonight to agree the highly sensitive but rushed proposals to protect the single currency from financial turbulence from the Greek debt crisis. “When the markets reopen Monday we will have in place a mechanism to defend the euro,” said President Sarkozy yesterday. “This is a full-scale mobilisation.”
Officials and diplomats have confirmed that Gordon Brown, the Prime Minister, was the last non-eurozone leader to be telephoned on Friday night by José Luis Rodríguez Zapatero, his Spanish oppositer number, to be warned about the EU plan. Europe’s failure to contain Greece’s fiscal crisis last week triggered a 4.3 per cent drop in the euro and threatened to spark a global debt crisis. Mats Persson, the director of Open Europe, said that while euro zone stability was in Britain’s interests, the bailout deal was not. ”This latest move could make British taxpayers liable for the debts of governments over which they have no democratic control – to the tune of billions of pounds,” he said.
”A British government, of whatever persuasion, must really consider whether it should take part in centralised EU borrowing on this scale, not least since such facilities were always considered illegal under the EU treaties and wholly undemocratic.”
Keywords: eurostabilitypact, oneeurogovernment, one euro government