European Leaders Assign Herman van Rompuy The Task Of Preparing The Legalities And Procedures For A Nation’s Sovereign Debt Default

Ambrose Evans Pritchard has it correct, the European Leaders have assigned Herman van Rompuy the task of preparing the legalities and procedures for a nation’s sovereign debt default in an orderly manner with as little unseen and unanticipated collateral damage as possible, to preserve the value of the Euro as much as possible, and to assure that there will be no bailout, and that investors, as well as sovereign nations share in the default.

When economic conditions devolve to such an extent that sovereign debt default is necessary, will that nation by default have to leave the EU currency union, and if so, will it have sufficient seigniorage authority to issue bonds? And if not, will seigniorage aid be forthcoming from some source?

Index of News Articles Covering The Final Meeting Of The Task Force On European Economic Governance:

1) New York Times: “European Union Tightens Rules Governing Euro”.

2) Guardian: “Angela Merkel struggles to win support for EU bailout rules at Brussels summit”.

3) The press conference with Van Rompuy and Barroso on video.

4) Van Rompuy’s remarks to the press via PDF Document on Consilium Europa.

5) Leigh Phillips reports on the EU Leaders Summit of October 28, 2010 EU Leaders Give Green Light To Tweak Treaty.

6) BBC News relates: EU leaders Clinch Pact To Defend Euro.

7)  The OpenEurope Press Summary of October 29, 2010 reports: Le Figaro suggests that the changes could be adopted through the Lisbon Treaty’s “simplified procedure”, meaning that the amendments would be adopted by unanimity within the European Council bypassing the ratification process through national parliaments or potential referendums. Swedish Prime Minister Fredrik Reinfeldt is quoted by Deutsche Welle saying, “Many countries do not want a huge treaty reform, and therefore we are trying to narrow it down to a very limited treaty change that should be acceptable for countries without having to face referendums.”

On his BBC Blog, Gavin Hewitt argues, “[David Cameron] is instinctively opposed to treaty change for another reason. Some of his backbenchers may see it as an opportunity to try and claw back some powers to London.” However, Die Welt reported last night that Cameron agreed to back the treaty changes in return for Chancellor Merkel’s support for capping next year’s EU budget increase at 2.9%.

On Conservative Home, Open Europe’s Director Mats Persson argues, “If true, Cameron may well have severely underplayed the UK’s hand, missing the opportunity to get real concessions in return for treaty change. A one-year 2.9% as opposed to 5.9% budget increase, though important in face of budget cuts at home, is pocket change in comparison to what Cameron could have achieved.”

Speaking on BBC Today’s Programme: Foreign Secretary William Hague said that Cameron had “secured beyond any doubt a full British opt-out from possible sanctions on individual member states and established that any possible future Treaty change would not affect the UK.”

AFT reports:  Hungarian Prime Minister Viktor Orban has revealed that, at an official lunch ahead of the EU summit, French President Nicolas Sarkozy said that EU Justice Commissioner Viviane Reding had “insulted France as a nation” when she dismissed Franco-German demands for Treaty change as “irresponsible”.

8) Ambrose Evans Pritchard in The Telegraph reports EU ‘haircut’ Plans Rattle Bondholders: Investors face large potential losses on eurozone debt under German plans likely to win backing from EU leaders on Friday – risking a boycott of Greek, Irish, and Portuguese bonds.

9) Constant Brand in European Voice reports Crisis Mechanism Would Affect Investors: Germany has insisted that private investors should be obliged to carry a share of losses incurred if eurozone governments make use of a permanent crisis mechanism approved by EU leaders. Angela Merkel, Germany’s chancellor, said today (29 October), at the end of a two-day summit of EU leaders, that the inclusion of private investors “is very important” to German taxpayers. “We won’t allow taxpayers alone to bear all the costs of a future crisis,” Merkel said. She said investors should also share responsibility if a country’s debt had to be restructured. Mark Rutte, the Dutch prime minister, echoed Merkel’s comments, saying that any effective crisis mechanism should “emphasise burden-sharing for the private sector”. Fear that investors might be affected by the EU’s plans have already spooked the markets, forcing up yields – the amount investors demand to hold certain bonds – on Greek, Portuguese and Irish debt. During the discussion on the permanent mechanism on Thursday (28 October), Jean-Claude Trichet, the president of the European Central Bank warned leaders about including private investors, saying it could be “counter-productive” if it led to a loss of confidence in existing debt. Jean-Claude Junker, Luxembourg’s prime minister, said the issue of including private investors was “very sensitive”, adding it could “lead to confusion in the markets”.

10) EuroIntelligence reports A (Conditional) Triumph For Merkel: A small treaty change. Less than what Angela Merkel asked for, more than what the others were ready to concede the night before. Superficially, this looks like a very European compromise. But is not. Merkel seems to be winning the argument – or least the core of the argument. Hermann van Rompuy has been asked to draw up a small Treaty change by December to allow for a permanent crisis resolution mechanism. But the treaty change will not encompass Art. 125 TFEU – the no bailout rule.

The hope is to make the Treaty big enough for the German constitutional court to accept it as part of a consistent rule set for a monetary union, yet small enough to circumvent a referendum in Ireland, or elsewhere – something you can tag on to a “technical” treaty, such as the next enlargement agreement.
To say that this is going to be a hard job, would somewhat understate the complexity of this task. In that sense, a small treaty change is not really a compromise between No Treaty change and a big Treaty change. It was a compromise for last night. But the real compromise has yet to be worked out. Reuters reports that several leaders accepted Merkel’s arguments with extreme reluctance, and the UK and Poland accepted it with some riders attached.

The European Council effectively rejected Merkel’s extreme proposals to withdraw voting rights for rogue member states, by putting on the long burner. It is technically still there. (We always suspected that Germany put this up to trade it against other demands. It was simply too extreme a proposal).

Last night, Merkel already outlined the parameters for a treaty change.

A crisis mechanism will not be a bailout mechanism, and will rest  on strong conditionality. It can only be triggered if the stability of the eurozone as a whole is at risk. It will specify the role of the IMF, and it will include provisions for a bail-in of private investors. Van Rompuy delineated the future anti-crisis mechanism in a similar narrow way: it should avoid contagion from one country to another, he said, and it should avoid moral hazard. That means it will be a relatively small system, designed in such way to minimize the incentive for country to make use of it. It is not what financial commentators refer to as umbrella. The purpose of this stability arrangement will not be to protect the country in trouble, but to protect the eurozone as a whole.

Der Spiegel calls the agreement constituted a political triumph for Merkel. She had sacrificed only two of her demands – automatic sanctions under the stability pact, and the voting right withdrawal – and gained a treaty change in return. But in the end, she had the upper hand, because she effectively threatened a slap a veto on a permanent crisis resolution mechanism, which cannot conceivably work without German participation.

The news coverage this morning is confined to the Internet. The 1.30 am breakthrough was too late for the print edition. The headlines all read that Merkel prevailed partially, without giving too many details.

11) Shaun Richards writes of The Peripheral Euro Zone Nations And Europe’s Problems With Austerity.
There were further developments yesterday to follow-on from my update on this subject. For once Greece was not particularly the centre of attraction as her ten-year government bond yield only edged higher to 10.5%. However Irish government bond yields surged and whilst this coincided with a speech from her Prime Minister I do not think that this was the cause. The real cause came from an interview on RTE given by the Chairman of Anglo-Irish Bank in which he said.

Ireland needs a second state-owned bad bank, the chairman of Anglo-Irish Bank said today Mr Dukes said even after NAMA had finished its work, the banks would still be left with distressed assets.

Just to give you an idea of the scale of the potential problem estimates of commercial property lending which remains outside the first NAMA are around 70 billion Euros. Now if you factor into this that the Chairman of Anglo-Irish is plainly telling us there are problems with these loans then several issues arise. For a start Anglo-Irish was only restructured last month! I know that bad news from the Irish banking sector drips out slowly and we are never told the truth but this is a particularly poor development.

A second NAMA would have severe implications for Ireland as a sovereign nation and the burden she will have to carry for the forseeable future. I discussed on the 27th of this month that the Irish government has indicated that a further 15 billion Euros of fiscal austerity will be needed in the next four years. Well if the Chairman of Anglo-Irish is correct then that will be an under-estimate. The Irish government bond market fell heavily on the news following on from a poor week. The ten-year yield closed at 6.78% and the yield on her shortest maturity of November 2011 rose above 3% again to 3.19%. Sometimes the shortest dated maturities are the most revealing, particularly at a time of low official interest-rates.

Portugal’s government was to be found boasting that China might invest in its government bonds and that foreign investors now owned around 40% of her government bonds. Someone should perhaps point out to them that foreign investors usually invest as much for expected currency gains as for yield so should investors expect the Euro to drop he may not turn out to be quite so proud as they sell! Indeed the reality was that her ten-year government bond yield ignored such “success” and rose above 6% to 6.07%.
Having watched with a little bemusement at the way the European Parliament passed a bill for a 6.9% budget increase in a time of supposed  austerity, I had several thoughts. Firstly we plainly have elected a group of people to this Parliament who do not believe the current buzz-phrase of “we are all in it together”. Indeed they are showing signs of being even more out of touch that I thought they were.

However there is a darker thought. Are we being played Sir Humphrey Appleby style? Propose an increase of 6.9% which you do not really believe you will get, but Jim Hacker, excuse me Europe’s politician’s can appear fiscally austere by restricting you and you end up with a still much too high 2.9%%!  So the bureaucrats get pretty much what they want and the politician’s can make some soundbites and the music plays with Sir Humphrey ending the episode with the usual refrain of “Yes Minister.” Everybody in the episode is happy that the obvious objective of no increase at all has been safely ignored. Oh everybody but the hard-pressed taxpayers of Europe who are likely to find themselves paying yet higher sums to individuals who sometimes are exempt from tax.

Meanwhile back in the real world unemployment in the Euro zone rose to 10.1% with a further 67,000 jobs being lost in September. Just to add to the gloom inflation rose to 1.9% as well. German retail sales also fell 2.3% in September but caution is required here as retail sales can be an erratic series.

11) Pater Tenebrarum in Credit Watch October 29, 2010 article reports of Renewed Trouble for Greece, Portugal and Ireland – Irish Bonds become ‘Confetti in the Winds’.

12) Simon Clark and John Glover of Bloomberg relate Bondholder ‘Immunity’ to Losses Challenged as Irish Bail Banks:  Two years after assuring senior bondholders that they wouldn’t lose their money if banks failed, the Irish government is making the same promise again. This time, some bondholders are skeptical the government will bail them out with taxpayer funds, sending down the price of senior guaranteed debt for Anglo Irish Bank Corp. to 90 cents on the euro, according to pricing data compiled by Bloomberg, to account for the risk it might not be repaid in full. Some equity investors, including Neil Dwane, who helps oversee about $80 billion of equities as chief investment officer at Allianz Global Investors’ RCM unit in Frankfurt, are angry the pledge is being made at all. “It’s as if bondholders have diplomatic immunity from losses,” Dwane said. “Two years into this crisis we’ve learned nothing and done nothing. Bondholders have got to understand that they can lose money when they invest in banks.”

13) Political analyst Giorgos Kirtsos is quoted by Le Figaro, reacting to yesterday’s announcements, that the estimates on Greece’s public deficit will be reviewed up to 15% from 13.6%.  ”It is impossible to pay back the €110 billion borrowed from the EU and the IMF in only three years. We will have to restructure our debt”, he argues.

14) Niki Kitsantonis of the New York Times writes: A World Upside Down for Greeks: Giorgos Sofronas, 66, has run a small shop selling ladies’ bags in central Athens for more than four decades. This year, all of a sudden, the future became uncertain. Mr. Sofronas has seen his sales drop by 45 percent since the onset of an unprecedented debt crisis earlier this year that prompted the Greek government to increase taxes and cut public salaries, in return for a €110 billion, or $154 billion, rescue package from its euro-zone partners and the International Monetary Fund, IMF.  The measures have sliced profit margins at businesses large and small and damped consumer demand. Watching shops closing one after another on his street has made Mr. Sofronas nervous, but he will not contemplate bankruptcy. “This business feeds nine people,” he said, referring to his family and five employees. “I can’t give up.” In Greece, small businesses, defined as stores or workshops employing fewer than 10 people, though many are one-person operations, account for 96 percent of all enterprises and employ around two million of Greece’s five million-strong work force. Many small businesses, particularly in Athens and on Greece’s many islands, support the tourism sector, a crucial part of the economy that is also reeling from the repercussions of the debt crisis.

Concluding thoughts

The Euro, FXE, and the Australian Dollar, FXA, have been among the powerhouse currencies driving the US Dollar, $USD, down and the price of gold, $GOLD, up. The Euro was brought back from the brink of disaster by Herman van Rompuy as he gathered the European Leaders together in April and May, and announced a seigniorage aid program for Greece as well as the EFSF Monetary authority, which was subsequently announced in June, propelling the Euro to the level where it resides today, and the Euro was supported with the expectation of QE 2 by US Federal Reserve Chairman Ben Bernanke.

So now after six months of task force meetings and coming forth with some proposals for federalized economic governance such as the European Semester and the vetting of budgets before national legislature action, the next step is to prepare for orderly sovereign debt default.

I observe global governance in operation in Europe. Task groups work to resolve regional issues and then present their recommendations to state leaders, who then meet in summits and announce framework agreements, setting forth regional governance, which supersedes national legislatures, national constitutions and all state law. The announcements of the region’s leaders effectively waives national sovereignty. The word, will and way of the leaders  is sovereign, in this case, the law for all Eurozone treaty participants. One is no longer a citizen of a sovereign state, rather one is resident living in a region of global governance.  I raise several  questions: should economic conditions devolve to such an extent that sovereign debt default is necessary, will that nation, by default, have to leave the EU currency union? And if so, will it have sufficient seigniorage authority to issue bonds? And if not, will seigniorage aid be forthcoming from some source. I see the day coming in the near future when Portugal, Italy, Ireland, Greece and Spain, will all default on their sovereign debt, and at some time thereafter, I believe a Global Seignior, which is a term that comes from Old English meaning top dog banker who takes a cut, will provide a global currency system, that is a world-wide credit system to conduct economic transactions, as many nations will have lost their sovereign debt seigniorage. The Seignior will oversee banking, lending, and credit world-wide. All seigniorage will come and go through him.

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