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November 17 signaled new fears for the euro, sowing seeds that soon might spread - of more unsustainable debts. Spain's ten-year bond yield reached a dangerous level, so that even France's borrowing rate rocked higher. On Thursday, what the euro zone's third and fourth-largest economies, Italy and Spain, paid on debt (6.8% and 6.6%, respectively) was more than three times Germany's rate (1.8%). France was (3.6%)
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| ECB President Mario Draghi |
Mario Draghi, the new head of the European Central Bank, is frustrated. This morning he grumbled that the European Financial Stability Facility, the would-be rescue fund, was created 18 months ago but the eurozone members have yet to launch its beefed-up version. "Where is the implementation of these long-standing decisions?" Draghi asked.
Good question – and a pressing one for the ECB, whose purchases of eurozone sovereign debt seem to be the only factor preventing a meltdown in bond prices. That task is meant to fall instead to the EFSF, which is supposed to be striking fear into the hearts of speculators by deploying its arsenal to ensure stability.Gary Jenkins of Evolution Securities notes that the central bank has spent about €192bn (£165bn) on buying assets to date, of which about €115bn has been spent since August, when purchases of Italian and Spanish debt were authorised. On some reasonable assumptions (necessary because the ECB doesn't provide a breakdown of whose debt it has bought, just a grand total of purchases), Jenkins thinks the ECB now holds €90bn-€100bn of Italian bonds on its books. That's about 5% of Italian bonds in issue. That's serious money, especially as the ECB's official position is that its purchases are merely designed to transmit smoothly its monetary policy.
The official explanation should be taken with a large helping of salt. If the ECB really wanted to ensure smooth transmission of monetary policy, the logical way would be to announce that it would intervene to prevent bond yields going over a certain level. But that, of course, would look suspiciously like an open-ended willingness to accept credit risk (which, on most interpretations of the ECB's mandate, is not allowed: see Sir Mervyn King's comments earlier this week about the role of a lender of last resort).
So what we have instead is a pretence that the ECB is doing nothing out of the ordinary, while everybody in the market knows that the central bank is really acting to keep a lid on prices. No wonder fresh fires break out. No wonder Draghi is frustrated: the ECB is buying time, the politicians aren't using it.
The trouble is, the fudge is necessary. Imagine if the EFSF had indeed been up and running since August. If it had been buying at the ECB's pace, it would almost be out of ammunition by now. Its guarantees from member states total €440bn and, besides buying bonds, it has other jobs to perform – such as recapitalising banks and aiding Greece. If the EFSF, with its limited guarantees, had been sent into battle, the state of the eurozone bond markets would be even more chaotic by now.
Anticipating that problem, the politicians pledged to increase the EFSF's weaponry via the use of leverage. Nice idea, but it's very unlikely to work: the Chinese aren't buying and France's triple-A credit rating might disappear under the strain.
Draghi's comments this morning, then, should be seen as a firm hitting of the ball into Berlin's court. It seems a reasonable thing to do given the size of bond purchases. As Jenkins put it, before Draghi's speech: "Without a change in the ECB's remit, market participants will constantly question both the bank's willingness and its ability to continue intervening in markets and this reduces the effectiveness of the interventions."
On Thursday, what the euro zone’s third and fourth-largest economies, Italy and Spain, paid on debt (6.8% and 6.6%, respectively) was more than three times Germany’s rate (1.8%). France was (3.6%).
This was even though the ECB had bought bonds earlier in the week, to ease pressures. Greece charted 30 percent territory, but Italy and Spain, so much bigger, pose a different scale of problem, maybe too big to handle.
Analyst Manoj Ladwa, with ETX Capital, said: “The yields on these bonds continue to go up. The price continues to come down for these bonds, and if the ECB is not able to step into the market and buy enough, the worst case scenario is going to happen, and those bond yields are going to carry on moving higher and higher as we’ve been seeing in the last few days or so.”The European Central Bank bought bonds in discreet quantities last week, 4.5 billion euros-worth, so as not to dilute incentives for countries deep in debt to reform their economies.
Chancellor Merkel supports this, and opposes issuing eurobonds, which would amalgamate euro countries’ debts.
Merkel said: “If politicians think the ECB can solve the euro crisis, then they are mistaken. My main point is political action.”
But what about contagion? Just a few euro states rate financial-economic top marks, with Germany strongest in the triple-As, then come Luxembourg, the Netherlands and Austria.
Austria and France are up there too, but France is looking queasier, Belgium and Slovakia respectable but weakened.
These states are in the ‘rescue-may-be-needed’ category: Italy and Spain of serious size, unlike Malta and Slovenia.
Greece, Portugal and Ireland already have rescue plans in play. Cyprus’s debt puts it in the red zone too.
Just six euro zone states of the total 17 enjoy triple-A credit ratings, which gets them reasonable borrowing rates. But France’s is in question. Paris has been warned.
France’s real economy is stagnating, with third quarter growth of only 0.2 percent. The full year’s results point to recession, making paying the debt harder.
