- The Financial Times – Bill Gross: Draghi and friends just want your money
Psst! Investors – do you wanna know a secret? Do you wanna know what Angela Merkel, François Hollande, Christine Lagarde and Mario Draghi all share in common? They want your money! They’ve wanted it for years now but you are resisting by holding on to it or investing it at negative interest rates in Switzerland, Germany and a growing number of other countries considered to be European Union havens. They want you to be less frugal and more risk-seeking. They want your money as a substitute for theirs in Spain, Italy and, of course, Greece, but they don’t mention that any more. The example would be too off-putting. “Investors,” they plead, “show us your money!” The ultimate goal of monetary and fiscal policy in the EU is to re-engage the private sector. The EU needs the private sector as a willing (but not necessarily equal) partner in funding its economy. This often gets lost in the noisy details of all too frequent promises such as the one to defend the euro made by Mr Draghi, European Central Bank president.
- The Wall Street Journal – A Dose of Dr. Draghi’s ‘Whatever It Takes’
Sadly, the story of the first half of the year was how governments responded to the initial euphoria that greeted the ECB’s Long-Term Refinancing Operations by easing off reforms. Crisis countries were supposed to boost their credibility by cutting spending, liberalizing markets, privatizing assets and repealing burdensome regulations and unwarranted entitlements, thereby ensuring credibility. Instead, Athens was soon paralyzed by in-fighting, bailout promises were broken, and early elections reignited doubts about the country’s future in the euro. In Italy, Prime Minister Mario Monti watered down a key labor market reform rather than stake his political capital on a showdown with the unions. In Spain, Prime Minister Mariano Rajoy squandered his credibility with three attempts at bank reform and three attempts at a budget. The election of François Hollande as French President appeared final proof that much of Europe had no serious appetite for overhauls.Still, many senior euro-zone bankers continued to insist the euro would survive, even as the situation in the markets deteriorated this summer. They have always argued that the ECB would ultimately do whatever was necessary to save it. But recently that had been starting to look harder to believe. How could the ECB act when there was still no solution to the problem of moral hazard, ensuring countries stuck to reform commitments after receiving support? Wouldn’t ECB bond-buying prove counter-productive given its refusal to take losses on its Greek bonds, which had left ordinary bondholders fearing the result would be to saddle them with even bigger losses? Besides, the ECB is prohibited by statute from financing governments and would clearly face vocal opposition to further bond-buying from the Bundesbank.
- The Telegraph – Debt crisis threatens to break up Europe
Tensions within the eurozone over how to resolve the debt crisis are turning countries against each other and threatening to rip Europe apart, Italian Prime Minister Mario Monti has warned.Resentment in Italy is growing against Germany, the European Union and even German chancellor Angela Merkel herself, he said, adding that “the pressures already bear the traits of a psychological break-up of Europe”. Mr Monti told German news magazine Der Spiegel that he was “concerned” about the deepening divisions and said governments “must work hard to contain it”.His words were released as Greece pledged further economic reforms to avert bankruptcy at a meeting with the bail-out “troika” of the European Commission, European Central Bank and International Monetary Fund.After Sunday’s meeting, the troika said: “There was an overall agreement on the need to strengthen policy efforts.”
- The Telegraph – Venetian cunning of Draghi-Monti masterplan may save euro for now
The European Central bank will not move until Spain requests a full sovereign rescue from the EU bail-out fund (EFSF), and cedes yet more ground to EU commissars. Spain in turn will not move until the ECB lays out the exact terms of any deal, and until the Teutonic bloc signals whether it intends to crush Spain into abject humiliation – a la Grecque – or seek a fraternal outcome. Madrid has no bond auctions in August. It can in theory hold out until October, if it is willing to let contagion spread to the last redoubts of corporate solvency. Global markets were surprised by Mario Draghi’s refusal to deliver instant ECB salvation last week. They should not have been.We have known for weeks that the `Draghi Plan’ for mass purchases of Spanish and Italian bonds requires the political trigger of an EFSF bail-out, with supplicant states signing a “Memorandum”. The EFSF is the enforcer. The ECB is the cash cow. One unlocks the other.
- CNBC – Monti Warns Euro Crisis Threatens EU as a Whole
Italy’s prime minister has warned that the euro zone’s sprawling debt crisis has created resentment amid the bloc’s nations, which could ultimately trigger a breakup of the wider European Union. Mario Monti told German news magazine Der Spiegel in an interview published Sunday that euro zone tensions over the past few years “bear the traits of a psychological dissolution of Europe,” adding that Europe “must work hard to contain it.” The debt crisis started in Greece more than two years ago, and soon engulfed Ireland and Portugal, with all three eventually needing to be bailed out. Spain recently applied for an aid package to rescue its troubled banks, and Italy, the euro zone’s third-largest economy, has also been hit hard by rising borrowing costs on its government debt. Asked about a strengthening in resentment between the allegedly profligate southern European nations and the bloc’s thrifty northern members, Monti told Der Spiegel “it is very alarming, and we have to fight against it.”
- Bloomberg.com – Draghi Echoing Merkel Has Trader Raise Bets Against Euro
When European Central Bank President Mario Draghi vowed July 26 to do “whatever it takes” to defend the euro, he succeeded in stemming a slide that pushed the 17- nation currency down about 6 percent since late March against its major counterparts. Traders in the options market responded by raising bets against the currency of the developed world’s worst-performing economy the most in 11 weeks. Options to protect against further weakness climbed in the past two weeks by the most since May. Between Jan. 12, 2011, when German Chancellor Angela Merkel vowed to do “whatever is needed to support the euro” and Draghi’s almost-identical pledge, Portugal, Spain and Cyprus sought bailouts and the region’s $13 trillion economy teetered on recession. Growth will trail its Group-of-10 peers through at least 2014, according to Bloomberg surveys, as companies from Siemens AG, Europe’s largest engineering company, to sporting- goods maker Puma SE cut their outlooks. “Whatever the ECB does, it can’t conjure growth out of nowhere,” Frances Hudson, a global strategist at Standard Life Investments in Edinburgh, said in a telephone interview on Aug. 2. “The euro could go down further. The markets are not really willing to give them the benefit of the doubt anymore.”
- Bloomberg.com – Merkel Coalition Members Show Acceptance of ECB Bond-Buying
Members of German Chancellor Angela Merkel’s coalition parties signaled they won’t stand in the way of European Central Bank chief Mario Draghi’s plan to buy government bonds. The envisaged move to purchase troubled euro states’ government bonds is “a wise middle way” to solve the region’s debt crisis, Elmar Brok, a European Parliament lawmaker and executive-committee member of Merkel’s Christian Democratic Union party, told Deutschlandfunk radio today. Norbert Barthle, CDU budget spokesman, said that German lawmakers will have veto rights over bond purchases by the euro- area’s rescue funds, which would operate in tandem with the ECB under Draghi’s proposal. The temporary fund “was created for a purpose and bond-buying is in the manual,” Barthle said yesterday by phone. With Merkel on vacation for another week and parliament in summer recess, there was no official government reaction to Draghi’s announcement yesterday of a blueprint to ease bond markets and lower borrowing costs for Italy and Spain in return for strict conditions. In her last statement on the crisis, on July 29, Merkel echoed Draghi’s language, saying that she will do everything to protect the euro.
- Reuters.com – Analysis: Euro zone action inches forward in game of chicken
“After you.” “No, after you.”The euro zone is inching towards a new plan to tackle its debt crisis in a three-dimensional game of chicken among all the main players.The European Central Bank’s heavily qualified offer last week to step in and buy bonds to bring down the borrowing costs of Spain and Italy was the latest gambit in this game.Each of the main protagonists – the central bank, the countries under pressure, EU paymaster Germany, and governments already under a bailout program – is angling for others to make the first move and carry the brunt of the cost. There is also a game of chicken between the ECB and bond market investors, who have driven the 17-nation currency area to the brink of dislocation due to a lack of confidence in its policymakers’ ability to overcome the crisis. Draghi sought to intimidate speculators out of betting against the single currency, saying European monetary union was “irrevocable” and it was pointless to short the euro.
- Reuters.com – Italy doesn’t need German cash, Monti tells Germans
Italy needs moral support from Germany but not its cash, Prime Minister Mario Monti said in an interview published on Sunday as German conservatives renewed calls for Greece to leave the euro zone. The Italian leader also told weekly magazine Der Spiegel that he was concerned about growing anti-euro, anti-German and anti-European Union sentiment in the parliament in Rome.The German government has resisted calls from Italy and struggling countries to introduce common euro zone bonds or take other action to help alleviate the bloc’s sovereign debt crisis, saying it would remove pressure to enact painful reforms. On Sunday, a senior member of Chancellor Angela Merkel’s conservative alliance, Bavaria’s finance minister Markus Soeder, said Greece would leave the euro zone by the end of 2012. “I’ll stay in office if all goes according to plan until April 2013, and I hope that I can help rescue Italy from financial ruin with moral support from some European friends, especially Germany,” Monti told Der Spiegel.
- Bloomberg Businessweek – Monti Warns of Euro Breakup as Tussle Over Spain Aid Hardens
Italy’s Prime Minister Mario Monti warned of a potential breakup of Europe without greater urgency in efforts to lower government borrowing costs, as a stand-off over European Central Bank help for Italy and Spain hardened. Monti, in an interview with Germany’s Der Spiegel magazine published yesterday, said that disagreements within the 17- nation euro area are detracting from the policy response to the debt crisis and undermining the future of the European Union. “The tensions that have accompanied the euro zone in the past years are already showing signs of a psychological dissolution of Europe,” Monti told Der Spiegel. While he backed the ECB’s willingness to address “severe malfunctioning” in the government bond market, Monti said the problems “have to be solved quickly now so that there’s no further uncertainty about the euro zone’s ability to overcome the crisis.” Spain and Italy, whose surging borrowing costs have moved them to the heart of the turmoil in the euro area almost three years after the crisis surfaced in Greece, are so far resisting ECB President Mario Draghi’s attempt to have them formally request help before the central bank will buy their bonds. Monti and Spanish Prime Minister Mariano Rajoy have both said they will await further details as the ECB works up its plan.
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For more information on this institutional research, please contact:
Max Konzelman
max.konzelman@arborresearch.com
800-606-1872
