A series of measures were announced today to provide support for troubled Euro-zone states. The broad outline of the plan is that the European Union (EU) and the International Monetary Fund (IMF) are committing almost $1 trillion to support bond issues by Euro-zone states. We see three reasons to question the initial market euphoria surrounding this announcement:
- The immediate issue is that this measure, and its cost, will likely need be voted on by all member-state legislative bodies. There is a good chance it faces stiff opposition in at least one Euro-zone nation, potentially setting the stage for a political standoff reminiscent of the US congress’s initial vote on the TARP plan in September 2008. The entire process will be controlled by member-states and the EU institutions have been largely bypassed. The EU leadership has decided they want to sell this deal in 27 member-states simultaneously, with the markets breathing down their neck. It is hard for us to believe they will find buyers in every member-state’s legislature. Imagine if TARP had to be voted on by every US state legislature. The UK government (after last week’s election, we aren’t sure who that is) has already decided it wants no part of the 440 billion euro loan guarantee program, others may follow upon reconsideration. In any case, we suspect member-state legislators will not be as easy to corral as finance and prime ministers.
- This announcement undermines the fiscal soundness of all European Union countries, especially if austerity measures are still resisted by the member states who are in very weak fiscal positions. David Roche writes in the FT that “this deal is a form of contagion by official action”.
- The German provincial election in Rhineland this past weekend did not go well for the Christian Democratic Union (CDU). German voters handed Angela Merkel’s party an effective loss based on her support for a much smaller bail-out of Greece. We do not believe German voters, or the constitutional court will be pleased about this announcement and the European Central Bank’s plan to purchase member-state debt.
A number of the fundamental issues raised as our generation’s financial crisis runs its course are summarized in an excellent Statfor piece titled The Global Crisis of Legitimacy.
In other news, Moody’s announced they may downgrade Greece to junk-bond status (S&P already has). The European Central Bank (ECB) has announced they will buy these junk-rated bonds and the prevailing mood in Europe is to blame the rating agencies and banks for the debt woes of profligate member nations. The ECB’s reputation for monetary stability and responsibility has been deeply compromised by this weekend’s announcement, and we fear it will be impossible to regain in the short-term.
The sovereign credit crisis in Europe is not over yet, and the questions surrounding the Euro have not been laid to rest.
- Europe agrees rescue package
- In a must-read analysis titled It’s not the way to solve Eurozone debt crisis, David Roche writes in the FT: “Initially, markets may be wowed by the size of the package. But the size just means that more debt has been added to a problem that is about too much debt! EU governments and the European Central Bank are now obliged to guarantee or buy the sovereign debt of other members as a solution to the Eurozone’s debt crisis. But the solution to a hangover is not more alcohol.”