Sovereign debt bubble thread

[Iormlund]

We now have Q1 data on capital flight from Spain. It accelerated quickly, and in March alone set a new record at €66 billion (IIRC ~6% GDP).

[Sheilbh]

Yeah I think that data's worrying.  It would make the crisis existential, either everyone's all in to save the Euro or it's time to break-up.

I saw a few other interesting details today.  Monti's campaign continues today he said the German government must reflect 'quickly and profoundly' on the popular backlash.  I think that's wise.  Also the day after the Commission suggested Eurobonds and banking union (I think the latter could be an even bigger ask than the Eurobonds), everyone seems to be thinking that redemption bonds or Eurobills might allay German concerns - I don't fully understand them yet but here's to hoping.  Also French yields are falling rapidly in the flight to safety, which is odd given how the Anglo-Saxon press has portrayed Hollande.

[Admiral Yi]

The people who need to reflect quickly and profoundly on the popular backlash are the the ones involved in the popular backlash.

[Neil]

The German government needs to worry about popular backlash from Germans, not from assorted foreigners trying to rob them.

[jimmy olsen]

Maybe they should try the old German practice of robbing foreigners instead?

[citizen k]

France cuts pension age for some despite EU unease
Reuters

PARIS (Reuters) - France's new left-wing government announced on Wednesday a cut in the pension age to 60 for some long-time workers, carrying out an election pledge in the face of economic troubles and an EU warning that it would overburden an already creaking social welfare system.

Socialist President Francois Hollande, who took power in mid-May on a pro-growth ticket for the economy, had promised a partial rollback of his predecessor Nicolas Sarkozy's pension reform if he won.

"Promise made, promise met," said Prime Minister Jean-Marc Ayrault.

He said in an interview on TV channel TF1 that the move was fully funded by a small rise in contributions and France would still meet European commitments gradually to reduce its public deficit to zero in 2017.

The cut, announced by decree, was anticipated but still drew stinging criticism from the conservative opposition.

The change, taking effect in November, partly reverses Sarkozy's 2010 reform that raised the pension age to 62 from 60 and affects workers who have spent at least 41 years in labor-intensive jobs.

Social Affairs Minister Marisol Touraine told reporters after a cabinet meeting that the measure would cost 1.1 billion euros per year up to 2017 and 3 billion euros thereafter, less than the 5 billion euros previously estimated.

This would be financed by increased pension contributions, she said, adding: "We committed to put this measure in place quickly for social justice for those who started working early."

The reform will also create vacancies at a time when unemployment is at its highest level this century.

The number of French jobseekers rose in April for the twelfth month running to 2.89 million, the highest since September 1999, data showed last week. The labor ministry said it was braced for more layoffs in the months ahead.

A BVA opinion poll suggested that economic morale had risen significantly since Hollande's election victory on May 3.

The poll showed that the percentage of people who said they were "relatively confident" about the economic situation in France had risen to 53 at the end of May from 33 percent at the start of the month.

CREDIT RATING THREAT?

The European Commission warned last week that France would struggle to meet its fiscal targets without spending cuts, and that financing of the pension system had to be closely monitored despite savings from Sarkozy's reforms.

While Ayrault said the government was committed to meeting its target of cutting the public deficit to within 3 percent of gross domestic product next year and balancing the books in 2017, the rollback on pensions drew fire from the conservatives who put the initial reform in place.

The head of Sarkozy's conservative UMP party, Jean-Francois Cope, called the change "madness."

"It risks the downgrade of France's credit rating and at this rate tempts fate," Cope said at a weekly party news conference. "It is not possible for Francois Hollande to continue to bury his head in the sand."

Sarkozy's pension reform, adopted despite street protests by millions in 2010, was welcomed by financial markets and credit ratings agencies concerned about France's ability to cut its debt and deficit levels in the face of stagnant economic growth.

[citizen k]

Cameron and Obama increase pressure on Merkel over eurozone crisis

Following phone call with US president, British PM will tell German chancellor eurozone has just weeks to act decisively

David Cameron will deliver a blunt message to Angela Merkel in Berlin on Thursday that he and Barack Obama have agreed on the need to flesh out an "immediate plan" to tackle the eurozone crisis.

Amid concerns in London and Washington that the German chancellor is dragging her feet – noticeably in declining at the moment to countenance eurobonds – the prime minister will tell Merkel the eurozone has just weeks to act to shore up the single currency.

Cameron, who has a meeting in Berlin on Thursday afternoon with the German chancellor, believes that agreement needs to be reached at two crucial summits this month. They are the G20 summit in Mexico next week and the EU's annual summer summit in Brussels at the end of the month.

The prime minister started a short European tour on Wednesday afternoon, flying to Oslo for dinner with Jens Stoltenberg, the prime minister of Norway, which is not an EU member state. Cameron and Stoltenberg will then travel to Berlin on Thursday for a town hall question-and-answer session with Merkel. The German chancellor invited Cameron and Stoltenberg. The town hall event will be followed by Cameron's meeting with Merkel.

Downing Street highlighted the transatlantic impatience with Berlin when it said the prime minister had agreed in a telephone call with Obama late on Tuesday on the need for urgent action.

Cameron's spokeswoman said: "They agreed on the need for an immediate plan to tackle the crisis and to restore market confidence as well as a longer-term strategy to ensure a strong single currency.

"The prime minister's view has always been that decisive action needs to be taken in order to underpin the eurozone. Confidence in the markets is essential, and in order to regain that confidence decisive action needs to be taken."

Cameron has caused some irritation in Berlin and Paris by appearing to lecture eurozone leaders on the action they need to take to save the single currency. In a video conference with Merkel and the new French president, François Hollande, ahead of last month's G8 summit at Camp David, the prime minister recited passages from a speech in Manchester in which he warned of a "remorseless logic" that stronger parts of a single currency help weaker parts.

In his meeting with Merkel in Berlin, Cameron is expected to highlight one particularly sensitive area for Germany – the need for eurobonds, which Merkel is currently resisting.

In his Manchester speech on 17 May, the prime minister said: "The eurozone needs to put in place governance arrangements that create confidence for the future. And as the British government has been arguing for a year now, that means following the logic of monetary union towards solutions that deliver greater forms of collective support and collective responsibility of which eurobonds are one possible example. Steps such as these are needed to put an end to speculation about the future of the euro."

But Britain does not detect any current moves in Berlin towards accepting eurobonds – jointly issued bonds which would enable debt-laden countries to benefit from the strong financial position, and lower borrowing costs, of Germany.

Merkel has said it would be wrong to demand eurobonds without accepting the "next step in European integration" – fiscal union.

The prime minister's spokeswoman said: "There are some immediate issues in the eurozone that need to be sorted, as we have said all along, in order to ensure that the eurozone deals with the issues that it is facing right now. The prime minister has discussed at length what he thinks those issues are."

She highlighted Cameron's blueprint in his Manchester speech, in which he said Europe needed to:

• Build an effective firewall

• Ensure their banks are well capitalised

• Create a system of fiscal burden sharing

• Enact a supportive monetary policy across the eurozone

• Promote competition.

His spokeswoman added: "The issues still need to be sorted out. Our position hasn't changed on that. They remain his pressing concerns. The prime minister has always been very clear that the eurozone needs to act decisively and needs to put in place some robust contingencies for all eventualities.

"In terms of what needs to be done in order to underpin the eurozone, he has been clear from the start what those issues are and how they should be resolved. They still need to be resolved.

"Clearly the eurozone has taken some steps in order to get its house in order with the fiscal stability compact. But more needs to be done and the prime minister has set out what needs to be done."

http://www.guardian.co.uk/business/2012/jun/06/cameron-obama-merkel-eurozone-crisis

[citizen k]

Some commentary from zh:

As France Lowers Retirement Age, Germany Better Be Ready To Pay For Austerity's Unwind

As noted earlier, Europe has been so obviously crippled by years of brutal austerity (which, as we pointed out before never actually happened), that it has had to experience the supreme indignity - a miserable two years of plunging flat GDP growth. Because under the old normal, it appears that unless one is issuing massive debt, pardon "growing", society grinds to a halt. Well, it appears that France has finally had enough, and as of today, "the French government approved a measure Wednesday that will lower the retirement age to 60 from 62 for a narrow group of workers, partly reversing unpopular pension reforms made by former President Nicolas Sarkozy as he sought to improve France's public finances." Obviously, this means that more welfare funding will have to be sourced as all else equal, this means less money will be produced by the country's workforce, and more money will be consumed by its retirees. Who will do it? Why German of course. Because after Merkel caved first on Greece, and then on Spain, it is now game over for German "prudence" and everyone will line up at the trough. Congrats Berlin: we can only hope you have discovered those magical money-growing trees. You will need them.

From Dow Jones:

    The reform, which is less sweeping than promised by new President François Hollande during his election campaign, comes just days ahead of legislative elections in France and is likely to further fuel questions about Mr. Hollande's ability to make a serious dent in France's deficit against a backdrop of the deepening euro-zone crisis.
   
    The government's decision will authorize people who contributed to the pension system for more than 41 years to retire at 60, Social Affairs Minister Marisol Touraine told reporters after the weekly cabinet meeting. The government will also take into account maternity leave and unemployment periods in the contribution period, she said.

    Ms. Touraine said the reforms will cost €1.1 billion ($1.37 billion) in 2013 and €3 billion in 2017. The extra expenditure will be covered by increased contributions by employees and employers, she added.

    The measures will allow people who started working early in life and who have paid the required amount of pension contributions over the course of their working life to retire at age 60, instead of the normal minimum retirement age of 62.

    Ms. Touraine said 110,000 people will be affected by the reform.

We don't know about 110,000 people but we know about one: Angela Merkel. Have fun paying for French early retirement as austerity dies a miserable death.

[Zanza]

She highlighted Cameron's blueprint in his Manchester speech, in which he said Europe needed to:

• Build an effective firewall

• Ensure their banks are well capitalised

• Create a system of fiscal burden sharing

Excellent. How many billions of British tax money is Cameron willing to spend/risk on these splendid proposals?

[Sheilbh]

Excellent. How many billions of British tax money is Cameron willing to spend/risk on these splendid proposals?

It's not our currency-union to save

Having said that I think there've been projections of how much we'd need to bailout the banks in case of a Eurozone collapse and it's pretty terrifying.

[Zanza]

So it is just warm words of advice?

As you say, Britain has a lot of exposure to this and all your prime minister suggests is that other people solve it by spending hundreds of billions? David Cameron, declared opponent of European integration, suggests that other countries should sign away their sovereignity in order to safeguard what in the end is also British interests? And all Britain will contribute is words?

Your foreign policy in the Euro crisis reminds me of Germany's during the Iraq War. Giving good advice, but not actually participating in a solution. And if I remember correctly, that wasn't particularly well received in Britain back then either.

Here is what Merkel should do when David Cameron gives her advice: 

[Valdemar]

So it is just warm words of advice?

As you say, Britain has a lot of exposure to this and all your prime minister suggests is that other people solve it by spending hundreds of billions? David Cameron, declared opponent of European integration, suggests that other countries should sign away their sovereignity in order to safeguard what in the end is also British interests? And all Britain will contribute is words?

Your foreign policy in the Euro crisis reminds me of Germany's during the Iraq War. Giving good advice, but not actually participating in a solution. And if I remember correctly, that wasn't particularly well received in Britain back then either.

Here is what Merkel should do when David Cameron gives her advice: 

I think you sum up the UK attitude to the EU pretty well and how the rest of us should respond

V

[Sheilbh]

In fairness the UK did voluntarily contribute to the Irish bailout and has increased our funding of the IMF to participate in other bailouts.  But I think that attitude is a bit like Greece to be honest.  Your line is basically - we'll blow up the world economy unless someone else pays. 

I don't like Cameron or Osborne.  I think they're incompetent spivs who deserve to lose the next election.  But their position doesn't seem too outlandish to me.
Our economy is enormously affected by the Eurozone crisis.
In addition we're members of the EU.
The extent of Cameron's suggestion is that the German leadership, perhaps, listens to other involved people like the Economic wisemen, the European Commission, the French leadership, the German-backed Italian technocrat, and it just so happens that their solutions are broadly what the British government, the American government, the OECD and much of the IMF think too.

Also the Tories aren't opposed to European integration in itself - though they think it's doomed - they're only opposed to it for Britain - and we'll probably be out within a decade anyway.  But it seems consistent to me.  The Eurosceptic right have said for years that you can't have a currency union without a country so either Europe integrates far more or the Euro would fall apart.  I don't entirely agree with them but I think that's a fair point.

Having said all of that I think if the EZ crisis does explode then we're probably going to spend billions and billions bailing out our banks again.

Your foreign policy in the Euro crisis reminds me of Germany's during the Iraq War. Giving good advice, but not actually participating in a solution. And if I remember correctly, that wasn't particularly well received in Britain back then either.

Wait, are you seriously suggesting that W's foreign policy leadership is the model Merkel should follow in the Euro-crisis?

Good advice is good regardless of the source.

Edit:  Incidentally I think Martin Wolf was on great form yesterday, with the headline 'Panic has become all too rational':

How much pain can the countries under stress endure? Nobody knows. What would happen if a country left the eurozone? Nobody knows. Might even Germany consider exit? Nobody knows. What is the long-run strategy for exit from the crises? Nobody knows. Given such uncertainty, panic is, alas, rational. A fiat currency backed by heterogeneous sovereigns is irremediably fragile.

Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Perhaps the panic will vanish. But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks. Policy makers must eliminate this panic, not stoke it.

In the eurozone, they are failing to do so. If those with good credit refuse to support those under pressure, when the latter cannot save themselves, the system will surely perish. Nobody knows what damage this would do to the world economy. But who wants to find out?

The Chief Economist of Commerzbank also made interesting comments today that if Spain taps the EFSF then 'the dam will burst'.  Does anyone have the context for that line because I'm not sure what he means?

[Zanza]

Wait, are you seriously suggesting that W's foreign policy leadership is the model Merkel should follow in the Euro-crisis?

You misunderstood me: Cameron shouldn't model his foreign policy on Schröder.

[Sheilbh]

Wait, are you seriously suggesting that W's foreign policy leadership is the model Merkel should follow in the Euro-crisis?

You misunderstood me: Cameron shouldn't model his foreign policy on Schröder.

I think you overestimate Schroeder's impact over here.  He was nearer Putin in terms of leading opponents to the war.  Chirac kind of drew all the attention and the anger

But I think there's something to the Schroeder comparison in that in neither case did the leader have any real leverage, but it's still right for them to put their view. 

The other thing I'd say which slightly contradicts that is as far as I can see Cameron's giving tacit support to Schauble's view.  He doesn't want Eurobonds before fiscal union and right now the Euro-Federalists have a British, Tory Prime Minister saying he'd support Eurozone fiscal union - that's a big deal, if he were to follow through.

Having said that I think it's fair to say that Cameron could probably have found a better way of making his point than reciting passages of his own speech to Merkel and Hollande