Sovereign debt bubble thread

[alfred russel]

Markets are not responding well after the bailout. I'm a bit suprised.

[MadImmortalMan]

Markets are not responding well after the bailout. I'm a bit suprised.

We had a quick pop but it sputtered out quickly. Spanish CDS is up today even after this. Euro dropping most of the day too. Neither of those had the initial pop our market had. So maybe not that surprising.

[Sheilbh]

Markets are not responding well after the bailout. I'm a bit suprised.

Still too few details I think.  But it looks like too little, done the wrong way and with seniority which means Iorm's point's a worry.

Plus there's still the Greek election and underlying market concern.  All that's really happened is that the halflife of Euro-fudge credibility is rapidly diminishing.

[Iormlund]

Why is it surprising? A lot of the details are still unknown and in any case it looks like the latest in a series of half measures cobbled up at the last minute. Plus it's not like previous bail outs have worked out.

[alfred russel]

Why is it surprising? A lot of the details are still unknown and in any case it looks like the latest in a series of half measures cobbled up at the last minute. Plus it's not like previous bail outs have worked out.

I don't think anyone think it solves any long term problems, but it at least keeps Spanish banks from failing in the short term. I thought that was worth a positive response, but I guess I was wrong.

[Legbiter]

Well, that didn't last long. Seems Italy will need a bailout soon as well.

[MadImmortalMan]

Quick bump, then lost it. What is that, 40 basis points?

[PJL]

Apparently the details of the deal is that bonds purchased by the EFSF/ESM bailout funds will take priority over private sector bonds in terms of repayment etc, a situation will is likely to the make the bond rates even worse for Spain. Hence the jump in the bond rates today.

[Zanza]

http://www.ft.com/intl/cms/s/0/bfc6959c-b158-11e1-bb9b-00144feabdc0.html#axzz1xW3Mbe8x

June 11, 2012 7:10 pm
We isolate and overload Germany at our peril
By Gideon Rachman

Visiting the Financial Times a couple of weeks ago, Luis de Guindos, Spain's economy minister, predicted: "The battle for the euro will be fought in Spain."
With Spain's decision this weekend to accept international aid to save its banks, the battle is now joined. The stakes are very high. Writing in this paper, Niall Ferguson and Nouriel Roubini warn that Europe is "perilously close" to "repeating the disasters of the 1930s".



As in the 1930s, a conflict in Spain is now seen as critical to a wider struggle for the fate of Europe. It cannot be long before an international brigade of Keynesian economists sets off for Catalonia. Once again, Germany is cast as the villain in a pan-European drama.

Of course, nobody questions modern Germany's democratic credentials. Only in the wilder fringes of the Greek press has Chancellor Angela Merkel been compared with Adolf Hitler. But the picture that emerges from the world's press is of a stubborn Germany, whose actions threaten the world. This weekend's Economist magazine cover showed the global economy as a sinking ship and beseeches Ms Merkel to "start the engines".

The magazine summarises an international "consensus on what Ms Merkel must do", including "shifting from austerity", "a banking union with euro-wide deposit insurance" and a "limited form of debt mutualisation". Privately, world leaders from London to Washington and Rome are urging similar actions on Berlin.

The demands being made of the German government spring from a sincere desire to avoid a rerun of the 1930s, when economic disaster provoked political catastrophe.
However, while these demands may make economic sense, they are politically unrealistic and dangerous. They are textbook solutions that fail the real-world test. Worse, if enacted, they would risk provoking the very political radicalisation they are ultimately meant to prevent.

Consider just one of the proposals on the shopping list: a Europe-wide bank deposit insurance scheme. As a senior Dutch politician who shares the German view, puts it: "We cannot push through a banking union when the French have just cut their retirement age to 60 and we have raised ours to 67." From the Dutch and German point of view, it is unfair for their citizens to underwrite the banks of countries using their own money to pay social benefits that are more generous than those on offer in Germany or the Netherlands.

This dilemma illustrates why a relatively technical-sounding exercise such as bank-deposit insurance has profound implications for national sovereignty. Once you take a big step towards the mutualisation of debt across Europe, you are forced towards much deeper political union. It is not just the much-discussed need for a European "minister of finance", with the power to override national governments. To avoid bitter disputes over fairness, you would also need to harmonise European social-security systems. That would be the work of decades.

The Merkel government is not ruling out eurozone bonds or EU deposit insurance for ever. It is arguing that any such moves can come only as part of a bigger project – the formation of a political union. Anything else will feel like giving southern Europe a German credit card, without setting a credit limit.
It is hard to see how European politicians could achieve such profound reforms within weeks or months – as the Americans and others are urging. A recent Pew opinion poll showed strong majorities across Europe against ceding national sovereignty over budgetary matters to a central authority. The same poll showed that Ms Merkel was widely admired – not just in Germany but across Europe.

On this, the public shows more sense than the intellectuals who are lining up to give Berlin a kicking. While Ms Merkel's handling of the crisis has not been faultless (whose has?), she has one huge achievement to her name. She has prevented the political extremes from gaining a foothold in the country.

Anybody who thinks that is a phantom danger should take a look at Germany's neighbours. In France, a third of the electorate recently voted for a far-right or a far-left candidate for the presidency. In the Netherlands – like Germany, a creditor nation that is sick of bailing out southern Europe – the far right and the far left are running first and second in the opinion polls. In Austria, the far right are at nearly 30 per cent in the polls.

Germany has all the conditions for a similar backlash. The country's voters have every reason to feel misled about the euro. They were once promised that the single currency involved a no-bailout clause that would prevent German taxpayers from having to support other eurozone countries. But Germany has already had to accept potential liabilities of €280bn to fund Europe's various bailouts – and there will be further demands to come. Simply funding Germany's capital contribution to the European Stability Mechanism will increase the country's budget deficit this year from €26bn to €35bn.

And yet despite the burdens and risks that Germany has already taken on, the country's government finds itself abused for not doing even more. Isolating and berating Berlin, while trying to force the country to underwrite the finances of the whole of the eurozone, is a politically dangerous course. The rise of far-right nationalists in Greece or the Netherlands is deeply regrettable. The rise of the far right in Germany would be a disaster.

Right now, that's just scaremongering. But I wonder if the conservatives and free democrats won't get more sceptic in the run-up to the next election...

[alfred russel]

Right now, that's just scaremongering. But I wonder if the conservatives and free democrats won't get more sceptic in the run-up to the next election...

100 billion bandaid here, 100 billion bandaid there; before long the cost of bandaids will add up to something resembling a bailout. Do you think Merkel has the political capital to cut off southern europe or pull off a long term solution (dissolution of the euro, genuine fiscal integration)?

[Neil]

I saw an article today about how the German government had come begging to the US and Canada for us to put some money in to bail out the EU.  There didn't seem to be much support for the idea.

[alfred russel]

I saw an article today about how the German government had come begging to the US and Canada for us to put some money in to bail out the EU.  There didn't seem to be much support for the idea.

If Germany wanted to waste money so badly they should have just sent the cash for those two international calls to Spain.

[MadImmortalMan]

The fed has already dumped a ton of cash into the EU.

[MadImmortalMan]

Spain's 10-year up another 30 basis points today. This is not good.

[Iormlund]

Well, that didn't last long. Seems Italy will need a bailout soon as well.

Italy? We haven't been properly bailed out yet, and at this rate we'll need to by the time the Greeks vote.