Tuesday, November 29, 2011

Wolfgang Münchau starts the countdown on the euro

Wolfgang Münchau in The eurozone really has only days to avoid collapse Financial Times 11/18/2011 says, well, what the headline says, that the time to take advantage of what small chance there is to save the euro in its current form is short:

If the European summit could reach a deal on December 9, its next scheduled meeting, the eurozone will survive. If not, it risks a violent collapse. Even then there is still a risk of a long recession, possibly a depression.
He lists the elements required for a practical solution: the European Central Bank (ECB) acting (directly or indirectly) as the buyer of last resort on eurozone countries' sovereign debt; establishment of eurobonds; and, a formal agreement on a tighter fiscal union.

Münchau writes:

Last week the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.
German Chancellor Angela Merkel, the worst head of government the Federal Republic of Germany has ever had, has been dead set against the ECB acting as the buyer of last resort.

The euro crisis was fundamentally a banking crisis that manifested itself publicly as a sovereign debt crisis that became a crisis of confidence in democratic institutions - I don't use the phrase lightly - that has intensified the crisis of insufficient investment resulting from the depression that began in 2007. The various crises are now manifesting themselves simultaneouly.

The same Financial Times reports that European banks are facing a constricted market in their own bonds now. (Tracy Alloway, European banks feel the effects of funding crunch; link is to the 11/27/2011 wire version on CNN) And not a minor one, either:

The funding hole for European banks is deepening following a sharp fall in bond issuance this year as market turmoil leads to a region-wide credit crunch.

European banks have sold $413bn worth of bonds this year, equivalent to just two-thirds of the $654bn that is due to be returned to investors in 2011 as the debts mature, according to data compiled for the Financial Times by Dealogic.
What "returned to investors" means is that the banks have to come up with the cash, either by drawing on their own capital or refinancing. Already facing both official and market-driven demands for increasing their capital cushion, this represents the bank crisis manifesting itself directly.

Investors say they have been deterred from buying bank bonds due to uncertainty over the financial health of some banks, the fate of the eurozone and the impact of new financial regulation. The funding freeze has raised fears about the knock-on effects for companies reliant on bank funding and the broader economy.

"Some deleveraging after the financial crisis is clearly needed, but I think banks are being sent on a crash diet that will have wider implications," said Morgan Stanley analyst Huw van Steenis. "It's not just the risk of a European credit crunch, it will have a knock-on effect in Asia and the US." ...

Banks face an even greater redemption hump next year, when $720bn worth of debt is due to mature.
Or, as Münchau summarizes the situation:

The banking sector, too, is broken. Important parts of the eurozone economy are cut off from credit. The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens.
I don't think Münchau is being alarmist when he says, "Italy's disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most." The 10 days being the lead-up to December 9. That's Friday of next week. It could give a whole new meaning to the concept of Black Friday.

Münchau expresses more-than-justified doubts about whether the failed current leadership of the EU can pull off anything so complex and important in the next week and a half. One major rumor is that Austria, Finland, France, Germany, Luxembourg and the Netherlands, or some subset of that group, all of which still are considered the best credit risks even though all of them to some degree are having their own troubles in the bond markets, might come together to issue common high-grade eurobonds among themselves. (Gemeinsame Bonds der AAA-Staaten.Verwirrung um Alleingang der Euro-Elite Süddeutsche Zeitung 28.11.2011)

But that won't solve the immediate issue for the existence of the euro.

It's going to be a dramatic week and a half!

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