COUP D’ETAT!!!! Sarkozy to renew his European presidency for another year
Le Monde has the real story of Sarkozy’s speech to the European Parliament we all missed yesterday, which is that Nicolas Sarkozy effectively suggested to continue as EU president for the euro zone for another year. The logic behind the argument is as follows: Russia’s invasion of Georgia and the financial crisis led to a common understanding that the EU currently needs a strong leadership. The Irish No vote to the Lisbon Treaty means that there is no quick fix for this in the near future. The altering presidencies are to be replaced, by what is subject to a roadmap to be worked out by Sarkozy’s presidency in December. One option would be an elected president, the far more easier option is to let Sarkozy continue to preside but at the euro zone level. It would circumvent the (widely feared) Czech and the Swedish EU presidency in 2009 until the next eurozone country, Spain, takes over in 2010. In principle Jean Claude Juncker, the current president of the informal Eurogroup, would also qualify for the job, but the proposal of a Eurogroup presidency is seen as a de facto coup d’etat by Sarkozy against the Ecofin, writes Wolfgang Proissl in the FT Deutschland. France did (obviously) not coordinate this subject with Germany, awaiting now the verdict of Angela Merkel.
Le Monde editorial argues that this is nothing but a method to extend his own influence in Europe beyond the French EU presidency. Apart from this presidency, he also suggested a European wealth fund and a new European industrial policy. Sarkozy knows too well that not all of his proposals get through but believes that some proposals will survive in the end. Le Monde warns that this tactic worked well in the crisis but when the calm sets in Europe might as well return to its traditional working method of moderation and compromise.
Jean Quatremer reports that the European Parliament favours by a large majority Sarkozy’s proposal of a euro area governance. In a resolution adopted yesterday by 499 against 130 votes and 69 abstentions the MEPs consider that the first eurozone summit held in October calls for further development. Quatremer also clarifies that Sarkozy’s proposal is not to institutionalize the eurozone governance but to preserve the initiative for a Eurogroup summit to euro area members during times when the EU presidency falls on a non-eurozone member. The French would thus pass on this role to Spain in 2010.
Financial crisis deteriorates once more – euro at $1.28, credit protection costs reaches new record
So much for the idea that those banking rescues have worked. We are essentially back to square one – except on the money markets. Global stock market indices yesterday lost some 4-6%, back to levels close to where they were at the height of the panic. The market are bracing themselves for another wave of credit write offs in respect of Lehman Brothers et al. The itraxx Crossover index, a measure of risk on a group of European corporate junk bonds, rose to 794 basis points, an all-time high, according to the Financial Times. Frankfurter Allgemeine reminds us that this group includes companies such as TUI or Infineon, whose refinancing costs have correspondingly risen. The Yen has now appreciated against the euro some 20%, as carry trades are being unwound, and the euro is now down to $1.28, as US investors are repatriating funds. The previous night we heard on CNN that we have surpassed the peak of market volatility. Baloney!
And here are the money market indicators. We can’t help noticing that the US money market rates come down faster than the European rate, with Euribor at 4.936% (4.94%) and Libor 3.54% (3.83%). The TED spread is now 2.5% (2.74%). Getting better, but still in deep crisis territory. Calculated Risk has a good overview of the American money market indicators. A good website for a quick overview of the European rates is from the Banco de Portugal
Credit cards – the next subprime
Frankfurter Allgemeine has an article on the rise in US credit card default, prompted by the bad quarterly figures of American Express. It now appears that other credit card issuers, such as JP Morgan Chase or Bank of America, could be affected by the current rise in credit card defaults. So far, the delinquency rate has risen only moderatly, from 4.61% in August 2007 to 6.82% recently, and a further deterioration is expected, as unemployment rises. This scenario would raise the prosepct of another subprime-default.
General strike in Greece
A 24-hour strike called by Greece's public sector trade unions yesterday grounded almost 200 flights by domestic airlines and shut state-run banks, schools and hospitals, reports the FT. The strikers were demanding changes in the 2009 draft budget, which is due to be debated in parliament later this week. The budget includes new taxes and tighter spending policies intended to curb a rising deficit. The finance ministry has warned that fiscal policy may be tightened further because of a projected increase in debt-servicing costs next year, as a result of the global financial crisis.
Eurozone governments struggle to raise money
Finland, Belgium and Spain are struggling to raise money in the bond markets reports the FT. Spain failed to launch a bond last week, while Belgium and Finland were having difficulty attracting investors for debt offerings after governments set aside billions to recapitalise their banks and guarantee their debt. Governments face problems raising money, as investors demand higher yields because of the extra credit risk resulting from the bank guarantees and the vast pipeline of sovereign debt expected over the next year. The Bank of America estimates that the eurozone countries will have to issue an extra €200bn in debt in the next year to pay for bank recapitalisations and guarantees.
Klaus attacks Merkel and Sarkozy
Vaclav Klaus wrote an article in the Czech daily Mlada Fronta Dnes (aka Frankfurter Allgemeine, which has a summary), in which he attacked the bank rescues as an attempt to bring back socialism. He said crises were part of the market economy system. The attempt to get rid of recessions and business cycles once and for all has already been undertaken. It was called communism. Klaus blames specifically three factors for this crisis: excessive government intervention in the financial industry, high indebtedness, and bad regulation. He wrote that politicians had introduced rules (Basle I) that forced banks to hide their risks by creating ultra-complex financial instruments. He also warned against the fiscal implications of the crisis. The Maastricht criteria at least attempted to put a lid on excessive government spending. Now these criteria are being thrown overboard with great enthusiasm.
The Reinharts on emerging markets
Writing in Vox, Carmen M. Reinhart and Vincent Reinhart write about the dynamics of emerging market financial crises. The standard pattern is that capital flows into the new “hot” nation, but then stop or reverses forcing painful adjustment. Their column presents research based on such episodes from 181 nations during 1980-2007 and for a subset of 66 nations for the 1960-2007 period. If the pattern of the past few decades holds true, emerging market economies may be facing a darkening future.
Laidi in the FT
Zaki Laidi, writing in the FT, takes issue with Peer Steinbruck’s statement that the US was finished as a global superpower. He makes the point that in economic terms, multipolarity started many years ago. The crisis may have revealed this, but not caused it. But, as he writes, “economic multipolarity does not guarantee strategic multipolarity. If these two dynamics were precisely correlated, the world would already be multipolar. But they are not and, contrary to what one might believe, they are not on the verge of becoming so.” The US accounts only for 25% of world GDP, but remains the geopolitical superpower.
What they were really thinking at S&P
Naked Capitalism has a very interesting entry about an exchange between two employees of rating agency S&P about a mortgage-backed securities deal. This is from an instant messaging system:
Official #1: Btw (by the way) that deal is ridiculous.
Official #2: I know right...model def (definitely) does not capture half the risk.
Official #1: We should not be rating it.
Official #2: We rate every deal. It could be structured by cows and we would rate it.
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