Towards a bond market crisis

 

Eurozone governments have borrowed a record of €110bn from markets this year, reports the FT. This forces up the borrowing costs for the weakest countries even further. Debt managers have to increase yields to lure investors amid competition from AAA-rated governments, a crowding out effect that is likely to continue as eurozone governments raise record amounts of bonds to pay their debt, bail out banks and finance their stimulus packages.  Investors warned that if there is no sign from politicians that they are prepared to tackle their debt levels, there will be a sell-off in eurozone bonds.

 

EU wants to put Greece on a short leash

FT Deutschland reports this morning that the EU wants to install a permanent supervision of the Greek budget, so that every deviation from the plan would have to compensated by some other measure. The Commission has serious doubt about the sustainability of the Greek plan, and fears setbacks. The strategy is now to signal to Greece that any such setbacks would have to be met by additional savings. The Commission will decide on Wednesday to recommend significant cuts in public sector wages. The report also says that Germany continues to be reluctant to agree to a bailout in principle, fearing that this would be misunderstood by the public, that tough measures could be avoided.

 

Greece should call the IMF

Jean Pisani Ferry and Andre Sapir write in the FT that the best way of action for Greece is to call in the IMF. The reason is that even if the eurozone manages to get the necessary funds together there is no way the Europeans can provide the same standard conditionality and credible monitoring process. Also would eurozone countries stay in line amid rising anger in the streets of Athens? Would the eurozone be prepared to do the same for larger member states?  The authors warn that there is a real danger that the EU package is not renegotiation proof. Rather than embarking on a risky course, EU heads of states should urge Greece to call the Fund now. (What it says is that there is no way that we can credibly fix the institutional requirements for a eurozone bailout.  How depressing is this..)

 

The European bailout comes for sure

Pierre Briancon from Breaking views writes in Le Monde that a European bailout will come no matter what although investors still refuse to consider a European bailout as an option. Instead they continue to demand higher spreads on Greek bonds, a rally that is likely to continue until the heads of states meet in February. But the Greek tragedy is easily to turn into a eurozone one, as investors increasingly also seek reassurance from other member countries that they will be capable of consolidating their public finance.  

 

Austrian government plans to rise taxes

The Austrian government is preparing slowly but surely higher taxes. Der Standard lists the candidates including a one percentage point rise in VAT from currently 20%; an increase in petrol tax by 10 Cents;  to claw back tax breaks on dividend taxes and for foundations;  a risk dependent bank contribution; an EU wide financial transaction cost or if that is not feasible the reintroduction of the stamp duty.

 

Germany to buy  stolen tax evasion Data CD

Germany’s government has decided that it wants to buy afterall a data CD containing details of 1500 case of tax evasion by German citizens in Switzerland. It is the second that Germany would have done so, and the decision has triggered a big political debate, which cuts right across the political spectrum about the morality of such action. All papers there lead with the story. Frankfurter Allgemeine says the bank involved is Credit Suisse. There are still several obstacles to be surmounted. The government is currently checking whether this is legal (it probably is, because the data cannot be “stolen” in a legal sense. If you are interested in this aspect, there is a good comment by Heribert Prantl in Sueddeutsche about the legality of the action.).

 

Manufacturing recovery gains strength

The eurozone’s manufacturing sector grew at its fastest rate for two years in January, but the gap between the eurozone’s healthiest and weakest economies is widening, writes the FT. The manufacturing purchasing managers’ index rose a forth month in a row to 52.4 in January, driven by the large contries, France in particular, now expanding at its fastest pace in close to a decade. Greece, Spain and Ireland meanwhile recorded lower output and faster contraction. The manufacturing sector indirectly benefits from the fiscal troubles of some countries like Greece, as they caused the euro to fall from $1.51 in November to $1.39.  

 

Blanchard advocates maintaining low interest rates

In an interview with Les Echos Olivier Blanchard said that central banks should maintain low interest rates to allow for a solid recovery of private consumption. This might imply a low interest rate policy even beyond 2010. If this creates a new bubble, it has to be dealt with instruments other than interest rates. The most essential point is that the economic activity regains momentum. It does not imply that central banks cannot retreat on other fronts. Blanchard considers it wrong to introduce an inflexible a balanced budget rule - as France is currently contemplating about - in times of heightened uncertainty about the recovery.       

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