Criminally incompetent

 

Another fine mess. They have been meeting almost daily since the crisis, at technical level, at the Ecofin, and several times even at the top level. And yet Merkel/Schauble forget to mention to their European friends that they are planning an important headline grabbing regulatory move. The French are outraged. Christine Lagarde not only criticised the German decision, saying that a short-sale ban kills market liquidity, and added that France will not follow suit. Financial market commissioner Michel Barnier also criticised the decision, emphasising the need for a common response. All effort to display European unity have once again by defeated in full public limelight. (Merkel is either criminally incompetent, or driving Europe off the cliff on purpose. We suspect it is the former.)

The reaction to Germany’s unilateral decision was one of shock and disbelief. Global stock markets plunged. European markets were down by 3%. The euro plunged, but later recovered. Criticism focused both on the decision itself (somewhat strange since most CDS activity is in London, not Frankfurt), but more important on the the unilateral way it was decided. Bloomberg this morning is full of stories citing currency analysts that the euro will have much further to fall.

The FT writes that the German decision was a quid-pro-quo to appease the Bundestag, where an increasing number of MPs want to link their approval of the EU rescue fund to progress on regulatory reform. Only on Sunday did Merkel rule out a financial transaction tax as unworkable, as she saw no chance of getting the US and the UK to participate. Within the space of a few days, this has become Germany’s official policy. As we have observed during the entire financial crisis, the German chancellor is driven by events, and thus entirely predictable.

El Pais quotes a Commerzbank analyst as saying that the German decision was seen as a desperate move, that signalled to the market that the debt crisis is going to get worse.

We liked the quote by Katinka Barysh of the Centre for European Reform, in the FT: “Germany feels isolated and misunderstood... The rift, if badly handled, could make Germany’s stance towards the EU more hard-nosed and inward-looking.” (The probability that this rift is going to be badly handled is close to 100% in our view.)

On the substance of the regulation, the Commission and France had together favoured a more gradual regulatory approach that would stop short of a wholesale ban, while achieving most of the objectives – the most important of which is to prevent disorderly markets.

In an interview with the FT, Wolfgang Schauble’s says financial markets are out of control. (Everything else thinks that the German government is out of control).

 

Germans are amazed at global reaction to their fiscal proposals

FT Deutschland had an interesting culture shock article in which it quotes several economists as saying that Germany’s debt rule, if applied to the whole of the eurozone, is much more likely to result in investor panic than solve the problem. This is one of the great debate mismatches at present, as the Germany are reducing the eurozone’s entire difficulties to fiscal indiscipline and speculative attacks, while many professional economists believe that the problems are the result of internal imbalances that got out of control.

 

Another day of strikes in Greece

Greece is facing another day of general strike, affecting almost all sectors of the economy, except air traffic controllers, some local transport, and journalists, in protest against the spending cuts. The BBC reports there is much anxiety in Athens over the prospect of violence following three deaths earlier this month. The organiser hope that some 100,000 people will turn up at demonstrations in Athens today.

 

Fitch on Greece

FT Alphaville has an interesting analysis by Fitch on Greece, which looks at the consequences of a minor growth shock on the sustainability of public debt. Rather than "stabillising" at 150%, as is currently planned under the IMF scheme, it would explode to 170%.  The important point to note is that Greece remains in acute default danger even if it does everything contained in the programme. That is what insolvency means. It means you cannot get out of a hole no matter what you do.

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