ECB warns Germany against EU bail-out

The Financial Times reports that ECB warns Germany against EU bail-out.

(emphasis mine) [my comment]

ECB warns Germany against EU bail-out
By Bertrand Benoit in Berlin and Ralph Atkins in Frankfurt
Published: February 20 2009 21:37

The European Central Bank gave a thinly veiled warning to the German government on Friday not to violate the European Union's "no bail-out" clause, which prevents members of the eurozone from supporting other members that are facing rising public debt.

Jürgen Stark, ECB executive board member, told Spiegel magazine in an interview released on Friday that the clause was an "important basis for the functioning of the monetary union".

The warning follows reports that Germany was considering ways to help members of the eurozone that are facing fast-rising refinancing costs as investor fears rise about deteriorating public finances. Peer Steinbrück, finance minister, said this week that Germany would not remain inactive if the eurozone was in danger of breaking up.

Asked about the issue on Friday, Frank-Walter Steinmeier, foreign minister, said; "A process is now starting to consider to what extent support via the eurozone and the economically strong countries of the eurozone can happen."


The "no bail-out" clause of the EU treaties prohibits countries from becoming "liable for" or assuming "the commitments" of other governments and is regarded by the ECB as an important weapon for ensuring fiscal discipline.

The cost of issuing sovereign debt has risen rapidly for the most indebted countries of the eurozone. The European Commission has excessive-deficit procedures open against six EU member states.

The German finance ministry denied it was developing "concepts" to assist strained eurozone member states.
[which is bullish for the euro]

But Berlin has made no secret of its concern at rapidly rising deficits in parts of the eurozone and has issued repeated calls for a swift return to fiscal discipline in the region. Even though it shares the ECB's concerns about the moral hazard, the finance ministry has been reviewing its theoretical options, putting Germany on a possible collision course with the central bank.

Among the available instruments, Berlin is sceptical of bilateral aid — which it thinks could encourage fiscal misbehaving
[and would be political suicide for German's government]— and of joint bond issues because of the additional refinancing costs these would imply [also political suicide].

Should Germany be forced to step in, it would prefer a multilateral approach that would use the EU and the International Monetary Fund to channel aid to individual countries.
[This would help hide the cost to German taxpayers, making the bailout more politically acceptable.]

Reuters reports that ECB's Stark-bail out prohibition vital plank of euro.

Thomson Financial News
ECB's Stark-bail out prohibition vital plank of euro
02.20.09, 05:13 AM EST

FRANKFURT, Feb 20 (Reuters) - The fact EU countries are not allowed to bail out partner countries is a vital part of the European Monetary Union, European Central Bank Executive Board member, Juergen Stark, was quoted as saying on Friday.

'The prohibition of the EU and its member states from guaranteeing its partner countries' liabilities is an important basis for the monetary union's functioning,' Stark was quoted as saying in a pre-released interview with German magazine Der Spiegel.

He added that were a country to 'exit', it would exacerbate any financial problems for the departing country.
[Agreed.]

(Reporting by Marc Jones; editing by Patrick Graham) Keywords: ECB/STARK

Spiegel Online reports what German commentators are saying about proposed bailouts.

German commentators on Friday warn that if countries fail to act, it could result in the collapse of the euro [Wrong]. At the same time, they say intervention could also trigger rampant inflation throughout the EU.

The center-right Frankfurter Allgemeine Zeitung writes:

[I agree completely with what Frankfurter Allgemeine Zeitung writes]

"The crisis has relentlessly exposed the weaknesses of Europe's monetary union.
Small countries on the edge of the EU have lived beyond their means and failed to get their welfare systems and national budgets in order in time. U nder the cover of a unified currency, they continued with their same bad habits. So it's natural that investors are now demanding higher risk premiums from these weakened countries when they borrow money by issuing bonds. These countries may soon be faced with the choice of either forfeiting their deficit policies or giving up the euro. The apparently comfortable option of falling back on Germany won't bring about a rescue -- it would instead result in rapid inflation for everyone [Agreed]. And if Germany, as Europe's most reliable bond issuer, loses the trust of its investers, the euro will collapse, too [Agreed]. That's why the promised community of stability cannot become a union of unlimited liabilities."

The Financial Times Deutschland writes:

[Germany apparently has a few Keynesian idiots of its own.]

"A signal from Steinbrück that Germany has the political will to step in and help its European neighbors if needed is a step in the right direction
[Wrong]. Right now, we haven't come to a point yet where we need to worry about the currency union collapsing or even that Greece or Ireland will go bankrupt. But their refinancing problems have become so bad in recent weeks that market participants have begun to speculate about the possibility. When a comparably liquid neighbor like Germany ensures that it will not allow euro zone countries to fail, that can do a lot to help quiet speculation."

"Clearer announcements on how Berlin or Brussels could help weaker euro zone members would be even more effective
[at destroying the euro]. After all, it is clear even to the markets that Steinbrück can't simply tell German taxpayers that they must pay off Ireland's debts [No, really? You mean German taxpayers don't want to subsidize a higher quality of life in Ireland? Shocking!], even if it were allowed under Maastricht [which it isn't]. ... Steinbrück would do well to clearly communicate concrete instruments [ie: clearly communicate which financial wizardry they will use to dupe German taxpayers into supporting the bailout of weaker EU members] that can be used instead of casually making commitments that are enormously broad and would hardly be possible to maintain in an emergency [because they have no popular support in Germany]."

[You know how the fed has been using all these complicated programs to hide its enormous money creation? Apparently, this guy wants Germany to do the same: figure out a bailout scheme for the EU's weak members in a way most German taxpayers won't understand.]

"Such instruments exist. For example, the EU could use the European Investment Bank to set up an emergency fund that could provide liquidity to member states unable to make their payments.
Countries like Germany could also purchase bonds from these countries and provide them with loans before they face the threat of collapse [See? This guy wants Germany to bailout the reckless, but in a way that is less clear to German taxpayers. There is essentially no difference between Germany paying off Ireland's debt and this proposed solution: both involve Germany subsidizing the quality of life of weak EU members]. Solidarity is honorable. But it only becomes sustainable and credible if it is backed by realistic plans."

The financial daily Handelsblatt writes:

"Steinbrück cannot risk the collapse of Europe's monetary union because the consequences for Germany's economy would be dramatic
[Misleading. The fallout from the current financial collapse will be dramatic no matter what Germany does]. Unfortunately, Steinbrück is first going to become aware of the fact that he is damned to solidarity with the weaker euro countries as a result of this crisis [Wrong]. The currency union is unprepared for it. The euro zone members failed to take advantage of the first 10 years of the currency to create aid mechanisms that could be used in an emergency. Germany is the country most responsible for this failure. Berlin simply avoided the issue because it wanted to protect Germany's coffers from weaker euro zone countries [See how Germany's experience with hyperinflation shaped the EU?]. But there are entirely intelligent ways of providing aid to these nations without placing too much of a burden on taxpayers, including the Eurobonds that Steinbrück has snubbed his nose at [as he should, because eurobonds screw Germany royally.]."

"For it s part, the European Commission has only one available option: Article 119 of the EU Treaty allows that the Brussels administration to take loans on capital markets on behalf of member states that are having trouble making payments. This aid, however, is limited to €25 billion. Ten billion euros of that amount has already been given to Hungary and Latvia."

"The Central European Bank (ECB) could also provide short-term aid. It would be theoretically possible for the ECB to buy up government bonds in order to help troubled countries. But the ECB is understandably hesitant.
This solution would force it to start printing money, which would result in incalculable intermediate consequences for the value of the euro [The US has been printing money for months now]. Besides, the ECB's independence would be called into question if were to encourage the creation of additional state deficits."

-- Caroline Winter, 4 p.m. CET

GoldSeek reports that the ECB is dithering.

The ECB is dithering while Rome burns. (Or at least their banking system is -- Italy's banks have large exposure to Eastern Europe through Austrian subsidiaries.) They need to bring rates down and figure out how to move into quantitative easing [Wrong, Wrong, Wrong. Quantitative easing would destroy the euro like the dollar]. Europe is at far greater risk than the US. [Wrong. The US's complete dependence on debt and foreign imports makes the US worse. The dollar is also at far greater risk than the euro]

Great Britain and Europe as a whole are down about 6% in GDP on an annualized basis. The Bank Credit Analyst sent the next graph out to their public list, and I reproduce it here. (www.bcaresearch.com) In another longer report, they note that the UK, Ireland, Denmark, and Switzerland have the greatest risk of widespread bank nationalization (outside of Iceland). The full report is quite sobering. The countries on the bottom of the list are also in danger of having their credit ratings downgraded.



This has the potential to be a real crisis, far worse than in the US [Wrong]. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think? [Answer: No way in hell!]

We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope [disgusting! I HATE how commentators are always pushing for bailouts of the irresponsible]) is that it is the former [My bet (or hope) is that it is the latter]. Dissolution at this point would be devastating for all concerned [Wrong! Dissolution would be devastating ONLY to those who are leaving the EU], and for the world economy at large [Wrong. Dissolution would strengthen the euro and kill the dollar. The sooner the dollar is put out of its misery the sooner the world economy can begin to recover from this downturn]. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.

However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point [I disagree, the fact that the ECB has resited IDIOTIC calls for quantitative easing is proof of leadership]. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point [no it is not]). And we have a central bank that could act [idiotically] decisively.

As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea. [The lack of quantitative easing and EU's large gold hoard make the euro the world's most attractive paper currency, together with the Chinese yuan.]

My reaction: The bailout debate is raging in Europe.

1) The European Central Bank gave a thinly veiled warning to the German government on Friday not to violate the European Union's "no bail-out" clause.

2) The "no bail-out" clause of the EU treaties prohibits countries from becoming "liable for" or assuming "the commitments" of other governments

3) The Maastricht treaty's "no bail-out" clause is regarded by the ECB as an important weapon for ensuring fiscal discipline and is an important basis for the monetary union's functioning.

4) The German finance ministry denied it was developing "concepts" to assist strained eurozone member states.

5) If a EU country were to abandon the euro, it would exacerbate any financial problems for the departing country.

6) Should EU bailout its weaker members, it would destroy the euro.

"Small countries on the edge of the EU have lived beyond their means and failed to get their welfare systems and national budgets in order in time. Under the cover of a unified currency, they continued with their same bad habits. So it's natural that investors are now demanding higher risk premiums from these weakened countries when they borrow money by issuing bonds. These countries may soon be faced with the choice of either forfeiting their deficit policies or giving up the euro. The apparently comfortable option of falling back on Germany won't bring about a rescue -- it would instead result in rapid inflation for everyone. And if Germany, as Europe's most reliable bond issuer, loses the trust of its investors, the euro will collapse, too. That's why the promised community of stability cannot become a union of unlimited liabilities."

7) (idiotic) commentators are calling for the ECB to bring rates down and figure out how to move into quantitative easing.

8) The ECB can't engage in quantitative easing like the US without the approval of all the member countries:

"For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea."

9) German and Dutch governments are unlikely to give the approval for quantitative easing:

"There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?"

"Steinbrück can't simply tell German taxpayers that they must pay off Ireland's debts"

10) Germany's experience with hyperinflation is the main reason why it is so difficult for the EU to print money:

"The euro zone members failed to take advantage of the first 10 years of the currency to create aid mechanisms that could be used in an emergency. Germany is the country most responsible for this failure. Berlin simply avoided the issue because it wanted to protect Germany's coffers from weaker euro zone countries"


Conclusion:
I doubt that German and Dutch governments will approve quantitative easing, which means the euro zone is heading for deflation.

If you insist on holding an interest bearing asset (vs owning gold), it might be worth looking at Germany's government bonds.


This entry was posted in Bailouts, Currency_Collapse, Euro_Zone, Market_Skepticism, News_Developments. Bookmark the permalink.

7 Responses to ECB warns Germany against EU bail-out

  1. Robert says:

    I really wouldn't be surprised if 'they' do find a way to get the ECB to print money. Look at the US bailouts.. noone was in favor of those either and they still got pushed through. With the right wording and special interest pork politicians will have no problem defrauding the german people.

    What I think should happen instead and may already be happening to some extent is that China should bail out Eastern europe. There's already been the $25billion loan to Russia and $8billion to Venezuela.

    China have loads of soon-to-be-worthless dollars and no way to spend them. They've got way more dollars than they need to fund imports and that probably isn't ever going to change in the life of the dollar. Now is the time to swap these dollars for something of value. European debt, if properly structured could be a bargain.

    Eastern europe needs dollars in the short term because of capital flight - what better time for a savvy investor to invest in eastern europe? Maybe they could even lend in dollars but ask for repayment in euros - that seems like a great way to hedge your currency holdings.

  2. Robert says:

    Here's a story about some of China's recent investment activities

  3. Anonymous says:

    Robert,

    China will most certainly not bail out eastern europe. It has no or very little political or economic significance to them.

    Why do you think the dollars are worthless? I think people are going to be surprise in how long the dollar will last as a currency.

    After all what other currency or commodity is the global reserve where more than 60% of the world's reserves are held it?

    Till there are viable alternatives the dollar shall undoubtedly continue as the global reserve and remain strong.

  4. Anonymous says:

    >>http://www.thenews.com.pk/print1.asp?id=163848

    Good clear example of the FUCKING BAILOUTS are crowding out private investments that bring about recovery.

    BAILOUT = CROWDING OUT = NO RECOVERY.

  5. Anonymous says:

    Don't forget hat 2009 is a year with a lot of elections in Germany.

    I personally fear that they will open the floodgates of the EZB in hope they can control the inflation and in of fear what a default of a eurozone country does to to Europe and the Euro.

  6. stibot says:

    Anyway, Jack Crooks released article which predicts dollar gains against euro.

    That is very bullish for euro. ;-)

  7. The links in the messages below were distorting the webpage, so I have deleted the messages and reposted them with the links fixed.

    -----

    Hugo said...
    As a non german european, I am not convinced at all that the ECB is going to be responsable at all.

    I hope they are. In fact the germans are my last and only hope. I am not in debt. I have been responsable. I know that if my country wasnt in the EU my currency would have been alredy debased.

    I dont know how longer the politicians are goint to pay attention to the BCE economist that tell them to be responsable. Even if they are german, at the end they are politicians, and they will end up choosing the irresponsable option.

    I heard there was a secret meeting of the EU members yesteraday, and probably we will have news during this week.

    Extrangely enough Gordon Brown asked today for soberty and savings. It may show a change in the finantial direction. ( Brown aboga por una nueva era de sobriedad y prudencia en la banca, sorry no english source). Will see what the EU does.

    February 22, 2009 4:49 AM

    -----

    Hugo said...
    UPDATE: Seems my fears are confirmed.

    Los europeos acuerdan un catálogo de siete puntos para la reunión de Londres (sorry no english source)

    Basically sais that the EU leaders have agreed on 7 points. The first six are bla bla bla. The key one is the 7th.

    (I am translating the las sentence of the article) : Finally, the propose to duplicate the funds of the FMI so it can help quick and with flexibility the members with problems in their payment balances.

    Guess that means inflation for the EU.

    February 22, 2009 7:36 AM

    -----

    Robert said...
    Eric:

    BIS Data Misinterpreted - East Europe Not That Bad !

    Have a look at this article today on MarketWatch.com - the Austrians claim the Easter European debt problem is FAR SMALLER than feared - due to GROSS MIS-INTERPRETATION of Bank of International Settlement data.

    Erste says debt levels in Eastern Europe are low

    If their contention proves correct - perhaps the Euro should be revisited in light of this?

    RL

    March 10, 2009 3:16 AM

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>