MacroScope

Do they they think it’s all over?

By Mike Peacock
September 13, 2012

Is everything falling into place to at least declare a moratorium in the euro zone debt crisis?

Well the ESM rescue fund getting a go-ahead from Germany’s consitutional court and the Dutch opting to vote for the two main pro-European parties, following Mario Draghi’s confirmation last week that the European Central Bank would buy Spanish and Italian bonds if required, means things are starting to look a little rosier.

The risks? Next spring’s Italian election, and what sort of government results, casts a long shadow and it is just about conceivable that Spain could baulk at asking for help, given the strings attached, although the sheer amount of debt it needs to shift by the end of the year will almost certainly force its hand. If the Bundesbank mounted a guerrilla war campaign against the ECB bond-buying programme it could well undermine its effectiveness. That is a big if given broad German political support for the scheme. Key countries remain deep in recession with little prospect of returning to growth because of the imperative to keep eating away at their debt mountains, which could eventually trigger a dramatic public reaction. France could well get dragged into that category.

More generally, there is the previous history of this crisis which has shown that when the heat is lifted, policymakers can take their foot off the pedal. Surely they’ve learned that lesson by now, I hear you cry. Well, Spanish premier Mariano Rajoy was out yesterday saying he was still studying the price to be paid for seeking help but improved market conditions may make aid unnecessary. Spanish 10-year yields have tumbled from around 7.5 percent to 5.7 since Draghi first showed his hand in late July. That’s still too high for Madrid to manage indefinitely. After regional elections in late October, Rajoy may well jump.

Everything achieved in the past week has been about buying policymakers time to put the permanent structures in place to make the euro zone viable in perpetuity. None of it amounts to a permanent solution. Evidence yesterday of a growing row about the scope and powers of a cross-border banking union and a distinctly mixed reception for Barroso’s call for a properly federal Europe shows there’s a lot still to be done. The most profound parts of a banking union, particularly a joint deposit guarantee scheme to prevent bank runs, are not even on the table yet and are likely to take years to introduce.

Nonetheless, given the last week’s events it’s a sound bet that today’s Italian bond auction will sail out of the door even though Rome is selling 15-year paper for the first time in over a year. A hefty 6.5 billion euros of three bonds is on offer and going that far down the maturity scale denotes some confidence. Yields tumbled sharply at a sale of treasury bills on Wednesday. Offering a glimmer of light at the end of the tunnel to its bailed-out peers, Ireland will hold its second T-bill sale of the year with yields expected to fall there too.

The other big event is the Swiss National Bank’s quarterly policy meeting. With the euro climbing versus the safe haven Swiss franc after Draghi’s thunderbolt, some of the pressure to take fresh action may have been removed. The cap imposed on the franc by the SNB has held intact, pretty much, for a year now. A Reuters poll showed economists expect it to hold even under a high stress scenario such as Greece bombing out of the euro zone. The SNB will also issue fresh forecasts which are expected to cut its growth outlook for 2012 to 1 percent from 1.5 percent.

There’s continued activity in Athens with French Finance Minister Pierre Moscovici visiting and the coalition party leaders meeting to work out what to do about the nearly 12 billion euros of cuts their international lenders have asked them to look at again because they are unconvinced about the existing package. Greece should still be right up top of the list of risks to the euro zone given its serial failure to meet its targets. But it’s all but inconceivable that having devoted so much energy trying to shore up Italy and Spain, policymakers will let Greece go now, plunging the bloc back into crisis. A way will be found for euro zone finance ministers to say with a straight face that Athens is back on track. The government did breathe new life into its stalled privatization process yesterday.

 

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