IMF fires euro zone broadside
The IMF is ratcheting up the pressure on the euro zone again, telling it to deepen financial and fiscal ties as a matter of urgency to restore confidence in the global financial system. Despite the European Central Bank’s recent statement of intent, the Fund said the risks to financial stability had risen over the past six months and it raised its prediction of how much European banks are going to have to offload as part of a deleveraging process that has a long way to run.
An eye-watering $2.8 trillion of assets now needs to be cut over two years, which could further choke off credit to the currency bloc’s weaker members, deepen recessions and push up unemployment. Despite recent steps, the euro area is still threatened by a “downward spiral of capital flight, breakup fears and economic decline”.
Gloomy stuff and particularly noteworthy since the growing view in Europe is that on break-up fears at least, the ECB’s promise to buy sovereign bonds in unlimited amounts, once a country seeks help from the ESM rescue fund, had fundamentally turned a corner.
The Fund is also, of course, a key player in the interminable Greek bailout negotiations. Angela Merkel’s visit to Athens yesterday signalled Germany’s new commitment to keep Greece in the euro zone, at least until German elections in a year’s time. But the country’s debt numbers still look ghastly and the IMF and euro zone appear to be at odds about what to do. Greek finance minister Stournaras said last night that the lenders were considering giving two years more time to meet debt reduction targets but it seems the IMF is also pushing for euro governments to take a writedown on Greek government bonds they hold, which they are reluctant to do.
Big setpiece of the day is a Franco-Spanish summit featuring President Francois Hollande and Spanish premier Mariano Rajoy. We know the French have been pressing Madrid to seek sovereign help, presumably to reduce the chances of France getting dragged into the mire, but given all the mixed messages from the Spanish government it is in entirely unclear that it has yet reconciled itself to doing so. Its debt refinancing numbers still dictate that it will probably have to before the year is out.
That uncertainty is keeping markets hamstrung. Bund futures have opened virtually unchanged while European stocks are poised to slip, with the focus now on the corporate results season. Italy will try to auction a hefty 11 billion euros of short-term bills and Germany is selling up to five billion euros of five-year paper. Signals that Mario Monti could reverse his stance and continue as prime minister after elections in the spring is a potentially seismic shift for investors’ view of Italy.
ECB policymaker Noyer, in Tokyo for the IMF meeting, has echoed the warning from Germany’s banking regulator yesterday – that it could take a year to “estabilish the modalities” of a euro area banking union. EU leaders had said cross-border supervision, at least, would be put in place by the beginning of 2013. Without that, the ESM rescue fund will be barred from recapitalizing banks directly, something that could have been a considerable help to Spain.
But longer-term thinking is still being done. Draft conclusions for next week’s EU summit include a suggestion that the euro zone should have its own budget, separate from the long-term budget of the wider European Union. And yesterday’s agreement by 11 euro zone nations to push ahead with a financial transactions tax is a potentially enormous one although there is clearly scope for it to drive trading activity away from those countries, thereby rendering it impotent.