Yet Another Crunch Week in Euroland

Meanwhile, we have yet another crunch meeting on December 9 to “finally resolve” the Euro-zone crisis.  The proposal on the table is “fiscal union”, which essentially means that the Bundestag will analyse a country’s budget before its own parliament gets to vote on it. Ireland had a sneak preview this week of how this might work. The belief is that with a fiscal union in agreement, the ECB will bring out its bazookas to buy all sovereign debt and keep yields in check. Essentially, this means the ECB will print money like the US, Japan, Britain and China already does.

Interestingly, one of the proposals agreed during the Merkozy summit yesterday (December 5) was the decision not to “force” private sector bondholders to take any further write-downs on future sovereign bailouts. Two things come to mind; first, bondholders may still “volunteer” to take a haircut (visualize the scene from the Godfather when an offer “you cannot refuse” is made) and second, guaranteeing all sovereign debt was actually what blew up Ireland (Read Michael Lewis’s recent book, Boomerang). One of these days people might just figure out that cheapening the cost of funding is no solution to a problem of solvency. But for now, we party. 

Although it’s not over until the fat lady sings (in this instance, a rendition of Wagner’s Wedding March might be appropriate), we have come a long way from the days of Europe’s leadership blaming “irresponsible, greedy hedge fund traders for targeting (fundamentally sound) Euro debt”. In order to help them focus on finding a solution, the rating agency S&P has placed all the Euro-zone countries on watch for a potential mass downgrade (50% probability that a downgrade will happen in three months). This will certainly dissuade Germany and France to provide further guarantees or funds to the EFSF leveraged scheme (which was heralded as the grand solution all of four weeks ago). Notwithstanding the deep scepticism with which S&P is viewed by Europe’s leaders, it appears justified. Italy alone will have to issue up to a third of the €350bn it needs to raise in 2012, in the first three months.