All the financial firepower Europe can muster will be used to drive down Spain's borrowing costs – that, at least, is the talk
German chancellor Angela Merkel at the G20 summit in Los Cabos, Mexico. Photograph: Andres Stapff/Reuters
Larry Elliot Tuesday 19 June 2012 14.12 EDT
If the stories coming out of Los Cabos are correct, the Germans have surrendered. Angela Merkel, it appears, has agreed that Europe's bailout fund should be used to buy up Spanish bonds. This is precisely the show of "shock and awe" that the markets have been demanding, and the immediate response will undoubtedly be positive. All the financial firepower that Europe can muster will be used in an attempt to drive down Spain's borrowing costs from the 7%-plus level they have reached this week.
That, at least, is the talk. It is worth noting from the outset that Europe has failed to deliver on its fine-sounding rhetoric in the past. The detail of this deal may prove less impressive than the behind-the-scenes briefing, in which case the market reaction will be swift and brutal.
But let's assume that this is for real. Why would Germany be prepared to play fast and loose with the tough conditions that Berlin itself insisted on when the European Financial Stability Facility and its successor were created.
The rules say that the bailout funds should not take on the risks associated with buying up the debt of a member country unless it is part of an official European Union-International Monetary Fund programme. Although details are sketchy, this appears to be the sort of no-strings attached deal that Merkel has always steadfastly opposed.
So why is this happening? Not because Germany has come under fire at the G20 summit, although it has. Not because Merkel has changed her mind about the potential costs of such an arrangement for her own taxpayers. Rather, it is because the events of the past few weeks have left Germany with a binary choice: support emergency action to prop up the eurozone's fourth biggest economy or watch monetary union slide into the abyss. Berlin does not want to be blamed for destroying the euro "project", and recognises that a crisis involving Spain (with Italy waiting in the wings) is of a whole different order or magnitude to one affecting Greece, Portugal and Ireland.
What this means is that European policymakers have decided to take on the bond vigilantes. The hope is that they can drive 10-year Spanish bond yields out of the danger zone, take the pressure off the creaking Spanish banking system, and thus avoid the need for Madrid to seek formal help from the EU and the IMF.
This, for certain, is a high stakes game. Part of Europe's fighting fund has already been spent on bailing out Greece, Portugal and Ireland. Spain has also pledged funds to the EFSF and ESM, and these clearly cannot be spent buying up the country's own debt. The markets might decide that it is worth taking on Europe in the way that George Soros did in 1992, when he saw the pound as ripe for a killing.
That risk is exacerbated by the dire state of the Spanish economy, which is suffering from a long-lasting hangover after the bubble in its construction and property sectors in the years running up to 2007. With a tough austerity programme in place, the economy is still going backwards and house prices have further to fall. A lot further, in all probability. If the gamble fails, Spain will still need a bailout and Europe will have nothing left in the kitty for Italy. But in the circumstances, Merkel and her fellow eurozone leaders may think it is a gamble they have to take.
Really... I ONLY posted this one for the photo of Angela .. I LOVE seeing her SMILE with that twinkle in her eye .. .;) at times and for good darn reason .. she looks soooo harassed and stressed .. BUT WHEN SHE SMILES ..;) ... that's it! ..... that warmth comes shining through!
1st thought .. Merkel and Obama faces, lol, look at the smiles .. what's she doing back there? .. (lol, every time i look at the picture now i think tickle tickle) .. shaddup, Stewie .. anyway .. 2nd thought .. Romney and McCain? .. oh no .. they could not have, really! .. isn't there some rule about undermining your president overseas?? .. somebody did it and the Republicans were critical of it before? .. 3rd thought . maybe that's what the smiles are about (your suggestion of a Romney/McCain note) .. 4th .. damn, am almost falling asleep here for some raisin ..
chuckle .. it's really good to see people who are capable of working together in crisis situations .. the news of Merkel's little adjustment on the European Financial Stability Facility lending "directly to troubled eurozone countries" is good news so early after the meeting .. she must know they have to at least try a different approach .. lemme see .. so far only this on which is bad behavior enough of Romney's ..
Obama’s Advice to Merkel ‘Unwise’, Romney-Adviser Hubbard Says By Rainer Buergin on June 08, 2012
U.S. President Barack Obama’s administration has been trying to force Germany to assume responsibility for financially weak governments and banks in the euro region, giving advice that’s unwise and reflecting a lack of knowledge about the sources of the crisis, Glenn Hubbard, an economic adviser for Republican presidential candidate Mitt Romney, said in the Handelsblatt newspaper.
Obama’s advice to Germany and Europe to focus on short-term economic stimulus to achieve longer-term growth goals is as flawed as his own economic policy, Hubbard, dean of Columbia University’s Graduate School of Business, said in an opinion piece in the newspaper.
Europe’s debt crisis is a crisis of confidence, Hubbard said. Confidence in sound public finances over the long term is a prerequisite for economic growth and creates scope for short- term emergency programs, he said.
To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
.. that little one supports what you believe? you heard ..
.. just now on radio here they are talking about Obama's bold move on immigration .. gee .. the guy just said "executive order", but i thought it was more a memo from 'Homeland Security' .. whatever that big government Bush thing is called ..
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