EUROPEAN DIARY:There is growing talk about new measures to suspend normal rules of play on bond markets
THE LATEST idea is for Europe’s bailout funds to intervene in sovereign bond markets to press down the borrowing costs of Spain and Italy. It may be but a sticking plaster but more radical solutions still appear shut off.
European leaders found themselves on the receiving end of a predictable clamour to do more in the debt debacle at the G20 summit in Los Cabos, Mexico. They uttered soothing words in response, yet the path ahead is as dangerous and unpredictable as ever.
Moves are certainly in train to create a banking and fiscal union but this is an inherently slow-moving process that could take years to complete. There remain deep divisions as to what exactly is in play here and little sign that Germany might yield ground on core articles of faith in respect of debt mutualisation.
But time is short. While an election victory for pro-bailout forces in Greece has not calmed the storm, the real focus right now is on Spain. The bailout of its banks was predicated on the government retaining the confidence of private investors for day-to-day lending. It’s not working. Spain’s bond yields are rocketing, fanning renewed pressure on Italy.
To say that this is a major anxiety for European and global leaders is to put it delicately. The tension on markets is escalating rapidly, hence growing talk about new measures to suspend normal rules of play on bond markets.
Enter Enzo Moavero, Italy’s minister for Europe. In Brussels on Monday he floated the notion of a semi-automatic mechanism under which the European Financial Stability Facility or European Stability Mechanism bailout funds would buy up the bonds of distressed countries whenever their borrowing costs reached a particular level. In essence, the funds would provide a ready-made market for bonds when investors shy away.
This would be a variant of the European Central Bank’s policy of bond market interventions in 2010 and 2011, which split its leadership under former chief Jean-Claude Trichet and which his successor, Mario Draghi, has been at pains to avoid repeating.
Moavero suggested the idea of EFSF/ESM purchases would be discussed tonight in Luxembourg when euro zone finance ministers gather and again tomorrow when all EU finance ministers meet.
However, a senior Brussels official played down the idea. “There is no instrument that we have at our disposal,” he told reporters.
But this is not the end of the matter. Although the EFSF has not yet bought bonds on the open market, EU leaders gave it the power to do so last year. “The procedure would be initiated by a request from a member state to the euro group president,” says an EFSF information note.
In exceptional circumstances the ECB could issue a warning to euro group officials. “In all cases, it will be subject to an ECB report identifying risk to euro area and assessing need for intervention. The procedure should take two to three days,” the note states.
Italian technocrat leader Mario Monti stepped up pressure for interventions of this kind in Los Cabos and French president François Hollande said the possibility of bond purchases of this nature was worthy of serious examination. “The idea is to stabilise borrowing costs, especially for countries who are complying with their reform goals, and this should be clearly separated from the idea of a bailout,” Monti said.
Some British media went so far as to say a move of this kind was imminent, which was readily put down to the London briefing machine. German officials insisted there were no concrete discussions on this kind of thing in Mexico but they still noted such instruments were available to both the ESM and EFSF.
The problem remains that the resources of the funds are finite, with a ceiling of some €500 billion. Indeed, the ECB’s store of Irish, Greek, Portuguese, Spanish and Italian bonds already exceeds €200 billion. Furthermore, German rules oblige the government to go to parliament every time the EFSF or ESM spends any money.
The G20 communique offered little clarity. Without any great surprise, it noted that euro zone members of the group “will take all necessary policy measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks.”
This could be code for any new kind of “big bang” response or none at all. To little avail, European leaders have issued dozens of similar declarations in which they pledge to finally sort out the problem.
For all that, bond purchases on the open market may yet provide a temporary salve while bigger questions are played out.
The fundamental conundrums remain the same. Any kind of debt mutualisation remains anathema to Germany and its allies. Furthermore, some senior Berliners still believe sky-high sovereign interest rates can be a “good thing” if they stoke reforms and do not prove fatal. At the same time, some of the more ardent federalists are licking their lips at the prospect of more integration.
No one knows quite how all this will evolve but crunch time is approaching rapidly.
