Tuesday, May 22, 2012

Euro Bunds Not A Rational Option

Today, we know that the young, photogenic Greek leftists were full of bluster but no bite.  Instead, they are now going in search of traditional political support for a combination of Euro bonds, debt write downs, and traditional bailouts with "other people's money."  Meanwhile, French socialists are behaving no differently from the deposed conservatives in trying to paint Germany in a corner as the obstructionist force to progress.  IMF Director Lagarde has joined in on cue, as the WSJ writes the "campaign for join Euro bonds gathers pace."  The pace may not be sustained.

No German politician of any stripe, Social Democrat or otherwise, would be able or willing to cede political and economic sovereignty to the extent triggered by issuing a Euro bond instrument.  France may be "jousting" with the Germans about Euro bonds, but aside from rhetoric and public relations, the Republic has no leverage.

The BBC did a series of walk around interviews with German citizens about the Euro crisis this morning, and I was amazed at the thoughtfulness of all the answers.  Certainly nobody offered a solution.  But, I would describe the sentiment as being (1) we wouldn't like the European union/currency/experiment end, but (2) Germany certainly can't be expected to write blank checks or to carry the burden for Greece and others.

There has never been any doubt that a euro zone fracture or breakup would be costly.  An economist at the University of Cologne mentioned something that I wasn't aware of: Target 2 funds of the European Central Bank.  (I regret not being able to credit his name because it wasn't very audible on my feed) These funds were, in his words, meant to slosh around European central banks to ease short-term liquidity crises without triggering public concerns.  He calculates that there are 240 billion euros issued under Target 2, with no clear requirements for repayment.  He estimates a Greek exit would wipe out repayment prospects, costing Germany almost thirty percent of this amount, which was its contribution.

Spain's issues are within the purview of a traditional central bank: a real estate bubble.  It has already put some of its smaller institutions under central bank control, and it just needs to act quickly and decisively.  The sooner it does this, the sooner the rest of Europe can own up to where some of the bad Spanish paper lies. 

As some of the German citizens interviewed by the BBC said, it would be a shame if Greece, at 2% of EU GDP could call the day for the end of the euro.  The Greeks don't seem ready to march off the cliff today.

No comments: