European peripheral bonds are little changed on Tuesday morning:
Now that’s somewhat surprising given the news flow of the past 24 hours.
In that time Chancellor Merkel has ruled out the idea of shared bond issuance in the eurozone, as have European Central Bank members Jürgen Stark and Nout Wellink, plus Austria’s finance minister Josef Proell. (Merkel also put the kibosh on the idea of increasing the size of the European Financial Stability Facility).
For the European rates strategy team at RBS, it’s clear that a firewall is being built by Germany to protect its taxpayers from the debt crisis in the periphery.
And that’s a positive for Bunds but a big negative for peripheral debt:
We may look back at this as the days/week when the market saw that the attitude toward bail-outs etc changed. I frankly cannot get my head round the idea that in a year’s time we will be sitting here and have actually seen a surrender from the core on the concept of fiscal pooling.
Not that the market has necessarily realised this yet, notes RBS:
We think there is a good chance that because everyone expects it (because of the desire to think pro-EMU thoughts by the consensus, from what we can see), and the noise levels on this are rising, that analysts are *not* getting prepared for the consequences when/if they realise Germany & the other core is not backing down.
Remember, liquidity is not solvency. The ECB can buy bonds, but unless the core taxpayers are generously willing to continuously pay for everyone else’s excessive public spending, this solvency is what we should be focused on as an end game.
In other words, the ECB’s bond-buying is just sticking plaster and the peripheral wound continues to fester.
And, lest you think RBS is merely talking its book (which of course it is — the bank is ultra-short the euro periphery and long Bunds) this point has been picked by other analysts, such as Gary Jenkins of Evolution Securities:
A few weeks ago we set out a few options with regard to how the EU might deal with the sovereign crisis. Yesterday (not in response to us I hasten to add) German Chancellor Angela Merkel gave a firm ‘nein’ to the idea of a single European debt agency issuing Euro government bonds and she also rejected the call for an increase in the size of the EFSF bailout fund. That leaves the “muddle through” option of the ECB buying more bonds or a complete implosion of the Euro area with financial support withdrawn from the damaged sovereigns leading to inevitable defaults across the region. Not sure at this stage which one I would put my money on if I was a gambling man.
However, Jenkins remains hopeful that some sort of resolution might be reached.
Clearly at some point you would expect some kind of resolution which might be a combination of the various (positive) options. For all the immediate rejection of a common European bond it is worth remembering that the EFSF is not a million miles away from that concept anyway.
Indeed.
But until there is an agreement expect further volatility in peripheral debt.
Related link:
Baby steps to follow E-bond dash – FT
Let’s all go on a European margin holiday – FT Alphaville
Public and private in the Ireland bailout - FT Alphaville