Cast your mind back for a moment to 1984.
Not the dystopian tale of what might have been that year according to George Orwell, mind you, but the year as it actually transpired.
Have a feel for the music of the era. (For example, Alphaville were Big in Japan, Madonna’s big hit was Like a Virgin, Michael Jackson was Thrilling the world, Bruce Springsteen was Born in the USA and Queen was using shots of Fritz Lang’s Metropolis in their music video for Radio Gaga).
Think back too to the big movie hits of the year, Ghostbusters, Gremlins, Indiana Jones, Terminator and the lesser known films like War Games, Protocol and Red Dawn. Read more
Everyone has an opinion or a theory about what really caused the global financial crisis of 2008. The usual suspects include subprime securities, a housing bubble, financial engineering gone mad, Black Scholes risk models, global imbalances, dollar liquidity shortages and in some cases even Gordon Brown having sold off all the UK’s gold leaving the country with nothing solid when we needed it most.
But what if there was another, more subtle, cause? One we all failed to notice because by its very nature it was designed not to be noticed? A cause connected, instead, to some misleading nomenclature and the tricks language plays on our brain when the etymology behind a word or a phrase is forgotten about due to its overly common dispersal. Read more
So you thought bearer securities weren’t a thing any more. And that jurisdictions left, right and centre were banning the bearer structure (much depended on in the past by the eurobond markets) precisely because of its association with tax-efficient offshore dealings.
Except, as we outlined on Monday, one of the things revealed by the Panama Paper leaks is the extent to which bearer securities were depended upon by the offshore finance network.
And yet, as we also noted, it’s not like bearer securities have entirely gone away either. We referenced as an example the Bank of England’s series of $2bn dollar-denominated bearer bonds paying a coupon of 1.25 per cent, which take the form of the so-called “New Global Note (NGN)” structure. Read more
Hans-Werner Sinn — he of Target2 imbalance fame — had a piece on Project Syndicate last week in which he stood firm against George Soros and his demands for Germany to leave the euro if it continues to block the introduction of Eurobonds.
Though not because he thinks Germany is wrong to oppose Eurobonds, but rather because he believes there is no legal basis for such demands. Article 125 of the Treaty on the Functioning of the European Union, he says, expressly forbids the mutualization of debt. Read more
Italy’s prime minister has pleaded for Germany and other creditor countries to do more to help lower his country’s borrowing costs, warning there would be a “powerful backlash” among voters in the eurozone’s struggling periphery if they did not. In an interview just three days after his country’s debt was downgraded two notches by Standard & Poor’s, Mario Monti said he did not dispute the vast majority of the credit rating agency’s diagnosis of Italy’s problems, the FT reports. Rome would push the German government to realise it was in “its own enlightened self-interest” to lend more of its fiscal weight to lowering borrowing costs of Italy and other highly indebted governments. The stance could put Mr Monti, whose appointment to replace Silvio Berlusconi was cheered by German chancellor Angela Merkel, on a collision course with Berlin. Ms Merkel has been reluctant to take more aggressive action to lower Italy’s euro-era high borrowing costs, such as supporting commonly-backed “eurobonds” or increasing the size of the eurozone’s rescue funds.
We’ve discussed why the ECB’s policy of applying different haircuts to eurozone government debt collateral may be adding to dysfunctions in the repo market.
It’s one reason why broadening the ECB’s list of accepted collateral to include lower-quality assets won’t make much of a difference on a policy scale. Read more
Oh Mario, you big tease. From the FT on Thursday:
Mario Draghi, European Central Bank president, has called for a “fiscal compact” between governments to restore investor confidence in the eurozone – and hinted such a step could pave the way for a more aggressive ECB response to the region’s debt crisis.
In order to be effective, a central bank must act as a monopoly. It, just like Sauron, must control all. That’s the point.
All central banks thus routinely corner markets. If they didn’t, they would compromise their own position. Read more
Here’s another way of looking at Wednesday’s German bund auction.
It’s a combined eurozone 10-year government bond yield weighted by each country’s GDP. It’s a rough approximation of the borrowing costs for an imaginary United States of Europe if you like, and can be found in Nils Pratley’s column in The Guardian. Read more
A “modest eurobond proposal,” courtesy of Deutsche Bank.
It’s meant to bypass some of those pesky EU Treaty issues, while overcoming the so-called ‘free rider’ problem that might come from very different eurozone governments issuing debt at identical costs. Read more
Or what price a 10-year eurobond?
Bank of America Merrill Lynch analysts got straight to the point late on Friday: Read more
Angela Merkel, German Chancellor, has repeated her country’s refusal to join other eurozone states in issuing joint “eurobonds” as protection from the debt crisis, the FT reports. “The markets want to force us into doing certain things, and that we won’t do,” Merkel said. The German finance minister added that the United States’ debt levels were worse than even the most troubled eurozone states, Reuters says. German officials are hostile to the extra interest payments that eurobonds may impose compared to Bunds, as well as pointing out tough constitutional hurdles, according to Der Spiegel.
Germany strongly rejected mounting calls for the eurozone to issue joint debt at the weekend, but signaled it was open for the bloc to move toward a form of fiscal union, Reuters says, with the finance minister saying he personally supported a European counterpart. Chanceller Angela Merkel told ZDF, the public broadcaster, that eurobonds “are exactly the wrong answer to the current crisis”. “They lead us to a debt union and not to a stability union,” she added. The FT says it was one of Ms Merkel’s most comprehensive rejections of the eurobond idea so far, and she was backed by Wolfgang Schäuble, her finance minister, who said the eurozone would become an “inflation community” if countries opted to sell a joint bond without first unifying their fiscal policies. Mr Schäuble is due to meet his French counterpart François Baroin on Tuesday to discuss the crisis, including proposed remedies such as a tax on financial transactions.
Sometimes, you have to turn to US history to realise how very confused the eurozone is at the moment…
Merkel and Sarkozy want balanced member-state budgets in 2012, but no eurobonds for the foreseeable future. Interestingly, in the 1840s, US states almost all added balanced budgets to their constitutions after a huge debt crisis. In fact after some states defaulted. But then again “eurobonds” already existed in this case. Read more
Eurobonds, e-bonds, common sovereign debt issuance or whatever you want to call them are widely regarded as the solution to the Eurozone crisis. No less an authority that George Soros told us so this week.
But there is a problem – politics. Germany isn’t keen on the idea while member states operate their own fiscal policy, while many citizens of Northern Europe aren’t keen on a more developed form of fiscal union. Read more
A disappointing meeting between the leaders of France and Germany over the deepening debt crisis in Europe sapped sentiment in Asian markets on Wednesday, the FT reports, following on from a slide in US markets. Japan’s Nikkei 225 Stock Average was off 0.9 per cent, South Korea’s Kospi composite was down 0.4 per cent, and the MSCI Asia Pacific index was 0.3 per cent lower after the much-anticipated meeting between Nicholas Sarkozy, France’s president, and Angela Merkel, German chancellor, failed to soothe concerns about the region’s slowing economic growth. Bloomberg reports that the euro declined against the yen for a second day, and also weakened for the first time in five days versus the Swiss franc before data today forecast to show European inflation slowed in July. The dollar slid against the yen before reports this week that may signal US price pressures are easing.
We’re calling it a victory for Jacques Delors.
Angela Merkel and Nicolas Sarkozy finished their bilateral summit on Tuesday afternoon and announced several new measures, some substantial, some speculative, some silly. Read more
France and Germany’s leaders face a stark choice in talks on Tuesday, says Reuters, over whether to steer the embattled euro zone toward closer monetary union or risk watching the bloc unravel. French president Nicolas Sarkozy and German chancellor Angela Merkel meet in Paris from 2pm GMT to discuss what further measures they can take to contain Europe’s debt crisis, and a joint news conference is due two hours later. Support for a eurobond appears to be rising, despite officials from both countries saying it will not be discussed on Tuesday. The German export association and Italian economy Minister Giulio Tremonti are among those calling for a eurobond. The NYT also looks at calls for a eurobond, saying a rising number of analysts believe eventually they may have no choice if they want to keep Europe’s currency union from falling apart. The euro rose against the dollar ahead of the meeting, Bloomberg reports, trading 0.3 per cent short a three-week high early on Tuesday, although the FT says investors can’t make up their minds which of the dollar or euro they dislike the most, and will also be looking to Q2 eurozone GDP data on Tuesday.
Germany and France are ruling out common eurozone bonds to solve the bloc’s current debt crisis, the FT reports, in spite of renewed pressure ahead of a meeting of chancellor Angela Merkel and president Nicolas Sarkozy on Tuesday. Wolfgang Schäuble, German finance minister, made clear in an interview with Der Spiegel, that Berlin remains opposed to such a policy. “I rule out eurobonds for as long as member states conduct their own financial policies and we need different rates of interest in order that there are possible incentives and sanctions to enforce fiscal solidity,” he said. Senior French officials also played down speculation that any firm announcement on jointly issued bonds would be issued after meetings when Ms Merkel comes to Paris on Tuesday.
The decision of our European partners to lend us at 3.5 percent, an interest rate just above the one at which Germany itself is borrowing, is in essence tantamount to introducing a European bond, regardless of the fact that this system has not been completed yet
Is that really the essence of eurobonds? Read more
Russia is planning to issue a seven-year rouble Eurobond this week, taking advantage of the rise in the price of oil and its effect on the Russian economy, reports the FT. The issue is expected to take place on Thursday, after Wednesday’s national holiday in Russia. The placement comes amid a resurgence in capital inflows and an appreciation of the rouble. Moscow wants to use the issue to plug its budget deficit, and to set a benchmark for Russian companies seeking to issue rouble debt abroad. While the finance ministry had originally planned to issue a rouble Eurobond last year, it chose instead to issue a fraction of the planned debt on the domestic market amid investor concern over inflation after a severe drought last summer that sent food prices higher.
Japan plans to buy eurozone bonds from the European Financial Stability Facility in an attempt to help build confidence in the bailout fund amid intensifying fears that the region’s debt crisis is spreading, the FT says. The EFSF was set up last year and is seen as a landmark for Europe’s bond markets as it will be the first to issue bonds for the eurozone as one entity. Reuters adds that Japan’s finance minister said Tokyo was considering using its euro reserves to buy about 20 percent of the AAA-rated bonds.
The European Union is to launch a multibillion-euro bond on Wednesday to raise money for the effort to rescue Ireland’s finances, in this year’s first important test of investor sentiment for Europe’s troubled government debt markets, the FT reports. Bankers said there was strong demand for the bonds from European, Asian and Middle Eastern investors, even before the official opening of order books. The EU is to sell about €5bn ($6.7bn) in five-year debt, the first part of some €50bn in bonds that will go towards the Irish bail-out over the next two years. The triple-A rated bonds are expected to price at yields of about 2.5 per cent, about 70 basis points over German Bunds and well below those of Italian and Spanish debt.
Angela Merkel, the German chancellor, has ruled out two of the most widely-backed ideas for combating the eurozone debt crisis, saying she saw no need to increase the size of the European Union’s €440bn rescue fund and that the bloc’s treaties did not allow for the creation of a Europe-wide bond, reports the FT. Ms Merkel’s comments on Monday came as finance ministers from the 16 countries that use the euro were gathering in Brussels for a regular meeting where both ideas were expected to be debated behind closed doors. The German rejection leaves the European Central Bank’s aggressive purchase of eurozone sovereign debt as the main weapon for the EU in fighting to keep the two most vulnerable countries, Portugal and Spain, from being forced into a bail-out. On Monday, Jean-Claude Juncker and Giulio Tremonti, in a comment piece for the FT, proposed the introduction of E-bonds to end the crisis.
But don’t you see, Jean-Claude Juncker?
We already have eurobonds, of a kind. Read more