Monday, August 29, 2011

Yet another Mid-afternoon EU Special

Pessimism upon pessimism . . .

Comments upon Ms Lagarde's prognostications, previously reported:-

European banks face ordeal by fire this week after the IMF called for “urgent” action to shore up their defences, if necessary with state money and under legal compulsion. Europe’s lenders are already reeling from a share price collapse since the debt crisis spread to Italy and Spain, threatening to overwhelm Europe’s bail-out fund and leave banks exposed to sovereign defaults. Shares of Intesa SanPaulo, Credit Agricole and Commerzbank are all below the extremes seen during the panic in March 2009.

Europe’s inter-bank market is effectively frozen and EMU banks have lost access to America’s $7 trillion money markets. Lenders have parked €126bn (£112bn) at the European Central Bank for safety rather than risk exposure to peers.

The IMF exhorted Europe’s banks over the last two years to beef up their capital base while the rally lasted. Many failed to do so and will now face harsher terms. Some may fall under state control, wiping out shareholders.

Julian Callow from Barclays Capital said Europe is already in “industrial recession” and risks tipping into outright economic slump. “The recent slide is eerily reminiscent of the pattern during the third quarter of 2008,” he said.

Mrs Lagarde issued a thinly-veiled attack on the ECB’s rate rises and Europe’s fiscal austerity drive.

Tim Congdon from International Monetary Research said it is folly to force Europe’s banks to raise money too quickly or crystallize losses abruptly. This will cause a monetary implosion and a repeat of the 2008 disaster. He said the ECB’s restrictive policies over the last 18 months and the lack of EMU fiscal union have doomed the euro to certain break-up. “It cannot be saved. Banks will suffer large losses,” he said.

Meanwhile, things go from bad to worse in Germany:-

Angela Merkel no longer has enough coalition votes in the Bundestag to secure backing for Europe's revamped rescue machinery, threatening a constitutional crisis in Germany and a fresh eruption of the euro debt saga.

Separately, if the constitutional court rules that the €440bn rescue fund (EFSF) breaches Treaty law or undermines German fiscal sovereignty, it risks setting off an instant brushfire across monetary union.

The seething discontent in Germany over Europe's debt crisis has spread to all the key institutions of the state.

A CSU document to be released on Monday flatly rebuts the latest accord between Chancellor Merkel and French president Nicholas Sarkozy, saying plans for an "economic government for eurozone states" are unacceptable. It demands treaty changes to let EMU states go bankrupt, and to eject them from the euro altogether for serial abuses.

Mrs Merkel faces mutiny even within her own Christian Democrat (CDU) family.

The Bundestag is expected to decide late next month on the package, which empowers the EFSF to buy bonds pre-emptively and recapitalize banks. While the bill is likely to pass, the furious debate leaves no doubt that Germany will resist moves to boost the EFSF's firepower yet further. Most City banks say the fund needs €2 trillion to stop the crisis engulfing Spain and Italy.

Mrs Merkel's aides say she is facing "war on every front". The next month will decide her future, Germany's destiny, and the fate of monetary union.

Meanwhile in France . . .

President Nicolas Sarkozy has veered from one extreme to another in his quest for popularity but his latest act, as a tough election battle approaches, has astounded his critics. He has adopted the “squeeze the rich” approach of his socialist rivals. For a figure who was often referred to as “President Bling-Bling” and was attacked by the left as a friend of the jet and yacht-owning classes, it is an eye-catchingly populist volte-face that some have dismissed as a crude electoral ploy.

Just as the French leader pandered to the far right last year by expelling Roma gypsies, he played last week to the public’s appetite for “let the rich pay” solutions with a set of austerity measures targeting large companies and high earners more than the man in the street.

Sarkozy’s proposal, which must be approved by parliament next week before becoming law, calls for an extra 3% of income tax to be paid on earnings above €500,000 and would only stay in effect until the government’s books are balanced, supposedly in two years. Nevertheless, some of Sarkozy’s supporters voiced concerns that the tax might alienate his traditional support base in the upper middle class ahead of the first round of presidential voting in April.

The Sarkozy team, worried that France might lose its much-cherished AAA credit rating unless it takes concrete measures to rein in the debt, is hoping to get high marks, at least, for credibility.

Sarkozy has tried to show that he is managing things responsibly by calling for a “golden rule” limiting the budget deficit by law — Germany has one and Italy has pledged to introduce one — and his team is ridiculing socialist candidates for failing to back it.

This would all be terrific fun, if it weren't so serious.

I hope Chas Butler appreciates the use of the subjunctive here.

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