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Home > Blogs > Anthony Harrington > Is the EU getting a grip? Fitch doesn’t think so...

Is the EU getting a grip? Fitch doesn’t think so...

Is the EU getting a grip? Fitch doesn’t think so... Anthony Harrington

With eurozone heads of government meeting on 9 December now fading into history it is already clear that the markets are not particularly interested in German Chancellor Angela Merkel’s call for a new treaty. If there is some easing in the markets, which, after all, did not completely fall off a cliff prior to Christmas, it is because the politicians now seem to be getting it through their heads that bold action is needed. However, grasping the thought and grasping the nettle as it were, are two different things, and decisive action post the December 9th Heads of State summit is starting to look elusive once again. That could cause markets to retreat into another downward spiral in mid January unless the politicians can offer something more concrete than words.

Merkel, understandably, wants Brussels to have real oversight of EU member budgets before Germany agrees to a bail out big enough to put Italy and Spain out of harm’s way. A new treaty that provides greater fiscal union would deliver this. But markets don’t care about this. What they want is confirmation that the European Central Bank will get over its fixation with price stability and will instead agree to become the lender of last resort to troubled EU sovereign states, printing as much money as it takes to bail them out. If a new treaty helps to get the ECB started down that road, fine. But the focus is on the ECB, not the treaty. In that regard, the ECB’s decision, announced just before the Christmas break, that it was providing more or less unlimited liquidity to banks, in the form of three year loans at 1%, was welcome.

However, Robert Marquardt, founder of the fund of hedge funds, Signet, and author of a forthcoming QFinance Viewpoint, argues that it makes no sense for the ECB to talk about being willing to do everything possible to bail out Europe’s banks while at the same time refusing to get involved in bailing out Europe’s sovereigns.

“Right now the European banks own so much European sovereign debt that the banks and the sovereigns are two sides of the same coin,” he points out.

If Italy was to default, for example, its banks would become insolvent overnight. Recapitalising the banks without recapitalising the sovereign simply won’t work and the markets know this. They like the idea of recapitalizing the banks. A more stable banking system in Europe would be a huge relief. But it can only happen if the sovereign issue is also addressed.

The problem with the Merkel/Sarkozy agreement is that while there was no support on the night for Cameron’s “selfish” you-want-something-I-want-something attempt to hold the EU hostage in order to renegotiate something or another by way of a bone to throw to his back-benchers, there are plenty of individual heads of state who are going to have problems getting their populace to sign up for swingeing new powers for Brussels. Everyone knows that fiscal union or bust has to be the end point of the euro game, but national interests die hard, and recent experience has not helped to make the idea of rule from Brussels particularly saleable in many a European capital, east or west. When the ratings agency Fitch, had had a chance to mull over what seems to have been agreed on December 9th, it had no hesitation in pronouncing the whole deal “unworkable”, and promptly put a number of EU states on notice of a downgrade.

Further reading on the EU crisis:


  • Dealing with the euro mood swings, by Ian Fraser
  • French German fudge on euro bond issue leaves markets unimpressed, by Anthony Harrington
  • Nothing but Painful Choices Ahead as the Global Debt Supercycle Ends, by John Mauldin


    Tags: central banks , ECB , economic recovery , EU , European Central Bank , European Monetary Union , eurozone , eurozone debt crisis , financial crisis , Fitch , Greece , ratings agencies , regulation , sovereign debt , Spain , UK
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