Monday, August 6, 2012

Monti Calls for More Crisis-Fighting Urgency in ECB Standoff

Italy’s Prime Minister Mario Monti warned of a potential breakup of Europe without greater urgency in efforts to lower government borrowing costs, as a stand-off over European Central Bank help for Italy and Spain hardened.

Monti, in an interview with Germany’s Der Spiegel magazine published yesterday, said that disagreements within the 17- nation euro area are detracting from the policy response to the debt crisis and undermining the future of the European Union.

“The tensions that have accompanied the euro zone in the past years are already showing signs of a psychological dissolution of Europe,” Monti told Der Spiegel. While he backed the ECB’s willingness to address “severe malfunctioning” in the government bond market, Monti said the problems “have to be solved quickly now so that there’s no further uncertainty about the euro zone’s ability to overcome the crisis.”

Spain and Italy, whose surging borrowing costs have shunted them to the heart of the turmoil in the euro area, are resisting pressure from ECB President Mario Draghi to formally request aid in return for strict conditions before the central bank will buy their bonds. Monti and Spanish Prime Minister Mariano Rajoy have both said they will await further details as the ECB works up its plan. The German government said for the first time today that Chancellor Angela Merkel supports Draghi’s proposals.
French President Francois Hollande is pushing Monti and Rajoy to request aid from Europe’s bailout fund to help ease markets and protect France from speculation, Italian newspaper la Repubblica reported, without citing anyone. Monti may speak with Draghi today, the newspaper said.

Kiss of Death

“Italy has, to all intents and purposes, been hung out to dry,” Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd., said in an e-mailed comment. “As far as Rome is concerned any external assistance would be the kiss of death. This puts Mr. Monti in an untenable situation.”
Monti isn’t under pressure from Hollande to request international rescue funds and has no plans to meet Draghi today, an Italian government official said, who asked not to be identified because any such discussions would be private.

Italian 10-year bond yields fell 6 basis point to 5.98 percent as of 2:15 p.m. in Berlin after rising to 6.28 percent as Draghi outlined his plan on Aug. 2. Spain’s 10-year bond yielded 6.76 percent, down 9 basis points, after rising as high as 7.44 percent. Equivalent German debt yields 1.36 percent.
The euro dropped 0.2 percent to $1.2362.

Troika Talks

Greece, the country at the nexus of the debt crisis, agreed after more than a week of meetings with representatives of the so-called troika of international creditors -- the International Monetary Fund, the ECB and the European Commission -- on the need to strengthen policy efforts to support the economy and comply with its bailout terms.
“We made a lot of good progress,” Poul Thomsen, the IMF’s representative to Athens, said after a meeting with Finance Minister Yannis Stournaras ended yesterday. The troika will return to Athens in early September.

Investors and politicians are meanwhile grappling with the significance of Draghi’s comments on sovereign debt purchases. While markets initially tumbled after Draghi said Spain and Italy would have to formally request a resumption of the bank’s bond buying in conjunction with Europe’s bailout fund, thus entering into a rescue program with tough conditions, they rallied the following day as investors concluded that ECB action would happen, albeit on an unknown future date.

Liquidity Backstop

“If the arrangement sketched out is fully implemented, the ECB will provide an effective liquidity backstop, enabling sovereigns to retain access to markets for a large portion of their funding needs,” Bruce Kasman, chief economist at JPMorgan Chase & Co., said in an Aug. 3 note to clients.
The German government is “not worried” by Draghi’s announcement, Georg Streiter, Merkel’s deputy spokesman, told reporters in Berlin today. Draghi “clearly addressed the primacy of politics in the euro crisis and the government has no doubt that everything the European Central Bank does happens within the framework of its mandate,” Streiter said.

Spain and Italy suggested that bailout requests may not be imminent or necessary.
Monti told Spiegel that he intends to stay in office until April 2013, when Italy is due to hold elections, and he hopes he “can save Italy from financial ruin until then, with the moral support of some European friends, and Germany foremost. But I say very clearly: moral support, not financial.”

Draghi Misunderstood

Spanish Economy Minister Luis de Guindos told ABC newspaper at the weekend that his country awaits details of the ECB’s bond-buying proposals before deciding whether to request aid. Both Italian Bank of Italy Governor Ignazio Visco and Minister for Economic Development Corrado Passera said in separate newspaper interviews that the country doesn’t need a bailout.

Visco told La Repubblica that markets had initially misunderstood Draghi’s comments.
“Not only did the ECB not take any steps backward, but it took decisive steps forward to correct the functioning of monetary policy transmission, and therefore of the stability of the single currency,” he told the newspaper.

Euro-area finance chiefs won’t meet until Sept. 3 to discuss possible Spanish bond buying and the economic situation in Greece, Italian news agency Ansa reported Aug. 3, citing unidentified European officials. European governments would not confirm the meeting. The next meeting of the ECB’s governing council is scheduled for Sept. 6.

German Criticism

Draghi’s plans to reactivate the ECB’s bond-buying program prompted some criticism in Germany. Former ECB Chief Economist Otmar Issing said price stability is “massively threatened,” Frankfurter Allgemeine Sonntagszeitung reported yesterday, while Juergen Stark, Issing’s successor who is now retired from the ECB, said the central bank is being asked to act outside its mandate, faces conflicts of interest and is losing its independence, the same newspaper said.

Monti garnered criticism from German lawmakers over his comments in Spiegel calling on governments to exercise greater autonomy from national parliaments in taking crisis decisions or risk making a euro-area breakup more likely. German lawmakers have a veto right on disbursements from Europe’s bailout fund.
Alexander Dobrindt, general secretary of Merkel’s CSU Bavarian sister party, said in an interview with the Rheinische Post newspaper Monti’s comments were an “attack on democracy.”

Merkel sees Germany as having had positive experiences with “the right degree of support by the parliament and the right degree of participation by parliament,” Streiter said. “It would be good if the debate was guided by a bit more calm.”