Monday, August 15, 2011

Expectations Too High for Tomorrow's Merkel Sarkozy Meeting?

Markets have rebounded the past few days, since news broke Thursday morning of an 'emergency' meeting Tuesday between Germany's Merkel and France's Sarkozy.  It appears the market is pushing for some sort of 'euro bond' - the equivalent of a U.S. type bond that would treat each EU member as a 'state'.  This would spread the risk over every country, and allow those countries with poor economic and debt situations to borrow at a continent wide interest rate.  Effectively that was what was happening the past decade+ as many countries were able to borrow at much lower rates within the euro zone - until the markets woke up one day and said no more post economic crisis in 2008.

The Germans appeared quite opposed to this so it would be highly doubtful anything of this nature is really brought up at this stage in the game.  Maybe it is the 'end game' but we are many steps away from it, even if it is.

Via AP:

  • Two leading German ministers reiterated their opposition to issuing jointly guaranteed European government bonds as a means to end the eurozone's crippling debt crisis.
  • Finance Minister Wolfgang Schaeuble told German news magazine Der Spiegel in its edition dated Monday that so-called eurobonds are out of the question as long as the currency zone's 17 nations still run their own fiscal policy, and that different interest rates for eurozone nations were needed to provide "incentives and the possibility of sanctions to enforce solid financial policy."
  • Schaeuble acknowledged that the EU must, and will, beef up its response to the crisis to assist the heavily indebted nations, but that "there won't be a collectivization of debt or unlimited assistance."
  • Chancellor Angela Merkel has long ruled out eurobonds, and Economy Minister Philipp Roesler joined the chorus Monday, describing jointly guaranteed debt as "the wrong way" out of the crisis. "Eurobonds would mean that everybody shares the same interest burden which would be a punishment for (financially) sound nations," he was quoted as saying by German news agency dapd. "We cannot want this for Germany and for all other good states."
  • Eurobonds would be a major step toward the bloc's economic integration, and are billed by supporters as an overnight solution to the crisis. Italy, Greece, Belgium and Luxembourg are among the nations calling for eurobonds.
  • The debate over eurobonds has ratcheted up ahead of Tuesday's meeting in Paris between Merkel and French President Nicolas Sarkozy, though eurobonds are not expected to form part of the discussions. "Eurobonds won't be an issue at the meeting tomorrow in Paris," Merkel's spokesman Steffen Seibert stressed Monday.  Instead, he said the two leaders will discuss strengthening financial and economic cooperation and governance across the eurozone.
  • The principle behind eurobonds is that European countries would guarantee each other's debts, so that investors would see the bonds as super-safe and loan at low interest rates. The hope is that lower borrowing costs would prevent any more financial bailouts. But Germany as the most creditworthy European country fears it would face higher borrowing costs and more risks if it had to borrow jointly with financially shaky nations.
  • Eurobonds could drive down the borrowing costs for troubled eurozone countries immediately, but Germany maintains that cheap credit without a powerful European institution overseeing the member states' budget and fiscal policy cannot be a solution.
  • Skeptics also point out that the current European Union treaty forbids countries from assuming each other's debts, and say it would be difficult to avoid reckless countries borrowing too much on the good credit of the more careful ones.

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