IMF Loan Target Not Reached

Yesterday the leaders of the euro area were confronted with another predictable development: The UK is not going to pay up for its share of the bilateral IMF loan program that is supposed to add to the bailout funding for the euro area by providing 'monetization through the back door'. Maybe the ersatz Napoleon and Mrs. Merkel should after all have given David Cameron his opt-out from their planned decimation of financial markets via the useless and economically nonsensical Tobin tax?

This is a bit like your neighbor asking you if he can borrow your car for 10 minutes, and right after you tell him that he can go to hell you say, 'oh by the way, can you quickly lend my ten grand?'

It appears therefore that the amount that will be forked over to the IMF will fall short of some €50 billion all in all.

As Reuters reports:

„Euro zone ministers agreed on Monday to boost IMF resources by 150 billion euros to ward off the debt crisis and won support for more money from EU allies, but it was unclear if the bloc would reach its 200 billion euro target after Britain bowed out.

Following a three-hour conference call, European Union finance ministers said currency zone outsiders the Czech Republic, Denmark, Poland and Sweden would also grant loans to the International Monetary Fund to help save the 17-nation zone.

But the EU said those lenders must first win parliamentary approval, while Britain made it clear it would not participate in the plan.

That leaves the euro zone more reliant than ever on major economies such China and on Russia, which has shown willingness to lend more to the IMF. The United States for its part is concerned about the lender's exposure to the euro zone.

Ministers had set an informal deadline of Monday to arrive at the 200 billion figure, which was agreed by EU leaders at a summit on December 8-9. and urged other nations to take part.

"Euro area member states will provide 150 billion euros of additional resources through bilateral loans to the fund's general resources account," the EU finance ministers said in a joint statement after their call.

"The EU would welcome G-20 members and other financially strong IMF members to support the efforts to safeguard global financial stability by contributing to the increase in IMF resources," the statement said.

British Treasury sources said Britain had decided not to contribute to an increase IMF resources. "We were clear that we would not be making a contribution," one Treasury source said, while another added that there was "no agreement on the 200 billion" euro funding boost.“

Needless to say, neither €150 billion nor € 200 billion will make any difference whatsoever if the rise in Italy's bond yields continues. It should be noted here that in a rare positive development, Italy's 2 year yield now trades significantly below its 10 year yield (the latter however is once again approaching the 7% level – alas, this may have to do with a change in the benchmark bond to a slightly less liquid issue). The return to a positively sloped yield curve indicates that for now, the worst of the panic is over. There has been some speculation in the markets that several euro area banks have been buying the short end of the curve in Italy and Spain in order to deposit the securities with the ECB in this week's upcoming first new LTRO (long term refinancing operation). This could not be independently confirmed, but someone clearly has been buying.

Italy's 2 year note yield has declined noticeably over the past few weeks – click chart for better resolution.

Italy's 10 year yield by contrast remains quite elevated at close to 7%. Alas, at least the 'curve inversion alarm' is for now gone. Note that the 10 year benchmark was recently changed, so there is a certain degree of discontinuity in this chart. The older benchmark issue has seen a bigger decline in yield – click chart for better resolution.

Draghi Warns of Pressures to Come

In testimony to the EU parliament he gave on Monday, ECB president Mario Draghi held forth on a number of pressing issues. He inter alia warned that 'bond market pressures in the euro area would be significant in the first quarter'.

No kidding. Readers may recall the charts we recently posted showing Italy's and Spain's enormous funding needs in 2012 as debt rollovers are front-loaded in that year. It is probably no coincidence that this coincides with rising market stresses. Moreover, banks also have very large funding requirements in the first quarter and will compete with the sovereigns for funding. This is inter alia what the ECB tries to soften to some extent with its LTROs.

As Reuters reports:

“Bond market pressure on the euro zone will be "very significant" in the first quarter of next year, European Central Bank President Mario Draghi said on Monday.

Draghi said that in the first quarter of next year, some 230 billion euros of bank bonds are expiring, 250 to 300 billion in government bonds, and that more than 200 billion in collateralised obligations issued by firms will be due in the course of next year.

"So the pressure that bond markets will be experiencing is really very, very significant if not unprecedented," Draghi said in testimony to the European Parliament, and added banks have also other problems, including lack of capital.

(emphasis added)

Yes, that sounds a bit worrisome. However Draghi once again stressed what the ECB's 'remit' is and that neither 'QE' nor euro-bonds were at present a solution that should be contemplated. At the same time he noted that he remains confident of the euro's survival. Let us just say that not everybody is so convinced.

“Draghi gave no hint that the ECB was about to change tack on its bond-buying programme, although it will later this week offer banks three-year funds for the first time to help ward off a freeze in interbank lending.

"The treaty specifies very closely what our remit is, namely ensure price stability in the medium term. The treaty also forbids monetary financing and … we want to act within the treaty," he said. "We know that banks experience now and will be experiencing, even more so, a very significant funding constraint, especially in the first quarter of 2012," he said.

Draghi also rejected joint bonds issued by euro zone countries, saying they would only be actual after there was more of a fiscal union than is currently the case. Joint bonds would cut financing costs for the most indebted countries, but likely lift them for the ones with lowest bond yields, especially Germany.

"The more countries release in terms of national sovereignty on their fiscal stance… the greater are going to be the benefits of any sort of euro bond concept," the Italian said. "(But) if you have separate countries that go on and spend on their own, separately and tax on their own, you cannot think about common issuance."

Turning to the future of the common currency, Draghi dismissed nay-sayers who doubt the sustainability of the euro. "I have no doubt whatsoever about the strength of the euro, about its permanence, about its irreversibility," he said.

In other words, if you want joint euro-bonds, you must go with the centralizers and harmonizers and allow them to erect their socialist super-state. Then Herman van Rompuy and Olli Rehn will own you in terms of fiscal sovereignty (they already partly do, after the most recent summit).

As to the euro's 'irreversibility' – that is actually largely in the hands of the markets and subject to unforeseeable future political developments. Many things that were held to be 'permanent' later turned out to be anything but. A great many currency unions have broken apart in the past, the euro area wouldn't be the first one by a long shot.

Spain's 2 year yield has vastly improved in recent weeks. Apparently the markets are giving the new government the benefit of the doubt regarding the continuation of the fiscal consolidation – click chart for better resolution.

Spain's 10 year yield has also improved strongly, but note that here too the benchmark was recently changed – in this case to a lower yielding bond – click chart for better resolution.

Meanwhile, bad loans in Spain's banking system have surged to a new 17 year high of 7.42% – the coming bank bailouts will likely cost Spain's government dearly.

Concurrently, the SMP has now increased to € 211 billion, according to the most recent communications from the ECB.

Merkel Goes on Vacation

Mrs. Merkel has decided she has had enough of crisis management for a while and is now finally going on vacation. One hopes that this will cut down a bit on the emergency summit inflation, but note that she already had to interrupt vacations in the past when things threatened to go out of control in her absence.

Bloomberg reports:

“German Chancellor Angela Merkel presided over her final Cabinet meeting of 2011 before she takes a winter break, leaving behind the simmering debt crisis and domestic turmoil that threatens to topple a political ally.

Merkel discussed lower limits on wages in some industries, changes to a stocks law and a bill on energy-efficiency labeling with ministers in Berlin today, her last scheduled appointment before she goes on vacation tomorrow. While her spokesman declined to say where she is going, he told reporters yesterday that her next official appearance is not until Jan. 5.

As she takes time out, the German leader leaves the threat of a credit-rating downgrade hanging over Europe’s biggest economy and the wider euro area, as rating companies join investors in questioning the impact of Merkel’s Dec. 9 European summit push for closer fiscal ties to combat the crisis. The euro fell to an 11-month low against the dollar on Dec. 14.

“They haven’t solved the crisis,” Christian Schulz, an economist at Joh. Berenberg Gossler & Co in London, said by phone. “If the whole thing blows up, it’s going to cost Merkel a lot. Her future rests on the future of the euro.”

(emphasis added)

To the above we merely want to draw everyone's attention to what the German government thinks are now the most important things worth discussing:

1.   the socialist program of the minimum wage, which is certain to increase institutional unemployment

2.   'changes to a stocks law' can only refer to the harmful Tobin tax

3.  'energy-efficiency labeling'  is likely one of the outgrowths of the global warming scare – and certain to impose huge additional costs on the economy.

In other words, the most pressing problems exercising Mrs. Merkel's government at the moment are all schemes that are going to restrict production and economic growth further.  We think she doesn't really have her priorities straight. Keep in mind here that she is supposed to be the leader of a 'conservative' government. We shudder to think what the German Left will do once it is in power again.

Addendum – Speaking of Socialism…

Via the Atlantic, here is a chart comparing GDP per capita of North and South Korea. So much for the alleged blessing of socialism:

Via the Atlantic: GDP per capita in North and South Korea. So much for the idea that socialism 'works' – click chart for better resolution.

North Korea's new designated ruler: will he do any better than his father?

Not if he doesn't ditch socialism.

(Photo via kimjongunlookingatthings.tumblr.com)

Charts by: BigCharts.com, The Atlantic

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