The euro is on the retreat. During the course of the week, the single currency weakened against the “risk off” currencies – particularly against the US dollar and its Chinese satellite CNY, but also versus the yen and the Swiss franc. EUR/USD fell from around 1.35 to less than 1.33; EUR/JPY slipped below 103. EUR/CHF is trading at just under 1.23 – still well over the SNB’s official limit of 1.20. However, this weakness was cancelled out to some extent by the euro rising (in some cases quite sharply) against most other European currencies and also versus emerging market and commodity currencies.
The euro’s fall against the dollar was triggered mainly by the poor reception of new 10-year German Bunds in the markets. Demand for the €6bn worth of Bunds was so weak that about 40% of the bonds had to be retained to be sold later in the secondary market – the highest percentage for many years. The markets are interpreting this as a warning sign that in an escalating sovereign debt and banking crisis, not even German Bunds can remain completely immune. However, it is also possible that the 2% coupon, offered for the first time on a 10-year bond, was no longer acceptable to medium and long-term oriented investors. An international comparison shows that the yield on its US counterpart is still around 1.90% despite the far more aggressive monetary policy of the US central bank.
But whatever the reason, 10-year Bund yields rose sharply as a result of the auction, climbing 30 points from about 1.90% prior to the auction to 2.20%. This of course had knock-on effects on the other eurozone bond markets, but the impact on interest rate spreads varied; the premium on Italian bonds widened again somewhat, whereas
yield spreads on Spanish and French bonds narrowed. Yields and risk premiums on Portuguese debt rose sharply, as Fitch cut Portugal’s credit rating to BB+, i.e. to “junk” status.
Government action in the eurozone seems to be increasingly shifting to a metaphysical level. Amid a dramatic widening of yield spreads within the eurozone and growing concerns that the markets could cut off banks and governments from refinancing, policymakers are discussing political (non-) interference in the decisions of the ECB and …eurobonds.
As far as the former is concerned, everyone ought to be able to think and say whatever he likes on whether more ECB intervention is appropriate or not; that is essential in democratic discussions, particularly when the discussions are on such wide reaching problems as the sovereign debt crisis. Members of the ECB governing council should be able to take political pressure in their stride and evaluate the arguments properly. Their position gives them enough authority to do so.
As to the latter: despite German opposition, EU Commission president Jose Manual Barroso has reverted to the idea of eurobonds, and unveiled proposals in a green paper where he has attempted to outline the advantages. The EU Commission lists three options for eurobonds, which are referred to as “stability bonds” and differ in the extent of liability (joint liability for all bonds or liability limited to a certain amount) and in whether all or only a certain proportion of national borrowing should be replaced by eurobonds. The proposals also include plans to tighten fiscal surveillance.
The debate about eurobonds is not fundamentally wrong. But eurobonds are not a solution to the present crisis: the only option which could be implemented in a relatively short time is the limited liability option. But for all practical purposes, this concept is very similar to that of the EFSF and thus does not offer any additional advantages – especially as the EFSF appears to be overstretched already amid the intensifying debt crisis. The Commission’s two other proposals require changes in the EU Treaty which – particularly combined with the substantial intervention in national parliaments’ budget competence – are unlikely to be politically realised in the foreseeable future. And even if this EU political miracle were to take place, given the increasing loss of confidence in the financial system, it is still far from certain whether “stability bonds” would solve the problem.
There is news from the ECB. Firstly, on the personnel front, as France has nominated Benoît Coeuré to succeed Lorenzo Bini Smaghi at the beginning of next year. Mr Coeuré is an economist and currently the number 2 official in the French finance ministry. Secondly, the ECB appears to be considering additional measures to stabilise the banking system. According to press reports, the ECB is looking into the possibility of offering refinancing operations with maturities of two or even three years. This could help to reduce looming shortfalls in medium to long-term refinancing for banks and thus ease the pressure to shorten the asset side. We think it feasible that the ECB will at least signal such an offer at its next meeting.
The euro’s fall against the dollar was triggered mainly by the poor reception of new 10-year German Bunds in the markets. Demand for the €6bn worth of Bunds was so weak that about 40% of the bonds had to be retained to be sold later in the secondary market – the highest percentage for many years. The markets are interpreting this as a warning sign that in an escalating sovereign debt and banking crisis, not even German Bunds can remain completely immune. However, it is also possible that the 2% coupon, offered for the first time on a 10-year bond, was no longer acceptable to medium and long-term oriented investors. An international comparison shows that the yield on its US counterpart is still around 1.90% despite the far more aggressive monetary policy of the US central bank.
But whatever the reason, 10-year Bund yields rose sharply as a result of the auction, climbing 30 points from about 1.90% prior to the auction to 2.20%. This of course had knock-on effects on the other eurozone bond markets, but the impact on interest rate spreads varied; the premium on Italian bonds widened again somewhat, whereas
yield spreads on Spanish and French bonds narrowed. Yields and risk premiums on Portuguese debt rose sharply, as Fitch cut Portugal’s credit rating to BB+, i.e. to “junk” status.
Government action in the eurozone seems to be increasingly shifting to a metaphysical level. Amid a dramatic widening of yield spreads within the eurozone and growing concerns that the markets could cut off banks and governments from refinancing, policymakers are discussing political (non-) interference in the decisions of the ECB and …eurobonds.
As far as the former is concerned, everyone ought to be able to think and say whatever he likes on whether more ECB intervention is appropriate or not; that is essential in democratic discussions, particularly when the discussions are on such wide reaching problems as the sovereign debt crisis. Members of the ECB governing council should be able to take political pressure in their stride and evaluate the arguments properly. Their position gives them enough authority to do so.
As to the latter: despite German opposition, EU Commission president Jose Manual Barroso has reverted to the idea of eurobonds, and unveiled proposals in a green paper where he has attempted to outline the advantages. The EU Commission lists three options for eurobonds, which are referred to as “stability bonds” and differ in the extent of liability (joint liability for all bonds or liability limited to a certain amount) and in whether all or only a certain proportion of national borrowing should be replaced by eurobonds. The proposals also include plans to tighten fiscal surveillance.
The debate about eurobonds is not fundamentally wrong. But eurobonds are not a solution to the present crisis: the only option which could be implemented in a relatively short time is the limited liability option. But for all practical purposes, this concept is very similar to that of the EFSF and thus does not offer any additional advantages – especially as the EFSF appears to be overstretched already amid the intensifying debt crisis. The Commission’s two other proposals require changes in the EU Treaty which – particularly combined with the substantial intervention in national parliaments’ budget competence – are unlikely to be politically realised in the foreseeable future. And even if this EU political miracle were to take place, given the increasing loss of confidence in the financial system, it is still far from certain whether “stability bonds” would solve the problem.
There is news from the ECB. Firstly, on the personnel front, as France has nominated Benoît Coeuré to succeed Lorenzo Bini Smaghi at the beginning of next year. Mr Coeuré is an economist and currently the number 2 official in the French finance ministry. Secondly, the ECB appears to be considering additional measures to stabilise the banking system. According to press reports, the ECB is looking into the possibility of offering refinancing operations with maturities of two or even three years. This could help to reduce looming shortfalls in medium to long-term refinancing for banks and thus ease the pressure to shorten the asset side. We think it feasible that the ECB will at least signal such an offer at its next meeting.