April 16, 2012
What a difference a month makes. About 4 weeks ago the European crisis was “over” – French President Sarkozy exclaimed that: “Today, the problem is solved!” Christine Lagarde, former French finance minister, and current IMF head following the framing of DSK, added that “Economic spring is in the air!”… Fast forward to today when following the inevitable end of the transitory favorable effects of the LTRO (remember: flow not stock, a/k/a the shark can not stop moving forward), the collapse of the Spanish stock market, the now daily halting of Italian financial stocks, the inevitable announcement that shorting of financials in Europe is again forbidden, and finally the record spike in Spanish CDS, Europe is broken all over again. Which brings us again the Sarkozy and Lagarde. The Frenchman who is about to lose the presidential race to socialist competitor Hollande (an event which will have major ramifications for Europe as UBS’ George Magnus patiently explainedtwo months ago), no longer sees anything as solved, and instead is openly begging for the ECB to inject more, more, more money into the system to pretend that “problems are solved” for a few more months. Incidentally, so is Lagarde, for whom in an odd change of seasons, economic spring is about to be followed by a depressionary winter. The problem is both will end up empty handed, as the well may just have run dry.
From the FT:
In effect ripping up a deal to shelve public differences over the ECB reached in November at the height of the eurozone crisis with Ms Merkel and Mario Monti, the Italian prime minister, Mr Sarkozy said the matter of ECB support for growth was “a question we cannot avoid”
He said: “If the central bank does not support growth, there will not be enough growth . . . I know the difficulties that surround this subject but we have the duty to reflect on it because it is a major problem for the future of Europe.”
Mr Sarkozy said: “Europe must purge its debts, it has no choice. But between deflation and growth, it has no more choice. If Europe chooses deflation it will die. We, the French, will open the debate on the role of the central bank in the support of growth.”
In other news, remember that so very “friendly” relationship between Merkel and Sarkozy? Kiss that goodbye.
And while Germany may or may not have had enough of bailing out everyone (between the ECB funding all peripheral banks, and TARGET2 funding all peripheral current account deficits), the IMF just can’t get enough. Unfortunately, unlike the ECB, it does not have its own printer. Enter panhandling. Literally:
Holding up her Louis Vuitton handbag, the new managing director of the International Monetary Fund (IMF) turned to her fellow power brokers in one session and said: “I am here, with my little bag, to collect a bit of money.”
The joke broke the ice and the room rippled with laughter. But, beneath the disarming charm, Lagarde was deadly serious. For months now, the IMF has been trying to coerce its 187 members into committing as much as $600bn (£378bn) more to the fund to build what she described at the Brookings Institute in Washington last week as a “global firewall” to defeat once and for all the European sovereign debt crisis.
The problem, as is glaringly obvious, is that the IMF’s piggybank really is the US. And no US, no “big bazooka”, no “giant firewall”
Ever since “the Greek problem” flared up again in July last year, the talk from Brussels to London to Beijing has been about “big bazookas” and “giant firewalls” – a vast bail-out fund available to rescue any struggling nation from bankruptcy.
It has been a baptism of fire for Lagarde, France’s former finance minister who was appointed after the disgraced Dominique Strauss-Kahn stepped down in the wake of rape allegations. Just nine months into the job, she has the unenviable task of trying to build a co-ordinated global strategy on the shifting tectonic plates of domestic politics.
At the IMF’s key spring meetings in Washington this week, she faces her first real test. If Lagarde can strike a big deal on resources, she will be garlanded with praise. If she can’t, the jury will remain out. Either way, the pressure is now on.
Sorry, but with a US debt ceiling fiasco due in 4 months just ahead of a critical presidential election, the fire is about to be turned up a notch. Or ten… and be sulfur based. Because the math no longer works… And it never did.
Tellingly, all the US Treasury could muster in response to the eurozone agreement was the weak recognition that it “reinforces a trajectory of positive efforts to strengthen confidence in the euro area”. UK sources said that, privately, the US was bitterly disappointed, and adamant that no further US taxpayer money would be put at risk of more euro bail-outs.
Normally, US opposition would be enough to kill any plan to increase resources. But Lagarde has other ideas. She hopes to corral the rest of the major non-eurozone players – the UK, Canada, Japan, Australia, China and India – into a joint agreement. But she has already begun managing down expectations.
Having previously indicated that she wanted as much as $600bn more, she said at Brookings: “The needs now may not be quite as large as we had estimated earlier this year.”
UK sources said she would be lucky to secure $400bn. Of that, the eurozone members have committed to contributing €150bn – on top of their own bazooka – leaving just $250bn to be gathered from other members.
Even at $400bn, the extra resources would be a retreat from earlier ambitions. Lagarde wanted to increase the IMF’s available resources from the current $400bn to $1 trillion, while global policymakers had hoped for a total bazooka of €2 trillion to allay concerns about Europe. The IMF and the eurozone’s combined funds will fall well short of that.
Forget bazooka: IMF will be lucky to get a peashooter. In the meantime, Spain will not wait:
As markets have lost faith in Spain, questions have resurfaced about whether the eurozone firewall is big enough. According to CEPS, “even if the [firewall] only had to cover half of the financial needs of Spain and Italy”, it would need another €400bn.
Even securing €250bn from non-eurozone members excluding the US could prove difficult.
So now that Europe is broken all over again, and with elections, riots, strikes, tumbling markets, hundreds of sovereign bond auctions, and no promise of free liquidity from anyone despite daily rumor otherwise… what happens next?
This article was posted: Monday, April 16, 2012 at 3:02 am