/ 30 September 2011

Throwing money at the euro

Stock markets have endured days of sharp volatility amid uncertainty about how eurozone leaders intend to solve the ongoing — and increasingly pressing — crisis that is gripping the single currency and threatening global growth.

Whereas the United States and United Kingdom hope that eurozone leaders will come up with a scheme strong enough to build a firewall around the most indebted countries in the eurozone, Germany has emerged as a stumbling block to any plan to increase the bailout funds for the eurozone to €2-trillion or more.

German politicians told the Guardian of their dismay at reports following last weekend’s meeting of the International Monetary Fund (IMF) about beefing up the existing bailout fund, known as the European Financial Stability Facility.

Frank Schäffler, a Free Democratic Party politician from North Rhine-Westphalia, said any scheme to bolster the fund from its existing €440-million capacity would be a “catastrophic development” that he feared would lead to inflation.

“It must be stopped,” he said in an interview. Schäffler’s pro-business party rules in coalition with the Christian Democratic Union of the chancellor, Angela Merkel.

Germany’s finance minister, Wolfgang Schäuble, appeared to downplay any attempt to bolster the stability facility.

“We do not intend to increase it,” he said in a television interview.

His remarks came after European markets closed and after France’s CAC40 closed 1.8% higher and the Dax in Germany rose 2.9%.

Gains in London were more muted with the FTSE index ending 0.4% higher at 5089.37, while Wall Street was gyrating.

President Barack Obama called on European leaders to move more quickly to address the crisis. He said in a town-hall meeting that Europe’s financial crisis was “scaring the world” and that the actions the region’s leaders had taken so far had not been “as quick as they need to be”.

Louise Cooper, of BGC Partners, said: “These massive moves tell us how deeply uncertain is the future. Trying to trade or invest in such markets is more than difficult — I would suggest it is almost impossible.”

Gold prices are falling — down by $40 and off $300 from its $1 920 an ounce high on September 6 — as traders liquidate positions to release cash to cover losses elsewhere.

But earlier Lorenzo Bini Smaghi, an executive board member of the European Central Bank, had insisted that discussions were under way about how to bolster the stability facility.

“I know that people are thinking about these things. They may not be willing to admit it in public, but they are thinking about these things,” he said, referring to the Troubled Asset Relief Programme (Tarp) used in the US after the 2008 banking crisis.

Analysts at JP Morgan expect European banks to get a capital injection of up to €150-billion through a Tarp-like deal.

“Euro-Tarp is, in our view, the best risk-reward medicine for ­opening the Eurobank funding ­market,” said JP Morgan analyst Kian Abouhossein.

There is also speculation about recapitalisation of eurozone banks, particularly because the losses on Greek bonds are expected to rise to 50%. The second bailout for Greece in July put the loss at 21% and fears of large write-downs drove shares in Greek banks – big holders of their country’s debt — to a 19-year low.

French banks are also of concern to the market and remarks by Banque de France’s Christian Noyer at the weekend were seen as suggesting that the central bank was ready to step in if necessary.

Although a wide-ranging solution is needed, the focus is still on Greece. It needs the sixth tranche of payouts — €8-billion — from its original bailout to be released next month or it will run out of cash, potentially defaulting on its debt and being unable to pay its public-sector workers.

The stability facility must also be endorsed across the eurozone, even before any plans are adopted to bolster its firepower.

A key vote in Germany was due on Thursday and Schäffler suggested that Merkel and Schäuble were not being honest with Parliament about what lay ahead. “The ink has not dried on this second bailout and already there is talk about more money,” he said.

Doubts remain about whether enough will be done. Philip Booth, from Cass Business School, said: “The IMF and the EU still have not woken up to the realities of the sovereign debt situation.” —