Formation of a European bond market likely?

[labasta]

Read this today in the German FT:

http://www.eurointelligence.com/arti...c4dc2ce.0.html

Original in German:
http://www.ftd.de/meinung/leitartike...er/469721.html

But that does not mean that a breakdown of the euro area is inconceivable under all scenarios. Let us start with the hypothetical scenario of a Greek payment default. If the German finance minister, as I would expect, were to insist pedantically to apply the no-bail out clause, the crisis could, within hours, spill over to Portugal, Ireland, Spain and Italy, where bond spreads would be shooting up. Hedge funds will suddenly have discovered a good opportunity to make up for previous losses. Finance instruments such as Credit Default Swaps (CDS) are imminently suited to this type of speculation: If you stock up with Portuguese or Italian CDS during one of the panic runs, you stand to make very large profits. This in turn accelerates the domino effect of the crisis, and market interest rates will go up to double-digit rates all over southern Europe. The EU will hold an emergency summit at which it becomes clear that it is too late for a general bailout. This would have worked in the case of Greece or Ireland. But Italy and Spain are simply too big.

The summit would summon experts who tell the prime ministers that there are only two alternatives. Either the euro-area is dissolved with immediate effect. Or, one creates an imminent fiscal union, starting with single the European issuance of all future debt, and the transformation of all existing debt into a single European bond. The member countries would lose the sovereignty over budgetary politics. The finance ministers would receive their daily marching orders from Brussels. This would, of course, require a whole new EU Treaty, which the prime minister would have to agree on almost in real time.

[metalman]

Re: Formation of a European bond market likely?

Read this today in the German FT:

http://www.eurointelligence.com/arti...c4dc2ce.0.html

Original in German:
http://www.ftd.de/meinung/leitartike...er/469721.html

very interesting site. thanks for posting.

what the writer doesn's say is this scenario also implies the formation of a european parliament with the power to tax. is that feasible?

[globaleconomicollaps]

Re: Formation of a European bond market likely?

I recall that EJ said this was not practical. This is the main reason that he expects deflation in Europe.

[labasta]

Re: Formation of a European bond market likely?

very interesting site. thanks for posting.

what the writer doesn's say is this scenario also implies the formation of a european parliament with the power to tax. is that feasible?

Yes. I got the link from the propertypin so I can't take the credit.

The tax issue is a problem. It's such a huge step for the EU. I think though that if it has to be done they will do it rather than give up on the currency altogether. They'll have to act fairly quickly though. Also, instead of the tax relieving the burden on local country taxes I imagine it will just be yet another layer of tax which nobody can afford to pay in this climate.

[labasta]

Re: Formation of a European bond market likely?

I recall that EJ said this was not practical. This is the main reason that he expects deflation in Europe.

I didn't read that. Maybe you can point me to the article.

As I remember it, EJ mentioned that the Euro as a currency is not viable because it doesn't have a bond market. I didn't see anything about deflation or that a EU bond market was impractical (even though it might be).

There's no deflation yet in Ireland at least. Disinflation yes.

What can the ECB do to counter deflationary pressures? I'm sure there are other ways apart from the bond market.

I think the ECB will inflate too, but not quite along the lines of the UK or US.

They have this Weimar phobia about them. I still see all major fiat currencies inflating quite a lot. It's already happening if the posters on housepricecrash.co.uk can be trusted.

[GRG55]

Re: Formation of a European bond market likely?

Things just keep on gettin' worse there too.

From the Telegraph:

European bank bail-out could push EU into crisis

A bail-out of the toxic assets held by European banks' could plunge the European Union into crisis, according to a confidential Brussels document.

By Bruno Waterfield in Brussels
Last Updated: 3:50PM GMT 11 Feb 2009

“Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned.

"It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”

The secret 17-page paper was discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday.

National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

The Commission figure is significant because of the role EU officials will play in devising rules to evaluate “toxic” bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.

In line with the risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany. Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart.

“Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance,” the EC paper warned.