Long-term yields for U.S. Treasuries should indeed firm but be tempered by a slowing as this phase o...
Germany's Merkel tries to lower expectations for a grand plan to end the euro crisis
10/17/2011 6:36 pm EST
German Chancellor Angela Merkel wants everyone to understand that the grand plan France and Germany have pledged to deliver by the end of this week won’t fix everything in the euro debt crisis. “Dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s spokesman, said in Berlin today. The search for a solution “surely extends well into next year,” he added.
Really? No kidding?
Of course, Merkel and French President Nicolas Sarkozy played a major role in creating those dreams when they pledged to produce a grand plan in time for the October 23 meeting of European leaders in Brussels. The idea, the German Chancellor and the French President said, would be to give European leaders time to hammer out an agreement ahead of the following week’s meeting of the leaders of the G20 economies.
The weeks since the two leaders met on October 9 have served mostly to emphasize the differences between the German and French positions. Germany wants banks to take a bigger hit than the 21% haircut agreed to in July on their holdings of Greek debt. France, allied on this with the European Central Bank, is looking to spare Greek bondholders (which includes the European Central Bank) as much pain as possible. The Germans insist that any plan to recapitalize Europe’s weaker banks—and the big French banks are certainly leading candidates for recapitalization—begin with contributions from national governments. France, worried about its own AAA credit rating, would like to see recapitalization involve institutions such as the European Financial Stability Facility as quickly as possible.
Last week, in their contribution to making an agreement as tough to reach as possible, EuroZone bankers issued a blanket “Hell, no, we won’t write down” statement saying that they wouldn’t participate in any new deal that required them to write down the value of their Greek holdings by more than the already agreed 21%. The banks know they’ve got a very strong bargaining position since credit rating companies such as Standard & Poor’s have made it clear that they would regard any forced write down of Greek debt as a Greek default.
With this as background it’s quite possible that there won’t be a grand plan ready by October 23 or, more likely, that any grand plan will be more plan and less grand. The outline of the plan as leaked so far includes five points: 1) Somehow ending the Greek crisis, 2) somehow adding to the firepower of the $600 billion European Financial Stability Facility, 3) somehow recapitalizing banks, 4) somehow boosting competitiveness in troubled EuroZone economies, 5) and somehow making treaty changes to tighten EuroZone economic management.
The markets paid attention to German worries today. At the close German DAX Index was down 1.8%, the French CAC 40 was down 1.6%, and the Spanish IBEX 35 was down 1.2%.
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