Follow Us

Follow us on Twitter  Follow us on LinkedIn
 

17 March 2011

Klaus Engelen: 'Angela Merkel's nightmare'


Default: Change to:


In The International Economy article, Engelen says the markets are testing the German Chancellor's approach of trial-and-error, and asks if there is an end game in sight.


Merkel has experienced a rapidly changing political environment since the eurozone crisis started early last year with the threatened default of Greece. She seems to realise that important segments of Germany's elite and a large part of the general population no longer want to serve as Europe's paymaster without more say in what is done with their money. Ill-feeling is growing against an ever-more-encroaching bureaucracy in Brussels telling Germany what to do. And there is resentment that the so-called "Club Med" countries along with a banking and corporate tax haven like Ireland now expect to be bailed out with German money on the grounds of European solidarity. Germans worry that their trusted Bundesbank is being taken over by Club Med central bankers who are ganging together to soften the euro.

The European Central Bank wants to rescue the euro by doling out easy money in order to keep weak eurozone sovereigns and banks with zero or reduced market access afloat. ECB president Trichet and his colleagues are eager to transfer much of the rescue job to where it belongs: the governments and their fiscal resources.

Under what was intended as a stopgap measure in May of last year, the ECB has bought through its Securities Market Programme €76.5bn worth of sovereign bonds of countries such as Greece, Ireland and Portugal in an effort to keep down their borrowing costs. This much-debated programme came on top of €60bn purchased in the form of implicitly government-guaranteed covered bonds between July 2009 and June 2010. This high exposure in the financially weak eurozone countries makes clear that the ECB is moving further towards becoming Europe's "bad bank," thereby damaging its independence.

According to Engelen, the problem in a nutshell is that the four big core countries - Germany, France, Belgium and the Netherlands - have peripheral country exposure equal to around 125 per cent of the banks' capital, so a hypothetical 25 per cent depreciation in periheral country assets will cause them to lose around one third of their capital. Thus, a sovereign debt restructuring would be highly disruptive.

The state of the German and French financial sectors should offer strong incentive to put in place a bank restructuring authority that can reach into the shattered banking systems of periphery member countries. European leaders must realise that a large part of what they perceive as a sovereign fiscal crisis in the periphery is in reality a lack of restructuring of bank portfolios and household debt in spite of the very low interest rates provided so far by the ECB.

Full article



© The International Economy


< Next Previous >
Key
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information



Add new comment