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Monday, 28 November 2011

Of Sovereign bonds, Euro bonds, Elite Bonds and the Loctite® Super Bond: European Trivia Extravaganza. Don’t get too Moody while you read it!

Elite Bonds and the Loctite® Super Bond

Today was just another day at the European office. The EU, the PIIGS countries and the Euro as a currency are all in desperate need of an integral rescue plan for the Euro-zone and the EU: a kind of Marshall plan for the European Union as a whole. And by the minute it becomes more clear that ‘kicking the can down the road’ and ‘delaying and praying’ is not doing the trick anymore. Now, it is not five, but probably two minutes to twelve on the Euro doomsday clock and there is absolutely no more time to lose.

But that is not how the the European leaders and other EU politicians think about it. These ´leaders´ still shy away from the consequences of such an integral plan and they all do their share of making up suboptimal solutions that serve their purpose and that of their grassroots alone. Angela Merkel says no to Quantitative E(U)asing by the ECB and says 'nyet' to the Euro-bond. Nicolas Sarkozy, however, is a huge fan of Quantitative Easing and ´money printing yourself out of misery´ by the ECB, IMF and whoever wants to take part in the plan. PM Mark Rutte of The Netherlands is busy demanding his special EU commissioner for the budget and other leaders are talking about a new stability pact that is much more stable than the original stability pact.

On top of that, the strong EU countries are now busy forming a kind of ´Frankfurter Tea Party´: a contact group of the strong Euro-countries that might ultimately form an EU within the EU.  In general you could say that everybody is pushing paper from side to side on their desk. But a real, credible solution? No way, José, Joao, Giovanni, Johan and Yorgos!

And the PIIGS and Belgium? These countries just want some money to buy ´a little bit of peace and quiet´ in order to get away from the continuous heat on the financial markets.

The latest ´fake solution to cover up the real solutions´ is the so-called Elite Bond: a bond, reputedly advocated by Germany Chancellor Angela Merkel, that would be issued by the six strongest Euro-countries (Finland, The Netherlands, Luxemburg, France, Austria and Germany).This bond would be the stronger brother of the normal Euro-bond, as the strongest countries of the Euro-zone warrant it.

This Elite bond would be issued, if other plans to reach an agreement within the 27 member states on stricter rules for the Euro-zone’s government budgets, would fail. By the way: the mere existence of a plan to invent the Elite-bonds was later categorically denied by Germany. Please, take note.

What the hell are these guys thinking anyway? The countries that need the yields of the Elite bonds mostly are not the countries that issue it! What problem is solved with these bonds?! The problem is: the more of these ridiculous ideas come to surface, the more the other countries outside the EU, the financial markets and the media think that the EU and the Euro-zone countries totally lost it.

I have a great idea: let’s issue the Loctite® Super Bond.

Loctite is a brand of

This super bond will glue the whole Euro-zone so strongly together that the financial markets cannot tear it apart. How is that for a bond!

The FT and the Euro Doomsday Clock

Talking about the doomsday clock for the Euro and the Euro-zone. The Financial Times was yesterday printing a column by Gavin Davies on what would happen if the Euro-zone would break up disorderly. This is a very legitimate question and I tried to do my share of thinking already two months ago in the article: Will the Euro implode?

Therefore I print some snips of this must-read column:

It has suddenly become respectable to ask the question: what would happen if the euro broke up? Last week’s rise in German bond yields signals that a euro break-up is being taken more seriously by investors. I am told that London law firms are allocating large amounts of time to examining the validity, following a break-up, of cross-border contracts written in euros. And, to judge from my own inbox, asset managers are beginning to ask about the economics of how it could occur.

When the euro was created, the process took many years of careful planning. The ECU, a basket of fixed amounts of national currencies, traded for several years in the foreign exchange markets, before its name was changed to the euro on 1 January 1999. There were no sudden revaluations and devaluations to disrupt economic relationships within the currency zone.

This movie cannot now be run backwards. It is hard to imagine the 17 members of the eurozone going through an orderly, decade-long process in which national currencies would first be reintroduced, then gradually allowed to deviate against each other within narrow bands, then ultimately allowed to float freely. I am not aware of any currency system which has broken up in such an orderly manner. Much more probable is a severe crisis, followed by the reintroduction of some national currencies, after which the “euro” might be retained by a remaining group of its current members, or it might simply cease to exist altogether.

As I said: the question is legitimate and it is a very good column with some very plausible outcomes. And as I told in the earlier part of this column; the EU politicians are still busy thinking of ‘fake solutions to cover up the real solutions´, instead of solving the problem.

But still, as an inhabitant of the Euro-zone, I suspect that the British and American feelings are not always free of malicious delight on this ‘arrogant’ EU, its wild dreams and its stupid single currency.

I heard from several directions that the UK with its massive debt, its massive income inequality and its ‘money-printing press going wild’ is now paying a lower interest rate than Germany and the other strong Euro-zone countries. Just like the US. And not even to mention Sweden. What did I think of that as a Euro-phile?! Hence: the Euro was a bad idea and now it is doomed. 

But I kindly ask you: don’t dance on the grave of the Euro too soon, because the EU might be back with a vengeance when this is all behind us. And yes, I'm still convinced of a happy ending, although the EU doesn't make it easy on me.


Also Moody’s came with a grim warning today. All Euro-zone countries might be downgraded if the Euro-problems are not solved very quickly. Here are the pertinent snips:

The continued rapid escalation of the euro area sovereign and banking credit crisis is threatening the credit standing of all European sovereigns, cautions Moody's Investors Service in a new Special Comment. In the absence of policy measures that stabilise market conditions over the short term, or those conditions stabilising for any other reason, credit risk will continue to rise. Moody's new report notes that, amid the increasing pressure on euro area authorities to act quickly to restore credit market confidence, the constraints they face are also rising. While the euro area as a whole possesses tremendous economic and financial strength, institutional weaknesses continue to hinder the resolution of the crisis and weigh on ratings. In terms of the policy framework, the euro area is approaching a junction, leading either to closer integration or greater fragmentation.

While Moody's central scenario remains that the euro area will be preserved without further widespread defaults, even this 'positive' scenario carries very negative rating implications in the interim period. The rating agency notes that the political impetus to implement an effective resolution plan may only emerge after a series of shocks, which may lead to more countries losing access to market funding for a sustained period and requiring a support programme. This would very likely cause those countries' ratings to be moved into speculative grade in view of the solvency tests that would likely be required and the burden-sharing that might be imposed if (as is likely) support were to be needed for a sustained period.

However, over the past few weeks, the likelihood of even more negative scenarios has risen. This reflects, among other factors, the political uncertainties in Greece and Italy, uncertainty around the final haircut imposed on holders of Greek debt, the emphasis in the recent Euro Summit statement on the conditional nature of the existing support programmes and the further worsening of the economic outlook across the euro area. Alternative outcomes fall into two broad categories: those involving one or more defaults by euro area countries (in addition to Greece's PSI programme); and those additionally involving exits from the euro area.

The probability of multiple defaults (in addition to Greece's private sector involvement programme) by euro area countries is no longer negligible. In Moody's view, the longer the liquidity crisis continues, the more rapidly the probability of defaults will continue to rise.

A series of defaults would also significantly increase the likelihood of one or more members not simply defaulting, but also leaving the euro area. Moody's believes that any multiple-exit scenario -- in other words, a fragmentation of the euro -- would have negative repercussions for the credit standing of all euro area and EU sovereigns.

Moody's notes that the situation is fluid and fast-moving. Policymakers are likely to respond to the escalating risks with new measures, the credit implications of which will require careful consideration. In the meantime, new shocks to financing conditions -- whether the announcement of new programmes or simply a further acceleration in the rise of funding cost across the euro area -- are likely to lead to selective rating changes. More broadly, in the absence of major policy initiatives in the near future which stabilise credit market conditions, or those conditions stabilising for any other reason, the point is likely to be reached where the overall architecture of Moody's ratings within the euro area, and possibly elsewhere within the EU, will need to be revisited. Moody's expects to complete such a repositioning during the first quarter of 2012.

Although the language of this comment is somewhat stately, its message cannot be misunderstood: EU, do something about the debt problems now and you will only suffer a moderate amount of financial damage. This amount can still be contained easily. However, if you wait too long the damage for all Euro-countries will be devastating.

I hope this crystal-clear message will not fall on deaf ears, but I’m not so sure about it. Killing the messenger is often the strategy of choice in the EU and the Euro-zone.

Belgium in financial need? Then the Belgians come to the rescue!

Next to all miserable news there was also some good news. From Belgium of all places.

The government called the Belgian citizens to the rescue for their credit roll-over plan and the Belgians ran the gauntlet enthusiastically.  The Belgian newspaper De Standaard ( reports:

Yesterday, Belgian savers subscribed for €34 mln to the 3Y sovereign bond, for €140 mln to the 5Y bond and for €16.7 mln to the 8Y bond.

The sale of special government bonds for savers, the so-called ´Staatsbons´, which had been strongly advocated by resigning PM Yves Leterme, turned therefore into a big success. At the last issuance date early in September, only €77 mln was collected; less than half of today´s yields.

Analysts were criticizing the new saver´s bonds. Although these offer the highest interest rate in three years, their yields are still well below the market rates. Also the recent rate increase was not taken into account.

I really don’t understand the analysts here: normally the Belgian savers, just like savers in other EU countries, receive a pathetic interest rate on their savings´account. Currently between 1.85% and 2.45% (source: 

Now the government offers them between 3.50% (3y) and 4.20% (8y) on a (virtually) no-risk investment. Assuming that access to the normal government bond market is not everybody´s cup of tea, this is a quite fair interest rate. At least this is what the Belgian citizens seem to think about it. And the Belgian government has an affordable way of rolling over some credit.

Anyway, it proves that the Belgian citizens still trust in a happy ending for Belgium. ´And with this positive bombshell, I want to finish this blog´. 

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