Former ECB President Calls Backers of Common Bonds "Euro Gravediggers"; Red and Blue Bonds? Merkel to Embrace Common Bonds?

Lots of rumors are circulating this morning including still undisclosed agreements between German Chancellor Angela Merkel and French President Nicolas Sarkozy, more talk of Greek default from Jean-Claude Juncker, discussion of a "Marshall Plan" for Greece, guarantees of Greek debt and an expansion of the size of the EFSF as well as the EFSF being allowed to buy bonds in the secondary market.

That so many rumors are circulating, I wonder if Merkel and Sarkozy have really agreed to do much more of anything than agree to agree.

The granddaddy speculation of them all is the possibility Merkel might drop her opposition to common Euro bonds. That is the "nanny state" option I have written about many times recently.

Euro Gravediggers and the Nanny State

Fearing the common bond nanny state possibility, Otmar Issing, former ECB president issued a statement called the backers of common bonds "Euro Gravediggers".

Please consider Merkel Drive to Save Euro May See Joint Bond Surrender as Crisis Spreads

German Chancellor Angela Merkel may need to abandon her opposition to issuing common bonds in order to stop a debt crisis that is threatening to splinter the euro region.

Merkel, who calls the single currency a “work of peace” and part of Europe’s “uniting idea,” is the key holdout on so- called euro bonds.

“Once they look into the abyss of a major speculative attack on Italy,” Merkel will have to embrace euro bonds, Peter Bofinger, a member of the chancellor’s Council of Economic Advisers, said in a telephone interview. “That would be the turning point. There needs to be a joint guarantee for all outstanding debt.”

Political Union

France sees little room for a common bond without more integration of Europe’s fiscal and budgetary regimes, a French official said. German Deputy Foreign Minister Werner Hoyer said it will require a closer “political union.”

“If we further develop the European Union toward a political union, then the question of liability via euro bonds is an option,” Hoyer said in an interview today. German constitutional rules bar the introduction of the debt instruments currently, he said.

“It’s a fact of life that common currency areas have subsidies from the rich to the poor,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. “You need euro bonds for the show to go on.”

Euro Gravediggers

Eighty-six percent of Germans are concerned about the value of their savings and 47 percent want Greece evicted from the euro area, according to a poll for ZDF public television published last week.

Politicians who back measures such as common bonds “will prove to be the euro’s gravediggers,” Otmar Issing, the European Central Bank’s former chief economist, said in a July 19 interview in the Frankfurter Allgemeine Zeitung newspaper. “The consequences of this policy will strangle Germany.”

A compromise proposed by the Brussels-based research group Bruegel would see countries fold debts up to 60 percent of gross domestic product into a joint “blue” bond. That would likely enjoy relative lower interest rates than even low-deficit governments now pay, in part because of the more liquid market.

Any excess debt would then be sold on a national basis as a “red” bond with a higher yield.

“I’m growing more sympathetic to the red-blue bond approach,” said Gilles Moec, co-chief European economist at Deutsche Bank AG in London. “You want a combination of accommodation and incentives for fiscal discipline.”
Final Straw

Euro bonds may become inevitable, said Frank Schaeffler, a lawmaker for Merkel’s Free Democratic Party coalition partner, who predicts Greece will succumb to a temporary exit from the euro region.

They “would be the last straw and Merkel knows it,” he said in an interview. “The reality is we’re steaming ahead into euro-bond land, it’s just a few stations down the line. We may not be about to create instruments that are called euro bonds but don’t be fooled by the labels.”

Red and Blue Bonds?

When it comes to talk of red and blue bonds you know those involved have lost their collective minds. Regardless, the number of folks screaming for adoption of the European Nanny State continues to climb.

For more on the Nanny State, please see...

• Right Place to Crash the Plane; Time Running Out for Europe; Nanny State or a Breakup?


• Trichet Calls for Creation of European "Nanny-State" and Fiscal "Nanny-Zone"


• Ireland Deputy Prime Minister Requests "Nanny State" Common Bond Solution to Solve Crisis; ECB Policymaker Weidmann, Opposes Common Bond Solution


• Support Rises for "European Nanny State"; Is Germany unfit for the Euro or is the Euro Unfit for the PIIGS?

Support for Nanny State Now Entrenched

Among the Eurocratic fools controlling things, support for the Nanny State Eurocracy is now approaching "critical mass". The only thing stopping common bonds is such a change would require a major overhaul of Maastricht Treaty that created the European Union, and a fresh vote by every country. Common bonds would also require changes to the German constitution.

Would German voters go along?

Loan Extensions

The most believable of all the rumors circulating involve loan extensions. Please consider Spanish, Greek, Italian Bonds Rise, Bunds Slump on Loan Extension Report

Spanish, Greek and Italian 10-year bonds jumped while bunds slumped after a media report said a draft document of conclusions from the European Union summit today calls for an extension of bailout loans for Greece.

Loans from the European Financial Stability Facility may be lengthened to 15 years from 7 1/2 years and offered at a rate of 3.5 percent, according to the Reuters report. Yields on benchmark German bunds climbed to the highest in almost two weeks after German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed on a joint position to solve Greece’s debt crisis. Luxembourg Prime Minister Jean-Claude Juncker said a so-called “selective default” is a possibility for Greece.

German Deputy Foreign Minister Werner Hoyer said Germany may back common euro bonds in the future as legal rules bar such a move for now.

Loan extensions will not solve a thing but they will help did a bigger hole.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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