While the euro bond song and dance is all too familiar, being a carbon copy replay of last year, we feel obliged to remind who the key actors are, but more importantly who the key decision makers are. In short: while last year, at least in the first half, it was everyone against Merkozy, demanding that the two AAA rated countries backstop Europe at their own expense, following the French downgrade, France no longer cared if there are Eurobonds and joined the peripheral push to convince Merkel to shoulder the cost of preserving the Eurozone on its own. Germany politely declined. Fast forward to this year, when we get the same, only Hollande is now more vocal than ever knowing full well that he alone will be unable to deliver the "growth", read incremental leverage, needed to back up his campaign promises. This is, or rather was, the whole point of today's and tomorrow's latest European summit which, just like this weekend's useless G-8 photosession for the world's leaders to express their support for either Chelsea or Arsenal, will achieve absolutely nothing. Importantly, we now can add at least one more country to the list of those opposed to a AAA-backstopped rescue of the rest of the Eurozone.
From Bloomberg [7]:
Austria’s Finance Minister Maria Fekter said she opposes joint euro-area bonds as they would cost the Alpine republic more interest.
“Like my colleague Schaeuble I am against euro bonds,” Fekter told reporters in Vienna today. “I’m not willing that Austria should potentially pay twice as high interest as we currently do. As long as fiscal discipline of the euro nations isn’t completely complied with, as long as stability isn’t really really reached, as long as there is no direct influence on how the states run their finances and which fiscal measures they set, I won’t sacrifice the Austrian credit rating.”
European Union leaders meet tomorrow in Brussels where German Chancellor Angela Merkel faces growing pressure to ease up on austerity measures after three years of the debt crisis crimps expansion. Newly elected French President Francois Hollande has said he plans to discuss common euro-area bonds at the meeting, while Merkel has rejected issuing such bonds, saying that eliminating the gaps in bond yields would remove the incentive for weaker countries to overhaul their economies.
In summary: the AAA-rated countries refuse to bail out the non AAA-rated countries, as it is them that will increasingly suffer the burden of preserving the Eurozone. We should add for now, because just like France, as more and more countries (and Holland appears to be next) leave the European AAA-club, the incentive to demand a bailout as opposed to grant it, becomes greater and greater. As a result, the only question is how long until Germany is all alone against 16 European countries, all demanding some tat for the German tit of having reaped the benefits of over a decade of quasi-mercantilist policies, even if, granted, nobody had a gun to the head of the PIIGS to import German "stuff."
At the end of the day, the simple math was captured perfectly by Citi over the weekend: nothing will change until, like last year, the market is on the edge of imploding, and everyone has to join the fray with some last-second hairbrained idea that delays the inevitable by a month or two.
Until said crash happens, nothing else will.