As Merkel, via Schaeuble, continues unwaveringly in Germany's pursuit of their consistent call for controls if the rest of Europe gets their money, chatter on desks is that maybe its not Zee Germans that are the problem at the Summit but Les French with Hollande's insistence that "there can be no transfer of sovereignty if there is no improvement in solidarity." Strategic Alpha's Maurice Pomery is "not convinced that Germany should be deemed the stubborn aggressor in all of this" and as we have been vociferously stating "Merkel is NOT going to be bullied into any wealth transfer; forget it" and "Hollande cannot make sweeping socialist changes and expect Germany to pay for it." Critically, given the levels of financial repression, and Newedge's comment that "the counter-intuitive moves Hollande has made by cutting some pension ages and rising the minimum wage have scared the market" and taken together with his comments about growth, the markets perceive Hollande as lacking a strong commitment to austerity. Until he demonstrates otherwise, France is vulnerable to a repatriation spiral (going the same way as Spain then Italy - where the markets have increasingly repatriated themselves into domestic enclaves) and the inevitable endgame where domestic demand for bonds becomes unsustainable.
France CDS remain in the middle of their post Grand-Plan range but at 200bps - having benefited modestly from recent safe-haven flows - it seems there is room for weakness the other side of a Summit doomed to fail and an increasingly anti-austerity leader...
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Via NewEdge:
Meanwhile, back to the Eurozone markets: The Euro summit still looks unlikely to produce anything of substance, but lets wait and see. Monti increasingly out on a limb. Today's Italy auction might be fun.
An increasing number of clients have been raising questions about France. Could its bond markets go the same way as Spain then Italy - where the markets have increasingly repatriated themselves into domestic enclaves. The conclusion seems to be yes.
Although the counter-intuitive moves Hollande has made by cutting some pension ages and rising the minimum wage have scared the market - these were election promises, and you've got to give credit to a man for honoring promises. On the other hand, taken together with all his comments about growth, the markets perceive Hollande as lacking a strong commitment to austerity. Until he demonstrates otherwise, France is vulnerable to a repatriation spiral.
The repatriation spiral has clearly occurred in Italy and Spain. Firstly we saw concerned foreign investors walk away from auctions and start to lower country weightings, then domestic banks using ECB liquidity to pick up bank seller positions for ALM, and domestic investors buying international bonds they perceived to be cheap. (Simple demand and supply laws mean markets can't stay at same levels if a large slice of demand walks away.)
That's followed by declining liquidity for international investors and hence greater selling pressure in a market that becomes increasingly reactive and volatile. That further increases repatriation flows. ECB liquidity was then increasingly used by banks to mop up paper. That then became a self-sustaining loop - for instance Spain banks buying any Spain bonds as ECB collateral!
The final stage is where it starts to break.. and the domestic demand for bonds can no longer be sustained (the stage we appear to have reached in Italy and Spain) and the death spiral becomes too apparent! Although a recent MSI report says the Spanish and Italian banks still have LTRO cash to invest, they show a marked reluctance to double up their domestic bets.
Can the same thing happen to France..? That rather depends on what Hollande says next. We've seen large flows out of Asia. Spain 10-yr back though 7% this morning!
Via Strategic Alpha's Maurice Pomery:
Is it really Germany that is the problem at this summit or France? I expect more fiddling whilst Rome burns.
I am not convinced that Germany should be deemed the stubborn aggressor in all of this as they have the morals and responsibility on their side and there is no way Germany should pay for all the problems in Europe without massive changes to laws and some union in common standards. Plus if we look at the numbers, they can’t afford it. In fact it is France now that I see as the problem as Hollande is making things worse by raising minimum wages, reducing retirement age and taxing the hell out of everyone. He is forcing the split in Europe to become a massive fault line. Surely nothing can be done unless we have a common level playing field in Europe. Do the politicians not get that? It is crying out for centralisation and whilst I am not keen on such a thing, a Union simply cannot exist without it. On this basis I see little more than some short term plaster again being put on this problem at the summit.
Banking unions and any other union will take a very long time indeed and I am not sure what can be done in the meantime unless they agree to change the mandate of the ECB or the structure of the ESM. Possibly a vehicle thy may be able to restructure quickly is the EIB but this is not clear but you cannot have a banking union without a viable fiscal AND political union. As the leaders enter this summit it is clear that there are massive rifts and both sides have laid their stores out quite publically which means a loss of face for someone or no agreement. On the macro issues I see no agreement at all but they look likely to discuss the role of the ECB and the ESM. But the ECB has already said that they cannot fix the crisis and must be left independent. Merkel is NOT going to be bullied into any wealth transfer; forget it. To me we are close to the point of no return as this game of chicken is coming to a conclusion and Merkel does not look like she is going to blink first.
Hollande cannot make sweeping socialist changes and expect Germany to pay for it, especially without structural reform and we hear nothing on this from this populist politician. He is yet to be tested but his true colours are very red indeed. . This is madness. The political rifts in Europe have never been wider since the EUR was born at a time when they need to be as close as ever. The problem is as this fight continues capital flight may force the issue into a fully blown bank run. The idea that it’s merely a question of Germany paying is not only naïve, but also impossible. To me the only real way forward is to fully restructure the whole thing as the cost of keeping this dying patient alive is huge and could remain in this coma for years. The costs will be too great to bear soon.
Hollande has again and again stated: “There can be no transfer of sovereignty if there is no improvement in solidarity”. Well that sounds good but he keeps making the situation worse and as for solidarity; pah. He is deliberately moving in the opposite direction to the wealthy core. Hollande does NOT want to cede sovereignty to Europe, never has and in fact he is becoming more insular the European. So who will win this battle between Hollande and Merkel? Merkel without doubt in my view as the weaker components of Europe cannot have money with =out strict rules. We have already tried that and look where it got us. No, Merkel is not the problem of Europe, it is Hollande. The trouble is at this summit nether will cede to the other and so nothing concrete can come until the 11th hour when Europe stares into the abyss. However that point is a lot closer than these idiots realise.
Back off Hollande and allow the structural process to take place and align yourself with the stronger nations or this whole thing is going to fail. Extend and pretend is no longer an option and if this is all we get from this summit as I think is the case, then the bond markets will trash Spain and Italy. Watch these yields closely as there is a very real danger that 10yr yields at 7% are the new floor rather than the ceiling. The ECB will likely cut rates but in all honesty it is a gesture at best and will make little difference. More LTRO? Maybe but QE is not what it was. Extend and pretend needs to end but we have more pain to come before the likes of Hollande give up their arrogance. The future of peace, stability and confidence in Europe is at stake and they are playing petty politics. I despair. Again I see France as the problem here not Germany but I guess that doesn’t really matter. They need to sort this out as no one can afford to bail Spain AND Italy.
Maybe Europe needs to be restructured with fewer in it and maybe Germany may test the experiment on Greece. Expect Greece to come back into view soon as to me it must. Germany must stick to its guns as if they cave in we may see a year or so of relief but then the whole thing implodes as the costs kill the very core of Europe. It is NOT an option for Germany and must NOT become one in my view. If they cave in they will see Bund yields explode at a time when global demand will see their economy struggle as the export engine stalls. This is a nightmare and I am pleased the lady is not for turning. It is France and Hollande that scare me the most.