Eurozone crisis: Merkel refuses to yield over ECB as general strike hits Portugal - 24 November 2011

 http://www.guardian.co.uk/business/blog/2011/nov/24/eurozone-crisis-sarkozy-merkel-monti?INTCMP=ILCNETTXT3487

Time to stop the blog for the day.

This summary from earlier is the best way to catch up with the events in Strasbourg. Main events since were the general strike in Portugal (with pictures), and the news that the FSA is preparing for the collapse of the eurozone (although it doesn't think this is likely).
My colleagues will be back tomorrow with more action -- which will include an Italian debt action. What can possibly go wrong?....
Thanks for reading and the great comments. Good night!

7.41pm: Some late news, the International Monetary Fund has welcomed the letter sent by Greek conservative leader Antonis Samaras. More importantly, the IMF are treating Samaras's written assurance of support for the country's draconian bailout policies as satisfactory (via my colleague Helena Smith)

In a statement, the IMF said:

We welcome that (main opposition party) New Democracy has expressed its support for the key objectives and policies of the program that is being supported by Euro 110 billion in financial assistance from Greece's European partners and the Fund.

As we explained this morning, without written promises from Samaras Greece risks not getting further aid.
The IMF also noted that the centre-right party has pledged that any changes it would propose would be in line with the philosophy of the loan agreement's basic framework. Samaras has been a stalwart opponent of the fiscal remedies meted out to Greece by very bodies now propping up its near insolvent economy.
As Helena says:

The big question, now, is whether Euro zone leaders will have the same view as the IMF and judge Samaras' two-page letter legally binding enough to assuage fears of the party rolling back on its committment to Greece's fiscal adjustment program. Worries abound that come March, next year, when elections have been held and a new government is in power, Athens may change course again. EU leaders are expected to make their decision on November 29th.

Earlier on Thursday Samaras declared: "Negotiations are like a game of chess. You make moves and then wait for the other side to move. That is when you have to stick to your position and that is exactly what I did."

6.26pm: The general strike has been taking place in Portugal today appears to have been well-supported.

Transport links have been badly hit, while there are reports that few staff were working at government offices. According to Associated Press, some medical appointments, school classes and court hearings were cancelled, while mail deliveries and trash collection were said to be severely disrupted.

There's a familiar quality to the images - following the long-running anti-austerity demonstrations seen in Greece over the last couple of years.
As Jones tweeted: "These scenes in Lisbon could be pretty much anywhere in Europe over the last year. Same chants, same frustration, same resentment of police"

5.42pm: Looking at the bond markets, Belgium has suffered most from the lack of progress in Strasbourg today. The yield on its 10-year bonds has risen to 5.75% this evening, and was even higher at one stage.

At the start of this month, Spain's 10-year yields were lower.....
As Gary Jenkins of Evolution Securities joked (I think):

Belgium better be careful or it may end up with a government…

Update: in the reader comments, Squiggle reminds me that the Belgian yields have been rising steadily since talks over a new Belgian government collapsed over the weekend. They were just 4.8% on Monday.

5.02pm: Today's Strasbourg talks are well covered in the media. Here's a rapid round-up:

The Financial Times reports that: Merkel and Sarkozy back treaty changes

In some of her most forceful comments to date, Ms Merkel, a strong advocate of moves to enforce greater budgetary discipline among the eurozone's members, said: "We must take steps towards a fiscal union."...
...But Mr Sarkozy was forced to soften the French line.

The BBC points out that, beyond the talk about Treaty changes, Mario Monti had laid out his economic programme to his French and German counterparts, including undertaking to balance Italy's budget in 2013.

At 118% of annual economic output, Italy has a high level of overall debt, but the country has managed to service similarly high debt levels for the past 20 years.
The main problem with the Italian economy is weak growth - the country has averaged 0.75% growth a year over the past 15 years.

Reuters looks to the positives....

France and Germany agreed on Thursday to stop arguing in public over whether the European Central Bank should do more to rescue the euro zone from a deepening sovereign debt crisis.

But the Wall Street Journal warned that the signs of unity only went so far...

The leaders acknowledged their push to forge common economic policy across the euro-zone faces major hurdles, even as the currency bloc is on the brink of collapse. On Thursday, the three leaders sought to play down divisions over how ambitious the ECB's mission in fighting the crisis should be. two are no closer to finding common ground....

Their comments after their meeting in this Eastern French city suggest [Merkel and Sarkozy] are no closer to finding common ground.

4.37pm: The FTSE 100 just posted its ninth daily fall in a row. After a lacklustre session, it ended 12 points lower at 5127. That means that its shed 417 points since the start of last week -or £107bn.

David Jones, chief market strategist at IG Index, commented:

It was business as usual this afternoon with the index once more slipping to fresh lows for this downward move...what little news flow there has been offered little in the way of cheer for investors.

4.16pm: Capital Economics has warned this afternoon that Germany is "caught between a rock and a hard place". Analyst John Higgins explained that:

If she rides to the rescue of her neighbours, she will undermine her own credit standing. If she chooses not to, the euro-zone will probably collapse.

Higgins reckons that Bunds will suffer whatever Berlin chooses to do. Either:

Quantitative easing and common euro-zone bond issuance may be the only ways to draw a line under the crisis given the limitations of the existing arrangements. Yet in the unlikely event that Germany gave ground on these issues, Bund yields would probably soar as investors fretted about the inflationary consequences and the pooling of credit risk.

Or:

Intransigence could be just as bad. Granted, investors might take comfort from the fact that Germany was not willing to throw good money after bad. But this attitude would simply reinforce the impression that she was unwilling to prevent a disorderly break-up of EMU. In this scenario investors probably would want to give the euro-zone, including Germany, a very wide berth. The upshot is that capital inflows could become outflows as investors sought sanctuary elsewhere.

3.46pm: Back in the UK, one of the top officials at the Financial Services Authority has admitted that the regulator is asking British banks to prepare for a possible break-up of the eurozone.

Andrew Bailey, the former chief cashier at the Bank of England and now a senior official at the Financial Services Authority, picked his words carefully - stressing that he was not predicting this would happen but was merely requiring contingency plans to be created - but nonetheless, his remarks are interesting.

Fear sweeps markets as Germany rules out ECB intervention

Global investors headed for the eurozone exit on Thursday after leaders of the area's three biggest economies squashed residual market hopes for a huge intervention by the European Central Bank (ECB) to solve the sovereign debt crisis.

Fears of an imminent banking crisis are expected to intensify on Friday as inter-bank lending freezes over again, billions of euros are withdrawn from "Club Med" banks and the ECB is forced to lend more to struggling institutions. The central bank could reportedly extend the term of its loans to two or even three years.

UK borrowing costs fell below those of Germany briefly on Thursday as the yields on eurozone sovereign debt rose, the euro fell against the dollar and European equities suffered a ninth successive day of losses. Friday is expected to be no different.

Angela Merkel again ruled out any expanded role for the ECB and stamped down proposals for single, eurozone-wide "eurobonds" to share the risk of sovereign debt. The ECB, she said, was only responsible for monetary policy.

At a news conference in Strasbourg, the French president, Nicolas Sarkozy, and the new Italian prime minister, Mario Monti, fell meekly into line, with Sarkozy dropping French demands for urgent and expansive intervention by the ECB.

He and Merkel instead pointed to forthcoming plans for (unspecified) European Union treaty changes to advance a (distant) fiscal union in the eurozone. The Franco-German allies, who represent the traditional engine of EU integration, plan to set out their proposals before an EU summit on 9 December.

Their plans, which could be endorsed at an unscheduled eurozone summit the day before, heap renewed pressure on David Cameron as he struggles to keep the UK as far away from eurozone contagion as possible while still demanding a say in shaping the area's future.

On Thursday, Merkel once again dominated the stage as she agreed only that early agreement to boost the EU's bailout fund, the European financial stability facility, could help resolve the immediate crisis. Plans to boost the fund to €1tn (£860bn) will be discussed by Eurogroup finance ministers on Tuesday, but there is no evidence that global investors are at all interested.

The euro began to drop as soon as Sarkozy fell into line with Merkel – only hours after his foreign minister, Alain Juppé, had called for urgent intervention by the ECB to "play an essential role in restoring confidence".
"We're seeking a compromise. We do not agree on everything at first, but we'll end by agreeing," Juppé told French radio before the meeting began. In the event, Sarkozy insisted that the ECB's independence was untouchable – adding that political leaders would make "neither positive nor negative" demands on the central bank. Monti took a similar stance.

Merkel was so pleased about Sarkozy's about-turn she repeated three times that "the French president said he had confidence in the ECB and its independence".

She reiterated the view she expressed to the Bundestag a day earlier that eurobonds or the collectivisation of sovereign risk were neither "necessary nor appropriate" and could function only at a later stage of fiscal union.
"We don't want eurobonds because we don't want interest rates to rise dramatically in Germany," her economy minister and leader of the liberal FDP party, Philipp Rösler, had said earlier.

The trio, Merkel added, would "do everything to defend the euro" and insisted "we want a strong, stable euro", but the German chancellor repeated her mantra that this required strict actions by governments to abide by the rules of the stability and growth pact setting limits on budget deficits and national debt. These, she said, would include automatic sanctions against countries running excessive deficits.

David Scammell, a fund manager at Schroders, said the markets would be "disappointed" by the developments in Strasbourg. Scammell told the BBC that treaty changes would simply take too long, and that an immediate solution with real firepower would soon be needed to stem the crisis. "That means the ECB," he said.

Joshua Raymond, chief market strategist at City Index, agreed that the leaders had done little to boost confidence in the City: "Merkel's determination to prevent any implementation of a eurobond before proper fiscal integration of the euro area is seen – which could take years to achieve – sent markets in an afternoon tailspin."

There were already signs on Thursday that the crisis is entering a new phase, only a day after Germany failed to move all of a planned €6bn auction of 10-year bonds. Belgian bonds soared to 5.7%, Portugal's credit rating was notched down to junk status by Fitch, and an ECB governing council member said the downturn would be "significantly longer than we expected".

Gloom darkened over the area despite a 0.5% rise in German economic output in the third quarter, driven by consumer spending, and an unexpected rise in the November IFO-index of business confidence in the federal republic.

The only concrete decision to emerge from the mini-summit was that the three are to meet again soon in Rome to discuss further Monti's pledge for structural reforms to promote growth.

'Industry bond' proposed by thinktank

The government should create an investment vehicle to buy up business loans from banks, says a leading thinktank.

The loans in turn could be packaged up as bonds and sold to the Bank of England as it attempts to kickstart lending to the small business sector through credit easing, the National Endowment for Science, Technology and the Arts (Nesta) said.

With the Treasury continuing to work on how its proposed credit easing plan will operate, Nesta reckons that "British industry and enterprise bonds" could be created by packaging up the business loans granted by banks and given top-notch ratings that would enable them to be bought through the Bank's £75bn quantitative easing programme.

"Providing access to new pools of capital is the long-term solution we need to unlock credit to Britain's small businesses," said Stian Westlake, Nesta's executive director of policy and research.

The chancellor raised the idea of credit easing in his party conference speech last month and is continuing to work on a range of ideas on how to put it into action - which could include measures to ease tensions in the inter-bank lending market - ahead of next week's autumn statement. Providing any guarantee from the government could have an impact on the government's deficit reduction plans, although the Treasury would argue that any effect would be temporary.

HOW REAL IS CHINA'S GROWTH

Jun 1st 2011, 14:39 by R.A.

WASHINGTON

I'M NOW back from China, and I'm going to resist the temptation to draw grand, sweeping conclusions based on two weeks jaunting around the country. I will tell you some of my impressions, however. And I'll start with the primary question on my mind as I left to visit China: how real is its economic growth?

I came away from China a bit less worried about property issues than I'd been going in. Don't get me wrong, China is building an enormous amount of new housing, and quite a lot of that new housing is standing empty, even as prices rise. But this isn't necessarily the problem many people suspect, for a few reasons. For one thing, the flow of new demand for housing seems sure. Millions of Chinese remain underhoused while real incomes are soaring. In some cases, the Chinese government is coordinating the construction of several years' worth of demand for new homes all at once, justifiably confident that new units will ultimately be occupied. In other cases, Chinese workers are buying up new units as investment vehicles—but are using savings, rather than debt, to fund the purchases. It's not impossible, or even that unlikely, that prices in the main cities may fall, but it would be wrong to assume that China's property markets operate in the way American markets do and share the same vulnerabilities.

Tightening restrictions on household purchases, and tightening credit, designed to rein in booming private construction, may produce a squeeze in some segments of the real estate market, leading to pain for some on the development and transactional side of the market. But a slowdown in private construction is unlikely to gut the broader economy, thanks to a massive government push for affordable housing construction that will keep workers and suppliers busy. And the government has the will and the ability to make sure any broader loan troubles are contained. I won't begin to argue that there aren't huge inefficiencies and costs to this system, but it doesn't look like the kind of structure that's likely to collapse, bringing the economy down with it. It's clear where the risk ultimately lies—with the government—and it's clear that the government can handle it.

What little I saw of China's manufacturing sector reinforced my sense that it's an impressive and productive part of the economy. China's manufacturing also spans the value-added chain. In the large coastal cities, deindustrialisation is already a reality; labour-intensive factories have already left for cheaper markets, leaving high-tech manufacturing and a growing service sector behind. In the poorer west, by contrast, the scope for movement up the value chain remains significant. Much of what rapid growth China has left will be powered, in no small, part, by the convergence of western provinces toward coastal development levels, and this process is well underway.

What's China's manufacturing isn't is labour-intensive, even at the fairly low-tech enterprises. As large and strong as China's manufacturing firms are, they're not able to absorb all that much of China's enormous labour force. China seems to compensate for this by absorbing huge numbers of workers in a growing service sector. Productivity levels in many service industries must be ming-bogglingly low. Hotels seemed to have as many employees as guests, teams of workers with hand tools maintained roadside greenery, and buildings of all sorts are staffed with large groups of greeters and security personnel. Cheap labour may make some of this sort of employment worthwhile, but officials also indicated that, in the past at least, the government used public service employment to help absorb workers displaced when hundreds of thousands of textile and electronic manufacturing jobs were lost to cheaper locales. This may be costly and inefficient, but one wonders if it isn't less costly and inefficient than America's habit of letting displaced workers linger in long-term unemployment, on disability roles, or out of the labour force entirely.

Chinese officials were quick to play down the country's dependence on foreign demand, pointing to progress in the country's trade surplus. There may be less to this than they indicate; Michael Pettis writes here, for instance, about financial chicanery in the country's copper trade that may have artificially boosted import totals early in 2011. China is also cultivating export markets in fast growing countries across central and southeast Asia. But candid Chinese professionals admitted that trouble in the US and European economies represented a big potential threat to the economy. That threat will slowly ebb as Chinese consumers become more active. Government officials repeatedly reported eye-popping real income growth figures. But more than one of the people I spoke with likened the Chinese economy to a large ship that can't turn on a dime. No amount of movement in exchange rates or wages or policies will move the Chinese economy to a more normal rate of domestic consumption overnight.

What seemed clear, however, was that the fundamentals in the Chinese economy are stronger than many Americans suspect. For this reason, a collapse looks unlikely, and the government has the will and the means to fight off a short-term crisis. The government cites stability as its source of legitimacy, and it draws a tight connection between stability and economic growth. Stability, and therefore growth, will be especially important given the looming handover of party and national leadership from Hu Jintao to (it seems certain) Xi Jinping. The present policy strategy is muddied somewhat by the rise in inflation, which is a big source of concern among the masses. China will trade off a little growth for control of its prices. Officials will try extremely hard to ensure that the landing is a soft one, however. (For more on the progress here, read this week's economics Lead note. Markets seem to be overreacting to signs of a Chinese slowdown.)

The longer-term picture is far murkier, however. Nothing that I saw on my trip convinced me that the country's economy is becoming more nimble. There are large structural problems in the economy that will begin to bite as China exhausts its potential for rapid catch-up growth. And what then? The private economy is growing in importance (many of the larger companies in the economy remain state-owned or controlled, including a substantial number that "look" private). Chinese citizens are no strangers to entrepreneurship. But entrepreneurial activity isn't always consistent with party goals. Successful start-ups may threaten established firms with state connections, leading officials to either rein in the start-up or take for themselves a direct financial interest in it. Will China be able to embrace the hurly burly of the entrepreneurial marketplace? If it can't, the middle-income trap may loom.

There was one question to which I could never get a satisfactory answer on my trip. Chinese officials, I was repeatedly told, take a very long view. They're focused on the next few decades, not the next quarter. And they're very cautious, always anticipating things that might go wrong. Responding to this, I'd point out that China hadn't experienced a full year of economic contraction in three decades, and that this streak was unlikely to continue; eventually, every economy has a recession. What were China's far-sighted leaders planning to do when the economy slowed, and how would the slowdown affect the country's stability? The answer was always a bit of a non sequitur. China has a model that works for China, I was told. Confidence in China understandably soared in the wake of the global crisis and recession. But I wonder if the government has learned too much from its ability to negotiate the crisis without suffering a recession. Eventually, China's economy will hit a true bad spot. The more China's leaders believe that it won't, the less prepared they may be to handle it when it does occur.

Of course, westerners may overstate the impact of a slowdown on political stability. Many of us assume that when the first downturn hits, support for the party will collapse. That needn't be true; China's government seems to have built up a remarkable reserve of goodwill in recent decades. From the perspective of the average Chinese worker, it must seem blindingly obvious that the current Chinese system is the ideal, a sure route to prosperity. Still, stories like this and this and this give one pause. From my (admittedly limited) view of China, arguments that China's economy is little more than a Ponzi scheme, in which any slowdown will lead to implosion, are mistaken. I left with more questions than answers about the political system, however. I simply can't say how legitimate and stable the current government appears in the eyes of the Chinese citizenry. But I feel fairly confident that it won't be that long, perhaps 5 or 10 years, before we find out.

http://www.economist.com/blogs/freeexchange/2011/05/chinas_economy_1?fsrc=rss