Merkel’s Coalition Steps Up Calls for EU ‘Orderly Insolvencies’

Discussion in 'Wall St. News' started by m22au, May 4, 2010.

  1. m22au


    May 4 (Bloomberg) -- German Chancellor Angela Merkel’s coalition stepped up calls for allowing the “orderly” default of euro-region member states to avoid any repeat of the Greek fiscal crisis.

    The parliamentary leaders of the three coalition parties agreed in Berlin today to put a resolution to parliament alongside the bill on Greek aid calling for the European Union to revise rules for the euro to put pressure on countries that run deficits.

    Merkel said in an interview with ARD television late yesterday that it’s time to learn lessons from the Greek bailout and raised the option of “an orderly insolvency” as a way to make sure creditors participate in any future rescue.

    “We want to move from crisis management to crisis prevention,” Birgit Homburger, the parliamentary head of Merkel’s Free Democratic coalition partner, told reporters in Berlin after the coalition leaders meeting. “We have to do everything we can to ensure we never get into such a situation again.”

    Volker Kauder, the floor leader of Merkel’s Christian Democrats, said that the European Commission, the EU’s executive body, must be able to better examine the finances of member states to avert any rerun of what happened in Greece.

    “We quite urgently need something for the members of European Monetary Union that we also didn’t have during the banking crisis two years ago,” Finance Minister Wolfgang Schaeuble told reporters yesterday. “Namely the possibility of a restructuring procedure in the event of looming insolvency that helps prevent systemic contagion risks.”

    To contact the reporter on this story: Tony Czuczka in Berlin at
    shows CDS spreads widening for the other 4 PIIGS
  2. m22au


    also a good article from Zero Hedge

    Containment Fails: European CDS Explode As Market Looks To Future Bail Outs, Bank Runs

    Now that Greece is thoroughly irrelevant, the market just told the ECB, the IMF, and the EMU to prepare another $1 trillion in bailout packages. The reason: the Greek bailout just made it abundantly clear the bond vigilantes have free reign to call the bureaucrats' bluff whenever they see fit. The result: CDS of all non Greek PIIGS are now blowing out, and represent the top 4 names of all biggest CDS wideners for the day, each pushing a 10%+ change from yesterday. This movement wider will not stop until the IMF resolves to backstop all the PIIS ex. G. At this point nothing that happens in Greece is important, although the thing that will most likely happen is that the Greek government will fall imminently, killing the austerity package and destroying whatever credibility the EMU and the EU have left, but not before the IMF and the EU soak up another 110 billion euro in their slush funds. However, even with the bailout the Greek stock market is tumbling: the Athens Stock Exchange is now down 3.4% to just under 1,800. As we expected, the euro is about to breach 1.31 support. At that point, not even the US algos and the Liberty 33 traders will be able to prevent the contagion. And adding insult to injury is the latest rumor of an upcoming downgrade or very cautious language of Germany by the suddenly hyperactive rating agencies. When that occurs, you can kiss Europe goodbye.

    Biggest CDS intraday movers (from CMA):

    (same table as the PragCap article)

  3. Euro convergence criteria

    1. Inflation rates: No more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU.

    2. Government finance:

    Annual government deficit:
    The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases.

    Government debt:
    The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.

    3. Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for two consecutive years and should not have devalued its currency during the period.

    4. Long-term interest rates: The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.

    The purpose of setting the criteria is to maintain the price stability within the Eurozone even with the inclusion of new member states.

    European Exchange Rate Mechanism

    The European Exchange Rate Mechanism, ERM, was a system introduced by the European Community in March 1979, as part of the European Monetary System (EMS), to reduce exchange rate variability and achieve monetary stability in Europe, in preparation for Economic and Monetary Union and the introduction of a single currency, the euro, which took place on 1 January 1999. After the adoption of euro, the policy changed to linking currencies of countries outside the Eurozone to the euro (having the common currency as a central point). The goal was to improve stability of those currencies, as well as to gain an evaluation mechanism for potential Eurozone members. This mechanism is known as ERM2.

    Intent and operation of the ERM

    The ERM is based on the concept of fixed currency exchange rate margins, but with exchange rates variable within those margins. This is also known as a semi-pegged system. Before the introduction of the euro, exchange rates were based on the ECU, the European unit of account, whose value was determined as a weighted average of the participating currencies.

    A grid (known as the Parity Grid) of bilateral rates was calculated on the basis of these central rates expressed in ECUs, and currency fluctuations had to be contained within a margin of 2.25% on either side of the bilateral rates (with the exception of the Italian lira, which was allowed a margin of 6%). Determined intervention and loan arrangements protected the participating currencies from greater exchange rates fluctuations.
    [edit] Irish pound breaks parity with pound sterling

    Ireland's participation in ERM resulted in the Irish pound breaking parity with the pound sterling in 1979 as very shortly after the launch of the ERM the pound sterling, not at the time an ERM currency, appreciated against all ERM currencies and continued parity would have taken the Irish pound outside its agreed band[clarification needed].
    [edit] Pound sterling's forced withdrawal from the ERM

    The United Kingdom entered the ERM in 1990, but was forced to exit the programme in 1992 after the pound sterling came under major pressure from currency speculators, including George Soros. The ensuing crash of 16 September 1992 was subsequently dubbed "Black Wednesday". There has been some revision of attitude towards this event given the UK's strong economic performance since 1992, with some commentators dubbing it "White Wednesday"[1]. Some commentators, following Norman Tebbit took to referring to ERM as an "Eternal Recession Mechanism"[2], after the UK fell into recession during the early 1990s. The UK spent over £6bn trying to keep the currency within the narrow limits with reports at the time widely noting that Soros individual profit of £1bn equated to over 12 Pound Sterling for each man, woman and child in Britain[1][2][3] and dubbing Soros as "the man who broke the Bank of England".[4]
    [edit] Increase of margins

    In 1993, the margin had to be expanded to 15% to accommodate speculation against the French franc and other currencies.
    [edit] Replacement with the euro and ERM II

    On 31 December 1998, the European Currency Unit (ECU)[3] exchange rates of the Eurozone countries were frozen and the value of the euro, which then superseded the ECU at par, was thus established.

    In 1999, ERM II replaced the original ERM. The Greek and Danish currencies were part of the new mechanism, but when Greece joined the euro in 2001, the Danish krone was left at that time as the only participant member. A currency in ERM II is allowed to float within a range of ±15% with respect to a central rate against the euro. In the case of the krone, Danmarks Nationalbank keeps the exchange rate within the narrower range of ± 2.25% against the central rate of EUR 1 = DKK 7.460 38.

    EU countries that have not adopted the euro are expected to participate for at least two years in the ERM II before joining the Eurozone.