If politicians have been bad news for the euro then the lawyers are going to be even worse.
At every juncture there appear to be legal blockages to Germany’s participation in the bailouts for the peripheral debtors of the euro zone.
And now, German President Christian Wulff is questioning the legality of the European Central Bank’s bond-buying efforts that have been helping to prevent Italy and Spain from going broke.
Without the ECB’s purchases and without German participation, these and other euro-zone peripherals would have long gone bust and the single currency itself would have fallen apart.
But, that doesn’t mean it still can’t happen.
To look at the euro’s rock steady performance over the last few weeks, these fears are hardly evident. But, if you look closer at how investors are quietly choosing their options in these quiet summer months, the picture is somewhat different.
Risk reversals, which essentially reflect the direction of a currency’s expected move, have risen to record levels skewed on the basis that the euro is going to fall against the dollar.
This shouldn’t be such a surprise to those who have been tracking political and legal developments in Germany, where Chancellor Angela Merkel’s political career is on the line.
Take the European Financial Stability Facility. This is the key fund through which richer nations, like Germany, can provide their funds to the poorer nations, like Greece, through bailouts.
For a start, the EFSF is seen as far too small to be able to bail out a major debtor such as Spain or Italy, much less both.
But even so, it’s still not clear that Germany can participate, even without an increase. A constitutional court in Karlesruhe won’t rule on this until September 7th.
Of course a negative ruling would lead to paralysis. But, there is also a chance that while the court will allow participation in the EFSF, it will increase parliamentary control over payments and even limit the time over which they can be made just when a more long-term solution to the debt crisis is needed.
In other words, Ms. Merkel will have less power to broadcast German largesse and running to the aid of failing peripheral nations will be even more difficult.
But, that isn’t all. The Finns have put their foot in by demanding collateral from Greece. Not only does this make the whole concept of a financial bailout for the country somewhat contradictory, but it has brought similar demands from Austria, the Netherlands as well as Slovakia and Slovenia.
Germany admits Greece can’t provide collateral for one without the others, but its failure to get Finland to drop the issue means the changes to the EFSF can’t be finalized.
Hopes that the debt crisis might be eased by the creation of a euro-zone bond market, in which all 17 members would participate, have been largely killed-off by Germany, where the politicians would face the ire of German borrowers, who probably would have to pay a lot more for funds if they were lumped with their Greek neighbors.
But, the latest twist of the legal knife came from the German president himself. Not only did he suggest that German democracy is in peril because of the bailouts, he described the ECB’s program of buying the bonds of peripheral debts as “legally questionable.”
Given that the ECB’s purchases were launched in a desperate bid to cap the rise in bond yields for Italy and Spain that was taking place as politicians failed to quell investor fears about the crisis, Mr. Wulff’s criticism looks questionable itself.
Nonetheless, it demonstrates that both political and legal objections to the way the debt crisis is being handled is on the rise and that the future of the euro is still very much in doubt.
By Nicholas Hastings
Source: http://blogs.wsj.com
At every juncture there appear to be legal blockages to Germany’s participation in the bailouts for the peripheral debtors of the euro zone.
And now, German President Christian Wulff is questioning the legality of the European Central Bank’s bond-buying efforts that have been helping to prevent Italy and Spain from going broke.
Without the ECB’s purchases and without German participation, these and other euro-zone peripherals would have long gone bust and the single currency itself would have fallen apart.
But, that doesn’t mean it still can’t happen.
To look at the euro’s rock steady performance over the last few weeks, these fears are hardly evident. But, if you look closer at how investors are quietly choosing their options in these quiet summer months, the picture is somewhat different.
Risk reversals, which essentially reflect the direction of a currency’s expected move, have risen to record levels skewed on the basis that the euro is going to fall against the dollar.
This shouldn’t be such a surprise to those who have been tracking political and legal developments in Germany, where Chancellor Angela Merkel’s political career is on the line.
Take the European Financial Stability Facility. This is the key fund through which richer nations, like Germany, can provide their funds to the poorer nations, like Greece, through bailouts.
For a start, the EFSF is seen as far too small to be able to bail out a major debtor such as Spain or Italy, much less both.
But even so, it’s still not clear that Germany can participate, even without an increase. A constitutional court in Karlesruhe won’t rule on this until September 7th.
Of course a negative ruling would lead to paralysis. But, there is also a chance that while the court will allow participation in the EFSF, it will increase parliamentary control over payments and even limit the time over which they can be made just when a more long-term solution to the debt crisis is needed.
In other words, Ms. Merkel will have less power to broadcast German largesse and running to the aid of failing peripheral nations will be even more difficult.
But, that isn’t all. The Finns have put their foot in by demanding collateral from Greece. Not only does this make the whole concept of a financial bailout for the country somewhat contradictory, but it has brought similar demands from Austria, the Netherlands as well as Slovakia and Slovenia.
Germany admits Greece can’t provide collateral for one without the others, but its failure to get Finland to drop the issue means the changes to the EFSF can’t be finalized.
Hopes that the debt crisis might be eased by the creation of a euro-zone bond market, in which all 17 members would participate, have been largely killed-off by Germany, where the politicians would face the ire of German borrowers, who probably would have to pay a lot more for funds if they were lumped with their Greek neighbors.
But, the latest twist of the legal knife came from the German president himself. Not only did he suggest that German democracy is in peril because of the bailouts, he described the ECB’s program of buying the bonds of peripheral debts as “legally questionable.”
Given that the ECB’s purchases were launched in a desperate bid to cap the rise in bond yields for Italy and Spain that was taking place as politicians failed to quell investor fears about the crisis, Mr. Wulff’s criticism looks questionable itself.
Nonetheless, it demonstrates that both political and legal objections to the way the debt crisis is being handled is on the rise and that the future of the euro is still very much in doubt.
By Nicholas Hastings
Source: http://blogs.wsj.com
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