Notes From Underground

The biggest story making the rounds is the op-ed in Wednesday’s Financial Times by two European heavyweights: Finance Ministers Giulio Tremonti of Italy and Jean-Claude Juncker of Luxembourg. In the FT piece, they argue for the ECB and Ecofin to get behind a push for a EUROBOND that is backed by the entire Eurozone and guaranteed by its coffers. While a good idea in theory, the Germans immediately said NEIN to the idea as they realized that they would be the one holding the bag for the entire project.

If the Germans had to bail out the finacially stressed it would make the European Union a transfer union with the good Bavarian Burghers being heavily taxed to absorb the debts of European “brethren.” If there is to be a EUROBOND, a fiscal union is mandatory and thus UNION-WIDE tax policy. Many of the critics of the Tremonti/Juncker proposal have raised the issue that present EU law prohibits a fiscal union, no one more vociferous than German Finance Minister Wolfgang Schauble.

Today, France joined Germany in its opposition to adding any funds to the present rescue fund and also of EUROBONDS. The BUNDS rallied today in relief that the Germans will not have a competitive instrument to deal with, one, of course, that is ultimately guaranteed by the Germans–nothing like competing against yourself. A question that will have to be answered: Why were the French so quick to agree with the Germans, instead of Sarkozy trying to upstage Merkel–as usual–and play the adversary to an instransigent Germany. In an interview in tomorrow’s FT, Italian Central Bank Governor Mario Draghi comes out against increased ECB bond purchases and/or quantitative ease. The Germans and its allies of fiscal responsibility appear to have stopped the effort to create a possible JUNCKer BOND.

In other relevant news, Brazilian Finance Minister Guido Mantega raised the issue of Brazil using other tools to halt the rise in the Brazilian real. After yesterday’s decision by the Brazilian Central Bank to hold rates, Mantega voiced his concern about further appreciation of the REAL. He said, “With the situation in Europe under stress we expect to see a continuation of the currency war in the coming months.”

Mantega’s statement is why I think next year we’ll see wide divergence in the financial performance of the emerging markets. (So much for the harmonious communiques issued by the G-20.) Also, the Australian DOLLAR was well bid as Aussie employment was very strong. The market anticipated a 20,000 job gain but the data showed 55,000 full-time jobs created. The RBA held rates this week waiting to see how the global growth unfolds. It’s now China’s move as the People’s Bank Of China is expected to raise rates this weekend. The markets await.

Tags: Angela Merkel, Brazil, Bunds, Dollar, ECB, Eurobond, France, Germany, Giulio Tremonti, Guido Mantega, Italy, Jean-Claude Juncker, Juncker bond, Luxembourg, Mario Draghi, RBA, Real, Sarkozy

This entry was posted on December 9, 2010 at 9:42 pm and is filed under Australia, Currency, Debt Market, ECB, Europe, France, Germany. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.