1--ECB hints at action if euro zone adopts fiscal pact, Reuters
Excerpt: The new head of the European Central Bank signaled Thursday it was ready to take stronger action to fight Europe's debt crisis if political leaders agree next week on much tighter budget controls in the 17-nation euro zone.
Speaking a day after the world's major central banks took joint action to provide cheaper dollar funding for starved European banks, Mario Draghi painted a dark picture of the state of the banking system.
"What I believe our economic and monetary union needs is a new fiscal compact -- a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made," he told the European Parliament.
"We might be asked whether a new fiscal compact would be enough to stabilize markets and how a credible longer-term vision can be helpful in the short-term. Our answer is that it is definitely the most important element to start restoring credibility.
2--Merkel Shuns ECB Role in Favor of Budget Limits, Bloomberg
Excerpt: German Chancellor Angela Merkel is set to snub investor pleas to back an expanded European Central Bank role in solving the debt crisis, as she pushes her demand for tighter economic ties in Europe as the only way forward.
On the eve of a speech to German lawmakers tomorrow outlining her stance before a Dec. 9 European summit, Merkel is digging in on her plan to rework the European Union’s rules to lock in budget monitoring and enforcement. That risks a showdown with fellow EU leaders and extends her conflict with financial markets looking for immediate measures to end the contagion.
“The market is questioning Merkel’s tough approach,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, said by phone today. Investors want “clarity on what the framework will look like and what the financial bridge will look like” to fund euro-area governments and banks that need aid while fiscal ties are negotiated....
ECB President Mario Draghi signaled today that the central bank could do more to fight the crisis in return for fiscal union, one day after the ECB joined the Fed and four other central banks to lower financing costs for banks. Michael Meister, the parliamentary finance spokesman for Merkel’s party, has said that greater integration is a precondition for any German rethink of its opposition to “joint liability.”
“If the euro zone succeeds in agreeing on more political integration with clear consequences for breaching fiscal and economic rules, the German government should eventually give up its resistance to euro bonds,” Carsten Brzeski, an economist at ING Group in Brussels, said in a commentary for Bloomberg Brief.
Throughout the market turbulence and conflict with allies, Merkel hasn’t budged, saying as recently as yesterday that joint euro-area bonds aren’t the answer for now. Her refusal to sanction using the ECB clashes with French President Nicolas Sarkozy’s government, while her focus on changing Europe’s rules irks countries such as the U.K. and Ireland, where voters twice rejected EU treaties in referendums.
3--Europe's shrinking money supply flashes slump warning, Telegraph
Excerpt: All key measures of the money supply in the eurozone contracted in October with drastic falls across parts of southern Europe, raising the risk of severe recession over coming months.
The three main gauges – M1, M2, and M3 – have each begun to decline in absolute terms after slowing sharply over the Autumn.
The broad M3 measure tracked closely by the European Central Bank as an early warning indicator shrank last month by €59bn to €9.78 trillion, a sign that Europe's long-feared credit squeeze is underway as banks retrench to meet tougher capital requirements.
"This is very worrying," said Tim Congdon from International Monetary Research. "What it shows is that the implosion of the banking system on the periphery is now outweighing any growth left in the core. We are seeing the destruction of money and it is a clear warning of serious trouble over the next six months."
"This is the first sign of an emerging credit crunch," said James Nixon from Societe Generale. Banks cut their balance sheets by €79bn in October, while mortage lending saw the biggest drop since December 2008....
The shrinking money supply comes as banks step up the pace of deleveraging. As feared, lenders are slashing loan books and selling assets to meet 9pc core Tier 1 capital targets imposed by the EU rather than raising fresh capital in a hostile market. "Forcing banks to recapitalise in a hurry is a major blunder," said Mr Congdon.
4--Eurozone crisis: the graph that shows why the central banks had to act, Guardian
Excerpt: (must see chart) Nervous banks have been charging each other more and more to turn their euros into dollars, creating an incipient liquidity crisis
5--Euro crisis deepens amid warnings of depression, WSWS
Excerpt: Financial Times columnist Martin Wolf, “the world has reached a new and potentially even more devastating stage of the financial crisis that emerged in the advanced countries in the summer of 2007.”
On Monday, the Organization for Economic Cooperation and Development (OECD), comprising 34 of the world’s leading economies, warned that even if an outright disaster is averted, the European economy will stagnate. Pointing to “serious downside risks,” it said that a “large negative event” would “most likely send the OECD area as a whole into recession, with marked declines in the US and Japan, and a prolonged and deep recession in the euro area.” The so-called emerging markets would also be hit.
But something much worse would result from a break-up of the euro zone precipitated by the withdrawal of one or more countries. “Such turbulence in Europe,” it said, “with the massive wealth destruction, bankruptcies and a collapse in confidence in European integration and cooperation would most likely result in a deep depression in both the existing and remaining euro countries as well as in the world economy.”
The OECD is not alone in such assessments. Forecasters at the Swiss banking firm UBS have predicted that if the euro collapses, economies in the euro zone could temporarily suffer a loss of output of as much as 50 percent. The rating agency Moody’s has warned that an exit from the euro by any country could trigger a cascade of sovereign debt defaults....
After the introduction of the euro in 1999, economic growth in Europe was increasingly debt-dependent. Economic development took place unevenly, with some countries, those on the so-called periphery, running balance of payments deficits, while core countries, above all Germany, ran up surpluses. These surpluses were then recycled by financial institutions to the periphery, where the spending they generated formed the basis of core country export markets.
Under conditions of cheap credit, the introduction of the euro seemed to create the conditions for an expanding European market, just as the recycling of export surpluses from China into the American financial system made possible the cheap credit that fuelled US economic growth after the recession of 2001.
But the collapse of Lehman Brothers in 2008 laid bare the rot and decay at the heart of the international financial system and brought an end to the debt-financed expansion of the European economy.
6--14th-consecutive-week-stock-outflows-retail-refuses-go-back-stocks-no-matter-what-market-does, zero hedge
Excerpt: So much for engineered stock market "rallies" and global "bailouts" - per the latest ICI update, we can now confirm that no matter how or what the market does, retail investors have firmly decided that the ridiculous market volatility is simply too much for most, and have withdrawn another $3.7 billion from domestic equity funds, and have now taken out money for 14 straight weeks ($44 billion) since the US debt downgrade (but, but, the S&P barely lower), or 31 weeks ($130 billion) if one ignores the statistically irrelevant blip of a $715mm inflow on August 17. Perhaps instead of trying to fabricate a makeshift price for the SPX which nobody believes any more, the Fed should focus on moderating the insane volatility which is the primary reason preventing any normal investors from putting cash into stocks. And yes, $6.2 billion went into bonds, despite the record low yields. Said otherwise, retail investors have withdrawn $214 billion from domestic equity mutual funds since the beginning of 2010.
7--S&P downgrades hit bank funding, counterparty cost, Reuters
Excerpt: Banks face a double hit to costs and revenues from a spate of credit rating downgrades, another burden for a sector already struggling because of the European Union's failure to deal decisively with its financial crisis.
Standard & Poor's cut its ratings on 15 big banks such as Bank of America Corp (BAC.N) and Morgan Stanley (MS.N) on Tuesday, as it seeks to give more insight into its methods and repair its reputation after the credit crisis.
While the downgrades were driven by a revision of the agency's internal models and not because of a change in the banks, they will have a real impact on funding costs for the sector, already on edge because of Europe's debt crisis.
"It will likely raise concerns about their short-term funding because they will be sidelined by money-market funds who are the traditional buyers of that short-term paper," said Andrew Fraser, investment director at Standard Life....
Interbank markets have largely frozen up as commercial banks grow increasingly wary of lending to one another. They rely on the European Central Bank for most of their short-term funding.
Ahead of the S&P downgrades, rival Moody's said on Tuesday it could downgrade the subordinated debt of 87 European banks, concerned that governments are too cash-strapped to bail out holders of riskier bank debt in times of stress.
8--U.S., UK investors slash euro zone debt: Reuters poll, Reuters
Excerpt: U.S. and British institutional investors walked away from euro zone bonds during November as fears for the future of the currency bloc grew, Reuters asset allocation polls showed on Wednesday.
The surveys of 59 leading investment houses in the United States, Europe ex UK, Britain and Japan also showed an increase in exposure to stocks, mainly as a result of demand for emerging market equities....
"The political and policy paralysis at the heart of Europe has raised the specter of a global recession, and greater uncertainty and volatility for asset markets," said Neil Michael, executive director of investment strategies at London & Capital.
9--Europe's Debt Crisis--ECB Hints at Help Pending Euro-Zone Integration, Der Speigel
Excerpt: Draghi also seemed to hint at a possible way out of the downward spiral, saying that the ECB could be prepared to take additional steps to halt the crisis. First, however, Europe needed to move quickly toward greater economic integration.
"Other elements might follow," he said, in reference to the coordinated central banks' action taken on Wednesday. "But the sequencing matters." He added that "a new fiscal compact would be the most important signal from euro-area governments for embarking on a path of comprehensive deepening of economic integration."
Draghi did not outline what kind of action the ECB might take, but he said that one reason the ECB had not embarked on the kind of massive bond-buying spree that many have called for is the concern that it would remove pressure on heavily indebted euro-zone nations to implement strict austerity programs.
That, it would seem, is a concern he shares with Angela Merkel. For weeks, the German chancellor has been both resisting pressure to introduce a pooling of euro-zone debt in the form of euro bonds and urging a change in existing European Union treaties to strengthen fiscal discipline. She has also gone on record several times as being opposed to making the ECB the lender of last resort in the crisis.
"I believe that we are in fact in a difficult situation and that we need the political courage to bring the euro zone closer together," Merkel said on Wednesday. "That is why we want limited treaty changes, only for the euro-zone members, so that we can win back the trust of the markets." Her proposed changes promise to top the agenda of the much anticipated EU summit that begins on Dec. 9.
10--Merkel says debt crisis will take years to solve, Reuters
Excerpt: - German Chancellor Angela Merkel called on Friday for rapid EU treaty change to remedy the root causes of the euro zone's debt crisis but warned that Europeans faced a long, hard "marathon" to restore lost credibility.
Outlining a long-term approach to tighter fiscal integration in the single currency area, with tougher budget discipline, she dismissed quick fixes such as massive Fed-style money printing by the European Central Bank or issuing joint euro zone bonds.
"Resolving the sovereign debt crisis is a process, and this process will take years," Merkel told parliament, vowing to defend the euro, which she said was stronger than Germany's former deutschemark.
"The European Central Bank has a different task from that of the U.S. Fed or the Bank of England," the German leader said.
However, sources close to Merkel said she was willing to see the ECB step up its buying of troubled euro zone countries' bonds as a bridging measure until budget controls took hold, but did not see it as a durable solution.
Speaking a week before a European Union summit seen as make-or-break for the 17-nation single currency area, Merkel ruled out issuing common euro zone bonds, saying that would breach the German constitution.
Instead, she called for a mixture of greater European powers to control national budgets, to be enshrined in treaty changes, and smart use of the euro zone rescue fund to stabilize markets...
On Monday, Merkel will travel to Paris to outline joint proposals with French President Nicolas Sarkozy for treaty changes to entrench stricter budget controls, with automatic sanctions on deficit sinners.
Sarkozy embraced German calls for a new treaty tightening fiscal discipline in a policy speech in Toulon on Thursday, but in contrast to Merkel, he made no mention of greater powers for the European Commission and European Court of Justice.
Instead, the French leader, struggling to win re-election next May, called for an "intergovernmental" Europe in which the presidents and prime ministers of euro zone countries would be the ultimate arbiters over national budgets.
His socialist opponents denounced him for advocating an "austerity treaty" dictated by Germany.
Merkel went out of her way to rebutt such accusations, telling the Bundestag it was "misleading" to suggest Germans were trying to dominate Europe....
German officials praised the conservative Sarkozy's courage in telling voters, in what the business daily Handelsblatt called a "blood, sweat and tears speech", that France would have to overhaul its social model and cut public spending.
Peter Altmaier, chief whip of Merkel's conservatives in the Bundestag, told German radio: "In Germany we have been tightening our budget for some years. Nicolas Sarkozy said yesterday that Europe must achieve a reduction of its debt, and that will only happen with iron discipline in national budgets....
A key measure of dollar funding stress felt by euro zone banks, the three-month euro/dollar cross currency basis swap, which shows the rate charged when swapping euro interest rate payments on an underlying asset into dollars, has narrowed by 30 basis points since the coordinated central bank move to around minus 130 bps. The basis swap was at its widest since end-2008 -- at the height of the global financial crisis -- before the central banks' move.