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Archived blogs: 2012

Jump to Month in Brussels reports

21 December 2012

The euro crisis: the life-threatening cancer is only in remission! Could the US fiscal cliff be the last straw?

The cancer threatening to kill off the euro went into remission in 4Q 2012 after the ECB announced its OMT programme. In 2H 2012, the Heads of Government repeatedly promised to set off down the – admittedly long and winding - `federal’ road to a complete cure. What could trigger a market realisation that - at the December Summit – the euro area backed away from the permanent cure? Is that backing away only until the German Elections in September 2013? Will France really come to terms with the need to pool economic sovereignty?  Could tiny Cyprus really be “much worse” than Greece – as Eurogroup chairman Juncker put it?

But economic growth is the key to a brighter outlook for 2013. Probably the biggest risk comes not from within Europe itself but across the Atlantic where the struggle to avoid falling over the `fiscal cliff’ is continuing right up to the cliff edge. These two economic powers have a very different approach to their fiscal problems.

Unfortunately, all policymakers will be more wary of economic forecasts in general after the IMF publicly admitted to its doubts about the basic relationship between growth and government fiscal policy. However, even if the econometric modellers wish to avoid it, the unpleasant reality is that the `bond market vigilantes’ have to be willing to buy the bonds that  fund government deficits no matter how socially desirable the deficit may be.

The European Commission’s autumn forecast for 2014 – based on uniform statistical measures – points to a sharp divergence in riskiness between the EU and US on some measures. The EU’s “net borrowing of the general government sector” should fall to 2.5% of GDP – from more than 6% in both 2009 and 2010. That would be driven by barely 1% real growth – just enough to stabilise the “general government sector’s consolidated gross debt” at 94% of GDP. For the US, the Commission assumes that only a quarter of the fiscal cliff retrenchment will be enacted so growth would remain above noticeably above 2%. The combination of retrenchment (is there an American word for `austerity’?) and growth would leave the `net borrowing’ figure down from 8% this year but still above 6%, with gross consolidated debt rising – to more than 113% of GDP. The issuer of the world’s reserve currency would still be borrowing abroad to raise 3% of its GDP from the rest of the world. The euro area would be lending over 1% of its GDP to the rest of the world.

Happy 2013!


20 December 2012

UK and Banking Union – is Cameron “delusional”?

The UK assented to the proposal to give the ECB additional `supervisory tasks’ thus providing the necessary unanimity of the Council to proceed. The parallel deal on voting rights in the European Banking Authority provide for the UK safeguard of the famous `double majority’ of ins and outs of banking union. BUT that falls away if there are less than four outs. Note that this still has to be agreed by the European Parliament as co-legislator and their existing, voted position is a minimum of five.

The exact mechanics are to be sorted out in the next year or so as the ECB has been allowed 12 months from the entry into force of the new legislation on 31 March 2013 or later. That will be the moment to test for the necessary minimum of outs to operate the double majority. This blogger regards it as a good bet there will not be four. So the results of Cameron’s delusion about a banking union deal could well crystallise during the European Parliament election campaign in May 2014!

13 December 2012

SSM agreed – Summit ahead…

ECOFIN agrees - so the famous year-end deadline for agreeing the SSM may be met. BUT – and it is a very significant BUT – the little word “unanimous” has crept into the ESM’s decision-making mechanism for a request to recapitalise any of these banks. For the ECB, an obvious step to avoid the risk of an early collision between bank supervison and monetary policy roles would be taking charge only of proven `good banks’.

The ever-closer union genie is out of the bottle completely now and it does not need a particular timetable for it to progress powerfully. Assuming Mrs Merkel is re-elected in September, she spelt out to the European Parliament in November a `federalist’ agenda for the future of Europe that included the possibility of a further Treaty change. The contents of any such change will be the moment of `federal’ truth. 

But in the meantime there are several litmus tests to be passed to check the actual sincerity of the eurozone’s leaders. It is this patient, step-by-step reform that will raise the competitiveness of the euro area economies that will be the permanent solution of the crisis. That is the pre-condition for major federal steps in the years ahead.

More for Graham Bishop clients: link

10 December 2012

Italy after Monti

The probable removal of Mario Monti from the Italian Premiership is exquisitely badly timed for the EU. But he may well have had time to create an enduring, positive legacy for both Italy and the European Union. On the current timetable for the Italian Budget vote, Monti will remain Prime Minister of Italy during the key EU Summit votes and on the two-pack. But the Italian electorate will soon be faced with a binary choice about sound economic policies OR chaos - for itself and Europe.

GrahamBishop clients: click here for more.

7 December 2012

Van Rompuy Final GEMU Report: Graham Bishop’s First Comments

The Report proposes as profound a transformation of the European Union as expected, and in three stages: to end-2013; to end-2014; and after that.  If this political timetable can be delivered on time and if the economic policies deliver the expected benefits: then investors buying longer-dated euro-area government bonds will find the redemption monies are paid to them by a highly integrated political entity.  The economy of this entity will be far more competitive globally and its public finances will be far more prudent. But its debt levels will still be high - and vulnerable to any failure to deliver on the promises. Private Sector Involvement (PSI) cannot be airbrushed out of history so the bond market vigilantes have good reason to remain very vigilant – for profit or loss. 

More for GrahamBishop clients link

28 November 2012

European Commission proposal for a genuine deepening of EMU: 'Eurobills’ feature

Commission President Barroso unexpectedly launched publicly the Commission’s final contribution to the Council President van Rompuy (HvR) report for the Heads of Government meeting on 13/14 December.

The timetable for short-, medium- and long-term actions emphasises the huge degree of further economic and political integration that is likely to be advocated by the final HvR proposals. Step One seems well underway as agreement on the economic governance two-pack seems imminent, but the next steps in the chain of events may be much less certain as Member States should “strive” for agreement on the SSM by year-end and agreement on the budget is simply assumed.

Thereafter, the timetable calls for a medium-term “strengthening of the collective conduct of budgetary and economic policy - including tax and employment policy – would go hand-in-hand with an enhanced fiscal capacity”. Eurobills are included in this time frame – probably due to the assumption that a Treaty change would be needed. 'Bishop Bills' would come within this framework but could be brought into operation with a treaty-style agreement amongst only the participating states, rather than a full-blown EU treaty change that would require unanimity.

The longer-term plans call for an “adequate pooling of sovereignty, responsibility and solidarity at the European level”.

(Press release link)

Extract from Executive Summary

The common issuance by euro area Member States of so-called eurobills - short-term government debt with a maturity of up to 1 to 2 years - could constitute a tool against the present fragmentation, reducing the negative feedback loop between sovereigns and banks, while limiting moral hazard. The introduction of such a common debt instrument would require a closer coordination and supervision of Member States' debt management in order to ensure sustainable and efficient national budgetary policies.

The monitoring and managing function for the fiscal capacity and other instruments should be provided by an EMU Treasury within the Commission. The further strengthening of policy coordination and enhancement of the fiscal capacity would initially start under secondary law, but would require Treaty changes at some point.

The creation of a Debt Redemption Fund and the common issuance of short-term government debt would require Treaty changes.

26 November 2012

BoE Governor Carney: questions that will need to be answered in the years to come

An extraordinary choice by Chancellor Osborne: if Mark Carney does not deliver `the goods’ – and that will be defined with the benefit of hindsight – Osborne will be blamed for overlooking a galaxy of well-qualified locals. It may well be difficult for Osborne to survive any failure by his `choice’.

Despite any reservations, everyone will offer the new Governor of the Bank of England every possible success in his new role. It is an extraordinarily challenging moment - in so many ways - to take charge. Success will reverberate way beyond the shores of Great Britain but he will need to draw deeply on his breadth of experience to achieve this across the full range of the Governor’s new mandate. More for Graham Bishop clientslink

22 November 2012

Is Cameron setting course ever more firmly for de facto Brexit?

The 'final act' of the EU budget negotiations is now getting underway in Brussels. In economic terms, this is something of a 'hurricane in a teacup’, as the spending itself amounts to just 1 per cent of the combined GDP of the EU. But the political nuances may be critical for Britain's future in the European Union. More for Graham Bishop clients.

21 November 2012

FSA levels the playing field between the Davids of independent research providers and the Goliath investment banks

The CSFI Report pointed out that “Following the findings of the 2001 Myners report, which decided that the bundling together of research and trade execution was an “unacceptable market distortion”, the Financial Services Authority introduced new rules at the start of 2006, which limited investment managers’ use of dealing commissions to the purchase of “execution” and “research” services. In practical terms, the mechanism adopted by the industry to implement the new rules has been Commission Sharing Arrangements (CSAs), which are designed to allow firms to choose a broker for execution, and to direct the research portion of the commission to another broker or independent research provider.”

But 'corporate access' is now the biggest distortion in the allocation of research funding – and growing. The CSFI Report found that “Corporate access continues to grow in importance. According to the Thomson Reuters Extel Survey 2012, the proportion of dealing commissions used to pay for corporate access has increased further in 2012 to 29 per cent, compared with 27 per cent in 2011 and 21 per cent in 2010. Also, corporate access is now the largest component of services provided by the sell-side, overtaking trading and execution (28 per cent) and research (26 per cent) for the first time. Among buy-side equity research respondents, 38 per cent ranked corporate access as very important.”

However, in early November, the FSA published a document (Conflicts of interest between asset managers and their customers: identifying and mitigating the risks) and wrote that “Firms were also unable to demonstrate how brokers arranging for access to company management (`corporate access’)… constituted research or execution services".

The FSA letter to CEOs requires them to attest - by 28th February 2013 – that any conflicts of this type have been fixed by then and that they are compliant: “Following an assessment of the firm’s arrangements in light of the Paper’s findings, the board resolved that the firm’s arrangements are sufficient to ensure that the firm manages conflicts of interest effectively and in compliance with FSA rules". This should level the playing field for independent research providers.

NOTE: Graham Bishop is a member of EuroIRP– sponsors of this research

"FSA takes action on corporate access.

The fund management industry is expected to stop paying for corporate access services with dealing commissions after the Financial Services Authority in November published a letter outlining its opinions on the issue. This represents a significant levelling of the playing field for IRPs, which typically are not in a position to provide fund managers with access to senior company management in the same way as sell-side side brokers and investment banks.

Corporate access was brought onto the regulator’s radar following the publication of last year’s CSFI/Euro IRP report “Has independent research come of age?” The report concluded that “use of dealing commissions to pay for corporate access services provided by investment banks is… evidence of continuing market distortions that legislation in the wake of the Myners report sought to eradicate"

Source: CSFI report

5 November 2012

Visit to Cyprus - a major twist to the regional geo-politics and economics?

The most startling aspect for me is the natural gas element. The implications for the geo-politics of the entire Eastern Mediterranean region and Europe’s energy security are profound. However, the Der Spiegel article (link) about Russian mafia being the chief beneficiaries of an EU bailout has underlined my long-standing fears that this was going to be a very difficult political debate that is a long way from finished.

Graham Bishop clients: click here for more

1 November 2012

Schäuble invites UK to work with Germany to develop EU’s future: UK MPS refuse to hear and Labour starts down the road to Brexit?

On Monday, German Finance Minister Schäuble - a life-long pro-European – gave a seminal speech in Oxford about German/UK relations. But he was in another world - literally and metaphorically from Britain. Oxford is more than about 15 minutes from Westminster and the UK media, so there was a startling absence of such people and the only print media coverage was in the Daily Telegraph, with a smattering of on-line comments. At the time of writing, even his own Ministry has not published the speech! So what was the point of it??

Certainly UK MPs who voted last night in the Commons on the EU budget issue were not influenced in the slightest. Even if they knew an olive branch was being held out, they were determined not to take it. Instead, they wanted to drive home the separateness of Britain. On the Tory side, they vented their euro-scepticism dramatically – knowing full well that the Labour opposition were just out to damage the Government rather than follow a position of political principle.  

That may be the more serious turn of events last night: The Labour Party has shown that its principles last the shortest possible time. Ed Balls may parade his pro-European credentials in private to the assembled Ambassadors of the EU but the public face is now back to the worst aspects of the old 'spin doctor politics'. If Labour were to be in power after 2015, they will be entirely trapped by the accumulated baggage of their tactical victories so that it will be the classic Pyrrhic election triumph.  Full speed ahead along the road to Brexit! More to come for Graham Bishop clients.

25 October 2012

Brexit: Hague versus City/British industry/Lib Dems?

The Banking Union debate is heating up – and looks set to be a major event in UK/EU relations. Is British industry and the City now waking up to the real risks of a fracture of the Single Market? Can such a fracture be avoided in the longer term?

As usual at this time of year, there are heavy fogs around southern England and it is abundantly clear that the Continent is indeed completely cut off from the received wisdom of the British political class cocooned in Westminster. Indeed, the fog is so dense that it is not even certain that van Rompuy’s Interim Report “Towards a Genuine Economic and Monetary Union” has percolated through the internet to London, as there is little evidence that it has even been read.

Will the UK’s private sector make the commercial argument sufficiently publicly and strongly that it becomes a potent political force? Otherwise the drift to 'Brexit' remains intact. Graham Bishop clients: click for more.

19 October 2012

EU Summit 18/19 October 2012: Graham Bishop comments

This Summit continued the process of EU leaders finally – though painfully slowly - getting to grips with the problems that have emerged. Following my visit to Berlin this week, I can now see the sequence of events dropping into place that could enable a durable EMU to emerge from the ashes of the first phase. But there is no quick fix! The arguments about immediate 'banking union' seem to be putting the cart before the horse.

The 'horse' must surely be agreement on economic governance, followed by a period when it actually works in practice. The banking union 'cart' can then be pulled along behind with some assurance that there will not be unknown (and potentially vast) costs that subsequently creep out of the woodwork. Moreover, the design of the cart must be robust so that it does not collapse under the weight of a crisis.

The final shape of the 'horse and cart' system will only be operational after a major new Treaty is in force – and that may be agreed in 2015 and finally ratified hopefully by 2017. So this is a five-year haul – and it could come unravelled at any stage depending on the vagaries of elections and other external events.

18 October 2102

FT story on illegality of Banking Union proposals: Graham Bishop Comments

The FT story really brings out the potentially-dubious legal basis of the rushed banking union proposals. Surely tonight, the HOSGs must just have a good dinner and sit back calmly and order a pause for reflection. A decision to tackle the whole banking problem within a new Treaty for 'a genuine EMU' would settle markets, rather than alarm them about cack-handed and potentially inadequate short term fixes. But that 'specific and time-bound roadmap' must have enough commitment.

Graham Bishop clients: click here for more details.

12 October 2012

THE NOBEL PEACE PRIZE FOR 2012 is awarded to the European Union

“The Norwegian Nobel Committee has decided that the Nobel Peace Prize for 2012 is to be awarded to the European Union (EU). The union and its forerunners have for over six decades contributed to the advancement of peace and reconciliation, democracy and human rights in Europe.

In the inter-war years, the Norwegian Nobel Committee made several awards to persons who were seeking reconciliation between Germany and France.….

The EU is currently undergoing grave economic difficulties and considerable social unrest. The Norwegian Nobel Committee wishes to focus on what it sees as the EU’s most important result: the successful struggle for peace and reconciliation and for democracy and human rights. The stabilizing part played by the EU has helped to transform most of Europe from a continent of war to a continent of peace.”

The euro area is well aware of those economic and social difficulties and by a remarkable coincidence, Council President van Rompuy published his interim report on taking this process the next stage to a “genuine economic and monetary union” that will surely involve much closer political union amongst that sub-set of Europe.

Detractors of this award point to the role of NATO, and could also point to the World Trade Organisation (WTO) as other ways of achieving this goal of reconciliation. However, they miss the vital point that the EU is far more than an agreement of mutual military assistance. The vision of the Founding Fathers was always to bring the entire peoples of Europe together so that trade between them would maximise their individual and collective wealth. Military activity against their neighbours would then be manifestly against their own best interests.

The EU has been, and remains, a beacon of inspiration for people who suffered under dictatorships to make the move to democracy.

The Nobel Committee has correctly noticed that the risks in the current situation are far more dangerous to a set-back to this process than at any time in the EU’s history. They have done a great service by reminding all Europeans that the process is still vulnerable – witness the rise in extremist (but still fringe) political parties in many states.

This is the moment to make every effort to strengthen solidarity amongst EU members to overcome the “grave economic difficulties” rather than fragmenting and risking the six-decade process unravelling.

12 October 2012

Van Rompuy Interim Report just issued ahead of Summit next week

It looks to be a very powerful statement of work in progress towards a `genuine economic and political union’. The building blocks for the economic governance have been assembled in recent years without financial markets paying much attention. But the key element for markets is the financial integration and HvR continues to call for a `safe and liquid financial asset for the euro area’. He highlights Treasury Bills and #BishopBills precisely meet all the stated requirements. More later for Graham Bishop clients.

2 October 2012

The Liikanen Group Report

It proposed powerful remedies to the ills of the banking system – but explicitly stopped short of a legal splitting up of banks. Instead, the Group has gone for a `bank holding company' structure of legally (and capital/IT) separate companies. But the red lines between some of the entities still look quite wish-washy.  Indeed, have key elements already been overtaken by other proposals since the Group was launched back in February? In particular, the Commission proposal on Bank Resolution and the BIS consultation on a Fundamental Review of Trading Book Capital Requirements have already eaten some of the Group’s red meat. Have they turned the report into a bit of a damp squib? The Barnier reaction may be telling: “This report will feed our reflections on the need for further action.” Sounds a bit like feeding in the long grass! (more comment for Graham Bishop clients here).

12 September 2012

Karlsruhe on the ESM

  • The Eurogroup appears to have no doubts about the Karlsruhe judgement. So the ESM will soon be in force - clearing that particular hurdle for the euro.
  • Risks to Germany: The German representative at the ESM is not some junior tea boy, but the Minister of Finance of the Federal Republic and therefore responsible directly to the German Parliament. A minster with an eye to remaining in office would simply decline to act if he believed he would not have his Parliament’s support.

Some commentators are saying that the German Constitutional Court judgement may still cause a need for a change in the ESM Treaty. The doubters’ objections centre first on the possibility that Germany could find its obligations increased by some subterfuge that is outside the control of the German Parliament. The ESM will normally take decisions by unanimity and in urgent matters by an 85 per cent vote. As Germany has a 27 per cent share of the votes, Germany has a veto under all circumstances.

In its recently-enacted Law, the Bundestag reserved various powers to itself so that in the end there may have to be a plenary vote of the Parliament before the German representative at the ESM can act. As a practical matter, it seems unlikely that the Finance Minister would agree to actions where he felt that the whole Parliament would not be supportive.

The doubters point to other reservations by the Court. They cite two issues of passing information to outsiders i.e. Parliament, and the implications of professional secrecy. Again, until the matters that he believed should be made public were indeed published, the Minister could decline to act. Lawyers should be able to draft a suitably binding statement to provide a mechanism that satisfies the Court’s needs on these points.

Statement by the President of the Eurogroup

"I take note of the decision of the German Federal Constitutional Court concerning the request for a preliminary injunction concerning the ratification by the German government of the treaty establishing the European Stability Mechanism (ESM) and the treaty on Stability, Cooperation and Governance in the Economic and Monetary Union (TSCG).

Taking full account of all elements of the ruling [GPB emphasis], I look forward to the completion of the outstanding procedures allowing for the Treaty Establishing the European Stability Mechanism to enter into force. I plan to convene the inaugural meeting of the ESM-Board of Governors in the margins of the Eurogroup meeting of 8 October…

The TSCG will enter into force once twelve euro area Member States have ratified it, but not earlier than 1 January 2013.”

30 August 2012

Draghi writes in Die Zeit

ECB President Mario Draghi would make an excellent finance minister of the euro area – and that job will probably be available within a few years, but not in the sense of a conventional equivalent to the US Treasury Secretary as there will NOT be a United States of Europe. That is indeed setting “the bar  too high”.

He stopped short of the analogy with the gold standard in its heyday but that is what the euro should be. Euro Governments cannot print `gold’ so they must live within their means but the single market (free movement of people, goods, services and capital) means there are spill-over effects onto the neighbours so I agree with him that “Where necessary, sovereignty in selected economic policy fields can and should be pooled and democratic legitimation deepened.” The core of the debate is now about what is `necessary’, and we have already gone a very long way – much further than most investors realise. (I will elaborate/explain this in my September book)

“When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy..” This is the key policy phrase and I have highlighted the operational code words! I do not see that large scale bond purchases will do that – and they will have other political and economic effects! So I argue even more strongly that `#bishopbills’ (more details) are what is needed. The book will explain how they can readily evolve in the foundation of a European Treasury – hence the eventual need for someone fulfilling the role of Secretary of such a body…

20 August 2012

Bundesbank blasts the idea of unlimited bond purchasing by the ECB on the grounds that it is “the responsibility of fiscal policymakers – the governments or Parliaments of euro area countries – to decide whether to possibly considerably enlarge the communitisation of solvency risks”. BuBa is right: the potential scale takes it way beyond technical considerations and the politicians cannot evade their responsibilities in this way. That is the object of the #bishopbills plan (more details)

1 August 2012

Read New York Times and International Herald Tribune and was pleased to see Landon Thomas' article on "Three answers to the euro puzzle". Given the interest now being shown by President Obama in a solution to the euro crisis, I was not totally surprised that it was a US newspaper that actually took the initiative in summarising some of the private plans that are around but I find it strange that the US papers pay far more attention to these ideas than say the Financial Times! However, I know my Treasury Bill Fund concept (Bishop Bills or Bishop Bonds) is gaining some traction so I am very keen to hear detailed objections and suggestions so that I can see how to meet them. Please write to me or direct Tweet: @grahambishopcom

30 July 2012

Dear Otmar,

I read your article in the FT today - looking eagerly for your wise suggestions about how to solve the problems of the eurozone. Instead, I only found critcisms and questions with no answers. Your comments on eurozone bonds were particularly disappointing as you did not appear to recognise the bubble that exisits in the pricing of German bonds today - unless the eurozone cease to exist.

Yours ever,


© Graham Bishop

29 June 2012

Day 2 of the European Council:

Graham Bishop's 3rd letter to bond market vigilantes

Dear Vigilante,

At the end of day 2 of the Summit, have we got much more than at the end of Day 1?

Just in case anyone had forgotten “We reaffirm our commitment to preserve the EMU and put it on a more solid basis for the future”. But of more direct impact in this high-stakes poker game ….”We also endorsed the country-specific recommendations to guide Member States' policies and budgets”. But did we get what we were really after: collective, binding agreement in advance on the number of bonds they are going to stuff down our throats? The short answer is No.

But HvR is becoming quite a bondie himself… the buyer of a 10-year bond is likely to want to know what the EU will look like in 10 years when it is redeemed! Just so… And the HOSGs did set a handy precedent with banks: when “we” have complete control of bank supervison (probably enacted some time in 2013) then “we” will collectively pay - via the ESM – if we make a hash of it. So responsibility for oversight is followed in sequence by accepting collective responsibility for the results. Does that remind you of Mrs Merkel’s recent speeches?

By the December Summit, HvR is tasked with producing a “specific and time-bound road map for the achievement of a genuine Economic and Monetary Union”. The two-pack should be in force by then. All of this gives a collective control of euro area economies and thus budget deficits. So it is just an arithmetical calculation (rather than the sovereignty stuff as that has already been sold off) as to what that means for bond issuance. Given the clear implications for collective payment if things go wrong, perhaps a rather juicy Christmas present is brewing?

Yours ever,

Graham, 29th June 2012

© Graham Bishop

29 June 2012

First comments on Day 1 of the European Council - Graham's 2nd letter to bond vigilantes

Dear Bond Market Vigilante,

After Day 1 of the European Council meeting, we seem to be winning – but we will have to wait for the Eurogroup lunch today to be certain. The EU-27 Summit agreed the usual stuff about pro-growth policies and spending worth about 1 per cent of GDP, but no-one cares about that group anymore.

We want to know what the real players are agreeing and the first bit of red meat to us is that the ECB will take on bank supervision (how much ? of which banks? When? - Answers by end-2012). But once the euro area has control of the key levers of bank supervison, they will allow ESM to recapitalise banks directly – subject to normal state aid rules… (are there buried messages to Landesbanken in there?) The same principles will be applied to Irish banks – so that could be a major boost to Ireland (though not to some bank bondholders…).

Spanish banks to get funding from EFSF soon and then it shifts to ESM when it exists… note the cunning move not to claim seniority for these loans – but no statement about any future loans! So nice of them not to pop €100 billion in ahead of us in Spain … for the moment, and just for Spain as they did not take this claim out of the ESM Treaty as that would be a bit late now that it is nearly ratified. So mind your eye on that one later!

The serious red meat is in the third paragraph – they re-affirmed their commitment to do whatever is necessary --- and are even showing signs of actually doing it! So EFSF/ESM will be able to “ensure financial stability” for members – and here is the catch – respecting their Country Specific Recommendations. You will ask what the hell are they?? And I think I saw a newspaper saying that meant these States would be getting condition-free money. Well, clean your glasses and have a good read – where necessary, the recommendations are drastic. That’s why Cyprus is asking that nice Mr Putin for money instead of Uncle Barroso. This bit at least to be done by next Friday.

And now off to lunch – should be quite a bit more red meat there as they have finally recognised that all this six pack/two pack European Semester stuff really gives a lot of power to Uncle Barroso. I think this may be the first time some of the Summiteers have actually read what their Finance Ministers have signed up to over the last year – probably because they just read the newspapers instead of all that interminable economic claptrap in the documents! Anyway, agreeing cash borrowing limits for bond issuance should now be a doddle – and that’s what we want. Then Mutti Merkel can agree to pro rata Treasury Bills (same guarantee structure as ECB/ESM) so that she keeps a permanent whip hand over all the backsliding Italians and Spaniards. None of these mutual liability bond things that give the whip away for a decade!

Yours ever,

Graham, 29th June 2012

© Graham Bishop

26 June 2012

Graham’s letter to bond market vigilantes: the van Rompuy Report

Dear Bond Market Vigilante,

If you are waiting for hundreds of pages of detailed Treaty-language measures to be voted unanimously on Friday 29th June by the euro area Heads of State/Government (HOSGs), then you will be deeply disappointed. You should go out and double up on `betting the bank’ on shorting Italy and Spain.

BUT before doing that – pause for thought and consideration:

  • Could the HOSGs be initiating a latter-day Delors Report that burnt the hands off your predecessors two decades ago?
  • How can you tell if they are serious behind all these Delphic comments that have turned out to be devoid of action so many times in recent years?

Here is a very simple test of sincerity: Do they completely commit to – with no ifs and buts – “Under these rules, the issuance of government debt beyond the level agreed in common would have to be justified and receive prior approval.”?

Germany has offered far-reaching union but for that to be sensible and sustainable for Europe, the other big deal-breaker countries (France, Italy, Spain) MUST be willing to promise not to break the deal. If any of them will not promise, then Germany is simply not big enough to carry the deal-breaker. Full stop!

So, even if Germany were willing to make a deal without this condition, then the vigilantes should look for the deal to come unravelled during the next decade of stress and make a real killing. At this turning point in history, why would a deal-breaker state hesitate for a moment in promising not to break the deal - unless they secretly thought they might choose to do so in a few years’ time (ratting on all their closest partners) thus creating the biggest killing field in history?

With such an unbreakable deal, a temporary, short-term, pro rata-guaranteed Treasury Bill Fund (subscribers to my articles, click here for details) can readily make the public finances of all deal-breaker states sustainable until the benefits of the other steps to enforce competitiveness come through. (Actually, most of these are already agreed, but the Anglo Saxon media could not read the hundreds of pages of text in the five minutes before they had to print the story, so they did not bother to tell you about it and I am sure you did not bother to read all that guff yourself).

Without such a “full deal” – stay short, stay very short.

Yours ever,

Graham, 26th June 2012

© Graham Bishop

May 15 ECOFIN and the banking regulation crisis with the UK, 14 May 2012

Fresh Start Tories seek Dead End for Britain by unwinding key Thatcher achievements in Europe, 27 March 2012

Blog on the Treaty/EU financial regulation, 5 March 2012

Month in Brussels 2012

December 2012, 14 January 2013

November 2012, 3 December 2012

October 2012, 29 October 2012

September 2012, 11 October 2012

July 2012, 3 August 2012

June 2012, 6 July 2012

May 2012, 12 June 2012

April 2012, 30 April 2012

March 2012, 2 April 2012

February 2012, 5 March 2012

January 2012, 6 February 2012