Tuesday, 11 May 2010

German anger finds a voice

Quicker than I had thought possible the EU's gigantic Greek rescue package announced only in the early hours of yesterday morning is starting to fall apart. It seems the package was increased in size dramatically following the intervention of Obama who, worried about the effect on US banks, phoned Merkel and Sarky to say half measures wont do. I got it wrong yesterday crediting the EU with learning some sense on this. In the true Franco Prussian tradition they learn only when a bigger bully kicks their arse hard.

The Bundesbank representatives on the ECB broke ranks and accused Trichet of caving in to political pressure. Well he is French after all as is Sarky, the owner of the big boot this time applied to Trichet's bum. The German's objection is as I noted yesterday, to the ECB buying PIGS government bonds outright and hence effectively printing money and moving to a QE policy which the noble Trichet was castigating when the hated Anglo Saxons did it. Ah well, needs must when your next job depends on President Sarkozy. Jeremy Warner makes a good point in today's DT that the so called balancing sterilising bond sales was put in to assuage German fears of another Weimar or Third Reich inflationary spiral and may not actually happen.

As I have previously pointed out, the Bundesbank is the only central bank that acts free of political control. It has a long and jealously guarded tradition of doing so. Its head, Axel Weber told a German newspaper, "The purchase of government bonds poses significant stability risks and that's why I am critical of this part of the ECB's council decision even in this extraordinary situation". What really upset Herr Weber was the announcement of the buy back decision by the EU before the ECB had spoken clearing confirming the view that monetary policy is being dictated by politicians, mainly Sarkozy. A case of mai oui mon president from Trichet.

And what of Dr Frau Merkel? Well she has further problems on the home front following her party's trouncing in the Westphalia elections. Senior figures in her CDU are reported as saying they have lost confidence in her ability to lead and called for her to go after her Greek policy had 'failed its first democratic test'. The well named Willy Wimmer, a former CDU minister, has called for her 'immediate resignation'. World saviours are without honour in their own land as Gord, the man who saved the world two years ago, has just found out. Worse for Merkel was yesterday forced to publicly abandon tax cut plans to pay for the Greek problems and as she has lost control of the upper house cannot push her planned public expenditure cuts through, all reminiscent of the UK.

Spreads on PIGS debt have fallen. For Greek bonds it is now 467 bps. Figures released yesterday that Greek total debt of 224% of GDP is in fact less than that of Ireland, 331%, Spain, 272% and Portugal, 331%. No wonder the Germans are worried. I opine PIG spreads will soon be on the rise once more.

My take on feasibility of a LibLab coaltion. Click link below to view:


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