A European Dream Deferred....

http://www.acting-man.com/?p=14974

G20 Aid on Pause

The 20 pow-wow in Mexico City ended with an communique to the effect  that further 'aid to Europe will be deferred'. The bone of contention as far as we can tell is the size of the 'firewall' erected by Europe itself, this is to say the resources allocated to the EFSF/ESM bailout vehicles. Germany has been steadfast in its demand that the ESM be limited to € 500 billion (does anyone even remember the eurocracy's full-throated announcement of a €750 billion 'bazooka' bailout mechanism in May of 2010? Apparently not). As far as we are concerned, such German declarations that the 'buck (or rather the euro) stops here' are as credible as anything that comes out of the eurocracy, which is to say, they rate precisely zero on the credibility scale. In the main these announcements are designed for the German domestic political audience, but they are certainly not to be taken seriously.

As the WSJ reports:

„Officials from the world's leading economies deferred for months key decisions on international aid for Europe as they awaited more euro-zone action to fight the Continent's debt crisis.

„Finance ministers and central bankers from the Group of 20 advanced and developing economies, after a two-day meeting here, indicated they anticipate an agreement to expand Europe's rescue fund next month.

That move "will provide an essential input in our ongoing consideration to mobilize resources" to the International Monetary Fund, the G-20 officials said in a joint statement Sunday.

The lack of significant progress effectively punts further discussion of new international support until the G-20 ministers' next gathering in April. Officials hoped that could lead to a final, confidence-boosting agreement at a summit of world leaders in June.

G-20 officials acknowledged a long list of potential obstacles ahead. Greece must meet numerous conditions for its latest bailout within weeks. European officials recognized German reluctance to quickly raise the capacity of a euro-zone financial firewall—a rescue fund large enough to reassure markets that other troubled euro-zone economies will be able to manage their debts. The G-20 set that expansion as a condition for increasing IMF resources to support Europe. At the same time, officials noted that surging oil prices, partly due to tensions with Iran, threatened to depress a global recovery already weakened by European turmoil.

G-20 officials encouraged European leaders to move quickly even as improved market conditions relaxed pressure on the euro zone. Over the past two years, European leaders have routinely slowed their efforts once markets improved.“

(emphasis added)

It's actually a good bet that events will once again overtake the various bailout and reform efforts by officialdom at some point this year. It is when these inevitable market routs commence that German reluctance to throw more good money after bad usually melts faster than snow in the sun.

As an aside to the G-20 meeting, motions to 'rework' the so-called 'Volcker rule' that prohibits proprietary trading by banks were on the agenda as well. It is of course all about sovereign bonds. Nobody cares whether banks will be allowed to trade in and thereby support private sector debt and equity. What is to be assured is that Leviathan stays well fed and happy – and please, not only the voracious beast in Washington. Others want their share of the pie to remain intact as well.  According to Reuters:

“Senior G20 officials said they felt Washington was listening to their fears over the U.S. Volcker rule, which is designed to curb banks' trading for their own profit. It exempts trade in U.S. Treasuries, but not other countries' sovereign debt.

"The way it was initially formulated was a quite domestic vision, not global enough," said Bank of France governor Christian Noyer at the weekend meeting of G20 central bankers and finance ministry officials in Mexico City. "This has been thoroughly explained to the United States… They perfectly understand the legitimacy of this reaction, which does not call into question the philosophy behind the rule."

The rule, named after former Federal Reserve Chairman Paul Volcker, aims to stop banks in the U.S. from taking risks with customer deposits. But Canadian, European and Mexican officials, among others, say that, as proposed, it could hurt trading in their government debt and potentially harm liquidity. "There is a concern that it could have (an) unintended consequence, that it will restrict the traditional role that banks have played as go-betweens," a UK treasury official attending the G20 meetings said.

He added though, that "very constructive" talks were underway with U.S. officials and that the British government was "very confident" they would resolve matters successfully. Bank of Italy Governor Ignazio Visco said he believes the United States will now look at ways in which the rule could be reworked to make it more fair internationally.

The International Monetary Fund said it was "very attentive" to the debate on the rule, but it has not taken a stand on it. "We will look at the economic and financial consequences as we normally do," said IMF Managing Director Christine Lagarde.

In the final G20 communique there was no mention of the Volcker rule, part of the 2010 Dodd-Frank Act set of reforms. Proposed in October, it is scheduled to be implemented in July.

At a conference organized by the Institute of International Finance that ran on Friday and Saturday in Mexico City, the Volcker Rule was a hot topic among speakers and attendees. "It's clearly a rule that discriminates against all trading that takes place in sovereign debt that's not U.S. debt," said Luis Tellez, head of Mexico's stock exchange.

Bankers and non-U.S. regulators are also concerned about a dip in liquidity as a result of the rule. One JPMorgan executive criticized the United States for trying to push it through despite the international concerns.

"It's playing with fire. You don't do that with medicine and you shouldn't do it with economic policy and financial regulation," said Jacob Frenkel, chairman of JPMorgan Chase International. Canada's central bank governor Mark Carney, who heads the Financial Stability Board, in January called for the rule to be changed to exclude foreign sovereign debt.

Industry trade groups and big banks affected by the rule have in recent weeks bombarded regulators with comments, most of which were opposed to the proposal. Regulators' next steps could include either adopting the rule or crafting a new one to put out for public comment again. Even some U.S. regulatory officials are concerned.”

(emphasis added)

What is of interest to us here is of course not only the stealth attempt to make US treasury debt the only exemption and give it a competitive advantage that way, but the tendency to differentiate sovereign debt as such from other investment asset classes, which are to be relegated to second class status. Readers may recall that the so-called 'Robin Hood tax' on financial transactions, which France is now introducing unilaterally in what appears to be an utterly bizarre bid to undermine its own capital markets, contains just such an exemption for sovereign debt as well.

However, of all investment classes investors can choose from, sovereign debt is without a doubt the most pernicious. It relies on income that is obtained solely by coercion and by buying sovereign debt, investors deprive those who actually serve consumers in the market economy of funds. Its existence perpetuates the parasitic regulatory welfare/warfare statism that is slowly but surely sucking the life-blood out of the economy. We are not on the least surprised that it is to be given preferred status by the political and bureaucratic ruling classes, but we are surprised that seemingly no-one appears to be discussing and criticizing these developments.

LTRO 2.01 the 'Last One'

We have previously mentioned the rumors that a number of ECB board members are becoming uncomfortable with the large-scale liquidity provisions via LTRO's. This has been confirmed in the meantime by Austrian CB chief Ewald Nowotny, who reportedly stated that there 'will be no need for more liquidity provisions' after the next tranche of the LTRO is dispensed on February 29.

“There is no current need for a further three-year tender after the European Central Bank's holds its second such refinancing operation at the end of this month, ECB Governing Council Member Ewald Nowotny said Friday.

"I believe the general feeling in ECB council is that we have set very considerable measures. Now it is about waiting and seeing what effect these measures have in connection with economic developments. I personally don't see any need [for a further three-year tender]," said Nowotny, adding, however, that the ECB never pre-commits to any course of action.

The central banker also said that the three-year tender had had a positive impact and its effect on banks had been structural and had not led to a wave of loans being given out. He also said that the ECB's role was not to provide monetary financing directly to member states. Nowotny, who is also the central bank governor of Austria, said that Austrian banks were not "addicted" to the ECB's liquidity measures.”

(emphasis added)

The little reminder that the ECB 'never pre-commits' to a course of action is best translated as 'there will be no need for another LTRO until there is need for one'. The ECB said the very same thing after the 2008/9 liquidity provisions and then allowed money supply growth in the euro area to slow down considerably in 2010-2011 – until the next phase of the crisis predictably struck. So we can probably expect the current batch of measures to go through the same process: after an initial spike in money supply growth that at present supports bond and stock markets alike, growth in monetary aggregates will once again slow down until it has slowed down enough to unmask the fact that the crisis has never ended.

As an interesting aside to all this, UK based banks also plan to once again take part in the ECB's LTRO tomorrow. Michael Pollaro has recently begun to gather and chart the UK's true money supply data as well and it has turned out that in spiteof several iterations of 'QE' by the BoE, UK true money supply growth has actually gone negative. We will have to say more about that phenomenon in an upcoming post.  As it were, the UK experience may actually become relevant for the euro area as well and it will be very important for investors to track these developments closely. The global interconnectedness of the financial system enables monetary inflation to be effectively 'exported and imported' and the US financial markets have clearly profited from this fact in recent months.

and...

http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_28/02/2012_430286

Tax statements to be submitted later By Prokopis Hatzinikolaou The Finance Ministry is planning to postpone the submission of income statements by taxpayers, with sources suggesting it may announce its decision on Wednesday. That is because of the lack of the appropriate forms and the delay in the issue of the guidelines booklet. The plan is for all 5.5 million taxpayers to submit their statements at the same time, probably in May and June, regardless of whether they are salary workers, pensioners, freelancers or farmers. This is set to cause serious problems in the execution of the 2012 budget.

and...

http://www.spiegel.de/international/europe/0,1518,818007,00.html

German Court Grants Parliament More Say in Bailouts

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The German parliament must have a greater role in euro decisions, the top court has ruled.

The nine-member panel set up by the German parliament to monitor the activities of the temporary euro bailout fund is "in large part" unconstitutional, Germany's top court said on Tuesday. The ruling could curtail Berlin's ability to fight the euro crisis.

Germany's Federal Constitutional Court on Tuesday handed down a ruling that could make it more difficult for the government to tackle the euro crisis. It decided that the nine-member panel of lawmakers set up to approve urgent action by the euro rescue fund was "in large part" unconstitutional and would need to be enlarged.The panel was set up last year to provide a quick green light for aid in especially urgent situations in which it wouldn't be feasible to put the issue up for a vote before the full parliament. Furthermore, due to market sensitivities, there was concern that some measures would have to be kept under wraps until they had been approved -- which would hardly be possible given that there are 620 parliamentarians in the German Bundestag.

But the country's top court said on Tuesday that members of the lower house of parliament, the Bundestag, would need to be given a greater say in the operations of the European Financial Stability Facility (EFSF), the temporary bailout fund, and that the panel must have more members and reflect the parliamentary majority.

Boosting the Role of Parliament

Thomas Oppermann, a leader of the opposition Social Democrats in parliament, welcomed the ruling. He said that the ruling would ensure that efforts to save the euro would become "more transparent and understandable to voters."

The court suspended the panel at the end of October pending its ruling after two parliamentarians from the opposition Social Democrats had filed a complaint, arguing that parliamentary powers were being undermined. The German constitution guarantees parliamentary oversight of the country's budget. Given the amounts of money necessary in bailing out stricken euro-zone countries, the court was concerned that the oversight guarantee was being ignored.

The court said the nine-member panel could still approve the purchase of debt on the secondary market by the EFSF but it ruled against other powers including extending loans or preventative credit lines to troubled states, and the recapitalization of banks.

The decision follows a ruling last September in which the court boosted the role of parliament in government decisions on the euro crisis.