Europe's sisyphean challenge: the top of the hill is out of sight and time is running short

The markets are showing signs of a spending strike making it harder for eurozone to sell debt. Time is running out and Germany needs to ask itself some serious questions

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Will Europe continue to push the boulder? Or will Germany step up?
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Simon Miller
On 25 November 2011 15:19

Like Sisyphus, the ball just keeps rolling down the hill. No matter how many times Europe pushes back, the task appears never-ending.

I make no apology for once again writing about Europe; it appears to be the one cause celebre where we don’t have to listen to Hugh Grant complaining about press intrusion.

It appears that the markets are becoming fed up with the continuous inaction over Europe. With the growing clamour for the Germans to allow the European Central Bank (ECB) to be more pro-active in the crisis, the markets decided to enact their version of an investment strike.

On Wednesday, Germany failed to offload 35 percent of its 10-year bond sale, resulting in only €3.9bn (£3.35bn) being raised. Coupled with the UK out-pricing Germany on yields, it appears that the markets are pricing in a euro collapse.

And yet, there is no reason for thinking the UK is a safer bet than Germany. With our own debt problems - albeit ones that we can monetise – there appears to be other factors going on.

The increasing liability for the eurozone that I talked about last week is being factored in by the markets. Simply put, the market is saying that they don’t want to buy German debt at the moment. The bond sale had a yield of 2 per cent and if you factor in the possible liabilities that rate is far too low to be attractive.

In addition, there’s always a profit to be made out of bankrupt countries.

Think about it, if you are getting a yield of 6.5% on six-month notes it may be worth taking the punt on Italy paying out over six-months.

OK, cynical; but it does beggar belief that Germany cannot settle its entire debt sale whilst Italian six-month notes are fully subscribed despite a doubling of yields from a month before.

And Italy is in serious trouble. Forget the technocrats, Italy is really getting the full Monty today. When short term debt such as 2-year bonds shoot up to 8 percent yields, higher than your long-term which is still in the highly dangerous 7 percent zone, you know you’re in trouble.

The markets don’t believe you in any time scale.  And for Italy, we are getting to the end zone. The country needs to sell €8bn of bonds, including a new three-year one on Monday and Tuesday and then has €22bn to sell in December alone.

Even the ECB seems to be half-hearted in its purchases on the second market.

There is no bailout fund big enough for Italy. The haircuts could be even greater. The country could possibly fully default leaving debtors with nothing.

Even though there have been attempts to camouflage the eurobond idea – a stability bond, really? -  it doesn’t fool Germany which is clearly not playing – for the moment.

After a fractious meeting between the leaders of France, Germany and Italy on Thursday, Angela Merkel once again dismissed attempts to get the ECB to do more. Even if agreement was reached, constitutional issues in Germany plus the speed of action that typifies Europe would see us clearly into January or beyond and it is doubtful whether Italy can actually survive paying these sorts of rates for long.

In addition, retrenchment is happening, with US and UK banks withdrawing from the eurozone and so restricting the money into the system.

We are heading into the stage where the issue is whether this is the actual death of a currency or whether we will see Germany jumping in to save the project?

The choice is that stark. The question is for Germany: What do you want to be part of? A trading union of Europe? Or a Europe that relies on your wealth to prop up the weaker parts?

It is not necessarily a blame game. But it is a question that is growing in urgency by the day if not the hour. Even the Bank of England – not exactly known for quick decisions – has instructed UK banks to develop contingency plans based on a euro break-up.

Just trying to push the boulder up the hill is not the answer. The status quo is no longer enough.

Simon Miller is the Editor of Financial Risks Today. He tweets at @simontm71 

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