She only went along and did it again. Yesterday, and not for the first time, German Chancellor Angela Merkel suggested bondholders should be willing to do their bit and contribute to the great EU bailout by cutting their losses. And yields on bonds, or at least yields on bonds pertaining to certain countries, soared. For a while now we have been saying it is only a matter of time before the Irish crisis spreads. But yesterday it began to look as though the next stage in this saga may be only days away.
If watching the Eurozone crisis is like watching a slow-motion car crash, then maybe someone has taken their hand off the remote, or even put it on fast forward, for the crisis seems to have gathered a new momentum. And markets have even noticed, something this column has hinted at many times, that Belgium could follow suit, too.
And they are blaming the German answer to the Iron Lady. How dare she say these things. The markets are punishing her.
There is one snag with this argument, and the innocent faces that adorn investment banks. Ms Merkel is right. She wants to see the markets punished for their misdemeanours, and sorry, if the truth hurts, well, so be it.
Yesterday, Angela said to the German parliament: “Do politicians have the courage to place the risk burden on those who make money? Or is trading in sovereign debt the only business in the world in which there is no need to take risk?” And then she added: “This is about the primacy of politics, this is about the limits of the markets.”
Well, with those words, the markets’ rage knew no limits.
The yield on bonds relating to Ireland, Portugal, Spain, and also poor old Belgium, soared. In effect, Ms Merkel told the markets she thinks they should share some of the burden in rescuing Europe, and take a haircut: make a loss. And so, if markets are going to lose money, or so it was reasoned, investors had better get a better return on their investment. So up went yields.
Central bankers were none too chuffed. Take Ewald Nowotny. He is Austria’s answer to Mervyn King, and one of the top men at the European Central Bank. He described Ms Merkel’s comments as “irritating” and “reckless”.
But traders across the world seemed to share those sentiments.
Actually, the German leader is not calling for an imminent haircut. Rather, she is thinking about the years ahead, and is trying to prepare the way.
But markets don’t like rumour, or half-baked ideas. Neither do they like hints that they may be forced to cut their losses.
So that’s what happened. We have three observations to make: firstly, default of some sort seems inevitable. Secondly, it seems that in a funny kind of way, Angela Merkel and arch-Keynesian Paul Krugman agree. Both seem to think that markets need to be encouraged to throw their money at business, and stop wasting it on buying assets they think are safe but in the process do little for the economy, which in turn makes these assets far from safe. And finally, we are concerned about interest rates. To find out more see The Eurozone’s three Ds: default, default, and default in the Eurozone
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