In January (2024), suspension of the Maastricht Treaty budget rules ends, meaning harsh ‘austerity’ comes back into play for the 28 members of the EU. In short, it means targets for budget deficits of no more than 3% of GDP and a debt-to-GDP ratio of 60% are the law of the land…
Unless you’re France.
This is the thing hotly debated during last week’s European Commission summit in Brussels. How do we, as the EU, engineer a soft landing on budget rules while not alienating what’s left of our investor base?
The EU got the last big lot of blood and treasure after the COVID operation from its investor class, who are now sitting on massive losses. Some of these investors, of course, were the member central banks themselves.
Don’t believe me? A €7 billion 0.1% coupon SURE bond maturing in October of 2040 is now trading at a yield of 3.867%. Now that doesn’t look so bad until you grep the price of that bond, which is trading with a bid/ask spread of 0.54/0.55… or a 45% loss.
The leaders of the European Union met last week to discuss how to rearrange the deck chairs on their political Titanic. While the decisions to continue to monetarily support Ukraine and now Israel dominated the headlines, the real story is that what they have to get right is the new budget rules.
And that discussion is important in the context of continued tight monetary policy by the Fed and now the potential for fiscal sanity coming from Capitol Hill with new Speaker of the House Mike Johnson than it was a year ago.
There is also a major push happening offscreen for these bonds to become indexed next to everyone else’s, i.e. to more easily sell them to Muppet investors, through the imprimatur of them being official and backed by the full faith and credit of the EC. Of course, the initial investors in them have lost their ass as the bulk of them were issued when the ECB was at -0.6%. (See Here).
The ECB just held rates at 4.5%. The bond math doesn’t work. So, the EU got the last big lot of blood and treasure after the COVID operation from its investor class, who are now sitting on massive losses. Some of these investors, of course, were the member central banks themselves.
Well, when I say trading, I really mean quoted, because no one actually trades this hot garbage, certainly not with yields rising globally, inflation not tamed anywhere for anything that really matters, and the euro clinging to the cliffside of a precipitous fall against everything that isn’t the Japanese yen.
And the Bank of Japan is intervening daily to shift its monetary policy to defend the yen. And they will.
But don’t feel too bad folks, because the EU is so creditworthy you’ll get your money back in 17 years paid in full plus 0.1% compounded annually.
If these people actually had blood in their veins they would feel at least a modicum of pressure from the investors they swindled out of billions. But they don’t.
What they want now is to get more fiscal integration in order to reassure investors that their more perfect union will be that great bet for 2040.
This is why ECB President Christine Lagarde lobbied hard going in for more fiscal unity.
Ensuring a deal about the implementation of the Stability and Growth Pact would be an important signal of unity, Lagarde said — according to an official familiar with the conversation — observing that the bloc’s framework must promote both debt sustainability and investment.
If you want to understand why the world hasn’t completely given up on the Eurobond markets it is precisely because of these budget rules, designed to reassure investors that they are the responsible party at the geopolitical table, at least compared to the Clown World that is Capitol Hill.
There’s only one problem with this, FOMC Chair Jerome Powell.
These SURE and NGEU bonds, much to the consternation of the EU Commission, continue to trade at far higher yields at similar maturities to German bunds, for example. Here’s a link to the latest report to the EC on the development of this market. The tone is anything but euphoric.
These SURE and NGEU bonds are meant to be the beginning of a real central EU borrower. But without direct taxing authority, slapping a AA+ rating on a bond doesn’t make it creditworthy.
And now you should be able to understand why this is the real war they need the kinetic war not just to cover up default and/or stricter capital controls but also for the US to fight that war alone.
Why else do you think France is sending support to Gaza?
The problem, of course, with the Maastricht rules is the euro itself. Without the ability of the European Commission to have cross-border tax and spend authority, the ECB’s interest rate policy puts undue burden on those countries with lower labor efficiency.
It creates the very dynamic the rules were supposedly designed to prevent, fiscal disintegration. For countries like Greece or Italy, where a local lira or drachma would be cheaper than a German mark thereby normalizing the differences between them when they trade, the euro is too strong for Italian or Greek merchants and too cheap for German.
The former run perpetual, structural trade deficits relative to the otherGermany had been the prime beneficiary of the euro until Powell began raising rates and acting like he runs the Fed for America’s benefit not Germany’s or China’s.
As predictable as the movements of the sun across the sky, German Chancellor Olaf Scholz demanded tighter fiscal rules while France and Germany are negotiating with themselves to screw the rest of the continent over.
It’s why their plans to sell the world on unlimited spending to fight Climate Change isn’t working either. Without the Fed giving them the buy in, global investors aren’t going to pony up the cash. The whole EU air of inevitability just starts to reek like three-day-old fish, or a house guest.
Because, in this model of the world, the Bank of Italy may be subordinate to the ECB but the ECB is subordinate to the Fed.
The EC is trying to supplant individual sovereign bonds with their own bonds. They have to get the next round of fiscal integration going this winter or lose the race for global capital to the US and/or China. If they pull it off — which I suspect they have no choice but to — it’s a signal the are trying to outlast Powell in the hope that they can present a unified front to European investors long enough for the US economy to implode while also hoping the Israeli Firsters in Congress ensure that the US goes to open war with someone… anyone … somewhere! Dammit!
That will keep bond spreads positively biased towards them versus the US as the US enters the throes of Silly Season and the reality TV shitshow as Davos et.al. pull out all the stops for sweeps week.
It’s not a bad bet, sadly.
