Author: Tyler Stoffers
This past week Germany’s Chancellor, Angela Merkel, once again reiterated her country’s stance when it comes to solving the European sovereign crisis. She directly opposes the issuance of Euro bonds as well as the expansion of the current role of the ECB. Merkel supports her opinion by stating that by issuing Euro bonds it would “level the difference” in interest rates among those in the Euro zone. This would eliminate the ability to see which part of the zone needs to be improved upon and would ultimately send the wrong messages to the market. Although one can see Ms. Merkel’s concerns, it has left many in question of what vehicle will be able to solve this continually-increasing issue. Originally, we had hoped that China would be a white knight in the situation by buying vast amount of European sovereign debt but the country has now pulled back as it is struggling within its own borders. We then had the proposed plan that involved levering up the EFSF which has been repeatedly delayed. Additionally, the IMF has become almost powerless and has been tossed to the side in the discussions of possibilities. Now, Merkel with the support of both Mario Mondi and Nicolas Sarkozy stating their opposition to Euro bonds and an expanded ECB, one begins to wonder what options are left. The crisis has also expanded to infect even the core countries of the Euro zone. This has been shown through a recent auction of German Bunds in which it was on able to place 65% of the issue into the hands of private investors with the rest being absorbed by the Bundesbank. Additionally, spread between Bunds and US Treasuries has widened to 31bp, indicating the increased perceived risk of the core European country. The Euro sovereign-crisis is negatively affecting the entire world economy, what options do you think will be pursued to try and solve this problem?