Eurozone: Is The Crisis Easing? – OpEd

By Roman Mamonov

The EU continues its battle against the financial crisis. This week it is preparing for the January 30th summit. On January 9, Angela Merkel met France’s Nicolas Sarkozy in Berlin and on Wednesday she had talks with Italy’s Mario Monti. All three support the imposition of the Tobin tax on financial transactions.

This week, the EU bailout facility sold its bonds for the first time.

This made the European Central Bank head Mario Draghi optimistic but hopes were shattered when Standard & Poor’s downgraded the credit rating of 9 countries late Friday depriving France of its AAA outlook.

The world’s stock markets had a nervous weekend. Top European indices sank into the red due to the downgrade. Traders who returned to work after Christmas and New Year holidays are beginning to discuss the European debt crisis again. And they have ample reason to do so.

On Monday, Merkel and Sarkozy, who lead the two EU donor countries, mainly concentrated on discussing the debt burden. Germany already supports and Paris is ready to support the euro-zone Tobin tax. However, the French Bank Federation stated that this measure was likely to drive all loan transactions abroad.

An economist from Russia’s Higher School of Economics Vladimir Zuyev believes that the threat of banks moving operations to countries with lower taxes is rather unlikely

“The majority of experts agree that the introduction of the Tobin tax in individual eurozone countries would bring no result it would force all transactions to be moved to countries which don’t impose such taxes. I find a 0,1% or a 0,01% tax reasonable and it may help keep transactions in the eurozone.”

Italy is also prepared to introduce the transaction tax. Meanwhile, Germany and France are planning to sign the EU budget pact by March 1.

Another good news came from the bond market. The European Financial Stabilization Facility (EFSF) has sold 300 million euros worth of bonds with a 3,75% yield to raise funds for Portugal and Ireland.

It is an encouraging sign despite the fact that the volume is not so high, says the head of Alfa Capital’s department of financial markets analysis Vladimir Bragin

“The volume is rather modest but Italy’s and Germany’s bond placement has shown that the demand for euro bonds has gone up. It happened due to an additional injection of ECB liquidity. I think that further bond placements will cause no problems.”

Spain and Italy have also successfully placed their bonds and the head of the ECB was happy about this, hailing this as first signs of economic recovery in the eurozone.

However, the main economic troublemaker Greece is still facing problems. The country’s government is pledging to finalize its write-off talks with banks soon.

Analyst from the Capital Group company, Fyodor Naumov, finds these hopes over-optimistic.

“No one are urging an official default but debt restructuring with such a big write-off (50 or 70 %) looks like a default disguised as voluntary restructuring.”

However, some debtholders want a default to get their credit default swap fulfilled.

There is also a third player, the ECB, which has a big say on the subject of Greece’s debt and a default could affect its capital.(end)

However, the EU is still far from unanimous- Slovakia’s Finance Minister Ivan Miklos stated that the eurozone has to think about expelling several members. Belgium’s socialist Minister Paul Magnette criticized the Euro Commission’s economic policy and claimed that the EU was entering a 15-year recession.

Bulgaria’s Foreign Minister Nikolay Mladenov said that Sofia was not prepared to commit to any financial liabilities aimed at saving the euro(even though Bulgaria is not part of the eurozone) and is against the Tobin tax.