Thursday, February 24, 2011

German Voters Express Desire for No More Bailouts

In the wake of a recent election in Germany, Bloomberg reported that the results reflect the desire on the part of Germans for no more bailouts.

This raises the interesting question of how are regulators and Euro market officials going to stop the sovereign debt crisis now that additional bailouts have been taken off the table?

Under the FDR Framework, the answer is disclosure of data at the financial institution level.  With this data, the market will determine which financial institutions need capital and how much capital.  At that point, the financial institution can try to raise capital from the private markets.  If not successful, the government has the option of injecting capital or closing the financial institution.

With this strategy, the era of bank bailouts is ended. The focus can then be placed solely on the sovereign issue.  [emphasis added]
Chancellor Angela Merkel’s party suffered its worst defeat since World War II in Germany’s richest state, losing control of Hamburg in the first of seven state elections this year that threaten to limit her scope to tackle Europe’s debt crisis. 
The result in Hamburg, the city-state of Merkel’s birth, underscores the challenge she faces trying to balance public opposition to bailouts for debt-wracked states against pressure from investors and fellow euro countries to lead the way in stemming the debt contagion. She faces three more state ballots next month on either side of a March 24-25 European Union summit called to form a comprehensive plan for the crisis. 
“It’s a warning to Merkel,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. “If she has to draw any lesson, it probably will be to get tougher at the European level to show something to German voters,” he said. “There is no room for Merkel to come home from Brussels on March 25 with anything that could look or smell like a defeat.” 
... “There’s a risk to peripheral bonds if Germany is seen not to be displaying support for the countries that are in trouble,” said Orlando Green, assistant director of capital- markets strategy at Credit Agricole Corporate & Investment bank in London. “The market would have been hoping that a deal would have been struck already” before the elections. 
... Hamburg was the first electoral test of Merkel’s policy since her party lost a state election last May, a result that she blamed on voter anger over bailing out Greece. The defeat cost her control of parliament’s upper house in Berlin, the Bundesrat, where regional administrations are represented. The Hamburg result, if confirmed, would cost the CDU 3 seats in the Bundesrat, further limiting her ability to pass legislation.
... Merkel’s main European policy challenge this year is getting the EU debt-fighting deal through parliament and “for her, Baden-Wuerttemberg is the test,” said Holger Schmieding, chief economist at Joh Berenberg Gossler & Co. in London. 
Germany, Europe’s largest economy, is already the biggest country contributor to last year’s 110 billion-euro bailout of Greece and the rescue fund for debt-stricken states. 

No comments: