European leaders agreed early Saturday to new measures intended to end the euro zone debt crisis, offering the debt-laden Greece a cut in its interest rate and injecting more flexibility into the way a bolstered bailout fund for the euro can be used.Trichet's Rulebook Two-Step
The deal, which went further than had been expected at Friday�s meeting of 17 euro zone leaders, came after a fierce dispute over corporate tax � pitting France and Germany on one side against Ireland on the other.
Because of the standoff, Ireland, which like Greece has accepted a bailout from the European Union and the International Monetary Fund, has not been offered a reduction in its interest rate, now about 6 percent.
The early morning agreement came alongside a deal on a pact called for by Germany and France to tighten discipline in the euro zone.
As expected, the current, temporary fund will be extended to allow it to lend its full 440 billion euros ($608 billion). The permanent fund that will replace it in 2013 will grow to 500 billion euros.
Under the latest agreement, the European Union�s bailout fund will be able to buy bonds on the primary market but not on the secondary one.
However, those seeking a more comprehensive solution had pressed for more far-reaching changes, such as allowing the bailout fund to extend lines of credit to countries or letting it be able to buy bonds on the secondary market. Those ideas were not accepted.
Greece was given a concession on the length of its loan repayments to 7.5 years and agreed to a package with the European Union under which it would raise around 50 billion euros through privatization to cut its debt.
In clear violation of the �no-bail-out clause� in the Maastricht Treaty, the group voted to allow the ECB to directly purchase sovereign bonds.
Note that the ECB is is already stuffed with sovereign bonds. It bought them in the secondary market because buying them in the primary market was against the rules.
Flashback May 4, 2010: Trichet, a Monetarist Pussycat at Heart, Throws ECB Rulebook Out the Window
While the ECB is prohibited from buying assets directly from authorities, it can buy them on the secondary market. Trichet said on May 2 that �at this stage, we have absolutely no decision on the purchase of government bonds.�I said at the time "No Decision" means pussycat-hearted Trichet is considering it. And so it was. "No decision" quickly became a decision, in clear violation of the intent of the treaty.
With strong objections from German central bank president Axel Weber, Trichet started loading up the ECB's balance sheet with garbage.
Now the EU has voted to allow the ECB to buy bonds in the primary market but not the secondary one.
As noted above, this bond buying debacle is not part of the Maastricht Treaty. Thus German voters need to ratify this provision. In effect, German Chancellor Angela Merkel just sold Germany down the river to meet her political goals. She will not survive this.
Greece Gets Interest Rate Reductions, Ireland Doesn't
The EU group also decided to stick it to Ireland, refusing to lower its interest rate although it did agree to modify the terms for Greece.
Bloomberg reports Europe Boosts Bailout Fund With Primary-Market Purchases, Eases Greek Pact
Euro-area leaders retooled their rescue fund to stamp out the debt crisis, authorizing the facility to spend its 440 billion-euro ($611 billion) capacity and enabling it to buy debt in primary markets, while cutting the cost of bailout loans to Greece.Kenny Holds The Line
The officials rejected Ireland�s bid for relief as Prime Minister Enda Kenny refused to yield to calls to raise its 12.5 percent company tax rate. The leaders also declined to permit the fund to finance bond buybacks of debt-strapped states.
The accord was unexpected, coming at the end of a session that began after 5 p.m. following daylong talks among the 27 European Union heads on a response to the uprising in Libya. Officials in Germany and France this week said they didn�t expect a comprehensive agreement until a summit March 24-25.
In return for the euro region acceptance of her conditions on controlling debt, Merkel swung Europe�s biggest economy behind plans to allow greater flexibility and firepower in the EU rescue fund, the European Financial Stability Facility.
With two weeks to the March 24-25 summit endgame, Merkel and Sarkozy clashed with Kenny over corporate taxes. They had insisted on a common corporate tax base as the condition for agreeing to ease the terms of Ireland�s 85 billion-euro bailout. Kenny rejected that position, calling it �harmonization of taxes through the back door.�
Ireland�s main corporate tax rate is 12.5 percent, compared with an EU average of about 23 percent and even higher rates in Germany and France, which it has used to lure companies such as Hewlett-Packard Co.
The European Commission, the EU�s executive body, will present a proposal on a common corporate tax base in the coming weeks, the agency said. Ireland will think it over and come back to the rest of the EU within two weeks, Merkel said.
Talks on a deal for Ireland �will be difficult and detailed but I am convinced and remain convinced that there will be that we can find a way forward,� Kenny said.
Will the real Kenny please stand up? The previous article makes it appear Kenny is about to collapse. A second Bloomberg article below makes it appear otherwise.
Please consider Ireland Bid for EU Relief Rejected as Kenny Holds Line on Increasing Taxes.
Euro-area leaders rebuffed Irish Prime Minister Enda Kenny�s bid for easier bailout terms, demanding that Ireland raise tax rates in return, as they rewarded Greece with a cut in its rescue-loan costs.Raising Corporate Taxes a Foolish Tradeoff
�We weren�t really satisfied yet today with what Ireland pledged,� German Chancellor Angela Merkel said after a summit that ended about 1:30 a.m. in Brussels. �We can only offer the interest-rate cut when we have something in return.�
Kenny, arriving for his first summit as Ireland�s leader, refused to buckle under pressure from Merkel and French President Nicolas Sarkozy as he pushed for relief on the 5.8 percent interest rate the country pays on the 85 billion-euro ($115 billion) rescue package it received in November.
On raising the tax rate, �I made it perfectly clear on many occasions that this is not something that I could or would contemplate and didn�t this evening,� Kenny said. He said talks would continue through a summit scheduled for March 24-25.
Ireland�s main corporate tax rate is 12.5 percent, compared with an EU average of about 23 percent and even higher rates in Germany and France, which it has used to lure companies such as Hewlett-Packard Co. to set up in the country.
�We�re not asking Ireland to put up their corporate taxes to the European average, but to make some effort,� Sarkozy said.
Kenny is a fool for putting himself in this position. Somehow the discussion is about pissy reductions in interest rates in return for unwise corporate tax hikes. The discussion ought to be on how big the haircuts will be. If Kenny comes to his senses, which is by no means certain, he should put the issue of haircuts to a vote.
I think somewhere in the neighborhood of 15 cents on the dollar is about right. If put to a vote, German and French banks would be lucky to see anything at all.
Watered Down Proposals
In spite of all this talk about agreement to a new deal, no real issues were solved.
It makes little difference if the ECB stuffs itself with garbage via the primary or secondary market. Neither way makes any sense.
Moreover, Germany wanted strict rules on raising retirement ages, aligning corporate tax rates and on debt limit enforcement mechanisms.
Instead, "after objections from a host of smaller countries, the proposals were loosened to allow countries to set their own targets. Sanctions are not envisaged, and the commitments nations enter into will be subject to peer pressure instead."
Agreement To Do Nothing
One way to get agreement is to agree to do nothing, which is essentially what happened.
There is no agreement on tax rates, on retirement age, or on sanctions. As before, everything boils down to "peer pressure". Yet one of the reasons Europe is in a mess is that peer pressure does not work.
Also note that we have not yet heard from Irish citizens who will be irate over favoritism to Greece. Perhaps they will force Kenny to get a backbone.
The same applies to Merkel's willingness to play loosey-goosey with German voters and the Maastricht Treaty.
Thus, for all the brouhaha about a "New Deal", nothing has changed except Greece has a slightly lower interest rate, and a few more years in which to "not" pay back its debts. Odds are still high that Greece and Ireland default. The only question is whether default occurs sooner rather than later.
For additional information, please see yesterday's article ECB Stuck in Sovereign Debt Garbage, Seeks German Help to Unload It; Anger in Greece, Ireland; Germany Sets High Price for Bailout Changes
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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