Blatant Arrogance of France

The "Merkozy" coalition is one again in open dispute with itself. German chancellor Angela Merkel has one position and French President Nicolas Sarkozy another.

Historically, Sarkozy's disputes with Merkel have always been resolved with Merkel buckling like corn flakes run over by a cement truck.

However, I expect a different result this time because Sakrozy is fighting not only Merkel, but the ECB, the German constitution, and the Maastricht Treaty.

This has spawned an emergency flight by Sarkozy to Germany where the feud will continue.

Plans to tackle the euro zone debt crisis have stalled with Paris and Berlin at odds over how to increase the firepower of the region's bailout fund, French President Nicolas Sarkozy said on Wednesday.

Sarkozy told French lawmakers the dispute was holding up negotiations and flew to Frankfurt to talk with German Chancellor Angela Merkel in an attempt to break the deadlock ahead of a make-or-break European leaders' summit on Sunday.

The two leaders left that meeting without speaking to waiting reporters.

Asked if a deal had been reached, Jean-Claude Juncker, chairman of the Eurogroup of euro zone finance ministers who attended the evening meeting, replied: "We're still in meetings Saturday, Sunday."

Divided Over Leverage

France has argued the most effective way of leveraging the European Financial Stability Facility (EFSF) is to turn it into a bank which could then access funding from the ECB, but both the central bank and the German government have opposed this.

"In Germany, the coalition is divided on this issue. It is not just Angela Merkel whom we need to convince," Sarkozy told the parliamentarians at a lunch meeting, according to Charles de Courson, one of the legislators present.

Adding to uncertainty, the Financial Times reported that plans to strengthen the banking system, another key plank of the discussions, would fall short of market expectations.

The latest official estimates have put the banks capital shortfall at less than 100 billion euros, the FT said, compared with a recent IMF report putting the funding hole and 200 billion and analysts' estimates of 275 billion or more.

Cirtcuit Breaker

One senior EU official, who is involved in coming up with solutions to the crisis, said the only "circuit-breaker" now was for the ECB to make an explicit commitment to go on buying distressed euro zone debt for "as long as it takes," something Trichet has said should not happen.

However, Barroso appeared to back such intervention, saying in Frankfurt: "The decisive intervention of the ECB in secondary bond markets was and still is a critical element in securing financial stability in the euro area."

"You know the French position and we are sticking to it. We think that clearly the best solution is that the fund has a banking license with the central bank, but everyone knows about the reticence of the central bank," French Finance Minister Francois Baroin told reporters in Frankfurt.

"Everyone also knows about the Germans' reticence. But for us that remains ... the most effective solution."

A senior German government source said Berlin remained resolutely opposed to the ECB backstopping the rescue fund.

Bank or Insurer?

Euro zone officials have told Reuters that an alternative model, whereby the EFSF could underwrite a portion of newly issued euro zone debt, is also on the table.

By guaranteeing the first 20-30 percent of any losses, the EFSF could stretch three to five times further. With about 300 billion euros of its 440-billion-euro capacity still available, the fund could be expanded to more than 1 trillion euros, and give markets pause for thought.

However, analysts are unconvinced that a leverage plan involving a guarantee on first losses would succeed, warning that it could create a two-tier structure in some bond markets and would be meaningless without an explicit commitment from the ECB to go on buying at-risk debt.

While Europe's leaders rush to stop a larger writedown of Greek debt infecting others in the euro zone, ordinary Greeks are angry at the prospects of several more years of pain as the price of help from international lenders.

"Who are they trying to fool? They won't save us. With these measures the poor become poorer and the rich richer. Well I say: 'No, thank you. I don't want your rescue'," said 50-year public sector worker Akis Papadopoulos.

The "French Position"

Notice the blatant arrogance of France a depicted in the statement "You know the French position and we are sticking to it."

Yes, the whole world knows the "French Position".

A month ago the Central bank of France insisted there were no toxic debts in French banks.

This prompted me to write on September 25 Desperate Times Lead to Desperate Lies; Europe Weighs the Weightless; Even Citigroup Sees the Lies

Are central bankers and politicians really as stupid as they sound or are they pathological liars who simply cannot help it?

Check out these preposterous lies by Bank of France Governor Christian Noyer as quoted by Bloomberg in Noyer Sees �Absolutely No Reason� to Use Bank Backstop

Noyer Lies

1. �I�m extremely confident� in French banks because �we know them very well. We know their balance sheets, their risk assessments. We know they have no toxic assets.�
2. There is �absolutely no reason� to activate a support system for the nation�s banks that was set up during the financial crisis in 2008.
3. Markets �are over-reacting,� he said. �They need to come back to a sense of reality.�

All of those are blatantly preposterous. However, lie number 1 has to be one of the top lies of the year. "French banks have no toxic assets"?!

For starters, what about Greek bonds about to take a 50% haircut or more in default? That lie is so ridiculous no one on the planet can possibly believe it.

The French central bank blatantly lied about the capitalization of French banks right before the implosion of Dexia Bank. Dexia was the allegedly the safest bank in stress tests.

Furthermore the "French Position" is in violation of the German constitution, the ECB's wishes, and the Maastricht treaty as well.

Bureaucrats never concern themselves with such details and worse yet, they are arrogant about it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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