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Bonds: Merkel might not oppose role for central bank, through IMF

Date: Monday 05 Dec 2011

Bonds: Merkel might not oppose role for central bank, through IMF

The international debt markets have been dominated yet again by events in Europe, as Germany and France appeared to edge closer to a comprehensive deal to “save the euro”.

Meeting in Paris Chancellor Angela Merkel of Germany and France’s President Sarkozy implied that a new treaty could be sought to impose tougher budgetary discipline on the European Union.

Several important ideas emerged from today’s meeting, the first is an increased “automaticity” in the way Euro area countries are punished if they break the existing rules on not borrowing more than 3% of GDP in one year. Frau. Merkel raised the prospect of Eurozone countries’ budgets being verified by the European Court of Justice.

Another feature of today’s meeting was the emphasis on the IMF, with Germany indicating it would not prevent the Bundesbank from lending money to the International Monetary Fund. That money could, in turn, be used to finance the distressed European states like Spain and Italy, but while avoiding the twin risks of moral hazard and regulatory capture.

One idea that does appear to be off the table is the so called “Eurobond”, which would have forced Germany to underwrite the debts of its Eurozone partners in a very direct manner.

On top of what markets interpreted as a coherent set of plans from Paris, there was also the news that emerged yesterday from Rome of a new €30bn austerity programme that could see the retirement age rising to 66 for women and a break in the link between inflation and pension increases.

Overall the effect on sovereign debt has been remarkable.

At 5:50PM in London the interest on Italian 10 year bonds had fallen to 5.95%, a drop of 73 basis points. Spanish equivalents fell 55.7bp to 5.123%. French 10 year debt notes dropped 13.5bp to 3.133%. British 10 year bonds gained 5.8bp to hit 2.35% while US 10 year treasuries were yielding 2.09%, up 5.3bp. German bunds gained 6.9bp to the 2.2% mark.

BS

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