Today they will learn whether this is wishful thinking.
"The markets have come to believe wrongly there is a grand master plan to save the world," said Andrew Roberts, credit chief at RBS. "They have built up enormous hopes that a deal will be struck to unlock the ECB's balance sheet. They will be extremely disappointed if there isn't a big acceleration in bond buying."
The ECB does not have a clear mandate to act as lender of last resort for sovereign states. "The bank is very conscious that it is a European institution and has to abide by EU treaty law, and Article 123 of the Lisbon Treaty prohibits the financing of governments," said Julian Callow from Barclays Capital.
What the ECB does have is authority to backstop Europe's €23 trillion banking system – by far the biggest in the world. It is doing so with a ballooning balance sheet of €2.4 trillion or 26pc or eurozone GDP.
It has increased bank support by over €500bn since March, including $51bn in US dollars for 34 lenders under the latest swap arrangement with the US Federal Reserve.
Frankfurt veterans say Thursday's meeting of the Governing Council will look for ways to save banks, not states. The ECB may lengthen maturity on loans to two years, and relax rules on collateral to allow use of low-grade assets.
Interest rates will almost certainly be cut a quarter-point to 1pc. But monetary conditions are deteriorating so fast as a credit crunch engulfs large parts of the eurozone and M3 money contracts (month-on-month) that small cuts may not be enough to keep pace with events. "Passive tightening" is well under way.
"The ECB should launch proper quantitative easing to offset the obsessive fiscal tightening in the eurozone," said Dario Perkins from Lombard Street Research.
Mr Draghi gave ambiguous hints last week that the ECB might come to the rescue once EU leaders had agreed to a "fiscal compact", with iron-clad mechanisms to assure that no eurozone state ever again flouts budget rules or endangers the system. "Other elements might follow, but the sequencing matters," he said.
The question is whether the fudged plan unveiled on Monday by German Chancellor Angela Merkel and French president Nicolas Sarkozy bears any resemblance to Mr Draghi's "fiscal compact", or even whether it can win support of all EMU states.
Hungary's EU commissioner Laszlo Andor said the "Merkozy" proposal for automatic sanctions against fiscal sinners was "a joke", saying fiscal union "needs collective, democratic decision-making".
The package of measures is a fiscal union in name only. There is no joint debt issuance, no shared budget, and no fiscal transfer. It is a charter of discipline, a revamped Stability Pact with lipstick.
Mrs Merkel has backed down on her demand that budget violations be justiciable before the European Court. Sanctions will be imposed by EU ministers, but France and Germany will each have a veto. The rest is flannel.
"The deal is clearly not enough to give political cover to the ECB and allow it to stabilise the bond markets," said Fredrik Erixon, head of the European Centre for International Political Economy in Brussels.
Mr Erixon said the ECB has the legal power under various treaty articles to impose a cap on bond yields – such as Article 3, which obliges all EU bodies to support the union's objectives and promote "economic cohesion". "Are they really going to stand back and allow Europe's neck to be broken?"
Crucially, the balance of power has shifted within the Governing Council, with the German purists increasingly isolated as even the Dutch start questioning the ECB's scorched-earth strategy. "The power struggle is already over. It has been won by those who want the ECB to act as real central bank, but they need political cover."
Mr Erixon said EU leaders should "end the charade" that their rescue fund (EFSF) has the firepower to handle the triple crisis in Italy, Spain and France. "Member states simply don't have the willingness to set aside the kind of money that would be necessary. The key task for EU governments now is to dress up the euro bride for the ECB and the International Monetary Fund."
Mr Draghi's words today will be parsed carefully by investors searching for signs that the central bank is willing to go nuclear. "If the ECB does not step in as lender of last resort, markets are going to react very abruptly," said Professor Giuseppe Ragusa from Rome's Luiss Guido Carli University.
Jitters are already reappearing. Italy's 10-year bond yields spiked back up to over 6pc on Wednesday, though still far below the extremes of late November. Nor is it clear that the EU's policy of further budget austerity is the right medicine at this stage.
Standard & Poor's warned on Monday that Europe's contractionary policies increase the risk of downgrades, even for the AAA core. "As the European economy slows, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, eroding the revenue side of national budgets."
Italy risks spiralling downwards. Industrial output slumped 4.2pc in October. "The austerity is counter-productive. The economy will contract even more next year, so we may be chasing our tail," said Prof Ragusa.
Mr Callow from Barclays Capital said there is no way to restore global confidence in the euro project until the eurozone equips itself with a treasury and the apparatus of a state. "You cannot resolve this crisis without a federal eurozone, but you are dealing with historic nation states that are not used to being treated like US states, and it would be democratically unaccountable. So how do you get there?"
Growing Conservative anger over Europe will be further inflamed today by a German rejection of Britain’s demand that the eurozone rescue deal must include legal protections for the City of London.
Owen Paterson, the Northern Ireland Secretary, broke ranks by declaring that backing a more integrated eurozone would make it “inevitable” that the Prime Minister would have to give voters a say.
Boris Johnson, the London Mayor, said Mr Cameron would have “absolutely no choice” but to hold a referendum. EU leaders were “in danger of saving the cancer and not the patient”, he said.
Mr Cameron also suffered embarrassment in the Commons as his backbenchers repeatedly challenged his European strategy, telling him to fight harder to win back powers from Brussels. Ed Miliband, the Labour leader, mocked the Prime Minister for failing to deliver on promises.
Mr Cameron travels to Brussels on Thursday for a summit on plans to resolve the eurozone debt crisis with a treaty that further integrates the fiscal systems of countries using the single currency.
Despite warnings that failure to agree a deal will lead to a catastrophic loss of confidence in financial markets, some European officials were pessimistic, suggesting that big decisions could be postponed.
France and Germany have said a treaty should be finalised by March. Paris and Berlin yesterday circulated a proposal for fiscal union that also suggests a tax on financial transactions between banks within the eurozone.
The US government has called for a swift resolution to the crisis, and President Barack Obama is understood to have discussed the summit with Mr Cameron yesterday.
Tory MPs told Mr Cameron the summit was a “once-in-a-lifetime opportunity” to win back power from Brussels in exchange for giving his consent to the fiscal union. Andrew Rosindell challenged Mr Cameron to “show some bulldog spirit” at the summit. John Baron demanded “a fundamental renegotiation of our relationship with the EU”.
But the Prime Minister insisted that his “key aim” was saving the euro, signalling that the repatriation of powers must wait. He has also ruled out a referendum on the rescue deal. Mr Cameron is trying to placate his party by insisting that he will veto any deal that does not offer clear assurances that the City will be shielded from EU regulation.
Almost 30 Tory MPs and peers have signed a letter to The Daily Telegraph telling Mr Cameron it is “imperative” he gets protection for the financial sector. “Without strong action, the present drift seriously threatens both British jobs and Exchequer revenues,” they warn.
Germany yesterday dismissed Mr Cameron’s claim for concessions. A senior official insisted that non-eurozone countries had no grounds for concessions because the treaty changes would not affect them.
“Nothing has been proposed that involves new treaty obligations for Britain so I cannot see what the big issue is,” the official said. “We don’t want a solution when that solution leads to demands from others to reopen treaties.”
In a tactic designed to isolate Britain and split the 10 non-eurozone EU members, Angela Merkel and Nicolas Sarkozy yesterday invited the 23 members of a “Euro Plus” economic pact to monthly summits.
The move, which splits non-euro countries such as Poland, Sweden and Denmark away from Britain, will lead to decisions on broader economic policy being taken without British involvement.
Back in September, Mr. Hatheway and colleagues Paul Donovan and Stephane Deo released a report that predicted a disastrous outcome if even one nation left the eurozone. The economists envisioned a 20% loss in gross domestic product for creditor countries (e.g. Germany) in a break up, and a 40% loss for debtor countries (e.g. Greece).
But Mr. Hatheway now says it could be much worse.
“On reflection this author, at least, feels the estimates are probably conservative — the true costs could well be higher,” he said. “That’s because once Europe (and the world economy) finds itself in depression, policy probably couldn’t arrest the decline. Broken financial systems and ruined economies are the stuff of prolonged deflation or worse.”
Mr. Hatheway goes on to say that the eurozone was “flawed from the start.” But in his view, the pain that would result from a collapse in the monetary union far outweighs the current volatility that stems from trying to save it.
“The preferred outcome is to fix what is broken,” he said.
And for those wondering why the eurozone doesn’t just kick out Greece and be done with it, Mr. Hatheway argues against that type of solution.
“Once one country leaves the eurozone, residents in other at-risk member countries would plausibly conclude their country might be next to go,” he explains. “Logic dictates they would send their wealth abroad, resulting in a run on their domestic banks, precipitating a collapse of their financial sectors and economies”
Mr. Hatheway gives some insight into how bad he thinks the global macro situation could become if the world is faced with a eurozone collapse. He says when people ask him how they should prepare for a eurozone collapse, he gives the following reply:
“I suppose there might be some assets worthy of consideration—precious metals, for example,” Mr. Hatheway said. “But other metals would make wise investments, too. Among them tinned goods and small calibre weapons.”
(Reuters) - The threat of a credit downgrade to the euro zone's top economies leaves the bloc's EFSF bailout fund dangerously exposed, piling yet more pressure on the European Central Bank to step in as lender of last resort.
The fund has struggled to attract investors even with the backing of six AAA-rated governments, and on Tuesday S&P followed up a warning of possible downgrades for 15 euro economies by saying it is also reviewing the EFSF.
Expanding the lending reach of the European Financial Stability Facility (EFSF), agreed at an emergency summit in October, is central to the euro zone's plan to show investors it can stand behind its wayward sovereigns.
But much of the fund's ordinal appeal lay in the top creditworthiness of its guarantors, notable the euro's main paymaster Germany and France, the EFSF's second largest contributor.
Even so, appetite for the rescue funds own bonds had waned by its fourth auction last month, while its complex plans to attract nations with big foreign reserves, such as China, to invest in leveraging the fund's lending capacity met a cool response.
Standard & Poor's warning on Monday that it could cut the credit ratings of 15 countries in the bloc, including France and Germany, by 1 to 2 notches, makes the goal of leveraging the EFSF's funds to up to 1 trillion euros (859.97 billion pounds) look even more doubtful.
"This can't be positive," said Guillaume Menuet, an economist at Citigroup. "Any prospective downgrade to something that was supposed to be the best thing available is going to diminish investor appetite in the facility, especially if you had doubts about it in the first place," he said.
The AAA rating of the EFSF, which is backed by guarantee commitments for 780 billion euros and has a lending capacity of 440 billion euros, would be at risk if one of its guarantors were downgraded because the remaining AAA members would have to take on a bigger burden, in turn endangering their own ratings.
As for the EFSF, "We could lower the long-term credit rating on EFSF by one or two notches if we were to lower the 'AAA' sovereign ratings," S&P said on Tuesday.
"There's a sense that events are overtaking the EFSF and the leveraging may not work in time," said an EU diplomat with knowledge of discussions about the plan.
The EFSF declined to comment on Tuesday.
ECB TO THE RESCUE
Following a meeting of euro zone finance ministers in Brussels last week, the EFSF said the leveraged fund should be fully operational from January. But concerns of a euro zone default could also make plans to offer first-loss bond insurance -- the other pillar of the EFSF's leveraging plan -- too costly.
Providing insurance on more than the first 20 percent of euro zone bonds in the case of default would eat up the 250 billion euros the EFSF has left, after lending to Ireland and Portugal, and aims to multiply.
Even before the S&P announcement, senior euro zone policymakers had expected the EFSF may only reach 500 to 750 billion euros in its new, leveraged form.
That sum is dwarfed by Italy and Spain's funding needs for the next three years of some 1.1 billion euros, should they find themselves unable to tap the markets.
The fund paid its highest yields on November 7 when it raised money for its Irish funding programme, and the fund's head, Klaus Regling, said the lack of details about how a leveraged EFSF will actually work were partly to blame.
"The basic issue here is that the EFSF, even in unleveraged form, is starting to find it difficult to raise money of late," said Malcolm Barr, an economist at JP Morgan. "So the idea that the EFSF is the vehicle to deal with this crisis is losing value," he added, speaking before the S&P statement was released.
Plans to increase the EFSF's firepower were introduced after the European Central Bank refused to consider giving a banking licence to the fund so it could draw upon ECB financing.
But the ECB remains the only European institution with the ability to play the role of lender of last resort.
"The ECB is the only institution that can help now," said one European banker who advises clients on investing in euro zone debt.
Mario Draghi, the ECB's new head, signalled last week the bank may be willing to pursue more aggressive action if euro zone governments adopted what he called a "fiscal compact."
European leaders will hold a summit in Brussels on Friday to try to calm panicky markets. France and Germany hope the ECB will be reassured by a master plan involving EU treaty change to impose budget discipline across the euro zone - and finally concede the sort of intensive bond buying that could restore confidence to the markets.
"The door is open for the ECB to start leaning more heavily against the wind in the sovereign debt market," said Erik Nielsen, global chief economist at UniCredit in London.
“Jim, economic collapse with the euro: will that lead to a recession?” asks Glenn Beck.
“That will lead to the end of the world as we know it,” answers Jim Rogers, founder of Rogers International Commodities Index. “That will certainly lead to the end of the world as Washington D.C. knows it. There’s no question about that.”
But who is Jim Rogers and what does he know about the global financial situation?
For those unfamiliar with Beck’s guest, Jim Rogers is a famous American investor who, along with George Soros, founded the Quantum Fund, one of the world’s first international funds. Also, as mentioned above, he is the creator of the Rogers International Commodities Index.
He is a well-known proponent of free market capitalism, a successful author, a regular lecturer of finance at the Columbia University Graduate School of Business, and he has been a regular guest on Fox News’ “Cavuto on Business.”
Needless to say, he knows what he’s talking about when it comes to finances and he has repeatedly proven his keen market sense.
“We do live in very perilous times and I hope you’re very careful and I hope you’re prepared,” Rogers said in regards to the growing financial meltdown.
The conversation then turned to the topic of gold and the importance the precious metal may play in the near future.
“Everybody knows what that [gold] is. You’ll be able to sell it, barter it you have to, if it gets this bad,” said Rogers.
But what could create conditions bad enough to force someone to have to barter gold?
A total financial collapse.
Beck asked Rogers to explain difference between a recession, a depression, and the much-feared total collapse.
“Well, a recession is when your neighbor loses his job and a depression is when you lose your job. And collapse is when nobody has a job and there are people foraging in the streets; happened in Argentina 10 years ago, happened in Germany in the early 20s—“
“But it’ll never happen here. This is the United States of America!” Beck interjected.
At that point, for both the host and the guest, trying to keep a straight face became an exercise in futility.
Watch Beck and Rogers discuss everything from the potential food shortages that may occur in the event of a total economic collapse, to the present-day agricultural disaster, and much more via GBTV:
Another legal trick Van Rompuy? you seems to be an expert!!!!!!
The European Union may be able to winkle out of the fraught process of a full treaty change via a clever legal trick, EU Council President Herman van Rompuy has suggested.
According to a two-page report from the Belgian EU chief submitted to national capitals on Tuesday (6 December), by amending a protocol attached to the Lisbon Treaty rather than changing the treaty itself, the lengthy and politically uncertain path of referendums and ratification by national parliaments can be avoided entirely.
Instead, so long as EU leaders unanimously back a redrafting of a single protocol, the changes can be achieved almost instantly, following consultations with the European Central Bank and the European Parliament, both of which would be formalities.
The article (Art. 126) in the treaty that deals with excessive deficits is fleshed out in a protocol attached to the legal text of the document but which remains separate from the treaty itself.
This article also gives the premiers and presidents the ability to change the attached protocol without having to go through the normal procedures associated with a treaty change.
The EU rulebook normally requires that ahead of any treaty change, a full intergovernmental convention be convened, involving national governments and the European Parliament, which last week issued a demand that any treaty change pushing through advanced economic integration be accompanied by deepening democratic controls at the EU level.
Some states, such as Ireland, would likely have to hold referendums over any further transfer of powers to the EU.
Dublin is still smarting from an unexpected defeat in its 2007 referendum on the Lisbon Treaty, a defeat that was overturned the following year after the country was forced to re-run the referendum.
The Irish government is convinced that another such referendum would be lost decisively in the current economic-political climate and at a time when the country has in effect abandoned sovereignty over fiscal policy to the EU and the IMF.
Polls put opposition to a fresh treaty change on 48 percent in the country against 27 percent in favour.
Whether Van Rompuy's trick will be sufficient to avoid triggering a referendum in the country remains an open question, depending on the scale of transfer of existing powers.
Some of the changes envisaged dovetail with those outlined in the past few days by France and Germany that push for deeper economic integration in the eurozone.
Under the plan, the European Commission would be given the power to impose austerity directly on bail-out nations. Those states that flouted debt and deficit rules potentially could have their voting rights in the Council suspended.
Member states would also introduce "golden rules" requiring balanced budgets into national legislation.
The eurozone's rescue fund would be awarded a bank licence in order to borrow from the ECB and labour laws, while pension systems and other social protections would steadily be harmonised.
Meanwhile, UK Prime Minister David Cameron has said that he will veto any new treaty if he does not win protections for the City of London, the British financial district.
"As long as we get those, then [a] treaty can go ahead. If we can't get those, it won't," he told the Press Association newswire in an interview.
