On Wednesday, Fitch Ratings Inc. downgraded its credit ratings on five of Europe's biggest banks, and while that decision made headlines, it's not the most important story to come out of Europe this week.
The real story, which the mainstream media is neglecting, is that there are signs of an underground run on Europe's banks.
Almost nobody's talking about it, but there are indications money is already moving out of the European Union (EU) faster than rats abandoning a sinking ship.
Not through the front door, mind you. There are no lines, no distraught customers and no teller windows being boarded up - not yet, anyway.
For now the run is through the back door, and there are four things that make me think so:
Italy's planned ban on cash transactions over 1,000 euros, or about $1,300.
French, Spanish, and Italian banks have run out of collateral and are now pledging real assets.
Swiss officials are preparing for the end of the euro with capital control measures.
Europe's CEOs are actively preparing for the end of the euro despite governmental reassurances.
Signs of a RunLet's start with Italy and Prime Minister Mario Monti's plans to restrict cash transactions over 1,000 euros (down from the current limit of 2,500 euros, or about $3,200).
Ostensibly the move is about reducing tax evasion by prohibiting the movement of large sums of cash outside the official transactional system, but I think it speaks to something far more sinister - namely that the Italian government knows things are going to get far worse than they're publicly admitting.
Consider: Cash is a stored value mechanism. There's not a lot of it because at any given point in time, most of it is on deposit with banks in any country. That's as true in Italy as it is here in the United States when real interest rates are positive during "healthy" times.
But when real interest rates turn negative, people are likely to withdraw cash and stuff it quite literally under mattresses or in coffee tins. (Real interest rates are the official lending interest rates as adjusted for inflation.)
In such an environment, holding cash in a bank becomes nothing more than an imputed tax and a disincentive for deposits. It's also a significant thorn in the side of central bankers who want to control their country's money supply, because cash can operate outside the system and, specifically, logjam reform efforts.
The reason is really pretty simple. If you have negative real interest rates, and cash transactions are largely restricted or removed altogether, then the only way to effectively use cash is to withdraw it and spend it... immediately.
In other words, by limiting cash transactions to 1,000 euros or less, Italy is putting into place a punitive financial control fully intended to keep money moving in a system lest it become worthless or worse - hoarded and worthless.
Now let's move on to banks.
Banking BreakdownMany investors have never thought about it before, but there are really only three sources of funding for a bank:
Money that's effectively "lent" to the bank by customers placing their assets on deposit;
Short-term money market funds;
And long-term bonds or securitized products based on long-term paper sold to bond investors.Together, the three funding sources are like the legs on a stool - lose any one of them and the stool will topple over because it is no longer balanced. Cut the legs down and the stool collapses - that's what is happening now.
Individuals, pension funds and institutions alike are withdrawing funds from Italian, Spanish and French banks. Money has long since left Greece, Ireland, and Portugal.
Thing is, though, it's not just European money that's fleeing. Various reports from The Economist, Bloomberg, CNBC and others suggest that American financials may have pulled more than 40% of their funds from all European banks and nearly two-thirds of their total deposits away from French banks. This is drying up short-term lending capacity and driving up interbank lending costs.
At the same time, money managers the world over are selling their European bonds. This is driving prices lower and yields higher to the point where the cost of debt is now prohibitive (bond prices and yields move in opposite directions). As a result, new bank bond issuance may be down as much as 85% over the past two years, which further hobbles cash hungry European banks.
Finally, facing a near total loss of short-term financing alternatives and having run out of short-term liquidity needed to operate, a number of EU banks are reportedly having to pledge real assets as collateral for badly needed loans.
Normally, banks would use loans, leases or receivables to accomplish the same thing. The fact that they're now having to throw in real estate, their own property, and other assets into the mix signals extreme levels of financial stress that are far worse than what's been disclosed publicly.
Bracing for the InevitableSwiss Finance Minister Eveline Widmer-Schlumpf noted to the Swiss Parliament that she's got a working group examining capital controls and negative interest rates as a means of preventing an economy-crushing Swiss franc appreciation when the euro fails. That's not if the euro fails, but when the Euro fails.
This is an especially dire sign because capital control measures like those the Swiss officials are considering are inevitably the end of any failed monetary system.
European CEOs and their companies are taking matters into their own hands by actively preparing for the destruction of the euro.
Some, like German machinery maker GEA Group AG (PINK: GEAGY) are limiting the maximum funds on deposit with any single bank. Others, like Grupo Gowex, are moving cash and deposits to Germany away from Spanish banks (and Grupo Gowex is a Spanish company based in Madrid, so this is especially telling). BMW plans to cut production by 30% while also tapping into central bank reserves. According to Chief Financial Officer Friedrich Eichiner, the company is already reducing its leasing portfolio to cope with the potential decrease in car values that would impact its borrowing capacity.
As for what all this means for our money, that's pretty clear - think SAFETY FIRST. The return of your capital is far more important than the return on your capital at the moment.
Here's what I suggest.
Buy dollars - I know they're a bad long-term bet, but short-term, they're the best looking horse in the global glue factory as long as the euro is under pressure.
Stick with what you have in place now and manage risk with trailing stops. Confine new stock purchases to high-growth, low-debt emerging markets rather than low-growth, high-debt developed markets.
Short gold and oil in the short-term. Both are priced in dollars, which means both will fall as the dollar rises in conjunction with panic in the EU.
Purchase inverse funds that track the broader markets. If the euro fails, it will tank the broader markets. Then, once it becomes clear that the world will live on, the markets will disconnect from Europe and begin to rise again in earnest.
Run the other way if people tell you that banks are a great investment. They are speculative at best given the number of skeletons still in the closet.
Monday Morning
Why did we join the EU in the first place? We didn’t; we joined the Common Market, which evolved into the EU. But this disguises a more fundamental truth. In the first couple of decades after the Second World War, the UK was in sharp relative decline. Meanwhile, from a state of devastation, the countries of continental Europe advanced rapidly. By contrast, the non–European world, in which we had played out so much of our history, seemed like a backwater. Add in a dose of Britain’s imagined cultural inferiority and a smidgeon of Vorsprung Durch Technik and you have the explanation.
Whatever was true then, the economic reality now is very different. Many of those backwater countries, including several members of the Commonwealth, are booming. Meanwhile, the countries of the EU have been growing relatively slowly – which looks set to continue.
Yet the UK policy establishment is still in the grip of three serious economic delusions which appear to dictate continued membership of the EU: top table syndrome, sizism, and proximity fetishism. The first I have discussed before but the other two need attention.
On size, it is striking that so many of the world’s richest countries are small. The reason, I suspect, is that in a large country the state can be incompetent and yet the country can get by – and still large resources can be available for governments to spend. By contrast, the government of a small country must ensure that the economy remains competitive or its own resources will soon be curtailed.
Singapore is an interesting example. At independence, the view of the British Government was that she should throw in her lot with the much larger Malaysian federation – which she did. Accordingly, when she was expelled in 1965 it must have seemed that her future was bleak. Now look at her. Never mind Malaysia, she has a higher income per head than the UK. Why? The essential answer is good government – by Singapore for Singapore.
On proximity, admittedly the EU gives us tariff-free access to its market, which may help to boost foreign direct investment into the UK. But the cost is high. It starts with our budget contribution, which amounts to about £7bn net per annum. In addition, there is the cost of the Common Agricultural Policy, which may be only about £3bn net, but is probably much more. Then there is the cost of complying with EU regulations, which some estimates suggest could be about £30bn.
Other costs are virtually impossible to quantify – the costs of having our democracy undermined and key national decisions effectively made by the kleptocracy in Brussels.
Admittedly, trade with the EU is very important – about 50pc of our exports go there – but that means that more than 80pc of our GDP does not consist of exports to the EU. Yet this overwhelming part is still governed by the EU’s panoply of ridiculous regulations.
In any case, being outside the EU would not imply being unable to export into it. The tariffs that non-EU goods pay to enter the European market are minor, being governed by world trade agreements. Moreover, there is every prospect of being able to negotiate favoured access, not least because we are their largest export market.
More fundamentally, over centuries this country has made her living (and endured much of her dying) around the world. It is extraordinary that in the age of the internet she should believe that she must do the economic and political equivalent of marrying her next door neighbour. If ever there was a time when matters of language, culture, shared history, law and fellow feeling should trump geography surely this is it.
The European crisis will play out in one of two ways. One is that the euro collapses and the integrationist tendency suffers a huge loss of prestige. In that event, the UK should be ready to advance her vision of a new Europe.
The second is that some sort of fiscal and political union is cobbled together to save the currency union, leaving us marginalised. This union would tax, harmonise and regulate until the (much subsided) cows come home. In that case, we should be prepared to withdraw from the EU. Far from being an economic catastrophe, this could be the making of us. And, most importantly, there would still be us for it to be the making of.
The Telegraph
North Korean leader Kim Jong-il has died at the age of 69, state-run television has announced.
Mr Kim, who has led the communist nation since the death of his father in 1994, died on a train while visiting an area outside the capital, the announcement said.
He suffered a stroke in 2008 and was absent from public view for months.
His designated successor is believed to be his third son, Kim Jong-un, who is thought to be in his late 20s.
The BBC's Lucy Williamson in Seoul says Mr Kim's death will cause huge shock waves across North Korea.
The announcement came in an emotional statement read out on national television.
The announcer, wearing black, said he had died of physical and mental over-work.
South Korea says its military has been put on alert following the announcement and its National Security Council is convening for an emergency meeting, Yonhap news agency reports.
BBC
Expanded Russian military and diplomatic support for the Assad regime was underscored by the deployment Friday, Dec. 16, of advanced Moscow-supplied Yakhont (SSN-26) shore-to-sea missiles along Syria's Mediterranean shore to fend off a potential Western-Turkish invasion by sea. Last week, Russia airlifted to Syria 3 million face masks against chemical and biological weapons and the Admiral Kutznetsov carrier and strike group was sent on its way to Syria's Mediterranean port of Tartus.
Russian naval sources in Moscow stressed that the flotilla is armed with the most advanced weapons against submarines and aerial attack. Upon arrival, the Russian craft will launch a major marine-air maneuver in which Syrian units will take part.
Syria has received from Russia 72 Yakhont missiles able to hit marine targets up to a distance of 300 kilometers - i.e., over the horizon, our military sources report. The missile's radar remains inert, making it hard to detect, until it is close to target. It is then switched on to guide its aim.
Its high speed – 2,000 kmh – enables the Yakhont to strike before its target has time to activate self-defense systems.
Thursday night, in response to the deployment of 21 Syrian Scuds on the Turkish border, including five with chemical warheads, Ankara convened its top military council and declared its armed forces ready for war. Syria also rushed armored reinforcements to the Jordanian border.
DEBKAfile's military and intelligence sources report that the rush of Syrian war moves backed by Russia indicates that both believe a Western-Arab force is on the point of invading Syria. They are keeping an eye especially on Turkey which is suspected of having obtained a NATO marine and air umbrella, including the US Sixth Fleet, for military preparations aimed at ousting Bashar Assad, so repeating the operation against Libya's Muammar Qaddafi.
The diplomatic flurry around Syria was accentuated by US Defense Secretary Leon Panetta's arrival in Ankara Friday morning to find Turkish armed forces on war preparedness, and Syrian Vice President Farouk A-Shara's landing in Moscow for a crisis conference with Russian leaders.
Thursday night, Dec. 15, DEBKAfile reported:
War tensions around Syria rose alarmingly Thursday night, Dec. 15, when Turkey's top military council convened "to review the armed forces' preparedness for war" in response to the deployment of Syrian missiles, some tipped with chemical warheads, on their common border. DEBKAfile's military sources report the meeting was led by Turkish President Abdullah Gul and Prime Minister Tayyip Erdogan.
The Assad government also rushed armored units in two directions - to the Turkish frontier and also to the Jordanian border opposite the US special operations units from Iraq newly deployed to defend Jordan against a Syrian attack, as DEBKAfile reported on Dec. 13
Our sources report that 21 Syrian missile launchers, five of them Scud D with chemical warheads, are deployed in northern Syria opposite the Turkish Hatai (Alexandretta) district. They were moved up in broad daylight to make sure Western spy satellites and Turkish intelligence surveillance saw them. More are on the way.
In Israel, the IDF announced it was reconstituting the special command for operations behind enemy lines under the command of Brig. Gen. Shay Avital.
Before the military council convened in Ankara, Turkey placed its border contingents, air force and navy on war preparedness.
The official statement said the high military council had "assessed Turkish army needs and necessary steps to address these requirements…"
The Turkish press repeated a statement by Foreign Minister Ahmet Davutoğlu in an interview two weeks ago that Turkey does not want to consider a military option for intervention in neighboring Syria as Damascus cracks down on popular protest, but it is ready for any scenario.
The Turkish army has prepared operational plans for seizing parts of northern Syria if the situation there continues to deteriorate. Those plans would essentially carve Syria into two entities, with the Turkish army holding the north and protecting opposition and civilian populations, while the Syrian army and Assad loyalists would remain in control of the central and southern regions.
Involuntary lending is what happens when your teenager figures out how to charge stuff to your credit card. The kid promises to pay for the purchases but never gets around to it, so your involuntary loan keeps getting bigger. At some point it dawns on you that you might never get your money back.
Something similar is happening in Europe, except the dysfunctional family consists of central bankers, with Germany’s Bundesbank in the role of aggrieved parent, Bloomberg Businessweek reports in its Dec. 19 edition. The figures are hard to find, policy makers don’t like to talk about them, and the accounting is far from sexy. Outside of Germany, headlines have been few. But the numbers are huge -- so huge that they may be one of the biggest factors in whether the euro zone hangs together or falls apart.
Expect to hear more about this issue as the glow from the Dec. 8-9 Brussels summit continues to dim and the stresses on Europe’s common currency intensify. The term to remember is Target2. It’s the name for the European Central Bank’s suddenly important interbank payment system, which before the crisis was just a lowly bit of financial plumbing.
The bottom line: Germany’s Bundesbank -- BuBa for short -- has quietly, automatically lent 495 billion euros ($644 billion) to the European Central Bank via Target2. That lending has balanced correspondingly huge borrowings from Target2 by the central banks of weaker nations including Greece, Ireland, and Portugal -- and lately Spain, Italy, and even France. They are technically “claims,” not loans. To find them you have to root around in the footnotes of the reports of the 17 national central banks of the euro zone.
Lose Entire Claim
If the euro zone breaks into sorry little pieces, Germany could possibly lose its entire claim. It is 60 percent bigger than Germany’s annual federal budget -- and larger than the lending under the European Financial Stability Facility and other aid programs that have received more scrutiny.
Germany’s plight gives it an incentive to keep the euro zone intact. “If the euro breaks up then the whole claim is under risk,” Hans-Werner Sinn, president of the Ifo Institute, a Munich-based economic research group, said in an interview. Sinn, the first economist to focus attention on the Target2 imbalances earlier this year, wrote in a November research paper, “This may be the largest threat keeping Germany within the Eurozone.”
Back-Office System
Nobody designed Target2 to ensnare Germany as a creditor. It was the most boring back-office transaction-processing system imaginable when it was launched in 2007-08 as a successor to the equally boring original Target (a rough acronym for Trans- European Automated Real-time Gross Settlement Express Transfer system). In the early days of the euro currency, Germany wasn’t even always a creditor: It had a net liability of 31 billion euros ($40 billion) at the end of 2001.
Then came the financial crisis of 2007-08. Europe’s peripheral nations began to suffer capital flight. Until then their chronic trade deficits were completely offset by inflows of private capital, both loans and investments. Afterward, lenders and investors grew leery of putting more and more money into those countries. Euros began to flow from the periphery into Germany and to a lesser extent Luxembourg, the Netherlands, and Finland. The Target2 imbalances are an accounting reflection of those outflows. From 2008 to 2010, Sinn estimated in his paper, “Target credits financed almost the entire current- account deficits of Portugal and Greece and a quarter of the Spanish one.”
Powerful Forces
That makes it sound like a central-bank policy decision, which it wasn’t. On the micro scale it was nothing but routine transaction-processing. The most powerful forces are the unguided ones, like the wind and the tides.
Here’s how it happened. When a Greek businessperson buys a truck from Germany with money from a checking account, the transaction is carried out between the two nations’ central banks via Target2. The truck seller isn’t interested in financing the purchase -- it wants euros now. So the Bundesbank has to come up with money in order to deposit it in the seller’s checking account. In accounting terms, the Bundesbank acquires a liability (what it owes to the truck seller’s checking account) and an asset (a claim on the ECB).
The transformation of the Bundesbank’s balance sheet through this slow-but-steady process has been stunning -- and to hard-money Germans, sickening. At the end of 2006, Target claims represented just 7 percent of the Bundesbank’s assets. By this October they represented 64 percent, according to data compiled by economists Aaron Tornell of the University of California-Los Angeles and Frank Westermann of Germany’s University of Osnabrück. The collateral the ECB holds to back those loans is primarily the sovereign debt of the euro zone’s weakest nations. It’s a far cry from the gold that’s the Bundesbank’s second- biggest asset (17 percent).
Any losses on Target2 are supposed to be shared by the euro zone’s 17 central banks in proportion to their share of the ECB’s capital, which for Germany is 28 percent of the total. But since the central bank of any country that couldn’t repay Target2 obviously wouldn’t share in the losses, Germany would have to pick up even more than its share. And as Sinn notes, there are no laws governing who would be responsible for the claim if the euro zone broke up entirely.
The European Central Bank is trying to be reassuring about the growing Target2 imbalances. In its October monthly bulletin it said “the uneven distribution of central bank liquidity within the Eurosystem provides stability, as it allows financially sound banks -- even those in countries under financial stress -- to cover their liquidity needs.” The ECB, though, doesn’t report which central banks are in the black and which are in the red on Target2, since the combined positions always net out to zero.
Obscure Table
The 17 member central banks don’t exactly trumpet the numbers, either. At the Bundesbank, the most up-to-date figures are available only in an obscure table called “Time series EU8148: External position of the Bundesbank in the EMU / Claims within the Eurosystem / Other claims (net).”
As Europe’s financial crisis has worsened, the ECB has benevolently turned a blind eye to the poor quality of collateral posted by the Bank of Greece and others. But a reckoning is due. In an interview with Bloomberg News on Dec. 13, Bundesbank President Jens Weidmann expressed more concern about the collateral than the volume of ECB balances. “In a situation like the current one, where we are providing solvent banks with liquidity,” he said, “for me the size of the Target2 balances is less important than the risks we are taking on. It is my concern that we limit these risks as much as possible.”
‘Being Alarmist’
An alternate theory is that there’s really nothing to worry about. University College Dublin Professor Karl Whelan says Sinn, Tornell, Westermann, and other economists who have raised red flags over Target2 are being alarmist. While Europe has plenty of other problems, “this is a crisis that is not about to happen,” Whelan wrote in a recent article posted at VoxEU.org, a forum mostly for European economists.
Yeah, maybe. What happens next depends on how far Germany is willing to go in converting its treasured central bank into a repository for more claims on the ECB, which are ultimately backed by the junk debt of Southern Europe. To fund more loans to Target2, BuBa could either sell some of its gold (unlikely) or take in more euro deposits, which it could then recirculate via the ECB (much more likely). “In principle this can go on indefinitely,” says Ebrahim Rahbari, an economist for Citigroup in London.
Germany faces a dilemma familiar to anyone who has ever made a bad loan -- whether to keep throwing good money after bad to keep the debtor afloat or pull the plug and suffer the consequences. The half-trillion-euro claim the Bundesbank has on the ECB is an important but poorly understood factor in the decisions over the future of the euro. So it’s in the interests of everyone that central bankers provide more transparency when it comes to Target2. Says Citi’s Rahbari: “From the moment that you seriously start to consider breakup as a plausible scenario, these issues should probably be given more prominent space in the public debate.”
Bloomberg
U.S. Ambassador to the United Nations Susan Rice denounced the treatment Israel receives in the United Nations on Thursday, adding that American support of Israel's security was an "essential truth."
Speaking at the annual reception of the Conference of Presidents Fund in New York, Rice said that the treatment Israel receives at the UN was “obsessive, ugly, bad for the United Nations and bad for peace.”
The ambassador stressed that the Obama administration was commitment to oppose all efforts to “chip away at Israel’s legitimacy,” adding that U.S. commitment to Israel’s peace and security was an “essential truth that will never change.”
The American official said U.S. President Barak Obama “has been clear all along that our special relationship with Israel is deeply rooted in our common interests and our common values,” adding that these common interests and values were the reason the U.S. has increased its financing of Israel’s military capabilities to record levels.
Other speakers at the Conference of Presidents event were Israeli Ambassador to the UN Ron Prosor and Consul General of Israel in New York Ido Aharoni.
At the event, Rice received a National Service Award from on behalf of the Conference of Presidents Fund for her service at the UN, particularly her opposition to the Durban III conference as well as her opposition to a unilateral recognition of Palestinian statehood.
While the event seemed to imply that the Obama administration had been supportive of Israel, a full page ad by the Emergency Committee for Israel (ECI), published in such leading newspapers such as the New York Times, the Miami Herald, and Variety, asked: "Why does the Obama administration treat Israel like a punching bag?"
Speaking of the ad, the ECI's chair Bill Kristol said that “the Obama administration has been using Israel as a punching bag. The pro-Israel wing of the pro-Israel community is punching back."
Another story causing a storm amid the U.S. Jewish voting public was stirred by the New York Times columnist Thomas Friedman, who in his column earlier this week titled "Newt, Mitt, Bibi and Vladimir" attacked Gingrich for calling the Palestinians "invented people," accusing him of pandering to Israel.
However it was Friedman's attack against Netanyahu that garnered the attention, as the veteran columnist wrote: "I sure hope that Israel’s Prime Minister, Benjamin Netanyahu, understands that the standing ovation he got in Congress this year was not for his politics."
An Israeli official told "Haaretz" that "Friedman has crossed a line that true friends of Israel should never allow themselves to cross and inadvertently encouraged anti-Semitism."
Haaretz
ROME/BERLIN – Credit rating agency Fitch told the eurozone on Friday it thinks a comprehensive solution to the bloc’s debt crisis is beyond reach, as it put an number of the bloc’s economies including Italy on watch for potential downgrades.
It reaffirmed France’s top-notch triple-A rating but even here said the outlook was now negative over a longer term.
Underscoring the tensions within the bloc over the crisis that has spread relentlessly over the past two years, Italy’s prime minister earlier urged European policymakers to beware of dividing the continent with their efforts to fight its debt crisis, warning against a “short-term hunger for rigor” in some countries, in a swipe at Germany.
Germany has led resistance to allowing the European Central Bank to ramp up its buying of government bonds on the open market to a big enough scale to douse the crisis.
Fitch said that following the EU summit a week ago it had concluded that “a ‘comprehensive solution’ to the eurozone crisis is technically and politically beyond reach.
“Of particular concern is the absence of a credible financial backstop. In Fitch’s opinion this requires more active and explicit commitment from the ECB to mitigate the risk of self-fulfilling liquidity crises for potentially illiquid but solvent Euro Area Member States,” Fitch said.
It put Belgium, Spain, Slovenia, Italy, Ireland, and Cyprus on negative watch. Another ratings agency, Standard & Poor’s, had already warned 15 of the currency bloc’s 17 members they were close to a downgrade.
Earlier German Chancellor Angela Merkel gained some respite from domestic pressure to take a tougher line in the eurozone crisis when Eurosceptics hostile to more bailouts lost a referendum in her junior coalition partner, the Free Democrats, aimed at blocking a permanent rescue fund.
Meanwhile, a first draft of a planned fiscal union treaty among eurozone countries and aspiring members, published on Friday, showed that countries could be taken to the European Court of Justice if they fail to meet agreed budget targets.
Ms. Merkel – under pressure from the revered Bundesbank to force debt-saddled eurozone countries to reform and save their way out of crisis with austerity measures – has led a push for automatic sanctions for deficit “sinners” in the bloc.
This has fed concerns that excessive belt-tightening in southern countries could send their economies into a negative spiral with no prospect of growing out of the crisis, while feeding resentment in the prosperous north.
Italian Prime Minister Mario Monti said Europe’s response to the debt crisis “should be wrapped in a long-term sustainable approach, not just to feed short-term hunger for rigor in some countries.
“To help European construction evolve in a way that unites, not divides, we cannot afford that the crisis in the eurozone brings us … the risk of conflicts between the virtuous North and an allegedly vicious South,” he told a conference in Rome.
In Germany, turnout in the FDP bailout referendum fell short of the necessary quorum of one-third of the party’s membership, and only 44.2% voted for dissident lawmaker Frank Schaeffler’s motion against the planned European Stability Mechanism.
A victory for the Eurosceptics could have brought down Ms. Merkel’s centre-right coalition, but the outcome still left the FDP split, with its public support in tatters.
BANKS TO SHUN BONDS?
French officials have sought to prepare the public for the likelihood that Paris will lose its top-notch rating from S&P for the first time since 1975, playing down the potential setback and focusing attention instead on neighbouring Britain.
“The economic situation in Britain today is very worrying, and you’d rather be French than British in economic terms,” Finance Minister Francois Baroin said in a radio interview, a day after Bank of France governor Christian Noyer said that if ratings agencies were even-handed, Britain deserved to be downgraded before France.
Britain’s Deputy Prime Minister Nick Clegg said French Prime Minister Francois Fillon had called him to explain that “it had not been his intention to call into question the U.K.’s rating but to highlight that ratings agencies appeared more focused on economic governance than deficit levels.”
Mr. Clegg’s office said he accepted the explanation “but made the point that recent remarks from members of the French Government about the U.K. economy were simply unacceptable and that steps should be taken to calm the rhetoric.”
Eurozone officials said potential downgrades, particularly from S&P, could raise the cost of borrowing for the region’s existing EFSF bailout fund but would not make a big difference to its operations.
EFSF chief Klaus Regling told the Rome conference there was about 600 billion euros available to fight the crisis, more than Italy and Spain’s combined funding needs for 2012.
“If Italy and Spain were to ask for support their gross financing needs for 2012 are less than that and I don’t think they would need to be taken off the market,” he said.
The EFSF has the option of providing first loss insurance on new bond issues, but the country concerned would have to make a formal request and negotiate conditionality, while the sum guaranteed would have to be agreed unanimously by EFSF members, subject to German parliamentary approval.
Eurozone countries are to hold a conference call next Monday to agree on a boost to the International Monetary Fund’s lending capacity, as part of measures to help cope with the debt crisis, to which they will commit 150 billion euros, Slovak Finance Minister Ivan Miklos told Reuters.
The United States has refused to offer any additional funding and it remains to be seen how much non-European economies such as China, Russia, Brazil and India are willing to commit.
The European Central Bank has resisted calls to embark on unlimited purchases of euro zone sovereign bonds to quell the debt crisis, putting the onus back on governments and their collective financial firewalls.
ECB President Mario Draghi said on Thursday that eurozone governments were on the right track to restore market confidence and the ECB’s bond-buy plan was “neither eternal nor infinite.”
But in one intriguing hint on Friday, Bank of Italy governor Ignazio Visco told the Rome conference: “The impression is that there is only one way to convince markets and we’ll work on that.” He did not elaborate.
The comments came amid growing signs that banks are resisting pressure from governments to come to the aid of debt-choked eurozone countries by using cheap money lent by the ECB to buy more sovereign bonds.
With eurozone governments needing to sell almost 80 billion euros of fresh debt in January alone, the stand-off between policymakers and banks could turn the slow-burning debt crisis into a conflagration in the New Year.
The chief executive of UniCredit, one of Italy’s two biggest banks, said this week using ECB money to buy government debt “wouldn’t be logical.”
In Greece, where the debt crisis began two years ago, a senior official of the EU/IMF troika team negotiating terms for a second bailout package said there was no guarantee that talks on the private sector’s contribution would lead to a voluntary deal involving the bulk of its creditors.
Agreement has been held up by wrangling over issues ranging from the credit status and interest coupons on the new bonds to legal guarantees to be offered by the official sector. Another key question is how many sign up to a private sector debt swap.
Failure to secure agreement could force a disorderly default which might in turn trigger a wider emergency across the eurozone.
Asked if there was a risk of a disorderly Greek default, the troika official said: “Our objective is still to have a voluntary operation. If you ask me: is there a guarantee that there will be a voluntary operation? Of course there can never be a guarantee.”
