FT Alphaville on the Merkel Crash Mechanism

BNP Paribas agrees, it’s the Merkel crash
Posted by Izabella Kaminska on Nov 30 11:15.
It was first highlighted by economist Paul de Grauwe.

But, dare we say, the so-called ‘Merkel crash’ is quickly becoming analyst consensus for what really triggered this latest European debt rout.

As BNP Paribas points out on Tuesday:

Yesterday did see EMU spreads widening further despite the release of a credible Irish rescue package. The reason for continued peripheral selling pressure may be related to the funding needs of banks as highlighted in the stability report of the BoP. It was last Tuesday when Germany showed a blueprint for the further regulation of the private bond market. Germany aims introducing this law in 2011 and would like to harmonise this law EU wide. The blue print suggested that next to creditors and debtors it would be the regulator to decide if and when there would be hair cuts or maturity lengthening on outstanding bonds announced. Hence, last Tuesday set the starting point for bank CDS’s moving sharply up as markets assumed that bonds which such kind of clause (regulator deciding) would be difficult to sell. Spanish banks will have come to the capital market in the first half of 2011 and will have to issue more bonds than the Spanish sovereign. The stability report of the BoP highlighting this problematic will keep investors concerned and the EUR offered.

And thus the European Stability Mechanism is transforms ever more officially into the European Instability Mechanism (EIM), alternatively to be known as Merkel’s Crash Mechanism (MCM).

Vorsprung durch mechanismen.