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SEEDS OF EU BREAK UP – ARE PLANTING IN THESE DETAILS
World financial markets have been thrown into fresh turmoil after the abrupt resignation of Germany’s member of the European Central Bank’s board exposed the deepening divisions over the bank’s handing of the eurozone debt crisis.
Jürgen Stark’s decision to quit highlighted the board’s disagreements over the ECB’s purchases of government debt, which were broadened last month to include Italian and Spanish bonds, and heightened German alarm at the expansion of the ECB’s responsibilities beyond its traditional inflation-fighting role.
The euro slid to the lowest level in six months against the dollar, and ‘safe haven’ bond yields plumbed fresh lows as news of Mr Stark’s resignation and Greek default rumours spread. The FTSE All-World index fell as much as 3.07 per cent, while Greek 10-year bond yields surged to yet another record, to more than 19.5 per cent.
Yields on the 10-year German Bund fell to a record low of 1.77 per cent. The yield on equivalent US debt also fell to 1.91 per cent in New York trading, the lowest in six decades, while 10-year UK gilt yields declined 9 basis points to 2.26 per cent.
“Rates can be lower than you’d imagine for longer than you’d think,” said Kit Juckes, currency analyst at Société Générale. “But you wouldn’t expect the kind of things we’ve seen in [European] rates unless you’re thinking something terrible will happen.”
The resignation of Mr Stark, who was a vociferous monetary hawk, presents a huge political dilemma for Angela Merkel, Germany’s chancellor, just as she is seeking to persuade her restive Christian Democrat supporters to increase Germany’s financial guarantees for its eurozone partners.
“It could scarcely have come at a worse time for the chancellor,” according to one political observer in Berlin. “She will have to make a very strong and convincing statement” to gain the support of her backbenchers.
Finance ministers and central bank governors of the G7 advanced economies meeting in Marseilles did not come up with any new plans to solve the crisis in Europe, but they emerged late on Friday night to express concern at the turmoil and pledged to do whatever is necessary in coming weeks to calm nerves in the eurozone.
Mr Stark was seen by many German conservatives as the one man holding the line at the ECB. Kurt Lauk, president of the ruling Christian Democratic Union’s business advisory council, said Mr Stark’s resignation was “a dramatic alarm signal” for the ECB to be “brought back on to the right path”.
He had opposed the ECB’s bond buying programme since its launch last May – but up until Friday had remained loyal to Jean-Claude Trichet, ECB president. In a statement, the ECB cited “personal reasons” for his departure but those familiar with his thinking cited his wide-ranging worries about steps being taken by the ECB and other central banks globally. He had been considering his departure for some weeks – and timed it to allow a successor to be in place by the end of the year, shortly after Italy’s Mario Draghi takes over from Mr Trichet on November 1.
It is the second high-level German departure this year from the ECB’s governing council, on which Mr Stark sits as well its six-man executive board. In February, Axel Weber resigned as Bundesbank president after disagreeing strongly with the ECB’s strategy.
The seeds of the EU breaking up – can pin point their fertile soil in this weekend’s news.
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