Saturday, December 6, 2014

03/22/2013 Cyprus and Money *

It was a week of high-stakes drama for the euro zone. Last weekend saw Cyprus leaders and European officials agree to a “bail in” whereby bank depositors would be “taxed” to help pay for the cost of bailing out Cyprus’ troubled banking sector. Apparently, outflows from Cypriot banks had recently accelerated and the available supply of emergency ECB liquidity had about been exhausted. The EU would contribute 10bn euros to the bailout, with Cypriot depositors on the hook for 5.8bn euros. The levy (“haircuts”) on deposits below the 100,000 threshold unleashed a firestorm of condemnation heard around the globe.

There actually seemed a bit of histrionics on the prospect of small depositors taking a 6.75% hit. Yes, these deposits were insured. But, as German Finance Minister Schaeuble noted, deposit insurance is only as good as the solvency of the sovereign. Are the Germans expected to back all euro zone deposit insurance? Still, with Draghi’s ECB market backstop in place, the worry that depositors (and investors/speculators) around Europe would suddenly fear for the safety of their deposits (or bonds) was farfetched.

At the same time, the Cyprus situation is as intriguing as it is potentially troubling. This Eastern Mediterranean Sea island has a population of only about a million and a tiny little economy. It didn’t become part of the euro until 2008. It’s a nice tourist spot, but mainly it’s distinguished by its bloated banking sector. Regrettably, bank assets doubled over the past five years, ballooning to a precarious eight times GDP. Its low corporate tax rate, loose banking regulations and euro zone membership propelled Cyprus into a major hub for tax evasion and money laundering. As money came flooding in, much of it from Russia, too much of it found its way to high-yield Greek corporate lending and government bonds.

I wonder if European officials appreciated at the time that euro membership would greatly increase the allure of Cyprus’ questionable “banking” arrangements. Here Cyprus, you and your friends enjoy your new euro printing press! We’ll count on you to regulate yourself, as we don’t even want to contemplate what we know you all are up to.

On Tuesday, the Cypriot parliament brazenly rejected the bailout agreement negotiated over the weekend between Cyprus’s new President and the “troika” (European Commission, ECB and IMF). To cheers from Cypriot citizens and others (notably left-wing Greek politicians), the Cyprus’ parliament became the first governmental body to spurn EU bailout terms. After the vote, Cyprus’ finance minister jumped on a flight to Russia, while street protesters pointed blame directly at Angela Merkel and the German government. In a Mediterranean region where “austerity” and German political influence have become such hot-button issues, there was palpable enthusiasm that someone was finally going to call Germany’s bluff.

At least the Cypriots acted as if they had a strong hand to play, as they fought to safeguard their little financial empire. They appeared confident in their close ties with Russia, and the Russians did lend Cyprus $2.5bn a year ago. Cyprus does have a strategically important location (and naval port), along with supposedly large untapped natural gas deposits. Protesters drew Hitler mustaches on Merkel photos, while politicians were determined to publicly snub euro zone officials. They were surely emboldened by tough talk from the likes of Putin and Medvedev.

By week’s end, however, the Cypriots were left empty-handed by the Russians. With tails between legs, the Cyprus Parliament was desperately passing legislation hoping to avert financial and economic collapse while remaining in the euro zone. Tuesday’s deposit levy legislation had been supplanted with bills providing the Central Bank of Cyprus authority to wind down at least one of its major banks. Instead of a 9.9% tax, many large depositors now face major losses and even the loss of access to their funds for an extended period. Capital controls will be necessary, as well as strict limitations on bank accounts and fund transfers. Cyprus may very well do enough to remain a euro member on Tuesday (banks are to reopen). But their banking and business model has been destroyed, with unknown consequences for Cyprus and their financial relationships. Thursday’s Russian tough talk had turned strangely quiet by Friday.

It has been part of my thesis that the Germans would over time adopt a harder line. Market participants never seem to tire repeating the mantra that the Merkel government will talk tough and predictably cave when market turmoil puts a gun to its head. Emboldened markets have been confident that, at the end of the day, Germany will have no option but to use their wealth to backstop the entire euro zone. This week’s Cyprus eruption may have market players rethinking a few things.

I’ve assumed that the further along the “European” crisis evolves the more the German point of view shifts from backstopping the euro project to protecting German interests. It is worth noting that while the Cyprus bailout structure was being lambasted (“stupid” and “incompetent”) Merkel and Schaeuble were winning plaudits at home. German public opinion against bailouts has notably hardened over recent months. The days of railroading big euro member bailouts through the Bundestag appear over.

For me, the near-term significance of this week’s developments rests not with deposits and potential runs. And it’s not even about the serious issues of capital flight and capital controls. I’m trying to discern if the Cyprus fiasco takes a little strength away from powerful “risk on” and perhaps even pushes some momentum in the direction of “risk off.” Do these developments spur players to consider taking a few chips off the table? On the margin, is the leveraged speculating community apt to see the world somewhat less supportive of market risk and leverage? Does Cyprus increase the odds we’re in the midst of a topping process and important inflection point for global risk markets?

The big macro hedge funds have placed major bearish bets against the yen. And the yen rallied more than 1% on Thursday’s more “risk off” trading session – and ended the week up 90 bps against the dollar and 1.5% versus the euro. Some funds have scored big returns from Greek bonds, and we see that Greek yields spiked 100 bps this week. And while there was certainly no panic in their bond markets, Spain’s and Italy’s Credit default swap (CDS) prices were modestly higher this week. More notably, European bank CDS prices jumped. Over the past few years, Europe’s bank CDS market has provided a decent early indicator of both market risk aversion and embracement.

From my perspective, the Cyprus crisis arrives with global markets in a somewhat vulnerable position. In particular, the emerging equity and debt markets have begun to struggle. India’s stocks were hit for 3.6% this week – and are down 3.6% y-t-d. South Korea’s Kospi declined 1.9%, pushing 2013 losses to 2.4%. Eastern European stocks and currencies have been under pressure. This week saw equities fall in Russia (down 2.2% y-t-d), Poland (down 5.1% y-t-d) and the Czech Republic (down 5.6% y-t-d). Latin America stocks also remained on the defensive, with Brazil’s 2.9% drop this week pushing y-t-d losses to 9.4%. And while U.S. investment grade and junk bond CDS have been grinding to multiple-year lows, emerging market CDS have curiously diverged and moved higher. On the more bullish side, Chinese stocks did muster a 2.2% recovery this week.

U.S. stocks ended the week having sustained only minimal damage. Bernanke confirmed that the Fed’s printing press will be running 24/7 for the foreseeable future. Between the Fed, Draghi’s backstop, the Bank of Japan and basically concerted global central bank printing, most market participants see no end to the bullish backdrop. The Financial Times ran a story Friday, “Hedge Funds Storm Back into Form.” Like most, the hedge funds have rediscovered the secret to success: throw caution to the wind and jump aboard the raging global bull. It’s late-night and the raucous crowd has gathered contently on one side of the party boat.

Inflated and highly speculative global risk markets remain enamored by central banker resolve – and perhaps not all that focused on fundamental developments. And, ironically, Bubbling risk markets were this week conducive to resolve elsewhere. Strong markets provided the Germans, Finns, Dutch and the EU more generally a favorable backdrop for demonstrating some backbone. For one, they didn’t appreciate little Cyprus copping a big attitude. The Germans were incensed – and they weren’t going to let Cypriot politicians get away with any nonsense. You either want to remain in the euro zone or you don’t. If so, we dictate the terms. If not, we’re confident we can manage the consequences. Cyprus follies must not set a precedent. EU and “troika” credibility was on the line, credibility that’s been taking some hits of late.

Actually, it was probably time for a new approach in dealing with the troubled debtors. I think the Germans and the “northern” countries come out of this experience with new resolve. And this could set the stage for trying times in the markets when bailouts are required for Spain and Italy - Draghi, Bernanke, Kuroda and friends, notwithstanding.

I also wouldn’t be surprised if history looks back at this week’s developments and finds some significance. There was some real money lost this week. And I mean “money” as in perceived safe and liquid nominal stores of value – like euro-denominated bank deposits (in contrast to non-money-like Greek sovereign bonds or subordinated bank debt). Cypriot deposits (small and large) had retained their “moneyness” based on what is now clearly a misperception that Germany and the EU would backstop their value. And there’s literally Trillions of suspect Credit and “money” throughout Europe whose value is today inflated based upon similar (mis)perceptions.

While we’re on the subject, there are tens of Trillions of securities and “money” that retain full and inflated market values based on the perception of the wealth-creating capacity of the Fed’s printing press. And there are as well monetary partners in crime in Japan, China, the developing economies and the rest-of-world. For going on five years now, since the 2008 Credit crisis, the global “system” has been grossly over-issuing “money.” I have referred to the Greek collapse and “European” crisis as the initial crack in the “global government finance Bubble.” It is tempting to see Cyprus as the first crack in “money.”

For the Week:

The S&P500 slipped 0.2% (up 9.2% y-t-d), while the Dow closed unchanged (up 10.7% y-t-d). The S&P 400 MidCaps dipped 0.2% (up 11.7%), and the small cap Russell 2000 declined 0.7% (up 11.4%). The Banks fell 1.6% (up 10.4%), and the Broker/Dealers dropped 1.8% (up 15.6%). The Morgan Stanley Cyclicals declined 0.9% (up 11.6%), and Transports fell 1.5% (up 16.4%). The Morgan Stanley Consumer index gained 0.9% (up 14.6%), and the Utilities added 0.1% (up 9.2%). The Nasdaq100 was little changed (up 5.3%), and the Morgan Stanley High Tech index fell 1.6% (up 6.3%). The Semiconductors declined 0.9% (up 12.0%). The InteractiveWeek Internet index lost 0.9% (up 10.6%). The Biotechs slipped 0.4% (up 15.8%). With bullion up $17, the HUI gold stock index recovered 2.2% (down 19%).

One-month Treasury bill rates ended the week at 7 bps and 3-month rates closed at 7 bps. Two-year government yields were unchanged at 0.25%. Five-year T-note yields ended the week down 3 bps to 0.80%. Ten-year yields fell 6 bps to 1.93%. Long bond yields dropped 6 bps to 3.15%. Benchmark Fannie MBS yields were down a basis point to 2.66%. The spread between benchmark MBS and 10-year Treasury yields widened 5 bps to 73 bps. The implied yield on December 2014 eurodollar futures increased 1.5 bps to 0.565%. The two-year dollar swap spread jumped 3 to 17.5 bps, and the 10-year swap spread jumped 4 to 13.25 bps. Corporate bond spreads widened. An index of investment grade bond risk increased 12 to 91 bps. An index of junk bond risk rose 6 to 399 bps. An index of emerging market debt risk jumped 12 to 292 bps.

Debt issuance slowed. Investment grade issuers included St. Jude Medical $1.6bn, Correction Corp of America $350 million, Healthcare Trust of America $300 million, and Westar Energy $250 million.

Junk bond funds saw inflows of $201 million (from Lipper). Junk issuers included Nationstar Mortgage $600 million, and Milacron $465 million.

I saw no convertible debt issued this week.

International issuers included Sompo Japan Insurance $1.4bn, UBS $1.2bn, Sweden $1.0bn, Swedbank Hypotek $1.0bn, Intelsat Luxembourg $1.0bn, Offshore Group $775 million, MHP $750 million, Sumitomo Trust & Bank $650 million, KPN $600 million, Manitoba $500 million, Star Energy Geothermal $350 million, Compania Minera Milpo $350 million, Gas Natural de Lima $320 million, and MMG $310 million.

Italian 10-yr yields were down 8 bps to 4.50% (unchanged y-t-d). Spain's 10-year yields declined 7 bps to 4.90% (down 44bps). German bund yields fell 8 bps to a 12-week low 1.38% (up 6bps), and French yields declined 5 bps to 2.01% (up one basis point). The French to German 10-year bond spread widened 3 to 63 bps. Ten-year Portuguese yields rose 8 bps to 5.90% (down 85bps). The Greek 10-year note yield surged 100 bps to 11.53% (up 106bps). U.K. 10-year gilt yields were down 8 bps to 1.85% (up 3bps).

Italy's FTSE MIB was little changed (down 1.4% y-t-d). The German DAX equities index dropped 1.6% for the week (up 3.9%). Spain's IBEX 35 equities index was hit for 3.4% (up 2.0%). Japanese 10-year "JGB" yields dropped a notable 6 bps an incredible 0.56% (down 22bps). Japan's Nikkei fell 1.8% (up 18.7%). Emerging markets were mostly unimpressive. Brazil's Bovespa equities index sank 2.9% (down 9.4%), while Mexico's Bolsa increased 0.2% (down 2.3%). South Korea's Kospi index declined 1.9% (down 2.4%). India’s Sensex equities sank 3.6% (down 3.6%). China’s Shanghai Exchange rallied 2.2% (up 2.6%).

Freddie Mac 30-year fixed mortgage rates fell 9 bps to 3.54% (down 54bps y-o-y). Fifteen-year fixed rates were down 7 bps to 2.72% (down 58bps). One-year ARM rates slipped one basis point to 2.63% (down 21bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 4.23% (down 29bps).

Federal Reserve Credit surged $56.4bn to a record $3.167 TN. Fed Credit expanded $381bn over the past 24 weeks. In the the past year, Fed Credit jumped $295bn, or 10.3%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $675bn y-o-y, or 6.6%, to $10.940 TN. Over two years, reserves were $1.559 TN higher, for 17% growth.

M2 (narrow) "money" supply increased $1.8bn to $10.412 TN. "Narrow money" expanded 6.3% ($615bn) over the past year. For the week, Currency was little changed. Demand and Checkable Deposits sank $51.4bn, while Savings Deposits jumped $56.3bn. Small Denominated Deposits declined $2.3bn. Retail Money Funds slipped $0.9bn.

Money market fund assets dropped $26.5bn to $2.625 TN. Money Fund assets were up $3bn from a year ago.

Total Commercial Paper outstanding declined $1.6bn this week to a 17-week low $1.016 TN CP has declined $49.2bn y-t-d, while having expanded $85bn, or 9.1%, over the past year.

Currency and 'Currency War' Watch:

The U.S. dollar index was little changed at 82.37 (up 3.3% y-t-d). For the week on the upside, the New Zealand dollar increased 1.0%, the Japanese yen 0.9%, the British pound 0.8%, the Mexican peso 0.7%, and the Australian dollar 0.3%. For the week on the downside, the Swedish krona declined 1.6%, the Brazilian real 1.3%, the South African rand 1.3%, the Norwegian krone 0.8%, the euro 0.7%, the Taiwanese dollar 0.6%, the Danish krone 0.6%, the Canadian dollar 0.4%, the Swiss franc 0.2%, and the Singapore dollar 0.2%.

Commodities Watch:

The CRB index declined 0.6% this week (down 0.1% y-t-d). The Goldman Sachs Commodities Index fell 0.9% (unchanged). Spot Gold gained 1.0% to $1,609 (down 4.0%). Silver dipped 0.5% to $28.70 (down 5.1%). May Crude slipped 11 cents to $93.71 (up 2%). April Gasoline fell 3.2% (up 11%), while April Natural Gas was little changed (up 19%). May Copper dropped 1.5% (down 5%). May Wheat gained 0.9% (down 6%), and May Corn rose 1.3% (up 4%).

Federal Reserve Watch:

March 21 – Bloomberg (Hans Nichols): “Federal Reserve Chairman Ben S. Bernanke said he’s ‘spoken to the president a bit’ about his future and that he feels no personal responsibility to stay at the helm until the Fed winds down its unprecedented policies to stimulate the economy. ‘I don’t think that I’m the only person in the world who can manage the exit,’ Bernanke said when asked… if he’s discussed his plans with President Barack Obama. His term expires at the end of January. Bernanke’s comments yesterday meshed with the views of some of Obama’s economic and political advisers who said Bernanke, 59, after spending most of his seven years on the job battling a financial crisis and its aftermath, is exhausted and wants to return to private life.”

Global Bubble Watch:

March 22 – Bloomberg (Tom Stoukas and Natalie Weeks): “Cypriot lawmakers approved capital controls and legislation to wind down banks as they scrambled to secure a European bailout and avert a financial collapse of the Mediterranean island. The parliament passed nine bills late yesterday after a day locked in talks between Cypriot and international officials in Nicosia. Lawmakers may vote later today on what sort of levy to impose on bank deposits above 100,000 euros ($130,000), four days after rejecting an initial proposal to tax all accounts. Banks have been shut all week and are due to reopen on March 26.”

Global Credit Watch:

March 20 – Bloomberg (Mary Childs): “Derivatives that pool credit-default swaps to make magnified bets on corporate debt, popularized in the last credit bubble, are making a comeback as investors search farther afield for alternatives to bonds at record-low yields. Citigroup Inc. is among banks that have sold as much as $1 billion of synthetic collateralized debt obligations this year, following $2 billion in all of 2012… Trading in so-called tranches of indexes that use a similar strategy to juice yields rose 61% in the past month.”

March 19 – Bloomberg (John Glover and Abigail Moses): “Europe’s unprecedented tax on Cyprus bank deposits is raising concern among holders of senior bank bonds that they’ll be made to take losses should another country need rescuing. The Markit iTraxx Financial Index of credit-default swaps insuring senior debt of 25 banks and insurers rose as much as 19 bps to 162 bps… That’s the biggest jump since Aug. 2, before the European Central Bank steadied markets by announcing its bond-buying program, and the gauge is now at the highest in almost three weeks.”

March 20 – Bloomberg (Anabela Reis): “Portuguese banks remain hooked on funding from the European Central Bank even as they try to wean themselves off the lender of last resort. ECB lending slipped to 49.51 billion euros ($64bn) last month, down 0.4% from January, the Bank of Portugal said… While that was the least in a year, ECB money still accounts for a larger proportion of the financial industry’s assets in Portugal than Ireland… ‘We are paying the bill for growth based on excessive debt in the country,’ said Carlos Peixoto, an analyst at Banco BPI SA… ‘We can’t go back to that or we will be feeding the next bubble.’”

March 22 – Bloomberg (Boris Cerni): “Slovenia’s dollar-denominated benchmark bonds declined, pushing yields to the highest level this year as bailout risks increase. The yield on the notes maturing in 2022 advanced 13 basis points to 5.556%... the highest since Nov. 29… The two-day-old government of Prime Minister Alenka Bratusek may be forced to ask for international aid to prop up the banking system because of increased political risk, economists at Nomura International Plc said…”

March 21 – Bloomberg (Ehren Goossens and Justin Doom): “Investors stand to lose most of the $1.28 billion they put into Suntech Power Holdings Co. after the solar manufacturer said it wouldn’t resist a bankruptcy petition filed in China. The company, based in Wuxi, outside Shanghai, had more than $2 billion in debt and defaulted on $541 million in bonds due on March 15, prompting eight Chinese banks to ask a local court to push Suntech’s main unit into insolvency. ‘There’s a host of companies that have gone to Wall Street investors and gotten billions of dollars, and these investors are ultimately going to be on the hook and get nothing out of it,’ Angelo Zino, an analyst at Standard & Poor’s… said…”

China Bubble Watch:

March 21 – Dow Jones (Esther Fung): “China's central bank is poised to drain more cash from the financial system for a fifth straight week, signaling a clear intention to rein in the supply of funds amid growing concerns over rising inflation. The People's Bank of China is set to drain a net 47 billion yuan ($7.56bn) from the banking system this week through its regular open-market operations.”

March 22 – Bloomberg (Stephanie Tong and Kelvin Wong): “Hong Kong officials, who have struggled in vain for three years to slow the growth in home prices, are about to get their wish as the city’s biggest banks raise mortgage rates. Prices could fall as much as 20% over the next two years, according to Deutsche Bank AG, after lenders… raise their home loan rates by 25 bps in response to tighter risk rules.”

Japan Watch:

March 22 – Bloomberg (Toru Fujioka and Mayumi Otsuma): “Bank of Japan Governor Haruhiko Kuroda said he’s confident in achieving a 2% inflation target, rebutting doubters who predict his efforts will fail as he prepares to strengthen monetary stimulus. ‘We will do whatever we can to achieve the 2 percent price target at the earliest time possible,’ Kuroda said… in his inaugural press conference after taking the helm of the BOJ this week. Kikuo Iwata, one of two new deputies, told reporters the bank should commit to achieving the goal for consumer-price increases within two years.”

India Watch:

March 22 – Bloomberg (Rajhkumar K Shaaw): “Indian stocks fell for the sixth day, with the benchmark index completing its worst weekly loss in 15 months, on concern political instability and limited room to cut interest rates will undermine efforts to revive growth. The S&P BSE Sensex… tumbled 3.6% this week, the worst weekly drop since the period ended Dec. 16, 2011…”

Latin America Watch:

March 22 – Bloomberg (Blake Schmidt and Julia Leite): “Unprecedented downgrades on two of Brazil’s biggest state banks are highlighting the risks faced by a government that is betting on a subsidized lending surge to reverse the slowest two years of growth in a decade. Moody’s… cut the long-term local-currency issuer rating on state development bank BNDES and long-term bank deposits rating for Caixa Economica Federal two levels from A3 to record lows of Baa2 this week, citing dwindling capital ratios as the banks’ credit surged by as much as 40 percent after President Dilma Rousseff’s urged more lending.”

Europe Watch:

March 21 – Bloomberg (Svenja O’Donnell): “Chancellor of the Exchequer George Osborne said the forecast for U.K. economic growth this year was cut by half as he lowered corporation tax and set out an updated central-bank remit to aid Britain’s recovery. Gross domestic product will increase 0.6% this year, compared with a previous forecast of 1.2%... ‘It is taking longer than anyone hoped, but we must hold to the right track,’ Osborne told lawmakers. ‘The problems in Cyprus this week are further evidence that the crisis is not over, and the situation remains very worrying…’”

Italy Watch:

March 22 – Bloomberg (Chiara Vasarri): “Italian President Giorgio Napolitano today asked Democratic Party leader Pier Luigi Bersani to try to form a government, a month after inconclusive elections. Bersani will consult with other parties in the next few days to muster enough support to form a government that can survive the required confidence votes in both houses of Parliament.”

Spain Watch:

March 22 – Bloomberg (Ben Sills and Charles Penty): “Spain cut the nominal value of Bankia SA shares to 1 euro-cent from 2 euros in a debt swap that will practically wipe out existing stockholders in the nationalized lender. The holding company BFA will own about 70% of Bankia following a 15.5 billion-euro ($20.1 billion) recapitalization approved by the Frob rescue fund… Investors who bought subordinated debt or preferred shares will end up with about 30% of the bank’s stock.”

France Watch:

March 22 – Bloomberg (Mark Deen): “The French economy will extend two years of stagnation in the first half as consumers hold off on spending and companies cut investments, national statistics office Insee predicted. Gross domestic product will be unchanged in the first quarter and expand 0.1% in the second, Insee said yesterday… GDP hasn’t registered quarterly growth of more than 0.2% since the first three months of 2011 and has had three quarters of declines since then.”

Germany Watch:

March 19 – Financial Times (Quentin Peel): “When news of the Cyprus bailout trickled through to Berlin on Saturday morning, bearing with it the potentially alarming news that bank depositors would be ‘bailed-in’ to share the cost, the German reaction was very positive. Politicians from both left and right agreed that without such a deal, the rescue would not have a hope of winning approval in the Bundestag. Wolfgang Schäuble, finance minister, had done a good job, they admitted. At €10bn, it is a far smaller programme than previous ones for Greece, Ireland and Portugal. But the German body politic is pretty well united in insisting that a bail-in of creditors must be part of any bailout by taxpayers…”

March 20 – Dow Jones (Matthew Karnitschnig): “Angela Merkel’s re-election campaign moved to Cyprus this week. Hundreds of Cypriots, irate over a European plan to tax their bank accounts, marched through the streets of Nicosia, some hoisting signs depicting the German chancellor in full Nazi regalia. ‘Merkel U stole our life savings,’ read one banner. Ms. Merkel, who faces a general election in September, couldn't have hoped for a stronger endorsement. The images, broadcast widely across German media, reinforce many Germans’ confidence that Ms. Merkel is protecting their money from fiscally wayward Southern Europeans, from Portugal to Spain, Greece and Cyprus. ‘Without German guarantees, there would be no rescue fund, yet these countries direct their criticism, open hatred even, at us Germans,’ wrote Hugo Muller-Vogg, a well-known columnist for the mass circulation Bild newspaper… ‘If this weren’t about the future of Europe there would be only one appropriate response: Clean up your own mess.’ Such views resonate in Germany amid growing public exasperation over being cast as Europe’s villain by countries that, in the German view, have benefited from Berlin's largess. Germany may yet agree to a compromise with Cyprus to avert a collapse of its banking system. Yet, with the German public solidly behind her, Ms. Merkel appears to have little reason to back down.”