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The bond markets can't turn on Germany - Germany will be the last member standing in the Eurozone.

The bond markets can turn on the €-Mark, in preference to the Swiss Franc. But frankly, if they believe that Switzerland has substantially better economic prospects than Germany then they are even more delusional than is usually the case.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 10th, 2011 at 07:38:57 PM EST
[ Parent ]
Leading to an interesting situation:

The bond market cannot allow the euro to collapse.  If the euro collapses their bonds are wastepaper.


Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Wed Aug 10th, 2011 at 09:49:21 PM EST
[ Parent ]
But the bond markets are not so constructed to be able to save the euro. That would require euro zone wide cooperation and statesmanship along the lines Yanis Varoufakis has suggested in his "Modest Proposal". But, more fundamentally, it would require the major players to accept that euro-zone economics is not a game that one country can win because pursuing such an attempt will destroy the euro in proportion to the extent the policy succeeds. A policy to make all members prosperous would be most valuable to the largest players, but accepting this is highly unlikely. Such a change would likely only come about through the deaths of the leaders of the existing policy, along the lines Thomas Kuhn has suggested.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 10th, 2011 at 10:56:04 PM EST
[ Parent ]
The problem is that an exit from the current situation requires a mature, adult approach that takes into consideration the needs and the lives of all involved and the vast majority of leadership on offer is by raging sociopaths who care only for their own aggrandizement or frightened, superannuated children who live in terror of the sociopaths.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 10th, 2011 at 10:59:23 PM EST
[ Parent ]
... new institutions and demolition of obsolete existing past-bound institutions, when the thinking of the people with power to do so are informed by the obsolete past-bound institutions.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Thu Aug 11th, 2011 at 11:30:29 AM EST
[ Parent ]
One of the reasons for the US Constitutional Convention and the resulting ratification of the current Constitution was a situation similar to the one the EU is in.

Deutsche Bank, et.al., have shown they could give a rat's ass about the EU Project® simultaneously they have shown they deeply care about getting their money back, with interest.  If the euro goes ker-blewie the financial instruments denominated in euros has as much value as German bonds denominated in Reichmarks.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Thu Aug 11th, 2011 at 01:44:35 PM EST
[ Parent ]
If the euro goes ker-blewie the financial instruments denominated in euros has as much value as German bonds denominated in Reichmarks.

No, if the €-Mark goes boom, those instruments will have as much value as ones denominated in D-Mark, as long as you possess sufficient political connections to the German government.

Of course the rest of the Eurozone may well be a wasteland by that point, and the German economy may well find itself fresh out of customers. But the currency will be sound.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 12th, 2011 at 05:16:55 AM EST
[ Parent ]
It will depend on the nationality of the issuer. Everyone will try to pretend their obligations were issued by greek entities and are therefore in Drachmas.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Aug 12th, 2011 at 07:22:21 AM EST
[ Parent ]
Not if the way the €-Mark falls apart is by ejecting the internal deficit countries one by one. Bailouts will then be decided on a case by case basis. Which means that what matters is how on how tight your political connections are to the CDU and the Quisling wing of the SPD.

Clearly, a number of bondholders view themselves as quite secure on that count. They may end up being surprised, of course, but by then the rest of us will be too busy trying to keep our heads above water to have much fun pointing and laughing.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 12th, 2011 at 09:35:43 AM EST
[ Parent ]
Overall, the history of a currency collapse is the holders of bonds, etc., in that currency can suck eggs.  There's no global agency to enforce a legal decision on a national government.  Offsetting that, ss you rightly say. who, what, and how much of these instruments are backed in the new currency depends on the Decision Making of the elites in the defaulting country and the connections (being "one of the kewl kidz") the holders have.

Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Fri Aug 12th, 2011 at 12:39:27 PM EST
[ Parent ]
The bond markets can perfectly well endure a collapse of the Eurozone, if the way it plays out is that all the non-German members are ejected one by one, with the various three- and four-letter agencies bailing out the holders of these "feckless swarthy Southerners'" bonds. Every time, obviously, with the resolution "never again." Which is an incredible threat, in the game theory definition of that term.

That will be hard on the German (and possibly French) taxpayers. But turkeys don't get to vote on the Thanksgiving menu.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 11th, 2011 at 07:11:22 AM EST
[ Parent ]
If the three and four letter agencies can actually bail out all of the bond holders, given the existing diameter of the Euro faucet. There is likely to be cascading failures, with most of the worst on a single day, certainly within a single week. Of course, Bernanke will offer unlimited dollar swaps. That is what he is there for.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Aug 11th, 2011 at 08:02:59 PM EST
[ Parent ]
They can, of course, bail out anybody important (NB: "Important" means "important to Angela Merkel," not "important to the national interest"). That was always within their capacity, and this whole theatre with the three- and four-letter agencies has been about concealing the bailout from the internal surplus countries' taxpayers and fraudulently cooking up a crisis to impose even tighter adherence to the Grief and Stupidity Pact.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 12th, 2011 at 05:17:06 AM EST
[ Parent ]
But Merkel won't let them open the faucet wide enough to bail out Italy, Spain, Belgium and France, especially if the crises occur simultaneously. They could do it but for the rules they have set in place. Of course Germany has, in the past, had no trouble bending the rules when it is in its interest to do so.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 12th, 2011 at 12:59:50 PM EST
[ Parent ]
Which gets back to the observation the EU is undergoing a political crisis with the overt symptoms being the economic crisis.

Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Fri Aug 12th, 2011 at 01:25:43 PM EST
[ Parent ]
It appears the Swiss Franc continues to appreciate with respect to the Euro. In fact, Zero Hedge calls the EURCHF exchange rate 'the most trustworthy indicator for European "bankrunny[n]ess'". And, also, the Swiss National Bank has been intervening in the markets to lower the Swiss Franc's value, going as far as to drop rates by 0.75% yesterday (!) which may have been a contributing factor to the French banking scare in the stock markets.

WSJ: SNB Cuts Rate To Zero To Counter Franc Strength.

There were reports that Polish exchange offices had run out of Swiss Francs.

If this move by the SNB doesn't work, what else can they do? They've gone all out to the zero lower bound.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Aug 11th, 2011 at 02:56:59 AM EST
[ Parent ]
Precisely my point - German leaders believe that they can throw Greece, Spain, Italy, France to the market wolves and it won't affect them.

It seems more and more there are only two ways forward:

Either we create a Eurobond, which by size is just a safe haven and so we can ignore a lot more of market "sentiment" - at least for the short term.

Or we dump the fiction that the government needs to borrow from the markets in it's own currency.

(We probably need also to dump the fiction that this will cause inflation while we're at the zero bound - and the fiction that the government is powerless against inflation generally...)

by Metatone (metatone [a|t] gmail (dot) com) on Thu Aug 11th, 2011 at 05:23:04 AM EST
[ Parent ]
For clarity, the German economic fundamentals are not weak - but there is lots of circumstantial evidence that their banking system is as vulnerable as many others...
by Metatone (metatone [a|t] gmail (dot) com) on Thu Aug 11th, 2011 at 05:23:55 AM EST
[ Parent ]
In truth, I'm starting to wonder if Germany might be approaching it's Niemöller moment:

"First they came for Greece, and I didn't speak out because I wasn't Greek..."


The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt št gmail dotcom) on Thu Aug 11th, 2011 at 06:25:12 AM EST
[ Parent ]
Unlikely.

But Sarko is.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 11th, 2011 at 07:16:20 AM EST
[ Parent ]
Except it's not much use for Germany to avoid getting mugged on the markets if all its trading partners are bankrupted.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt št gmail dotcom) on Thu Aug 11th, 2011 at 07:26:00 AM EST
[ Parent ]
Cue in Bob the Angry Flower:



Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Aug 11th, 2011 at 07:33:58 AM EST
[ Parent ]
Ah. About time.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Aug 11th, 2011 at 08:02:40 AM EST
[ Parent ]
Er... no, they did not forgot the servants.

Its us.

by cagatacos on Thu Aug 11th, 2011 at 08:27:07 AM EST
[ Parent ]
This day could come but right now I'd argue it's the opposite. The people rioting aren't needed by the world economy, yet the world economy still generates enough "excess energy" for this group of people to live on. If the parasitic wealthy kill off the technicians, then yes, this will probably play out.

Theoretically we could have created a society in which all this excess energy was converted to a lifestyle wherein humans simply get to enjoy being humans - but I say theoretically because it would have been (and was) outcompeted by societies who prefer guns.

It's a huge disaster - such a big proportion of the modern world no longer has access to the myths of a good life as offered by their individual cultures, much less the environment that actually leads to happy, healthy humans.

you are the media you consume.

by MillMan (millguy at gmail) on Thu Aug 11th, 2011 at 03:54:20 PM EST
[ Parent ]
Sadly, I think you're right.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Aug 24th, 2011 at 06:25:25 PM EST
[ Parent ]
For the German banks... well, the currency will still be sound.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 12th, 2011 at 05:50:27 AM EST
[ Parent ]
The Guardian: Euro crisis: Angela Merkel and Nicolas Sarkozy facing new bailout bust-up: Eurozone's odd couple may face fresh battles over the Greek bailout, but both will also be looking to please voters at home (21 July 2011)
The hyperactive "Super" Sarkozy thinks she is ponderous, slow and too keen on rules; the methodical "Iron Frau" Merkel considers him overly impatient, impetuous and too quick to break them.

The pair do not speak the same language - literally or metaphorically - so like the hapless comic duo, when it comes to Franco-German relations anything can happen.

...

[The Economist] quoted a former European foreign minister saying Merkel and Sarkozy found each other "mutually unbearable" but said they had found a way to get along despite disagreeing on a number of major issues, including fiscal harmonisation.

"France and Germany have never been natural partners. Agreement always has to be worked on," a French official told the magazine.

Last month, in a report of Sarkozy's visit to Berlin to discuss the Greek crisis, Der Spiegel wrote: "The welcome will once again appear very cordial... Nicolas Sarkozy and Angela Merkel will also work the cameras this time around ... a kiss on the left cheek, a peck on the right one, smiles and waving. Behind closed doors, the atmosphere will be less amicable." It added: "The fronts have hardened - especially between Germany and France".

In the past the modus operandi of France has often been to dream up big European ideas ... and expect Germany to pay for them.

A year earlier...

The Guardian: How the euro - and the EU - teetered on the brink of collapse: French president Nicolas Sarkozy dramatically forced German chancellor Anglela Merkel to retreat (14 May 2010)

The tensions were palpable, the theatrics mesmerising. It was well past midnight and the leaders, charged with saving the euro, were getting nowhere fast after a fine Friday supper. Greece might be saved. But Portugal? Ireland? Spain? Even Italy?

...

Sarkozy claimed the political leadership of the 16 members, announced a defining victory against the markets and the "speculators" wrecking the currency. The metaphors were all martial. Europe was at war. He would not give away his "lines of defence". But by the time the markets opened on Monday morning, the enemy would have learned its lessons and beat a retreat.

In the previous hour upstairs at the summit, Sarkozy had thrown a wobbly. "It was really a drama," said an experienced European diplomat. "A very abrupt end to a summit - because Sarkozy said he had had enough and really forced Merkel to face her responsibility."

A European Commission official added: "He was shouting and bawling. The Germans were being very difficult, and not only the Germans. It was a big fight between Sarkozy and Merkel."

...

According to senior Spanish government officials quoted by Spain's El Pais, Sarkozy called Merkel's bluff on what, 48 hours later, turned into a massive financial package that has rewritten the way the single currency functions and changed the European Union in fundamental ways that may take years to play out.

...

"Sarkozy went as far as banging his fist on the table and threatening to leave the euro," one unnamed Zapatero colleague told the paper. "That obliged Angel Merkel to bend and reach an agreement."

The French had Spain, Italy, Portugal and the European Commission lined up behind them. On the other side stood Germany, ranged alongside the Dutch, the Austrians and the Finns, all quietly hoping Merkel would prevail.

...

"It was a fundamental discussion about sovereignty, about the role of the member state, about what the EU is for, the role and power of the European Commission," said a second diplomat.

...

Europe was opting for shock and awe. Repeatedly in the past two weeks, Merkel has declared that "politics has to reassert primacy over the financial markets". This was the attempt.

...

Tellingly, the White House confirmed that Merkel, not Sarkozy, was the main obstacle to a decision staggering in its scale and ambition. Obama and Sarkozy "agreed" on the need for urgent action, while Obama and Merkel "discussed" the need for urgent action.

...

Outline agreement had been reached on the European fund of €500bn. But who would control it? The Germans insisted it had to be national governments, not the European Commission. They won that argument and Christine Lagarde, the French finance minister, pushed for a rapid conclusion before the Tokyo traders switched on their computer screens. As argument continued over how to label the rescue, the Dutch conjured a new concept that kept everyone happy - a "special purposes vehicle". The deal was done. France had won. Germany had lost.

"This was supposed to be a German euro. It's turned into a French euro," complained a German expert.

...

Barroso's argument was for full-fledged harmonisation of tax and spending policies among the countries sharing the currency, otherwise the euro had no future.

"Let's be clear. You can't have a monetary union without having an economic union," he said. "Member states should have the courage to say whether they want an economic union or not. And if they don't, it's better to forget monetary union altogether."

And in Aachen the next day, Merkel started talking about "the pound, the deutschmark, the franc, and the drachma". It sounded almost nostalgic for the old, simpler days of Germans' love affair with their national currency, though her speech was to advertise her credentials as a fervent European.

...

Sarkozy's famous victory is less than final - and he might yet regret his showdown with a chancellor of Germany.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Aug 11th, 2011 at 02:38:55 PM EST
[ Parent ]
German leaders believe that they can throw Greece, Spain, Italy, France to the market wolves and it won't affect them.

Clearly, and for the past 20 years.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Aug 11th, 2011 at 05:32:10 AM EST
[ Parent ]
I think it's time to update my Euro Crisis Scorecard:
GDP rank Country       CAB/GDP status
--------------------------------------------
17	 Romania	-5.13% under IMF
22	 Bulgaria	-3%
 7	 Poland 	-2.41%
 3	 UK		-2.23%
16	 Czech Republic -1.21%
--------------------------------------------
12 (8)	 Greece        -10.84% under EFSF
14(10)	 Portugal	-9.98% under EFSF
25(15)	 Cyprus 	-7.92% under attack
27(16)	 Malta		-5.39% 
 5 (4)	 Spain		-5.23% under attack
 4 (3)	 Italy		-2.86% under attack
15(11)	 Ireland	-2.73% under EFSF
 2	 France 	-1.79% under attack
19(12)	 Slovakia	-1.36%
21(14)	 Slovenia	-0.73%
--------------------------------------------
 8 (6)	 Belgium	+0.5%
13 (9)	 Finland	+1.43%
10 (7)	 Austria	+2.31%
26(17)	 Estonia	+4.21%
 6 (5)	 Netherlands	+5.72%
 1	 Germany	+6.06%
20(13)	 Luxembourg	+6.91%
--------------------------------------------
18	 Hungary	+0.51% under IMF
23	 Lithuania	+1.86%
11	 Denmark	+3.42%
24	 Latvia 	+5.49% under IMF
 9	 Sweden 	+5.95%


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Aug 11th, 2011 at 05:37:05 AM EST
[ Parent ]
Let me add this: Cyprus is still under attack, yet the (communist-led, I should remind readers) has agreed to austerity measures much more mild and indeed progressive (as they raise taxes on the richest and on property) in their effects that the usual kill-the-poor routine... This basically because the huge explosion last month, that knocked-out most of Cyprus' power generation and dealt a crippling blow to the economy, had made the government more susceptible to pressure, especially given the exposure to Greek debt and banks.

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Thu Aug 11th, 2011 at 08:16:32 AM EST
[ Parent ]
That leaves Malta, Slovenia and Slovakia, then...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Aug 11th, 2011 at 08:17:16 AM EST
[ Parent ]
Top is deficit countries not in the euro, and bottom is surplus countries not in the euro, right?

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Fri Aug 12th, 2011 at 07:45:21 AM EST
[ Parent ]
Right, and rank in parentheses is rank within the Eurozone.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Aug 12th, 2011 at 07:58:27 AM EST
[ Parent ]
If this move by the Swiss National Bank does not work, then it is only because the SNB does not move with sufficient determination.

The SNB can always, should it so desire, use open market operations to place a hard upper bound on the Swiss Franc's appreciation relative to any other currency it cares to name. That's one of the privileges that comes with being a central bank.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 11th, 2011 at 07:15:39 AM EST
[ Parent ]
In the current instance, that could be massively deflationary for the Eurozone.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Aug 11th, 2011 at 07:38:54 AM EST
[ Parent ]
If the Swiss central bank were able to increase the valuation of the €-Mark relative to the currencies of our trading partners, it would have a deflationary effect.

But (a) simply defending the existing exchange rate is neither inflationary nor deflationary and (b) they can't seriously affect our trade-weighted exchange rate even if they were to try. The Swiss Franc simply isn't a big enough currency. Any Franc/€-Mark exchange rate movement large enough to appreciably influence the Eurozone trade-weighted exchange rate is also large enough to cause politically unacceptable dislocations in Switzerland. And since the Swiss Franc is the currency under upwards pressure at the moment, the Swiss CB can always curtail such disruption.

It will be more interesting to see what happens if the Swiss CB fails to use the current upwards pressure to accumulate sufficient hard currency reserves to cover the inevitable exit from the Swiss Franc when the immediate panic subsides. Because then they will be defending against a potentially substantial depreciation of their currency.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 12th, 2011 at 05:48:55 AM EST
[ Parent ]
People aren't buying the Swiss Franc because it's a groovy thing to do.  They are buying it for a perceived benefit which, in turn, can be measured or valued.  So the question becomes what, exactly, ARE they paying for that benefit?

Cutting to the chase: not much.  Certainly they are not paying the full price for the benefit although the Swiss economy is paying the full cost of the benefit.  Which argues the Swiss Franc is being bought below the (cost of production + profit) at this time, in these market conditions.  

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Fri Aug 12th, 2011 at 01:52:08 PM EST
[ Parent ]
... among the "not big enough to be a world reserve currency" currencies.



I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Aug 13th, 2011 at 12:27:23 PM EST
[ Parent ]
... courtesy Mr. X Porter.



I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Aug 14th, 2011 at 05:27:36 PM EST
[ Parent ]
SNB could start charging a Tobin tax and a transfer fee.  

<evil grin>

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Fri Aug 12th, 2011 at 01:28:39 PM EST
[ Parent ]
That's something you do when you want to stem outflows. When you want to police inflows, you just put a hard cap on the rate of appreciation and use the opportunity to score some hard currency seigniorage.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 12th, 2011 at 03:15:32 PM EST
[ Parent ]
Isn't there a simpler solution: You want CHF? Sure, let me print some for you. Here you are. Want more? I will print more.

If people noticed that the SNB would be willing to print, they would lose trust in the CHF as a store of value... No?

The SNB would just have to print enough to defray the craziness but not too much. It seems to me that they are in the better situation: Printing to lower the value of the currency not because they are in debt and need to service it.

???

by cagatacos on Fri Aug 12th, 2011 at 03:30:16 PM EST
[ Parent ]
Isn't there a simpler solution: You want CHF? Sure, let me print some for you. Here you are. Want more? I will print more.

Precisely. That's how you "put a hard cap on the rate of appreciation and use the opportunity to score some hard currency seigniorage."

If people noticed that the SNB would be willing to print, they would lose trust in the CHF as a store of value... No?

Doesn't matter.

If they do, then Mission Accomplished. If they don't, then they give you hard currency for free. Heads they lose, tails you win.

It seems to me that they are in the better situation: Printing to lower the value of the currency not because they are in debt and need to service it.

Yep, that's precisely what they're doing.

My concern is that they may not be doing it enough if the CHF is appreciating noticeably. Because this is hot money - it's not in Switzerland because it believes in the virtues of Swiss engineering. It's in Switzerland because it believes that Switzerland is a safe place to watch the €-Mark come undone. Once the crisis is resolved - one way or another - they will move back out.

And the Swiss central bank can't print German money, so when they do, the Swiss CB had better have enough German money in its vaults if it does not want an object lesson in the difficulties of defending the lower bound of an exchange rate.

Of course, this is a notorious flag of convenience country we're talking about, so I won't precisely be crying my eyes out if they end up in a tailspin.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 12th, 2011 at 03:53:40 PM EST
[ Parent ]
My PhD advisor, to me: So, in what may be my last act of "advising", I'll advise you to cut the jargon.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Aug 12th, 2011 at 04:47:14 PM EST
[ Parent ]
The CHF, outside of Switzerland, is a commodity ... like wheat, oil, etc.  

Nobody has to "inflow" their CHF holdings into Switzerland to use it as a means of exchange.  Firms can take their CHF holdings, convert to dollars, and buy oil - or whatever - on the global commodity market.  By design the global commodity markets are outside the control of any one State, although some countries: e.g., US, China, have more short term influence than others.

Nobody has to "inflow" to use the CHF to play the "Financial Engineering" Game.  Possible to use CHF to buy dollar denominated instruments paying interest in euros.

In both cases the affects on the Swiss economy - where they HAVE to take the CHF - can be dire if the "reverse seigniorage" percentage gets large enough.


Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Sat Aug 13th, 2011 at 01:31:06 PM EST
[ Parent ]
Nobody has to "inflow" to use the CHF to play the "Financial Engineering" Game.

They do have to buy or borrow CHF if they don't have any to begin with. So they do create an inflow into the currency, even though they do not create one into the country.

Now, this can affect Switzerland in four ways: First, their buying of CHF can cause the CHF to climb relative to RoW. This is bad news for Swiss net exporters. Second, when they get tired of playing with the CHF they bought, they can exit their positions by buying stuff in Switzerland. That is not a serious problem for the Swiss unless they have very little slack in their economy, and even then only a minor problem. Third, they can exit their positions by buying other currencies with their CHF. This will be bad news for Swiss importers, including some net exporters. Fourth, they can move in and out of CHF in ways that increase the volatility of the exchange rate. This is bad for everybody except the noise traders.

The Swiss CB, meanwhile, can defend perfectly against the first effect if they want to. The second is not a serious problem. The fourth effect can be reduced by capping appreciation, which will simultaneously net the Swiss CB hard currency, at the "cost" of an overall net depreciation.

That leaves the third effect - a massive exit from CHF positions when the €-zone crisis is resolved (one way or another). This, the Swiss CB can only defend against if they either (a) have considerably more hard currency than they need in order to simply pay out all those who wish to exit (since the Swiss CB can't distinguish between people exiting long positions and people shorting, so the latter can use the former to cover as they set up a Soros attack). Or (b) cut the balls off any Swiss bank that assists the attackers in shorting the CHF (since you need the cooperation of Swiss banks to create CHF for shorting).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Aug 13th, 2011 at 02:12:21 PM EST
[ Parent ]
to the Wonderful World of International Finance, where reality is how you calculate it.

International currency traders and hedge fund managers have bugger-all interest in buying stuff in Switzerland.  There's nothing Switzerland produces they want or need.  They do care about this, but not all that much.

International currency traders and hedge fund managers do not have to own CHF to play their little mathematical game - and it is a Game.  All they have to do is have exposure to options:

CurrencyShares Swiss Franc Fund (NYSEArca:FXF): Option volume 579 percent above average. Activity surged in the August 126 puts and the September 126 puts. FXF fell 4.43 percent to $130.02.

or futures or financial instruments exposed to the CHF, e.g., Hungarian or Polish CMOs.  

Hell, a large trading company, making billions of CHF trades a hour, can "make" millions of CHFs, per year, by extending the mantissa on their trades a couple of decimal points to the right.

Or they can lie.  If Goldman Sachs is telling you they want to make a small trade of 50 million CHF how the hell do you know if they DO have it sitting in their coffers?  A desk trader doesn't have time to waste double checking their Cash Balance¹, if it is in his advantage to make the trade, he will.  All GS has to do is come-up with the cash, or pretend to, in a Financially Acceptable Kind of Way - which is, at the bottom, a Financial calculation! - at settlement.  

Nobody knows the actual monetary value of Forex trading done in a day.  Firms who do this estimated in 2007 it's in the neighborhood of $4 trillion (US) a day, or about one year of US GDP every four days, and it is certain the volume has increase over the last four years.  In the Forex market traders go about "buying France" in the morning, "selling Greece" in the afternoon to offset the trade is all in a day's work.  Thus, the affects and effects of their trades in the CHF on the Swiss economy is of only idle interest - if the trader can have any interest at all since a goodly portion of these trades are done by computers.  (How much? Don't know.)

Since US regulators can't rein-in this trading the SNB sure as hell can't.  The system is set-up so no national government can.  The best any national government can do is light a match in a hurricane.

The only way to slow down this nonsense and erect a buffer against damage it causes is to change the damn system by creating a global clearing house that can exact a Tobin Tax on each and every trade and a transfer fee when moving from one currency to another.

¹  Which you can't know until the end of the trading day in the best of circumstances.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Sat Aug 13th, 2011 at 03:38:27 PM EST
[ Parent ]
And Switzerland should care about any of that why?

If somebody wants to Soros attack them, then somebody can. Plenty of operators out there who have better hard-currency credit than a small sovereign. There are ways to cut their balls off, but those ways require quite heavy-handed intrusion into your domestic banking system,1 which I am not confident the Swiss have the political stomach for.

If people do not want to Soros attack them, or even buy their stuff, then why, precisely, should they care that somebody is conjuring up some Monopoly money and playing with it? A run on fake CHF will not do anything the Swiss CB can't defend against if they want to.

- Jake

1Hike liquidity requirements above total outstanding sovereign bond volume, restrict rediscounts to notes collateralised by domestically held non-financial assets - or just to non-financial assets if you're feeling generous. Then publicly announce these measures, along with the fact that they mean that most of the alleged CHF being sold is not backed by any Swiss bank or government institution. That is, it is counterfeit in every way that matters.

If idiots persist in buying counterfeit CHF off Goldman or some other high street bank, well, that's their problem when Goldman can't deliver.

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Aug 13th, 2011 at 03:58:26 PM EST
[ Parent ]
Because the Swiss could wake-up one day and find they no longer own their banking system or large manufacturing companies.  The 1997 Asian Financial Crisis is instructive.  At the last stages the Indonesia rupiah fell such an extent that it was possible, exaggerating only slightly, to buy companies producing $50 million worth of goods a year for $50 million.

As I've already said, currency traders don't give a hang about the relative valuation of the Real Economy of the country whose currency they are manipulating.  There are, however, trans-national companies who do; their purpose of being is to seek out "under-valued" assets and grab 'em on the cheap.  This process, confined within the US, is how Warren Buffet took a $3 million textile company and in 45 years turned it into a $372.229 billion conglomerate.  At the point everybody goes stampeding out of the Swiss Franc it's going to fall and if it falls low enough¹ it exposes Swiss companies to the predators.  

¹  something nobody can predict

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Sun Aug 14th, 2011 at 01:21:54 PM EST
[ Parent ]
At the point everybody goes stampeding out of the Swiss Franc it's going to fall and if it falls low enough¹ it exposes Swiss companies to the predators.

Unless the Swiss National Bank has accumulated enough foreign reserves. But I guess your point is that it's impossible for the SNB to accumulate enough reserves to counter the possibility of massive naked short selling of its currency in the international FX market.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue Aug 16th, 2011 at 08:39:50 AM EST
[ Parent ]
And my point is that if the Swiss regulator has its eyes on the ball, it can kill the hostile takeovers during any the potential CHF panic dead by requiring cash settlement of all stock market transactions before they are valid. Which means that naked short selling counterfeiting CHF will not enable Mr. Buffet and his colleagues to buy up real assets in Switzerland. They will have to short using real money to provide for takeover bids. Which means they will have to go to the Swiss banking system, which is the only place on the planet that can make genuine Swiss money.

And the Swiss CB/financial regulator can grab the Swiss banking system by the short and curlies quite literally overnight.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 16th, 2011 at 08:59:01 AM EST
[ Parent ]
At the risk of whip-sawing, or even crashing, the Hungarian economy where 44% of all household debt and 55% of mortgages are denominated in Swiss Francs.  

 

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Tue Aug 16th, 2011 at 02:00:04 PM EST
[ Parent ]
Bank lending denominated in hard currency, like inflation-indexed bonds, is an abomination onto God and must be exorcised with fire, garlic and holy water.

Or a severe currency crash. Y'know, whichever comes first.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 16th, 2011 at 02:16:09 PM EST
[ Parent ]
It gets better:

[Emphasis added]

The potential for a debt spiral is very real, as any deterioration in the economy causes the HUF to weaken further, creating a negative feedback loop with Swiss Franc loans and further deterioration in non-performing loans.  With another peak in gross government re-financing coming next year amounting to about 20% of Hungarian GDP, and the foreign debt burden denominated in HUF worsening, the markets are watching closely.

Interestingly, the Swiss themselves weren't foolish enough to do any of this lending. [!] Austrian banks provided about 40% of CHF loans in the euro-zone. And between 15-25% of the balance sheets of the top four Greek banks are exposed to SE Europe, including almost 40% and 30% of loans to the private sector in Bulgaria and Romania respectively, according to Macquarie Bank.  In turn, German, French and other northern European banks are heavily exposed to Greece. No wonder then, that the EU fears the chain reaction which would ensue from a Greek default.

Wheeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee!

I'm beginning to think there are two scenarios:

  1.  Everybody gets together and writes off and offsets their debt, one to another, to reduce the mutual plunder via interest payments to a realistic level

  2.  A cascade failure ripples through the system and everyone's FIRE sector goes bye-bye


Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Tue Aug 16th, 2011 at 02:35:17 PM EST
[ Parent ]
The entire continent is run by EPP or, at the very best, the Quisling wing of the PES.

#1 is not even within shouting distance of the Overton window.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 16th, 2011 at 02:48:20 PM EST
[ Parent ]
Bank lending denominated in hard currency, like inflation-indexed bonds, is an abomination onto God

The problem is that central bankers are idiots and didn't do their job properly. Moreover, they used the EU's free movement of capital for cover:

"There is nothing we can do to stop foreign exchange borrowing, and we don't even try. As members of the European Union, we have to respect the free flow of capital," he [Hamezc Istvan, director of Hungary's Central Bank] said.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Aug 16th, 2011 at 05:09:48 PM EST
[ Parent ]
See also: this thread from 3 March 2009, and this thread from 27 October 2008.

In the interim, an IMF intervention and a rescue of the Central-Eastern European economies by encouraging Western Banks to not bail themselves out of their Central-Eastern European investments, going by the name of "the Vienna Initiative" has been in place since 2009.

We're going to have another round of currency crises in the same countries we have already had to rescue?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue Aug 16th, 2011 at 05:07:59 PM EST
[ Parent ]
Not as such.

You're going to have countries going further into recession, making it harder for them to service their debt, that will be seen and responded to as a currency crisis.

The ECB, et.al., is dealing with the symptom, not the problem.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Wed Aug 17th, 2011 at 12:40:46 PM EST
[ Parent ]
You're going to have countries going further into recession, making it harder for them to service their debt, that will be seen and responded to as a currency crisis.

So you're saying another three iterations of Teh Stupid: One to realise that it's a currency crisis (European Tribune: Get your news two years early), but deal with it by the IMF playbook. Another one to realise that maybe it's time to dust off the proper policy response (John Maynard Keynes: Get your policy response eighty years early). And a third one to actually get their act together and convince even the dumbest Bild Zeitung reading meatbrain that Keynes was right all along.

What great fun. Maybe I should move to Germany.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Aug 17th, 2011 at 12:47:09 PM EST
[ Parent ]
Got no idea how many more iterations.  Apparently our global Masters, as advised by people with neo-liberal brain rot, are feverishly working on the premise, "If you're in a hole.  Keep digging."

The recent boffo-socko idea of a BALANCED BUDGET!!1!11!!eleventyone!!!! is Yet Another bit of evidence showing how removed from reality TPTB are.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Wed Aug 17th, 2011 at 01:04:14 PM EST
[ Parent ]
Maybe I should move to Germany.

Why bother? German policy, at a minimum, is coming to you.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Aug 18th, 2011 at 03:55:55 PM EST
[ Parent ]
Germany policy is designed to benefit Germany.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 18th, 2011 at 08:16:07 PM EST
[ Parent ]
And the former West Germany, to boot.

Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Thu Aug 18th, 2011 at 09:22:42 PM EST
[ Parent ]
Germany policy is designed to benefit Germany.

It might not work out that way and, in any case, it is designed to benefit only a few Germans, on whose behalf the others are resolutely sacrificing their prospects.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Aug 19th, 2011 at 12:23:35 AM EST
[ Parent ]
They could stop fooling around, print a shit load of money and buy Deutsche Bank and Goldman Sachs.  

Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Sat Aug 13th, 2011 at 01:09:43 PM EST
[ Parent ]

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