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Three months that will test the Eurozone

by Migeru Sat Apr 16th, 2011 at 06:14:23 AM EST

Portugal's blood was not yet dry on the maws of the hyena pack when our old friends the economy editors of the Frankfurter Allgemeine Zeitung announced that Spain would be next.

Eurointelligence Daily Briefing: "We will continue to monitor very closely" (8 April 2011)

After Portugal, who is next?

Frankfurter Allgemeine Zeitung's Werner Mussler has an interesting comment on the consequences of Portugal's rescue demand. According to the Brussels correspondent the next in line is the first really big Euro economy: Spain. Economically the country is in better shape than Portugal, he concedes. But unemployment is rising, growth perspectives are bad and the Spanish banks are heavily engaged in neighbouring Portugal. "The risk of contagion has not diminished with the Portuguese appeal for help", Mussler concludes. "And the EFSF is not sufficient to satisfy a potential Spanish request".

(link to FAZ, in German, added)

The signs for Spain are ominous. Not only are Spanish politicians and commentators (see El Pais calling Portugal's defeat The Final Rescue) publicly reassuring themselves that Spain is Not Portugal (have I not heard that one twice before?) but during the last week the Financial Times, Trichet, Merkel and the European Commission have all praised Spain's policy adjustments over the past 9 months. But most serious of all is the open consensus that Spain is too big to fail as the European Financial Stability Fund is too small for a possible "rescue" of Spain.

There is nothing more dangerous in financial markets than the belief that something cannot happen. To illustrate this, here's a battle story recounted by Nassim Taleb in his 1996 technical book Dynamic Hedging

A trader who survived the EMS (European Monetary System) breakup of 1992 recounts the following. In the events leading up to the turmoil of September 1992, he had to execute a large option order in Sterling versus German marks for a customer. He needed to buy quantities of out-of-the-money puts on the sterling, calls on the mark, struck 10% outside the official government band. The customer was a conspiracy theorist fund manager who believed in the imminent breakup of the monetary order. He belonged to the small coterie of traders who took on the Bank of England later that month.

The trader, being risk-averse, decided to do what most of his headache-free peers do: call a large market-maker, add on a margin, and earn the difference. He called two of the largest option dealers in the world asking for their selling price and received the following answers:

  1. W, based in the United States, and a former CME pit trader, told him that they were reluctant to show a price "because the strike is outside the band" and the options were "too risky". They would accommodate him if necessary, but at a very expensive implied volatility and only for a moderate amount.
  2. B, based in Europe, literally laughed at him. "But Zey are outside the band, if I am not mistaken," he was told. "How many do you vant? I can sell you all you need. You should give your money to charity instead".
W was a former pit trader surrounded by pit traders. He is now the head of worldwide foreign exchange for a large bank. The second dealer, B, was a graduate of a prestigious European school of Engineering. He is now back to Engineering and other precise activities after his desk was decimated by disastrous losses in September 1992. After all, in the physical world, barriers are barriers, bridges are bridges, and horses are horses.

frongpaged - Nomad


The situation in the Eurozone is ripe for a repeat of the events of 1992.

The UK's prime minister and cabinet members tried vehemently to prop up a sinking pound and withdrawal from the monetary system the country had joined two years prior was the last resort. Major raised interest rates to 10 percent and authorised the spending of billions of pounds to buy up the sterling being frantically sold on the currency markets but the measures failed to prevent the pound falling lower than its minimum level in the ERM.

The Treasury took the decision to defend Sterling's position, believing that to devalue would be to promote inflation. On 16 September the British government announced a rise in the base interest rate from an already high 10 to 12 percent in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15 percent, dealers kept selling pounds, convinced that the government would not stick with its promise. By 19:00 that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would remain at the new level of 12 percent (however, on the next day interest rate was back on 10%). It was later revealed that the decision to withdraw had been agreed at an emergency meeting during the day between Norman Lamont, Prime Minister John Major, Foreign Secretary Douglas Hurd, President of the Board of Trade Michael Heseltine and Home Secretary Kenneth Clarke (the latter three all being strong pro-Europeans as well as senior Cabinet Ministers), and that the interest rate hike to 15 percent had only been a temporary measure to prevent a rout in the pound that afternoon.

It is, in fact, impossible for a monetary authority to prop up its overvalued currency indefinitely, as that requires buying its own currency with foreign reserves, which are by definition finite. The only monetary authority which could have preserved the ERM was the Bundesbank, since the DM was in fact overvalued (when a majority of the currencies in the ERM including the Lira, Sterling and the French Franc are all near the bottom of their exchange-rate band with respect to the DM, one has to conclude that maybe the currency that needs corrective action is the DM) and a monetary authority of a fiat currency can always lower its value by buying foreign currencies with newly created money. However, the Bundesbank was engaged in a fight to contain the inflationary pressures from the 1:1 conversion of East German Marks to DM. In any case, the Bundesbank saw that it was being asked to act as EU central bank and issue DM to help "irresponsible others" and would likely have refused even in the absence of perceived inflationary tendencies. See this third-person account by the Bundesbank itself:
Crises in the ERM. In 1992, investors lose confidence in the stability of the pound sterling, in particular, and then, in 1993, in the French franc, resulting in speculative selling of the pound and franc; in 1992, the United Kingdom and Italy leave the ERM; in 1993, the fluctuations margins around the bilateral central rates are expanded sharply. The Bundesbank with its commitment to price stability had refused to lower interest rates massively. The partner countries are forcibly reminded of their responsibility for their currencies; the process of convergence needed for monetary union is strengthened.
Now, there is an interesting detail about the 1992 events which is very relevant to our current predicament in 2011:
On Monday, October 26, 1992, The Times quoted Soros as saying: "Our total position by Black Wednesday had to be worth almost $10 billion. We planned to sell more than that. In fact, when Norman Lamont said just before the devaluation that he would borrow nearly $15 billion to defend sterling, we were amused because that was about how much we wanted to sell."
Further,
Soros said he had been confident that the German Bundesbank wanted devaluations in Italy and Britain, but not in France. I felt safe betting with the Bundesbank. The Bundesbank clearly wanted the lira and pound devalued, but it was prepared to defend the franc. In the end, the score was Bundesbank, 3-nil; speculators, 2-1. I did even better than some others by sticking to the Bundesbanks side.
Note here, that the Bundesbank was politically prepared to defend the Franc, but not Sterling or the Lira. Ask yourself, does it look like Germany is prepared, politically, to defend Spain from debt speculators? Come to that, would it be prepared to defend France any longer?

The European Union has failed to contain the ongoing sovereign debt crisis in large part because both the European Central Bank and the Member States (individually and collegially as the European Council) have refused to provide unlimited support to government debt when it came under attack, and have even telegraphed the amount of the exposure they were willing to take to deal with the problem. You cannot bicker about the amount of capital available to the European Financial Stability Mechanism and tell the markets in inequivocal terms that this or that precise amount is as far as you're willing to go to defend a financial position from attack, and expect them not to be "amused" like Soros in 1992. If Soros could muster £15bn in 1992, who can seriously claim that international speculators cannot put together €400bn in 2011 given a period of a year and a string of targets to place a succesion of ever larger bets? Another sign of limited intervention is the ECB's obsession with "sterilizing" any bond purchases made (adding up to €77bn at latest count) and the fact that these purchases are always too little, too late due to pressure from inflation hawks within it.

So, I am pretty confident things will come to a head with Spain within three months. Speculators are recouping their gains from the successful attack on Portugal, and can start to amass a war chest to go after Spain. They even have estimates of the amount of money they need, since everybody and their grandmother has been speculating about the amount that a "rescue" of Spain would require. Success is assured, since everyone agrees that the required amount exceeds the resources that the EFSF is politically allowed to commit. In Wolfgang Munchau's words, total überfordert

Usually I stay clear of connotation-rich German words that have no real equivalent in other languages. Their purpose is to obfuscate. But there is one that describes the eurozone's crisis management rather well. It is überfordert. The nearest English translation is "overwhelmed", or "not on top of something", but those are not quite the same. You can be overwhelmed one day, and on top the next. Überfordert is as hopeless as Dante's hell. It has an intellectual and an emotional component. If you are it today, you are it tomorrow.
Yes, sometimes (as in metaphysics) you need to use German words; and yes, when the Eurozone is a smoking ruin 3 months from now, the European political and economic policy class won't know what hit them. Take France's finance minister Christine Lagarde: Ireland aid sufficient, confident on Portugal (Reuters, Nov 29, 2010)
"Europe is difficult to understand for the markets. They work in an irrational way sometimes," Lagarde told RTL radio.
It appears that the difficulties in comprehension are mutual, since European economic policymakers don't seem to understand markets either. In fact, their being "confident" in a country in the aftermath of another's "rescue" seems to be a good 3-month leading indicator of trouble. That doesn't bode well for Spain.

The evidence that the people in charge have no idea what they're contending with is ample. From the Spanish government believing that the problem is one of communication with the investors who just cannot see how virtuous the Spanish fiscal policy is and will be swayed by the Spanish treasury setting up an English-language website to explain the adjustment programme; to ECB council members declaring themselves surprised that the markets haven't been shocked and awed by the announced maximum size of the EFSF; to the politicians who on the one hand proclaim that they will do everything necessary to "save the Euro" while at the same time putting limits to their resource commitment, pandering to xenophobic populists at home, or protecting insolvent banks.

Politically, not only is the European Union over its head, but the positioning on the sovereign debt crisis has been full of moral overtones - economics as a morality play on debt. The whole thing is likely going to end up in an assertion of the moral superiority of the Protestant North of Europe over their inferiors, be they Catholic or Orthodox.

As for timing, I suspect the final crisis of the Euro will be within a couple of weeks of the publication of banking stress test results in June of 2011. If the results of the stress test are bad for the German banks, expect the speculative attack on Spain to be before the publication of the stress test results; if the results are favourable for German banks, the attack will come after. But it will come.

Display:
I am not a fund manager or a conspiracy theorist, but I do believe in the imminent breakup of the monetary order because the Eurozone leadership is incompetent and its institutional framework is wrongheaded.

That which is unsustainable will be sustained by politics up to a point, but not indefinitely.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sun Apr 10th, 2011 at 11:20:49 AM EST
that European politicians have NOT taken any real political decisions. They're still hoping to avoid taking them; thus the markets will put them against the wall, but I still wouldn't bet that they won't do the right thing in the end.

What's the saying about doing the right thing, after having exhausted the alternatives?

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sun Apr 10th, 2011 at 04:35:35 PM EST
[ Parent ]
What's the saying about doing the right thing, after having exhausted the alternatives?

That was Churchill, and he was talking about us on the other side of the Pond.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Apr 10th, 2011 at 05:28:34 PM EST
[ Parent ]
But, does doing "the right thing" involve more than the bare minimum to keep in place a system that sends just enough benefits to France to keep her allied with Germany and the rest of the benefits to the export surplus northern countries, primarily Germany? Surely doing "the right thing" couldn't involve giving Greece, Portugal or Ireland a break, could it?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Apr 10th, 2011 at 07:49:38 PM EST
[ Parent ]
They have not taken any political decisions in the direction of what you consider the right thing. By the way, could you expand on specifically what you mean by "the right thing?".

But they have taken plenty of political decisions.

It is a political decision to create the EFSF. The size of its capital is also a political decision. The fact that tapping the EFSF is subject to "strict conditionalities" imposed by fellow EU finance ministers on the offending country is a political decision. The fact that these "strict conditionalities" amount to IMF'ing a fellow member state is a political decision. Crying bloody murder over ECB secondary market bond purchases is a political decision. So is the decision to bar the ESM (which will replace the EFSF after 2013) from buying sovereign debt in the secondary market (to complement the ECB's prohibition to buy it in the primary market). So is the decision to have "no bondholder bail-in before 2013". So is the ECB's threat to withhold liquidity from Irish banks. So is the lengthy negotiation of the parameters and timetable of banking stress tests (the very decision to do another round of banking stress tests is political).

Refer to my signature.

There is absolutely no indication that the current EU leadership has it in them to "do the right thing". In fact, in their public pronouncements on Portugal they're positively drooling over the prospect of imposing harsher austerity than rejected by the Portuguese parliament last month.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 05:00:57 AM EST
[ Parent ]
The fact that the only way to satisfy the predators is to impose austerity - not that they'll care - is very much political.

The issue here is that the politics has become invisible and pretends to be inevitable.

The standard narratives are now built into the frame of the debate. No serious person can ever question them, and even unserious people can have difficulty seeing through them.

Economics is politics by other means

Or in more detail, economics has become a very literal form of Newspeak.

Instead of being simple, it pretends to be complicated. But it has the same deadening effect; dissenting concepts become unthinkable, challenging questions become unaskable, and humane values become morally hazardous.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Apr 11th, 2011 at 07:41:23 AM EST
[ Parent ]
politicians pretend they are powerless and thus TINA. But it's not true. But they don't want to rock the boat (the yacht) with all their friends on it.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Tue Apr 12th, 2011 at 05:37:50 PM EST
[ Parent ]
So they are making political decisions all the time.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Apr 12th, 2011 at 07:15:45 PM EST
[ Parent ]
but these are passive decisions, not active ones. I agree it's a political choice, but it's not exactly a "decision" in that it requires doing nothing, or close to that (or worse, most of the times these days: doing almost nothing and pretending you've taken big decisions - something which decredibilises political decisions in making it look like "big decisions" don't change a thing)

Wind power
by Jerome a Paris (etg@eurotrib.com) on Wed Apr 13th, 2011 at 05:45:25 AM EST
[ Parent ]
Once again "the Euro can do no wrong", only this time it's "they just fail to do the right thing, or anything for that matter" version.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 13th, 2011 at 05:53:43 AM EST
[ Parent ]
An optimist will note that the Euro could be saved at any time by sound policy.

A pessimist will note that nobody in a position of power to help implement sound policy gives any indication of being able to even think in terms that makes it possible to talk about what a sound policy is.

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 Wed Apr 13th, 2011 at 01:52:42 PM EST
[ Parent ]
That is why the whole spectacle is like watching a bad horror movie. Everyone is inexplicably paralyzed while being engulfed by their doom. But in this case, some of us can see how the whole "crisis" could be resolved, but that would require dialing back the looting, or wealth transfer, if you prefer, by the financial elites and doing it by political means.

The elites, collectively, cannot bring themselves to moderate their greed even in the interests of prolonging their highly successful game, and all others have not been able to bring themselves to stop the elites or even to significantly oppose them. So we roll onward towards the cliff that lies ahead. The question that remains is the extent to which those elites and those who serve them understand this and are just caught up "riding the tiger", are complete, unquestioning believers in the propaganda that has been promulgated on their behalf or simply don't care about the consequences and are convinced that the consequences will be for others.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Apr 14th, 2011 at 07:43:56 PM EST
[ Parent ]
Doing the right thing means buying as much spanish debt as needed to fix its rate. Better without withdrawing liquidity from the market.

But this means Spain will have to do whatever Germany decides it has to do. Otherwise Spain will follow Portugal fate and the ECB will stop buying bonds.

And here you have a poker game if Germany and Spain knew what they are doing.. the problem is that the crazy economic sect of uber-austerity is in the middle of the game. They may want Spain to receive a lesson, and more pain for the South and all that stuff. They could destroy the euro in theprocess.

So, the austeristas and gold-stadnard lovers will have to break one of their dremas. A pure gold-standard, since the ECB has to buy spanish debt... or just the end of the euro-gold because noone will pay the spanish bail-out.

Two years on, the only last hope of Spain is  still that it is too big to fail and the ECB must fix the spanish bond rate or the euro can go in flames...

The other option is that they try to do a Portugal to Spain... more pain for Spain.. and a bridge loan.. and then moves to the next country.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Apr 11th, 2011 at 09:09:30 AM EST
[ Parent ]
I still wouldn't bet that they won't do the right thing in the end.

I wouldn't bet that they will be able to do what is necessary and sufficient once they have reluctantly come to the conclusion that they must. Dither around long enough and the opportunity is likely to pass.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 10:58:36 AM EST
[ Parent ]
In addition, a number of countries which have already been IMF'd by the EU would rightly feel aggrieved by the preferential treatment given to Spain. This is not limited to Portugal, Ireland or Greece, but includes Hungary, Estonia...

Spain, in fact, joined forces with the other big European economies on an earlier occasion:

The surge in Irish bond prices on Friday came after the finance ministers of Europe's five largest economies issued a statement reiterating that any plans to force private investors to bear the burden of future sovereign bail-outs would not affect anybody currently holding eurozone bonds.

"We are clear that this does not apply to any outstanding debt and any programme under current instruments," the British, French, German, Italian and Spanish finance ministers said in the statement released at the G20 summit in Seoul.

which I criticised harshly:
Zapatero, the last best hope of Social Democracy in Europe [sic], joins forces with the Conservative-Neoliberal governments of Germany, France, Britain and Italy in a futile attempt to protect his own bond spreads, only to find a few weeks/months from now that the other 4 larger economies hang him out to dry...
Chickens coming to Spain to roost in 3, 2, 1...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 11:28:05 AM EST
[ Parent ]
By breakup of the monetary order do you mean a breakup of the Eurozone? As in retaining the Euro for the core members and having all the "weak links" (which have a tendency to multiply anyway) return to national currencies? Or a series of sovereign defaults in the peripheral countries? Or both? Or what else?

What would you think all that will mean for common Europeans north and south, in terms of their daily lives, and in terms of prospects? What would it mean for the EU as a project?

The way you are describing it, if I understand correctly, there will be no winners in this - apart from very rich speculators...

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Sun Apr 10th, 2011 at 05:15:44 PM EST
[ Parent ]
I'm just rhetorically paraphrasing Taleb's description of the investor in his war story...

Nevertheless, I'm taking at face value the claims that the EFSF doesn't have enough capital to "rescue" Spain from a market run. In the current environment, public knowledge that this is the case pretty much guarantees that an attack will be attempted.

So, the baseline scenario is one in which Spain is forced to apply for help from the EFSF and the EFSF doesn't have enough money. Then what? Will Germany, the Netherlands, Finland (by then with the True Finns installed as at least the second party in the country) allow an expansion of the EFSF's capital? Their parliaments might openly revolt even if that would be the easier way to force Spain to dismantle its welfare state, which seems to be the EPP's continent-wide goal here.

If they don't expand the EFSF, Spain would have to default on some of its debt. That would "break up the monetary order", since

The eurozone was founded on the three principles of No Default, No Bailout, and No Exit, which came into conflict during the recent financial crisis.
There are ways to avoid getting there. One is for the ECB to set a ceiling on the yield (i.e., a floor on the price) of Spanish sovereign debt in the secondary market. However, the ECB has so far always done too little and too late of this, because they always wait until the debt is in free fall before intervening, and do so only to stem the fall. This does nothing to stop a run - it just signals to speculators that their attack has been successful.

Another option is for Spanish commercial banks to manage the yield of Spanish debt in the primary market (at the auction stage) and to fund this by repo-ing the bonds at the ECB's discount window. This leads us to a different angle of attack on Spain which is to deny interbank liquidity to the banks - that is, a run on the banks rather than a run on the sovereign (or as a prelude to it). This would force the banks to go to the ECB for liquidity, and last November the ECB forced the hand of the Irish government by threatening to instantly crash the Irish banks by denying them access to liquidity. Had the ECB not done that, we wouldn't be talking about a Portuguese "rescue" since the Irish "rescue" wouldn't have happened as it did.

Recall that, in June 2010, when rumour-mongering about Spain was raging, Spanish banks were indeed having to rely heavily on liquidity from the ECB. The situation was resolved by Spain's Central bank threatening to unilaterally do a full disclosure of their stress test data:

FT.com / Europe - Spain to reveal bank `stress tests' results (June 16 2010)

Spain's central bank has thrown down the gauntlet to bank regulators elsewhere in Europe, saying it plans to publish the results of "stress tests" on the country's financial institutions in the near future to clear up doubts about Spain's banking system.
(my emphasis)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 04:51:40 AM EST
[ Parent ]
But what could really happen if Spain defaults?

Is there any conditions in the Maastricht Treaty (or any following) that says that a defaulting country will be excluded from the eurozone? Is there any legal consequence arising from the defaulting to Spain's ncil, presence in the EU council, commission, or Parliament?

Will Spain be forced out of the euro? The treaty will have to be ratified, any modification also, this would be really an atomic explosion, as all the treaties that found the European Union are interdependent. Is Germany actually willing to risk a break-up of the European Union? Is it able to survive this kind of massive destruction of the political frame in Europe?

Or will we see a default of Spain (or another country) immediately followed by the disappearance of yet another principle of the eurozone? Furthermore, I'm convinced that a default would translate as a fall in the €/$ rate, and therefore a sharp rise in the Eurozone economy.

by Xavier in Paris on Mon Apr 11th, 2011 at 06:37:03 AM EST
[ Parent ]
Of course they can't exclude Spain from the Eurozone - there is no explicit legal prohibition against sovereign defaults, and there is no legal mechanism for excluding a member. Default is a market solution. But the EPP supports the market only in the second person and in the abstract: It is good for disciplining other persons, or people in general, not for disciplining the EPP's Good Old Boys.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 11th, 2011 at 07:09:05 AM EST
[ Parent ]
I'm wondering whether having announced that he isn't running for reelection in 2012 will free Zapatero to actually default on Spain's debt if push comes to shove.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 09:08:23 AM EST
[ Parent ]
If he accompanied the default with a vigorous defense of his actions and a cogent critique of the stupidity that led him to such action he could drive a stake through the existing ideology. But he seems to be a consensus guy and shows few signs of understanding what is happening. He needs to start listening to much better advice. One source springs to mind.  :-)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 11:12:05 AM EST
[ Parent ]
Those are good questions, but I don't know the answers any more than I know where in the Treaties the following comes from:
The eurozone was founded on the three principles of No Default, No Bailout, and No Exit


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 08:08:32 AM EST
[ Parent ]
My guess is that it would be politically much easier to gloss over a default, using some twist that may probably be found in some treaty and then, in a few months, prepare a solution through a new treaty (as for the deficit and debt rules). Spain would be in a political mess, sure, but this wouldn't be the end of the European Union, as would be excluding a member.

I personally pray for Ireland to default first, because that would weaken the anglo-group of countries in the EU political game.

by Xavier in Paris on Mon Apr 11th, 2011 at 08:28:16 AM EST
[ Parent ]
The Anglo countries aren't the problem this time around ...
by Colman (colman at eurotrib.com) on Mon Apr 11th, 2011 at 09:36:39 AM EST
[ Parent ]
Seen from a federal EU, they are. It's Ireland and Britain which mainly pushed the agenda of privatization in the EU commission regulation.

A default in an Anglo country would, I feel, be important to rule out the return of the deregulation at the EU level.

On the contrary, if one of the southern PIGS breaks up, it would reinforce the Britain view on the EU, which is a huge cause of social stagnation in Europe.

Germany, notwithstanding the current issues, is usually more prone to state regulation, probably due to its industrial background.

by Xavier in Paris on Mon Apr 11th, 2011 at 12:24:33 PM EST
[ Parent ]
You'd think with all that influence the Irish would have been able to get themselves a better deal, eh?

Don't confuse the Irish being held up as an example with the Irish doing the pushing.

by Colman (colman at eurotrib.com) on Mon Apr 11th, 2011 at 12:29:26 PM EST
[ Parent ]
when New Zealand was, for a couple of years, the poster boy of Chicago-school economics.

When it became obvious to everyone what an unmitigated disaster that was, it completely dropped off the radar (in fact the country was never heard of again)

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Apr 11th, 2011 at 12:38:48 PM EST
[ Parent ]
In any case, the narrative will be profligate public spending if the Irish default. You lose anyway.
by Colman (colman at eurotrib.com) on Mon Apr 11th, 2011 at 12:30:30 PM EST
[ Parent ]
This may be so... but as you guys in Green Eire are english-talking people, it will be easier to convince the Good Bankers Guys that it was not public spending.

To be clear, I believe that there is a strong xenophobic bias in the mainstream analysis of the mediterranean crisis. So, if you allow me a bit of cynicism, if it's a bunch of white aryan guys who get dunced first, then it would mitigate this view.

The best would be the fall of Britain bank's. I'm counting on Cameron on this issue.

by Xavier in Paris on Tue Apr 12th, 2011 at 02:35:27 AM EST
[ Parent ]
Xavier in Paris:
This may be so... but as you guys in Green Eire are english-talking people, it will be easier to convince the Good Bankers Guys that it was not public spending.
The bankers that need to be convinced are German-speaking.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Apr 12th, 2011 at 04:09:58 AM EST
[ Parent ]
Xavier in Paris:
I believe that there is a strong xenophobic bias in the mainstream analysis of the mediterranean crisis. So, if you allow me a bit of cynicism, if it's a bunch of white aryan guys who get dunced first, then it would mitigate this view.
You're assimilating the Irish to "white aryan"? You're aware of the Irish being called "white niggers", aren't you?

In any case, the "superior race" in this here crisis is the Protestant, and the Irish are Catholic.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue Apr 12th, 2011 at 04:13:05 AM EST
[ Parent ]
I believe that compared to what the british may think of the greeks, Irish people get out well.
by Xavier in Paris on Tue Apr 12th, 2011 at 06:37:44 AM EST
[ Parent ]
I just figured out why you keep talking about the British - you're thinking about the "market" while I'm thinking about the ECB...

There are two principal centers of action here: London (via the City, the Financial Times and The Economist) and Frankfurt (Bundesbank, ECB, Financial Times Deutschland).

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue Apr 12th, 2011 at 06:47:29 AM EST
[ Parent ]
Frankfurt (Bundesbank, ECB, Financial Times Deutschland)

On the last, you mean FAZ (FTD is in Hamburg).

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Tue Apr 12th, 2011 at 08:03:36 AM EST
[ Parent ]
I think Migeru an opthers are using Frankurt more like a imaginary place. Not so much the real location.
by IM on Tue Apr 12th, 2011 at 12:31:51 PM EST
[ Parent ]
Metonymy - Wikipedia, the free encyclopedia
Metonymy (pronounced mɨˈtɒnɨmi, mi-ton-uh-mee [1]) is a figure of speech used in rhetoric in which a thing or concept is not called by its own name, but by the name of something intimately associated with that thing or concept. For instance, "Westminster" is used as a metonym (an instance of metonymy) for the Parliament of the United Kingdom, because it is located there.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Apr 12th, 2011 at 12:46:52 PM EST
[ Parent ]
... Hamburg, but its heart is in Frankfort?

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 Wed Apr 13th, 2011 at 01:59:15 PM EST
[ Parent ]
but was the FTD as bad as the FAZ in the crisis-mongering?

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Apr 13th, 2011 at 05:12:01 PM EST
[ Parent ]
... Financial Times.

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 Wed Apr 13th, 2011 at 07:00:03 PM EST
[ Parent ]
I apologize by the way if I sound offensive. I personally have nothing against Ireland. Nevertheless, I actually think that there is some bias in the english speaking world against Europe in a general point of view, and in particular against the south of Europe. German bankers also have this bias, and I think it's cultural, transmitted through the university, and the feeling these people may have that they belong to an elite.

I'll had that you may find quite easily this kind of behaviour in France too.

by Xavier in Paris on Tue Apr 12th, 2011 at 06:42:44 AM EST
[ Parent ]
f it's a bunch of white aryan guys who get dunced first, then it would mitigate this view.

The first to get dunced were white aryans - Iceland....

The best would be the fall of Britain bank's. I'm counting on Cameron on this issue.

I'm with you there. But don't forget to give Clegg some credit as well.

by gk (gk (gk quattro due due sette @gmail.com)) on Tue Apr 12th, 2011 at 04:16:54 AM EST
[ Parent ]
Protestant, too. However, there is no narrative of irresponsible people living off welfare having caused the disaster.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Apr 12th, 2011 at 05:32:59 AM EST
[ Parent ]
Iceland did not get screwed up. They just refused to pay, and sent their creditors out with a thanks.

I'm not believing that they are doing badly.

by Xavier in Paris on Tue Apr 12th, 2011 at 06:38:59 AM EST
[ Parent ]
I agree with you that Iceland is doing the right thing (by now). But they get away with it because they are northern Protestants. If the Greeks did exactly the same thing, they'd be attacked by the media using all the usual stereotypes. Ireland will or will not be treated like the Greeks depending on which stereotype of Ireland the media believes in.
by gk (gk (gk quattro due due sette @gmail.com)) on Tue Apr 12th, 2011 at 06:49:26 AM EST
[ Parent ]
Xavier in Paris:
Is Germany actually willing to risk a break-up of the European Union? Is it able to survive this kind of massive destruction of the political frame in Europe?

that's the $64,000 question... or is that billions?

will the whole european union founder on the shoals of a few german economists and their ideology, (paranoid hangover from another age)?

whether it's greed, fear, stupidity or a combo of the above is daily discussed among the conoscenti, but the average joe does not even begin to understand the murky, opaque reasons why all the bennies of a new forged union are going to have to be sacrificed, (along with the savage austerity cuts), just because of some financial machinations w-a-y behind the curtains, whether these shadowy characters come from lichtenstein, luxembourg, or germany for that matter.

all they know is that they ~we~ have become accustomed a borderless, blended, co-operative europe, and this wonderful improvement is being endangered by a few media-obscure individuals, who will not be able to hide under the glare of public consciousness trained on these saboteurs.

if europe's future lies in the hands of gamblers trying to cover their losses through obfuscation and doublespeak, the exposure of this social criminality is a risk even they can't hedge.

we have come too far to be undone by a crew of jowly backroom pirates, it won't stand.

the only question is when enough of the discomfited public wake up and stop believing the BS, and these powerfreaks will go down. the world's too small to hide in, where can they disappear to?

the dull roar of rage is mounting every day, as more and more feel the sting of the bankers' lash. when the masses have as little to lose as the arabs, well, you know the rest...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Apr 11th, 2011 at 09:22:28 AM EST
[ Parent ]
And the EPP could give birth to a Hitler 2.0 featuring Roma, Muslims and who knows who else.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 11:17:09 AM EST
[ Parent ]
The ECB to the rescue: Fiscal policies
Fiscal policies have a significant impact on economic growth, macroeconomic stability and inflation. Key aspects in this respect are the level and composition of government expenditure and revenue, budget deficits and government debt. Fiscal discipline is a pivotal element of macroeconomic stability. The need for fiscal discipline is even stronger in a monetary union, such as the euro area, which is made of sovereign states that retain responsibility for their fiscal policies. There are no longer national monetary and exchange rate policies to respond to country-specific shocks, and fiscal policies can better cushion such shocks if they start from a sound position.

Institutional arrangements

A number of institutional arrangements for sound fiscal policies have been agreed at the EU level, also with a view to limiting risks to price stability. These include:

  • the prohibition of monetary financing (Article 123 of the Treaty on the Functioning of the European Union),
  • the prohibition of privileged access to financial institutions (Article 124 of the Treaty on the Functioning of the European Union),
  • the no-bail-out clause (Article 125 of the Treaty on the Functioning of the European Union),
  • the fiscal provisions to avoid excessive government deficits (Article 126 of the Treaty on the Functioning of the European Union, including the excessive deficit procedure), and
  • the Stability and Growth Pact (secondary legislation based on Articles 121 and 126 of the Treaty on the Functioning of the European Union).


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 09:24:37 AM EST
[ Parent ]
See also: Eurozone Watch » Getting around the No-Bail-Out-Clause by Daniela Schwarzer on 20 February 2009
For a few weeks now, the debate about whether a bail out of an EMU country is a likely option has accelerated. A few days after we had argued in a syndicated piece for Project Syndicate which was printed by a number of papers across the world that the no-bail-out clause has no relevance in the current crisis and EU member states would bail out a EMU member with solvency or liquidity problems. Germany's Finance Minister recently added flavour to the debate. Only yesterday, it was reported that Steinbrück confirmed that EMU countries might bail-out a fellow euro-area country (read for instance Bloomberg on this).
On the same day, we had

FT.com / Brussels - ECB warns Germany against EU bail-out (February 20 2009)

The European Central Bank gave a thinly veiled warning to the German government on Friday not to violate the European Union's "no bail-out" clause, which prevents members of the eurozone from supporting other members that are facing rising public debt.

Jürgen Stark, ECB executive board member, told Spiegel magazine in an interview released on Friday that the clause was an "important basis for the functioning of the monetary union".

The warning follows reports that Germany was considering ways to help members of the eurozone that are facing fast-rising refinancing costs as investor fears rise about deteriorating public finances. Peer Steinbrück, finance minister, said this week that Germany would not remain inactive if the eurozone was in danger of breaking up.

Back to Daniela Schwarzer:
Let us, first of all, reframe the issue. If an EMU member country heads for a situation in which it cannot refinance its debt, it may not need a full bail out, but would indeed need financial assistance. For such an emergency action, Article 100 TEC, section 2 could be used as a legal base:  "Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned. The President of the Council shall inform the European Parliament of the decision to be taken." The fact that EU member countries and the EU as such is not liable for the commitments of other member states (as stated in Article 103), hence does not imply that the Treaty assumes that fellow member states should go bankrupt.
Whether by issuing Eurobonds, which Schwarzer suggests, or by means of the EFSF, this can be done.

The issue really is the political stance that results in the EU (Commission, Council and Central Bank) consciously IMF'ing the member states in difficulties.

All this to prevent a default.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 09:35:41 AM EST
[ Parent ]
Will somebody please tell the ECB to either stand for election or shut the fuck up about fiscal policy? It's bad enough to have a monetary theocracy that operates on a Ptolemaic view of money, without having it meddle in fiscal policy as well.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 11th, 2011 at 01:47:34 PM EST
[ Parent ]
A little late for that. The last 20 years are the story of how the Bundesbank became the most influential institution in the European Union and through the German government wrote itself into the EU treaties as the most powerful instutution.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 02:59:47 PM EST
[ Parent ]
the Bunedesbank was already the most powerful institution in Europe before - just ask various governments in France until the 80s about the repeated traumas of the devaluations of the Franc against the DM, and thus the need to be as tough as the Buba. Thus the euro, to try to tie the ECB to European politics rather than to its monetarist core.

That European influence obviously is not strong enough, but the situation today would be no different with the Buba- you'd have devaluations, and I fail to see how that is any worse than austerity.

Case in point, the UK, which supposedly avoided the eurozone crisis by devaluating, and is doing even more austerity today.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Tue Apr 12th, 2011 at 05:47:10 PM EST
[ Parent ]
But you don't want to devalue from one fixed peg to another. You want to defend an upper bound to the read exchange rate, and then use accumulated hard currency reserves to act in a discretionary manner to defend your national economic interest against speculative hot money.

Oh, and you want to withdraw rediscount facilities from all banks that assist in speculative attacks against your currency. You can't attack a currency unless you can short it, and you can't short it unless its central bank is being a sucker.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Apr 12th, 2011 at 05:56:46 PM EST
[ Parent ]
The take-away point there is that central banks either don't understand the world economy or they're complicit with the predators.

While everyone is pretending that these investor attacks on sovereign political entities which we know as nation states are somehow the fault of the nation states themselves it's impossible to deal with the political reality of what's actually happening - which is that a gang of thugs with baseball bats is kicking in the windows of democracy.

This is an extended economic Kristallnacht. It's soft violence-by-spreadsheet rather than hard violence with a fist to the face. But it's still criminal violence, with immensely destructive consequences - and not the genteel debate about financial niceties that it pretends to be.

Here's a useful graph of UK insolvencies. (The downtick last year was the result of new legislation which created a simplified pseudo-bankruptcy process for certain debtors.)

Considering that Osborne's plan seems to be to move public debt to private households, the next few years aren't going to be a happy experience for many people.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Apr 12th, 2011 at 07:49:40 PM EST
[ Parent ]
... "real exchange rate."

And I should learn to proofread better.

And it's not quite true that you can't short a currency unless the CB is being a sucker. The CB is just the most common sucker in a Soros attack, but any entity that has domestic currency lying around in large quantities can be the sucker.

Also, if your CB is not committing to defend a lower bound, it should be brokering currency swaps between foreign central banks and domestic firms that are considered to be of strategic importance and require imports of raw materials or intermediate goods. That way, you would minimise disruptions in the event of a Soros attack that you find yourself unable to defend against.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Apr 12th, 2011 at 08:54:52 PM EST
[ Parent ]
you'd have devaluations, and I fail to see how that is any worse than austerity

There's a world of difference when it comes to the effect on employment.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue Apr 12th, 2011 at 07:14:25 PM EST
[ Parent ]
... performance of your economy.

(Cheat sheet: Countries that devalue win relative to countries that commit Austerity against their economies.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Apr 12th, 2011 at 08:20:04 PM EST
[ Parent ]
[proof needed] - and in Europe.

Was French unemployment worse in 93-08 than it was in 78-93? Growth? General state of the economy?
How about Italy? Greece? Spain?

Wind power

by Jerome a Paris (etg@eurotrib.com) on Wed Apr 13th, 2011 at 05:47:41 AM EST
[ Parent ]
3 years into the crisis, the general state of the economy is approaching 1970's stagflation conditions, actually.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 13th, 2011 at 05:54:53 AM EST
[ Parent ]
but that's my point - it's not obvious to me yet that the devaluation/inflation route is any less painful than the austerity route.

There was a bubble, ie a perception of more wealth than there really was, and there needs to be a downwards adjustment of sorts. The questions are how big it is, and who bears the pain.

My point is to say that the bigger problem is the allocation of pain rather than the size of the crash. Asset owners, in particular financial asset owners, are protected at the expense of workers. Austerity ensures that, but it can certainly also happen under devaluation/inflation, depending on which policies go along.

I don't think there's anything today that cannot be solved by high marginal tax rates and severe re-regulation (and breakup) of banks.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Wed Apr 13th, 2011 at 07:29:24 AM EST
[ Parent ]
Jerome a Paris:

My point is to say that the bigger problem is the allocation of pain rather than the size of the crash. Asset owners, in particular financial asset owners, are protected at the expense of workers. Austerity ensures that, but it can certainly also happen under devaluation/inflation, depending on which policies go along.

I don't think there's anything today that cannot be solved by high marginal tax rates and severe re-regulation (and breakup) of banks.

How would this solve the problems of Portugal?

As I see it, the currency union means that the peripheral countries need transfers and an industrial policy or we are eventually facing the depopulation of the periphery.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Apr 13th, 2011 at 08:06:09 AM EST
[ Parent ]
The current situation is bizarre - explosively incoherent banker-politics pretending to be sound and wise economic management.

But the problem isn't just the fact that the policies make no sense - it's that there's no group or organisation that can offer a solid counterpunch against them.

Effectively the Bundesbank and "investors" decide policy, and governments exist solely to implement it.

If the policy happens to be suicidally inappropriate for a given government, that government can always be replaced.

However, governments are not allowed to set policy for banks and investors. Even minor restrictions, like the ones being proposed in the UK, are met with outraged howls and self-righteous huffing.

It's obvious that nation states are no longer able to act as sovereign entities. Even when pols understand what's happening, and don't choose to be complicit with it, there's very little individual governments can do.

The only workable solution is an EU-wide - preferably an international - political front to oppose investor domination.

This can't take the form of a single party or wing, but has to include senior (dissenting) figures from across the region working together and coordinating responses and actions.

This isn't likely to happen - I'm not holding my breath for it. But unfortunately I think it may be the only way to stop the neo-lib thugs before they break something permanently.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Apr 13th, 2011 at 08:33:52 AM EST
[ Parent ]
ThatBritGuy:
It's obvious that nation states are no longer able to act as sovereign entities. Even when pols understand what's happening, and don't choose to be complicit with it, there's very little individual governments can do.
Spain's Zapatero gets Chinese investment pledges | Reuters
China will continue to buy Spanish debt and will help to fund a restructuring of its savings banks, a Spanish government source said after Chinese Premier Wen Jiabao met Spanish Prime Minister Jose Luis Rodriguez Zapatero in Beijing.
The figure being thrown about in the Spanish press is €9bn to recapitalize the Cajas and an unspecified amount of debt. Wen Jiabao is quoted calling Spain "China's best friend in Europe".

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 13th, 2011 at 08:44:10 AM EST
[ Parent ]
to be China's best bitch in Europe?

['s Macho Moment of the Day™ Technology]

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Apr 13th, 2011 at 12:53:15 PM EST
[ Parent ]
El mayor fondo chino niega que vaya a invertir 9.000 millones en las cajas · ELPAÍS.comChina's biggest fund denies it will invest €9bn in [Spain's] Cajas - ElPais.com
El Ejecutivo español admite que se equivocó de fondo y que no se habló de ninguna cantidad, aunque mantiene que Pekín está interesado en el sector.- Hu Jintao: "La visita de Zapatero es un éxito"The Spanish government admits they spoke of the wrong fund and that there was no talk of amounts, though they maintain that Pekin is interested in the sector. Hu Jintao: "ZP's visit is a success".


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 14th, 2011 at 06:13:41 AM EST
[ Parent ]
Yes, political capture is the basic problem. No matter what a crisis consist of, the recepy is the same - take from the poor and give to the rich. Which leads to new crisises, more shock therapy and so on.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Wed Apr 13th, 2011 at 02:44:01 PM EST
[ Parent ]
ThatBritGuy:
senior (dissenting) figures from across the region working together

a choir in the wilderness?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Apr 13th, 2011 at 08:02:26 PM EST
[ Parent ]
The bigger problem is the economic illiteracy of the EU economic establishment and the institutional rules of the Eurozone.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 13th, 2011 at 08:19:37 AM EST
[ Parent ]
Jerome a Paris:
Asset owners, in particular financial asset owners, are protected at the expense of workers. Austerity ensures that, but it can certainly also happen under devaluation/inflation, depending on which policies go along.
Debt Asset owners are not protected by inflation. That's the whole origin of the Bundesbank policy, Austrian economics and Goldbuggery in general.

Inflation helps the owners of productive assets if higher prices allow them to pocket higher margins. Other than that, inflation is bad for the wealthy.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed Apr 13th, 2011 at 08:24:25 AM EST
[ Parent ]
Debt Asset owners are not protected by inflation.

Potentially including all pensioners.

Inflation helps the owners of productive assets if higher prices allow them to pocket higher margins.

Except when imported raw materials make up a high part of their production costs.

Additionally, when inflation is chiefly inflation of imported food and heating fuel, that will disproportionately hit the poor.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Wed Apr 13th, 2011 at 10:02:14 AM EST
[ Parent ]
Debt Asset owners are not protected by inflation.

Potentially including all pensioners.

But that is an argument against privatising pensions, not an argument against inflation.

Inflation helps the owners of productive assets if higher prices allow them to pocket higher margins.

Except when imported raw materials make up a high part of their production costs.

Additionally, when inflation is chiefly inflation of imported food and heating fuel, that will disproportionately hit the poor.

True. But imported inflation is not amenable to fiscal or interest rate policy. The only long-term way to deal with imported inflation is import substitution or reduced dependence on the goods in question. And the short-term solution to imported inflation - interest rate hikes or austerity in order to improve (or defend) your terms of trade with RoW - works at cross purposes with the industrial policy required to reduce your import dependencies.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Apr 13th, 2011 at 10:29:28 AM EST
[ Parent ]
But that is an argument against privatising pensions

What is the relationship there? Pensions weren't yet privatised when this happened to pensioners in ex-communist states. Methinks this has more to do with the model of retirement funds as a pot of lifetime savings, whether private or state-run.

And the short-term solution to imported inflation - interest rate hikes or austerity in order to improve (or defend) your terms of trade with RoW - works at cross purposes with the industrial policy required to reduce your import dependencies.

Does that apply to basic food items and heating fuel?

Let me add a third problem I see with the inflation narrative: on the side of wealthy people. What inflation eats away at is the value of their assets. If they can decouple at least a good part of their income from asset prices and keep their assets (bee it gold or stocks in companies not going bust or means of production), then they don't loose anything physical, and the value of those assets will rebound in the next rally. I imagine this is not something that can't be countered with some nice taxes on wealth, but don't you agree that the rich don't automatically suffer the inflation route?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Wed Apr 13th, 2011 at 05:26:53 PM EST
[ Parent ]
In the US we have "defined benefit" and "defined contribution" plans. One difference is that the payout of the "defined contribution" plans explicitly depends on how well the economy and the investment decisions of the provider work out, whereas the burden of coming up with the benefit remains with the provider in defined benefit plans. State sponsored pensions funds, such as CALPERS provide what they can from their investments and the State of California remains on the hook for the balance, it what CALPERS provides doesn't meet the definition.
Defined contribution plans seem to work out better for the provider than for the beneficiary. That is why there is such pressure for companies that provide "defined benefit" retirement plans to label them "unsustainable" and convert them to "defined contribution" plans. The state plans are likely to be "re-defined" benefits when all is said and done. Voters getting $20,000/yr or less from Social Security are not likely to be terribly sympathetic to retired officials getting >$75,000/yr from CALPERS.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 13th, 2011 at 05:56:32 PM EST
[ Parent ]
What is the relationship there? Pensions weren't yet privatised when this happened to pensioners in ex-communist states. Methinks this has more to do with the model of retirement funds as a pot of lifetime savings, whether private or state-run.

Well, yes, the point of retaining state control of the pensions is that you can index them, precisely because the state works on cash rather than accrual accounting.

Does that apply to basic food items and heating fuel?

Suppose you want to actively reduce your import dependency on fuel. This requires you to, in the aggregate, invest more in your housing stock and industrial plant than you would under a business-as-usual scenario. Both contractionary fiscal policy and contractionary interest rate policy will impair that investment. I suppose that in principle you might reconcile overall contractionary policy with greater targeted investment if you go all-out command economy in the relevant sectors, but as long as you want to retain a monetary economy with fungible money it's hard to see how that would work in practise.

Let me add a third problem I see with the inflation narrative: on the side of wealthy people. What inflation eats away at is the value of their assets. If they can decouple at least a good part of their income from asset prices and keep their assets (bee it gold or stocks in companies not going bust or means of production), then they don't loose anything physical, and the value of those assets will rebound in the next rally. I imagine this is not something that can't be countered with some nice taxes on wealth, but don't you agree that the rich don't automatically suffer the inflation route?

Inflation is not a tax on wealth, it's a tax on lazy money. So a rich person won't automatically suffer under inflation, and a poor person won't automatically gain.

More precisely, inflation is a tax on net creditors and those wage-earners and benefits claimants that are in a weaker political position than they were when their wages and benefits were originally instituted (due to the high downward rigidity of nominal wages and benefits). It is a subsidy to net debtors and employers who are in a stronger bargaining position than they used to be. That makes it a net loss for the financial sector, lazy money and weakly organised labour, and a net gain for the industrial sector and homeowners.

Devaluation or depreciation is a tax on imports and a subsidy for exports. Overall that translates to a net benefit for people associated with primary or manufacturing industries and a net loss for people associated with the financial or service sectors.

Contractionary interest rate policy is a tax on the future and a subsidy to the present. Homeowners and the industrial sector lose, because they are capital intensive; lazy money and the financial sector win because they are capital-extensive.

Contractionary fiscal policies are a tax on labour and the industrial sector, both of which are sensitive to the state of demand.

Further, economic activity is impaired by double-digit inflation rates, appreciation of the currency, contractionary interest rate policy and contractionary fiscal policy, and boosted by depreciation of the currency and expansionary interest rate and fiscal policy (note that there is no documented gain from further lowering inflation once you've eliminated the disruption caused by impairment of the ability of the currency to function as money).

As you will see, there is no perfect overlap between any of these groups and "the wealthy" or "the poor." But it is often possible to construct combinations that will favour the groups you want to favour. A combination of expansionary fiscal policy and moderate inflation favours labour and the industrial sector while it penalises the financial sector, lazy money and benefit claimants that lack adequate political power to defend the real value of their claims. Conversely, a combination of a strong currency, low inflation and contractionary interest rates favours lazy money and the financial sector, at the expense of homeowners, the industrial sector and overall economic performance (incidentally, I think that is as good an explanation as any for why this policy combination is so popular with The Serious People).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Apr 13th, 2011 at 06:18:01 PM EST
[ Parent ]
Diary.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 14th, 2011 at 03:59:30 AM EST
[ Parent ]
Otherwise I'll just post it myself.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sat Apr 16th, 2011 at 11:31:00 AM EST
[ Parent ]
Done.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Apr 16th, 2011 at 06:53:40 PM EST
[ Parent ]
The fact that social insurance pensions are always only a redistribution of current production among current consumers means that inflation makes social insurance look more effective than financial savings for retirement funding ~ and that is also bad for those who get a slice of financial savings for retirement, but no slice of social insurance pensions.

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 Wed Apr 13th, 2011 at 02:06:28 PM EST
[ Parent ]
[proof needed] - and in Europe.

There is nothing sufficiently unique about Europe to exempts us from simple accounting relations. Cycle-averaged balanced budgets in a nominally growing economy impose an upwards unemployment bias by withdrawing fiat-money purchasing power from the economy, relative to the demand for fiat-money purchasing power.

Was French unemployment worse in 93-08 than it was in 78-93? Growth? General state of the economy?

Both of those periods are dominated by intra-European fixed-rate ForEx regimes (the ERM between '79 and '93, the EMU between '98 and '08), so you can hardly use a comparison between the two to test a hypothesis on the influence of floating versus fixed exchange rates.

I am not contesting that repeated devaluations in a fixed exchange rate system is a poor policy. This is, I believe, a theoretically well founded and clearly empirically validated conclusion. My contentions are that

  1. Continuous depreciation of the currency in a floating-rate system in order to defend the real exchange rate from appreciation is not painful, as long as your financial regulator prevents people from carry trading in your currency.

  2. When you are Soros attacked, you need to make a clear-headed judgement as to whether you will be able to defend against it or not. If you do not believe that you will be able to defend against it, you should not mount a defence - instead, you should use your currency reserves to minimise industrial disruption by providing bridging currency swaps to strategically important firms that require essential imports. Which firms are considered "strategic" and which imports are considered "essential" should be planned out ahead of time and continually revised, as should your estimate of your ability to defend against Soros attacks. Regular drills would be a good idea.

  3. The crises in Greece, Spain and Portugal are fundamentally currency crises, not debt crises.

Now, if my third contention is correct, then the relevant comparison is between the 1993 currency crisis and the 2008 currency crisis, not between the ERM and EMU periods.

Simple inspection suggests that the 1993 devaluation was much less painful than the 2008 austerity, but in order to make a compelling case one would have to compare the magnitude of the required exchange rate adjustments to achieve real exchange rate parity with the one's choice of indicators of economic performance. I don't have 1993 price level, unemployment and exchange rate data on hand for these countries, but if you're really interested I can probably get them and run the numbers.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Apr 13th, 2011 at 08:55:26 AM EST
[ Parent ]
# he prohibition of monetary financing (Article 123 of the Treaty on the Functioning of the European Union),

No QE?

# the prohibition of privileged access to financial institutions (Article 124 of the Treaty on the Functioning of the European Union),

Banks should get no tax payer guarantees?

# the no-bail-out clause (Article 125 of the Treaty on the Functioning of the European Union),

Banks and funds should get a haircut.

# the fiscal provisions to avoid excessive government deficits (Article 126 of the Treaty on the Functioning of the European Union, including the excessive deficit procedure), and

All governments have followed this, including Ireland and Spain. All have paid off their debts for 10-20 yrs. Ireland was only 2 yrs ago practically debt free.

# the Stability and Growth Pact (secondary legislation based on Articles 121 and 126 of the Treaty on the Functioning of the European Union).

Here is the key. In neoliberalism "growth" does not mean "wealth creation." It means credit creation. And wealth distribution by asset price inflation.

by kjr63 on Mon Apr 11th, 2011 at 08:38:43 PM EST
[ Parent ]
kjr63:
# the prohibition of monetary financing (Article 123 of the Treaty on the Functioning of the European Union),

No QE?

Specifically, what is prohibited is direct lending to public institutions, including buying bonds at issue. Interested parties such as ECB Chief Economist Jürgen Stark have wrongly claimed that the ECB was in violation of the treaty for buying the bonds in the secondary market.

If you want, it means no QE for the public sector. There is nothing in the EU treaties or the ECB's internal regulations to restrict QE for the benefit of the private sector, as long as it doesn't conflict with the inflation mandate.

kjr63:

# the prohibition of privileged access to financial institutions (Article 124 of the Treaty on the Functioning of the European Union),
Banks should get no tax payer guarantees?
All the EU prohibitions in this area apply to the public sector, not to the private sector. So "no privileged access to financial institutions for public entities". Look at the context: it's a discussion of government fiscal policy.

kjr63:

# the Stability and Growth Pact (secondary legislation based on Articles 121 and 126 of the Treaty on the Functioning of the European Union).

Here is the key. In neoliberalism "growth" does not mean "wealth creation." It means credit creation. And wealth distribution by asset price inflation.

Further, the SGP only constrains public finances. But if you constrain government deficit to 3% and you have countries running primary deficits in excess of 3%, the difference must come from private deficits. The result of the GSP is necessarily a private debt bubble. Or, if that is prevented as well, a recession.

Also, the only way to reduce a promary deficit is through import substitution or other industrial policy forbidden to EU member states under the "illegal state aid" rules. Only the EU as a whole, though structural funds, could legally carry out such an industrial policy. But structural funds come out of the EU budget which is roughly 1% of EU GDP. Even if all of that were directed to reducing primary deficits, it would not be nearly sufficient.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue Apr 12th, 2011 at 04:22:28 AM EST
[ Parent ]
It is interesting that Articles 123 through 126 of The Treaty on the Functioning of the European Union effectively outlaw all measures that could be used to prevent a default but do not outlaw defaults. This could be used as a cogent defense of a default.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Apr 12th, 2011 at 09:29:19 AM EST
[ Parent ]
I the course of looking for references and quotations for this I came across two interesting pieces. One by The Independent [UK]: The Sterling Crisis: The bank that likes to say realign: The Bundesbank (17 September 1992); and a cognitive-linguistic analysis of the press coverage: THE BUNDESBANK AND THE MAKING OF AN ECONOMIC PRESS STORY by a certain Michael White of Universidad Complutense de Madrid.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Apr 10th, 2011 at 11:42:03 AM EST
Lets see if I understand this.

In order to break Spain the speculators need to amass more bets on it failing then the EU structure is willing to counter? And if (and only if) they do so the speculators stand to gain a lot of money? And at the same time borrowing money is dirt cheap due to recession?

Yes, that looks like a really easy way to make billions (though you need billions to start playing).

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sun Apr 10th, 2011 at 01:55:01 PM EST
The US TBTFs should have plenty of almost free money at least through June, and Bernanke could always assert that withdrawing Quantitative Easing risks a financial collapse in order to tide the TBTFs over until they have made their killing on the breakup of the euro-zone. And all would vociferously deny that bets on euro-zone break-up had anything to do with continuation of QEII. Of course the Fed would never be so rude as to require that the proceeds from such bets should go to bank stability. They obviously will need to be paid out as bonuses so the 2012 elections can be financed.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Apr 10th, 2011 at 03:12:24 PM EST
[ Parent ]
Noob question, perhaps: What has Germany to gain from a breakdown of the EMU? Don't the German banks have huge outstanding debts that will be affected in the worst case scenario and the EMU folds like a wet paper bag?
by Nomad on Sun Apr 10th, 2011 at 02:39:32 PM EST
They are about to find out. After such a rupture they will no longer be able to be certain about the value of payments they receive from trading partners in much of Europe and the Deutchmark will be very strong and thus an impediment to German exports. But defending the euro requires political vision and courage, both of which seem to be lacking.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Apr 10th, 2011 at 03:15:12 PM EST
[ Parent ]
So in other words, the German industrial establishment (which is major here) is going to be pitted against the banking establishment.

This is going to be (if you'll excuse the term) rich.

Or: Angela Who?

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Sun Apr 10th, 2011 at 04:18:53 PM EST
[ Parent ]
by afew (afew(a in a circle)eurotrib_dot_com) on Sun Apr 10th, 2011 at 04:27:21 PM EST
[ Parent ]
by Jerome a Paris (etg@eurotrib.com) on Sun Apr 10th, 2011 at 04:32:56 PM EST
[ Parent ]
... it'd seem to leverage the bet to have an pro industrial-capitalist shock policy that the industrialists know about and can ram through when the shit hits the fan.

The financial-capitalists are quite possibly not looking out for a shock policy that looks after the common interests of industrialist-capitalists with other stakeholder and tosses the financial-capitalists under the bus.

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 Wed Apr 13th, 2011 at 02:15:13 PM EST
[ Parent ]
Are the industrialists sufficiently united and organized to "ram through" a "pro-industrialist" shock policy? How many are compromised by being beholden to the financial capitalists?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 13th, 2011 at 09:58:20 PM EST
[ Parent ]
I wonder whether being beholden to finance capitalists is a motivation to do it.

In the US, certainly not. In Germany ... I don't know. Its a lot more plausible, in any event.

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 Wed Apr 13th, 2011 at 10:32:42 PM EST
[ Parent ]
I am reminded of the old maxim: "If you strike at a King you must kill him."

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 13th, 2011 at 10:39:42 PM EST
[ Parent ]
Hence why in US probably not.

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 Wed Apr 13th, 2011 at 10:58:22 PM EST
[ Parent ]
I guess the industrialists were happy to let the bankers make most of the contributions and get most of the press until....

Fortunately for Germany, it still HAS a manufacturing sector. In better run economies, such as the USA and UK manufacturing is SO 20th century. My question is: why have the industrialists let things get to this point? Or does it take the earth opening up beneath them to arouse them from their stupor?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Apr 10th, 2011 at 04:38:27 PM EST
[ Parent ]
Fachidioten.

Isn't there a french word for it?

Their understanding of everything outside their area of competence is somewhat limited.

by IM on Sun Apr 10th, 2011 at 04:40:43 PM EST
[ Parent ]
In English a specialized idiot or idiot-savant? Suffers from tunnel vision?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Apr 10th, 2011 at 05:23:38 PM EST
[ Parent ]
Yes. That is the word.
by IM on Sun Apr 10th, 2011 at 05:47:11 PM EST
[ Parent ]
Narrow-gauge specialist?

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt ät gmail dotcom) on Mon Apr 11th, 2011 at 05:55:16 AM EST
[ Parent ]
That... would be a railfan :-)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Apr 11th, 2011 at 08:10:51 AM EST
[ Parent ]
... I'm a standard gauge specialist ...

OTOH maybe I'm not a true railfan.

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 Wed Apr 13th, 2011 at 02:16:33 PM EST
[ Parent ]
I meant, a narrow-gauge specialist is one special sub-type of railfans :-)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Apr 13th, 2011 at 05:28:46 PM EST
[ Parent ]
... someone who sees a reaction to someone being described as a narrow-gauge specialist as being a railfan, and whose first reaction is to think of the pro's and con's of having rails 2ft apart ...

... risks being a narrow gauge specialist in the broader sense, even if he comes down in favor of 4ft 8.5in.

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 Wed Apr 13th, 2011 at 06:59:02 PM EST
[ Parent ]
What do you mean, Germany? Our government is thinking in weeks and days.

Do you really think e. g. Phillip Rösler thinks about the Eurozone? He is thinking about his party conference in may, about who will be deputy party leader, about whow he can economy minister instead of the economy minister (calif instead of the calif). Rösler is at least a bit thinking about his party too - the aforesaid eoconomy minister is fighting for his very short term political survival.

Merkel is.. I don't know. Does she know?

And the Bundesbank is as usual in a spiritual realm of their own, worrying about inflation, about rising wages (in Germany!), the public finances (in Germany!). And of course since the upheaval there, they are occupied with their own personal quarrels.

Drift, nothing more.
The result could still be the same.

by IM on Sun Apr 10th, 2011 at 04:35:15 PM EST
[ Parent ]
... are betting that by the time the periphery gets around to defaulting or devaluing, they will have shifted all the periphery's debt to the German government.

Which is why defaulting sooner is better than defaulting later.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Apr 10th, 2011 at 05:25:29 PM EST
[ Parent ]
Defaulting sooner is better than defaulting later...for the people, not the banks.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Apr 10th, 2011 at 07:38:20 PM EST
[ Parent ]
The bet here is that the political commitment to the EU and the combination of neoliberal and Austrian economics in the establishment will ensure that the EU doesn't break up and doesn't allow a default, preferring to go the IMF-style austerity route instead.

I wonder where the "no bondholder bail-ins before 2013" comes from. Is it that 2008-13 is a five-year period that they think a priori will allow banks to make their balance sheets whole to the point where they can take a default without blowing up?

Is it that by 2013 the banks will have offloaded all their debt onto the governments? Note that the EFSF is basically a way to replace unpayable maturing debt owed to "the market" with new debt owed to the EU Member States' treasuries. "The market" refuses to roll over the debt, so the EFSF does it for them.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 09:13:44 AM EST
[ Parent ]
I wonder where the "no bondholder bail-ins before 2013" comes from. Is it that 2008-13 is a five-year period that they think a priori will allow banks to make their balance sheets whole to the point where they can take a default without blowing up?

That is the only thing that makes sense of the provision. And it is confirmed by the howls from Germany over StressTest 2.0. And, per Basel II definitions many of the Landsbanks will have to be capitalized, not re-capitalized. Has their capitalization to date consisted of "the full faith and credit" of their state governments?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 11:28:06 AM EST
[ Parent ]
Silent Capital

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 12:02:18 PM EST
[ Parent ]
per Basel III definitions

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 12:03:44 PM EST
[ Parent ]
UPDATE 1-Germany acknowledges Greece may need to restructure deb

BERLIN, April 13 (Reuters) - Germany acknowledged for the first time on Wednesday that Greece may need to restructure its debt but said such a step could only be pursued before 2013 if it were done on a voluntary basis. In an interview with Die Welt newspaper, German Finance Minister Wolfgang Schaeuble said on Wednesday "additional steps" would have to be taken to deal with Greece's huge debt burden if an analysis from the European Central Bank and European Commission in June showed it is unsustainable.

His comments were the first by a senior euro zone official acknowledging that some form of restructuring of Greek debt may be needed. The ECB and the European Commission have both ruled out such a step, fearful that asking investors to accept changes such as smaller or later repayments could intensify the bloc's debt crisis, possibly sucking in other vulnerable economies. When asked by the daily how Greece, or other countries like Portugal, would ever be able to eliminate their "mountains of debt", Schaeuble said:

"In June we will get a progress report. I'm expecting a detailed analysis on the debt sustainability of Greece, that will be done in consultation with the Commission and the ECB. If this report concludes that there are doubts about the debt sustainability of Greece, something must be done about it."

Asked what should be done, Schaeuble said: "Then further steps will have to be taken."

Schaeuble made clear, however, that any restructuring would have to happen on a voluntary basis if done before 2013, when new rules go into effect that envision private creditors shouldering losses in the event debt relief is provided to stricken euro zone states. "Until then a restructuring could only take place on a voluntary basis," Schaeuble said.


This strikes me as about as reasonable as specifying that Grandpa can't die before 2013 because that would be awkward for the heirs. What ever the color scale is for unreality, this requires the deepest shade.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 13th, 2011 at 09:50:11 PM EST
[ Parent ]
Take another sip, Angela.



"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 13th, 2011 at 09:52:59 PM EST
[ Parent ]
ARGeezer:
Germany acknowledged for the first time on Wednesday that Greece may need to restructure its debt but said such a step could only be pursued before 2013 if it were done on a voluntary basis.
What is it with the magic 2013 date?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 14th, 2011 at 04:00:29 AM EST
[ Parent ]
Next German Federal elections?
by gk (gk (gk quattro due due sette @gmail.com)) on Thu Apr 14th, 2011 at 04:06:01 AM EST
[ Parent ]
Surely they'd be better off doing it all now? Voters will have forgotten by 2013?

I suspect it's  the complex of regional and federal elections from now to 2013: lose too many of the smaller ones and Merkel will be gone.

by Colman (colman at eurotrib.com) on Thu Apr 14th, 2011 at 05:01:27 AM EST
[ Parent ]
Do voters care much? She may be postponing the problem so that her successor has to deal with it. If she gets reelected, then they can start talking about 2017 being the key date....
by gk (gk (gk quattro due due sette @gmail.com)) on Thu Apr 14th, 2011 at 08:16:19 AM EST
[ Parent ]
The date for the next fiveyear plan?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Thu Apr 14th, 2011 at 08:00:04 AM EST
[ Parent ]
Finland may block Portugal aid
Greek debt restructuring to involve 40 to 50% haircuts

The German weekly Die Zeit quotes EU sources as estimating the size of a potential haircut for Greece of 40 to 50% to ensure debt sustainability. The paper reports that various options were under consideration now, including a simple maturity transformation. Moritz Kraemer of S&P is quoted in the article as suggesting a size of the necessary haircut of 50-70%, adding that a simple rescheduling would not provide sufficient debt relief. He said a restructuring is only worth doing if the debt is reduced to a sustainable level - considering the price a country has to pay for a restructuring of debt is very high in terms of lost market access.

 

Talking to Die Welt Wolfgang Schäuble said that he expected a detailed debt sustainability study for Greece to be prepared by the Commission and the ECB. "We will have to do something should this report conclude that the debt sustainability is in doubt", the finance minister said referring to "further measures" that would have to be undertaken.  However Schäuble also stressed that up until 2013 private creditors could only be subjected to voluntary debt restructuring. After 2013 private creditors would have to expect to automatically part of restructuring.

Why wasn't a debt sustainability study done a year ago? Anyway, better late than never.

And what is it about 2013?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Apr 14th, 2011 at 04:06:38 AM EST
[ Parent ]
... enough time to quietly shift their liabilities onto the public balance sheet, so a public publicised bailout can be avoided.

The fact that the collateral damage from such a PR exercise includes several Mediterranean economies does not seem to overly concern Die Seriöse Leute.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Apr 14th, 2011 at 05:22:33 AM EST
[ Parent ]
Exactly.
by kjr63 on Fri Apr 15th, 2011 at 03:32:58 PM EST
[ Parent ]
First year after the end of the world, so a safe place to punt to.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Apr 14th, 2011 at 05:36:03 AM EST
[ Parent ]
A rather forgotten yet relevant episode was the speculative attack on the Greek drachma in Spring 1994. It was triggered by the belief that the imminent liberalisation of capital flows in Greece would be accompanied by a large devaluation of the currency. However, the Bank of Greece had enough forex reserves (if I remember well, they were at the order of 10-15 billion USD) to pump into the market and also raised interest rates up to 200%. Having lost lots of money, the speculators conceded. But all that's history now.

"Eurozone leaders have turned a €50bn Greek solvency problem into a €1,000bn existential crisis for the European Union." David Miliband
by Kostis Papadimitriou on Sun Apr 10th, 2011 at 06:06:07 PM EST
überfordert translates to "totally fucked" in English.
by Upstate NY on Sun Apr 10th, 2011 at 09:28:11 PM EST
Eurointelligence daily briefing: Is the Iceland referendum a harbinger for popular unrest in the eurozone? (11.04.2011)
The people of Iceland voted against the Icesafe deal for the second time - raising the prospect that popular anti-establishment unrest may spread to the eurozone; dispute with UK and the Netherlands will now go to the EFSFEFTA court; 45% of Irish executives said to be in favour to burn bank bondholders according to a survey of Ireland's 200 top companies; another poll suggests that though support for Enda Kenny is up, there is much anger over his enforced U-turn on bailing in bank bondholders; the European Banking Authority says silent capital is unacceptable, and sets 5% for core equity tier-1 as the pass threshold for the stress tests; two German Landesbank at risk, and Wolfgang Schäuble says no money from Berlin if any of the banks would fail; Axel Weber calls on Landesbanken to convert silent capital into ordinary capital; European finance ministers reject bridging finance for Portugal, and demand tough austerity as a quid-pro-quo for a loan; Elena Salgado says: We are safe; Wolfgang Münchau says: You are not safe; Olli Rehn calls on Finland's political parties to approve the Portugal rescue package, or risk severe repercussions; Lucas Papademos says the Greek 2010 deficit is possibly above 10%, and calls on his country to meet the shortfall with further austerity; Wolfgang Schäuble is the first Euro finance minister to admit that Greece might not be able to go back to the markets next year; Jean-Claude Trichet rebuffs European finance ministers ruminations about a Greek debt restructuring; Axel Weber expects 3% inflation for Germany this year, and 2,5% for the eurozone; 45% of the French, meanwhile, would like to see Strauss Kahn as the next French president.
(Google link)


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 03:59:51 AM EST
"Europe is difficult to understand for the markets. They work in an irrational way sometimes," Lagarde told RTL radio.
It appears that the difficulties in comprehension are mutual, since European economic policymakers don't seem to understand markets either.

And journos don't get either.

I can't figure out who created the myth in lender countries and Germany especially that the EFSF means a transfer of tax dollars, rather than lending. But that sentiment seems central to the parliamentary resistances to the scheme which in turn seem central to the motivation of Merkel & co in blocking action.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Apr 11th, 2011 at 08:17:32 AM EST
It is a transfer of tax money. The EFSF is a glorified (and, more importantly, legalised) pyramid scam, where the peripheral countries are loaded with ever increasing volumes of debt, at unpayable interest rates and subject to conditionalities that virtually guarantee that their ability to pay will be reduced. Lending money to a pyramid scam is the same thing as transferring that money, because you're never gonna see it again.

It's just that the beneficiaries are the German banks, not the Mediterranean countries.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 11th, 2011 at 08:36:54 AM EST
[ Parent ]
Especially because we're now told that neither Greece nor Ireland are being allowed to borrow from the EFSF to buy back their bonds. And also, because the EFSF is supposed to lend at penalty rates of interest.

There is some debate as to whether the EFSF violates the "no-bailout clause" of the Eurozone. These rules are an attempt to make it possible to argue that it doesn't. But by not violating the "no-bailout clause" the EFSF also solves nothing.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 08:51:00 AM EST
[ Parent ]
Effectively, the only legitimate use of ESF funds to a recipient country is to pay the interest on bonds, which are mostly from EMU banks, at rates that cause these countries to increase their debt and under conditions that cause these countries to be ever less able to make the payments. So the "no bailout clause" combined with the "no repurchase of bonds at a discount clause" do one useful thing: the clearly show that the whole process shows that the mechanism is a means of laundering the transfer of money from various central banks to private banks sufficiently that it slips past most EPP and PES members.

Why not just call the ESF and associated rules what it is: Bailout Laundering.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 11:41:04 AM EST
[ Parent ]
Dutch FinMin Warns Portugal Opposition On Austerity Measures - Report - WSJ.com
The Portuguese opposition must stick to promises on austerity if it wins upcoming elections, Dutch Finance Minister Jan Kees de Jager said in an interview pre-released Sunday.

If Portugal does not stick to promises to be made to the IMF and the EU as terms of a bailout program, "then the payments to Portugal will be halted immediately," the minister said in an interview with Germany's Handelsblatt.

It has taken Portugal too long to draw the appropriate lessons from the debt crisis, Kees de Jager said. "That is worrying. Numerous finance ministers have spoken about this with concern," he said.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 09:02:57 AM EST
I've finally got the "plot" for my novel.

Faceless speculators who are betting big money to pick off countries one by one. They will go to extremes to silence the whistle-blowers. They lose if information, understanding, and political will emerges to counter them.

Not sure how it ends.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Apr 11th, 2011 at 10:01:21 AM EST
Remember that most individuals in the audience have to to identify with at least one protagonist in the drama, (not necessarily the same character). Without identification, no-one cares what happens.

You can't be me, I'm taken
by Sven Triloqvist on Mon Apr 11th, 2011 at 11:07:51 AM EST
[ Parent ]
That's the easy part.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Mon Apr 11th, 2011 at 11:38:39 AM EST
[ Parent ]
Acts of congress are as hard to describe in books as car chases.

You can't be me, I'm taken
by Sven Triloqvist on Mon Apr 11th, 2011 at 12:18:50 PM EST
[ Parent ]
Description is to be eschewed. Ewww.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Mon Apr 11th, 2011 at 12:39:48 PM EST
[ Parent ]
How to describe a bicycle chase.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Mon Apr 11th, 2011 at 12:40:37 PM EST
[ Parent ]
I think I have read some chases on foot. Something that should be able to use is the focus on the physical pain of the chased. Anyone that has chased a bus should be able to identify.

An example that comes to mind is a chase in God emperor of Dune. Of course, the protagonist there has friends whom she can here being ripped apart by mutant wolfes.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Mon Apr 11th, 2011 at 01:25:26 PM EST
[ Parent ]
Don't describe the chase, describe reactions to the chase.

You can't be me, I'm taken
by Sven Triloqvist on Mon Apr 11th, 2011 at 01:50:26 PM EST
[ Parent ]


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Mon Apr 11th, 2011 at 01:57:27 PM EST
[ Parent ]
They will go to extremes to silence the whistle-blowers
.
See, for example: Blacklisted Economics Professor Found Dead: NC Publishes His Last Letter

Professor  was found dead in his home three days ago; the coroner's report cited natural causes that were left unspecified. Unfortunately, all of the professor's academic work has disappeared; the only trace left appears to be the following letter, which he sent to an admirer shortly before his death. The understandably concerned recipient of the letter has shared its contents with Naked Capitalism, and has insisted that her identity be protected.

A touch of satire? Read the article and the comments.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 11:51:41 AM EST
[ Parent ]
Unfortunately, all of the professor's academic work has disappeared

Worse : the assassins managed to wipe all traces of it from Google. Seriously creepy...

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Apr 11th, 2011 at 12:12:07 PM EST
[ Parent ]
IMF, European Union line up to heap praise on Spain · ELPAÍS.com in English
Spain earned plaudits from economic leaders of the European Union and the International Monetary Fund (IMF) during an Ecofin summit held this weekend in Gödölló, Hungary. Support for Spanish policies came from the head of the European Central Bank, Jean-Claude Trichet; Germany's Finance Minister Wolfgang Schäuble and the IMF's number two, John Lipsky, who joined the meeting.

...

Spanish Economy Minister Elena Salgado said that IMF representative John Lipsky "began his address by saying that in the last six months, the most important and most positive news has come out of Spain."

...

The German finance minister said that both he and the markets believe "Spain is in good shape."



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 10:20:44 AM EST
But they came not to praise Spain, but to bury her? Praise Spain best by saving Portugal. Methinks much of the praise is prayer that Spain will bail out Spanish banks with loans to Portugal which, in turn have sold bonds to German and French banks.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 12:10:15 PM EST
[ Parent ]
Spain to contribute 5 billion to Portuguese rescue package
The 5 billion Spanish contribution to Portugal compares to the 2.6 billion for Ireland and 10 billion for Greece. It's clear that Portugal will have to engage in a far tougher adjustment program than first envisaged.
Spain's contribution will be proportiaonal to GDP, not proportional to exposure to Portugal.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Apr 11th, 2011 at 12:25:14 PM EST
[ Parent ]
But, if Portugal does not agree to the "help", would Spain bail out her own damaged banks? If not, the contagion could stop there -- for Spain at least.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 12:38:05 PM EST
[ Parent ]
When are these flunkies gonna realise that if the IMF is praising you it means you're doing it wrong.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 11th, 2011 at 01:55:15 PM EST
[ Parent ]
Yeah, I once told an accountant that I had never been audited by the IRS. His response: "You're not trying hard enough!"

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 09:15:40 PM EST
[ Parent ]
Certainly not trying hard enough to ensure the proper care and feeding of the accounting profession.

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 Wed Apr 13th, 2011 at 02:29:31 PM EST
[ Parent ]
Could you please not talk about the IRS right now. Some of us still haven't started on their tax returns.... I decided to file the form for the 2-month extension, and just spent an hour trying to figure out what form it is - it turns out that there is no form, as the extension is automatic, but you have to attach a statement claiming the extension when you file the actual return.
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Apr 13th, 2011 at 02:37:15 PM EST
[ Parent ]
Did mine yesterday. Called my tax preparer in LA, an old grad school friend, told him it was ridiculous for me to go through all my 2010 records as I only had $600 in reported income, and I hadn't had to pay any income tax for several years. He reminded me that I did owe the tax on my $600 of 1099 income and ee had me send our SS statements, all interest income etc. He then found carry forward losses from previous years and an earned income credit so that I don't have to go through anything and get a $58 refund. I will have to pay him something, but it is well worth it for not having to do a week's worth of prep, as in the past. Eat your heart out!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 13th, 2011 at 03:52:09 PM EST
[ Parent ]
Bruce:
"the proper care and feeding of the accounting profession"

The person who told me that I wasn't trying hard enough was the accountant for the company for which I worked for 17 years. The four partners in that electronics contracting company all became multi-millionairs in the 20 year life of that corporation and part of that involved pushing the limits and exploiting the weaknesses of the tax codes. For that they had a very good accountant. One of the partners told me of meetings with California State tax officials in which these officials were tied in knots and unable to answer basic tax questions, as posed by the accountant. I suspect this is par for the course.

The company and partners might have paid the accountant more than they paid in taxes. And, from what I have gathered, if you get to the point where you need a tax lawyer, you effectively pay the lawyer's fees in leiu of taxes, if you have properly followed his advice and haven't been played by him. These are the reasons the tax code is as it is.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 13th, 2011 at 05:19:06 PM EST
[ Parent ]
Yanis Varoufakis: "For whom the bells toll: Why the foretold Greek debt restructure will bring Spain into the mire which will, in turn, boost Ireland's pain":

...To put it simply, once Spanish sovereign debt (under the influence of the Spanish real estate sector bad debts) begins to scale the upper echelons of the 5 to 5.5 per cent range, and Spaniards join [Greeks and Irish] in shifting their savings to Germany and Holland, the periphery's Central Banks will end up owing the Bundesbank well over €500 billion. The ECB (aided and abetted by the Bundesbank - especially after Mr Trichet's departure) will start making loud noises about the need to switch off the tap that keeps the periphery's banks going, suggesting that they turn instead to the EFSF for much, much more expensive loans. At that point, the euro crisis will take a new, nastier turn.
...

Varoufakis is an economist working with others on a proposal for a resolution of the Eurozone crisis, but it seems, ehm, politically unfeasible at the moment...

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Mon Apr 11th, 2011 at 07:30:33 PM EST
Good proposal by Varoufakis and Holland, but the problem remains of finding an appropriate governing structure for the issuer of European Bonds. The mechanism could likely solve the present problem, but would certainly be gamed and could lead to a bigger blow-up in a future round of crises.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 13th, 2011 at 10:59:29 AM EST
[ Parent ]
Eurointelligence Daily Briefing: Draghi's chances of succeeding Trichet are "getting better by the day" (Google link)
Bundesbank open to capital controls as a last line of defence

Bundesbank board member Andreas Dombret told Börsenzeitung that capital controls can be introduced by countries as "a last line of defence". "If they are used, it should be done temporarily and in a transparent and targeted manner", Dombret said. In combating high inflows of capital countries need to define a hierarchy of things to do. "If after that the inflows persists, capital controls can be considered", Dombret said. Capital controls were up until very recently a taboo and have only been proposed last week by the IMF in a position that was controversial among certain member states.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Apr 12th, 2011 at 08:47:46 AM EST
Eurointelligence Daily Briefing: Bundestag to torpedo a key element of the ESM deal
Budget committee says automatic capital rule of the ESM both unacceptable and unconstitutional; wants to subject each capital increase to a vote in the Bundestag (which would probably impair the AAA-rating of the ESM; statement comes after German Court of Auditors handed out a ruling saying that Merkel understated the amounted of capital Germany is likely to provide, as it underestimates the possibility that other guarantors might not pay up; S&P says ESM is not going to impair the creditworthiness of its guarantors; Portuguese banks reduce ECB borrowings; polls suggest a close outcome of Finnish elections; AIB considers debt forgiveness for Irish mortgage holders; Troika frustrated about Greek authorities' failures on taxes and customs; 30 NGOs create a "Finance Watch" lobby group to counter the lobbying strength of the financial sector; the Netherlands threatens to block Iceland's bid to join the EU; Wolfgang Münchau argues that the lack of  bond purchasing powers of the EFSF/ESM makes any voluntary debt restructuring options impossible; Lorenzo Bini-Smaghi, meanwhile, argues that it is fair for Irish taxpayers to shoulder the burden, as they created a financial centre based on lax financial regulation and low corporate taxes.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 13th, 2011 at 04:52:32 AM EST
That would be a serious rebellion against the leadership (Merkel/Rösler) and I don't think the political situation is as serious yet.
by IM on Wed Apr 13th, 2011 at 09:02:32 AM EST
[ Parent ]
From two months ago: A surprise from the Bundestag: Merkel will need two-thirds majority for ESM (Eurointelligence, 14.02.2011)
According to a news report in Der Spiegel this morning, Angela Merkel may require a two-thirds majority to approve any agreement on the European Stability Mechanism, the long-term replacement of the EFSF. This came from an opinion expressed by the Bundestag legal department. This is the same hurdle as required for a full blown change in the German constitution, but in this case the high voting threshold is required because the decision has implications for the Bundestag's administrative sovereignty (we presume it might require the Bundestag to sign checks against its will). This means that Merkel will need the support of the SPD and/or the Greens to push her package through, and this in turn means that her degrees of freedom during the negotiations on the competitiveness pact will be even more constrained.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 13th, 2011 at 09:07:37 AM EST
[ Parent ]
Eurointelligence: Bundestag wants to reduce Merkel's room for manoeuvre (23.02.2011)
(Here is very short overview to keep track of where the various actors are standing: The Bundesbank opposes pretty much anything, stress tests, extension of the EFSF's ceiling and mandate; the German government would be open to a wider ceiling, but would find it hard to sell it to the Bundestag, unless Portugal agrees to come under the EFSF. Generally the finance ministry is more open on matters such as the mandate of the EFSF than the chancellor's office; but the big gap is not between Schäuble and Merkel, but between the government and the Bundestag. The Bundestag is hostile to any mandate extension of the EFSF, and cautious about the ESM, including bond purchases, as this would invariably put pressure on the ceiling. Everybody wants to avoid a situation where the government keeps coming back to the Bundesbank for more money every so often)


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 13th, 2011 at 09:09:56 AM EST
[ Parent ]
Even if a two/third majority is needed - I doubt that and the Wissenschaftliche Dienst is not the constitutional court after all - SPD and Greens will support the government on this question. There won't be a rebellion on this side, either.

The unhappiness is real, but there will be no consequences yet.

by IM on Wed Apr 13th, 2011 at 09:26:36 AM EST
[ Parent ]
Finland may block Portugal aid
Bundestag's revolt gains support

The Bundestag's revolt against the ESM procedures also gathered pace (see our morning briefing yesterday), after the publication of the court of auditor's report warning that the liabilities for the German taxpayers may be higher than foreseen so far. MPs are angry at Wolfgang Schäuble for informing only the Bundestag's budgetary committee on negotiations around the EMS and not the entire parliament. "The whole parliament has to be involved", Gunther Kirchbaum, the chairman of the European affairs committee, told Handelsblatt. So far it is unclear how the parliament will be involved. There are tricky issues to be solved. There is for example the five-year period in which the participating states contribute the paid in capital with a total volume of €80bn. In case of a big rescue operation the states may have to top up their participation. It is unclear what the parliament's influence would be. The parliamentarians of the three coalition parties CDU, CSU and FDP want to work closely together to get a maximum of Bundestag involvement.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 14th, 2011 at 04:03:29 AM EST
[ Parent ]
How many divisions has Gunther Kirchbaum?

I doubt anything serious will happen.

by IM on Thu Apr 14th, 2011 at 12:25:36 PM EST
[ Parent ]
In the afternoon I tried to find some German media reaction (I started in taz), but it was practically nil: one short Spiegel Online reproduction of the news, nothing in any of the other major media outlets.

Over the past few years, in spite of his position, Krichbaum himself doesn't seem to be high on the media radar.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Thu Apr 14th, 2011 at 01:50:28 PM EST
[ Parent ]
Bundestag to torpedo a key element of the ESM deal
Wolfgang Münchau revisists the bond purchasing question

In his FT Deutschland column, Wolfgang Münchau argues that Germany shot an own goal by preventing the ESM/EFSF to purchase bond on the secondary market. Angela Merkel favours a voluntary restructuring of Greek debt - something that cannot conceivably work unless you provide an incentive in the form of EFSF swaps, for example, whereby banks and insurance companies can swap their Greek debt for EFSF bonds under some agreed terms, including a haircut. Without the incentive of swapping into a AAA-rated security, they will not do so, or will not do so on a sufficient scale. This means that Germany's preference for a voluntary restructuring is at odds with Germany's opposition to secondary market purchases.

This is what happens when you base your policy on talking points. The talking point of today may be in contradiction with the talking point of tomorrow, and then what?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 13th, 2011 at 05:27:32 AM EST
Eurointelligence Daily Briefing: Finland may block Portugal aid
Opposition is growing in Finland to Portugal's EFSF package, as Social Democrats urge debt restructuring; Bundestag's opposition to ESM co-decision rules widened yesterday; Portugal's opposition leader strikes conciliatory tone on forthcoming EFSF negotiations;Portugal's finance minister says money will run out end-May; Barroso says no to interim finance for Portugal, insists on a full package; EU officials say Greek haircut to be in the range of 40-50%; S&P puts the number at 50-70%;Schäuble says no involuntary haircuts until 2013; a PwC study shows a strong rise in non-performing loans to €688bn in Germany, Italy, UK, Spain and Ireland; IMF's global financial stability report says European banks need to refinance €3200bn in next two years; Joseph Pröll quits as Austria's finance minister for health reasons; Largarde revises growth forecast down to 2.25% on the grounds of weaker foreign demand; ECB officials are stepping up their rhetoric for the next rate hike; John Bruton, meanwhile, hits back at Lorenzo Bini-Smaghi, pointing towards the ECB's own role in the crisis.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 14th, 2011 at 03:54:18 AM EST
Eurointelligence Policy Brief: Some subtle shifts in the German position (11 April, 2011)
The official position [on] debt restructuring is unchanged - that Greece will continue to follow the programme. That's everybody's official position, and it is of course not true as we all [know]. But do not expect any sudden changes in the official position, also because of Merkel's respect for George Papandreou. Merkel in particular opposes any involuntary restructuring of Greek debt until mid-2013 because she has already publically excluded that possibility following the discussions in recent months. Any decision to the contrary could cause further uncertainty in the financial markets.

To be clear: She is not actually afraid of a restructuring in the way the ECB is afraid of it. But Merkel is concerned about an adverse market reaction, which is why she gave the no default commitment until July 2013. She believes that she cannot easily go back on this date. In other words, there is also a credibility issue at stake here. She made a pledge to bondholders, which [she] is, as yet, unwilling to break.

In the finance ministry, however, the position seems to be shifting. Among all the actors involved, the finance ministers, the European Commission, the ECB, and the IMF, there is now an open discussion about whether and how to restructure Greek debt. Many high-ranking experts in Berlin, but also in the parliamentary parties, are increasing convinced that Greece will not be able to service the high level of debt after the financial assistance programme expires.

Where's that Queen of Yurp picture, again?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 14th, 2011 at 06:20:36 AM EST
that "the markets" place such a high value on her "pledge"?

The day there's no choice, it just becomes yet another Merkel flipflop. BFD.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Thu Apr 14th, 2011 at 07:59:27 AM EST
[ Parent ]
I can assure everyone in the German government that without a very generous restructuring, and some sort of growth prospect, by 2013 there won't be much of a Greek society, let alone economy, left to follow any sort of programme. At this rate of collapse, by July 2013, Papandreou will have long escaped the country carried away by a helicopter from some government building's rooftop  (à la manière de IMF traditionnelle) and army generals/gangsters with armed goons will be running parts of the country like Somalian warlords.

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Thu Apr 14th, 2011 at 09:31:29 PM EST
[ Parent ]
Why should the German government care?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Apr 15th, 2011 at 02:39:31 AM EST
[ Parent ]
Well, I would assume that political chaos is not conducive to any form of repayment and is bad for the Eurozone generally speaking. Also political turmoil has a bad habit of spreading (as the Arab world recently has reminded us)...
Other than that, however, you're probably right

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Fri Apr 15th, 2011 at 04:21:32 AM EST
[ Parent ]
Well, default is not conducive to repayment either. And if the German banks (or at least the ones that have the ear of the BuBa) are geared as hard as I think they are, a full default won't be that much worse for them than a thirty percent haircut (which is, after all, what the bonds are trading at). You can only go bankrupt once - there are no "doubleplus insolvencies."

Further, if the Greek bonds are not repaid because the Greek are rioting in the streets, then obviously it is those brown-skinned barbarians who don't understand civilised virtues of thrift and austerity that caused the virtuous, prudent and generous German banks to go bust. Whereas if the German banks go bust because they take the same, negotiated, haircut as everybody else, then it'll be a lot harder to prevent people from arguing that the bailout should come with strings attached.

And avoiding strings on the private banking sector is the point of the exercise. Sure, they may tear Europe apart in the process. But since when does the BuBa or the EPP care about the European interest?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 15th, 2011 at 05:30:16 AM EST
[ Parent ]
The 40-50% haircut in Greek bonds is already priced into the secondary market prices.

The issue here must be institutions which hold Greek bonds in "investment" books which are marked to "hold to maturity" values. Institutions which have Greek debt in "trading" books which are marked-to-market have already realised the losses.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri Apr 15th, 2011 at 05:57:06 AM EST
[ Parent ]
They haven't realised them until the bonds are either sold or defaulted on.

But yes, realising a 50 % haircut will be more painful for people who have not booked it already.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 15th, 2011 at 06:19:53 AM EST
[ Parent ]
So the key to the whole thing is probably the existence of large "hold to maturity" positions in German banking books, with maturity dates before 2013.

Banking regulators worthy of the name would require that banks set aside reserves to cover likely losses on "investment" books, of which the deterioration of the mark-to-market would be a basic indicator.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri Apr 15th, 2011 at 06:34:46 AM EST
[ Parent ]
And competent regulators would have forced progressively larger haircuts on the private banking sector as collective exposure to foreign markets grew. But that would have required the BuBa to pay attention and police creditors instead of waxing lyrical on the moral responsibilities of debtors to fulfil mathematically impossible obligations.

The more I think about it, the more a central bank guarantee of a lower bound on the exchange rate strikes me as turning idiosyncratic risk into systemic risk. Or, if you will, socialising the cost of buying currency swaps to hedge against sudden currency movements by replacing it with restrictions on fiscal and interest rate policy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 15th, 2011 at 06:54:25 AM EST
[ Parent ]
Reggie Middelton made a presentation to ING in Amsterdam where he noted that the stress tests only tested the trading book of the banks, which is usually no more than about 10% of the total book. He also noted that almost all banks, when they bough sovereign debt, did so with about 10:1 leverage. This led him to conclude that the total exposure of European banks to sovereign default was grossly underestimated. In a default it does not matter where the bank carries the debt as their whole book is at risk and 10:1 leverage would produce a 100% loss on a 10% haircut. The leverage means that a small default can have big consequences.

Text and links are at his BoomBustBlog. Double click on the video so as to watch it on YouTube where graphs will be readable.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Apr 14th, 2011 at 11:28:05 PM EST
So they actually checked something? And here I thought it went something like this:

Tester: How do you feel? Stressed?
Bankers: Nah, we are cool.
Tester: Banks are fine! Test completed.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Apr 15th, 2011 at 03:41:35 PM EST
[ Parent ]
Only what they were pretty sure would not be a problem.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 15th, 2011 at 04:50:41 PM EST
[ Parent ]
Eurointelligence daily briefing: ECB raises stakes on Greek debt restructuring (15.04.2011)
Lorenzo Bini Smaghi warns of a collapse of the Greek banking system, and catastrophic social consequences of a default; indirectly criticises Schäuble's open talk about a debt restructuring as scaring away potential investors; peripheral bonds rise to new records, as investors take fright at restructuring and the prospect of a Finnish No to the Portugal package; Pro-Euro National coalition party confirms its lead in the polls ahead of Finnish elections on Sunday; a Reuters poll puts the chances of a Greek debt restructuring at 60%; the IMF hints at a new programme for Greece; Olli Rehn declares end-game in eurozone crisis management has arrived; the Spanish government was forced to correct a hyped announcement that China Investment Corporation would save the cajas; Lower Saxony recapitalises Landesbank following silent participation ruling of EBA; Francois Fillon wants to freeze EU budget until 2020; ECB rate hike talk has led to an increase in the Euribor across all maturities; the ECB, meanwhile, expressed alarm at the rise in contingent debt.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Apr 15th, 2011 at 02:17:02 PM EST
Can the ECB get any more explicit?

Eurointelligence: ECB RAISES STAKES ON GREEK DEBT RESTRUCTURING (15.04.2011)

Lorenzo Bini-Smaghi, the most prolific campaigner against default, told il Sole24 ore that the ECB had carried out an analysis on the potential impact of a Greek debt restructuring, and found it would imply the failure of a large part of the Greek banking system, as the Greek banks hold a large portion of the Greek sovereign debt. (Another reason is that Greeks would transfer all their deposit to foreign banks, a process that is already partially under way). At the point the Greek banks would no longer have access to ECB liquidity, and would have to end their support for the corporate sector. He said that since Greece does not have a primary balance, a default at this time would lead to the cessation of pension and other social payments. The Greek economy would collapse, with devastating economic and social consequences. He said the other countries should stop pushing Greece into a catastrophe. In what we would understand to be an indirect reference to Wolfgang Schäuble, he said that talk about restructuring had seriously negative effects on market sentiment.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Apr 15th, 2011 at 02:20:40 PM EST
[ Parent ]
Pass an emergency law saying that sovereign expenses will continue to be credited to the recipients accounts in Greek banks, who may then consider the least senior creditor's claims void in sufficient amount that the bank remains solvent. Essentially, the Greek sovereign would then first default on the sovereign debt, then default by proxy on its private sector debt.

Oh, and clamp down hard currency rationing before you begin.

If you really want to twist the knife, reorder creditor seniority by legal fiat to make - say - Deutche Bank the least senior creditor of all Greek banks. When they have no more DB interbank debt or bonds, proceed to the next major money Eurozone bank you believe is insolvent. If the ECB wants to play chicken with Greek civil society, let's see how many major Eurozone banks it's prepared to lose in the process.

Oh, and when you do it, make sure to widely publicise the amount of impairment of other €-zone banks' balance sheets. Of course, those numbers do not have to bear any but the most platonic relationship to the truth. If you can trigger a couple of bank runs with hostile rumour-mongering, then that's a fair enough payback for the ECB's attempts to murder your economy wholesale.

If you really want to have fun, void all non-bank private debt to individuals and other €-zone countries.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 15th, 2011 at 04:00:49 PM EST
[ Parent ]
Would that Papandreou would do something like that, but if he would, things likely would not have gotten to this point. But, perhaps some of your analysis will have spread in Greece via Talos and other ET bloggers.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 15th, 2011 at 05:00:16 PM EST
[ Parent ]
Yes and no. Let's be quite clear that what I'm proposing here amounts to little more than economic terrorism: Deliberately causing bank runs in other people's countries is undoubtedly a hostile and unfriendly act.

Of course, that's precisely what the ECB is doing right now, which sort of relativises the ethics of the matter...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 15th, 2011 at 05:17:05 PM EST
[ Parent ]
As lightly capitalized, if we can call it that, as some of the German banks appear to be, repudiation of even a $5.5 billion bond obligation, if it was leveraged 10:1 by the bank that purchased it and if it became public knowledge, could have serious consequences. Someone would want their $5 billion back and the bank's balance sheet would be down $5.5 billion from the "pray and delay" status previous to default.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 15th, 2011 at 05:10:49 PM EST
[ Parent ]
Help me with this: If Greece has currently (2010) a primary deficit of 4,5% than why would "a default at this time would lead to the cessation of pension and other social payments" and not a net cut of ~5% in all public expenses?
And how worse can this "market sentiment" be? Spreads are at over 1000 bps for 10 year bonds, the day the PM announced an extension of the auterity program complete with a sell out of most of the public sectors assets.

On another note "Greeks would transfer all their deposit to foreign banks, a process that is already partially under way" implies that when the process is completed, there won't be much of a problem. I note that the Greek taxpayer has offered the Greek banks from the start of the crisis until now, somewhere close to 110 billion euros in direct funding and (mostly) guarantees - 30 billion Euros a few days ago

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Sat Apr 16th, 2011 at 06:13:02 AM EST
[ Parent ]
On another note "Greeks would transfer all their deposit to foreign banks, a process that is already partially under way" implies that when the process is completed, there won't be much of a problem.

What is implies is that the Greek banks have for all intents and purposes already failed and the drain of cash out of Greece is impacting the current account balance. That is a process that should be stopped.

The charitable interpretation is that Bini Smaghi seems to be implying that the only eligible collateral the Greek banks have at this time is Greek debt, and were that to become worthless the Greek banks would lose access to ECB liquidity for that reason.

If either of these interpretations let alone both are correct, I think desperate corrective measures are needed, including a derogation of free movement of capital in and out of Greece. More than an outright ban, possibly a tax on outflows. This might allow Greece to restructure its banking sector without defaulting on the public debt. The situation might be hopeless, though, and then a default would follow after a complete collapse, whereas Bini Smaghi claims a collapse would follow a default.

On capital controls, see this post by Krugman and links therein.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Apr 16th, 2011 at 06:47:22 AM EST
[ Parent ]

If Greece has currently (2010) a primary deficit of 4,5% than why would "a default at this time would lead to the cessation of pension and other social payments" and not a net cut of ~5% in all public expenses?

Because the 5% is 5% of GDP, not 5% of government expenses (which are something closer to 35% of GDP - so spending would need to be slashed by 15% across the board.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Apr 16th, 2011 at 11:43:04 AM EST
[ Parent ]
My bad, I was repeating a previous calculation with the wrong numbers. The primary deficit this year is predicted according to the Greek ministry of finance's 2011 budget (a work of speculative fiction in many respects, but anyway) to be around 2 billion Euros (actually 1,7 but that has been already corrected. That is less than 5% of current expenditures, something like 3,5%.

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Sat Apr 16th, 2011 at 01:31:34 PM EST
[ Parent ]
For the Greek gov't to rebalance its primary deficit from negative five percent of GDP, then the Greek gov't would need to withdraw spending to the tune of five percentage points of GDP times the tax rate and divided by the money savings rate of the people from whom it is withdrawn. So more like 15 % of Greek GDP, or around half of the government's budget.

Keynesian multipliers are just as dramatic in reverse as they are when you're doing it right...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Apr 16th, 2011 at 06:24:18 PM EST
[ Parent ]
Here's an ameliorated (by me, suggestions for better translation gratefully received) Google translation of what Il Sole 24 ORE makes public of Bini Smaghi's remarks (I'm presuming Eurointelligence saw more):

Bini Smaghi: l'euro non è troppo forte - Il Sole 24 OREBini Smaghi: the euro is not too strong - Il Sole 24 ORE
La cosa più frustrante nella discussione in corso è la povertà di analisi. Si rischia di prendere decisioni importanti, che avranno un impatto sulla vita di milioni di persone, sulla base di preconcetti ideologici. Una ristrutturazione del debito greco produrrebbe vari effetti, che bisogna considerare con attenzione. Il primo è una perdita per gli investitori internazionali. Nella maggior parte dei casi, questi investitori sono in grado di far fronte a tali perdite. Per molti il ragionamento finisce qui. È sbagliato.The most frustrating thing in this discussion is the poor quality of the analysis. The risk is of making important decisions that will impact the lives of millions of people on the basis of ideological preconceptions. A Greek debt restructuring would produce various effects, which must be considered carefully. The first is a loss for international investors. In most cases, these investors are able to cope with such losses. For many people, the argument ends here. That's a mistake.
Quali altri effetti vede?
Il prestito straordinario che gli altri Paesi europei hanno dato alla Grecia non verrebbe rimborsato e pertanto i contribuenti di questi Paesi perderebbero svariati miliardi di euro. Sicuramente si rafforzerebbe l'euroscetticismo dell'opinione pubblica che si oppone all'euro e chiederebbe l'uscita dei Paesi più deboli perché non rimborsano i debiti. Ma l'impatto più grave di un fallimento si avrebbe nel Paese che fallisce. Di questo molti si dimenticano, anche nella stessa Grecia.
What other effects do you see?
The extraordinary loan that other European countries have given to Greece would not be repaid and therefore the taxpayers of these countries would lose several billion euros. This would certainly strengthen Eurosceptic public opinion which is opposed to the euro and which would demand the exit of weaker countries because they do not repay their debts. But the most serious impact of a failure would occur in the country that fails. Many people forget this, even in Greece itself.
Più precisamente?
Secondo la nostra analisi una ristrutturazione del debito comporterebbe il fallimento di gran parte del sistema bancario greco, che detiene titoli di quel Paese ed è garantito in gran parte dallo Stato. Le banche greche non avrebbero più accesso al rifinanziamento presso la Bce e dovrebbero ridurre i loro impieghi a famiglie e imprese. Senza dimenticare infine l'impatto sui singoli risparmiatori, fondi pensione e altre istituzioni greche che tengono i loro risparmi in titoli pubblici. L'economia greca sarebbe in ginocchio, con effetti devastanti sulla coesione sociale e la tenuta del sistema democratico di quel Paese. In fin dei conti sta alla Grecia decidere la via da seguire, visto che le conseguenze peggiori saranno su di essa. Ma gli altri Paesi devono evitare di spingerla verso una catastrofe.
More specifically?
According to our analysis, debt restructuring would result in the failure of most of the Greek banking system, which holds bonds of that country and is largely guaranteed by the state. Greek banks would no longer have access to refinancing with the ECB and would have to reduce their lending to households and businesses. Not to mention finally the impact on individual investors, pension funds and other Greek institutions that hold their savings in government bonds. The Greek economy would be on its knees, with devastating effects on social cohesion and maintenance of the democratic system in that country. Ultimately it's up to Greece to decide the way forward, given that it will face the worst of the consequences. But other countries should avoid pushing Greece towards disaster.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 06:29:56 AM EST
[ Parent ]
I now see (thanks to turning Java on!) that there are further pages to the article...
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 06:32:44 AM EST
[ Parent ]
Bini Smaghi: l'euro non è troppo forte - Detto ciò, la Grecia riuscirà a - Il Sole 24 ORE
Detto ciò, la Grecia riuscirà a tornare sui mercati nel 2012, come previsto?
Per tornare sul mercato bisogna che gli investitori abbiano fiducia. Se si continua a ventilare la possibilità di ristrutturare il debito nessun investitore privato si prenderà il rischio di comprare titoli di Stato greci.
E se non riuscirà a tornare sui mercati?
Se non ha altre forme di finanziamento, la Grecia si troverà nella drammatica situazione di non riuscire a pagare gli stipendi dei propri dipendenti pubblici, le pensioni, ecc. In questo caso fallire o ristrutturare il debito non aiuterebbe, perché la Grecia ha un disavanzo primario e deve comunque indebitarsi per finanziare le spese correnti.
Having said this, will Greece be able to go back to the markets in 2012, as planned?
To return to the market, investors must have confidence. If you continue to air the possibility of restructuring the debt no private investor will take the risk of buying Greek bonds.
And if it cannot return to the markets?
If it has no other means of financing, Greece will be in the plight of not being able to pay the salaries of its civil servants, pensions, etc.. In this case, default or debt restructuring would not help, because Greece has a primary deficit and still needs to borrow to finance current expenditure.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 06:38:13 AM EST
[ Parent ]
In so many words, Greece (as an EU member state) lacks monetary sovereignty and must run its finances like a private entity because the ECB will not monetize its debt (by EU treaty prohibition and ideological opposition).

For the past 30 years politicians of the right have been using the idea of running the state like a private firm, but it mostly hasn't worked with the voters. It also was an economic fantasy. However, at least in the EU the institutional structures have been reformed in the direction dictated by Neoclassical economics and neoliberalism, resulting in a system in which operating according to the Austrian economic fantasies is the only legal possibility. This doesn't mean that macroeconomically this is less nonsensical than it ever was, but we have now managed to write this nonsense into the rules of the game whereas before it was all politics.

Now, one thing this means is that the state is in no position to provide any guarantees. Something like the restructuring of General Motors is not possible in the Eurozone (or no sensible government should attempt it, given the fiscal and monetary constraints under which it now operates). Also, bank guarantees are criminally reckless, and I have my doubts about deposit guarantees without an actual fund backing them.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Apr 16th, 2011 at 06:55:29 AM EST
[ Parent ]
bank guarantees are criminally reckless

Then surely they will expect Spain to allow banks with large exposure to Portugal to simply default and be resolved in the case that Portugal defaults. But, clearly they don't. And it is criminal to allow a default on lightly capitalized German banks.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Apr 16th, 2011 at 08:15:29 AM EST
[ Parent ]
So what does Bini Smaghi say about voters? Never mind them, the inevitable must be applied by a government of national unity or at least an agreement between government and opposition, because there is no alternative:

Bini Smaghi: l'euro non è troppo forte - Detto ciò, la Grecia riuscirà a - Il Sole 24 ORE
Intanto anche il Portogallo, in campagna elettorale, ha chiesto aiuto all'Unione. Si riuscirà a trovare un accordo che possa essere fatto proprio dal prossimo Governo, quale esso sia?
Non ci sono alternative al risanamento e alle riforme. Il problema del Portogallo è la bassa crescita. Per far fronte ad una crisi come quella che sta attraversando c'è bisogno di unità nel Paese, con un accordo tra maggioranza e opposizione su come risanare le finanze pubbliche e adottare riforme coraggiose che ripristino la competitività del Paese. Altrimenti i giochi politici interni rischiano di prevalere sull'interesse nazionale. Ciò è vero per il Portogallo, ma anche per la Grecia.
- Meanwhile, Portugal, during the election campaign, asked the Union for help. Will an agreement be found that will be accepted by the next government, whichever it may be?
BS: There is no alternative to reorganization and reform. Portugal's problem is low growth. To cope with a crisis like the one it is going through calls for the unity of the country, with an agreement between the majority and the opposition about how to return to healthy public finances and to adopt courageous reforms that restore the country's competitiveness. Otherwise, the internal political games are likely to prevail over the national interest. This is true for Portugal, but also for Greece.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 08:50:14 AM EST
[ Parent ]
Gotta love that the answers are "BS" speaking...

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sat Apr 16th, 2011 at 11:45:15 AM EST
[ Parent ]
Though my only concern was for brevity, of course.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 12:31:19 PM EST
[ Parent ]
The only "courageous reform" available that would let Greece "to return to healthy public finances" is for the Greek Government to default on all or part of the foreign debt, starting with the debt from those who have been talking up the risk of default. If that were followed by Portugal doing the same and Ireland providing huge haircuts on its bonds to foreign banks the ECB, IMF, Germany and France, along with the relevant EU organizations would possibly be too busy dealing with more important problems to pay much attention to Greece. Greece could help itself domestically by issuing a domestic currency, going after what ever wealth of the Greek oligarchs it could, stopping the rent seeking by the financial sector and stop worrying about the dictates of the "troika".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Apr 16th, 2011 at 04:22:41 PM EST
[ Parent ]
Bini Smaghi: l'euro non è troppo forte - Detto ciò, la Grecia riuscirà a - Il Sole 24 ORE
Eppure, il ministro delle Finanze tedesco Wolfgang Schäuble avrebbe detto che i timori legati a una ristrutturazione del debito, oggi della Grecia, domani di un altro Paese, sono «esagerati».
Ho già sentito queste accuse, per esempio nel settembre 2008, quando alcuni sostenevano che il mercato aveva avuto tutto il tempo per far fronte al fallimento di una banca d'investimento e che i rischi di contagio sarebbero stati contenuti. Lehman Brothers è stata fatta fallire e questo è stato un errore di valutazione madornale, pagato con la più grossa crisi finanziaria dal dopoguerra, con milioni di disoccupati. Vogliamo riprovarci? Veramente non abbiamo capito nulla di questa crisi? La Bce intende dire chiaramente ai governi quali rischi prendono se si comportano allo stesso modo. Sta poi a loro decidere.
Ma l'ipotesi di una ristrutturazione dei debiti sovrani nella zona euro non si imporrà da sé nel 2013, quando verrà attivato l'Esm, il nuovo paracadute europeo per i Paesi più indebitati?
Come è stato ribadito nel recente Consiglio europeo le ristrutturazioni del debito dovranno rimanere eventi eccezionali, anche dopo il 2013, e solo in casi drammatici come quelli che in passato si sono verificati, generalmente in Paesi sottosviluppati come lo Zimbabwe o l'Ecuador, mai nei Paesi dell'Unione europea.
- Still, the German Finance Minister Wolfgang Schäuble said that fears of a debt restructuring, in Greece today, tomorrow in another country, are "exaggerated. "
BS: I've heard these accusations, for example, in September 2008, when some argued that the market had had time to cope with the failure of an investment bank and that the risk of infection would be contained. Lehman Brothers was made ​​bankrupt and that was a glaring error of assessment, paid for with the biggest financial crisis since the war, with millions of unemployed. We want to try it again? We have not really understood anything about this crisis? The ECB aims to make it clear to governments what risks they take if they behave the same way. It is then up to them to decide.
- But doesn't the hypothesis of a restructuring of sovereign debt in the euro area impose itself in 2013, when the ESM, the new European safety mechanism for the most indebted countries, will be activated?
BS: As was reiterated in the recent European Council, debt restructurings will be exceptional events, even after 2013, and only in dramatic cases such as those that occurred in the past, usually in underdeveloped countries such as Zimbabwe and Ecuador, never in European Union countries.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 06:46:28 AM EST
[ Parent ]
I knew there was something about 2013...
by afew (afew(a in a circle)eurotrib_dot_com) on Sat Apr 16th, 2011 at 06:47:27 AM EST
[ Parent ]
As was reiterated in the recent European Council, debt restructurings will be exceptional events, even after 2013, and only in dramatic cases such as those that occurred in the past, usually in underdeveloped countries such as Zimbabwe and Ecuador, never in European Union countries.

This is such a load of drivel.

I'm going to send Mr. Bini Smaghi a copy of This Time is Different by Reinhart and Rogoff so he learns some economic history.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Apr 16th, 2011 at 04:51:14 PM EST
[ Parent ]
Greek banks would no longer have access to refinancing with the ECB

This is the policy decision that should be highlighted.

There is no law of nature, or of economics, or of the European Union that states that the ECB can not rediscount new Greek bonds that are used to recapitalise the "good bank" part of the Greek banks, after the bondholders, management, interbank loans and deposits above the guarantee limit have been destroyed. Those new bonds will be if not pristine then at least much lower risk by any rational analysis than the old Greek bonds. Refusing to rediscount the new bonds while being prepared to rediscount the old bonds is an explicit admission that at least one of the following is true:

  1. The ECB should not be holding Greek bonds now.

  2. The ECB is threatening to refuse to rediscount Greek private bank assets based on a policy decision to punish Greece in the event of a default, rather than based on a sane and sober analysis of the real default risk at the time the rediscount is granted.

- Jake

Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Apr 16th, 2011 at 06:37:36 PM EST
[ Parent ]
On 1, yes they should. There is nothing to prevent the ECB from repo-ing them at a steep discount with respect to the market valuation which already are about 50% of par value.

So, if you have a Greek bond and supposedly you can sell it at a 50% discount in the secondary market, why could you not repo it at a 60% discount?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sun Apr 17th, 2011 at 02:50:47 PM EST
[ Parent ]
Of course that would be the sane and sensible view. But it is not logically impossible to believe that the central bank should only rediscount pristine bonds. The logical inconsistency is between admitting that it is proper for the central bank to rediscount dirty bonds before the default and not wanting to rediscount less dirty bonds after the default.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Apr 17th, 2011 at 05:14:09 PM EST
[ Parent ]
Eurointelligence Daily Briefing: The crisis is back
Frenzy over increasingly likely Greek debt restructuring and outcome of Finnish elections sends eurozone bond spreads back up to crisis levels; Spain  has returned  once again in the spotlight of the markets; German and Greek newspapers report that officials had confirmed that debt restructuring would be under way; Reuters says investors disbelieve the story of a "voluntary restructuring", fearing a massive forced restructuring down the road; markets were also spooked by S&P downgrade threat for the US and the outcome of the Finnish elections; Finnish Social Democrats call for participation of True Finns in government, citing common ground on economic policy; Klaus-Dieter Frankenberger pleas for some perspective in the discussion over the significance of the True Finns; Peter Ehrlich sees the rise of a European Tea Party;Spanish bad loans ratio increases; Le Monde ruminates about the dichotomy of a strong euro and a weak eurozone; Wolfgang Schäuble supports
Mario Draghi for the ECB presidency, but Merkel's office sceptical about a "southern European"; Deutsche Bank fails in its bid to sell BHF over concerns of its regulator; the Bundesbank, meanwhile, went ballistic in its monthly report, criticising each aspect of the March 24/25 agreement as insufficient.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue Apr 19th, 2011 at 08:53:51 AM EST
Eurointelligence Daily Briefing: Will the Bundestag veto the ESM? (20 April 2011)
The first Christian Democrat rebel outed himself, joining 12 FDP deputies who pledged to vote against the ESM; 20 rebels are needed to defeat the legislation; spotlight is about to turn on German opposition parties, who have so far indicated their support (but this may change); the Greek government appointed international advisers for their programme on asset sales, as opposition to privatisation is mounting domestically; Gerald Braunberger argues that a Greek debt restructuring is necessary, as the country's debt is not sustainable; Wolfgang Münchau argues that there are a large hidden costs for the German taxpayer of a full debt restructuring, as the ECB will need to be recapitalised; Portugal's president attacks the lack of a European spirit among EU member states (without even a hint of self-criticism); the European Parliament voted in favour of a motion to instruct the European Commission to propose the outlines of a single eurozone bond; a study shows that Germany's financial services industry has no confidence in the eurozone rescue package; Christine Lagarde and Francois Baroin outline austerity measures to achieve the budget goal of a 3% deficit in 2013; Nicholas Sarkozy, meanwhile, is proposing a special bonus scheme for workers in companies that pay dividends to their shareholders.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 21st, 2011 at 04:59:46 PM EST
Eurointelligence Daily Briefing: Rumours on Greek restructuring are spooking the markets (21 April, 2011)
Greek bank stocks fell 4.6%, and CDS reach new record on rumours of a forced haircut to be imposed this weekend; Greek finance ministry requested a prosecutor to investigate possible criminal conduct, as traders sent an email containing the rumours of an early restructuring; a member of Merkel's council of economic advisers said Greek debt needs to be restructured; a majority of economists polled by Reuters agree, but say no action needed for another year; in Germany, parliamentary opposition to the ratification of the ESM is widening; Merkel is coming under pressure to give the Bundestag full co-decision rights; vote on EFSF and ESM has been postponed until the autumn; True Finns leader Timo Soini insists that Spanish banks should participate in a Portuguese bail-out, as a precondition for his acceptance of an EFSF package; there was some good news from Spain as it managed to auction of two long-term bonds;the Swiss government aims to impose Draconian capital requirements on Swiss banks, including a 19% capital buffer, with 10pc in core tier-1 capital; two Germany federal states, meanwhile, have agreed to recapitalise the Helaba Landesbank, which would otherwise have failed the stress test.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 21st, 2011 at 05:03:14 PM EST
Eurointelligence Policy Brief: A short background note on the European politics behind the Portuguese rescue (18.04.2011)
The Finnish elections brought a not entirely unexpected tectonic shift, but it probably falls short of a European revolution. We would expect the worst case scenario from these election to be a request for a partial renegotiations of Finland's terms of involvement with European Financial Stability Facility (EFSF). The Finnish conservatives may not even seek a coalition with the True Finns, but with the Social Democrats and a couple of small parties. Juri Katainen said he was seeking a coalition of parties that share a minimum consensus. Whether the True Finns enter parliament or not, we do not see a Finnish No.

That said, the Portuguese rescue is problematic nevertheless. Finance ministers were absolutely furious about the late Portuguese application, and some, like Anders Borg from Sweden or Jan Kees de Jager from the Netherlands did not hide their intense frustration at the recent informal Ecofin in Hungary. We expect the tension to persist for a number of weeks. It looks as though the country's liquidity will run out before any official EU/IMF can be dispersed. And there is at present no willingness to extend a short-term loan. The two statements are of course contradictory, unless you accept the principle of a default, so we would assume there will be some very short-term interim finance in place. But this is far from guaranteed.

The critical point is the beginning of June. The European Commission has calculated that the first tranche of the EFSF package of around €9bn would have to arrive in Lisbon by June 15. This is not a technical problem. The EU/IMF mission has started talks in Lisbon today, and finance ministers hope to reach a final agreement by mid-May. EFSF und EFSM will need about two weeks to place their own bond issues on the market.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 21st, 2011 at 05:20:31 PM EST
Eurointelligence Daily Briefing: Draghi it is
Nicolas Sarkozy endorses Mario Draghi as the next president of the ECB; FT reports that Merkel will also soon come out in favour of Draghi; German commentators grudgingly accept Draghi, but ask for a quid-pro-quo; the ECB now says that a Greek default would be worse than Lehman Brothers; Gerald Braunberger says the ECB is irresponsible; Wolfgang Münchau says Europe's politicians are out of their depth in crisis resolution, and are now vulnerable to hugely expensive quack solutions; Eurostat has revised Greek and Portuguese 2010 deficits upwards; eurozone 2010 deficit only marginally higher than in 2009; Greek two year bonds shoot up to over 24% as the markets now expect a debt restructuring; Spain has to pay a markedly higher price for its latest T-bill auctions; the ECB has not been able to fully sterilise its bond purchases; euro shoots up to near $1.47, as bond spreads deteriorate; the US housing bubble, meanwhile, has now completely reversed according to the latest Case/Shiller house price statistics.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 27th, 2011 at 03:54:23 AM EST
A Tale of Two Trilemmas
In order to understand why EMU happened, we often turn to the familiar Mundell-Fleming monetary policy trilemma. Given intra-European capital mobility, the decision by a subset of EC members to move to EMU was a logical, if radical response to the challenges posed by this trilemma. However, the institutional framework of EMU is seriously flawed. For decades economists have argued that fiscal union was a desirable, and perhaps indispensable, complement to EMU. What we now know is that a common eurozone framework for regulating financial institutions, and dealing with the consequences of their failure, is equally important. We have a monetary union with neither of these complementary institutions, and it is clear that this architecture is not fit for purpose. How did we end up here, and what happens now?

...

Superimposed upon these long-run political cleavages are the effects of the global crisis of 2008-9, and the present banking crisis. In principle, the global financial crisis could have led people to view the EU as a port in the storm, and there is an element of this in the Irish referendum approving the Lisbon Treaty in 2009. On balance, however, Eurobarometer surveys indicate that attitudes towards the EU have become more negative during the crisis, while there has been a fairly dramatic deterioration in trust in the institutions of the Union. The interaction between a sharp economic crisis in several countries, and underlying class-based or national hostility to EMU, could turn out to be a potent one. Even more serious could be the mishandling of the banking cum debt crisis. The decision of the ECB to veto the new Irish government's desire to impose burden sharing on private bank bondholders is extraordinary, and provides Irish eurosceptics with an extreme example of the democratic deficit in action. Meanwhile, taxpayers in Finland and elsewhere are revolting against the notion that they should bail out their profligate partners - recognising that this is a European banking crisis that needs a European solution might help change perceptions. So would recognising that an end to regulatory competition in the financial sector would be a more logical concession to be sought from the Irish, in return for cutting interest rates, than an increase in their corporate tax rate.

Whether EMU can survive in the long run if the status quo persists is an open question.  Governments have tended to muddle between the stark trade-offs implied by the political trilemmas, but this crisis may force them to confront those trade-offs head-on. What happens then is anyone's guess.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 27th, 2011 at 04:12:55 AM EST
(By Kevin O'Rourke on 15.04.2011 for Eurointelligence.)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 27th, 2011 at 06:02:41 AM EST
[ Parent ]
Eurointelligence syndicated column: Ireland's debts to the eurosystem (By: John Whittaker, 7 April 2011)
Yet, for all Germany's fear of becoming locked into permanent support for the Irish and others, the irony is that it is already providing involuntary `bailouts' via the eurosystem that carry similar risks. In the Irish case, this is both larger than the EFSF bailout , €146bn as against €67bn,  and much cheaper, 1% interest as against 5.8%. Pushing the Irish and Greeks into official EFSF-style bailouts thus worsens their finances and makes default more likely.

...

In the event of Irish - or Greek - sovereign default, it is not clear whether losses would fall on national central banks or on the ECB. But this is of little relevance as the national central banks are the ECB's shareholders and the Bundesbank is both the largest shareholder and the largest eurosystem lender. Losses of the Bundesbank would be for the account of the German treasury.

...

As the ECB raises its official interest rates, this will have much the same effect as EFSF bailouts. It will bring closer the moment at which the debts of Ireland, Greece and Portugal have to be `restructured', regardless of any efforts to push these countries into greater austerity.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 28th, 2011 at 07:27:19 AM EST
Increasingly, people I'm talking to here don't give a crap about the EFSF interest rate, because it'll never be paid: debts that can't be paid won't be paid.
by Colman (colman at eurotrib.com) on Thu Apr 28th, 2011 at 07:36:37 AM EST
[ Parent ]
Eurointelligence Daily Briefing: Towards $1.50
Ben Bernanke chose his first news conference to produce a dovish message: no policy tightening expected for the time being; Fed's raises inflation forecast; euro/dollar rise to $1.4867; Greek two-year yields rise to 27%, as market participants are speculating on a large enforced haircut before 2013; Portuguese media report on a delay for Portugal's deficit goals under the rescue package; FT Alphaville writes that the ECB quietly killed off the Securities Markets Programme; Klaus Regling criticises EU cacophony, and says Commission did not enough to warn about unsustainable development in Ireland; the FT writes that Germany will support Draghi, though Germany is not ready to commit yet in public; Elena Salgado urges Spanish autonomous regions to stick to their deficit targets; the Flemish separatists, previously staunchly pro-European, have discovered the electoral benefits of EU bashing;Belgian bonds spreads, meanwhile, are quietly rising again, as the country's has been without a government for one year.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 28th, 2011 at 08:26:57 AM EST
Eurointelligence Daily Briefing: Why does it take Merkel so long to come out in support of Draghi? (29.04.2011)
Merkel's staff brief journalists that she is ready to back Mario Draghi for the ECB; her spokesman still denies the story, presumably to allow her to pull back if she were encounter any opposition; Bild says Draghi was the most Germanic of all candidates; Juncker is also now supporting Draghi; Socrates wants bailout package ready mid-May, IMF and Juncker more cautious; Costas warns of effect of unemployment on the Portuguese banking sector; Greek two-year bond yields decline for the first time in 12 days; trade unions announce strike action against Greek privatisation plans; a Reuters poll suggests that there will be no rate rise until July; Orphanides says too little progress has been made on the too-big-to-fail problem of large financial institutions; El Pais warns of a miserable decade ahead for the Spanish labour market; Germany supports European company statute for mid-sized firms; Il Sole 24 ore, meanwhile, reports on the debate on whether a soft restructuring of Greek sovereign debt would trigger CDS contracts.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sat Apr 30th, 2011 at 04:18:27 AM EST
Eurointelligence Daily Briefing: Merkel's quid pro quo for Draghi (02.05.2011)
Der Spiegel reports this morning that Angela Merkel wants Germans to run the Financial Stability Board and the Economic and Finance Committee in return for her support of Mario Draghi; she also wants to renegotiate some aspects of the ESM;European Commission opens an important investigation into the market for credit default swaps; the True Finns tone down their criticism of the EU bailout package for Portugal;the French government sees the 2011 deficit below the 5.7% target; more German officials have gone on the record in support of a Greek debt restructuring; Klaus Regling accuses banks of greed by advocated a Greek restructuring; the Irish government continues to forecast 3% GDP growth for 2013 onwards; the finance minister of Lower Saxony warns that the EBA's ruling on silent capital will undermine Germany's state banking sector; Daniel Gros says Ireland is solvent because of relatively low levels of external debt; Colm McCarthy, meanwhile, argues that the ECB's uncompromising stance on defaults is leading Europe to disaster.
(Google Link)

I say Merkel has demonstrated in spades she's a xenophobe and she should be told to stuff her quid pro quo. If Germany was not able to muster a worthy candidate for ECB president, what guarantee can we have that the candidates they nominate for the Financial Stability Board and the Economic and Finance Committee will be qualified?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon May 2nd, 2011 at 02:34:50 PM EST
Eurointelligence Daily Briefing: Weidmann ascends to the throne (03.05.2011)
New Bundesbank president Jens Weidman was official enthroned yesterday; indicates his main focus would be to watch over, and comment on, German government's fiscal policy; says price stability must take precedence over financial stability
Oh, dear. And this a day after we're told "Merkel's quid-pro-quo on Draghi" (being the next President of the ECB) is to put a German in charge of the European Financial Stability Board.

Merkel's quid pro quo for Draghi

Der Spiegel has the story that Angela Merkel's silence on Mario Draghi's candidacy for the ECB presidency is explained by heavy horsetrading behind the scenes. The German chancellor wants to extract substantive concessions for supporting the Italian central bank governor. First she would like Jörg Asmussen, Wolfgang Schäuble's influential state secretary at the finance ministry to head the Economic and Finance Committee (EFC), the powerful steering committee for the Eurogroup and Ecofin meetings. Secondly she wants Jens Weidmann, who is officially inaugurated as the Bundesbank president today, to succeed to Draghi as the chairman of the Financial Stability Board (FSB). Thirdly she wants to impose a very restrictive line in the ongoing technical discussion surrounding practical matters at the ESM such as what majorities are required to take what kind of decisions and whether the ESM can create new rescue instruments for troubled Euro states in its own authority.
Jean-Claude  Trichet took a swipe at Axel Weber at the ceremony, saying that the ECB  followed Weber's advice to bail out the German Pfandbrief market;
For more, see here
the True Finns changed their mind again: they are now categorically ruling out the Portuguese rescue package; Vitor  Constancio says Portugal may be able to push back its targets for  deficit reduction, but EU officials say no deal has been reached on this  issue yet; Nout Wellink says he is open to a rescheduling, but not restructuring, of Greek debt; criticises ESM for moral hazard; the Greeks are asking once again for a cut on the interest rate on their EU/IMF loan; inflation expectations jump back to close to 2.5%; Jean-Marc Vittori, meanwhile, describes the decision to curtail the Schengen agreement as a "great leap backward".


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue May 3rd, 2011 at 04:14:36 AM EST
Eurointelligence Daily Briefing: Portugal brags about EFSF terms
José  Sócrates agrees €78bn EFSF programme; deal includes a softer deficit reduction trajectory;interest rate to be decided May 16; Sócrates claims he got a better deal than the Greeks and the Irish (which will no doubt lead to calls for a renegotiation of existing programmes); he also brags that there will be no additional pain in 2011; the troika forecasts a 2% contraction of the Portuguese economy this year; Jyrki Katainen is optimistic that he could gain a parliamentary mandate allowing him to support the Portuguese programme; Michael Noonan says Ireland is solvent due to current account surplus; Bank of Spain gives cautious outlook in its latest Financial Stability Report; Nicolas Sarkozy plans to focus his re-election campaign on fiscal rigour, as his advisers talk of a possible ratings downgrade; Wolfgang Schäuble's budget plan will be saved through much higher revenues from a booming economy; ECB fails to sterilise bond purchases yet again; Martin Wolf, meanwhile, argues that the eurozone faces a choice between permanent pro-cyclical adjustments, a break-up; or closer
union.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed May 4th, 2011 at 04:00:41 AM EST
Eurointelligence: Portugal brags about EFSF terms
Martin Wolf on the eurozone

An interesting column by Martin Wolf on the eurozone, based on a paper written by Paul de Grauwe. He starts by noting that Spain's real interest rate is double that of the UK, which is entirely due to its membership of a monetary union. The ECB supports the banking system, but acts like the IMF: it wants its money back. There are three possible outcomes to the crisis. The first is a fall-back to the gold standard, with its pro-cyclical policies, which will be as unacceptable to European today, as it was in the past. The second will be a break-up, a concentration of the eurozone around countries similar to Germany. And the third will be deeper integration. He predicts they will choose the latter, but it is a political choice.

Since the Euro is being run as if it were already on the gold standard, I predict the first option will be chosen since we're already there.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed May 4th, 2011 at 04:17:53 AM EST
[ Parent ]
Eurointelligence Daily Briefing: Has Socrates misrepresented the agreement? The actual memorandum suggests harsh tax increases, and a two year economic contraction.
The FT has seen a copy of the rescue deal, which suggest that the adjustment is far bigger than what Socrates seemed to suggest; there will be special taxes on pensions, and welfare benefits, freezes on pensions and public sector pay, and dismissal reforms; includes a forecast of a contraction of 1.5%-2% for 2011 and 2012 each; Reuters writes that the final size of the package may be higher than €78bn, depending on the capitalisation needs of the banks;Portugal's opposition said it will accept the package; the ECB's governing board meets in Finland today, as observers are sharply divided over whether the next rate rise will come in June or July; euro/dollar shoots up; Enda Kenny says an announcement on Ireland's interest rate reduction will come after the agreement on the Portugal rescue package - without any concession on corporate taxes; Ireland's fiscal position improved during April; Ireland, Germany and the UK spent the most money on bank rescues in the EU; a sighting of DSK in a Porsche is making headline news in the French media; Merkel is reportedly hopping mad about the number of Italians running important EU-level economic jobs; Xavier Fidal Folch compares the euro rescue to the stone of Sisyphus - rolling down once it reach the top; Holger Stelzner said the rescue operations have been unsuccessful, and that only structural reforms will work; Thomas Hanke says the cut in interest rates on the Greek loan already constituted a form of restructuring; Wolfgang Proissl says Jens Weidmann could be the next ECB president - after Draghi.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu May 5th, 2011 at 04:34:16 AM EST
Eurointelligence Daily Briefing: Not vigilant, with risks finely balanced
Trichet signals no rate rise in June, and says risks are finely balanced; euro falls some 4 cents on the news; Trichet also said he is not committed to the notion of interest rates normalisation in contrast to other central bankers; yesterday also saw a broad-based crash in commodity markets, with oil prices down some 10- cents; EU and IMF officials say Portugal's programme was tough but fair, and that the interest rate will be similar to the one of Greece; German politicians want countries subject to financial help to sell their gold reserves; Brian Lenihan blames ECB for forcing Ireland into a bailout; German bank levy is about to flop; leaks suggest that German tax revenue will grow strongly in the next few years; Fillon calls for iron discipline in the French budget; Dominique Seux says Christine Lagarde should be considered as a potential successor to Dominique Strauss Kahn at the IMF; Argentine's central bank governor Mario Blejer, meanwhile, calls the European financial rescue stragtegy a Ponzi scheme.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 6th, 2011 at 04:11:17 AM EST
Eurointelligence Daily Briefing: The consequences of a not so secret meeting
European finance ministers hold a secret meeting in Luxembourg, and reach consensus to put up another Greek rescue programme; current programme is regarded as having failed, with no chance of a return to capital markets in 2012; Der  Spiegel reported the news of this meeting on Friday night, along with the story that Greece was planning to exit from the eurozone; this part of the story was vigorously denied by everybody; euro continues to fall on these developments; Wolfgang Münchau writes that the failure to organise a secret meeting is symbolic of the eurozone's collective action problem: the present setup is not sustainable; Juan Igancio Crespo writes that a Greek exit from the eurozone would give rise to a  catastrophic financial crisis; Holger Stelzner writes that the EU and the IMF have no way to exert pressure on Greece if they explicitly rule out a debt restructuring; Hugo Müller Vogg says it is better to pay the one-time costs for a Greek exit than to pay the permanent price for Greece remaining in the eurozone; Handelsblatt and FT Deutschland support a new Greek plan; Portugal's PSD proposes radical supply side reforms, including drastic tax cuts for companies; Morgan Kelly proposes an Irish default on the banking system - and the ECB; Nicolas Barre warns that France might slip into a similar position than the peripheral countries; Angela Merkel, meanwhile, is getting increasingly desperate about Mario Draghi - now she wants him at the IMF.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon May 9th, 2011 at 05:36:53 AM EST
DAILY MORNING NEWSBRIEFING: "I was told to say there was no meeting... We had certain necessities to consider" (Eurointelligence, 10.05.2011)
Juncker's spokesman Guy Schuller admits to lying about the secret meeting; Juncker himself is quoted as saying :"when it becomes serious, you have to lie", thereby undermining the credibility of the EU's policy response; Lucas Zeise says lies are a hallmark of an economic policy end game, with the eurozone now very likely to break up; Jean Claude Trichet has proposed another €50bn loan for Greece; Greek tax revenues fall way short of the plan; there are reports that Angela Merkel will travel to Brussels for emergency consultations; euro falls further, and bond spreads rise; an FDP politician has tabled a motion to end all eurozone rescue packages; there are huge recriminations in Brussels against the Germans for leaking the meeting, and for undermining the Greek stabilisation efforts; S&P downgrades Greece, and says that even a voluntary debt restructuring constitutes default; Finnish parties start difficult negotiations about Portugal's bailout package today; Portuguese banks borrowed €48bn from ECB in May; new FDP chief Philipp Rösler becomes economics minister, asserting his power in the party; German exports and imports reach new records, with net exports rising; the euro, meanwhile, is far more popular in France than it is in Germany.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 02:19:04 AM EST
Eurointelligence Daily Briefing: German rebellion against second loan tranche for Greece
Bundestag votes in favour of Portugal package, but more and more MPs come out in opposition to a second loan package for Greece; Schäuble says Germany's support was a question of fate for Europe; Der Spiegel says Europe has become the fault line of centre-right politics in Germany; Bild Zeitung has another outrageous article about overpaid and lazy Greeks, and why the crisis will last forever; Antonio Borges and Jean Claude Juncker call for more Greek privatisations; Holger Steltzner bemoans that the ECB is becoming more French, and less German; the IMF warns that the crisis may yet spread to core Europe; El Pais wonders why the IMF still considers Spain to be among the Euro Area 4 peripheral countries; economists and investors overwhelmingly expect a Greek restructuring, according to a Reuters poll; Barclays Capital calculates that Greece needs a 67% haircut; True Finns stay out of government in protest over the decision to support a Portuguese aid package; there were more violent protests in Athens after the serious injury of a protester earlier this week; John Walters argues why Ireland is the victim in this crisis; Christine Lagarde is to revise the 2011 growth forecast upwards following a better than expected first quarter;there is much speculation, meanwhile, about the future of Lorenzo Bini-Smaghi after Mario Draghi's accession to the ECB presidency.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 13th, 2011 at 04:52:51 AM EST
El Pais wonders why the IMF still considers Spain to be among the Euro Area 4 peripheral countries

ElPais.com in English: IMF puts Spain in same boat as bailout recipients

Must be because Spain is enacting the same economy-killingh austerity policies, only without (or, should I say before) the "bailout".

Fund issues warning over potential "lost generation"

...

In a report on the economic recovery in Europe, the IMF predicts Spain will continue to lag behind the rest of the continent, maintaining its growth forecasts for the country of 0.8 percent this year and 1.6 percent in 2012, compared with 1.6 and 1.8 percent respectively for the euro zone.

...

The IMF expects the ongoing drop in house prices after the property-bubble burst to depress consumer spending, while investment is also expected to be dampened by the weak outlook for the economy. "Spain continues to experience a significant housing-market contraction that will hinder consumption in the near term," the report said.

...

The report notes a "strengthening of national reforms" that allowed Spain to "decouple from other periphery countries in early 2011," but questioned whether the government would meet its deficit reduction targets for this year and the next. Specifically, the IMF sees the shortfall in Spain's finances narrowing from 9.2 percent of GDP in 2010 to 6.2 percent this year and 5.6 percent next year, compared with the administration's goal of a deficit of 6 percent in 2011 and 4.4 percent in 2012.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 13th, 2011 at 07:56:29 AM EST
[ Parent ]


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