While it’s relatively small potatoes, it’s misguided. Without a proactive fiscal adjustment/larger deficit, the economy can’t do much more than muddle through without an increase in private sector credit expansion. And traditionally housing has been a substantial source of credit expansion. So, given their presumed desire for lower unemployment, hiking the price of housing credit- the only actual change come Jan 1 as FICA deduction are only not going to increase-seems counter productive.

In other words, the only change from Q4 to Q1 is the fee hike.

Cost of Tax Cut: Another $17 a Month on Most Mortgages

By

Dec 17 (Reuters) — Who is paying for the two-month extension of the payroll tax cut working its way through Congress? The cost is being dropped in the laps of most people who buy homes or refinance beginning next year.

The typical person who buys a home or refinances starting on Jan. 1 would have to pay roughly $17 more a month for their mortgage, thanks to a fee increase included in the payroll tax cut bill that the Senate passed Saturday. The White House said the fee increases would be phased in gradually.

The legislation provides a two-month extension of a payroll tax cut and long-term unemployment benefits that would otherwise expire on Jan. 1. It would also delay for two months a cut in Medicare reimbursements for doctors that is scheduled to take effect on New Year’s Day. The House is expected to act on the bill early next week. Two more months of the Social Security tax cut amounts to a savings of about $165 for a worker making $50,000 a year.

To cover its $33 billion price tag, the measure increases the fee that the government-backed mortgage giants, Fannie Mae and Freddie Mac, charge to insure home mortgages. That fee, which Senate aides said currently averages around 0.3 percentage point, would rise by 0.1 percentage point under the bill.

For the holder of a typical $200,000 mortgage, that means their monthly housing payment would be about $17 higher.

The 0.1 percentage point increase will also apply to people whose mortgages are backed by the Federal Housing Administration, which typically serves lower-income and first-time buyers.

The higher fee would not apply to people who currently have mortgages unless they refinance beginning next year.

Because of the weak housing market and the huge numbers of foreclosures in the last few years, private insurers have not competed strongly for business with Fannie Mae and Freddie Mac, which have the backing of the federal government. As a result, about 9 in 10 new home mortgages are backed by Fannie Mae, Freddie Mac and the FHA.

President Obama and many congressional Democrats and Republicans want to curb Fannie Mae’s and Freddie Mac’s dominance in the mortgage market. Obama earlier this year proposed raising the mortgage guarantee fees they charge as one way to do that.

The Saudis are the only producer with excess capacity, which puts them in the position of swing producer.

They post prices and then let their refiners buy as much as they want at their posted prices.

They have no choice but to be price setter, but they also don’t want anyone to know they are simply setting prices, so they talk around it and have obviously done a good pr job in that regard.

So after production spiked due to lost Libyan output, production now seems be falling back to prior levels as Libya comes back online.

There are other things affecting supply and demand as well, also altering Saudi production accordingly.

The Saudis lose control of price on the upside only when they don’t have sufficient productive capacity to meet demand. And they lose control on the downside when they can’t cut sufficiently to address a fall in net demand.

Looks to me like they will remain in that catbird seat for quite a while.

And if they keep prices relatively stable there will not likely be a 70′s style global inflation problem.

Best I can tell the jury is still out as to whether China is going through
the ‘hard landing’ scenario that began when modest first half state lending was
followed by lower second half state lending, all to control inflation.

Note the recent social unrest that could be inflation linked.
All we know is the regime change risk was sufficient for them to cut back on growth.
And so far not much sign of anything of consequence in the pro growth direction,
which means the political concerns over inflation are still there.

The currency could also be heading south fundamentally due to inflation.
Net fx reserves may be down to minimum levels
after factoring in their dollar debt that has been indirectly supporting the yuan.
And with foreign direct investment tapering off,
that source of currency support seems to have subsided.

While slower growth in China hurts some US companies,
lower resource costs for the US are consumer friendly.

If gold has lost enough of it’s bid from central bankers,
it could be headed back to it’s marginal cost of production, 1980′s style,
which is where it goes without global central bank accumulation.
I recall the buyers earlier this year included the Greek and Mexican central banks,
as well as the central bank of Bangladesh.
I suppose with high unemployment,
govt figures it might as well put people to work in the gold mines? Whatever!
Anyway, the final leg up for this cycle may have been the spike after Chavez
opted to take delivery of his gold, which he now has,
debunking the speculation that it wasn’t there to be delivered.

Next is whether Congress lets the FICA cuts expire and take maybe 1% off of Q1 GDP.
The President just said he wouldn’t veto the Republican plan, so they may work something out.
But with their bent on ‘paying for it’ no telling what the final result will be.

China headlines:

China’s Manufacturing May Contract a Second Month
Foreign Direct Investment in China Falls as Factories Slow
China Money Rate Rises Most in 2 Weeks
Yuan Forwards Fall for an Eighth Day as Manufacturing May Shrink
Chinese Cut Back on London Luxury Homes as Stock Losses Bite
China Money Supply Growth Slows to Weakest Pace in Decade
China Affirms Property Curbs Amid ‘Grim’ Outlook
China’s Stocks Fall to Lowest in 33 Months on Economic Concerns

It’s supports the notion that they understand that for govt debt to go down with the current institutional structure they need private sector debt (and/or exports) to increase.

However with the private sector necessarily pro cyclical (which is what Minsky boils down to),
at best this policy will keep mainly keep things from getting worse than otherwise.

ECB Wants New Capital Rules Amid Credit Crunch Fears

December 15 (MNI) — The European Central Bank, fearful of a looming credit crunch, is pushing regulators to alter new recapitalization rules in a way that will dissuade banks from shrinking their balance sheets to reach the 9% core tier 1 ratio required by the middle of next year, well-placed Eurosystem sources told Market News International.

In late October, the European Banking Authority (EBA) said it was requiring the region’s biggest banks to establish an exceptional and temporary buffer: the ratio of their highest quality capital to the assets on their balance sheet, weighted for risk, must reach 9% by the end of June 2012.

Eurosystem central bank officials as well as some EU governments are concerned that this new capital requirement could lead to a massive deleveraging by banks in Europe, which would entail selling off assets and significantly tightening conditions for lending.

There is widespread fear that such a development would depress loans to households and businesses. Some say it is already partly to blame for the big selloff in sovereign government bonds last month that led to sharply higher borrowing costs for Italy and Spain.

The original idea behind the EBA directive was that banks would need to maintain a constant 9% ratio over the entire period during which the requirement was in force. They could do so either by raising new capital — a big challenge in current market conditions — or by dumping assets and not acquiring new ones, which turned out to be the easier route.

“If you combine [asset] disposals with an aggressive fiscal tightening, you are creating the conditions for a sharp contraction,” a Eurozone central banker warned. He projected that the combined hit on GDP from fiscal tightening and bank retrenchment could be as much as two full percentage points. “That means a recession next year,” he said.

In recent public comments, ECB President Mario Draghi expressed concern about the potentially pernicious impact of bank deleveraging to meet the new capital targets. “We want to make absolutely sure that this process does not aggravate the credit tightening that is going on now,” the ECB president said. “It is important that banks raise capital, but not in a way that affects lending.”

Sources said that under a new proposal intended to address this problem, banks would be required not to reach a 9% ratio but to raise a specified, fixed amount of capital by the mid-2012 deadline.

Based on figures banks provided to the EBA as of end-September, the regulators would calculate the amount of capital a bank would have needed to hit the 9% capital ratio at that time. Banks would then be required to raise that level of capital regardless of what they had done with their assets since then or what they might do with them in the future.

Because banks would be required to raise the same amount of core tier one capital regardless of subsequent balance sheet moves, they would no longer have the same incentive to dump assets as a means of meeting the capital requirement.

A senior EU source said that a recent letter from the chairman of the EBA and the Polish EU presidency had noted that bank deleveraging was hurting the recovery, and it laid out a plan by which the 9% ratio would be calculated on the basis of risk-weighted assets on banks’ books as of September 30.

If the plan is approved, “you won’t see a change to the actual ratios or the sums [to be raised], but there will be a clarification that this should not be achieved through asset disposal,” this source said. “It should slow the aggressive [asset] disposal, which many people think is killing any chance of an upswing.”

After releasing new figures last Thursday on the total capital shortfall of European banks, totaling E114.7 billion, the EBA told banks to raise the money from investors, retained earnings and lower bonuses. Banks may only sell assets if the disposals do not limit overall lending to the economy, the EBA said.

However, it is not clear how bank regulators and supervisors would enforce this and whether there would be a level playing field, a well-placed Eurosystem source said. A new EBA requirement of the type now being discussed could address this issue, he said.

The decision on whether to switch from a capital ratio to a fixed amount of capital that each bank must raise lies in the hands of supervisors and regulators. It is too early to tell whether regulators will adopt the recommendation, since deliberations are still going on, another Eurosystem source said.

In its own effort to ensure the Eurozone’s economy won’t be starved for credit, the ECB last week announced a radical set of new liquidity measures, including a looser collateral framework and refinancing operations with a maturity of three years.

While not my first choice for public policy,
the 20 billion euro ECB bond buying isn’t nothing.
It’s something over $1.3 trillion per year at current exchange rates.

At the macro level it sort of funds the entire euro zone deficit spending.
And deficits are currently reasonable high.

So, even while recognizing that timing is everything,
the solvency issue could be in the process of stabilizing as the various ‘new’
‘E’ funding proposals and IMF come closer to fruition.

Not that the euro economy will boom anytime soon
as austerity measures take their toll,
but that ‘leg 2′ of the relief rally could be in progress.

“Give a man a fish, feed him for a day,
teach a man to fish,
and he spends the rest of his life on a boat drinking beer”

Fish 24:7

*ECB SAID TO CONSIDER TWO-YEAR LOANS FOR BANKS
*ECB SAID TO LOOK AT ALLOWING MORE UNCOVERED BONDS AS COLLATERAL
*ECB SAID TO PLAN LOOSENING

Meanwhile the ECB continues to look at liquidity enhancement to try to get a private sector credit expansion
going.

Good luck to them. It’s not about liquidity. It’s about private sector lending being pro cyclical.

As expected, it’s all about fiscal responsibility which they believe is the cure for their funding issues.

Their actual economic problem is a shortage of aggregate demand and their response continues to be measures to reduce
aggregate demand further.

All efforts are focused on funding being conditional on further austerity.

As previously suggested, it’s better thought of as the Sarcophagus plan:

The letter attached signed by Sarkozy and Merkel appears to contain the details of the new measures addressed to EU President Herman van Rompuy.

“Mr President,

To overcome the current crisis, all necessary measures to stabilize the euro area
as a whole will have to be taken. We are confident that we will succeed.

We are convinced that we need to reinforce the architecture of Economic and
Monetary Union going beyond the indispensable measures which are urgently
needed to cope with immediate crisis resolution. Those steps need to be taken
now without further delay. We consider this as a matter of necessity, credibility and
confidence in the future of Economic and Monetary Union.

The current crisis has uncovered the deficiencies in the construction of EMU
mercilessly. We need to remedy those deficiencies. To build a lasting Stability and
Growth Union which allows us to preserve our unique European model combining
economic success and social responsibility, we have to substantially reinforce
the foundations of EMU. Alongside the single currency, a strong economic pillar
is indispensable, building on enhanced governance to foster fiscal discipline as
well as stronger growth and enhanced competitiveness. In order to achieve these
objectives, we need a renewed contract between the Euro area Member States.
This conviction is the driving-force behind our proposal.

We need more binding and more ambitious rules and commitments for the Euro
area Member States. They should reflect that sharing a single currency means
sharing responsibility for the Euro area as a whole. They should pave the way for
a new quality of cooperation and integration within the Euro area.

We propose that those new rules and commitments should be enshrined in the
European Treaties as. Alternatively , the Member States whose currency is the
Euro will have to go ahead. In that case, we would ensure that those Member
States willing and able to do so would be able to join and the European institutions
would play an important role. We would also work towards bringing this new
agreement into the framework of the European Union as soon as possible.

The main building blocks of the new Stability and Growth Union are:

A strengthened institutional architecture

Euro area governance needs to be substantially reinforced. We should provide for
a more integrated and more efficient institutional set-up without duplicating existing
European structures or institutions. This set-up should be based on:

•Regular summits – at least twice a year – of the Euro area heads of State
and Government with a permanent president. These summits will provide
strategic orientations on the economic and fiscal policies in the euro area.
The impact of our domestic economic and fiscal policies on the euro area
should be considered as a matter of common interest, while safeguarding
national responsibility.
• During the crisis, the Eurosummit should meet on a monthly basis: each
meeting should focus on a precise agenda regarding governance and
policies to foster growth, competitiveness and fiscal stability. Member
States having signed the Euro Plus Pact will be invited to participate to the
discussions on issues related to it.

• A ministerial Eurogroup and a reinforced preparatory structure to prepare
and implement the decisions taken by the summit and ensuring the current
functioning.

This framework will be fully consistent with the EU institutional architecture. We
strongly reaffirm our willingness to fully associate the European Commission.
The European Parliament and national Parliaments should also be involved in an
adequate way.

A comprehensive framework of prevention

It is undoubtedly in the interest of all members of the Stability and Growth Union to
detect and correct departures from sound economic and fiscal policies long before
they become a threat to the stability of the Euro area as a whole. Therefore, we
need a comprehensive framework on prevention consisting of strengthened co-
ordination, surveillance and enforcement as well as positive incentives, building
on current arrangements (new macroeconomic imbalances procedure, EU 2020-
Strategy, Euro Plus Pact, a greater focus of structural- and cohesion funds on
competitiveness etc.) and developing them further.

This framework should comprise in particular:

the adoption by each euro area member state of rules on a balanced
budget translating the objectives and requirements of the Stability and
Growth Pact into national legislation at constitutional or equivalent level.
A new legal provison should set minimum requirements for the national
rules on balanced budgets. The European Court of Justice, on request of
the European Commission or a Euro area Member State, should have the
possibility to verify the transposition in the national legislation.

-

Commitment of national Parliaments to take into account recommendations
adopted at the European level on the conduct of economic and budgetary
policies.

-

We need to foster growth through greater competitiveness as well as greater
convergence of economic policies at least amongst Euro Area Member States.
To these aims, building on Article 136 and/or on enhanced cooperation, a new
common legal framework, fully consistent with the internal market, should be
established to allowing for faster progress in specific areas such as :
- Financial regulation;

24
…24

-3-

Labor markets;
Convergence and harmonisation of corporate tax base and creation of a
financial transaction tax;
Growth supporting policies and more efficient use of European funds in the
euro area.

-
-

-

A reinforced procedure to enforce sound fiscal policies

To complement the preventive arm of the Stability and Growth Pact and in
particular the goal to achieve a structurally balanced budget and ex-ante
examination of draft budgets, a new procedure should be established to correct
breaches of the 3 % deficit of GDP ceiling.

As soon as a Member State is recognized to be in breach with the 3 % ceiling
by the European Commission, there should be automatic consequences unless
the Eurogroup, acting by qualified majority, decides otherwise. Exceptional
circumstances should be taken into account:

-

The obligation for the Member State to conclude with the Commission and
approved by the Eurogroup by reversed qualified majority on behalf of the
other Member States, a „European Reform Partnership“ specifying the
concerned Euro area Member States’ fiscal and structural policy measures
to overcome its difficulties and assisting them in those efforts.

-

A sequence of interventions of increasing intensity into Euro area Member
States’ rights should be allowed as a focussed response to continued
infringement. Steps and sanctions proposed or recommended by the
Commission should be adopted by the Council unless a qualified majority of
the Euro area Member States decides otherwise.

Buiding on the provisions for a numerical benchmark for debt reduction in the “six-
pack” (1/20 rule), the procedure for debt reduction by Euro area Member States
with a public debt of more than 60 % of GDP needs to be enshrined in the new
treaty provisions.

A permanent crisis resolution mechanism

We will accelerate the setting of the permanent intergovernmental European
Stability Mechanism which should be effective in 2012 to better address any future
threats to the stability of the Eurozone as a whole, including through the risk of
contagion for other Euro area Member States, thus assisting them in situations of
emergency.

In order to maximize the efficiency of the ESM and its capacity to take decisions,
specific super majority rules (85 % of signed ECB-Capital) should be implemented.

As far as the private-sector involvement is concerned, the ESM treaty should be
revised to make clear that Greece required a unique and exceptional solution. We

34
…34

-4-

recall that all other Euro area Member States reaffirm their inflexible determination
to honour fully their own individual sovereign signature. A recital in the preamble
should clarify that the euro area will apply the IMF practice. As agreed, common
terms of reference on CACs shall be introduced in national legislations.

***

On the occasion of the 50th anniversary of the Treaties of Rome we reiterated
solemnly together with all Member States of the European Union our resolve
to protect the achievements of European unification for the good of future
generations. To this end, we committed ourselves to always renewing the political
shape of Europe in keeping with the times. It is in this spirit that we submit our
proposal to our European partners.

We are convinced that we need to act without delay. We need to take a decision
at our next European Council meeting in order to have the new treaty provisions
ready by march 2012.

Angela MERKEL

Nicolas SARKOZY”

yes, it will keep a lid on dollar libor so bma ratios aren’t so much of a blowup trade from that aspect anymore.

And the lower rate could mean most all dollar funding in the eurozone goes this route which could be both a political problem for the US and a financial issue if it all goes bad and the ECB should somehow cease to exist. The ECB is a ‘shell company’ with a bit of gold and no member nation guarantees.

Also, if I were a US bank regulator seems I wouldn’t let member US banks invest FDIC funds in any euro member nation debt and/or related securities. I might not even allow lending to corporations with exposure that could interfere with their ability to service their loans. Regulators do this via increasing risk weights accordingly.

The US regulators have a fiduciary responsibility to US tax payers and if I were one of them I’d act accordingly unless specifically told otherwise by Congress.

Subject: Huge allotment at ECB 84days USD operation:

 
sizeable USD allotment at ECB 84-day $ operation: $50.685Bn at 59bps.
The total number of banks participating was 34.
With the halving in cost, the facility provided much cheaper than market x-ccy basis levels, clarly all the chatter around the stigma attached to the use of the line was inaccurate to say the least!

REUTERS POLL: 61 PCT OF JAPAN BIG FIRMS VERY WORRIED JAPAN MAY FACE EUROPE-LIKE DEBT CRISIS IN NEAR FUTURE

In case you thought those big firms understood the monetary system.

Yes, the Germans are concerned that ECB bond buying and direct funding might be inflationary,
but there is something even more fundamental supporting their to objection to ECB support.

The problem is,
the EU leaders believe the high rates, failed auctions, and related funding and liquidity issues
are caused by the national government budget deficits being too high.

And therefore the fundamental solution is deficit reduction.
That is, only by reducing deficits,
will the ability to independently fund return to where it was before the 2008 financial crisis hit.

So while they recognize that ECB funding can keep them muddling through,
though with some perceived inflation risk,
they firmly believe it is deficit reduction that will allow them to return to pre 2008 funding dynamics,
where each member nation could independently fund itself in the market place at reasonable rates.

Unfortunately, that’s a bit like saying that by adjusting his financial ratios,
Bernie Madoff’s fund could return to pre crisis business as usual.

And just like Bernie could only be back in business if somehow he got
the Fed to guarantee his investors against loss,
the way I see it (but, unfortunately, not the way they see it),
the euro member nations now require ECB backing, directly or indirectly,
to be back in business.

As previously discussed, spending and deficits for currency issuers like the US, Japan, UK,
and the euro members when they had their own currencies are not constrained by income or
market forces. Observed debt to GDP levels for currency issuers can be anywhere from
50% to maybe 200%, as they serve to provide the net financial assets demanded by the
various institutional structures of those nations. And regardless of debt ratios, interest rates
are necessarily set by the Central Banks, and not market forces.

Spending and deficits for currency users, including the US states, businesses, households, and the euro member nations since
adopting the euro, are, however, necessarily constrained by income and market forces.
That’s why observed deficits for currency users are far lower than currency issuers.
California, for example, has seen its financing difficulties even though it’s debt to GDP ratio is under 5%.

Luxembourg’s debt to GDP ratio of about 15% when it adopted the euro was by far the lowest of the euro member nations.
And that’s because Luxembourg never did have it’s own currency. It was always a currency user,
and so market forces never let it’s debt get any higher than that. And even with the current financial crisis
Luxembourg’s debt is only about 20% of GDP.

So what happened about 13 lucky years ago is that the currency issuers of mainland Europe decided to turn themselves into currency users.
And at the same time, now as currency users rather than currency issuers,
simply waltz into the euro zone with their suddenly/absurdly too high existing debt ratios they incurred as currency issuers.

The ‘right’ way to do it back then would have been to have the ECB guarantee their debt from the inception of the euro,
and use the Growth and Stability Pact to avoid moral hazard issues and enforce compliance.
But that would not have worked politically.
The only way they would all come together is the way they did all come together.
The priority was union first, and work out subsequent problems as needed.

So now they have two problems-
a solvency problem where they can’t fund themselves without ECB support,
and a bad economy, now further deteriorating as evidenced by negative growth and rising unemployment.

And while the Germans aren’t entirely wrong in their belief that lower deficits would restore funding capacity,
I don’t think they recognize that as currency users debt to GDP ratios may need to be under 30% to get to that point.

Nor do they recognize that given current private sector credit conditions, deficits and debt ratios need to be higher
to offset the demand leakages (unspent income) inherent in their institutional structures. These include pension contributions,
insurance reserves, corporate reserves, individual retirement plans, and the demand for actual cash in circulation.
This means that what they call austerity- pro active tax increases and spending cuts- will slow the economy and therefore cause
tax revenue to fall and transfer payments to rise to the point where deficits increase rather than decrease.
The only remaining hope for growth is exports, but with all the world doing much the same that channel is not currently open.

So back to the present.

(And yes, without the 2008 financial crisis all of this may not yet have happened.
But it all did happen, and here we are.)

The firm belief is that deficit reduction is what is needed to return to independent funding.
And while funding by the ECB can allow things to muddle through, and hopefully not prove inflationary,
there is no exit from ECB funding and the inherent inflation risk it carries apart from deficit reduction.

Therefore I expect the upcoming discussions to focus entirely around deficit reduction, with little if any discussion of funding.
And, as is currently the case, funding assistance will only come conditionally with accelerated austerity.

That is, all options on the table will only cause a bad economy to get worse.
And all options on the table will tend to drive deficits higher,
which both makes matters worse, and,
as recent history has shown,
triggers demands for more austerity.

The chart, below, shows how the financial crisis of 2008 caused what seemed to be working just fine on the way up
to come apart when private sector credit expansion faltered, and the economy took a dive, driving up national government
debt to GDP ratios, and causing it all to go bad in typical ponzi fashion.

They seriously believe that the crisis is all about deficits being too high,
and it all will be and can only be remedied by bringing deficits down.

Therefore they see ECB funding as not solving anything if it doesn’t serve the further purpose of deficit reduction.

Good luck to them, and good luck to us as we’re trying to do the same thing.

:(

France, Germany to Propose New EU Treaty

Published: Monday, 5 Dec 2011 | 10:55 AM ET
By: Reuters with CNBC.com

 
France and Germany have agreed on a series of reforms to address the euro zone sovereign debt crisis that will be presented to EU President Herman Van Rompuy on Wednesday, French President Nicolas Sarkozy said after a meeting with German Chancellor Angela Merkel on Monday.

 
“Things cannot continue as they have done up until today. Our preference is for a treaty among the 27 (EU members), so that nobody feels excluded, but we are open to a treaty among the 17 (euro members), open to any state that wants to join us,” Sarkozy told a press conference following the meeting.

 
“This treaty would contain the following things: We want automatic sanctions in the event of a breach of the rule on deficits below 3 percent (of GDP),” he said.

 
“We want a golden rule that is reinforced and harmonized on the European level so that the budgets of all 17 (euro zone states) have a constitutional rule to ensure that national budgets move toward a return to equilibrium,” Sarkozy added.

 
The French President said the Franco-German agreement would be written up in a letter and presented to (European Council President) Herman Van Rompuy on Wednesday.

 
“We want to make sure that the imbalances which led to the situation in the euro zone today cannot happen again,” he said.

 
Angela Merkel stressed the leaders wanted structural changes which go beyond agreements.

 
“We need binding debt brakes, which can be verified by the European court of Justice … in order for the Stability and Growth Pact to hold,” she said.

 
The Stability and Growth pact lays out the budgetary rules that member states must follow.

 
Berlin and Paris are under unprecedented pressure to see eye to eye in a crisis that has split them on issues such as the role of the European Central Bank in lending to troubled states and on whether the bloc should issue joint euro bonds.

 
“Regarding what we have said about the ECB, nothing has changed. We reject the idea of euro bonds,” Merkel said.

“This package shows that we are absolutely determined to keep the euro as a stable currency and as an important contributor to European stability.”
Top ECB policymakers have been reluctant to buy up debt from distressed euro zone states, as this would take the pressure off governments to get their financial houses in order.

 
But ECB chief Mario Draghi has signaled that a “fiscal compact” produced by the euro zone governments could nudge the bank to act more decisively on the crisis.

 
The hope is that private bondholders will be assured that they are not being singled out by European policymakers for losses, bolstering their confidence in buying euro zone bonds.

 
On Monday, an ECB policymaker described a plan for holders of Greek government debt to take heavy losses had led to a big rise in borrowing costs for other euro zone countries.

 
“It was a terrible mistake,” said ECB Governing Council member Athanasios Orphanides, who is also the Cyprus central bank chief.

 
Cyprus banks are big holders of Greek government debt, the value of which is due to be halved under a new 130 billion euro bailout deal for Athens.

 
In Dublin, Ireland’s government will unveil what it hopes will be the toughest budget of its five-year term, but as it tries to keep the public onside economists are warning that a global downturn means the worst may be yet to come.

 
On Tuesday, the Greek parliament is due to give final approval to a draconian 2012 austerity budget that is a condition for a second bailout package still under negotiation with private creditors, euro zone governments and the IMF.

From the NY Times:

The leaders met over lunch at the Élysée Palace to prepare joint proposals to
offer the full membership the European Union in Brussels on Thursday night. They
agreed to propose automatic penalties for countries that exceed European deficit
limits as well as the creation of a monetary fund for Europe. They also backed
monthly meetings of European leaders.

Supporting suspicions it’s all for the further purpose of supporting their lifestyle…

Forwarded Message

From the WSJ:

“Ms. Merkel signalled on Friday that she is having second thoughts about the wisdom of emphasizing bondholder losses. “We have a draft for the ESM, which must be changed in the light of developments” in financial markets since the Greek-restructuring decision in July, she said after meeting Austria’s chancellor in Berlin.

 

Austrian Finance Minister Maria Fekter, speaking at a conference in Hamburg on Friday, was more direct. “Trust in government treasuries was so thoroughly destroyed by involving private sector investors in the debt relief that you have to wonder why anyone still buys government bonds at all,” Ms. Fekter said.”

This is not constructive.
He clearly doesn’t understand monetary operations:

*DJ Fed’s Plosser: Worried About Rising Pressure On Central Banks To Monetize Debt
*DJ Plosser: Worried About Wavering Commitments To Price Stability
*DJ Plosser: Monetizing Debt Would Unleash Inflation

In this crisis of ignorance
the only thing they all agree on
is austerity:

By Jurjen van de Pol
Dec. 2 (Bloomberg) — The Netherlands isn’t in favor of
monetary financing by the European Central Bank to combat the
region’s debt crisis as it may spur inflation and takes away
pressure to reform, Dutch Prime Minister Mark Rutte said.
“Countries that are now forced to reform may get the idea
that there’s no need to reform because the printing press has
been switched on,” Rutte told reporters after the weekly
council of ministers in The Hague today.

My takeaway from two days in DC is that Europe is headed to a blood in the streets outcome.

While ECB funding remains ongoing even as it’s uncertain,
in any case the underlying theme remains austerity.

There is no plan B.
Just keep raising taxes and cutting spending even as
those actions work to cause deficits to go higher rather than lower.

So while the solvency and funding issue is likely to be resolved,
the relief rally won’t last long as the funding will continue to be
conditional to ongoing austerity and negative growth.
And the austerity looks likely to not only continue but also to intensify,
even as the euro zone has already slipped into recession.

So from what I can see,
there’s no chance that the ECB would fund and at the same time mandate the
higher deficts needed for a recovery,
In which case the only thing that will end the austerity is
blood on the streets in sufficent quantity to trigger chaos and a change in governance.