Without an interest rate and a credible quantity pledged, the agreement is grossly deficient.

The way Greece obtains funding is by offering ever higher rates until there is a taker.

So let’s say they offer securities at 5%, then 6, then 7, then 10, then 15, then 20 with no takers. How high do they go before they tell the EU group they have failed to obtain funding?
And then what rate does the EU charge them if they agree?

The process makes no sense.

The way to do it is for the EU group to offer funding at some rate, giving Greece some amount of time to try to find a better rate.

Euro finance ministers to agree on Greek aid: source

By Jan Strupczewski

March 13 (Reuters) — Euro zone finance ministers are likely to agree on Monday on a mechanism for aiding Greece financially, if it is required, but will leave out any sums until Athens asks for them, an EU source said on Saturday.

Policymakers have been debating possible financial support for the heavily-indebted European Union member state for more than a month, but have provided only words of support. Germany, key to any deal, has resisted appeals to promise aid.

British newspaper The Guardian on Saturday quoted sources as saying Monday’s meeting of the currency zone’s 16 finance ministers would agree to make aid of up to 25 billion euros available.

But a senior EU source with knowledge of preparations for Monday’s meeting told Reuters no numbers were likely at this stage.

“I think we should be able to agree on principles of a euro area facility for coordinated assistance. The European Commission and the Eurogroup task force would have the mandate to finalize the work,” the source said.

“It would be the principles and parameters of a facility or mechanism, which then could be activated if needed and requested.

He said no figure had been agreed.

“You would have a framework mechanism and you would have blank spaces for the numbers because there has been no request (from Greece) yet,” the source said.

Greece has announced steps to reduce its budget deficit this year to 8.7 percent of GDP from 12.7 percent in 2009, triggering street protests and strikes but also reducing market concern over whether the country would be able to service its debt.

That helped Athens sell its bonds with ease on debt markets earlier this month, but policymakers are still searching for ways of making its cost of borrowing — still far above that of other Europeans — more sustainable.

They are also concerned that the problems in Greece could undermine confidence in the euro and spread to other heavily indebted eurozone countries such as Portugal or Spain.

CUTBACKS

The EU source said that among the instruments considered to help Greece were both bilateral loans and loan guarantees.

“The preparations have been done under the Eurogroup by member states and the Commission. The Commission has done much of the technical work,” the source said.

“The aim of the exercise so far has been to do the technical preparations, so that the political decision could be possible on Monday. Germany holds the key at the moment.”

Polls show that public opinion in Europe’s biggest economy Germany is strongly opposed to bailing out Greece, which has for years provided unreliable statistics about the true size of its deficit and debt, breaking EU budget rules.

In a move that is likely to alleviate German concerns about spending money on Greece, the Commission has said it would soon make a proposal for stronger economic cooperation between euro zone countries and tighter surveillance of their performance.

French Economy Minister Christine Lagarde told the Wall Street Journal she believed Greece’s austerity moves were behind the improvement in its situation on markets and negated the need for a bailout.

“”There is no such thing as a bailout plan which would have been approved, agreed or otherwise, because there is no need for such a thing,” she said.

But she added that “technical experts” at the EU have been working on a contingency plan, so that if the need arose “all we would have to do is press the button.”

The Guardian quoted a senior official at the European, the EU executive, official as saying the euro zone members had agreed on “coordinated bilateral contributions” in the form of loans or loan guarantees if Athens was unable to refinance its debts and called on the EU for help.

The agreement has been tailored to avoid breaking the rules governing the operation of the euro currency which bar a bailout for a country on the brink of bankruptcy, and to avoid a challenge by Germany’s supreme court, the official said.

A German ministry spokesman said he could not believe the newspaper’s report on the bailout plan was correct.

“We are not aware that this is being planned,” he said, adding that Greece had not requested any aid. “Greece is implementing its (savings) program and we expect that it will manage it alone.”

(Additional reporting by Tim Pearce in London, Pete Harrison in Brussels and Volker Warkentin in Berlin, Writing by Sarah Marsh and Jan Strupczewski; Editing by Patrick Graham)

The Eurozone Solution For Greece Is A Very “Clever Bluff”?

The Guardian is today reporting that, after weeks of crisis, the Eurozone has agreed to what appears to be a multibillion-euro assistance package for Greece that will be finalized on Monday. Member states have apparently agreed on “coordinated bilateral contributions” in the form of loans or loan guarantees to Greece, but only if Athens finds that it is unable to refinance its soaring debt and asks for help. Other sources said the aid could total €25bn (£22.6bn) to meet funding needs estimated in European capitals that Greece could need up to €55bn by the end of this year.

Once again, however, since funding is a function of interest rates, this proposal has the appearance of a very “clever bluff”. It says nothing about how high interest rates for Greece would have to go before the Greek government is somehow declared unable to refinance, and asks for additional help. The member nations probably structured the loan package and terms this way hoping to try to draw in lenders who would rely on this member nation as a back stop when making their investment decisions. However, if this ploy fails, Greek rates will go sky high in an attempt to refinance, and as Greece asks for more help, the spike in rates will make it all the more difficult for the entire Eurozone monetary system to function. Additionally, the prerequisite austerity measures will subtract aggregate demand in Greece and the rest of the Eurozone, and, to some extent, the rest of the world as well.

I have a very different proposal. It is designed to be fair to all, and not a relief package for any one member nation. It is also designed to not add nor subtract from aggregate demand, and also provide an effective enforcement tool for any measures the Eurozone wishes to introduce.

My proposal is for the ECB to distribute 1 trillion euro annually to the national governments on a per capita basis. The per capita criteria means that it is neither a targeted bailout nor a reward for bad behavior. This distribution would immediately adjust national government debt ratios downward which eases credit fears without triggering additional national government spending. This serves to dramatically ease credit tensions and thereby foster normal functioning of the credit markets for the national government debt issues.

The 1 trillion euro distribution would not add to aggregate demand or inflation, as member nation spending and tax policy are in any case restricted by the Maastricht criteria. Furthermore, making this distribution an annual event greatly enhances enforcement of EU rules, as the penalty for non compliance can be the withholding of annual payments. This is vastly more effective than the current arrangement of fines and penalties for non compliance, which have proven themselves unenforceable as a practical matter.

There are no operational obstacles to the crediting of the accounts of the national governments by the ECB. What would likely be required is approval by the finance ministers. I see no reason why any would object, as this proposal serves to both reduce national debt levels of all member nations and at the same time tighten the control of the European Union over national government finances.

Not a good time for Greece and others to be cutting agg demand with
spending cuts and tax hikes, but that’s what the euro’s institutional structure ‘demands.’

The risk is this fiscal constraint employed to reduce national deficits will further reduce demand, which causes revenues to fall further and transfer payments to increase further, resulting in even larger deficits, etc.

But nothing will change unless things get bad enough, which obviously they are not.

EU Headlines:

Europe’s Recovery Almost Stalls as Investment Drops

German Machine Orders Fell in January on Weak Domestic Demand

EU Says Competitiveness of Greek Economy Down ‘Substantially’

French Unemployment Rate Increases as Companies Trim Payrolls

Markets are getting closer to the idea that:

Interest rates don’t/won’t help
QE doesn’t/won’t help

With the larger point being coming to terms with the possibility the Fed can’t inflate, or do much of anything that actually matters for the real economy, except maybe fund zombie entities to keep them from failing.

So bonds are throwing in the inflation towel and yields are coming down.
The dollar is going up with miles to go before ppp is reached.
Gold is well off the highs and being held up probably by europeans running from the euro to dollars and a bit of gold.

(***Bernanke just again testified that a contango in futures prices is a reasonable forecast of higher prices down the road. So much for the credibility of their inflation forecast)

Meanwhile the eurozone is continuing it’s methodical implosion with no credible response in sight.
And the realization that all eurozone bank deposits are only insured by the national govts has yet to hit the headlines.

The Obama administration believes the US Treasury is ‘out of money’ and we have to borrow from China to spend and leave that for our children to pay back.
So any kind of meaningful US fiscal response seems off the table.

The American economy works best when people working for a living make enough to be able to one way or another buy their own output, and business competes for their dollars. It’s not happening.

We are grossly overtaxed for current circumstances with no meaningful relief in sight.

Lots of reasons to stay on the sidelines.

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I propose the ECB distribute 1 trillion euro to the national govts on a per capita basis.

The per capita criteria means it’s not a bailout and not a ‘reward for bad behavior.’

It would immediately adjust national government debt ratios substantially downward and ease credit fears.

If there is no undesired effect on aggregate demand/inflation/etc., which there should not be, it can be repeated as desired until national government. Finances are enhanced to the point where they can take local action to support aggregate demand as desired.

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That spread for its own banks that it guarantees shows a serious funding issue.

During a period of euro weakness funding problems could become worse and spread to other euro nations.

When foreign govts. buy euros for their portfolio of fx reserves, they have to hold them in some kind of account or security. Most probably opt for eurozone national govt paper. Same with international institutional investors.

When they stop adding to their euro portfolios and/or reduce them, they stop buying and/or sell that paper.

The new holders of euro (those who buy the euros when portfolios sell them) may or may not buy that same govt paper, and the euros may instead wind up as excess reserves at the ECB in a member bank account, or even as cash in circulation as individuals who don’t trust the banks turn to actual cash. The banks with the excess reserves may or may not buy the National govt paper or even accept it as repo collateral, to keep their risk down, and instead simply hold excess reserves at the ECB.

Markets will clear via ever widening funding spreads as national govt paper competes for euros that are otherwise held as ‘cash reserves.’ The amount of reserves held at the ECB doesn’t actually change, apart from some going to actual cash.

What changes are the ‘indifference levels’- yield spreads- between having cash on your books and holding national govt paper risk. And the ability to repo national govt paper at the ECB doesn’t help much.

Would you buy Greek paper today if you were concerned it might default just because you could repo it at the ECB, for example?

Also, while Americans go to insured banks and Tsy secs when they get scared, Europeans exit the currency as they have a lot more history of hyper inflation.

That means a non virtuous cycle can set in with a falling euro making National govt funding problematic, which makes the euro continue to fall.

This happened a little over a year ago due to a dollar funding liquidity squeeze.

The Fed bailed them out with unlimited dollar swap lines and the euro bottomed at something less than 130 to the dollar.

This time it’s not about dollars so the Fed can’t help even if it wanted to.

And the ‘remedies’ of tax hikes and/or spending cuts Greece intends to pursue will only make it all worse, especially if undertaken by the rest of the eurozone as well. Fiscal tightening will only slow the economy and cause national govt. revenues to fall further, unless the taxes are on those taxpayers who will not reduce their spending (no marginal propensity to spend) and the spending cuts don’t reduce the spending of those who were receiving those funds.

And the treaty prevents ECB bailouts of the national govts. so any bailout from the ECB would require a unified Fin Min action and an abrupt ideological reversal of the core monetary values of the union towards a central fiscal authority.

This is somewhat analgous to what happened to the US when the original articles of confederation gave way to the current constitution in the late 1700’s..

Greece Sells 2 Billion Euros of 2015 Debt to Banks, Bankers Say

By Anna Rascouet and Christos Ziotis

Dec. 16 (Bloomberg) — Greece sold 2 billion euros ($2.9 billion) of floating-rate notes privately to banks, eight days after Fitch Ratings downgraded the nation’s debt as the government struggles to cut the European Union’s largest budget deficit, two bankers familiar with the transaction said.

The securities, which mature in February 2015, will yield 250 basis points, or 2.5 percentage points, more than the six- month euro interbank offered rate, or Euribor, they said. That’s 30 basis points higher than a similar-maturity Greek fixed-rate bond when converted into a floating rate of interest, according to data compiled by Bloomberg.

Greek bonds have fallen in the past week, with two-year note yields rising by the most in more than a decade on Dec. 8, when Fitch cut the nation’s credit rating to BBB+, the lowest in the euro region, citing the “vulnerability” of the nation’s finances. Prime Minister George Papandreou has been unable to convince investors he can reduce a deficit the government says will rise to 12.7 percent of gross domestic product this year, after the economy shrank 1.7 percent in the third quarter.

“Selling bonds via a private placement can be a double- edged sword at this point,” said Luca Cazzulani, a fixed-income strategist in Milan at UniCredit Markets & Investment Banking. “On the one hand, it shows that Greece can always find buyers for their bonds. But the market might take it as a sign that they only have this channel left.”

Widening Spread

Greek bonds rose snapped two days of declines today, with the yield on the 10-year note dropping 11 basis points to 5.62 percent as of 10:26 a.m. in London. It rose as much as 29 basis points yesterday to 5.76 percent, the highest since April 3.

Concern some countries may struggle to pay their debt was reignited after Dubai’s state-owned Dubai World said on Dec. 1 it wanted to restructure $26 billion of debt. The premium, or spread, investors demand to hold Greek 10-year bonds instead of German bunds, Europe’s benchmark government securities, rose as high as 250 basis points yesterday, the highest closing level since April 2. It narrowed to 239 basis points today.

The participating banks in yesterday’s private placement were National Bank of Greece SA, Alpha Bank AE, EFG Eurobank Ergasias SA, Piraeus Bank SA and Banca IMI SpA, the bankers familiar with the transaction said. Italy’s Banca IMI was the only foreign-based in the group.

Worst Performers

The government paid “generous” terms, said Wilson Chin, a fixed-income strategist in Amsterdam at ING Groep NV.

“I guess you have to pay some liquidity premium, given the sale was done at the end of the year,” he said. “I would be very surprised if they continue to use this method into the first quarter of next year. That would probably be taken as a sign the market isn’t working for them.”

Greek bonds are the worst performers after Ireland among the debt of so-called peripheral euro-region countries this year, handing investors a 3.5 percent return, according to Bloomberg/EFFAS indexes.

In a private placement, issuers offer securities directly to chosen private investors as opposed to selling them through an auction or via a group of banks.

Papandreou pledged in a speech two days ago to begin reducing the nation’s debt, set to exceed 100 percent of GDP this year, from 2012. The European Commission estimates the ratio at 112.6 percent of GDP this year, second only to Italy.

‘Painful Decisions’

“In the next three months we will take those decisions which weren’t taken for decades,” Papandreou said in Athens. He said many choices will be “painful,” though he promised to protect poorer and middle-income Greeks.

Credit-default swaps on Greece rose 1 basis point to 238.5, according to CMA DataVision, after surging 25.5 basis points yesterday. Such swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should an issuer fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

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Looks like it’s serious enough for this, thanks.

And anything done at the national level serves to weaken the group as a whole.

Eurobond Being Mulled Again Amid Fears Over Greece>

2009-12-15 15:40:15.949 GMT

PARIS (MNI) - Eurozone leaders, reacting to worries about the situation in Greece and its potential fallout are looking at the option of a special fund to provide emergency aid, a well-placed monetary source told Market News International.

The source, who is familiar with the ongoing discussions, said that if a eurobond proposal ended up being nixed, “there is also the option of a solidarity rescue fund to which all eurozone countries can contribute.”


It’s not quite clear how the EU or eurozone would get around the so-called “no-bailout clause,” but there is a sentiment among many EU leaders that the clause has lost credibility because the political and economic costs of letting a member state fail would be too high.

The no-bailout clause, in article 103 of the EU Treaty, says that neither the EU, the ECB nor any national government “shall…be liable for or assume the commitments” of a member state.

A eurobond, depending on how it was structured, could be a hard sell in this regard. However, some sort of fund that loaned to a country - but did not take on any burden associated with its debt - might just pass muster.

It’s unclear what such a fund might look like, since one has never been attempted. But one option might be for large EU countries or the EU to create a special facility through which it borrowed money in the bond market to help the member in trouble.

Such an arrangement might be similar to the bonds that the European Commission has already issued for the emergency facility from which Hungary and Latvia have been borrowing. Under current rules, these particular EU Commission bonds can’t be used to help eurozone members.

Some observers have warned that any arrangement smacking of a bailout - whether a eurobond or “solidarity fund” — could potentially be regarded as unfair by countries such as Ireland, which has already announced stiff spending cuts to try and put its fiscal house back in order.

However, proponents of doing something would argue that Ireland is not yet out of the woods and could be submerged again in the market undertow should the situation in Greece lead to a more generalized selloff of peripheral EMU sovereign debt.

So far, other peripherals have been largely spared in the recent tumult surrounding Greece, which is by far the worst performing among sovereign eurozone issuers.

The spread on Greek bonds widened Tuesday by 24 basis points to 253 points above the benchmark German Bund, on market disappointment over a paucity of budget balancing details contained in the speech Monday night by Greece’s Prime Minister George Papandreou.

By contrast, Ireland’s sovereign paper was unchanged at a spread of 165 points above Bunds; Spain widened just 1 point to a spread of 62 basis points; Portugal widened 2 points to 67 bps above Bunds.

Papandreou pledged to bring Greece’s deficit back to within the Maastricht limit of 3% of GDP within four years, but some of the other details were sketchy. On the revenue side - Greece’s government has promised a hefty 40% increase - Papandreou mentioned a new progressive tax on all sources of income, as well as the abolition of certain tax exemptions, a new capital gains tax and a stiff tax on bonuses. He also promised new revenue from a reinvigorated fight against tax evasion.

On spending, he pledged a freeze on public sector wages above E2,000 a month; a 10% cut in supplemental wages; a hiring freeze in most sectors for 2010; and a 10% cut in social security spending next year.

Reaction was lukewarm not only in markets but also at the European Commission, which in each of the past 5 years has registered dissatisfaction with spending and revenue estimates posited by Greece, calling them overly optimistic.

“It’s not just a question of words but also deeds,” the spokesperson for European Monetary and Economic Affairs Commissioner Joaquin Almunia said Tuesday, adding that the Commission wants to see “concrete measures” to get [Greece's] budget deficit “moving downwards as soon as possible.”

Greece is expected to submit specific proposals to the Commission shortly after the New Year.

Meanwhile, the ECB is expected on Thursday to consider the possibility of further ratings downgrades on Greek debt.

“In the case of a further downgrade, we must be prepared, as it could have a domino effect on other eurozone countries,” the central banking source asserted. “That in turn would put pressure on the euro and the euro is a prime concern.”

The source also seemed to hint that Greek debt, if hit by additional downgrades, could have trouble staying on the list of eligible collateral at ECB refinancing operations after next year, when
the current acceptable minimum rating of BBB- will revert to the pre-crisis standard of A-.

“We will have to take under consideration what will happen after 2010, when the temporary and more lenient stance of the ECB will stop,” he said.

“I don’t say that Greece is heading towards losing its eligibility for collateral,” he continued. “However, we always plan and assess how a situation will evolve in the medium-term, and there is a risk that some countries might be facing much more expensive borrowing conditions in the next two years, because of market conditions.”

The official added that, in the case of Greece, “if borrowing becomes even more expensive, it will create problems in its efforts to combat high debt and deficit.”

But he waxed optimistic, nonetheless. “Despite the fact that rating agencies are downgrading Greece, we do not believe that there will be a borrowing problem,” he said.

“We believe that the Greek government will adopt all necessary measures to satisfy not only the markets but also its EU allies and the ECB and work towards fiscal consolidation within the next four years.”

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Headlines all negative today.  

Soft prices indicate soft demand.

Weakness and calls for deficit cuts heightens stresses on vulnerable national govt finances.

The eurozone remains the one part of the world with systemic risk built into its institutional structure.  

Highlights:
German October Consumer Prices Unexpectedly Decline
German Investor Confidence Drops in November on Weaker Outlook
Germany to Observe EU Call for Deficit Cuts, Schaeuble Says
French Economic Recovery Probably Strengthened in Third Quarter
Italian Industrial Output Fell More Than Forecast in September
EU to Give Spain Extra Year to Trim Budget Deficit, ABC Reports

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The Euro zone remains at risk of a liquidity crisis for the national govts.

This doesn’t help.

On Thu, Oct 29, 2009 at 5:37 AM, wrote:

5:02 *MOODY’S CHANGES THE OUTLOOK ON PORTUGAL’S Aa2 RATING TO NEG (From
Stable)
5:01 *MOODY’S PLACES GREECE’S RATINGS ON REVIEW FOR POSSIBLE DOWNGRAD

MOODY’S SAYS REVISION IN GREECE’S PROJECTED 2009 DEFICIT ADDS TO
CONCERNS ABOUT RELIABILITY OF COUNTRY’S OFFICIAL STATISTIC

to be clear Moody’s has Greece on A1 while S&P already has them on A-
and for Portugal Moody’s still has it on Aa2 and S&P is very penalizing
on A+

Peripherals cheaper after the news (Portugal +2bps, Greece +3bps, Italy
+ 1.5bps)

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If markets turn on any Euro national govt this one is a prime candidate

Subject: initial thoughts on greece downgrade: CDS maybe a couple of bp

Initial thoughts on greece downgrade: CDS maybe a couple of bp wider and bonds more or less a non event.
The deficit numbers aren’t really new news - central bank governor Provopoulos said that he expected a 12% deficit this year in the week after the Oct 4th elections, and the press was speculating 14%.
The new government are busy dragging all the skeletons out of the cupboard, trying to make a clean break.
Depending on the level of cash balances, additional issuance this year could be around 10bn.

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Debt ratios are far higher in the Eurozone than the federal govt in the US, and the eurozone national govts are subject to liquidity crisis risk much like the US States.

Could there be some kind of anti US bias at Moody’s???

Rising Debts in Europe Won’t Trigger Downgrades, Moody’s Says

Oct. 22 (Bloomberg) — European countries’ rising debt won’t trigger across-the-board credit-rating downgrades because countries are measured relative to each other, Moody’s Investors Service said.

The worst recession in six decades and the stimulus measures used to moderate its effects are going to drive debt levels up in the euro zone and in the European Union over the next two years, the European Commission predicts.

“We are doing relative ranking of sovereign risk within peer groups,” Alexander Kockerbeck, a senior European analyst for Moody’s, said in an interview. “Part of the quality of an AAA country is to be able to absorb a shock of this kind.”

Moody’s ranks Germany and France among the countries with the highest credit ratings. European governments spent billions of euros to fight the region’s worst recession since World War II. As a result, the commission forecasts that euro-area debt will rise to 77.7 percent this year from 69.3 percent, and that it would advance to 83.8 percent in 2010.

Debt sustainability will continue to be monitored country- by-country, Kockerbeck said. Moody’s downgraded Ireland’s top credit rating in July, cutting it one step to Aa1.

While a temporary debt expansion should be expected, countries need to get their public finances under control soon because of the region’s ageing population, Kockerbeck said.

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European Construction Output Declined for Fourth Month

Domestic housing markets still weak.

Eurozone officials say they support strong dollar

I’m sure they do- they are hoping to export their way out of their recession.

EU Ministers Agree to Start Cutting Deficits in 2011

Back to their old formula- tight fiscal to keep deflationary forces at work on labor costs, to support exports.

Except that formula requires the govt to sell its currency and buy dollars, like Germany and the rest used to do,
to keep relative costs low enough to support exports.

ECB’s Bini Smaghi Says Doesn’t See ‘Any Risk’ of Inflation

Right, the deflationary forces are so severe the ECB actually hit its inflation target for the first time since inception.

German September Producer Prices Decline on Cheaper Energy

It’s not a weak dollar, it’s a strong euro as the eurozone continues to deflate.

Bundesbank Says Germany Continued Recovery in Third Quarter

Like the US, gdp stopped falling while increased productivity keeps employment from increasing.

Merkel in stand-off over tax cuts

They need to cut taxes, increase spending, and at the same time cut the deficit.
Haven’t figured out how to do that yet.

Germany Mulls Fund to Ease Labor, Health Budget

France’s Woerth May Roll Back Tax Deductions

They haven’t figured out how to do it either.

German Bonds Advance as Stock Declines Stoke Demand for Safety

Stock declines reduce chances of rate hikes

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They are worried raising rates will further support the euro.

And they all seek a quick return to ‘fiscal responsibility’

This all should insure the Eurozone remains characterized by high unemployment and elevated systemic risk

EU Officials Say Stimulus Exit Unlikely Before 2011

By Svenja O’Donnell and Chris Burns

Oct. 1 (Bloomberg) — European Union finance chiefs said the pace of recovery means they probably won’t withdraw stimulus measures before 2011 as they grapple with rising unemployment and the effects of the euro’s gains.

“We look with concern to the exchange-rate developments and the impact of our ability to export,” Portuguese Finance Minister Fernando Teixeira dos Santos said today in an interview with Bloomberg Television at a meeting of European finance chiefs in Gothenburg, Sweden. “But we should expect markets to react appropriately to the fundamentals of our economy.”

The finance officials are discussing the form and timing of exit strategies after spending billions of euros in emergency measures to drag the economy out of its worst recession in 60 years. While there are signs the recovery is under way, it may not be sustained enough to permit a withdrawal of these measures before 2011, ministers said.

“We have to prepare exit strategies, of course, and we shall see if these strategies can be implemented then in 2011,” Luxembourg’s Jean-Claude Juncker said after leading a meeting of euro-area finance chiefs today. “We shall see whether this situation becomes more stable by then.”

The euro, which has gained 13 percent in the past seven months against the dollar, traded at $1.4544 at 2:10 p.m. in London today, down from $1.4640 in New York yesterday.

Euro’s Advance

The ministers discussed the euro’s advance in preparation for a Group of Seven meeting in Istanbul this weekend, European Central Bank President Jean-Claude Trichet told a press conference.

“We had a discussion as usual preparing for the meetings in Istanbul,” Trichet said. “There is very strong sentiment that we have a shared interest in a strong and stable international financial system and excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.”

Trichet also said exit plans should be implemented once the recovery is under way, “in our own view the latest in 2011,” he said.

The euro-area economy may expand 0.2 percent in the current quarter and 0.1 percent in the three months through December, the commission said on Sept. 14. In the second quarter, the economy contracted just 0.1 percent as Germany and France returned to growth.

Jobless Rate

Europe’s unemployment rate rose to a 10-year high of 9.6 percent in August, data showed today, as companies continued to cut jobs even as the recession eased. The European Commission forecasts the euro-area jobless rate will reach 11.5 percent next year.

“It’s clear we have to keep economic policy very expansionary in the coming period to really be sure of establishing a recovery,” Swedish Finance Minister Anders Borg said today. “At the same time, this is the time to start designing and communicating exit strategies,” he said, adding that it’s “clear that fiscal policy in Europe is not sustainable.”

France’s budget deficit will widen next year to a record, the government projected yesterday, as President Nicolas Sarkozy cuts business taxes and spending on jobless benefits climbs. Spain this week posted the largest budget shortfall in at least nine years.

This afternoon the euro-area officials were joined by finance ministers from the rest of the European Union as well as central bankers from the 27 EU nations. Included on their agenda is the banking industry and financial- supervision proposals. The Committee of European Banking Supervisors is due to present the results of stress tests carried out on the banking industry.

Reducing Deficits

Officials should focus on reducing deficits over raising interest rates, Jean Pisani-Ferry, director of Bruegel, a Brussels-based study group, said in a presentation to ministers in Gothenburg today.

“In view of the public finance costs of large deficits, budgetary consolidation should be given priority over monetary tightening,” Pisani-Ferry said in the report, co-written with Juergen von Hagen and Jakob von Weizsaecker. “For this to succeed, governments need to start fiscal consolidation swiftly in 2011 with the withdrawal of the stimuli.”

This afternoon the euro-area officials were joined by finance ministers from the rest of the European Union as well as central bankers from the 27 EU nations. Included on their agenda is the banking industry and financial-supervision proposals. The Committee of European Banking Supervisors is due to present the results of stress tests carried out on the banking industry.

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>   
>   (email exchange)
>   
>   On Thu, Oct 1, 2009 at 7:27 AM, wrote:
>   
>   May be of interest-from JPM China weekly-so much for lower dollar being inflationary!
>   

Details suggest that:

the fall in export prices is rather broad-based across manufactured goods, including chemicals, metal products, machinery and

equipment, telecom products, autos, handbags, and shoes. Indeed, feedback from exporters in coastal areas showed that

although orders from the EU and the US have been increasing, importers are very sensitive to prices and have been negotiating

prices aggressively. The general trend is consistent with our view that although external demand, especially from the G-3

economies, is experiencing a cyclical rebound, the bounce is from unprecedented lows. As such, there is still plenty of slack in

the global economy and the large output gap is depressing the pricing power of producers everywhere.

and Japan has to be seeing the same thing.

Won’t surprise me if they start buying dollars and test the US admin’s resolve on that issue

Be nice if they do and help sustain our real terms of trade!

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Yes, interesting to see if the Eurozone national governments are able to run their deficits as high as projections indicate without themselves having liquidity issues, even with the indirect help from the ECB. Looks to me like all the support measures add to the deficits of the national govts.

On Tue, Aug 18, 2009 at 4:57 PM, Russell wrote:

Regardless of your view on the economy, you have to at least consider the possibility that the financial crisis isn’t over, that we may just be in the eye of the storm. There are all the smaller (but still big) banks failing, as well as the lingering concerns over mortgages, commercial real estate and the national debt.

According to The Telegraph’s Ambrose Evans-Pritchard, the German government is laying the groundwork to head off a second coming of the credit crisis:

“The most difficult phase for financing is going to be in the first and second quarter of 2010,” said Hartmut Schauerte, the economic state secretary.

“We are working as a government to create instruments that can offset a feared credit crunch or any credit squeeze in sectors of the economy,” he said.

Mr Schauerte said firms with weak balance sheets may struggle to roll over loans as they come due in coming months. Negotiations with banks could prove “very difficult”.

State support is likely to be concentrated on boosting the capital base of German firms and providing credit insurance for exporters, perhaps to the tune of €250bn to €300bn (£256bn). “If this service fails, we are going to see dozens of credit collapses,” he said.

Articles:

Germany braces for second wave of credit crunch

Germany Prepares For Credit Crunch Part II

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Looks to me like the world hit a ’soft spot’ in July, maybe due to the winding down of China’s suspected ‘inventory building.’

CPI’s continue to fall in the Eurozone indicating continuing domestic demand weakness.

Strong productivity gains are not being matched with fiscal adjustments to sustain output and employment, as evidenced by a continuing rise in unemployment and a widening of the output gap.

I like the term Zombie economy as the world continues to unknowingly rely on ‘automatic stabilizers’ for a very ugly means of fiscal adjustment.

Meanwhile, as unemployment continues to rise, they wait, with blind certainty for the mythical ‘kicking in of billions’ by Central Banks to somehow take effect, and be so powerful, that they are spending their time debating irrelevant ‘exit strategies’ from this non event for aggregate demand.

Right now there is no hope for further US fiscal adjustment, barring a major economic setback. President Obama has pledged not to sign a health care bill that is not ‘revenue neutral’ and it’s all but certain marginal tax rates will rise next year.

And the increased expenditures for ’shovel ready’ projects, merits of the projects aside, are being offset by forced cut backs by States that continue to face revenue shortages due to the fall in GDP.

Banks that have been sustained by wide net interest margins that offset lingering loan losses are now seeing portfolios run off, as those with positive cash flow (corporations with flat sales and consumers in foxholes still worried about job losses) are paying down debt and net new lending languishes.

• European Industrial Production Unexpectedly Declines
• Liikanen Says Next Months Will Show If Euro Area Through Worst
• French Consumer Prices Fall for Third Month on Energy, Retail
• European Government Bonds Extend Gain After BOE Inflation Report

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Economy looking grim over there:

Highlights

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(email exchange)

>   On Mon, Jun 22, 2009 at 9:10 AM, wrote:
>   
>   And reach Wolfgang Munchnau in the FT today. Germany is really going nuts here.
>   German sado-fiscalism!
>   

As he says towards the end, it’s a moral issue.

This type of thing is the largest long term risk to economic well being.

I am starting to call it the federal ‘contribution’ rather than the federal ‘deficit’ hoping that might help.

Berlin weaves a deficit hair-shirt for us all

by Wolfgang Münchau

June 21 (FT) —

A decision was taken recently in Berlin to introduce a balanced-budget law in the German constitution. It was a hugely important decision. It may not have received due attention outside Germany given the flood of other economic and financial news. From 2016, it will be illegal for the federal government to run a deficit of more than 0.35 per cent of gross domestic product. From 2020, the federal states will not be allowed to run any deficit at all. Unlike Europe’s stability and growth pact, which was first circumvented, later softened and then ignored, this unilateral constitutional law will stick. I would expect that for the next 20 or 30 years, deficit reduction will be the first, second and third priority of German economic policy.

Anchoring the stability law at the level of the national constitution is an extreme measure – like locking the door, and throwing the keys away. It can only ever be undone with a two-thirds majority – and even a future Grand Coalition may not be able to deliver this as both of the large parties are in a process of secular decline. It means that future fiscal policy will be in the hands of the justices of Germany’s Constitutional Court. The new law replaces a much softer constitutional clause – a golden investment rule that said deficits can only be used to finance investments. It was not a satisfactory rule, but at least it allowed structural deficits in principle. The new law not only sets draconian deficit ceilings, it also provides a detailed numerical toolkit to implement the rules over the economic cycle.

I can foresee two outcomes. First, Germany might end up in a procyclical downward spiral of debt reduction and low growth. In that case, the constitutionally prescribed pursuit of a balanced budget would require ever greater budgetary cuts to compensate for a loss of tax revenues.

To meet the interim deficit reduction goals, the new government will have to start cutting the structural deficits by 2011 at the latest. There is clear danger that the budget consolidation timetable might conflict with the need for further economic stimulus, should the economic crisis take another turn for the worse. There is still economic uncertainty. Bankruptcies are rising, and the German banks are just about to tighten their credit standards again. I simply cannot see how Germany can produce robust growth in such an environment, not even in 2011. If that scenario prevails – as I believe it will – the new constitutional law will produce a pro-cyclical fiscal policy with immediate effect.

One could also construct a virtuous cycle – the second outcome. If Germany were to return to a pre-crisis level of growth in 2011, and all is well after that, the consolidation phase would then start in a cyclical upturn.

Either of those scenarios, even the positive one, is going to be hugely damaging to the eurozone. In the first case, the German economy would become a structural basket case, and would drag down the rest of Europe for a generation. In the second case, economic and political tensions inside the eurozone are going to become unbearable. Over the past 25 years, France has more or less followed Germany’s lead at every turn, but I suspect this may be a turn too far. Deficit reduction has not been, nor will it be, a priority for Nicolas Sarkozy, the French president. On the contrary: he has listened to bad advice from French economists who told him that budget deficits are irrelevant, and that he should focus only on structural reforms. Budget deficits and debt levels matter in a monetary union. But a zero level of debt is neither necessary nor desirable.

I am a little surprised not to hear howls of protests from France and other European countries. Germany has not consulted its European partners in a systematic way. While the Maastricht treaty says countries should treat economic policy as a matter of common concern, this was an example of policy unilateralism at its most extreme.

What is the rationale for such a decision? It cannot be economic, for there is no rule in economics to suggest that zero is the correct level of debt, which is what a balanced budget would effectively imply in the very long run. The optimal debt-to-GDP ratio might be lower for Germany than for some other countries, but it surely is not zero.

While the balanced budget law is economically illiterate, it is also universally popular. Average Germans do not primarily regard debt in terms of its economic meaning, but as a moral issue. Der Spiegel, the German news magazine, had an intriguing report last week on the country’s young generation. One of the protagonists in its story was a young woman who had borrowed a little money to set up her own company. The company turned out to be a success, and she had began to repay the loan. And yet she said she had not felt proud of having taken on debt.

This general level of debt-aversion is bizarre. Many ordinary Germans regard debt as morally objectionable, even if it is put to proper use. They see the financial crisis primarily as a moral crisis of Anglo-Saxon capitalism. The balanced budget constitutional law is therefore not about economics. It is a moral crusade, and it is the last thing, Germany, the eurozone and the world need right now.

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(email exchange)

>   On Mon, Jun 22, 2009 at 4:32 AM, wrote:
>   
>   ECB President Trichet has warned that governments have no more room
>   for taking on more debt, and should now look to start bringing down
>   budget deficits. “There is a moment where you can’t spend anymore and
>   you can’t accumulate any more debt. I think we are at that moment”.
>   

Similar to the Obama statement that the US has ‘run out of money.’

The difference is that under current institutional constraints Trichet is, unfortunately, probably right.

They are stuck waiting around for their own automatic stabilizers to function, and for exports to improve.

And hope the markets don’t test their banking system deposit guarantees and national government funding abilities.

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Mike Norman Economics

Some thoughts

If we ever enact a balanced budget amendment, take yourself and your family and move to Canada or China.

Obama believes the U.S. has “run out of money.” Scary. Our president doesn’t understand our own monetary system. Even George Bush understood this.

Any country that spends in its own currency, where that currency is not backed by gold or bound by some fixed exchange can NEVER run out of money!

We are ceding our position as the world’s largest economy to China because of stupid policies that are based on myth and fallacy.

The demise of GM was not due to putting workers’ interests over the company and shareholders. It was precisely the opposite!

The easiest way to lower “debt” (if that’s what you want to do) is to sustain full output and employment.

If the private sector can’t sustain full output and employment for whatever reason, then gov’t should!

Here in America we mock the Europeans as being, “Socialist.” Did anyone notice that Europe’s economy is larger than ours and adding size?

By definition, those Socialist Europeans are richer than us! And they have free health care, education, 6-weeks paid vacations, new cars, homes, movies, culture and all the consumer items that we have, in abundance. Not bad for a bunch of commies!

Our leadership is destroying America’s real terms of trade because of irrational sensitivity to perceived “imbalances.”

We care more about the Chinese standard of living than our own, apparently!

For every debit there is a credit. For every liability there is an asset. For every borrower there is a saver. This is all definitional. It’s double entry accounting! Did anyone in Obama’s administration take an accounting course? Has any Republican taken one? Has any Democrat taken one?

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