Category Archives: EU

Cyprus- Just in case you thought negative interest rates help an economy

Posted on by

Many have proposed negative interest rates as further ‘easing’ to help the economy.(too many, actually)

The proposed deposit tax in Cypress is functionally a one time negative interest rate. So maybe if they made it annual- just like the negative interest rates proposed elsewhere- it would help the economy?

So as previously discussed, I still see it in a spectrum. Positive rates are a govt subsidy and negative rates a tax. And so the Fed’s rate cuts and QE removed the prior subsidy, for example.

:(

Share
Posted in EU

Pesky Cyprus Agrees to Euro Zone Bailout Package – Who wood have thought?

Posted on by

As suspected the PSI/bond tax/deposit tax has become more attractive politically than other tax hikes and spending cuts. And it is also deflationary/contractionary, though less so than other taxes. And yes, it destabilizes the banking system in general.

After Negotiations, Cyprus Agrees to a Euro Zone Bailout Package

In the early hours of Saturday morning, after 10 hours of talks, finance ministers from euro area countries, the International Monetary Fund and the European Central Bank agreed on terms that include a one-time tax of 9.9 percent on Cypriot bank deposits of more than $130,000, or 100,000 euros, and a tax of 6.75 percent on smaller deposits, European Union officials said.

Share

Bundesbank Almost Doubles Risk Provisions on ECB Crisis Measures

Posted on by

How stupid is this?
Unless they want to reduce funds available to distribution to the members?

Bundesbank Almost Doubles Risk Provisions on ECB Crisis Measures

By Jeff Black & Stefan Riecher

March 12 (Bloomberg) — Germany’s Bundesbank almost doubled its risk provisions in 2012, citing increased potential for losses stemming from the European Central Bank’s monetary policy.

The Frankfurt-based central bank increased provisions for general risks by 6.7 billion euros ($8.7 billion) to 14.4 billion euros, it said in an e-mailed statement today when releasing its 2012 annual report. Due to higher interest income, the Bundesbank’s profit rose to 664 million euros from 643 million euros in 2011. The increase in provisions stems from the ECB’s enhanced support of the financial sector over the course of the year, the Bundesbank said.

“The past year had seen an overall increase in counterparty credit risks stemming from refinancing loans and purchasing bonds,” Bundesbank President Jens Weidmann said in the statement.

The ECB injected more than 1 trillion euros into the banking system with two three-year refinancing loans designed to avoid a credit crunch. Some 22 percent of those loans have since been paid back as the ECB’s pledge to buy unlimited government bonds if certain conditions are met eased tensions on financial markets.

Weidmann reiterated in a foreword to the annual report that the Bundesbank is critical of some of the measures taken by the ECB because “they blur too much the responsibilities of monetary and fiscal policies.”

Share

French and Italian debt chiefs warn on EU Tobin Tax

Posted on by

So how about just letting the ECB fund them all at 0%???

Transactions taxes reduce transactions by making them costly,
which is exactly what this one will do.

So if that’s the outcome they want they should go ahead and do it.

And if they want deficit reduction, well, if they were working for me I’d replace them.

But they’re not, so expect more of same.

French and Italian debt chiefs warn on EU Tobin Tax

By Ambrose Evans-Pritchard

March 6 (Telegraph) — Both France and Italy have been keen advocates of the new Financial Transaction Tax (FTT) proposed by Brussels last month, claiming that it will raise money and curb speculation. But they may have overlooked the unintended effect on their own borrowing costs.

Maya Atig, acting chief of French debt agency, said the European Commission’s internal documents acknowledge that the FTT could drain liquidity in the bond markets by 15pc, an effect that would push up yield spreads and raise debt costs.

Brussels estimates that the tax will raise €30bn to €35bn each year for the eleven EU states taking part, but Mrs Atig told a Euromoney conference in London that any revenue would offset “the extra costs that we might have to pay”.

She said the French government is searching for ways to ensure that the tax does not “perturb” the bond market. “This something still to be discussed.”

Maria Cannata, director of Italy’s debt agency, said her country already has a version of the Tobin Tax but has been careful to exempt sovereign debt, adding that policy-makers must bear in mindful the “importance of not damaging the government bond markets”.

The proposal – now in the hands of working groups – is to come into force in early 2014. It will raise a fee of 0.1pc for shares and bonds, and 0.01pc for derivatives.

These rates are far higher than the Swedish tax in 1989 that led to an 85pc crash in bond sales, a 98pc fall in bond futures, and shut-down of options trading, before the experiment was abandoned.

Gabriele Frediani, head of the electronic fixed income market MTS, said the tax would cause repurchase or Repo trades to plunge by 99pc. “The Repo market would disappear overnight,” he said.

The Repo market serves as a vast pawn shop allowing banks to raise funds on money markets by pledging assets. It is a key source of short-term finance for firms, but by its nature it involves fast turn-over.

Brussels said it had changed the text after listening to concerns. Repo trades will be treated as a single transaction instead of two, halving the tax. Short-term loans with collateral will be exempted.

It said the FTT will cover the secondary market for bonds only, insisting that good yield on long-term debt will “still leave enough room for profit after the tax is applied”.

Markus Beyrer, head of the pan-EU industry lobby BusinessEurope, said he was “very disappointed” by the draft text, calling it a threat to growth and jobs.

The text includes an “issuance principle”, meaning that the tax will cover bonds and other assets issued in the eleven countries taking part, even if they are traded in London. This may breach “extra-territoriality” codes.

The Chancellor, George Osborne, said the FTT scheme would amount to a tax on pensioners and cost up to 1m jobs across the EU “without costing bankers a penny”. The traders would migrate to the US or Asia, taking the financial industry with them.

Share

Euro-Area Unemployment Climbs to Record as Recession Deepens

Posted on by

EU Headlines:
Euro-Area Inflation Slowed More Than Estimated in February

With catastrophic unemployment prices are still rising. Seems a rethink of their model assumptions are in order.

ECB’s Constancio Says Barnier Plan Not Enough for Bank Failures

Right, the ECB must insure deposits and ensure liquidity and therefore do the regulation.

Europe Relying too Much on ECB, Fuest Tells Handelsblatt

No, not enough. The ECB, like all CB’s, directly or indirectly, ultimately/necessarily provides unlimited bank liquidity and supports member nation debt.

Euro-Area Unemployment Climbs to Record as Recession Deepens

And they all believe in deficit reduction, including Italy’s ‘anti establishment’ Grillo who’s merely proposed default (aka psi, bond tax) rather than other tax hikes and spending cuts.

German Retail Sales Post Biggest Monthly Jump in Six Years

From low levels for a nation presumably doing ‘very well’. It also highlights fact that any currency union requires some form of ‘fiscal transfers’ to sustain full employment. And unfortunately they don’t understand fiscal transfers for the production of public goods and services in fact imposes a real cost on the region with the high unemployment, and therefore hold back on doing it.

Italy Unemployment Rate Rises to Highest Since at Least 1992

The entire culture is being destroyed. It’s a slow motion train wreck. And all the proposals, including default, only add to the deflationary pressures, making it even worse. Call it a self inflicted crime against humanity.

Share

Euro-Area Inflation

Posted on by

I wonder if any of the early models had this much ‘inflation’ with this large of an output gap…

Euro-Area Inflation Rate Declined in January on Energy, Services

By Angeline Benoit

February 28 (Bloomberg) — The euro-area inflation rate fell in January, led by slower price growth for energy and services.

Annual consumer-price growth slowed to 2 percent from 2.2 percent in December, in line with an initial estimate on Feb. 1, the European Union’s statistics office in Luxembourg said today. In the month, prices fell 1 percent.

The European Central Bank will probably maintain its benchmark interest rate at 0.75 percent next week, according to a Bloomberg News survey of economists. The ECB will update its December economic forecasts after the euro area’s recession deepened in the fourth quarter. The European Commission sees inflation at 1.8 percent this year and 1.5 percent in 2014.

The annual core inflation rate, excluding volatile costs such as energy, alcohol and tobacco, fell to 1.3 percent in January from 1.5 percent a month earlier, today’s report showed. The cost of energy rose 3.9 percent after a 5.2 percent annual gain in December, while services-price growth slowed to 1.6 percent from 1.8 percent. Food, alcohol and tobacco costs rose 3.2 percent.

European Union car sales last month fell to the lowest level for a month of January since the data series began in 1990. Manufacturers in the region have announced 30,000 job cuts and five plant shutdowns since July, with Renault (RNO) and Peugeot outlining domestic workforce reductions of 17 percent.

Share

OpenEurope: What Happens Next in Italy?

Posted on by

The Grillo factor

Beppe Grillos Five Star Movement received over 25% of the vote exceeding all expectations. Though Berlusconi and Grillo are both populist and anti-austerity, in many ways, theyre also each others antithesis one representing the old sclerotic system, the other a new, impulsive anti-establishment future. Grillo is clearly a new breed in Italian politics. He has been very critical of Italys euro membership, and wants a referendum to decide whether the country should leave the single currency. Hes also suggested that Italy should consider refusing to pay back at least part of its huge public debt.

As previously discussed, the PSI has irresistible political appeal?

Share

ECB’S CONSTANCIO SAYS NEGATIVE INTEREST RATES ALWAYS POSSIBLE

Posted on by

Negative rates are just a tax, of course. Pretty close to a PSI.

With deficits as high as they are, all they need to do is leave it all alone and a modest recovery will quickly materialize. But instead they keep pressing the austerity with a ‘we’ve paid the price to get this far- there’s no going back now’ mentality.

*ECB’S CONSTANCIO SAYS NEGATIVE INTEREST RATES ALWAYS POSSIBLE
*CONSTANCIO SAYS IMPACT OF NEGATIVE DEPOSIT RATE NOT CLEAR
*CONSTANCIO: ECB HAS LOOKED AT NEGATIVE RATES AT OTHER CENBANKS
*CONSTANCIO: ECB IS TECHNICALLY READY FOR NEG RATES IF NEEDED
*CONSTANCIO: ECB HASN’T MADE DECISION ON NEGATIVE DEPOSIT RATE

>   
>   but also – overlooked:
>   

*CONSTANCIO SAYS ECB LOOKS AY FX RATE FOR INFLATION OUTLOOK

>   
>   ECB will revise HICP path at the March meeting
>   

Share

A question

Posted on by

>   
>   (email exchange)
>   
>   On Thu, Feb 7, 2013 at 1:06 PM, wrote:
>   
>   There was an almost sensible article by Samuelson in the WP today. What caught my eye
>   was this comment that claims Japan failed at using Keynsian over the years. Can you
>   clarify this:
>   
>   Here is the comment:
>   

The problem is that economists have not recognized the failure of Keynsian economics. I think the uniform failure of deficit spending to promote growth has to be recognized.

They just didn’t run large enough deficits.

If the model worked, we would not be talking about Japan’s lost decade, or more accurately lost generation. Japan’s debt is now over 200 percent of GDP.

So?

Their growth rate in response to an ocean of deficits is uniformly poor.

Because they aren’t large enough to cover their savings desires.

The story is similar in Europe, particularly Southern Europe. There is no way Uncle Sam can continue to borrow 40 cents of every dollar spent.

Why not?

When governments get this far behind, they usually pay off the debt with hyper inflation.

Usually? hardly!

This never ends well. The usual outcome is social disintegration followed by dictatorship. For example, the hyper inflation of Weimar Germany after WWI lead to Hitler.

That was due to deficits of 50% of GDP to sell marks for fx and gold to pay war reparations. Any other examples???

The Federal Reserve’s constant quantitative easing in search of economic growth is going to lead to increasing inflation and interest rates.

Japan’s been doing it for over 20 years and still has no inflation and a strong currency.

They are buying 70 percent of the debt the Federal Governments incurs this month. Once Once interest rates go up, the deficits will balloon, 160 billion dollars a year for each percentage point.

So?

We have got to cut spending and stop the coming train wreck.

What train wreck? The train wreck is the current state of affairs from a deficit that’s too small.

Note that every move towards deficit reduction in Japan made things worse, and every supplementary budget made things better. they just haven’t ever done enough

>   
>   Its a typical RW comment, but what am I missing. How can you keep stating Japan did this
>   wrong for the other reason?
>   

Share

Fiscal Devaluation in Europe

Posted on by

It’s a policy designed to drive exports.
A form of protectionism.
It reduces consumption of imports to the extent domestic prices are helped by lower labor costs where domestic goods a compete directly with imports, which is probably limited.

And of course without further support of fx intervention (dollar and yen buying etc.) it makes the currency go up to the point where the effects are offset/no gains in employment, etc.

And if one nation does it the currency move hurts the others who don’t so it opens up a race to the bottom.

Recap:
It hurts low income consumers
It helps corporate profits
It supports the currency
And so those are the people that support it.
:(

Am I missing something?

Harvards Gopinath Helps France Beat Euro Straitjacket

By Rina Chandran

Feb 6 (Bloomberg) — When French President Francois Hollandeunveiled a plan in November for a business tax credit and higher sales taxes as a way to revive the economy, he was implementing an idea championed by economist Gita Gopinath.

Gopinath, 41, a professor at Harvard University in Cambridge, Massachusetts, has pushed for tax intervention as a way forward for euro-area countries that cannot devalue their exchange rates. Fiscal devaluation is helping France turn the corner during a period of extreme budget constraints, former Airbus SAS chief Louis Gallois said in a business- competitiveness report Hollande commissioned.

She advocated fiscal devaluation for Europes currency union in a 2011 paper she co-authored with her colleague Emmanuel Farhi and former student Oleg Itskhoki, an assistant professor at Princeton in New Jersey.

Despite discussions in policy circles, there is little formal analysis of the equivalence between fiscal devaluations and exchange-rate devaluations, they wrote. This paper is intended to bridge this gap.

The paper examines a remarkably simple alternative that doesnt require countries to abandon the euro and devalue their currencies, Gopinath said. By increasing value-added taxes while cutting payroll taxes, a government can create very similar effects on gross domestic product, consumption, employment and inflation.

The higher VAT raises the price of imported goods as foreign companies pay the levy. The lower payroll tax helps offset the extra sales tax for domestic companies, reducing the need for them to raise prices. Since exports are VAT exempt, the payroll-cost saving allows producers to sell goods cheaper overseas, simulating the effect of a weaker currency, according to the paper.

The policy also can help on the fiscal front, as increased competitiveness can lead to higher tax revenue, Gopinath said.

Hollande is seeking to revive Frances competitive edge by offering companies a 20 billion-euro ($27 billion) tax cut on some salaries as he attempts to turn around an economy that has barely grown in more than a year. He also will lift the two highest value-added tax rates. The plan was inspired partly by Gopinaths paper, said Harvard professorPhilippe Aghion, an informal campaign adviser to Hollande, who was elected president in May.

Aghion, who co-wrote a column in Le Monde newspaper last October advocating Gopinaths theory, said Gallois proposed to Hollande that its the right strategy for France. Gallois is slated to become a member of the board at automaker PSA Peugeot Citroen this year.

We contributed to the adoption of the policy by Hollande, and Gallois called to thank me, Aghion said in a telephone interview. There is wider interest in the policy. Italy, Spain, Greece — they should all be interested. Its an idea that would work.

Share