Doesn’t seem to me ‘avoiding market turbulence’ is actually of any particular concern in the euro zone:
EU Leaders Urged to Set Timetable for Action (Again)
By Catherine Boyle
June 20 (CNBC) — Ahead of two key European policymaker meetings on the credit crisis Friday, politicians are yet again being urged to set out a clear timetable for action to avoid further market turbulence.
Looking like it was another ‘buy the rumor sell the news’ near term.
After you do the maths it still doesn’t add up.
It can’t add up.
Ever.
Given today’s institutional structures- pension funds, insurance reserves, etc.- that include massive, tax advantaged, demand leakages where private sector credit expansion is bound to periodically fall short full employment levels. And with the private sector necessarily pro cyclical, counter cyclical fiscal adjustments are, for all practical purposes, entirely in the realm of the issuer of the currency- the ECB, and not the users of the currency- the euro member nations.
In other words, as previously discussed, the maths can’t add up without the ECB, directly or indirectly, writing the check.
And that includes the banking system, which, to serve public purpose, requires credible deposit insurance, again meaning support from the issuer of the currency.
The last few weeks have demonstrated that the ECB does ‘write the check’ for bank liquidity even though it’s not legally required to do that,(and even though some think it’s not acting within legal limits) but it won’t just come out and say it.
And, apart perhaps from the Greek PSI (100 billion euro bond tax), which they still call ‘voluntary’, no government has missed a payment, also with indirect ECB support either through bond buying or via the banking system, but, again, it won’t just come out and say it’s an ongoing policy.
So while the ECB can and has ‘written the check’ as needed, there has been no formal proclamation of any sort that it will continue to do so. Nor does it look like there will be any such over policy announcement for a considerable period of time.
This means any manager of ‘other people’s money’ with any fiduciary responsibility will continue to remain on the sidelines.
And even as markets fluctuate, and then some, underneath it all payments are met on a timely basis and the banking system continues to function to service deposits and loans.
And budget deficits will continue to be deemed too large, (at least until private sector credit expansion exceeds the ‘savings desires’/demand leakages) ensuring the maths don’t ever add up without the assumption of the ECB writing the check.
One last thing.
Publicly, at least, they all still think the problem in the euro zone is that the public debts/deficits are too high. And to reduce debt the member nations need to cut spending and/or hike taxes, either immediately or down the road.
A good economy with rising debt and ECB support to keep it all going isn’t even a consideration.
They’ve painted themselves into an ideological corner.
And deficit spending, exacerbated by austerity, may nonetheless be high enough for it all to muddle through at current (deplorable) levels of economic performance.
This economic ‘torture chamber’ of mass unemployment can, operationally, persist indefinitely, even as, politically, it’s showing signs of coming apart.
The founders of the euro believed a single currency would work to prevent a third great war. So they did what it took politically to get the consensus needed to create the euro. Ironically not realizing what they created to promote unity has turned out to be the instrument of social disintegration.
Yes, a banking license means unlimited ECB support.
The ‘talk’ continues to move in the right direction.
*HOLLANDE SAYS BANKING LICENSE WOULD GIVE ESM `GREATER POWER’
*HOLLANDE SAYS MANY IDEAS ON TABLE TO COMBAT CRISIS
*HOLLANDE SAYS EUROPE CAN IMPROVE ITS CRISIS RESPONSE
*HOLLANDE SAYS EUROPE HAS THE MEANS TO CONTROL ITS FUTURE
*HOLLANDE SAYS EUROPE MUST SO ITS DUTY ON GROWTH FOR GREECE
*HOLLANDE SAYS GREECE HAS MADE ENORMOUS EFFORTS
*HOLLANDE SAYS ITALY UNJUSTLY ATTACKED BY FINANCIAL MARKETS
*HOLLANDE SAYS HE’S IN AGREEMENT WITH MONTI ON GROWTH MEASURES
*HOLLANDE SAYS EUROPE NEEDS MECHANISMS AGAINST SPECULATION
*HOLLANDE SAYS GROWTH IS NECESSARY FOR DEBT REDUCTION
*HOLLANDE SAYS HAS `GREAT CONSIDERATION’ FOR MONTI’S LEADERSHIPHollande Says Europe Needs Mechanisms Against Speculation
By Gregory Viscusi
June 14 (Bloomberg) — French President Francois Hollande said that Italy has been unjustly attacked by financial markets and that Europe needs mechanisms to counter speculation.
Speaking in Rome today at a joint press conference with Italian Prime Minister Mario Monti, Hollande said that both leadders agreed on measures to spur economic growth. Growth is necessary for debt reduction, he said.
Europe must do its duty in helping to deliver growth for Greece, which has made enormous efforts during its bailout program, Hollande said.
Europe can improve its crisis response, and has the means to control its fuuture, he said. Many ideas are on the table to combat the crisis, he said, citing a banking license for the permanent rescue fund, which would give it “greater power.”
Getting there as previously discussed:
Germany signals shift on 2.3 trillion redemption fund for Europoe
By Ambrose Evans-Pritchard
June 13 (Telegraph) — The German government has begun opening the door to shared debts for the first time in a profound change of policy, agreeing to explore proposals for a €2.3 trillion (£1.9 trillion) stabilization fund in order to stop the eurozone’s crisis escalating out of control.
Mr Merkel rejected the Redemption Pact last November as “totally impossible”, even though it was drafted by Germany’s Council of Economic Experts or Five Wise Men and is widely-viewed as the only viable route out of the current impasse. Photo: Alamy
Officials in Berlin say privately that Chancellor Angela Merkel is willing to drop her vehement opposition to plans for a “European Redemption Pact”, a “sinking fund” that would pay down excess sovereign debt in the eurozone.
“It is conceivable so long as there is proper supervision of tax revenues,” said a source in the Chancellor’s office. The official warned that there would be no “master plan” or major break-through at the EU summit later this month.
Mr Merkel rejected the Redemption Pact last November as “totally impossible”, even though it was drafted by Germany’s Council of Economic Experts or Five Wise Men and is widely-viewed as the only viable route out of the current impasse.
Fast-moving events may have forced her hand. She is under immense pressure from the US, China, Britain, and Latin Europe to change course as the crisis engulfs Spain and Italy, threatening a global cataclysm.
If this holds, as previously discussed, some growth can return, albeit from currently depressed levels, as the austerity pushed down GDP and pushed up the deficit to the point where the deficit becomes sufficiently large to support things.
Monti Rules Out More Austerity Measures for Italy
June 13 (Bloomberg) — Italian Prime Minister Mario Monti’s government is not planning to adopt further austerity measures going forward, Pierferdinando Casini, the leader of the Union of Centrists party, told reporters in Rome today.
Casini, together with Pier Luigi Bersani and Angelino Alfano, the leaders of the Democratic Party and of the People of Liberty party respectively, met with Monti last night to discuss the European economic crisis. The three leaders pledged to back the government’s reforms that are now in parliament, according to a statement from Monti’s office.
“Nor the parties, nor the government are willing to plan a further budget adjustment although the situation has become very negative” also in light of the earthquake, which “will be a blow for public finances,” Casini said.
From Dave Vealey:
On April 17 the EFSF made a 25 bb loan to the Hellenic Financial Stability Fund (HFSF) guaranteed by the Greek government. The HFSF used these funds from the EFSF to buy 25 bb EUR of 6-10 yr EFSF FRN MTN bonds.
On May 28th, 18 bb of the 25 bb EFSF bonds were sold to the Greek banks by the HFSF in return for convertible bonds or new shares in the bank.
The EFSF bonds are eligible collateral at the ECB and are thought to have been used to replace previous ELA borrowings by the same Greek banks.
This operation gives the Greek banks capital plus improved funding with the Greek government ultimately liable for the initial loan from the EFSF. However, no EFSF bonds were needed to be issued to the market. Effectively the ECB financed the Greek banking systems recapitalization.
The total amount set aside by the EFSF for Greek bank recapitalizations is 48 bb euro.
A similar structure could likely be done in Spain:
ESM makes a loan to the FROB (loan gtd by Spanish govt) to buy ESM bonds
The FROB buys ESM bonds
The FROB then sells the ESM bonds to banks in return for convertible bonds or common stock ownership in the bank
The Spanish bank then has a capital injection and the ability to post ESM bonds at ECB for funding
This avoids in theory at least, the ECB directly bailing out the Spanish banking system
Reads like a well conceived proposal, as, following Trichet a couple of weeks ago, more and more proposals emerge that actually make operational sense:
Spain wants euro zone fiscal authority
June 2 (Reuters) — Spain called on Saturday for a new fiscal euro zone authority which would harmonize national budgets and manage the block’s debts.
Prime Minister Mariano Rajoy said the authority was the answer to the European debt crisis and would go a long way in alleviating Spain’s woes as it would send a clear signal to investors that the single currency is an irreversible project.
It is not the first time a European leader has proposed creating such an authority but the woes and the size of Spain – a country deemed too big to fail – may now accelerate talks ahead of a EU summit on June 28-29.
The prospect of a Greek euro exit and Spain’s parlous finances have prompted EU policymakers to hurriedly consider measures such as a “banking union”.
Germany, the paymaster of the euro zone, and others insist such a move can only happen as part of a drive to much closer fiscal union and relinquishing of national sovereignty.
Overspending in the regions and troubles with a banking sector badly hit by a property crash four years ago have sent Spain’s borrowing costs to record highs and pushed the country closer to seeking an international bailout.
The risk premium investors demand to hold Spanish 10-year debt rather than German bonds rose to its highest since the launch of the euro – 548 basis points – on Friday.
The Spanish government, which has hiked taxes, slashed spending, cut social benefits and bailed out troubled banks, argues that there is little else it can do and the European Union should now act to ease the country’s liquidity concerns.
In private, senior Spanish officials have said this could be done by using European money to recapitalize directly ailing banks or though a direct intervention of the European Central Bank on the bond market.
They have also said the euro zone should quickly move towards a fiscal union to complete its 13-year monetary union but Rajoy went a step further by making a formal offer.
“The European Union needs to reinforce its architecture,” Rajoy said at an event in Sitges, in the north-eastern province of Catalonia. “This entails moving towards more integration, transferring more sovereignty, especially in the fiscal field.
“And this means a compromise to create a new European fiscal authority which would guide the fiscal policy in the euro zone, harmonize the fiscal policy of member states and enable a centralized control of (public) finances,” he added.
NO TABOOS
He also said the authority would be in charge of managing European debts and should be constituted by countries of the euro zone meeting strict conditions.
Earlier this week, ECB President Mario Draghi said EU leaders should break away from the incremental approach that has failed to get ahead of the euro zone debt crisis for more than two years and quickly clarify their vision for the future of the currency.
Adding to growing pressure for dramatic policy action at this month EU leaders’ summit, he warned that the Central Bank could not fill the policy vacuum.
The set-up of the new authority would require a change in the European Union treaties, a usually lengthy and politically painful process which requires ratification in the 27-member states of the bloc.
Germany has said further integration in Europe was required, including additional controls on national public finances, and was ready to consider revising the treaties if needed.
German chancellor Angela Merkel said there should be no taboos when discussing these questions.
A day after Berlin supported giving Spain an extra year to cut its deficit down to the 3 percent of GDP threshold, Merkel said it should be possible for countries that violate fiscal rules to be sued in the European Court of Justice.
BANKING UNION
Merkel also praised higher German wage deals and signaled flexibility on a financial transaction tax, in a sign she is open to new measures to boost growth in Europe.
The comments, at a conference of her Christian Democrats (CDU) in Berlin, show that she is ready to heed calls for Germany to do more for growth but wants other euro states to accept giving up sovereignty over their budgets in exchange.
“You can’t ask for euro bonds, but then not be prepared to take the next step towards closer integration,” she said. “We won’t be able to create a successful currency together this way.”
With the debt crisis now centered on Spain’s teetering banking sector, talks are also under way on creating a banking union in the euro zone based on a centralized supervision, a European deposit scheme and a central fund that would cope with failed lenders.
Germany’s finance ministry said on Friday it was willing to consider this option in a mid-term perspective.
Rajoy backed the idea on Saturday. He also said that the government would explain before the end of June how it will recapitalize Spain’s troubled banking sector, which is currently being reviewed by independent auditors.
Spain has picked the “Big Four” accounting firms KPMG, PwC, Deloitte and Ernst & Young to carry a full, individual audit of its ailing banks, a source with knowledge of the decision told Reuters on Saturday.
The banks need, and I propose, ECB deposit insurance for all euro zone banks.
Currently the member governments insure their own member bank deposits and do the regulation and supervision.
So to get from here to there politically they need to turn over banking supervision to the ECB.
Let me suggest that’s a change pretty much no one would notice or care about from a practical/operational point of view?
The political problem would come from losses from existing portfolios that, in the case of a bank failure due to losses in excess of equity capital, currently would be charged to the appropriate member nations.
So under my proposal, for the ECB to suffer actual losses a member bank that it supervises and regulates would have to suffer losses in excess of its capital.
And none of the member governments currently think that their banks have negative capital, especially if they assume member governments don’t default on their debt to the banks.
And this ‘fix’ for the banking system would help insure the member governments don’t default on their obligations to their banks.
The euro zone has three financial issues at this point. One is bank liquidity which this proposal fixes. Second is national government solvency, and third is the output gap.
They need to allow larger government deficits to narrow the output gap, but that first requires fixing the solvency issue.
The solvency issue can be addressed by having the ECB guarantee all of the member government debt, which then raises the moral hazard issue.
The moral hazard issue can be addressed by giving the EU the option of not having the ECB insure new government debt and forbidding its banks to buy new government debt as a penalty for violators of the debt and deficit limits of the Stability and Growth Pact.
Looks like the drama could be about over, with the ECB now deciding to support the entire banking system.
The ECB guarantees bank liquidity via lending to any member bank with qualifying collateral. The list of qualifying collateral is kept sufficiently inclusive and haircuts sufficiently low to ensure liquidity.
With national govt debt on the list of qualifying collateral, this allows the banking system to support national govt funding needs.
And it all comes at a time where euro zone deficit spending is sufficient to support flat to modest growth. And at a time when the politics are unlikely to push for additional material proactive austerity measures.
With modest growth and relative stability will come proclamations along the lines of ‘the austerity worked’, however, without the austerity it all would have ‘worked’ just as well, but from a starting point of a lower output gap.
Thanks!
These are onetime events that tend to reverse after running their course.
Aka inventory liquidation
Big European funds dump euro assets
By David Oakley and Alice Ross
May 24 (FT) — Some of Europe’s biggest fund managers have confirmed they are dumping euro assets amid rising fears over a possible Greek exit from the eurozone and single currency turmoil.
The euro’s sudden fall this month caught many investors by surprise. Europe’s single currency has lost 5 per cent in the past three weeks after barely moving against the US dollar for much of the year. On Thursday, the euro hit a fresh 22-month low at $1.2514.
Amundi, Europe’s second-biggest private fund manager, and Threadneedle Investments, the big UK manager, have cut their exposure to the euro in recent days as frustration grows with political leaders’ efforts to resolve the crisis.
US-based Merk Investments, the currency specialists, has cut all of its euro holdings in its flagship fund this month.
“We sold our last euro on May 15,” said Axel Merk, chief investment officer. “We’re concerned about how dysfunctional the process is. No one is there to talk to in Greece.”
Amundi, which manages money for some of the continent’s biggest pension funds and companies, said the risk of the crisis spreading to the bigger economies of Spain and Italy was growing because policy makers had failed to convince investors it had built a sufficient firewall.
Other big fund managers fear the likelihood of a so-called “Grexit”, in the event of Athens leaving the euro, has risen sharply in the past week.
European leaders put off any decisions on shoring up the region’s banks at a late-night summit on Wednesday despite rising concerns that instability in Greece was undermining confidence in the eurozone’s financial sector. Citigroup says the euro could fall close to parity in the event of a disorderly exit.
Richard Batty, investment director at Standard Life Investments which has been underweight in European equities and bonds for the past two years, said: “This is a crisis that looks like worsening and that is why the euro has come under pressure.”
Neil Williams, chief economist at Hermes Fund Managers, which has reduced its exposure to European peripheral equities to close to zero, said: “There is a failure by the politicians to convince the markets they are tackling the problems in the eurozone.”
Trading desks at investment banks say that asset managers and pension funds in particular have been selling the euro in recent days.
Amundi, which was created through a merger of Crédit Agricole Asset Management and Société Générale Asset Management three years ago and has €659bn in assets under management, has switched some of its money out of euro-denominated bonds into dollar assets.
Eric Brard, global head of fixed income at Amundi, said: “Although we have reduced our exposure to the euro, a weaker euro could be good news for Europe and exporting companies in the region.”
He added: “Our baseline scenario is that the eurozone will not break up and Greece will remain in the monetary union. However, taking a pragmatic view, in recent weeks the market’s perception of risks of a eurozone break-up and Greece exiting have risen.”
Threadneedle, which has £73bn under management, has reduced its euro exposure through its absolute return fund in the belief the euro will fall further.