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Category Archives: EU
euro zone update- markets yet to discount the discounts
The issues I’ve been discussing over the last year or two while now crystallizing, remain highly problematic.
The idea of Greek default transformed from being a Greek punishment to a gift, with the pending question: ‘If Greece doesn’t have to pay, why do I?’- threatening a far more disruptive outcome that is yet to be fully discounted.
That is, should Greek bonds be formally discounted, the consequences of merely the political discussion of that question will be all it takes to trigger a financial crisis rivaling anything yet seen.
And note, also as previously discussed, that there has yet to be an actual Greek default, and that all Greek bonds have continued to mature at par, as there has yet to be an acceptable alternative.
So what are the alternatives?
1. Continue to fund Greece with terms and conditions.
2. Don’t fund Greece which forces:
a. Greece is forced to limit spending to actual tax revenues
b. Greece moves back to the drachma
And what are the ‘terms and conditions’?
Austerity is always the lead demand, which slows both the Greek economy and to some extent the euro zone in general.
Additional demands currently include discounting Greek bonds to bring down their debt to GDP ratio to ‘sustainable’ levels. However, after 8 months of negotiations, this has proven highly problematic, probably for reasons yet to be fully disclosed. And, as just discussed, there may be a growing awareness that discounting opens Pandora’s box with the politically attractive question ‘if Greece doesn’t have to pay, why do we?’
So what actually happens?
My best guess, and not with a lot of conviction, is that nothing is concluded before the coming maturity dates, and the ECB winds up writing the check to support short term Greek funding to buy more time for more inconclusive discussion. So, again as previously discussed, seems like this is the solution- death by 1,000 cuts and reluctant ECB bond buying when push comes to shove to keep it all going.
And, currently, the catastrophic risk I’d highly recommend immediately hedging is the risk that Greek bonds are formally discounted, rapidly followed by a global discussion of ‘so why should we have to pay?’ Possible immediate consequences of that discussion include a sharp spike in gold, silver, and other commodities in a flight from currency, falling equity and debt valuations, a banking crisis, and a tightening of ‘financial conditions’ in general from portfolio shifting, even as it’s fundamentally highly deflationary. And while it probably won’t last all that long, it will be long enough to seriously shake things up.
Portugal Union Leader Wants Debt Renegotiation
Yes, as previously discussed, the obvious political move is to demand the same discounts as Greece.
Especially with the pending Greek ‘restructure’ and ECB check writing to support the banking system seemingly making the euro stronger and not causing inflation.
And the ‘sustainability maths’ is just about the same for all of them as well, particularly given the current slowdown.
Once the markets realize the politics are moving in that direction, all euro member nation bonds again become suspect and the crisis enters the next stage, resulting in the ECB pretty much funding everything, one way or another.
It’s just a question of how it all gets from here to there.
Portugal Union Leader Wants Debt Renegotiation
By Axel Bugge and Daniel Alvarenga
Feb 7 (Reuters) — Portugal must renegotiate its debts rather than impose harsh austerity measures to overcome its economic crisis, the head of the country’s largest trade union said on Wednesday, threatening to step up strikes if the government pushed on with cuts.
Armenio Carlos, head of the CGTP union, told Reuters Portuguese workers would take a stand against attacks on labor rights, which he said were part of the government’s sweeping economic reforms promised under a 78 billion euro ($103.29 billion) bailout.
“What we defend is the renegotiation of debts, in terms of deadlines, in terms of interest and in terms of the amount,” Carlos said in an interview, adding that the country’s bailout had made it impossible to meet its obligations.
Portugal’s debt currently equals about 105 percent of gross domestic product.
“We are being confronted with a neo-liberal attack on workers’ rights,” he added, saying the government’s recent labor reform, making it easier to hire and fire, could spark a growing wave of protests.
The union leader, a former electrician and an ex-Communist lawmaker who took over as head of the CGTP a week ago, warned that with the austerity policies demanded by the bailout, Portugal was heading down the same road to ruin as Greece.
EU Leaders to Agree on Rescue Fund, Balanced Budget
No let up on the austerity demands, which are now to be legislated via balanced budget rules.
EU Leaders to Agree on Rescue Fund, Balanced Budget
Jan 29 (Reuters) — European Union leaders will sign off on a permanent rescue fund for the euro zone at a summit on Monday and are expected to agree on a balanced budget rule in national legislation, with unresolved problems in Greece casting a shadow on the discussions.
The summit – the 17th in two years as the EU battles to resolve its sovereign debt problems – is supposed to focus on creating jobs and growth, with leaders looking to shift the narrative away from politically unpopular budget austerity. The summit is expected to announce that up to 20 billion euros of unused funds from the EU’s 2007-2013 budget will be redirected towards job creation, especially among the young, and will commit to freeing up bank lending to small- and medium-sized companies.
But discussions over the permanent rescue fund, a new ‘fiscal treaty’ and Greece will dominate the talks.
Negotiations between the Greek government and private bondholders over the restructuring of 200 billion euros of Greek debt made progress over the weekend, but are not expected to conclude before the summit begins.
Until there is a deal between Greece and its private bondholders, EU leaders cannot move forward with a second, 130 billion euro rescue program for Athens, which they originally agreed to at a summit last October.
Instead, they will sign a treaty creating the European Stability Mechanism (ESM), a 500 billion-euro permanent bailout fund that is due to become operational in July, a year earlier than first planned. And they are likely to agree the terms of a ‘fiscal treaty’ tightening budget rules for those that sign up.
The ESM will replace the European Financial Stability Facility (EFSF), a temporary fund that has been used to bail out Ireland and Portugal and will help in the second Greek package.
Leaders hope the ESM will boost defenses against the debt crisis, but many – including Italian premier Mario Monti, IMF chief Christine Lagarde and U.S. Treasury Secretary Timothy Geithner – say it will only do so if its resources are combined with what remains in the EFSF, creating a super-fund of 750 billion euros ($1 trillion).
The International Monetary Fund says an agreement to increase the size of the euro zone ‘firewall’ will convince others to contribute more resources to the IMF, boosting its crisis-fighting abilities and improving market sentiment.
But Germany is opposed to such a step.
Chancellor Angela Merkel has said she will not discuss the issue of the ESM/EFSF’s ceiling until leaders meet for their next summit in March. In the meantime, financial markets will continue to fret that there may not be sufficient rescue funds available to help the likes of Italy and Spain if they run into renewed debt funding problems.
“There are certainly signals that Germany is willing to consider it and it is rather geared towards March from the German side,” a senior euro zone official said.
The sticking point is German public opinion which is tired of bailing out the euro zone’s financially less prudent. Instead, Merkel wants to see the EU – except Britain, which has rejected any such move – sign up to the fiscal treaty, including a balanced budget rule written into constitutions. Once that is done, the discussion about a bigger rescue fund can take place.
GDP/Euro Lending Data
Good report!
Additional notations below:
Karim writes:
U.S. GDP growth in Q4 a bit weaker than expected at 2.8%
Perhaps the FOMC had word of this, explaining the unexpected dovishness?
1.9% of that growth accounted for by inventories. Other contributions: (consumer spending 2%, fixed investment 0.4%, government spending -0.9%, net exports -0.1%).
Rebuilding post earthquake supply lines probably now complete.
Govt spending continues weak, as revenues increase some and the federal deficit falls some.
Imports rise quickly with any increase in consumer spending.
In growth terms: (consumer spending 2%, fixed investment 3.3%, government spending -4.6%, exports 4.7% and imports 4.4%).
So stripping away inventories, growth was below trend. Plus savings rate fell back to 3.7% from 3.9%.
Domestic savings down with spending up indicates increasing consumer debt.
The question is whether this is ‘wanted’ as per increased desires to buy on credit,
or because the decline in govt deficit spending ‘forced’ more consumer debt for ‘essentials’
And, core PCE slowed from 2.1% to 1.1%.
Also explains FOMC dovishness as they see risk as asymmetrical, fearing deflation more than inflation.
In sum, will keep QE3 talk very much alive
And somewhat moot, even as Q1 GDP forecasts are being revised down some, as most don’t think QE matters much for the real economy.
What’s becoming understood is that while there is ‘more the Fed can do’
for all practical purposes there is nothing they can do to further support the real economy.
Euro money and lending data shockingly weak in December.
Might partially explain how some banks apparently got the balance sheet room to buy more national govt debt?
In particular, record single month decline in lending to the non-bank private sector (74bn). Of that, 37bn decline in lending to non-financial corporates and 8bn drop in lending to households.
This should be very supportive of additional ECB rate cuts over the next few months.
euro shares slipping on Greece
It wouldn’t be taking this long if there was a way to get’er done?
Not to mention that once haircuts are finalized the obvious political response from the opposition in Italy, for example, is “if Greece doesn’t have to pay why do we?’
Europe Shares Retreat From Highs as Greece Talks Stall
Jan 24 (Reuters) — European shares retreated from near six-month highs as concerns deepened that Greece might head towards a disorderly default and technical analysts said the recent rally could be coming to a close.
Europe Agrees to Ban Imports of Iran Oil; No Date Set
The European leadership’s grasp of market forces is even worse than I had imagined.
Unless they somehow cut back on oil consumption, and no one else buys from Iran,
Iran’s sales and prices received don’t change:
Europe Agrees to Ban Imports of Iran Oil; No Date Set
Published: Wednesday, 4 Jan 2012 | 1:01 PM ET
By: Reuters
European governments have agreed in principle to ban imports of Iranian oil, EU diplomats said Wednesday, dealing a potentially heavy blow to Tehran just months before an Iranian election.
French pro growth formula
This is their idea of pro growth:
In a speech given in Paris on January 3rd, the President of France Nicolas Sarkozy confirmed that the country will soon see an increase to the national rate of value added tax and a reduction to the mandatory social security contributions paid by employers.
http://www.taxationinfonews.com/2012/01/president-confirms-tax-hike-in-france/
This is on top of the increase in the reduced rate of VAT in France (from 5.5% to 7%) that was announced earlier.
An increase in standard VAT rate (19.6%) in France (even though still under consideration), could have quite a significant impact on EU HICP and FR CPIx
EU Officials Begin New Year With Calls to Save and Consolidate
Ominous start for the new year:
EU Officials Begin New Year With Calls to Save the Euro
Published: Sunday, 1 Jan 2012 | 5:49 PM ET
By: Reuters
Policymakers marked the 10th anniversary on Sunday of the introduction of euro notes and coins by urging governments in the currency bloc to save and consolidate to overcome their debt crisis.
While German Finance Minister Wolfgang Schaeuble called the euro “a clear success story” and pledged the currency would remain stable, he also urged vulnerable debtor states to follow a tough savings course in 2012, boost their competitiveness and work to win back market confidence.
“This is not a euro crisis, it is a debt crisis in some euro states,” Schaeuble told German newspaper Bild in an interview to be published in Monday’s edition of the paper.
quick look at the 489 billion euro LTRO
When it comes to CB liquidity operations, as previously discussed, it’s about price- interest rates- and not quantities of funds. In other words, the LTRO is an ECB tool that assists in setting the term structure of euro interest rates. It helps the ECB set the term cost of funds for its banking system, with that cost being passed through to the economy on a risk adjusted basis, with the banking system continuing to price risk.
So what does locking in their funds via LTRO do for most banks? Not much. Helps keep interest rate risk off the table, but they’ve always had other ways of doing that. It takes away some liquidity risk, but not much, as the banks haven’t been euro liquidity constrained. And banks still have the same constraints due to capital and associated risks.
To it’s credit, the ECB has been pretty good on the liquidity front all along. I’d give it an A grade for liquidity vs the Fed where I’d give a D grade for liquidity. Back in 2008 the ECB was quick to provide unlimited euro liquidity to its member banks, while the Fed dragged its feet for months before expanding its programs sufficiently to ensure its member banks dollar liquidity. And the FDIC did the unthinkable, closing WAMU for liquidity rather than for capital and asset reasons.
But while liquidity is a necessary condition for banking and the economy under current institutional arrangements, and while aggregate demand would further retreat if the CB failed to support bank liquidity, liquidity provision per se doesn’t add to aggregate demand.
What’s needed to restore output and employment is an increase in net spending, either public or private. And that choice is more political than economic.
Public sector spending can be increased by simply budgeting and spending. Private sector spending can be supported by cutting taxes to enhance income and/or somehow providing for the expansion of private sector debt.
Unfortunately current euro zone institutional structure is working against both of these channels to increased aggregate demand, as previously discussed.
And even in the US, where both channels are, operationally, wide open, it looks like FICA taxes are going to be allowed to rise at year end and work against aggregate demand, when the ‘right’ answer is to suspend it entirely.