*DJ ECB Draghi: Italy’s Recent Fiscal Policies “Not Enough”
*DJ ECB Draghi: Italy Must “Drastically” Cut Debt
*DJ ECB Draghi: Italy Must Boost Growth To Keep Loyal To Europe
Good trick if they can pull it off…
Category Archives: EU
Trichet comments
As suspected:
*DJ Trichet: No Crisis Of The Euro As A Currency
He looks at the euro as a currency as per the single mandate of price stability.
*DJ Trichet: Euro As Currency Is Evidently Not In Danger
There is no euro crisis as the value of the euro has been reasonably strong.
*DJ Trichet: Fear That Non-Standard Measures Stoke Inflation Totally Unfounded
They are now comfortable that the bond buying is not inflationary as it doesn’t alter actual spending on goods and services (aggregate demand) and in fact the required austerity reduces it.
*DJ Trichet: ECB Still Against Taking Defaulted Govt Bonds As Collateral
Ok, but so far there aren’t any.
*DJ Trichet: ECB Still Against Credit Event
No reason to let any member nation default and be released from their obligations.
*DJ Trichet: Rescue Fund Must Be Operational As Soon As Possible
*DJ Trichet: EFSF Should Be Appropriately Leveraged
Implying ECB involvement as suspected .
*DJ Trichet: Govts Should Be Responsible For Making Safety Nets Work
Which requires they be backstopped by the ECB which dictates austerity in return for said backstopping.
*DJ Trichet: EFSF Shouldn’t Get Banking Licence
*DJ Trichet: Banks Must Shore Up Capital As Soon As Possible
*DJ Trichet: Govts Must Be Ready To Recapitalize Banks If Needed
All of which requires ECB as backstop directly or indirectly.
*DJ Trichet: Need Euro-Zone Fin Min, Executive Branch In Future
Which would be ECB ‘funded’ much like the US Fed/treasury relation.
*DJ Trichet: Crisis Questions Econ, Fincl Strategy Of All Developed Economies
*DJ Trichet: Working Assumption That Govts Will Overcome Crisis
*DJ Trichet: Euro Is Credible, Stable
Again, the value of the euro is telling for the ECB.
GS US Views: OK for Now, But Slowdown Ahead (Hatzius)
As previously discussed, no double dip, but instead continued sequential quarter to quarter gdp growth with q4 possible better than q3 as well, helped by lower gasoline prices.
The 8.5% federal budget deficit continues to provide fundamental nominal support for GDP and the domestic credit sectors are still too weak to subtract much if they do pull back.
And it still seems to me that the chances of a euro area event reducing aggregate demand in the US are reasonably low.
US Views : OK for Now, But Slowdown Ahead
By Jan Hatzius
October 9 (Goldman Sachs)
1. After the sharp slowdown earlier in the year, the US economy seems to have grown at roughly a trend pace over the summer. Our GDP “bean count” now stands at 2½% for the third quarter, the ISM indexes are broadly stable in the low 50s, payroll employment is growing at a pace of around 100k per month, and the unemployment rate has been flat for the past three months.
2. Although the recent US growth news has generally beaten low expectations, we expect a renewed deceleration to just a ½%-1% growth pace in the next two quarters and see the risk of renewed recession at about 40%. The main reason is the turmoil in the euro area, where we switched to a recession forecast last Monday. To be sure, there is more talk in Europe about the types of action that we think would help, including a larger financial safety net for sovereign issuers (perhaps achieved by “leveraging” the EFSF), proactive bank recapitalization, and monetary easing. But policy continues to move very slowly relative to the building risks in the financial system and the deterioration in the real economy. A true turnaround in the financial situation does not yet appear to be in sight, let alone a bottoming in the real economy.
3. There are several channels through which the European crisis is likely to weigh on US growth. The impact via reduced exports is the most obvious, but it is unlikely to be very large. Exports to the Euro area account for about 2% of US GDP, so an impact of much more than 0.1-0.2 percentage point would probably require a much deeper European recession than we are forecasting. The bigger issue is the significant tightening in financial conditions and the availability of credit. Since early summer, our financial conditions index has tightened by more than 50bp, a move that might shave ½ percentage point from growth over the next year. In addition, there are some early indications of tightening credit availability including an increase in the percentage of small firms reporting in the NFIB survey that “credit was harder to get” last time they tried to borrow (the next update is due on Tuesday). Tighter credit could easily shave another ½ point or more, for a total impact from Europe on US growth of 1-1½ percentage points. Should the European recession deepen, the risk of further dislocations in the financial system and greater spillovers into the US would grow (for more on this, see Andrew Tilton’s US weekly dated September 16 at US Economics Analyst: 11/37 – Will the European Storm Cross the Atlantic?).
4. One key question is whether the European crisis—and the unsettled fiscal policy environment more generally—has caused a sufficiently large increase in uncertainty to lead companies to postpone hiring and capex decisions in a self-reinforcing manner. There is some evidence that corporate behavior may be changing, as online job ads have dropped off and the percentage of firms increasing employment in the nonmanufacturing ISM survey has declined at the most rapid pace on record over the past two months (data go back to 1997). No such deterioration was visible in Friday’s payroll numbers, but online job ads lead by a month or two and most of the ISM responses probably came after the payroll survey week, so the jury is still out.
5. The other key drag on US growth is the tightening of fiscal policy. Our baseline assumption remains extension of the employee-side payroll tax cut and passage of a small business hiring incentive; we do not assume extension of emergency unemployment benefits (although this is a close call), a further expansion of the payroll tax cut as proposed by the President, additional infrastructure spending or aid to state governments, or another foreign repatriation tax break. We also expect the Congressional “supercommittee” to agree on spending cuts and revenue increases that cover part of the mandated $1.2 trillion in savings over 10 years; the remainder will likely come via automatic cuts that take place from 2013. Overall, we view the risks around our assumption of just under 1 percentage point of fiscal drag (excluding multiplier effects) in 2012 as roughly balanced at present.
6. Even in the baseline case of no recession, we expect additional monetary easing as the Federal Reserve supplements “Operation Twist” with yet more purchases of long-term securities financed by creation of excess bank reserves (that is, additional QE). We believe that this could still boost growth a bit by further reducing the term premium in the Treasury yield curve and thereby ease financial conditions. But policymakers are clearly running into diminishing returns. If they want a bigger impact, they will probably need to supplement additional QE with changes to the Fed’s monetary policy framework. A relatively incremental version of this is the proposal by Chicago Fed President Evans to promise no monetary tightening until the unemployment rate falls back to 7%-7½% and/or inflation rises to 3%. A more radical version would be a temporary increase in the Fed’s inflation target or a move to price level or nominal GDP level targeting as discussed by Jari Stehn a couple of weeks ago (see US Economics Analyst: 11/38 – The Fed’s “Unconventional” Unconventional Options).
7. While additional easing is likely eventually, we currently do not expect a big move at the November 1-2 FOMC meeting. This is based partly on the somewhat better data and partly on Fed Chairman Bernanke’s remark in his congressional testimony that Fed officials had “no immediate plans” to ease further. Of course, since Bernanke also said that he saw the economy as “close to faltering,” it probably would not take a huge amount of new information to change his mind, but for now our best guess is that the next statement will be less eventful than its two predecessors.
Japan’s Fujimura Says Japan May Boost Europe Bailout Bond Purchases
The modern day saga of the Trojan Horse continues.
as the euro debt crisis gives Japan the cover to do something
otherwise highly problematic.
Japan buying euro zone debt is a way to bolster the euro vs the yen
and thereby support Japan’s exporters.
Fujimura Says Japan May Boost Europe Bailout Bond Purchases
October 5 (Bloomberg) — Japan may increase its purchases of bonds to finance Europe’s debt crisis rescue fund, Chief Cabinet Secretary Osamu Fujimura said.
Fujimura told reporters today in Tokyo the government “would like to consider” buying more bonds from the European Financial Stability Facility to help stabilize the region. Japan bought more than 20 percent of the fund’s initial five-year, 5 billion euro ($6.6 billion) bonds in January, and purchased another 1.1 billion euros of 10-year EFSF bonds issued in June.
“Europe’s fiscal problem is also very important for Japan in terms of restoring market confidence, and the Europeans are grappling with this,” Fujimura said.
EU Ministers to Debate More Stimulus
Interesting!
EU Ministers to Debate More Stimulus
By Matthew Dalton
October 2 —European Union finance ministers this week will discuss whether governments with the strongest public finances can provide some budget stimulus to help support flagging economic growth in the 27-nation bloc.
The debate, set for a meeting in Luxembourg on Tuesday, could signal a small reversal of a policy adopted by ministers in October 2009 that calls on all EU countries to start cutting their deficits in 2011. With postcrisis economic growth much slower than expected, the EU is under pressure from the International Monetary Fund and the U.S. to consider more stimulus.
The European Commission sought to debate the idea at the meeting. The idea is that countries not violating the EU’s deficit limit of 3% of gross domestic product could allow their “automatic stabilizers”to operate without restrictions.
Lignet Link
Mosler: Greek Default Not Logical Path Out of Crisis
Mosler: Greek Default Not Logical Path Out of Crisis
By Forrest Jones and Kathleen Walter
September 30 — Letting Greece default won’t end Europe’s crisis and won’t allow Germany and other core nations to brush themselves off and move merrily on their way, says Warren Mosler, principal and co-founder of AVM, an international bond firm with 30 years of experience in Europe and author of the 2010 book, “The 7 Deadly Innocent Frauds of Economic Policy.”
In fact, it will do the opposite. It will cost money and rattle key export markets for Germany and other countries targeting European periphery countries.
Greece has run up debts and may default and exit the euro, yet many in wealthier nations such as Germany oppose bailouts for Greece and other debt-ridden Mediterranean nations.
They also have opposed backing euro-wide bonds, which basically shores up the Greek economy via the financial backing of the Greece’s richer northern neighbors.
However, allowing the European Central Bank to play a role in Greece’s economic reform will not put the load on German, French and other taxpayers, Mosler says.
“It’s a question if a bailout now is good for Germany and France but not so good for Greece, because if Greece is allowed to default, then their debt goes away. They are agreeing to wipe out their debt and it reduces their payments,” he said in an exclusive Newsmax.TV interview.
“But if they fund Greece, and don’t allow them to default, then Greece has to continue to make these payments. So the whole dynamic has changed from doing Greece a favor to disciplining Greece by not allowing them to default.”
That makes default, arguably, less imminent.
“I would think the odds are shifting to the endgame where Greece doesn’t default, where at the end of the day Greece is forced though the austerity measures to run a primary balance or primary surplus, the interest payments will largely wind up with up with the European Central Bank, who is buying Greek debt in the marketplace,” Mosler says.
Furthermore, the logic that applies to keeping Greece in the eurozone applies to the other nations such as Italy.
“It used to be if Germany, France and the others bailed out Greece, and then suddenly they have to bail out Ireland, Portugal, Spain and Italy, they could never have the capacity to do that. It’s now understood that there is no limit, no nominal limit to the check that the European Central Bank can write,” Mosler says.
Plus, Europe can expect no side effects of such Central Bank involvement.
“It will not weaken the euro, it will not cause inflation and it will not increase total spending in the region. In fact it will help reduce total spending in the region because the European Central Bank imposes terms and conditions when it intervenes.”
Should Greece default, however, Europe would feel the pain, but it shouldn’t be too bad in the United States, Mosler says.
Yes, regulators would have to react.
“The FDIC would have to decide how they would want to respond to a drop in equity. Would they want the banks to raise more capital? Would they give them time to do it?”
But they wouldn’t have to react too much.
“They don’t need to shut the banks down, it doesn’t need to be disruptive to the real economy.”
Turning to the United States and President Barack Obama’s economic policies, Mosler says the president is on the right track by running deficits, but adds he’s doing a poor job of explaining the rationale behind his policies.
Or he just doesn’t understand it.
Mosler Bonds for the ECB, and reasons why Greece will not be allowed to default
First, The ECB should turn the bonds it buys into Mosler bonds, by requiring the govt of issue to legally state that in the case of non payment, the bearer on demand can use those bonds for payment of taxes to the govt of issue.
The ECB holding Mosler bonds will shift the default option from the issuer to the ECB, as in the case of non payment,
the ECB would have the option to make it’s holdings available for sale to tax payers of that nation to offset their taxes.
Therefore, conversion to Mosler bonds will ensure that the ECB’s holdings of national govt debt are ‘money good’ without regard to external credit ratings, and give the ECB control over the default process.
Second, I see several substantial reasons Greece should not be allowed to default, which center around why it’s in the best interest of Germany for Greece not to default.
Sustaining Greece with ECB purchases of Greek debt costs German tax payers nothing.
The purchases are not inflationary because they are directly tied to reduced Greek spending and increased Greek taxes, which are both deflationary forces for the euro zone.
Funding Greece facilitates the purchase of German exports to Greece.
Funding Greece does not reward Greek bad behavior.
Instead, it exacts a price from Greece for its bad behavior.
With the ECB prospectively owning the majority of Greek debt, and, potentially, Greek Mosler bonds, Greece will be paying interest primarily to the ECB.
The funding of Greece by the ECB carries with it austerity measures that will bring the Greek budget into primary balance.
That means Greek taxes will be approximately equal to Greek govt expenditures, not including interest, which will then be largely payments to the ECB.
So if default is not allowed, the Greek govt spending will be limited to what it taxes, and additional tax revenues will be required as well to pay interest primarily to the ECB.
But if default is facilitated, Greece will still be required to spend only from tax revenues, but the debt forgiveness will mean substantially lower interest payments to the ECB than otherwise.
And while without default, it can be said that the holders of Greek bonds have been bailed out, the euro zone will be considering the following:
The ECB buys Greek bonds at a discount, indicating holders of those bonds have, on average, taken a loss.
The EU in general did not consider the purchase of Greek bonds as bad behavior that is rightly punished with a default.
In fact, it was EU regulation and guidelines that resulted in the initial purchases of Greek bonds by its banking system.
Therefore, I see the main reason Greece will not be allowed to default is that not allowing default serves the further purpose of Germany and the EU by every measure I can think of.
It sustains the transfer of control of fiscal policy to the ECB.
It’s deflationary which helps support the value of the currency.
It provides for an ongoing income stream from Greece to the ECB.
Note, however, that not long ago it was not widely recognized as it now is that the ECB can write the check without nominal limit.
Before the EU leaders recognized that fundamental of monetary operations, Greek default was serious consideration for financial reasons as it was believed the funding of Greece and subsequently the rest of the ‘weaker’ euro zone nations would threaten the entire euro zone’s ability to fund itself.
It is the realization that the ECB is the issuer of the currency, and is therefore not revenue constrained, that leads to the conclusion that not allowing Greece to default best serves public purpose.
(as always, feel free to distribute, repost, etc.)
Greek Parliament Approves Unpopular Property Tax
No compliance issues here- if the tax isn’t paid the property gets sold.
Don’t even have to know the owner.
Greek Parliament Approves Unpopular Property Tax
September 27 (Reuters) — Greek lawmakers approved an unpopular property tax law on Tuesday that is crucial to a new austerity campaign the government has proposed so it can meet the terms of its international bailout and continue receiving aid funds.
All 154 of the ruling Socialist PASOK party’s deputies voted in favor of the measure, winning a majority in the 300-seat parliament.
The vote is the first test of the government’s capacity to win backing for a new wave of belt-tightening measures announced last week to convince the International Monetary Fund and European Union that Greece is worthy of an 8-billion euro ($11 billion) loan that Athens needs to avoid bankruptcy next month.
Having grown increasingly impatient at the slow pace of reforms, an EU/IMF team abruptly quit Greece in early September following disagreements over what was needed for Athens to plug fiscal slippage this year and next.
Finance Minister Evangelos Venizelos met representatives from the lenders in Washington over the weekend and Greek officials said the inspectors had asked Athens for written assurances it will implement the measures announced before they return.
“We are at the moment of truth for Greece,” European Commission spokesman for economic affairs Amadeu Altafaj said on Monday. “This is the last chance to avoid the collapse of the Greek economy. The criteria must be fully met in order to allocate the funds.”
The IMF and EU team has rapped Athens for dragging its feet on cutting the size of the bloated public sector because it has made little progress on a pledge to cut the 730,000 public workforce by a fifth, eliminate dozens of inefficient state entities and sell off loss-making state firms.
The government has failed to end rampant tax evasion, while the third year of economic contraction has undermined budget revenues and put Greece off-track for its goal of cutting the budget deficit to 7.6 percent of annual output this year.
Analysts say the property tax is a short-term measure that will not forestall a default most economists see as inevitable.
Activists have pledged to step up demonstrations in Athens’ central Syntagma square, where Greek riot police clashed with anti-austerity protesters on Sunday, firing tear gas in the first such unrest after a summer lull.
When lawmakers voted on an earlier austerity package at the end of June, more than 100 people were injured in two days of clashes with police at the square in front of parliament.
Prime Minister George Papandreou was in Germany for a meeting with Chancellor Angela Merkel during the vote on the tax bill.
He will discuss reforms ahead of another key parliamentary vote in Germany on Thursday meant to give more powers to the EU’s EFSF bailout fund.
Some 92 percent of Greeks believe the austerity measures are unfair and 72 percent believe they will not work, according to a GPO poll published by Mega TV on Monday. But only 23 percent said they would not pay the new taxes.
The poll also showed 77.8 percent of Greeks think the country should stay in the single currency zone while 54.8 percent saw a risk that Greece would default on its 340 billion euro debt pile in the next couple of months.
Greece has vowed to do what it takes to get the next tranche and announced on Monday it may close concession deals as part of its 50-billion euro privatization plan, another key condition for bailout aid.
The property tax is meant to help plug a gap of about 2 billion euros in this year’s budget to try and meet EU/IMF fiscal targets.
The euro zone is operationally sustainable as is
While the way the euro zone is currently function would not be my first choice for public policy, it is operationally sustainable.
The ECB is writing the check, and can continue to do so indefinitely.
For example,
as long as the ECB buys sufficient quantities of Greek bonds in the secondary markets,
Greece will be able to fund itself.
The ECB debt purchases merely shift net financial assets held by the ‘economy’ from Greek govt. liabilities
to ECB liabilities in the form of clearing balances at the ECB, which does not alter any ‘flows’ in the real economy.
So as long as the ECB imposes austeric terms and conditions, their bond buying will not be inflationary.
Inflation from this channel comes from spending,
and in this case the ECB support comes only with reduced spending.
For the ECB this also means they accrue substantial net interest margins on their portfolio of Greek debt.
And as long as they keep funding Greece in any manner, Greece need not default.
This means the ECB books profits from their portfolio that adds to their stated capital.
While this is of no operational consequence,
it does help satisfy political concerns over ECB capital adequacy.
Nor is this ‘Ponzi’ in any sense,
as the ECB is not dependent on external funding
to make payments in euro.
Additionally, the ECB no officially has stated it will provide unlimited euro liquidity to its banks.
This too is not inflationary or expansionary, as bank assets remain constrained by regulation
including capital adequacy and asset eligibility which is required for them to receive ECB support.
So while politics is and will always be a factor in government in general, the current state of affairs can be operationally sustained.
The problem then shifts to political sustainability which is necessarily less certain.
The near universally accepted austerity theme is likely to result in continually elevated unemployment,
and a large output gap in general characterized by a lagging standard of living and high personal stress in general.
With ECB continuing to fund, this can, operationally be readily adjusted via a loosening of the Growth and Stability Pact budget constraints, but politically this possibility remains remote without a substantial increase in popular opposition.