Category Archives: Germany

Osborne Vows More Austerity as Slump Hits U.K. Deficit Plan

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Says it all, sadly.

France and Germany also announce agreement to target 0 deficits for all euro members which
takes the steam out of any relief rally as they solve the solvency issue.

Not much upside for the world economy when it all thinks and acts like this:

Osborne Vows More Austerity as Slump Hits U.K. Deficit Plan

By Gonzalo Vina

Nov 30 (Bloomberg) — Chancellor of the Exchequer George Osborne said Britain faces two extra years of austerity as he sought to shore up his deficit-reduction plans, intensifying a conflict with unions that are staging a mass walkout today.

Osborne used his end-of-year economic statement to Parliament yesterday to announce 23 billion pounds ($36 billion) of additional spending cuts after the Office for Budget Responsibility slashed its forecasts for economic growth. The fiscal watchdog predicted Osborne will need to borrow an extra 112 billion pounds by 2016 and said more than 700,000 public- sector workers will lose their jobs over the next six years.

“Osborne acknowledges that the consolidation program is behind schedule and aims to make up for lost ground with an even longer period of fiscal austerity,” Michael Saunders, chief European economist at Citigroup in London, said in an interview. “The government has no alternative. If they slide, the markets will put the U.K. from Category A to Category B.”

Unions say as many as 2 million public-sector workers will join today’s 24-hour strike over plans to make them contribute more toward their pensions and retire later. Osborne is extending his spending cuts beyond 2015, when they were due to end, risking a backlash from voters in the election due in May of that year.

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Why the IMF thing works for the euro

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As a matter of chance, the euro’s lucky stars fall in line with the latest IMF musings.

Perhaps most important,
operationally,
the ECB lending to the IMF,
which then lends to euro member nations,
doesn’t count as ‘printing money’ in the Teutonic monetary bible.

To recap:

When the ECB buys bonds,
it credits member bank accounts on the ECB’s spreadsheet.
Those accounts count as ‘money’ while the bonds did not count as ‘money’
So this is said to be ‘printing money’

The ECB then offers different euro accounts,
also data on the same ECB spreadsheet,
that pay interest with relatively short maturities.
This is called ‘sterilization’ because those deposits don’t count as ‘money’

However, when the ECB buys SDR from the IMF loans to the IMF,
and it credits the IMF account at the ECB with euro,
that doesn’t count as ‘printing money.’

Nor does the IMF lending those euro to the likes of Italy count as ‘printing money’

And, while a bit of a stretch,
the IMF was, after all, set up to address balance of payments issues.
And while overall the euro zone doesn’t have a balance of payments issue of any consequence,
it’s not wrong to say the euro nations in question
do have balance of payments issues.
So here’s one place in the world of floating exchange rates between nations
where IMF involvement can be said to actually fit its original mandate.

Furthermore, if there’s one force that can be trusted to impose austerity,
it’s the IMF, of course.

Also interesting is that the IMF takes the credit risk for the loans it makes,
while the ECB takes IMF credit risk on its balance sheet.
This means the rest of world is assuming the risk for the loans to the national govts.

Lastly, while it triggers a massive relief rally,
it’s just Bigfoot kicking the can way down the road,
as the austerity continues to weaken the euro economy,
now to the point of driving up deficits as GDP growth goes negative.

So bringing in the IMF helps Germany preserve it’s ‘max austerity’ image,
kicks the solvency issue down the road,
and all without the ECB ‘printing money’!

So now let’s see if it actually happens.

Merry Christmas!

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U.S. and Eur Data/GDP Downgrades

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Karim writes:

U.S. data on the soft side (October)

  • Most notable is core durable goods orders (capex has been gwth leader of late) falling 1.8% and 3mth annual rate slowing to 4% from 7.3%
  • Core shipments (more important for current quarter growth) down 1.1%
  • Personal spending up 0.1%.
  • Personal income up 0.4% (mostly via wages) and savings rate up from 3.3% to 3.5%
  • Headline Price index-0.1% and core unchanged, so reasonable increase in real incomes. Core PCE Index now 1.5% 3mth annualized vs 2% last month

EUR Composite PMI ‘surprises’ to upside in November, rising from 46.5 to 47.2

  • Interesting that manufacturing (more volatile and more of a leading indicator) much weaker than services.
  • Also, German new orders fall 2.6pts to 42.6

Q4 GDP estimates in U.S. being shaved 0.25-0.50% on the data. Current range 2.5-3.25%.
Failure to extend payroll tax cut would have impact almost entirely in Q1 2012 (annual withholding ceilings typically reached early in the year)-about 1% on GDP.

European estimates are about -1.5% annualized for both Q4 and Q1. Germany among the weakest (due to manufacturing) with estimates in the -2.5% area.

PMI data in Europe has had a very good track record signaling ECB policy rate changes. This data pretty much cements another rate cut next month.

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EU Proposes Intrusive Control of Euro Zone Budgets

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Another prelude to Germany supporting the ECB funding support that will end the solvency issue falling into place:

EU exec proposes intrusive control of euro zone budgets

By Luke Baker and Jan Strupczewski

November 23 (Reuters) — The Commission, the executive arm of the 27-member European Union, presented a draft regulation which would allow it to review draft budgets of euro zone countries by mid-October and ask for revisions if they were not in line with EU budget rules.

The budget drafts of euro zone countries would have to be based on independent forecasts.

The second regulation would create a legal basis for heavy surveillance of policies of a country either already getting emergency financial aid from the euro zone or facing serious financial instability.

“To return to growth, member states need to raise their game when it comes to implementing their commitments to structural reforms, as well as embrace deeper integration for the euro area,” Commission President Jose Manuel Barroso said.

“The goals driving this package — economic growth, financial stability, budgetary discipline — are linked to each other. We need all of them if we are to move beyond the current emergency towards a Europe in which solidarity is balanced by strengthened responsibility,” Barroso said.

Once the tighter oversight and control of euro zone national fiscal policy is in place, the 17 countries now sharing the euro could jointly borrow from the market through “stability bonds.”

The Commission outlined three main options for such joint debt issuance without making any recommendations on which might be best.

“The Commission makes clear that any move towards introducing stability bonds would only be feasible and desirable if there were a simultaneous strengthening of budgetary discipline,” it said in a statement.

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relief rally musings

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The German 10 year just traded above 1.9%.
The 10th plague is now beginning to threaten the Pharaoh.

If I were cynical I’d think it would go down something like this:

First, German insiders give the nod to their cronies.
The Great European Relief Rally begins.
The euro begins to firm, stocks start to rally, etc.
Then, noises start coming out of Germany to the effect that
they might consider ECB support if austerity could be guaranteed,
causing prices to suddenly gap higher as shorts try to cover with no sellers in sight.

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ECB’S STARK SAYS DEBT CRISIS SPREADING TO ‘CORE’ COUNTRIES

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Seems the logical consequence of hair cutting Greek debt and announcing it may happen to other member nations?

That said, would not surprise me to soon be hearing hints of something like:
‘ECB bond buying not necessarily inflationary if combined with austerity’ coming out of Germany,
triggering a massive ‘relief rally’ that will last until the reality of the austerity part sinks (syncs) in,
as the 10th plague infects the German bonds markets.

*ECB’S STARK SAYS DEBT CRISIS SPREADING TO ‘CORE’ COUNTRIES
*ECB’S STARK SAYS DEBT TOLERANCE IN EUROPE IS DECLINING
*ECB’S STARK SAYS INVESTORS ARE REASSESSING SOVEREIGN DEBT

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Germany takes the world down, take 3?

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Looks like for the third time in the last 100 years the world fiddles while Germany torches it?

Germany now stands pretty much alone in objecting to the ECB writing the check on the grounds that it’s inflationary, when it’s clearly not.

But, unfortunately, the rest of the world’s political and economic leadership doesn’t have what it takes to get through to them.

And the economic destruction this is causing far exceeds the destruction caused by all the shooting wars in history, as the death toll from the consequent global unrest mounts as well.

On Mon, Nov 21, 2011 at 7:05 AM, wrote:

Subject: BBK AGAIN REJECTS IDEA OF GIVING EFSF A BANK LICENCE

(BBK = Germany’s Bundesbank)

BBK AGAIN REJECTS IDEA OF GIVING EFSF A BANK LICENCE
BBK: RISING CONFLICT POTENTIAL WITH STABILITY-ORIENTED MON POL
BBK SEES GERMANY’S DEFICIT AROUND 1% OF GDP IN 2011, 2012
BBK: GERMANY’S GDP GROWTH TO SLOW TO 0.5-1.0% IN 2012
BBK: DEBT CRISIS IS JEOPARDIZING RECOVERY IN EUROPE
BBK: GERMANY’S INDUSTRY ADJUSTING FOR MILD DOWNTURN
BBK SEES GERMANY’S DEBT DOWN TO 81.1% OF GDP IN 2011

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Spanish Voters Set to Throw Out Socialists in Election

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As previously discussed, there is virtually no political support to leave the euro,
as it’s not intuitively obvious the euro is the problem.

It is intuitively obvious, however, that the problem was irresponsible govt
and so the move towards responsible govt- aka austerity- continues.

The euro economy can be easily ‘fixed’ and in short order.
The ECB can, one way or another, facilitate all funding needs and end the solvency issue.
And the Stability and Growth Pact (SGP) can be modified to allow deficits sufficient to sustain aggregate demand.

Currently Germany continues to be obstructing the elimination of the solvency issue,
even as market forces are now begining to weaken German bonds.
And there are no member nations yet supporting readjusting the SGP to allow higher deficits.

So my best guess is Germany will soon recognize what most of the financial community has recently been voicing- ECB bond buying combined with austerity is not inflationary- opening the door to the ECB bond buying being an EU sanctioned policy of the institutional structure to ensure solvency.

That will trigger a massive ‘relief rally’ that will fade as the reality of the depressing nature of the
austerity takes over.

It could also sideline the discussion of Greek haircuts and default discussion in general.

Spanish Voters Set to Throw Out Socialists in Election

November 20 (Reuters) — Spaniards are expected to throw out the Socialists they blame for a disastrous economic situation in an election on Sunday and to vote in a center-right party likely to dole out more bitter medicine in the form of public spending cuts.

Opinion polls show the People’s Party (PP), led by Mariano Rajoy, has an unassailable lead over the ruling Socialists, who have led the country from boom to bust in seven years in power.

Voters are angry with the Socialists for failing to act swiftly to prevent the economic slide and then for bringing in austerity measures that have cut wages, benefits and jobs.

Yet people are now resigned to further slashes in spending on health and education in the midst of a European debt crisis that has toppled the governments of Ireland, Portugal, Greece and Italy and pushed Spain’s borrowing costs ever higher.

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German Foreign Ministry confirms it is considering the possibility of more eurozone “orderly defaults”

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In this case default = EU sanctioned debt forgiveness,
which, at this point in time, only reinforces the notion that
no one with any fiduciary responsibility should be buying any euro member debt.

This shortens the time frame between now and when things get bad enough for
Germany to permit the ECB to do what it takes to get past the national govt solvency issue.

Germany confirms it is considering more eurozone “orderly defaults”

Berlin/Brussels (DPA) — The German Foreign Ministry on Friday confirmed that Germany was considering the possibility of more eurozone “orderly defaults” beyond that of Greece, as suggested by a paper leaked by the British press.

The Daily Telegraph published a six-page document, attributed to the Foreign Ministry, suggesting that partial bankruptcy must be made possible for all euro members “unable to achieve debt sustainability.”

“There must also be the option of an orderly default (of a struggling euro member) to reduce the burden on taxpayers” in other eurozone members which are paying for its bailout, the document said.

“There is nothing secret about it,” the ministry said Friday, stressing that it contained ideas on which Foreign Minister Guido Westerwelle had already publicly commented upon.

At the start of the euro debt crisis, EU leaders maintained that no country would ever fail to pay back debts. This year the taboo was broken with Greece, as private lenders were ordered to take a 21 per cent hair cut on Greek bonds. The figure was then raised to 50 per cent.

The memo proposed that “orderly default” procedures should be governed by the European Stability Mechanism, the new euro rescue fund which, under current plans, is due to enter into operation in 2013.

The paper also backed strong EU interference in the economic affairs of eurozone budget sinners, proposing that a country not meeting austerity targets could “have concrete budgetary measures imposed upon it,” such as “specific spending cuts” or new taxes.

But commenting on Dutch proposals to create an EU commissioner with direct powers of intervention in national budgetary policies, it warned that “the constitutional provisions on the budgetary autonomy of the Bundestag (German parliament) must be observed in every case.”

Recalling well-known German positions, the document called for EU treaty changes to implement the budget discipline reforms it advocated, which also include the possible freezing of EU regional aid and taking budget sinners before the EU Court of Justice.

But it also accepted that such course of action may not be possible.

“In case (an EU treaty change) is not politically feasible, an alternative treaty between the member states that is legitimate under international law ought to be considered,” it said.

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