Category Archives: Greece

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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Franco-German Spat on Role of ECB Renewed

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Not long ago France would have conducted a nuclear test to make the point.
Today, it takes a core meltdown to make the point:

Franco-German Spat on Role of ECB Renewed

By Tony Czuczka and Mark Deen

November 18 (Bloomberg) — The failure of European leaders to end the debt crisis with their broadest effort yet has revived a Franco-German dispute over theEuropean Central Bank’s role and fueled investor concerns over policy makers’ economic impotence.

ECB chief Mario Draghi today slammed governments for failing to implement policy commitments as holders of Greek debt began talks in Athens on structuring a 50 percent writeoff that was the cornerstone of a deal pieced together last month at an all-night summit. Officials in Berlin and Paris yesterday swapped barbs and European borrowing costs outside of Germany rose to euro-era records.

The discord highlighted markets’ brushoff of a package that included a scaled-up rescue fund, proposed guarantees of sovereign debt and a bid to attract more international loans. The accord, which finance ministers aim to implement next month, was at least the fourth plan billed as a comprehensive strategy to end the crisis born in Greece in 2009, none of which provided a lasting fix.

“Where is the implementation of these long-standing decisions?” Draghi said in a speech in Frankfurt today. “We should not be waiting any longer.”

Stocks slid, dragging the MSCI All Country World Index to a six-week low. The Stoxx Europe 600 Index decreased 0.7 percent. The premium France pays over Germany to borrow for 10 years jumped to a record 200 basis points yesterday, as yields on bonds of countries from Portugal to Finland, the Netherlands to Austria also rose relative to Germany.

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My big fat Greek MMT exit strategy

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Due to popular demand, I’ve begun outlining a Greek exit strategy to exit the euro currency,
and instead use its own new currency to provision itself:

1. The Greek government would announce that it will begin taxing exclusively in the new currency.
2. The Greek government would announce that it will make all payments in the new currency.

That’s it, deed done!
The govt can now provision itself and continue to function on a sustainable basis.

Now some Q and A:

Q. How will the new currency exchange for euro?
A. The new currency will be freely floating, with exchange between willing buyers and sellers at market prices.

Q. What about the existing euro debt?
A. Announce that it will consider it on a ‘when and if’ basis with no specific payment plans.

Q. What about existing govt contracts for goods and services?
A. They will be redenominated in the new currency.

Q. What about euro bank deposits and euro bank loans?
A. They remain in place.

Q. What about foreign trade?
A. Markets forces will function to adjust the trade balance to reflect foreign desires to accumulate financial assets denominated in the new currency.

To maintain full employment and internal price stability, I would further recommend the following:

1. The govt would fund a minimum wage job for anyone willing and able to work.

2. For any given size government, taxes should be adjusted to ensure the labor force that works for that minimum wage be kept to a minimum.

3. I would recommend the govt levy only a tax on real estate for the following reasons:
   a. Compliance is maximized and compliance costs and related issues are minimized- if the
       tax isn’t paid the property can be simply sold at auction.
   b. Everyone contributes as either an owner of the property or as a renter as the owner’s costs
       are ultimately passed through to renters.
   c. Transactions taxes are eliminated, thereby removing those restrictions on transactions.
       Freedom to transact is the source of that substantial contribution to real wealth.

4. A zero rate policy where govt deficit spending remains as non interest bearing balances held by counter parties at the Bank of Greece, and no govt securities are permitted.

5. All bank deposits in the new currency will be fully insured by the govt.

6. Banks will be govt regulated and supervised, which will include a 15% capital requirement, govt guaranteed liquidity, and a prohibition from any secondary market activity.

Comments welcome with additional questions, thanks!

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(RNC) Chairman Reince Priebus on the deficit

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With the Republicans now willing to hike taxes out of fear of becoming the next Greece, the odds of the super committee going super big are increasing.

“America has crossed an unthinkable threshold: our national debt now exceeds $15 trillion dollars. That’s more than $48,000 per citizen,” Republican National Committee (RNC) Chairman Reince Priebus said. “In 2009, President Obama promised to cut the deficit in half by the end of his first term. Instead, he further accelerated its growth, producing three years of record deficits.”

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Republicans, fearing Greece, agreeing to tax hikes

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Shows the Republicans truly do fear the US becoming the next Greece,
as they begin to lean towards tax hikes.

Meanwhile, they continue keeping us on the road to Japan.
Or worse.
A lot worse.

Republicans Consider Breaking No-Tax Vow as Deadline Looms

By Brian Faler

November 15 (Bloomberg) — For Senator John Cornyn, it was the situation in Greece.

The Texas Republican said he is willing to back tax increases as part of a major deficit-reduction deal because he fears the European debt crisis could spread to the U.S.

“We’ve never been in this spot before,” said Cornyn, who also leads his party’s effort to elect more Republicans to the Senate. “We’re looking over at Europe and what’s happening in Greece and Italy — we risk having another huge financial crisis in this country, and we’ve got to try to solve the problem.”

He is one of a growing number of Republicans, many with otherwise impeccable anti-tax credentials, who say they are willing to raise taxes to reach a big deficit-reduction deal with Democrats.

That may help insulate them from charges of stubbornness if Congress’s bipartisan supercommittee doesn’t meet its Nov. 23 deadline to find a way to cut $1.5 trillion. For now, it’s helped shift Washington’s debate to how much, rather than whether, to raise taxes.

Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, said he is encouraged by the shift even as Democrats scoff at a specific Republican proposal.

“It’s a step in the right direction for them to just rhetorically cross that line,” said Conrad.

‘Real Trouble’

Asked if Republicans were trying to set up a blame game should the supercommittee fail, Conrad said, “I hope not” because “if we aren’t beyond that, we are in real trouble.”

Democrats say the Republican deficit plan relies too heavily on spending cuts and would give the wealthy too much of a tax break. Some question whether its numbers add up.

At issue is a proposal by the supercommittee’s Republicans to trade permanent cuts in income tax rates, with the top rate dropping to as little as 28 percent, for new limits on deductions, exclusions and other tax breaks. They estimate that it would produce $300 billion to reduce the deficit.

The plan’s principal author is Senator Pat Toomey, a Pennsylvania Republican who previously led the Club for Growth, a Washington anti-tax group. House Speaker John Boehner, an Ohio Republican, today endorsed the proposal, calling it a “fair offer.”

Some conservative organizations are accusing Republicans of trying to hide tax increases through the Toomey plan.

Norquist Reaction

“Closing tax loopholes is all well and good,” said Americans for Tax Reform president Grover Norquist in an opinion article in Politico. “But doing so to raise revenues is just as much a tax hike as raising tax rates.” He added, “Any congressman who wants to keep his promise to voters to oppose tax increases” must oppose the plan.

Many Republican lawmakers are also unhappy with the proposal. “We don’t have a tax problem — we have a spending problem,” said Senator Jim DeMint, a South Carolina Republican. “For us to get lulled into ‘how much to raise taxes’ in this thing is foolish.”

Senator Orrin Hatch, the top Republican on the tax-writing Finance Committee, said, “Some of these loopholes really aren’t loopholes.” He called them “important policy provisions, like the home interest mortgage deduction.”

Republican supporters of the plan say they are trying to lock in lower income-tax rates that will otherwise jump if, as is currently scheduled, the tax cuts enacted in President George W. Bush’s administration expire at the end of next year. President Barack Obama opposes extending the Bush-era cuts for those earning more than $250,000, and Republicans are unlikely in the 2012 elections to win the Senate votes they would need to keep the tax cuts in effect.

‘Biggest Tax Increase’

“What we’re trying to do is avoid the biggest tax increase in the history of the country,” Senator Charles Grassley, an Iowa Republican, said of Toomey’s plan.

Toomey declined to comment other than to point to a Nov. 10 Wall Street Journal editorial quoting him as calling his proposal a “bitter pill” that is “justified to prevent the tax increase that’s coming.”

A number of Republicans are playing down anti-tax pledges they signed with Norquist’s group. “We take an oath to uphold the Constitution” and “that trumps any and every consideration,” said Cornyn.

“I didn’t know I was signing a marriage vow,” said Representative Mike Simpson of Idaho, one of 40 House Republicans who recently signed a letter signaling willingness to raise taxes as part of a major deficit-cutting deal.

Shifting Opinion

Senator Lamar Alexander of Tennessee, the chamber’s third- ranking Republican, said he saw a sign of shifting opinion when three of the supercommittee Republican members — Toomey, Rob Portman of Ohio and Arizona’s Jon Kyl — briefed Senate colleagues on their plan and no one complained.

“For Pat Toomey and Portman and Kyl to come in and tell a whole roomful of Republicans that ‘we’ve put $250 billion of tax increases on the table’ and not get a murmur of dissent is remarkable,” said Alexander.

Senator Saxby Chambliss, a Georgia Republican, said his party’s lawmakers should consider bigger tax increases if it would lead to a larger debt-reduction deal, because the political price they would pay will essentially be the same.

“You’re going to be criticized by the same people irrespective of what the number is,” said Chambliss.

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Valance Weekly Report 11.9.2011

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Valance Weekly Report

(To download PDF, right click link and select save link as)

Highlights
US – Underwhelming payroll report
EU – ECB cut rates; Greece and Italian Prime Ministers agree to step down
JN – Exports improve
UK – Negative effect from Euro-area crisis
CA – BoC renewed its inflation target.
AU – RBA cut Growth/CPI forecast
NZ – Unemployment continued to edged up

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German “wise men” (classic oxymoron) warn ECB is risking credibility

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German “wise men” warn ECB is risking credibility

By Alexandra Hudson

November 9 (Reuters) — Germany’s “wise men” panel of economic advisers warned the European Central Bank it risks losing credibility by buying the bonds of heavily-indebted euro zone states, and that monetary and fiscal policy are becoming worryingly blurred.

The group, which advises the German government, said in a report published on Wednesday: “The bond buying program dismantles market discipline without establishing any political discipline in its place.”

What about the Stability and Growth Pact? And what other choice do they offer?

In blurring monetary and fiscal policy, the report said, “the ECB is jeopardizing its credibility, because it is falling under the suspicion of monetizing sovereign indebtedness.”

Meaningless in the context of fiat currency and floating fx policy.

Germany strongly objects to the bond-buying strategy but the ECB’s new president Mario Draghi has signaled the bank is ready to carry on buying bonds of troubled euro zone governments.

The wise men said they expected the bank to make a further cut in the key euro zone interest rate to 1 percent by the end of 2011, and that rates would remain at this level throughout 2012.

The silver bullet!

In the report, the panel suggested a different method for increasing the euro zone’s capacity to prevent contagion from the debt crisis, should the 440 billion-euro European Financial Stability Facility (EFSF) not suffice.

In what the “wise men” said would be a departure from current models of securing debt with ever more borrowing, they advised setting up a “European Redemption Pact.”

This would involve countries with sovereign debt above 60 percent of GDP pooling their excess debt into a redemption fund with common liability. They would commit to reforms and see their debts repaid over 20-25 years.

Within a few years the redemption fund could have a volume of 2.3 trillion euros worth of bonds, the study said.

Back to standing in a bucket and picking yourself up by the handle.

Germany, the euro zone’s largest economy and growth engine of the last two years, is expected to see economic expansion stutter in coming quarters as the euro zone debt crisis saps business and consumer confidence and export markets shrink.

Including exports to the other euro members as their economies continue to slow as well.

The “wise men” forecast economic growth of 0.9 percent in 2012, slightly below the 1.0 percent forecast by the government, which last month almost halved its estimate from a previous 1.8 percent.

Growth this year was seen at a healthy 3 percent.

Thanks to ECB supported funding for Greece and the others used to buy German goods and services.

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For BTPS & SPGBs all inter dealer screens have gone blank

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As previously discussed, it’s hard to see how anyone with fiduciary responsibility can buy Italian debt or any other member nation debt after EU officials announced the plan for 50% haircuts on Greek bonds held by the private sector.

Yes, all governments have the authority, one way or another, to confiscate an investors funds. But they don’t, and work to establish credibility that they won’t.

But now that the EU has actually announced they are going to do it, as a fiduciary you’d have to be a darn fool to support investing any client funds in any member nation debt.

The last buyer standing is and was always to be the ECB, which will now be buying most all new member nation debt as there is no alternative that includes survival of the union.

And when this happens there will be a massive relief response, as the solvency issue will be behind them, with the euro firming as well.

Then the reality of the state of their economy take over, as GDP continues to fade and unemployment continues to rise until they figure out austerity can’t work and instead they need to proactively increase their member nation’s budget deficits.

Hopefully this doesn’t take quite so long as it took to figure out the ECB has to write the check.

But this one might take even longer as it will be a function of blood in the streets rather than funding capacity.

   
>   (email exchange)
>   
>   On Wednesday, November 09, 2011 5:37 AM, Dave wrote:
>   
>    For BTPS & SPGBs all inter dealer screens have gone blank and there is no liquidity left.
>    There are really no quotes for even 10y BTPs for example and the last bids were hit
>    about 80BP wider for the day vs Bunds.
>   

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Merkel is seeking to make it easier for the German arms industry to export weapons

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Merkel Seeks to Ease German Arms Exports

November 8 (Spiegel) — Chancellor Angela Merkel is seeking to make it easier for the German arms industry to export weapons. In a position paper sent to Brussels recently, Berlin asked that “economic interests” be “adequately considered” when it comes to export controls on arms shipments.

On a similar theme, ThyssenKrupp looking to distance itself from its joint venture with Ferrostaal – the Munich public prosecutor’s office has accused Ferrostaal of paying millions of euros in bribes to Greece related to the purchase of 214-class submarines.

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News recap comments

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The news flow from last week was so voluminous it was nearly impossible to process. For good measure I want to start today’s commentary with a simple recap of what happened.

On the negative side –

· Greece called a referendum and threw bailout plans up in the air taking Greek 2yrs from 70% to 90% or +2000bps.
· Italian 10yr debt collapsed 40bps with spreads to Germany out 70bps. The moves were far larger in the 2yr sector.
· France 10y debt widened 25bps to Germany. At one point spreads were almost 40 wider.
· Italian PMI and Spanish employment data were miserable.
· German factory orders plunged 4.3 percent on the month.
· The planned EFSF bond for 3bio was pulled.
· Itraxx financials were +34 while subs were +45.
· Draghi predicted a recession for Europe along with disinflation.
· The G20 was flop – there was no agreement on IMF involvement in Europe.
· The US super committee deadline is 17 days away with no clear agreement.
· The 8th largest US bankruptcy in history took place.
· US 10yr and 30yr rallied 28bps, Spoos were -2.5%, the Dax was -6% and EURUSD was -3%.
· German CDS was up 16bps on the week.

On the positive side –

· The Fed showed its hand with tightening dissents now gone and an easing dissent in place.

Too bad what they call ‘easing’ at best has been shown to do nothing.

· The Fed’s significant downside risk language remained intact.

Downside risks sound like bad news to me.

· In the press conference Ben teed up QE3 in MBS space.

Which at best have been shown to do little or nothing for the macro economy.

· US payrolls, claims, vehicle sales and productivity came in better than expected.

And the real output gap if anything widened.

· S&P earnings are coming in at +18% y/y with implied corporate profits at +23 percent q/q a.r.

Reinforces the notion that it’s a good for stocks, bad for people economy.

· Mortgage speeds were much faster than expectations suggesting some easing refi pressures.

And savers holding those securities saw their incomes cut faster than expected.

· The ECB cut 25bps and indicated a dovish forward looking stance.

Which reduced euro interest income for the non govt sectors

· CME Margins were reduced.

Just means volatility was down some.

· There was a massive USDJPY intervention which may be a precursor to a Swiss style Japanese policy easing.

Which, for the US, means reduced costs of imports from Japan, which works against US exports, which should be a good thing for the US as it means for the size govt we have, taxes could be lowered to sustain demand, but becomes a bad thing as our leadership believes the US Federal deficit to be too large and so instead we get higher unemployment.

· The Swiss have indicated they want an even weaker CHF – possibly EURCHF 1.40.

When this makes a list of ‘positives’ you know the positives are pretty sorry

· The Aussies cut rates 25bps

Cutting net interest income for the economy.

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