Help Ireland or it will exit euro, economist warns


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He touches on the domestic demand issue, highlighted below.

And while sterling is going down versus the euro, more important is the fiscal response in the UK vs the eurozone.

Also, Germany and France are probably not in any position to help, even if they wanted to.

Help Ireland or it will exit euro, economist warns

by Ambrose Evans-Pritchard

Jan 19 (Telegraph) — “This is war: countries have to defend themselves,” said David McWilliams, a former official at the Irish central bank.

“It is essential that we go to Europe and say we have a serious problem. We say, either we default or we pull out of Europe,” he told RTE radio.

“If Ireland continues hurtling down this road, which is close to default, the whole of Europe will be badly affected. The credibility of the euro will be badly affected. Then Spain might default, Italy and Greece,” he said.

Mr McWilliams, a former UBS director and now prominent broadcaster, has broken the ultimate taboo by evoking threats to precipitate an EMU crisis, which would risk a chain reaction across the eurozone’s southern belt, where yield spreads on state bonds are already flashing warning signals. The comments reflect growing bitterness in Dublin over the way the country has been treated after voting against the EU’s Lisbon Treaty.

“If we have a single currency there are obligations and responsibilities on both sides. The idea that Germany and France can just hang us out to dry, as has been the talk in the last couple of days should not be taken lying down,” he said.

Mr McWilliams cited the example of New York’s threat to default in 1975. President Gerald Ford “blinked” at the 11th hour and backed a bail-out to prevent broader damage.

As yet, there is no public support for withdrawal from the euro. A Quantum poll published by the Irish Independent yesterday found that 97pc reject such a radical move. Three-quarters are in favour of a national government, an idea floated by Unilever’s ex-chief Niall Fitzgerald.

“The economic disaster we are facing is unlike anything which has happened in my lifetime. It is a national crisis and needs a government of national unity,” Mr Fitzgerald said.

Mr McWilliams said EMU was preventing Irish recovery. “The only way we can win this war is by becoming, once again, an export country. We can do what we are doing now, which is to reduce our wages, throw more people on the dole and suffer a long contraction. The other model is what the British are doing. Britain is letting sterling fall so that the problem becomes someone else’s. But we, of course, have ruled this out by our euro membership.

“We are paying twice for the euro: once on the exchange rate and once more on the interest rate,” he said.

“By keeping with the current policy, the state is ensuring that Ireland turns itself into a large debt-repayment machine. Is this the sort of strategy to win wars? ” he said.


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2009-01-16 EU News Highlights


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The news just keeps getting worse over there.

They are unlikely to make up for lost exports with domestic demand due to structural constraints on proactive fiscal policy.

This put deflationary forces in place that drive relative prices down until exports resume.

And with national government solvency in question, there is no ‘safe haven’ for euro financial assets.

Overly tight fiscal currency keeps it strong, but a reduction in the desire to save in that currency works the other way.

Highlights

European Exports Drop Most in Eight Years as Downturn Deepens
Trichet Denies ECB Will Cut Rates to Zero Percent, NHK Says
Trichet Vision Unravels as Italy, Spain Debt Shunned
German Government Sees 250,000 More Jobless in 2009, FAZ Says
German Union Chief Sommer Says New Pay Deals Will Mirror Crisis
German Economy May Shrink 2.5% in 2009
French Business Confidence Index Falls to 21-Year Low
France’s Woerth Says 2009 Deficit to Widen on Lower Tax Revenue
France Cuts Tax-Free Savings Rate to 2.5% as Inflation Slows
Italian Economy Will Shrink Most Since 1975, Central Bank Says
Italy’s Tremonti Says Further Stimulus Packages Are Pointless
European Government Bonds Drop; Stock Rally Saps Safety Demand


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Re: More talk of prepherals trouble and euro break-up


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(email exchange)

Yes, as well as this:

Pros Say: German Stimulus ‘Irrelevant’

Jan 13 (CNBC) — The euro remained under pressure Tuesday despite the German government approving a second stimulus package worth $64 billion to help Europe’s largest economy.

Experts tell CNBC the rescue package is “irrelevant” and that the euro will remain under pressure ahead of the European Central Bank rate decision on Thursday.

It’s irrelevant regarding economic recovery, but can accelerate the rate of credit deterioration of the German state.

And the falling euro once again distorts USD exposure as a percentage of capital that is expressed in euros.

>   
>   On Tue, Jan 13, 2009 at 8:01 AM, Dave wrote:
>   
>   France and Italy under performing Germany 5
>   bps today and Greece under performing 12 bps
>   in 10yrs
>   
>   DV
>   

Greeks Bearing Gifts

by John Authers

Jan 12 (FT) – The market fears the Greeks, even when bearing gifts. It is also scared about the Irish and the Spanish.

Greece has always been treated as a peripheral eurozone member, not only in geography. Even before last year’s civil unrest, its bonds traded at a significantly higher yield than those of Germany – showing a higher perceived default risk.

A eurozone country defaulting and leaving the euro is close to an
unthinkable event. But Friday’s news from Standard & Poor’s that Greece and Ireland were on review for a possible downgrade, followed on Monday by Spain, left many thinking the unthinkable.

The spread of Greek bonds over German bunds is 2.32 percentage points, almost 10 times its level of two years ago. Spanish spreads on Monday rose above 90 for the first time. An Intrade prediction market future puts the odds on a current eurozone member leaving the euro by the end of next year at about 30 per cent.

And German default swaps cost nearly 10 times as much as they did not long ago as well.

The euro dropped more than 1 per cent against the dollar within minutes of the Spanish news, and is down 9.8 per cent in the last few weeks.

A crisis over Greece might be the euro’s ultimate “stress test” (to
borrow a phrase from Daniel Katzive of Credit Suisse). If the eurozone
could find a way to deal with a default, that might confirm the euro’s
status as the world’s next reserve currency.


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2009-01-09 EU News Highlights


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Highlights

Trichet Sees ‘Significant’ Economic Worsening, II Magazine Says
European Confidence Drops to Record Low; Unemployment Increases
German Exports Drop 10.6% as Recession Hurts Orders
German Ministry Seeks $136 Billion Fund to Ease Company Credit
German bond sale’s fate signals trouble ahead

‘Bond failures’ are not all that uncommon in the eurozone and more of a debt management issue at this point.

However a rising deficit due to falling revenues and rising transfer payments as GDP weakens could cause the ability to fund to deteriorate rapidly.

Bank failures that require national government funding don’t help either, and the eurozone seems long overdue for multiple major bank failures.

German Builders See 2% Drop in Revenue in 2009, HDB Group Says
Steinmeier Casts Doubt on German Deficit Limit, Rundschau Says
Sarkozy Says France to Provide More Capital to Banks
Spain December Jobless Claims Rise as Economy Enters Recession
European Two-Year Government Notes Decline, Reversing Gains

German bond sale’s fate signals trouble ahead

by David Oakley

A German sovereign bond auction failed on Wednesday as investors shunned one of the most liquid and safe assets in the world in a warning for governments seeking to raise record amounts of debt to stimulate slowing economies.

The fate of the first eurozone bond auction of 2009 signals trouble ahead as governments around the world hope to issue an estimated $3,000bn in debt this year, three times more than in 2008.

The 10-year bonds failed to attract enough bids to reach the €6bn the German government wanted. Bids of €5.24bn, a cover of only 87 per cent, amounted to the second worst auction on record in terms of demand.

Such developments were rare before the credit crisis. Before the seven German bond auctions that failed last year, the last German bond auction to fail was in July 2000 after the dotcom crash.

Analysts said the vast amount of supply is deterring investors and a growing number of countries, including those with deep and mature bond markets, such as Germany, the UK and Italy, are struggling to attract buyers.

The Netherlands has seen bond auctions fail, the UK and Italy have been forced to offer investors higher yields to meet their auction targets, while Spain and Belgium have cancelled offerings because of a lack of demand.

The German finance agency admitted that investor appetite for government debt had waned, although insisted the auction was “not a disappointment”.

Meyrick Chapman, a UBS fixed-income strategist, said when a German bond auction failed it “does suggest there may be trouble ahead for other governments wanting to raise money in the debt markets. Before the financial crisis, German bond auctions just did not fail.”


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EU Daily | Europe Manufacturing Recession Worsens in December


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Highlights
Europe Manufacturing Recession Worsens in December
Nowotny Says ECB’s Liquidity Measures Need Time to Take Effect

Right, time to wait for a US fiscal response large enough to help the eurozone as well as the US.

Merkel hints at German tax cuts
Spain Manufacturing Contracted at Record Pace in December
German Home Foreclosures Fell 3.7% in 2008, Sueddeutsche Says
Sarkozy Says He’s Ready to Do More to Spur Economy
European Bonds Fall as Gains by Stocks, Low Yields Deter Buyers


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View from Europe


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Here in Europe, things are worsening at a breathtaking speed: the Mediterranean countries are probably bankrupt (but everybody pretends not to know this as to keep the spirits high) and hence there is some chatter that Spain and Italy are about to leave the Eurozone.

Even in our biggest port of Rotterdam some sandwich salesman told in a TV program that he sells almost no sandwiches because the daily number of hungry truck drivers leaving that port with goods is now less than 10% (!) of that of only a few month ago – therefore (according to this TV program) he sells only 10% of his usual amount of sandwiches.

I got caught by the Madoff swindle, my bank (triple A, audited by KPMG, so by now one should consider that to be a very suspicious CV) had sold me a product (also triple A, and approved by KPMG) that ultimately proved to be guaranteed by Madoff (through two other banks one of them the Deutsche Bank) ,so I lost 50,000 Euro’s overnight. According to our Dutch financial commentators, the difference between Madoff and ordinary banks is non-existent: banks have almost no assets either, so maybe the USA government will bail out Madoff as well as City Bank.


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Re: Looks like Central Banks are losing it


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(email exchange)

In actual fact they’ve never had it to lose.

>   
>   On Mon, Dec 22, 2008 at 11:02 AM, Russell wrote:
>   

The New Doom-and-Gloomers

My, how times have changed.

A year ago, few policymakers, “strategists,” or economists, here or elsewhere, saw an economic downturn coming (even though the National Bureau of Economic Research now says that a U.S. recession actually began in December 2007).

Now, as the following Agence France-Presse report, “World Faces Total Financial Meltdown: Spain’s Bank Chief,” reveals, we have central bankers who sound like doom-and-gloomers (gearing up to write their own books, perhaps?).

The governor of the Bank of Spain on Sunday issued a bleak assessment of the economic crisis, warning that the world faces a “total” financial meltdown unseen since the Great Depression.

“The lack of confidence is total,” Miguel Angel Fernandez Ordonez said in an interview with Spain’s El Pais daily.

“The inter-bank (lending) market is not functioning and this is generating vicious cycles: consumers are not consuming, businessmen are not taking on workers, investors are not investing and the banks are not lending.

“There is an almost total paralysis from which no-one is escaping,” he said, adding that any recovery – pencilled in by optimists for the end of 2009 and the start of 2010 – could be delayed if confidence is not restored.

No, if the appropriate fiscal balance is not restored-

Might I suggest an immediate payroll tax holiday?

Immediate revenue sharing?

Offering a federally funded job to anyone willing and able to work?

Doesn’t get any simpler than that?

Where’s the ‘complex’ problem?

Yes, they are too far out of paradigm to or they never would have let it all go this far, and being willing to wait yet another month for a fiscal response.

Sadly, another case of innocent fraud.

Ordonez recognised that falling oil prices and lower taxes could kick-start a faster-than-anticipated recovery, but warned that a deepening cycle of falling consumer demand, rising unemployment and an ongoing lending squeeze cannot be ruled out.

“This is the worst financial crisis since the Great Depression” of 1929, he added.

Ordonez said the European Central Bank, of which he is a governing council member, will cut interest rates in January if inflation expectations go much below two per cent.

“If, among other variables, we observe that inflation expectations go much below two per cent, it’s logical that we will lower rates.”

As if any of that matters.

Regarding the dire situation in the United States, Ordonez said he backs the decision by the US Federal Reserve to cut interest rates almost to zero in the face of profound deflation fears.

The blind leading the blind.

Central banks are seeking to jumpstart movements on crucial interbank money markets that froze after the US market for high-risk, or subprime, mortgages collapsed in mid 2007, and locked tighter after the US investment bank Lehman Brothers declared bankruptcy in mid-September.

Interbank markets are a key link in the chain which provides credit to businesses and households.

The central bankers and mainstream economists in general are the ‘missing links’, anthropologically speaking.


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Obamaboom fiscal fitness update


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Leaning in the right direction to restore demand.

A decisive move from the new Obama team is very possible given the latest rhetoric.

FACTBOX-Fiscal stimulus plans to tackle the crisis

Nov 23 (Reuters) – Countries around the world are setting out fiscal stimulus packages to help their economies withstand the impact of the global financial crisis.

Below are some details:

* AUSTRALIA:

— The government has announced a A$10.4 billion ($6.8 billion) package of cash handouts and family benefits and has pledged more if it is needed.

— It is providing A$1.5 billion to boost the housing and home building markets and doubling the grant for first-time home buyers. They will now get A$14,000 from an original A$7,000.

* CHINA:

— Provincial government plans will add an additional 10 trillion yuan ($1.464 trillion) to a 4 trillion yuan stimulus package announced by the central government earlier this month, state television said. The central scheme included rail and infrastructure schemes as well as extra social spending to offset the sharp drop in demand for the exports which fuel China’s economy.

— China is also changing value added tax (VAT) to allow companies to deduct the cost of capital equipment, saving them about 120 billion yuan a year.

* EUROPEAN UNION

– An economic stimulus plan to be presented on Nov. 26 will include a significant budgetary expansion, the head of the EU executive said on Friday, as it signalled longer deadlines for countries to slash budget gaps.

— German Economy Minister Michael Glos has said the plan envisaged, among other things, a 1 percentage point cut in value-added tax across the EU and that the total value of the stimulus was 130 billion euros ($163 billion).

* GERMANY:

— The government has announced a package which will generate about 50 billion euros ($64.22 billion) in investment and contracts.

– A new lending programme of up to 15 billion euros will be introduced for German state-owned development bank Kreditanstalt fuer Wiederaufbau (KfW) to strengthen its lending activities. KfW’s infrastructure programme for structurally weak local authorities will be raised by 3 billion euros.

— Urgent investment in transport will be accelerated via a new programme totalling 1 billion euros in both 2009 and 2010.

— Parliament has approved a rise in government net new borrowing in 2009 to 18.5 billion euros from 10.5 billion.

* NETHERLANDS

— The government has announced a “liquidity impulse” of about 6 billion euros ($7.5 billion), including allowing companies to write down investments earlier than usual.

— Companies will also receive temporary financial support from an unemployment fund to pay employees who will cut down on their working hours.

*RUSSIA

— Prime Minister Vladimir Putin on Nov. 20 unveiled a $20 billion economic stimulus package and help for people hurt in the economic slowdown. He offered assurances there would be no repeat of the economic turmoil when the Soviet Union collapsed in 1991 and, 10 years ago, when the state defaulted on its debt.

— The package will include a cut in profit tax, which accounts for 8.5 percent of budget revenues, to 20 percent from 24 now, and a new depreciation mechanism that will allow firms to reduce the profit tax further.

— The government has already sanctioned state-run banks to support industry with billions of dollars of soft funding.

* SOUTH KOREA:

— The government has unveiled a package worth at least 14 trillion won ($9.37 billion), including tax cuts

— Measures also include an extension of 1.3 trillion won to state-owned banks to help SMEs. The government is to expand credit guarantees to SMEs by 6 trillion won.

* SPAIN:

— In the last six months, Spain announced various measures to cushion the impact of the economic slowdown and soaring unemployment including a 38 billion euro ($49.28 billion) fiscal stimulus package.

— The package includes 6 billion euros in tax cuts and 4 billion euros of liquidity to credit strapped companies and households.

— It also includes a 400-euro income tax rebate for employees, pensioners and the self-employed.

* SWITZERLAND:

— The government announced an economic stimulus package worth 890 million Swiss francs ($753 million). It includes government spending of 340 million francs on flood defence, natural disasters and energy efficiency projects.

— Spending plans also include up to 1 billion francs on roads and railways and 550 million francs as tax breaks to 650 firms for job creation programmes.

* TAIWAN:

— Taiwan has announced T$122.6 billion worth of subsidies and tax cuts and T$58.3 billion of infrastructure spending. The steps unveiled are expected to generate T$1 trillion ($31.2 billion) in investment and consumption.

* UNITED KINGDOM:

— The government is expected to announce on Monday a package of tax cuts and extra public spending of upto 20 billion pounds ($29.70 billion), with the centrepiece a temporary cut in sales tax.

— The packagesis also expected to feature tax relief for small firms, efficiency savings and help for mortgage payers.

— British Prime Minister Gordon Brown said on Nov. 11 he was ready to borrow to provide the British economy a fiscal boost and he urged other countries to do the same.

* UNITED STATES:

— President-elect Barack Obama said he is crafting a two-year plan to revive the economy and save or create 2.5 million jobs. He called in October for a $175 billion stimulus measure but appears ready to for a much larger package. — Congressional Democrats have promised to make a broad economic stimulus a priority when they reconvene in January. The package is expected to include middle-class tax cuts and billions of dollars for public works projects, such as the construction of roads, bridges and mass transit. OTE]))

— President George W. Bush signed a $168 billion, two-year economic stimulus package into law in early 2008. Of that total, $152 billion was earmarked for 2008.

— The package includes tax rebates of up to $600 per individual earning $75,000 in adjusted gross income or less and $1,200 per couple plus $300 per child. Businesses would be able to deduct half the costs of purchases of new equipment. (Editing by David Cowell; +44 207 542 6486)


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Austria abandons bond offering


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Not looking at all promising.

Austria abandons bond offering

By David Oakley

Austria, one of Europe’s stronger economies, cancelled a bond auction yesterday in the latest sign that European governments are facing increasing problems raising debt in the deepening credit crisis.

The difficulties of Austria, which has a triple A credit rating, highlights the extent of the deterioration, which saw benchmark indicators of credit risk such as the iTraxx index hit fresh record wides yesterday.

Austria is the fourth European country to cancel a bond offering in recent weeks amid growing worries over its exposure to beleaguered eastern European economies such as Hungary.

Hungary, which has been forced to turn to the International Monetary Fund to shore up its crisis-hit economy, also scrapped an auction for short-term government bills after only attracting Ft5bn ($22.5m) in a Ft40bn offering.

Analysts said Austria had dropped plans to launch a bond next week because investors wanted bigger premiums to offset the credit worries and fears over lending by its banks to eastern Europe.

The Austrian Federal Financing Agency did not give a reason for the move.

Spain, another triple A rated country, and Belgium have cancelled bond offerings in the past month because of the turbulence, with investors demanding much higher interest rates than debt managers had bargained for.

Market conditions have steadily deteriorated in recent days with the best gauge to credit sentiment, the iTraxx investment grade index, which measures the cost to protect bonds against default in Europe, widening to more than 180 basis points, or a cost of €180,000 to insure €10m of debt over five years, yesterday.

This is a steep increase since Monday of last week, when the index closed at 142bp.

Huw Worthington, European strategist at Barclays Capital, said: “These are difficult markets. Austria did not need to raise the money, so it has decided to hold off but, if these conditions persist, it could prove a problem for some governments as their debt needs to be refinanced.”

Analysts warn that the huge pipeline of government bonds due to be issued in the fourth quarter and next year could increase problems for some countries, particularly those already carrying large amounts of debt that needs to be refinanced or rolled over.

European government bond issuance will rise to record levels of more than €1,000bn in 2009 – 30 per cent higher than 2008 – as governments seek to stimulate their economies and pay for bank recapitalisations.

The eurozone countries will raise €925bn ($1,200bn) in 2009, according to Barclays Capital. The UK, which is expected to increase its bond issuance from the current €137.5bn in the 2008-09 financial year, will take the figure above €1,000bn.

Italy, with a debt-to-gross domestic product ratio of 104 per cent, is most exposed to continuing difficulties in the credit markets. Analysts forecast that it will need to raise €220bn in 2009.


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Interview with the BBC


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(email exchange)

Dear David:

Let me refer you to what I call “Mosler’s Law”: There is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it.

But the European problem is, who can borrow? who can spend?

Solving that problem is the key – the only key – to resolving the crisis.

Regards, James

>   
>   Professor Galbraith,
>   
>   This is David … I’m a BBC Spanish listener. You told that the European
>   Central Bank has not the same solid structure as the banking system in
>   the States. I want to ask you what does Europe has to do to recover
>   from this crisis? Ok, deliver less credits and mortgages maybe, I don’t
>   know, you know it much better than me. But how the recovery will be
>   seen through a decrease in unemployment? what does Spain has to do?
>   
>   Call me David (only 43)
>   Yours sincerely,
>   
>   David …
>   


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