(email exchange)
He gets it!
>
> On Fri, Oct 3, 2008 at 8:49 AM, Karim wrote:
>
> Trichet says solvency is an issue
> for governments.
>
Yes!
>
> Trichet: West passing through
> most serious time since WWII.
>
The largest systemic risk is in the eurozone.
>
> Trichet: We must do everything
> to preserve unity in Europe.
>
Good luck to them!
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There is only one immediate response that will turn the tide that I know of.
The US Congress can declare a ‘tax holiday’ and lower the ‘payroll taxes’ (social security, medicare, payroll deductions) at least temporarily to 0%.
This tax is currently killing about $80 billion a month in aggregate demand- about $1 trillion per year.
This would IMMEDIATELY add maybe 5% to GDP.
The financial sector is immediately supported as the increase in after tax incomes allows workers to make their mortgage payments and pay their other costs of living.
This is ‘trickle up’ economics at work.
Politically, it would look like this:
Rather than Congress taking $700+ billion from taxpayers (and removing that much aggregate demand) and allocating $700+ billion to buy securities from the financial sector which adds no aggregate demand), and hoping for this to somehow ‘trickle down’ to the real economy.
Congress instead lets workers keep their $700+ billion so they can make their mortgage payments and support the real economy as the funds ‘trickle up’ to the financial sector.
There are no ‘scare resources’ causing this financial crisis and slow down.
It’s a purely ‘nominal’ event that’s causing the problems.
That’s why a ‘solution’ is necessarily ‘easy’ and immediately executable.
All we need to do is change numbers on spreadsheets.
It is only a vote to change those tax rates that is separating the world from an instant return to prosperity.
And once again that vote probably won’t happen due to the absurd myths about government deficits that should have fallen by the wayside decades ago.
Warren
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(email exchange)
Anyone hearing about issues at Unibank in Italy?
>
> On Thu, Oct 2, 2008 at 11:17 AM, Kevin wrote:
>
> If you mean Unicredito (UCG IM), yesterday there was talk they were to call an
> EGM, with a rumor that the CEO Profumo was to resign and talk the bank was
> suffering from liquidity issues. They subsequently announced some real estate
> sales improving their tier 1 capital ratio. At the same time Italy suspended
> short sales. Today I see they are looking to raise euro 2.3bn, through the
> sales senior bonds, aimed at retail investors.
>
> Having been regarded as one of Europes strongest banks, market has been
> concerned that Profumo has persistently claimed they have no balance sheet
> problems, despite worsening financial environment.
>
> Senior cds is trading at 140bp (5yr), it was 80/90 on sept 25th.
>
> Kevin
Thanks, heard they are very big and having issues.
US market action seems to be spreading to the eurozone where it can do a lot more damage than it’s doing here.
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Hi Joseph,
Agreed, and this attitude continues this morning, with comments like ‘Europe needs this slowdown to bring down inflation’ as their opinion leaders argue against a rate cut (not that a rate cut would actually help demand as they think it would, but that’s another story).
It seems they are actually welcoming this weakness, probably out of fear unemployment was getting far too low to ‘discipline’ the unions, as wage demands were anecdotally featured in the Eurozone news.
France’s proposal for a 300 billion euro wide fund to calm bank depositors was immediately shot down by Germany (not that it would have or could have been sufficient to stop a run on the banking system, but that too is another story).
It is also becoming more clear that effectively major euro lending institutions have found themselves massively ‘long’ euros and ‘short’ dollars. The Fed’s swap lines have grown to over $600 billion, mainly with the ECB. This means the ECB is borrowing USD from the Fed to lend to its banks. This represents the same kind of external debt that has brought down currencies since time began. Running up external debt to sustain your currency is highly unlikely to succeed.
Ultimately, their only exit is to sell euros and buy the USD needed to cover their net USD needs. The resulting fall in the currency can spiral into a serious run on the banking system. Unlike Americans who run to high quality securities in their local currency when they get scared, Europeans and their institutions tend to flee the currency itself.
While the national governments will attempt to contain any such run, they don’t have the capability, as they are all limited fiscally by both law and market forces, with the latter the far stronger force. Only the ECB can write the check of the size needed, no matter how large, but they are currently prohibited by treaty from making such a fiscal transfer.
I have serious doubts the Eurozone can get through this week without entering into a system wide banking crisis that will end with the payments system being closed down until it reopens with bank deposit insurance at the ‘federal level’- in this case from the ECB itself.
The Eurozone would have been ‘saved’ if the US has responded with a fiscal response in the range of 5% of GDP, and continued to increase imports and keep the world export industries alive.
But that didn’t happen, and, by design, that channel was cut off when Paulson, supported by Bernanke and Bush, managed to convince foreign central banks to stop accumulating USD reserves.
This both killed the goose laying the golden eggs for the US (imports are a real benefit and exports a real cost), as US exports have boomed and real terms of trade fell, and also triggered the looming collapse of the Eurozone as exports fell off and domestic demand remained weak.
Good morning!
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What’s happening is the world desire to net accumulate euro financial assets has increased and can only be achieved by the rest of the world net selling goods and services (or real assets) to the eurozone.
Europe Trade Deficit Widens to Record on Exports, Energy Costs
by Fergal O’Brien
Sept. 17 (Bloomberg) Europe’s trade gap widened to a record in July as a cooling global economy damped exports and crude oil’s advance to a record boosted the energy deficit.
The 15-nation euro region had a seasonally adjusted deficit of 6.4 billion euros ($9.1 billion), compared with a 3.5 billion-euro trade gap in June, the European Union’s statistics office in Luxembourg said today. The July deficit is the largest since the euro was introduced in 1999.
Euro-area exports to the U.S., the second-biggest buyer of the region’s goods, have fallen the most since 2003 this year as economic expansion there has eased. At the same time, record oil prices pushed up spending on imported fuels such as gasoline and heating oil by 41 percent, further widening the trade gap.
“On the one side, you’re getting weakness in exports and that then is feeding through to weaker industrial production,” said Marco Valli, an economist at Unicredit MIB in Milan. “On the other side, there is the oil prices and in July we will see the maximum impact of that, as oil peaked in early July.”
Crude oil reached a record $147.27 a barrel on July 11 and the euro region’s energy imports soared 41 percent to 151 billion euros in the first half, according to today’s report. The detailed data are published with a one-month lag.
The soaring energy costs boosted imports from Russia, which supplies 34 percent of Europe’s imported oil and 40 percent of its imported gas. Overall imports from Russia, home of OAO Gazprom, the world’s biggest gas producer, soared 22 percent in the first half and the euro area’s trade gap with the nation soared 25 percent to 20.4 billion euros, today’s report showed.
First-Half Decline
The detailed data for the January-June period also showed exports to the U.S., the world’s largest economy, fell 4 percent from a year earlier. That is the biggest first-half decline since a 9 percent drop in 2003. Shipments to the U.K., the euro area’s biggest trading partner, rose 1 percent.
The euro reached a record above $1.60 to the dollar in July, taking its gain over the previous 12 months to 15 percent. The euro’s strength undermines the competitiveness of European goods sold abroad. The currency was at $1.4224 today, down 11 percent from its record.
A slowdown in overseas sales has curbed production at Europe’s factories and dragged the region’s economy into its first contraction in almost a decade in the second quarter. Manufacturing activity has contracted for the last three months, according to a monthly survey of purchasing managers, while export orders have fallen for five months.
`Mightily Relieved’
“Euro-zone exporters will be mightily relieved by the recent marked retreat in the euro from its July peak,” said Howard Archer, chief European economist at Global Insight in London. “However, this is being countered by slowing global growth and a very uncertain outlook.”
Some companies have tried to offset falling U.S. orders by expanding in Asia and oil-exporting countries. Asian sales at French skin-creams maker Clarins SA rose 3 percent in the second quarter as North American sales fell by the same percentage.
Volkswagen AG, Europe’s biggest carmaker, on Sept. 8 said emerging markets will provide the fastest growth in worldwide sales over the next 10 years, led by economic expansion in Asia and Russia.
Europe’s trade deficit with China, which last year overtook the U.K. to become the euro area’s biggest supplier, narrowed by 1.2 percent to 49.9 billion euros in the six months through June. Exports to Asia’s second biggest economy rose 15 percent.
Economists had expected the euro region to show a trade deficit of 3.5 million euros in July, compared with an initially reported 3 billion-euro deficit in June, according to the median of nine estimates in a Bloomberg News survey.
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Weakness and inflation= rate hikes in the eurozone.
Fed response to same conditions later today.
| Trichet Says Price-Stability Risks Have Intensified |
| Spanish Producer-Price Inflation Accelerates to 23-Year High |
| European Bonds Drop Before German Price Reports, as Stocks Gain |
| ECB’s Noyer Backs Inflation Vigilance, Flexible Exchange Rates |
| ECB’s Tumpel-Gugerell Says ECB Ready to Raise Rates If Needed |
| Wellink Says Inflation Accelerating, ECB on `Heightened Alert’ |
| ECB Confirms August Press Conference, Scraps Summer Holiday |
| Inflation Tops Unemployment as Main Concern in EU, Survey Shows |
| German Consumer Optimism Nears 3-Year Low, Stern Poll Shows |
| Spain Recession Risk Climbs as Rates Move Higher, Survey Shows |
| Europe Heavy-Truck Sales Fall on Eastern Region Drop |
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Medvedev May Seek to Assure Merkel on Russian Energy Supplies
by Lyubov Pronina and Brian Parkin
(Bloomberg) Russian President Dmitry Medvedev may seek to assure Europe of Russia’s reliability as an energy supplier and allay German Chancellor Angela Merkel‘s human- rights concerns in a one-day visit to Berlin today.
Medvedev will meet Merkel and President Horst Kohler and address about 1,000 business executives and lawmakers in his first trip to Western Europe as Russia’s leader.
“Energy will be at the forefront of talks and they won’t be easy,” Yevgeny Volk, a Moscow-based analyst for the Heritage Foundation, a U.S. research group, said in a telephone interview. “Russia wants to increase its energy influence in Europe, while Western countries would like to get more guarantees from Russia that deliveries will not fail.”
Note there is no discussion about price. The euro negotiators want to ensure deliveries with an agreement that is necessarily unenforceable in any case. Russia does have 25,000 nuclear weapons, for example.
Russia, which supplies 25 percent of Europe’s energy, has clashed with Europe over concerns that it abuses its role as Europe’s main energy source to further its political agenda. It opposes further eastward expansion of the North Atlantic Treaty Organization, U.S. plans for a missile-defense shield in Europe and Kosovo’s secession from Serbia.
Looks to me that Russia is in full control, and is using its position to enhance its real terms of trade, something never even mentioned by the Eurozone.
Germany and the European Union have pressed for guarantees that Russia will follow a uniform policy for supplying oil and gas across the bloc, weakening its capacity to wield energy policy as an arm of diplomacy. Russia briefly cut off gas to Ukraine in 2006 in a pricing dispute.
As if quantity ‘guarantees’ would ‘weaken’ anything. Apart from being unenforceable, it all misses the point of price and relative value.
Good luck to the Eurozone!!!
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While problems in the US financial sector pose risks for the real economy, systemic risk to the payments system is not an issue. The US banking system has credible deposit insurance, so it is unlikely there would be any kind of run on the banks by depositors, and operationally the Fed can easily deal with it if it did happen.
In the UK, Northern Rock did have a run, but in the UK the BOE is there to provide funding as needed.
Not so in the eurozone where the ECB is prohibited from this type of action, and it’s up to the national governments to write the checks, and a major run on their banks has the potential to bring down the national governments.
European Banks May Write Down $81 Billion More, Merrill Says
by Poppy Trowbridge
(Bloomberg) Europe’s 11 largest banks may make additional writedowns of as much as $81 billion linked to U.S. subprime mortgages and have to cut dividends and raise money by issuing new equity, Merrill Lynch & Co. said.
“Banks are still playing catch-up on writedowns” following declines in the Markit ABX, CMBX and other indexes tied to subprime mortgages, Stuart Graham, a London-based analyst at Merrill, wrote in a note to clients today. “No bank has so far admitted to selling these assets off.”
In addition to writedowns from underperforming assets, lower profit means Europe’s banks will have to ease a cash shortage in the industry of as much as $104 billion, Graham wrote.
“We have assumed the European banks take significant further writedowns on” subprime mortgages, asset-backed securities, collateralized debt obligations and other derivatives, Graham said.
HSBC Holdings Plc, Europe’s biggest bank, HBOS Plc, Britain’s largest mortgage lender, Barclays Plc and Edinburgh-based Royal Bank of Scotland Group Plc are among banks that may make writedowns, Graham said. As many as eight banks may need to reduce their dividends by 20 percent and raise $84 billion in new equity.
The companies may also sell assets to raise money, he added.
–Editor: Ben Vickers, Adrian Cox
(an interoffice email)
I’m thinking they had to do something about the euro.
the eurozone exporters can be very convincing
warren
On Feb 7, 2008 10:41 AM, Karim wrote:
>
>
>
> Is taking hikes off the table, so:
>
> 1) No mention of acting ‘pre-emptively’
>
> 2) No one voted to hike (or cut) at meeting
>
> 3) Trichet: “I never subscribed to theory of decoupling’
>
> 4) Downside risks to growth now ‘confirmed’
>
>
>
> All the usual references to preventing 2nd round effects not new, 1-4 above
> is.
♥
Falling deficits in general in the Eurozone due to the growth rate of GDP combined and the countercyclical tax structure.
Aggregate demand from non government credit expansion (and some from exports) is supporting GDP as support from government deficit spending wanes. This can go on for quite a while as consumer leverage still has a lot of upside potential. However, it will self-destruct if allowed to continue long enough. And, as in the US, net exports have the potential to sustain growth in the medium term as well, though this is hard to fathom without a fall in the Euro.
I need to do more work on this as there are a lot of moving parts over there, including prospective members targeting their currencies, building Euro reserves (public and private), and tightening their fiscal balances. Additionally, portfolios have been rebalancing toward the Euro.
Overall, however, we enter 2008 with tightening fiscal balances in most countries. This will serve to keep a lid on demand and output, while rising food/energy will keep upward pressure on prices.
Italy’s 2007 public deficit about 2 pct of GDP
Prodi 27 Dec 2007 06:39 AM ET
Thomson Financial
Italy’s public deficit will be about 2 pct of GDP, compared with a government forecast of 2.5 pct, said prime minister Romano Prodi in his year-end address.
“We will close the year with a lower deficit, it will be around 2 pct, a figure below any forecast,” Prodi said.
philip.webster@thomson.com pw/ejb COPYRIGHT Copyright Thomson
Financial News Limited 2007. All rights reserved.
♥
