Governments and central banks shouldn’t throw principles overboard in their efforts to fight the debt crisis, Jürgen Stark, a hawkish member of the European Central Bank’s Executive Board, warned Tuesday. “Red lines mustn’t be crossed, otherwise efforts to solve the crisis today create the basis for a new crisis tomorrow,” Mr. Stark said in a speech in Lucerne, Switzerland.
via ‘Excessive Liquidity’ Not the Solution for Central Banks – WSJ.com.
[Economist Hans-Werner Sinn, president of the Institute for Economic Research, in Munich]: What politicians refer to as a “rescue” will not actually save Greece. The Greeks won’t ever return to health under the euro. The country just isn’t competitive. Wages and prices are far too high, and the bailout plan will only freeze this situation in place. So it’s in Greece’s interest to leave the euro and reintroduce the drachma.
In the end this is Germany’s crisis to resolve, not China’s. Germany has benefited tremendously from the euro. Nearly all of its growth in the past decade can be explained by its rising trade surplus which, given monetary policy driven almost exclusively by the needs of slow-growing and consumption-repressed Germany, came at the expense of the rest of Europe.
If the Germans want to save Europe, they must reverse their polices and start running large trade deficits even if that comes with slower growth. If not, the euro will break apart and peripheral Europe will almost certainly default on its obligations to Germany. Either way Germany loses.
Less than two weeks after European leaders unveiled an agreement that was designed to bolster confidence in the region, the yield on Italy’s 10-year debt drew close to the 7% mark, a line in the sand of both practical and psychological importance to the market. Psychologically, 7% has become a beacon due to the fact that Greece, Portugal and Ireland each sought bailouts soon after their debt reached these levels. While analysts said it is too simplistic to say that Italy will be forced to ask for support if its 10-year debt yields 7%, they said the recent selloff is taking the country to the tipping point.
via Italy Nears Tipping Point as Bond Yields Spike – WSJ.com.
Markets have been fed a steady diet of press releases out of Europe for the past few weeks but very little substance. This is a dangerous strategy as hopes are raised and reaction to any form of disappointment will be strong. No matter how it is dressed up, we are likely to witness a substantial default of Southern European borrowers, requiring recapitalization of French and Northern European banks. With public debt close to danger levels in many of these countries, there are no ready funds available for a bailout. Quantitative easing by the ECB has been touted as a possible solution, but aversion to this is so strong — particularly in Germany — that it would be political suicide for Angela Merkel to support this. So Europe stumbles onwards, searching for a disguised form of QE solution that is palatable to German voters.
Germany’s DAX is testing support at 5600. Breach would test 5000, while respect would signal a primary advance to 7200*. 13-week Twiggs Money Flow is relatively weak and reversal below zero would warn of renewed selling pressure.
* Target calculation: 6400 + ( 6400 – 5600 ) = 7200 OR 5700 + ( 5700 – 5000 ) = 6400
France’s CAC-40 index is testing medium-term support at 3000. Failure would test 2700, while respect (signaled by breakout above 3350) would signal a further advance. 13-week Twiggs Money Flow remains weak and reversal below zero would also warn of renewed selling pressure.
* Target calculation: 2700 – ( 3300 – 2700 ) = 2100
Italy’s FTSE MIB index is similarly testing support at 15000. Again, 13-week Twiggs Money Flow is weak and reversal below zero would warn of renewed selling pressure.
* Target calculation: 13 – ( 17 – 13 ) = 9
The FTSE 100 index is testing support at 5350. Failure would test primary support at 4800, while respect (signaled by breakout above 5700) would confirm a primary advance to 6100*. Rising 13-week Twiggs Money Flow favors an advance.
* Target calculation: 5400 + ( 5400 – 4800 ) = 6000
ATHENS—Greece’s major political parties on Sunday agreed to form a national unity government that will lead the country to new elections after putting in place a debt-slashing deal, in the hope of averting financial catastrophe for the country and winning back the trust of its European partners. The deal was made possible after Prime Minister George Papandreou agreed to step down to make way for a new prime minister under a commonly accepted government.
As policymakers continue to grapple with the problems facing the crisis-hit countries in the euro area and the clouded outlook for the global economy, attention has turned to Iceland, which three years ago saw its entire banking system crumble in just a few days.
Private creditors ended up shouldering most of the losses relating to the failed banks, and today Iceland is experiencing a moderate recovery. Unemployment is declining, and the government was able to return to the capital markets earlier this year.
“What was seen as a disaster for Iceland three years ago is increasingly being seen as good fortune with the passing of time. Icelanders may have lost their financial system but instead they were spared the burden of nationalizing private debt,” said Árni Páll Árnason, Minister of the Economy.
via IMF Survey: Iceland’s Unorthodox Policies Suggest Alternative Way Out of Crisis.
Conservative daily Die Welt writes:
“At the end of the eventful day, the redemptive message came: Papandreou would withdraw his referendum because conservative Greek opposition leader Antonis Samaras declared he was ready to vote for the aid package with the government and take part in an interim national unity government……”
“But the reasons behind this welcome development did not lie in Athens, but in Cannes. There, Merkel and Sarkozy bet the house when they took the Greek prime minister to task. They didn’t just say that payments to Greece would stop until the Greeks made it clear they would hold up their end of the bargain. They also insisted that the Greek referendum would essentially be a vote on Greece’s membership in the euro zone — the really big question. The politicians in Athens decided they’d rather not take the risk.”
A former vice president of the European Central Bank has emerged as an early favorite to lead what could become a new Greek caretaker government of technical experts that would finalize aid talks and stabilize the country’s fractured politics. The interim government would oversee the transition until possible new elections next year.
Officials from the country’s two leading political parties said Lucas Papademos keeps coming up as political insiders consider candidates for a prime minister of a transitional national unity government, if Prime Minister George Papandreou resigns, a possibility that is now widely expected.
[Greek Prime Minister] Mr. Papandreou was under intense pressure from his own Socialist party and the center-right opposition to step aside if his government survived the confidence vote [early Saturday], to pave the way for a unity government or early elections.
…….. New Democracy [the opposition] has refused to consider talks on a transitional government unless Mr. Papandreou resigns.
via Worried Eyes on Greece Ahead of Confidence – NYTimes.com.
