12.05 German Chancellor Angela Merkel’s spokesman Steffen Seibert is doing his best to sprinkle a bit of reality back on to the euro crisis. He said:
Dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled.
If Europe’s leaders do indeed leverage their €440bn bail-out fund (EFSF) to €2 trillion or €3 trillion through some form of “first loss” insurance on Club Med bonds – as markets now seem to assume – the consequences will be swift and brutal.
Professor Ansgar Belke, from Berlin’s DIW Institute, said any leveraging of the EFSF would be “poisonous” for France’s AAA rating and would set off an uncontrollable chain of events.
“It counteracts all efforts made so far to stabilize the eurozone debt crisis, which are premised on the AAA rating of a sufficiently large number of strong economies. In extremis, it would probably cause the break-up of the eurozone”, he told Handlesblatt.
…..Dr Belke said France is already under pressure. BNP Paribas, Société Générale, Crédit Agricole may need €20bn in fresh capital, with knock-on risk for the French state. He warned that France’s public debt (Now 82pc of GDP) would shoot up to 90pc of GDP if the debt crisis rumbles on. Variants of this theme were picked up by other German economists in a Handelsblatt forum.
Policy makers in the [euro-zone] core believe in the sustainability of export led growth strategies. Keynes warned about this in the last piece he published before his death. If the reserves earned by current account surplus nations like Germany, Austria, etc. are not reinvested in productive capital equipment and structures in the current account deficit nations, then the deficit nations will not be able to earn the income required to service their external debt in the future. They will default. Or, as economist Jan Kregel put it in very clear terms, if Germany wishes to run a sustained current account surplus with the periphery, Germany can chose to accept either liabilities issued by the periphery, or tradeable goods provided by the periphery, but they do not have the option of choosing neither.
It is not in the best interest of the creditor/current account surplus nations to continually accumulate liabilities issued by debtor/current account deficit nations if this simply leads to eventual default on those obligations, but the economists and policy makers in the eurozone are too myopic and too blinded by faith to see this. The European Investment Bank could be used to recycle current account surpluses into productive capital investment in the periphery in a sustainable fashion, but instead, policy makers remain wedded to the faith based economic belief that export led growth strategies are both sustainable and optimal.
via Rob Parenteau: Blinded by Faith – Sinking the Eurozone « naked capitalism.
As I said in July, I expect contagion to be a real concern regarding the dithering policy approach. I believe the sovereign debt crisis will continue to deteriorate further for just this reason.
…..So, what happens is that the crisis rolls through. More and more countries in the euro zone get plucked off and put into the penalty box. First it was Greece. Then it was Ireland and Portugal. Later the crisis rolled into Italy and Spain.
There are ever fewer players left to skate. Now we see Belgium in big trouble. Austria and France cannot be far behind. Once France has difficulties, the core only has one country, Germany, which is a truly large economy, capable of shouldering any burdens. In my view, that is the end of the line.
via Chart of the day: Greatest Credit Deterioration Focus – Belgium, Spanish banking | Credit Writedowns.
What does it mean – for individuals, businesses, and governments – that structural adjustment is falling further and further behind the global forces that are causing pressure for structural change? Above all, it means that expectations are broadly inconsistent with reality, and need to adjust, in some cases downward. But distributional effects need to be taken seriously and addressed. The burden of weak or non-existent recoveries should not be borne by the unemployed, including the young. In the interest of social cohesion, market outcomes need to be modified to create a more even distribution of incomes and benefits, both now and in inter-temporal terms. After all, underinvestment now implies diminished opportunity in the future.
via The Global Jobs Challenge – Michael Spence – Project Syndicate.
Germany’s DAX index is testing resistance at 6000. Penetration of the descending trendline on 13-week Twiggs Money Flow indicates no more than a secondary reaction (bear market rally). Breakout above 6000 would offer a target of 6500, while respect of resistance would re-visit primary support at 5000.
* Target calculation: 5000 – ( 6000 – 5000 ) = 4000
The FTSE 100 is headed for a test of 5600 after breaking resistance at 5400. Rising 13-week Twiggs MoneyFlow indicates a strong bear market rally rather than a reversal.
* Target calculation: 4800 – ( 5600 – 4800 ) = 4000
Why do they [European financial institutions] hold so much Greek government debt? Because under Basel II, implemented (outside the United States) in 2007, Greek government bonds, rated A-, had the same 20 percent risk weight as AA/AAA asset-backed securities in the United States. That is, until S&P downgraded Greek debt from A- to BBB+. That raised the risk weight to 50 percent, suddenly requiring 60 percent more capital from banks holding Greek bonds.
This appears to be the reason that the possibility of Greek default has led to fears of another banking crisis.
via Causes of the Crisis: February 2010.
The 20 percent risk weight required banks to only hold $2 of bank capital against a $100 security — at the 8 percent Basel rate for adequately capitalized banks — allowing 50 to 1 leverage compared to 12.5 to 1 on normal bank loans.
According to a European Union official familiar with the situation, Germany and France are weighing two models but leaning towards using the fund to insure bonds from euro-zone countries.
….Germany and France are (also) fine-tuning a proposal for European banks to bring their core Tier 1 capital ratios, a key measure of financial strength, to 9%, within six to nine months, said the EU official, who spoke on condition of anonymity.
Europe’s two largest economies agree that the region’s banks should seek to raise funds in the open market and will suggest giving the banks up to nine months to fulfil the new capital requirements, the official said.
It is not only the U.S. economy that is in peril right now. …Europe is struggling to prevent the sovereign debt problems of its peripheral Euro-zone economies from spiraling into a full-fledged banking crisis… Meanwhile, China and other large emerging economies… are beginning to experience slowdowns…Nor is renewed recession the only threat we now face. Even if a return to negative growth rates is somehow avoided, there will remain a real and present danger that Europe and the United States alike fall into an indefinitely lengthy period of negligible growth, high unemployment and deflation, much as Japan has experienced over the past 20 years following its own stock-and-real estate bubble and burst of the early 1990s.
via Roubini: Moving From the Post-Bubble, Post-Bust Economy to Growth | Credit Writedowns.
Mr Sulik (Slovakia’s speaker of parliament) is right. The EU-IMF rescue loans have not helped Greece pull out of its downward spiral. They have pushed the country further into bankruptcy. Greek public debt will rise from around 120pc of GDP to 160pc under the rescue programme, and the IMF is pencilling in figures above 180pc.
The rescue loans have rotated into the hands of creditor banks, life insurers, pension funds, and even a few hedge funds. ECB bond purchases have allowed to investors to dump their holdings at reduced loss, shifting the risk to EMU taxpayers. It is a racket for financial elites. A pickpocketing of taxpayers, including poor Slovak taxpayers.
“I’d rather be a pariah in Brussels than have to feel ashamed before my children,” he said.
via Even a Slovak ‘Yes’ will make no difference – Telegraph Blogs.
