“Given that one of the root causes of the current sovereign debt
crisis are unsustainable fiscal policies, I want to emphasise that this calls for a clear strengthening of incentives for prudent and sustainable fiscal policies. The introduction of common bonds in the euro area would, however, clearly weaken such incentives without
offering a long-term crisis resolution.”
via Jürgen Stark: Hearing at the Committee on Economic and Monetary Affairs of the European Parliament.
Merkel and Sarkozy claim they’ve got everything under control. They’re lying. Anyone who uses common sense can tell this. The reason…
They’ve never considered the true price tag for the leveraged EFSF. I’m not talking about money, I’m talking about funding costs for France and Germany when they lose their AAA rated status as a result of backing up Greece. First off, while France and Germany are the most solvent members of the EU, they’re not exactly models of fiscal austerity. Consider that both countries officially have Debt to GDP ratios of roughly 80% (Germany’s is 78% and France’s is 84%).
Efforts to cut the deficits in these [EU Mediterranean] countries are not failing because of different reasons in each nation, although there are some such. They are failing because of misguided austerity plans.
Spending cuts and tax increases drive GDP down faster than the deficit, causing the deficit:GDP ratio to rise rather than fall. These measures are being imposed on economies with rigid labor markets, no history of entrepreneurial innovation, high taxes, and regulations that strangle their private sectors. That is not to say that the roles played by governments should not be reduced: They should. But without growth-inducing reforms, all the cutting will continue to be for naught.
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.
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.
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.
