Euros are in a muddle for the next decade

[triage]

Some holiday viewing: this BBC documentary about the travails of Spain "feels" a bit dated but actually only came out earlier this month. It seems to arrive at one conclusion, that it is the euro that is at the core of Spain's problems, but it does not even attempt to explore any viable solution.

It identifies three things that contributed to Spain being the trainwreck it is today: fairly autonomous regional governments that were given enough space to behave irresponsibly, fairly unregulated unrestrained regional financial instututions and a freeing up of town planning rules that allowed an explosion of construction to occur. Together with the easy access to cheap credit that joining the EU gave Spanish entities these were enough to cause systemic havoc even though the national government of Spain was one of the better behaving governments in the EU. Nowadays the euro is offering the type of support to Spain that the noose offers to a hanged man in that it is preventing Spain from devaluing itself back into being competitive.

The program ends with the suggestion that if Spain continues on with the euro this may put unsustainable pressure on the unity of the country, with the possibility of the richest region, Catalonia, which has its own language (and football team), breaking away.

http://www.youtube.com/watch?v=ldu8X_UQPRA

I was not aware that modern Spain is as new as modern China (Franco only carked it a year before Mao).

h/t markco2 on hc

[Dave_vic_ozz]

In Reply To: sette's post @ Dec 12 2012, 06:49 AM

Agree and agree.

BUT - Rejection hurts. The rest of the EU would be horrified. Little gain long term, surely?

Dave

[sette]

This is for Dave,
http://www.theage.com.au/business/montis-e...1211-2b7oc.html

Again proof that things are much more complicated than we think. We underestimate the volume of private wealth in Europe and our thinking is very superficial at times.

[nipper]

Merkel Signals Debt Write-Off Possible as Buyback Begins By Patrick Donahue - Dec 3, 2012

Chancellor Angela Merkel opened the possibility that Germany may ultimately accept a write-off of Greek debt, as policy makers this week attempt to engineer a buyback that's crucial for Greece to receive more funding.

With Greece announcing bids today to repurchase bonds issued earlier this year, Merkel told Bild newspaper yesterday that euro leaders might consider writing off debt once the country has a budget surplus. Germany has until now ruled out such a scenario as violating European Union treaties.

Greece one day can rely once again on its own revenue, without having to borrow, then we'll have to look at this situation and make an evaluation," German Chancellor Angela Merkel told Bild am Sonntag in an interview when asked about the prospect of debt forgiveness.

"If Greece one day can rely once again on its own revenue, without having to borrow, then we'll have to look at this situation and make an evaluation," Merkel told Bild am Sonntag in an interview when asked about the prospect of debt forgiveness. It wouldn't happen before 2014 or 2015, "if everything goes according to plan," the chancellor said.

The shift on Greece's mounting indebtedness, which triggered Europe's debt crisis three years ago, signals a growing consensus that a Greek exit could doom the 17-member single currency. German lawmakers approved the latest package to alleviate Greece's burden after Finance Minister Wolfgang Schaeuble said a default could foreshadow the euro's collapse.

Merkel's signal of openness to eventual debt forgiveness marks "the end of denial," Carsten Brzeski, an economist for ING Groep in Brussels who, said in a phone interview. "It's definitely a shift, but on the other hand, it's obvious," said Brzeski, who called an eventual debt writedown inevitable.

Extra Time
Last week's agreement by European finance ministers to give Greece more time to meet its debt targets helped ease concerns over the crisis. Spanish 10-year bonds posted a third monthly gain, with yields sliding last week to 5.3 percent from 5.6 percent. The euro rose almost 2 percent in two weeks.

EU finance ministers will meet again in Brussels today as Greece starts the repurchase operation. The Public Debt Management Agency in Athens announced an offer to spend as much as 10 billion euros ($13 billion) to buy back bonds, swapping them for six-month bills issued by the euro area rescue fund.

Greek debt rallied after the buyback specifics were published. Ten-year yields fell 41 basis points to 15.7 percent, the lowest in more than 15 months.

The transaction lies at the center of new measures aimed at helping scale back Greece's debt load to a level policy makers consider sustainable: 124 percent of gross domestic product by 2020, down from a projected 144 percent if policy makers hadn't acted.

The complex repurchase measure accounts for 11 percentage points, or more than half, of that drop, according to a letter Schaeuble wrote to German lawmakers Nov. 28. Should it fail, Greece's creditors will have to go back to the negotiating table and try something else, Schaeuble said last week.

New Bonds
What constitutes sustainable debt has spawned tension between the EU and the IMF. IMF Managing Director Christine Lagarde, who has taken a harder line on the 2020 target, said the fund's contribution to the next aid tranche will hinge on the success of the buyback.

The repurchase will target about 62 billion euros of new bonds issued as part of a swap of privately held debt earlier this year, the biggest debt restructuring in history, according to a draft troika report. Greek banks hold some 15 billion euros of those bonds, while the country's pension funds hold 8 billion euros.

The success of the measure, considered risky because of bondholders' reluctance to part with securities they might be able to hold to maturity, could rest with cajoling Greek banks to participate, ING's Brzeski said. Greek Finance Minister Yannis Stournaras has called the repurchase voluntary.

'Peer Pressure'
"It can only work if there is some kind of peer pressure on the Greek banks," Brzeski said, estimating that that alone could take 20 billion euros in Greek debt off the market.

The amount to be raised has been left open, giving an element of leeway for euro policy makers and freeing them to fill in the blanks after the buyback ends. European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters in New York on Nov. 30 that he was refraining from giving an "explicit target figure" for the repurchase.

While Greece has gotten pledges for 240 billion euros of aid, the funds have been frozen since June as the government tries to get its bailout program back on track after it was disrupted by two elections and a deepening recession.

The efforts to wrest Greece from collapse is part of a move toward moderation among leaders in northern Europe who earlier led a drive of austerity measures and often flirted with the prospect of expelling the country. Merkel's visit to Athens in October ushered in a period of detente.

"The idea that Greece would have to leave the euro against its will would still cost us much more money than the path we've chosen -- and cause great harm to our economy," Merkel told Bild in yesterday's interview. "We need to avoid all this uncertainty."

http://www.bloomberg.com/news/2012-12-02/m...es-buyback.html


Merkel's signal of openness to eventual debt forgiveness marks "the end of denial". (or , more likely, the beginning of the end of denial)

[triage]

Here is a recent blogentry and a link to an article by the (moderately right of centre) US economist Tyler Cowen. His prognosis is that things will likely just muddle along for some time, with some debt foregiveness needed for a "positive" resolution (which apparently he thinks an unlikey development).

http://marginalrevolution.com/marginalrevo...one-doomed.html

What he describes where the reaction to improving conditions is for the pollies to slacken off and the reaction to souring conditions is for the pollies to do enough to pull things back from the brink seems to me to be a classic example of the "reflexivity" that George Soros uses to explain how markets work. According to that theory things often don't develop as expected because people see what is developing and change their behaviour which in turn changes how things develop.

[bam_bamm]

In Reply To: nipper's post @ Nov 30 2012, 11:45 AM

Key events to keep an eye out for over the next week

Sound like more gabfests to me.

[nipper]

In Reply To: nipper's post @ Nov 22 2012, 02:43 PM

Resolution in the eurozone is less likely to come on the back of one 'silver bullet' announcement, but a series of smaller policy resolutions, which will unfortunately draw out the crisis over a longer period of time. Similarly in the U.S., PIMCO's base-case resolution to the fiscal cliff debate is a two-step deal, incorporating a short-term mini-bargain, which will only go part-way in reducing the 4.5% contraction.Implication: Don't expect a quick and clean resolution to the developed world's problems.

• The role of the ECB - The ECB's Outright Monetary Transactions (OMT) announcements in August and September provided much-needed liquidity to the markets, but ultimately, there is only so much a central bank can do - the ECB can only provide a bridge for the EMU's problems, not a solution. Debt problems, competitiveness issues and growth concerns need to be addressed by policymakers themselves.Implication: Look beyond ECB announcements and look for tangible policy announcements from policymakers.
• Imbalance and contagion - Although eurozone countries have relatively open borders, they do not enjoy the labour mobility seen in other developed countries, which exacerbates their economic conditions. Because of this, the ability to find internal equilibrium between parts of the economy, normally available for an individual country, is not so easy to achieve in the eurozone. Implication: 'Muddle through' is likely to continue, so plan for the long-term.
• Monetary Union with no Political Union - While eurozone member states are connected by a single currency and monetary body, what is lacking is political unity across the states. As a result, politics will likely continue to be a highly influential factor on markets.
• Implication: Market volatility will likely continue to be heavily tied with political events.

Inflationary pressures - While inflation does not appear to be an immediate concern, the unprecedented levels of unconventional monetary policy actions by global central banks continues to fuel long-term inflationary pressures

Key events to keep an eye out for over the next week:

30 November - Francois Hollande meets ECB President Mario Draghi
02 December - Eurogroup Meeting of eurozone finance ministers
04 December - Bank of England Monetary Policy Committee meeting
06 December - EU interest rate announcement
12 December - EU Summit

[nipper]

In Reply To: triage's post @ Nov 20 2012, 07:15 AM

phew, indeed

Decision Time

After months of squabbling in the eurozone, where does Greece stand? In short, disappointing economic and financial developments: gross domestic product has contracted more than anticipated under prior bailout agreements; unemployment has risen further; domestic payment arrears are at record levels; and debt is still way too high.

Part of this reflects incomplete policy implementation by Greece, and part is due to problems in the design of previous programmes. In regards to the latter, there is a serious question to be asked of policymaker intentions: do they truly believe in the outright merit of their actions, or are they acting out of fear of the alternatives? PIMCO believes it is more the latter than the former.

Rather than provide a solution, the current approach seeks to buy more time and to avoid fundamental decisions. It is hard to find many officials who believe that a revamped Greek programme will do what all of us hope for - namely, restore economic growth, jobs and financial stability. What that means is that yet another Greek rescue will stand no greater chance of success than previous ones, doing little more than buy a few more months for a struggling Greek population.

Judging from signalled actions (as opposed to the diplomatic words), there is insufficient commitment to retaining Greece within the eurozone, and there is no plan for an exit that minimises dislocations. Instead, Greece and the troika of external creditors (the European Central Bank, European Union and the International Monetary Fund) have opted again for the muddled middle - one that talks about sustainable eurozone membership but does not do enough to make this highly probable.

Implications

In all likelihood, further policy announcements by the European policymakers will continue to have notable effects on the markets, but PIMCO continues to look through these short-term volatilites and focus on the long-term, choosing to look for the policy announcements that point to fundamental changes that encourage increased growth potential, better productivity levels and a reduction of debt.

This communication is based off an original article written by PIMCO CEO and Co-CIO Mohamed El-Erian for the Financial Times (http://www.pimco.com/EN/Insights/Pages/Time-to-decide-whether-Greece-is-in-or-out-of-the-euro-.aspx).

[triage]

Phew! Well apparently the worst of the mounting crisis for the euro has passed, there's no longer anything to see, time for us to all move along and get on with investing as usual....

...well that's according to the Spanish pm, Mariano Rajoy.

http://www.telegraph.co.uk/finance/financi...h-PM-Rajoy.html

And we can rely on the advice and predictions of european politicans, right?

Actually politicans seem to be the inverse of a lot of the tin foil hat blogosphere, such as zerohedge, in that the latter every day are able to pick 4 or 5 imminent crises very few if any of which seem to actually come to pass whereas the pollies seem to always be saying how the worst is behind us only for another wheel to fall off shortly after.

And for something slightly different, some time ago I posted this list:

"Spain is not Greece" - Elena Salgado, Spanish Finance minister, February 2010.

"Portugal is not Greece" - The Economist, April 2010.

"Greece is not Ireland" - George Papaconstantinou, Greek Finance minister, November 2010.

"Spain is neither Ireland nor Portugal" - Elena Salgado, Spanish Finance minister, November 2010.

"Ireland is not in 'Greek Territory'" – Irish Finance Minister Brian Lenihan. November 2010.

"Neither Spain nor Portugal is Ireland" - Angel Gurria, Secretary-general OECD, November 2010.

"Italy is not Spain" - Ed Parker, Fitch MD, June 12, 2012

"Spain is not Uganda" – Spanish PM Mariano Rajoy, June 2012

"Uganda does not want to be Spain" - Ugandan foreign minister, June 13, 2012

http://dailycapitalist.com/2012/06/22/spai...-choice-quotes/

Now we can add the observation of our very own Wayne Duck to that list of denials. He recently sternly reprimanded the analyst Andy Xie for drawing some comparisons between Australia's predicament and that of Spain's. Yes apparently Australia is not Spain.

http://www.macrobusiness.com.au/2012/11/xi...ralia-as-spain/

[triage]

Et tu France?

The Economist magazine has come out with a confronting (to some) cover story, highlighted by one of their killer cover designs. Those steenking english dogs have dared to question whether France is any longer the steady foundation of Euroland - silly impudent question of course as every Frenchmen knows that France is was and always will be the centre of all civilisation ....

http://www.economist.com/news/leaders/2156...time-bomb-heart

They really do have a clever arts department - exploding baguettes - how sharp a symbol is that - sure to get up the noses of most gauls. It is almost worth checking out the Economist just for their cover designs.

Though I have to say that this financial crisis that we are living through is getting to be more like one of those day time soap operas with numerous new plots starting up even before the old plots have fully run their course. It would be nice if they would get one crisis and collapse out of the way before they start musing about new crises and collapses. I mean wasn't Iceland supposed to totally collapse?, but it didn't, and Ireland was a basket case but now it's not so much, and I am sure six months ago most of the punditry was assuring us that Greece was a dead man walking, and yet it continues strolling along, and Spain, even Paul Krugman was calling it to crash and burn but it seems to be hanging in there for the time being (then of course there's the USD that Peter Schiff and others said in 2005, and again in 2008, was dogmeat but seems to be still running at Flemington, and there's the bug in search of a windsreen otherwise known as Japan...). Maybe one or all of these crises will suddenly erupt but we seem to be talking geological timeframes rather than investment timeframe.

The Economist journo puts the timing of France hitting the wall as possibly as early as next year Jim O'Neill aka the goldman sachs analyst who came up with the BRIC acronym seems to think the task of righting things within the EU may have to wait until after the German elections are held later next year (from late August to late October).

http://www.businessinsider.com/jim-oneill-on-europe-2012-11