Archive for the ‘Eurozone’ Category
A couple of points.
All lending to a sovereign is inherently unsecured. Contracts aside, there’s the problem of guns, and the government always seems to have more of them than the creditors do. Never mind that it’s relatively rare for lending to a sovereign to be backed by anything more than the “full faith and credit” of the government itself, which it can (of course) disavow. Remember that no Congress can bind the next one; this generally applies across the globe.
Alliances are always available should you find yourself in serious trouble. Cyprus, in particular, has suspected (but unproved) massive gas reserves and happens to have territorial waters through which people may wish to pass pipelines and similar things. Europe has a wee problem with this at present in terms of its energy infrastructure and requirements, and is largely dependent upon Russia. Cyprus has quite the whip hand, should it choose to exercise it following a departure from the EU.
Sovereigns have the privilege — and duty — of seigniorage. Duty? Why, yes. Privilege in that they have the right to issue into an expanding economy in order to balance output and keep the monetary unit stable, duty in that they have the responsibility to remove same during economic contractions so as to also keep the monetary unit stable. The EU is a failed system because it does not recognize this balance of right and responsibility and due to structural imbalances creates a forced subsidy model instead. This is an inherently unstable situation but neither Brussels or the periphery want to deal with it. The periphery has enjoyed quite a bit of these effects for years, but now the costs are biting hard.
IMHO the proper action is for Cyprus to tell the EU and ECB to bite it. Germany says:
“Cyprus has it in its own hands to prevent the state’s bankruptcy but time is running out,” said Hans Michelbach, a German lawmaker and ally of Chancellor Angela Merkel.
Germany has no right to dictate anything to Cyprus. Indeed, Germany and the ECB, along with the machinery at the EU, is at least as responsible for this problem as is the government of Cyprus, if not more so, as they have all failed in their supervision of these banking institutions for sufficient capital.
Let us not forget that these banks passed ”Stress Tests” from the ECB; they were thus claimed to be sound. The ECB should be told to suck it up and eat the consequence of their claimed “soundness”, in this case to the tune of the required €7 billion or so, for they did not flag the banks as unsound or demand they be closed before they exhausted their bondholder capital.
More to the point is that there is yet more gaming going on in this regard with the capital structure with the incessant reports that the real problem isn’t that the bondholder equity is exhausted — it is that with the deterioration that has occurred resolution of the institutions would cause the bondholders to take losses and that’s unacceptable. This, however, is at odds with the very capital structure and its definition.
In short this is the case of the ECB and certain EU members putting a gun to the head of a sovereign nation and demanding that they rob their people to protect those who invested knowing there was a risk of loss from the consequences of their bad investment.
Cyprus’ response to that ought to be exactly this:
And if the ECB and EU want to press the issue then do what Iceland did; tell the ECB and EU to stick it where the sun doesn’t shine, issueindictments against the Troika’s members for extortion and criminal fraud (prohibiting them from entering Cyprus — ever — unless they’d like to spend the rest of their lives in prison) and resolve the institutions forcing the losses on the bondholders but protecting the depositors.
Then trace all the criminal activity in these banks and where there is evidence of fraud or other criminal activity by other financial institutions interconnected with Cyprus issue criminal indictments against both the banks and the executives.
This has a decent shot at winding up with Cyprus leaving the EU. So what? Cyprus would get their national sovereignty back and given that they’re sitting on a bunch of natural gas deposits while the short-term pain would be considerable in the intermediate term they would wind up the winner, much as Iceland has.
The futures are open and down by 15, which doesn’t sound like much (about 1%)
The problem isn’t the magnitude of the drop. It’s the principle of the matter — Cyprus told its residents recently that there was no contemplation of taking bank deposits.
Bluntly, they lied.
Remember that Euro Zone depositors allegedly have bank account insurance just like we do with the FDIC in the United States. Their funds are supposed to be guaranteed by their respective governments.
Instead they are being stolen to bail out both outrageous speculation and rank malfeasance by government regulators who failed to shut these banks down before they invaded their depositor capital, an act that any reasonable person would consider grand larceny and an outrageous felony for which people should literally hang.
The problem is that all the politicians lie. Obama lies. Boehner lies. Reid lies. Pelosi lies. Merkel lies.
They all lie and in fact all they do is lie!
As we saw last week in the Senate Subcommittee hearing the entire “London Whale” scheme was a litany of lies, obfuscations and regulators ducking their jobs, despite virtually everyone admitting that they knew there was something wrong.
Nobody who lies pays, you see; the common man is the only one who pays.
And he pays so those who lie can loot, cheat and steal — and get away with it.
Confidence is a funny thing. People will stand for just about anything for quite some time, but eventually they have had enough and confidence breaks. When it breaks it does so suddenly, without warning.
Is this “the event”?
Who the hell knows.
What I do know with certainly is this: Unless the liars, cheats and scammers start facing the music — indictments, prosecutions and prison sentences, instead of being given license by the government to loot the people in furtherance of their schemes, confidence will inevitably be lost.
We’re well past the point where we should have had heads on pikes through lawful process.
We haven’t gotten that and there’s no indication that it’s going to happen either, despite the claims of many in Government and elsewhere.
Time is quickly running out for the process to remain peaceful and lawful. What comes next is something nobody who is sane wants to see, but if there is no change in the immediate future in the behavior of our national governments it is, unfortunately, inevitable.
BOE Warns An Imminent Private Equity Crash, China Just Sounded a Warning Bell For What’s Coming Our Way, Morgan Stanley: The Central-Bank-Inspired “Omnishambles” Is Closer Than Most Think, DEUTSCHE BANK: Only Jesus Can Save The Euro Area
Bank of England fears that larger private equity deals done in the boom years ‘pose a risk to the stability of the financial system’ as refinancing looms
The Bank of England warned on Thursday that the next phase of the UK’s six-year financial and economic crisis may be triggered by the collapse of debt-laden companies bought by private equity firms in the boom years before the crash.
In its latest quarterly bulletin, Threadneedle Street said the need over the next year to refinance firms subject to heavily leveraged buyouts posed a systemic threat.
The Bank added that it would use its new role as the watchdog of the City to monitor private equity deals in future “episodes of exuberance” to prevent a repeat of the debt-driven takeover boom in the run-up to the banking crisis.
“In the mid-2000s, there was a dramatic increase in acquisitions of UK companies by private equity funds,” the Bank said.
It seems more likely to Morgan Stanley’s Gerard Minack that central bankers may win the battle: sustaining recovery in developed economies with extraordinarily loose monetary policy. For a while this would go hand-in-hand with better equity performance. The battle is against a crisis caused by too loose monetary policy, elevated debt and mis-priced risk. Ironically, he notes, central bankers may overcome these problems by running even looser monetary policy, encouraging a new round of levering up, and fresh mis-pricing of risk. However, winning the battle isn’t winning the war. If central bankers do win this round, the next downturn could be, in Minack’s view, an omnishambles. In short, it seems more likely that central bankers may add another leg to the credit super-cycle. The key question for investors in this scenario is when (and how) this cycle may end, and Minack’s hunch is that this cycle is already closer to 2006 than 2003.
Let’s wind the clock back to 2008.
The world was thought to be ending. Lehman went bust. Markets were plunging. Everyone was scared that growth was over. It was as though the global economy was grinding to a halt.
But then China’s stock market bottomed. The Chinese Government announced a massive stimulus plan to turn its economy around. And sure enough the Chinese economy took off again.
A few months later, the US markets bottomed courtesy of extraordinary stimulus from the US Federal Reserve. Three months after that, the US economy was showing what everyone claimed were “green shoots.”
And the world began to gradually shift towards growth and increased confidence.
Why do I bring all of this up? Because it was China’s stimulus and China’s economy that supposedly lead the world back towards growth again. China is the proverbial canary in the coalmine, the economy that most quickly reveals what’s coming and where we’re all heading…
Well, China’s heading for inflation.
China should be on “high alert” over inflation after February’s figures exceeded forecasts, central bank Governor Zhou Xiaochuan said, signaling a heightened focus on controlling prices.
Monetary policy is “no longer relaxed” and is “relatively neutral” as demonstrated by a 13 percent target for money-supply growth that’s tighter than expansion in the last two years, Zhou, head of the People’s Bank of China, said at a press conference today during the annual gathering of China’s National People’s Congress…
“The central bank has always attached great importance to consumer prices,” Zhou said. “Therefore we will use monetary policy and other measures to hopefully stabilize prices and inflation expectations.”
China’s new leaders including Li Keqiang, set to become premier this week, inherit the task of sustaining a recovery from the slowest growth in 13 years while reining in asset prices and credit. February inflation, distorted by the weeklong Lunar New Year holiday, accelerated to a 10-month-high of 3.2 percent.
The bank’s research department transcribed Hafeez’s speech and sent it out to clients in a note.
The speech focuses on the euro area’s economic woes and the need for the currency bloc to move forward with further integration in order to be economically successful.
Hafeez opens the speech with a reflection on parenting and a child’s years as a “terrible teen.”
The gist is that euro member states are behaving like infighting teens – which is preventing further integration – and they need a role model that everyone across Europe can respect.
“I can only think of one figure that is respected by most Europeans and has never sinned, Jesus!” said Hafeez.
Japan is falling on their sword for the good of the NY & London criminal banksters by purchasing their worthless derivatives.
The Japanese have decided to perform Hari-kari on themselves and disembowel their economy on a global stage. In what can only be described as willful suicide, the BOJ has decided to begin buying derivatives. The most volatile financial weapon of mass destruction will be purchased by the Japanese, the question is why?
As the US economy continues its death spiral, Japan has been ordered to jump on the grenade and keep the dollar charade going for just a little bit longer.
Japan is finished, energy and food prices are through the roof and they are moving from the lost decades to being the lost civilization.
For all the groundless, starry-eyed optimism permeating Europe’s bureaucratic corridors of the fading oligarchy these days (because this time is not like every other time that, too, was different), there has always existed one sure, never-fail antidote: Germany, which without fail has managed to ground Europe any time its delusion of grandure hit escape velocity. Sure enough, while all the statist soothsayers who threatened with Armageddon if the outcome of the Italian elections happened to be precisely the one that transpired, were stuck in backpedal mode, and scrambling to calm nerves that all shall be well after all, one person who refuses to play by the script is Lars Feld, member of panel of economic advisers to German Chancellor Angela Merkel, who in an interview with the Frankfurter Allgemeine Zeitung tomorrow says the euro crisis is to return shortly and “with a vengeance” as capital loss will lead to higher risk premiums for Italy’s interest rates.
From Handelsblatt, previewing the FAZ Wednesday edition:
The Italian economy would not find their way out of the recession, according to the pessimistic assessment by Lars Feld: “The sustainability of Italian public finances is in jeopardy. The euro crisis will therefore return shortly with a vengeance.”
Apparently, the Italians were not ready to move on the path of reform that has been taken by Mr. Mario Monti, Field said.
“You can not expect that Italy’s European partners or the ECB will stabilize the Italian economy, when its people are not ready for reform.”
And making sure Feld is not alone, he was joined by Anton Boerner, head of Germany’s BGA exporters’ association, who in turn said Italy must reform tax, labor, judicial system or risk “irreparable damage” of euro. Finally, Boerner says if Italy not willing to reform, “we have to think about how to deal with a modified eurozone.”
What exactly a “modified” Eurozone means we don’t know. We will, however, surely find out soon enough.
European finance ministers eased the terms on emergency aid for Greece, declaring after three years of false starts that Europe has found the formula for nursing the debt-stricken country back to health.
In the latest bid to keep the 17-nation euro intact, the ministers cut the rates on bailout loans, suspended interest payments for a decade, gave Greece more time to repay and engineered a Greek bond buyback. The country was also cleared to receive a 34.4 billion-euro ($44.7 billion) loan installment in December. Greek bonds rose and the euro reached a three-week high on the accord.
See? All have to do is pull out a hand grenade and threaten to pull the pin! Even though doing so would blow you to bits along with everyone in the room you’ll get whatever you demand as nobody has the balls to call the bluff.
“This has been a very difficult deal,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels after chairing a 13-hour meeting that ended early today. “All initiatives decided upon today will bring Greece’s public debt clearly back on a sustainable path.”
How do you know Luncker, uh, Juncker, is lying?
That’s simple: His lips are moving.
There is no realistic way for Greece to pay what it owes. This means that the only real solution is for it to default, but that’s unacceptable because it means people have to take losses, and a large chunk of those losses would fall in places that can’t take losses — like the ECB.
“Official” losses would destroy credibility in the capital base of these institutions, including the ECB. That in turn could (and probably would) provoke capital flight, which would instantly destroy the ability of the ECB to “manage” interest rates and possibly even impair its ability to clear transactions.
That’s the real problem in a nutshell — the ECB and IMF made loans that they should have never made, all under the premise that “the Euro is inviolate.”
Such a declaration is functionally identical to declaring that the crazy aunt you have who is drug-addicted and steals anything that isn’t nailed down cannot be ejected from your home and is an “inviolate” part of your household, despite the fact that she’s draining you to the tune of over $1,000 a month in “stuff” that’s being pawned off to feed her habit!
You either cut that crap out or you’re (eventually) hosed.
More-ominously the Shanghai stock market broke a key technical level last night, declining into territory last seen in 2009. While we’re not yet at the nadir seen in ’08, the Shanghai market is threatening to head there — another ~30% down from here. There are some rather troubling analogues between China and Japan’s Nikkei all-time top, and the premise that China will continue to be in a position to power the debt-financing games that it has over the last decade or so looks to be on increasingly-shaky ground.
But the largest problem today is here in the United States. There is no realistic outcome given the positions of the Republican and Democrat parties in Washington today. The simple fact of the matter is that we have gotten to the point where we’re spending 30+% more than the government taxes through both parties, and to correct that both parties are going to have to accept that government simply cannot provide services that the people will not fund with current taxes.
That sounds easy, but it isn’t for two reasons: The ridiculous monopoly-style ramp-job in medical spending and the penchant for both political parties to lie about economic growth through the deficit spending of the last two decades.
In short $600 billion in deficit spending creates $600 billion in demand that otherwise does not exist in the economy. So is $1.3 trillion in deficit spending. The former was about 6% of GDP at the time (Bush’s Presidency) and the latter is about 8% of GDP, which are huge numbers.
Cessation of that spending is not just a political problem with the handouts that won’t happen, or with the lobbyists that will get told to stuff it, particularly in the health care arena. It is also a matter of admitting that we’ve been covering up a terrible economy for more than 10 years through these manipulations and that we must both accept reality and vow to sin no more.
Two words you’ll never hear in Washington DC make this very difficult: “I lied.”
But a refusal to tell the truth doesn’t change anything — it just makes you a serial liar, and arithmetic always eventually asserts itself. The bad news is that economic damage such as this compounds over time, and as such what was a 10% problem in 2000 turned into a 20% one in 2007 and now is approaching a 40% problem (in terms of government spending reductions) that are required to restore balance.
I’m sure you can figure out from that progression what happens if we don’t cut the crap, and soon.
Eventually you run out of other people’s money to pledge, and are forced to either pledge your own (and face that you’ll never see it again) or tell the person with their hand out to stuff it.
With creditors led by Germany refusing to put up fresh money or offer debt relief, the finance chiefs were unable to scrape together enough funds from other sources to help alleviate Greece’s debt burden, set to hit 190 percent of gross domestic product in 2014.
Yep. And now the IMF has a problem because its bylaws prohibit lending to nations with “unsustainable” debts, which it defines as 120% of GDP.
Then we must define “debt”; the US violates this in spades if you use the discounted cash flow requirement for entitlements as part of “debt.”
Isn’t it convenient that despite the claims of many, and beliefs of virtually everyone, the law does not define those forward promises in Medicare and Social Security as debts, and that is a settled matter within the courts as well?
Use your thinking caps folks; while at the present time the market is having a few shots of eggnog and (Wild) Turkey, the hangover is just around the corner.
One comment from the forum comes from our good friend TMD, who says…
A person who earns an average of $50,000 a year for 50 years has contributed $72,000 at today’s rates. You can go thru that in a week at the hospital. When you hear people say they paid for Medicare I want to tell them they paid for one hospital stay – the rest is just welfare.
Come join the conversation.