FedUpUSA

Archive for the ‘Eurozone’ Category

Oh no, it’s just Greece, right?  Uh, wrong.

BUDAPEST (Reuters) – Hungary is seeking an international credit line of 15 to 20 billion ($20 to $26.3 billion) euros, the secretary of state heading the prime minister’s office, Mihaly Varga, was quoted on Saturday as saying.

Hungary is seeking backup from the International Monetary Fund and the European Union to reassure investors it has financing even if it gets cut off from debt markets later this year.

Uh huh.  Remember that Hungary has been having some wee problems of late with regard to its government, the EU and IMF.

Hungarian bond yields are over 11%, which is not good at all in a world of ZIRP.  This effectively precludes most borrowing.

The problem with these pleas and “rescues” is that they continue to belie the real problem, which is that governments cannot continually borrow more than they tax.  It is simply not possible on a long-term basis for this to work, as compounding eventually gets you.  It might not immediately, but in the longer run it will with certainty.

Do I expect Hungary to eschew that which it must?  Not right away, and perhaps not at all until there’s a disaster, but in the end all governments must reconcile their budgets to this underlying fact — like it or not.

It may be starting….

(Reuters) – Germany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters on Friday.

“There are internal discussions within the Euro group and proposals, one of which comes from Germany, on how to constructively treat country aid programs that are continuously off track, whether this can simply be ignored or whether we say that’s enough,” the source said.

That’s not going to work out very well.

There are many reports that Greece is “close” to a debt deal on the swap and release of the next tranche of funds from the IMF, but if it includes this provision I bet it blows up.  There are already rumblings that it has, with the BBC reporting:

Greek officials have reacted angrily to a leaked German proposal for an EU budget commissioner with veto powers over Greek taxes and spending.

The Greek government said it must remain in control of its own budget.

The European Commission says it wants to reinforce its monitoring of Greek finances, but Greece should retain sovereign control.

Meanwhile, Greece and its private investors are close to a deal which will pave the way for a second bailout.

Negotiators say a tentative agreement could be finalised next week.

Uh huh.  The two are linked folks, and Greece is not going to give up budget sovereignty.

The only solution is for Greece’s government to quit spending more than they take in via taxes — that is, stop deficit spending.  This is the same problem around the world.

What is not understood among most people is that bankruptcies (defaults) among borrowers and thus recessions are necessary any time capital can be lent out at interest.

This is simply due to the fact that two exponential (compound) functions, such as growth of output and growth of debt, must always over time run away from one another.  If debt grows faster than output it will always eventually lead to insolvency.

That is a mathematical fact and there is nothing that can be done to prevent it.

Therefore, governments should not, in the main, borrow at all and if they do then lenders must accept the risk that such borrowing is unsecured and from time to time will lead to defaults and losses.

Until this recognition occurs and the price of lent capital reflects this fact — that is, “sovereign debt” stops being considered a preferred investment (preferably by ceasing to exist!) we will not find a solution to the problems that face the world economy.

As a refresher course in French politics, presidential elections are a two-stage process. In the first round, voters select from candidates of all the political parties. The second round pits the top two vote getters against each other.

Never before in history has a sitting French president polled so low 100 days before the first round of votes.

 
The video is as of January 13. The first round of elections is April 22, 2012. Here is the pertinent snip.

“Sarkozy’s ratings compared to previous presidents make grim readings. Sarkozy is not shown leading the first round of voting. We’ve never seen a president is such a weak position in terms of public opinion. If polls are to believed come May 6, the country will have a new head of state”
 
“Let the Euro Die” Candidate Trails Sarkozy by Slight 2 Percentage Points

Bloomberg reports Sarkozy Just Ahead of Le Pen in French Presidency Election Poll.

French President Nicolas Sarkozy is just two percentage points ahead of anti-immigration candidate Marine Le Pen less than four months before the presidential election, an Ifop poll for Paris Match showed.

In the first round, to be held April 22, Socialist candidate Francois Hollande would finish first with 27 percent, followed by Sarkozy with 23.5 percent and National Front candidate Le Pen on 21.5 percent, the poll published today showed today.

The top two vote getters then go to a decisive run-off on May 6, in which Hollande would beat Sarkozy 57 percent to 43 percent, according to the poll. Ifop polled 943 voters Jan. 9- 12. No margin of error was given.

Will Sarkozy Survive the First Round Vote?

Bloomberg reporter Gregory Viscusi depicts Le Pen as “anti-immigration“. Yes, that is true. However, Viscusi failed to mention Le Pen’s main claim to fame.
 
Le Pen is running on a platform to “Let the Euro Die” as I commented on September 8, 2011.
See link for Le Pen’s comments. This is what I said at the time.

German  Chancellor Merkel, Spanish Prime Minister Zapatero, Italian Prime  Minister Berlusconi, and Greek President George Papandreou will all be  gone after the next set of elections.

French President Nicholas Sarkozy may bite the dust as well, and if he does it may be to a vehemently anti-Euro candidate.

All it takes is one government to say “to hell with this” and the whole mess unravels.

The  current set of politicians all want to “save the Euro”. But what did  the Euro buy Greece, Ireland, Spain, or Portugal except misery?

Even German and Finnish voters wonder what it bought them.

Zapatero, Berlusconi, and Papandreou are now gone. You can kiss Merkel and Sarkozy goodbye as well.

Le Pen would not likely win a runoff with Hollande. Socialists dominate French politics. However, Sarkozy will not survive and Hollande has vowed to rework the Merkel-Sarkozy agreement.

Think that is going to fly? In what timeframe?
 
Eurozone About to Become Unglued

All of the agreements hammed out by two arrogant but tough-as-nails and widely respected leaders of Germany and France will fail. Whoever replaces Merkel and Sarkozy will not have the same respect and both will soon be gone.

Politics suggests that the Eurozone is about to become unglued.
 
Mike  “Mish”  Shedlock

The European debt crisis has just gone to an entirely new level.  Just when it seemed like things may be stabilizing somewhat, we get news of huge financial bombs being dropped all over Europe.  Very shortly after U.S. financial markets closed on Friday, S&P announced credit downgrades for nine European nations.  This included both France and Austria losing their cherished AAA credit ratings.  When the credit rating of a country gets slashed, that is a signal to investors that they should start demanding higher interest rates when they invest in the debt of that nation.  Over the past year it has become significantly more expensive for many European nations to borrow money, and these new credit downgrades certainly are certainly not going to help matters.  Quite a few financially troubled nations in Europe are very dependent on the ability to borrow huge piles of cheap money, and as debt becomes more expensive that is going to push many of them over the edge.    Yesterday I wrote about 22 signs that we are on the verge of a devastating global recession, and unfortunately that list just got a whole lot longer.

Over the past several months we have seen quite a few credit downgrades all over Europe, but we have never seen anything quite like what S&P just did.  Standard & Poor’s unleashed a barrage of credit downgrades on Friday….

-France was downgraded from AAA to AA+

-Austria was downgraded from AAA to AA+

-Italy was downgraded two more levels from A to BBB+

-Spain was downgraded two more levels

-Portugal was downgraded two more levels

-Cyprus was downgraded two more levels

-Malta was downgraded one level

-Slovakia was downgraded one level

-Slovenia was downgraded one level

This is really bad news for anyone that was hoping that things in Europe would start to get better.  Borrowing costs for many of these financially troubled nations are going to go even higher.

In addition, there was another really, really troubling piece of news that came out of Europe on Friday.

It was announced that negotiations between the Greek government and private holders of Greek debt have broken down.

The Institute of International Finance has been representing private bondholders in negotiations with the Greek government about the terms of a “voluntary haircut” that is supposed to be a key component of the “rescue plan” for Greece.

Greece desperately needs private bondholders to agree to accept a “voluntary haircut” of 50% or more.  Without some sort of an agreement, the finances of the Greek government will collapse very quickly.

For now, negotiations have failed.  There is hope that negotiations will resume soon, but Greece is rapidly running out of time.

The Institute of International Finance issued a statement on Friday which said the following….

“Unfortunately, despite the efforts of Greece’s leadership, the proposal put forward … which involves an unprecedented 50% nominal reduction of Greece’s sovereign bonds in private investors’ hands and up to €100 billion of debt forgiveness — has not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt”

The IIF says that negotiations are “paused for reflection” right now, but they are hoping that they will be able to resume before too long….

“Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach”

Something needs to be done, because Greece is experiencing a complete and total financial meltdown.

Back at the end of July, the yield on one year Greek bonds was sitting at about 40 percent.  Today, the yield on one year Greek bonds is up to an astounding 396 percent.

That is how fast these things can move when confidence disappears.

Those living in the United States should keep that in mind.

Unfortunately, Greece is not the only European nation that is completely falling apart financially.

We aren’t hearing much about it in the U.S. media, but Hungary is a total basket case right now.  The credit rating of Hungary was reduced to junk status some time ago, and now the IMF and the EU are threatening to withhold financial aid from Hungary if the Hungarians do not run their country exactly as they are being told to do.

In particular, the IMF and the EU are absolutely furious that Hungary is trying to take more political control over the central bank in Hungary.  The following is from an article in the Daily Mail….

The European Union has stepped up pressure on Hungary over the country’s refusal to implement austerity policies and threatened legal action over its new constitution.

The warnings escalated the standoff between Budapest and the EU, as Hungary negotiates fresh financial aid from Europe and the International Monetary Fund.

Over the past months, the country’s credit rating has been cut to junk by all three major rating agencies, unemployment is 10.6 percent and the country may be facing a recession.

But bailout negotiations broke down after Budapest refused to cut public spending and implemented a new constitution reasserting political control over its central bank.

Slovenia is a total mess right now as well.  The following comes from a recent article posted on EUObserver.com….

Slovenia’s borrowing costs have reached ‘bail-out territory’ after lawmakers rejected the premier-designate, putting the euro-country on the line for further downgrades by ratings agencies.

Zoran Jankovic, the mayor of Slovenia’s capital Ljubljana, fell four votes short of the 46 needed to be approved as prime minister by the parliament, with the country’s president set to re-cast his name or propose someone new within two weeks.

Some time ago, I warned that 2012 was going to be a more difficult year for the global economy than 2011 was.

Well, things are certainly starting to shape up that way.

Europe is heading for some really hard times.  What is about to happen in Europe is going to shake the entire global financial system.

Those that live in the United States should take notice, because the U.S. financial system is far more fragile than most people believe.

Our banking system is a gigantic mountain of debt, leverage and risk and it could fall again at any time.

In addition, the U.S. debt problem is bigger than it has ever been before.

For example, did you know that the federal government is on a pace to borrow 6.2 trillion dollars by the end of Obama’s first term in office?

That is more debt than the U.S. government accumulated from the time that George Washington became president to the time that George W. Bush became president.

For now the U.S. government is still able to borrow giant piles of super cheap money, but such a situation does not last forever.

Just ask Greece.

Already there are indications that foreigners are starting to dump large amounts of U.S. debt.  If this trickle becomes a flood things could become very bad for the United States very quickly.

We are on the verge of some very bad things.  The kinds of “financial bombs” that we saw dropped today are going to become much more frequent.  As governments, banks and investors scramble to survive, we are going to see extreme amounts of volatility in the financial marketplace.

Things are not going to be “normal” again for a really, really long time.

Hold on tight, because 2012 is going to be a very interesting year.

The Economic Collapse

The euro is a dying currency.  On Thursday, the EUR/USD fell below 1.28 for the first time since September 2010.  In fact, as I write this the EUR/USD is sitting at 1.2791.  Back in July, the EUR/USD was over 1.45.  But this is just the beginning.  The euro is going to go a lot lower.  At this point, there are several major European nations that are on the verge of default, the European financial system is overflowing with debt and toxic assets, and most major European banks are leveraged about as badly as Lehman Brothers was when it collapsed.  Most Americans simply do not grasp the gravity of what is happening.  Just because the Dow is sitting above 12000 and a few U.S. economic numbers have improved slightly does not mean that everything is going to be okay.  As I wrote about recently, the EU has a bigger economy than we do and they have a bigger banking system than we do.  U.S. banks are massively exposed to European sovereign debt and European banking debt.  When the financial system of Europe collapses and the euro falls apart it is going to rock the entire planet.  So you better look out below – the euro is coming down and it is coming down hard.  After the euro implodes, nothing is every going to be the same again.

So how far are we going to see the euro decline?

Julian Jessop of Capital Economics expects the euro to fall much further….

The relative strength of the recent economic data from the US is supporting the dollar more generally, and we expect this divergence to persist as the euro-zone slides into a deep and prolonged recession. Above all, doubts about the very survival of the euro itself are likely to remain a drag on the currency. We therefore continue to expect the euro to fall to around $1.10 by the end of the year.

Others are even more pessimistic.

As I have written about previously, the head of global bond portfolio management at PIMCO believes that the euro is going to go even lower than that….

“Parity with the dollar next year is not out of the question”

Can you imagine that?

1 dollar = 1 euro?

Don’t think that it can’t happen.

But the decline of the euro is just part of the story.  The truth is that Europe is on the verge of a financial collapse that could end up dwarfing the financial crisis of 2008.

Sadly, most Americans have no idea what has been going on in Europe the past few days….

-The stock of the biggest bank in Italy, UniCredit, is absolutely collapsing.  Shares of UniCredit fell 14 percent on Wednesday and 17 percent on Thursday.

-Shares of another major Italian bank, Intesa Sanpaolo, fell 7.3 percent on Thursday.

-Shares of three major French banks all fell by at least 5 percent on Thursday.

-Even shares of German banks are falling like a rock.  Shares of Commerzbank fell 4.5 percent on Thursday and shares of Deutsche Bank fell 5.6 percent on Thursday.

-The yield on 5 years Italian bonds is back over 6 percent and the yield on 10 year Italian bonds is back over 7 percent.  Analysts all over Europe insist that that the Italian debt situation is not sustainable if rates stay this high.

-Italy’s youth unemployment rate has hit the highest level ever.

This is mind blowing news.

But what is the top headline on USA Today right now?

“Employers Impose Bans On Smokers”

These are some of the other top headlines on USA Today right now….

“Automakers Rush To Offer Apps In Your Car”

“Bargain Season At Taco Bell, Pizza Hut, Wendy’s”

“Does Your Dog Understand You? Study Says Maybe”

Is that what passes as news in this country?

A financial meltdown of historic proportions is happening in Europe and you cannot even find anything about it on the front page of USA Today.

Amazing.

All of us need to snap out of our television-induced comas and start waking up.

Things are about to get really bad for the global financial system.

At this point so much confidence has been lost in the euro that even the Council on Foreign Relations is admitting that the euro is a failure….

The euro should now be recognized as an experiment that failed. This failure, which has come after just over a dozen years since the euro was introduced, in 1999, was not an accident or the result of bureaucratic mismanagement but rather the inevitable consequence of imposing a single currency on a very heterogeneous group of countries. The adverse economic consequences of the euro include the sovereign debt crises in several European countries, the fragile condition of major European banks, high levels of unemployment across the eurozone, and the large trade deficits that now plague most eurozone countries.

If even the CFR is throwing in the towel, that should tell you something about what is about to happen to the euro.

There is a very real possibility that we could see the euro break up at some point during the next couple of years.

It now seems that a report produced a while back by Credit Suisse’s Fixed Income Research unit was right on target….

“We seem to have entered the last days of the euro as we currently know it. That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.”

The European debt crisis just continues to get worse and worse.  None of the solutions that European leaders have tried have worked.  We are rapidly approaching the meltdown phase of this crisis.

As I have written about previously, it doesn’t take a genius to figure out what is happening in Europe.  The equation is simple….

Brutal austerity + toxic levels of government debt + rising bond yields + a lack of confidence in the financial system + banks that are massively overleveraged + a massive credit crunch = A financial implosion of historic proportions

Unfortunately, what is happening right now in Europe is eventually going to happen in the United States as well.

As I wrote about yesterday, U.S. debt is a ticking time bomb that is going to devastate the entire global economy at some point.  Nobody knows when the implosion will happen, but everyone knows that it is inevitable.

When Europe falls apart financially, that is going to make our own financial system much less stable.  What is happening in Europe could turn our “limited recovery” into a “major recession” almost overnight.

So keep your eye on the euro.

If the euro keeps going down, that is going to be really bad news for the global economy.

Unfortunately, the truth is that the decline of the euro is just getting started.

Hold on to your hats.

The Economic Collapse

Well look what we have here….

America’s central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.

The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

…

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

Actually, The Fed claimed it was not bailing Europe out in direct conversations with Senators at a closed-door meeting.

It’s convenient that Bernanke wasn’t under oath in recorded testimony when he made those comments isn’t it?

The reality of the so-called “bailout”, however, is small.  We’re talking about $60 billion, more or less, which is tiny in the grand scheme of things.

This makes one wonder “why”?  If it’s just year-end shenanigans, well then it is.  But what if it’s a trial balloon — to see if Congress — or anyone else — calls Bernanke on it?

If so then we better pay attention eh?