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The Imf Itself Has Become The Problem As Europe's Woes Return

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http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8012175/The-IMF-itself-has-become-the-problem-as-Europes-woes-return.html

Once a quorum of big names says the game is up in a debt crisis, events move fast and furiously.

Portugal neared the line on Friday when Diário de Noticias cited three ex-finance ministers warning that the country might have to call in the International Monetary Fund (IMF).

One spoke of a "reckless reliance on foreign debt"; another spoke of "runaway public spending". No matter that all were complicit in euro membership, the policy that incubated this crisis and now traps Portugal in its depression.

Portugal was a net foreign creditor in the mid-1990s. EMU has turned it into a net foreign debtor to the tune of 109pc of GDP. That is what happens when you cut interest rates suddenly from 16pc to 3pc.

Be that as it may, the comments struck a nerve. Yields on 10-year Portuguese debt surged to 6.15pc, back to May crisis levels when the EU faced its "Lehman moment" and launched a €750bn (£625bn) rescue blitz.

António de Sousa, head of Portugal's bank lobby, said his members are in dire straits. Banks cannot raise funds abroad, remain "extremely fragile", and "quite simply" will have nothing more to lend unless foreign capital returns.

Portuguese banks cannot survive on local savings. They rely on foreign funding to cover 40pc of assets (IMF data). Hence an urgent meeting between the central bank governor and President Cavaco Silva for an hour-and-a-half late on Friday. The governor said global funding for Portugal was drying up. Markets would no longer tolerate Portugal's leisurely pace of fiscal tightening.

Hours later, Portugal's leaders agreed to draft an emergency budget. So much for hopes that they could avoid cuts and let growth trim the deficit from 9.3pc of GDP in 2009 to 7.3pc. The first casualty is the high-speed train to Madrid.

Yet what exactly will austerity achieve? Combined private and public debt is 325pc of GDP (viz 247pc for Greece), so the country already risks a debt-compound spiral.

Lisbon has been cutting state jobs for several years. This has certainly crimped growth, but not cured the problem. Productivity is stuck at 64pc of the EU average.

The brutal truth is that Portugal lost competitiveness on a grand scale on joining EMU and has never been able to get it back. Convergence never came.

Ireland has shown what happens when you grasp the fiscal nettle, slashing public wages by 13pc – to applause from EU elites – without offsetting monetary and exchange stimulus. Irish bonds have spiked even higher to a post-EMU record 6.38pc.

This was triggered by two client notes: Barclays said Ireland may need the IMF's help; Citigroup's Willem Buiter said Ireland "may not be able to make whole" creditors of both sovereign debt and the bank. Dr Buiter has also said a default by Greece is "a high probability event".

Two years into its purge, Ireland has a budget deficit near 20pc of GDP. It is 12pc if you strip out the bank rescues, but the reason why the bad debts of Anglo Irish keep spiralling upwards is that the economy keeps spiralling downwards. House prices have fallen 35pc. Nominal GDP has contracted 19pc.

"Ireland's debt is ballooning, while its capacity to pay has collapsed," said Simon Johnson, ex-chief economist at the IMF. He said the country has made a Faustian pact with Europe, able to draw ECB loans worth 75pc of GDP so long as Irish taxpayers shield European creditors.

.......

Simon Johnson says the solution for EMU's orphans is debt reduction along the lines of "Brady Bonds" in Latin America in the 1980s, forcing creditors to share pain in an orderly fashion and giving debtors a way out of the morass.

In fairness to EU policymakers, perhaps the problem really is so big that if they let Greece, Portugal, or Ireland restructure debt they risk instant contagion to Spain, and from there to Italy. Perhaps they really have no choice. If so, monetary union has created a monster.

More at the link.

Monetary Union was always going to end this way as there was no convergence when the currency was created. A single interest rate was never going to produce a stable Eurozone.

Luckily it's contained.

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I want Will Hutton and the other f*ckwits who advocated this absurd politically inspired project to explain themselves.

Obviously they will displace the problem to God knows who, but they always will find any excuse for them doing something which never made economic sense.

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I want Will Hutton and the other f*ckwits who advocated this absurd politically inspired project to explain themselves.

Obviously they will displace the problem to God knows who, but they always will find any excuse for them doing something which never made economic sense.

I always felt that the driving force behind EMU was to create a currency with a size and strength to rival the dollar.

It obviously hasn't worked.

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I always felt that the driving force behind EMU was to create a currency with a size and strength to rival the dollar.

It obviously hasn't worked.

it is probably stronger than the dollar.

its the banks that need to be culled...If Europe can kill a few, NOW, they will have a huge head start on the US.

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I always felt that the driving force behind EMU was to create a currency with a size and strength to rival the dollar.

It obviously hasn't worked.

That's because they fudged the rules.

If you are going to have a common currency you need economic convergence and I'd would advocate no one runs a deficit, so a balanced budget is a necessity.

Once you start fudging the ripples will end up becoming a tsunami that will destroy the system.

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That's because they fudged the rules.

If you are going to have a common currency you need economic convergence and I'd would advocate no one runs a deficit, so a balanced budget is a necessity.

Once you start fudging the ripples will end up becoming a tsunami that will destroy the system.

indeed, as the backing for a currency these days is peoples labour, then the labour in each country should be producing the same...otherwise the weak will quickly fall...as they have.

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it is probably stronger than the dollar.

its the banks that need to be culled...If Europe can kill a few, NOW, they will have a huge head start on the US.

IF you measure it against the launch exchange rate,(1:1.18 Euro/dollar) then the Euro is definitely stronger than the dollar.

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The Machiavelli thought I've just had is did Germany want the PIIGS on board to create a weaker currency where it's exports would be cheaper? The DM was a very strong stable currency. How could they weaken it without appearing to do so? Get the PIIGS involved and on board to produce a weaker Euro (DM?) short term gain exchanged for long term economic crisis?

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The Machiavelli thought I've just had is did Germany want the PIIGS on board to create a weaker currency where it's exports would be cheaper? The DM was a very strong stable currency. How could they weaken it without appearing to do so? Get the PIIGS involved and on board to produce a weaker Euro (DM?) short term gain exchanged for long term economic crisis?

I doubt it, as already stated they wer probably just thick, ultimately Germany and China are going to lose the most out of this because they arent going to get paid (through inflation or default) for the work theyve done. They may not be as badly affected as all the debtor countries but its always the surplus countries that lose the most

Edited by Tamara De Lempicka

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good comment from poldark in the Telegraph comments:

Whenever there is discussion on economics and markets take this into consideration. From Money Morning

This is not a free market

The European Central Bank (ECB) reportedly ended up having to intervene in the bond market on Friday, after Irish bond yields spiked (in other words, investors suddenly developed an even more pronounced aversion to lending the Irish government money).

The source of the sudden spasm of fear? A Barclays Capital research note suggesting that Ireland might eventually have to get "financial assistance from the EU-IMF" if there were "unexpected losses in the financial sector".

We've come to something when a piece of analyst research is all it takes to rock confidence in a developed world sovereign bond market. Analysts churn this sort of stuff out every day. And it was hardly relentlessly damning. A healthy market could take this sort of thing on the chin.

Instead, we had the IMF rushing to deny that the country was in trouble. Or at least, any more trouble than it's already in: "we do not envision that IMF financing will be needed".

And of course, we had the ECB stepping in to the bond market to prop prices up. The Financial Times report on the purchase says that "traders said the intervention by the ECB was small - in the tens of millions of euros", but that's not really the point. After all, if prices had fallen harder, we can only assume that the ECB would have upped its purchases accordingly.

The point is, it's not a free market. Whether or not you think that's a bad thing (I think it's bad, but lots of people seem to be quite happy for governments to be embedding themselves in the markets) is neither here nor there. What is for sure, is that you can't take a view on these markets without trying to incorporate what central banks might do next. That political dimension has always existed. But now it takes precedence over any economic considerations, which makes 'investing' a gamble.

As anonymous blogger 'Tyler Durden' puts it on the Zero Hedge website, we know that central banks are openly piling into currency and bond markets every day. Maybe it's only a matter of time before we find them doing the same to equity markets. Markets "have now become merely a venue for global central banks to conduct domestic policy, and have lost all traditional capital formation and forward looking properties."

....................

I am sure central banks are fixing stock markets. They are supporting the ftse at 5000 and the Dow at 10000.

I find it surprising that the Euro has been rising against the $ recently given the eurozone problems. I suspect that it is being manipulated for the benefit of US exporters. I'd like to short it but just don't trust what's going in the markets atm.

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good comment from poldark in the Telegraph comments:

I find it surprising that the Euro has been rising against the $ recently given the eurozone problems. I suspect that it is being manipulated for the benefit of US exporters. I'd like to short it but just don't trust what's going in the markets atm.

Yep - Euro strength puzzles me as well.

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it is probably stronger than the dollar.

its the banks that need to be culled...If Europe can kill a few, NOW, they will have a huge head start on the US.

Why do you say that? Loads of banks in the US have gone to the wall. I can't think of any in Europe.

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Why do you say that? Loads of banks in the US have gone to the wall. I can't think of any in Europe.

nor can I..the small ones are like the corner shop going bust, when it needs a Morrisons to go due to oversupply ( sorry Morrisons...love your food..you are the best)

We need a major banking default. there are just too many of them making bad decisions...a busted one would focus minds...look how panicked they ALL were when Lehmans went....oh, and the World didnt end as they promised it would.

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Get the PIIGS involved and on board to produce a weaker Euro (DM?) short term gain exchanged for long term economic crisis?

Germany's surge has been almost an entirely unintended consquence . . . as with recent events. It has benefited from artificially low interest rates and a weakened currency from the mess the Greeks created. But you are correct . . . no one expects this latest export boom to be sustainable.

To me, the IMF policies - or should one say 'policy', its medicine hardly varies - seems only to exaggerate imbalances within Europe, throwing some countries into poverty with no hope of an export led recovery . . . particularly when competing against the likes of Germany. The newly created poor then only diminish the total European market for other exporters. As Paul Krugman said:

“At a time when the financial crisis is generalised across all developed economies – whether because those who borrowed the money now have difficulty paying back, or those who lent it now struggle to recover the money owed them – to which new planet are we all going to export?”

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  • 150 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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