Monday, July 18, 2011

You heard it here first..

The euro and the endgame

The notion that the euro is a terminally sick freak of nature has at last gone mainstream..

Posted by uncle tom @ 10:06 PM (2383 views)
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24 thoughts on “You heard it here first..

  • I’ve just read the BBC article – are we approaching a “sort of” Tipping Point?

    Tonight Al Jazeera comments: The markets want “Europe to sing with one voice, make decisions quickly to resolve Greece’s problems”, Kathleen Brooks, at Forex.com, said. “Show markets there is someone in control of the situation.”. “Right now, none of the branches of power within the EU are doing that so investors are selling euro-based assets,” Brooks said.

    Al Jazeera continues “Bullion has gained 8 per cent in 11 days”.”Gold prices have jumped to a record high as world stocks and the euro stumbled on fears the debt problems in Europe and the United States may spiral into a global crisis”.

    What’s happening? They all seem to be asleep at the wheel….or is it a very special type of brinkmanship that’s totally beyond me?

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  • “There is now talk of private investors writing off 25-30% of Greek debt, either through a buy-back or a debt swap. It would need to be voluntary and somehow avoid being declared a default.

    Have the ECB employed Harry Potter or Moldevort to assist them with this?

    “Europe could take a giant leap towards integration and so all debt would become European debt. It could only do this with fiscal union – and that almost certainly would need the backing of political union.”

    Sorry, scrub the last idea. Fiscal union requires Moldevort’s expertise.

    “German voters will have to be persuaded that it is in their interest to give more money to Greece.”

    Lost for words now. Mere wizardry will not suffice.

    “Some are now openly advocating political union as the solution to the crisis. The former EU Commissioner Emma Bonino was refreshingly candid when I met her in Rome last week. She believes that a United States of Europe is the answer. She accepted that political union would have to be put to the voters.

    Jeez, that was awfully big of her. The fact that such a statement is required says a lot about the people who run the EU.

    What a mess!

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  • qg – agree!

    alan – I like your input – you think before you type, do your homework, and don’t sign up to some of the ludicrous theories that get banged on about here – ad infinitum..!

    – Keep up the good work..:-)

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  • Meanwhile, gold is nudging £1,000 / $1,600 an ounce.

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  • If only this could be attributed to Greece alone, boundaries could be set in place and sensible plans made (I assume they want to fix things).

    However, reporting on yesterday’s activities, the FT logged:
    Italy’s benchmark 10-year bond yields rose 27 basis points at 6.03 per cent in midday trading. Spanish yields hit 6.35 per cent (debt auctions take place Tuesday and Thursday).

    For Spain, its the highest percentage this side of the Millenium! The markets do not seem to be showing confidence towards these other EU countries either.

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  • “She believes that a United States of Europe is the answer. She accepted that political union would have to be put to the voters.”

    Jeez, that was awfully big of her. The fact that such a statement is required says a lot about the people who run the EU.”

    At last . An admission they have been operating without any mandate for the last 50 years .

    Soon as this scum are hanging from lamp posts the better .

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  • Sorry, I forgot Portugal.

    Telegraph says:
    “Portugal’s new leader Pedro Passos Coelho has told the nation to brace for further austerity measures after his government discovered a “colossal” €2bn (£1.7bn) hole in the public accounts left by the outgoing Socialists. Yields on two-year Portuguese debt rose to a fresh record of 20.3pc on Monday, reflecting fears by investors that the country would struggle to pull itself out of downward spiral without some form of debt restructuring”.

    …Toast, anyone?

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  • I really don’t care if the Euro thrives or dies but they’ve got this in hand. The press is running off at the mouth and misinforming everyone, presumably to attract more readers (shock horror)

    6% ish yields are hardly sensational by historical standards

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  • I don’t think it the end of the road for the euro by any stretch; there are too many people with vested interests….

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  • @flashman,

    I think the press is running with this because the Euro is unpopular with a large percentage of people. In recent years, the EU has increased its power over member states to a degree which is unacceptable to many folk.

    When power structures ruled by tyrants (or unelected officials) come under attack, lots of people come out of the woodwork to put in a knife, however small. Maybe they are encouraged by the “Arab spring” or the NOTW debacle, I’m not a sociologist…

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  • flashman @ 7 “6% ish yields are hardly sensational by historical standards”

    True, but everything comes back to market confidence..

    Italy very nearly spiralled into default in the 1990’s, but was saved by a combination of austerity measures, reasonable GDP growth and the low interest rates of eurozone membership – the prospect of which was their salvation in the eyes of the bond market at the time.

    Italian GDP took a big hit in 2009/10 and has only come limping back. Meanwhile debt to GDP is close to record highs.

    The core issue today is that Italy has been running a budget deficit, despite historically low interest rates on its debt. Recent events have pushed Italian 10yr yields from 4% to 6%, which with debt at 120% GDP equates to roughly 5% of tax revenue – just to pay the extra interest.

    Italy’s recent austerity package will not stop their debt to GDP ratio reaching record highs, and banks a very optimistic projection of GDP growth in its projection to zero their budget deficit.

    They are swimming against the tide – like other members of the PIIGS, the euro has made their exports uncompetitive and their tourism unattractively expensive. Devaluation would give the Italians a route to economic salvation without defaulting – a route that is barred to them while they remain members of the eurozone.

    The bond market needs to be very confident that Italy will pay its debts, if it is to enjoy low borrowing costs. and so far it has only priced in a modest degree of risk.

    Italy is one of only a small number of countries in recent years who have a managed to reduce their debt to GDP ratio after it has topped 100% (albeit modestly) – and while the markets hope for an encore, their demographic profile and continued eurozone membership do not augur well..

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  • While the media’s radar is firmly fixed on Murdoch, it is good to see a well balance article from Gavin Hewitt of the BBC.

    The only future for the EU and Euro is political and fiscal union… but time and sentiment is running out faster than the politicians can react or organise the next summit. Those stronger members can see that to take the step to a Federal European Union can see that the weaker states will be a drain on them for years to come. Germany has recent experience of the continuing costs of their own unification. If national debt is to become EU debt will that help, or will it mean a Federal European starts life a sickly child?

    If there is to be an ‘FEU’ or ‘USofE’, what is the future for those EU members such as the UK who are outside the Eurozone?

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  • alan: Yes it is unpopular with a large number of people (particularly in this country) but it’s still a shame that the press would rather pander than inform. Luckily we’ve got that mighty bastion of impartiality, the BBC. I quite like the convenience of the Euro but other than that I find it hard to get passionate about it one way or another.

    uncle tom: The Euro ‘crisis’ is a microcosm of what is happening in the wider world vis-à-vis debt. I posted an explanation yesterday of the likely mechanics for patching up the Greek/Euro but these mechanics equally apply to the whole world.

    The debts in this world are roughly equal to the surpluses. When the debts and surpluses become too big and concentrated (as they are now), all that has to be done is a certain amount of paper modification and shuffling.

    It is no ones interest that large numbers of debtors collapse, so the creditor countries/entities/people forgive, convert, modify or transfer a certain amount of debt. In the case of Europe, Germany is a large surplus country, so there is internal scope for the above-mentioned activity. Germany is indirectly responsible for the internal trade imbalances, via the Euro damaging the weaker countries former ability to compete, so it is only fair that they take the brunt of the ‘shuffling’

    In any given crisis, a certain number of debtors are usually allowed to collapse because they are either unimportant or need to be taught a lesson but there is absolutely no mathematical reason why collapse has to be systemic. If they want to save the Euro then they can. A few years ago there was a great punch up over Germany and France breaching the Euro rules by going over the 3% current account spending rule. France and Germany ARE the Euro, so no one could do anything about it. Consequently everyone broke the spending rules and we are where we are now. If they all decide to keep the Euro, then going forward, the spending rule will be strictly enforced, unless of course Germany and France decide otherwise. Countries like Greece that decide to keep the Euro (if they do) will live in relative poverty for quite a few years because the debt paper shuffling exercise will come with strings attached. The strings will be the almost total control of their spending by national banks of Germany and France. This is quite ironic because France and Germany were the first to flout the Eurozone spending rules.

    The above is, in no way, meant to be taken as a defence of the Euro. There are good reasons why some countries should leave the Eurozone but the same countries surprisingly see some reasons for staying. If I was a Greek citizen, I would probably want my country to default but there would be severe consequences. In Argentina there was dislocation and some serious individual poverty after their default. Greece can’t really win either way. They will have to muddle by with less, for quite some time

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  • The ex Financial minister in the deposed Argentine government mentioned in the comments should not be listened to, because he was the crook responsible for their mess.

    I don’t agree with even the current EU political collusion and usurpation let alone losing complete loss of sovereignty for the UK or any other Sovereign nation. The EU as a political and economic union is a corrupt failure, it should only be a trading bloc.

    Greece needs to:
    * prosecute their errant bankers, including those abroad
    * do a government debt audit
    * privatise all ‘bailout’ private debt
    * void all Odious Debt
    * prosecute all the government officials who supported bad debt and Odious Debt
    * replace the current government
    * leave the EU
    * impose currency and asset controls to stop them fleeing the country
    * rapidly find and deport all IMF, EU and other financial terrorist reps
    * sue the financial terrorists in the USA and Europe
    * restructure the genuine debt, which may require some default
    * bring back their own currency
    * impose flat rate blanket taxes with no loopholes
    * gradually shrink the public sector to something they can reasonably fund
    * get used to a lower, affordable standard of living

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  • Hello Flashman, where is the link to what you wrote yesterday.
    On the face of it, what you are saying sounds very hard to comprehend.
    Would an asset be a country’s tourist attractions or are you talking about assets as money in what sort of institution’s bank account?

    Thank you,

    Mike

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  • @ Flashman,
    I read your analysis of debt reduction for Greece. It is possible to go this route, with enough support.

    However, the problem the EU might quickly run into, once you progress along this path, is that everyone else wants their debts reduced too. I’ll not write a big article about who else might be getting their begging bowls ready, but you can see the possible drawback, perhaps?

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  • Hi mike. Here’s the link. My post is near the end

    http://www.housepricecrash.co.uk/newsblog/2011/07/blog-greek-pm-knows-game-is-up-for-greece-game-is-also-up-for-the-rest-of-eu-time-to-change-the-game-34119.php

    alan: it all comes down to my previous comment ‘the debts in this world are roughly equal to the surpluses’. If everyone gets their begging bowls out, then there is theoretically enough of a surplus sitting around somewhere to net off the required portion of the debts. Don’t get me wrong, there is a heavy price to pay for this crap and it would have been far better if everyone had stayed sane in the first place and the ‘gift’ being offered to the beggars is more akin to a cosh than a present. It is also worth mentioning that once the dust has settled, worldwide coupons will inevitably be higher across a broad spectrum of rates. This stuff is not free or without serious consequence

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  • Flashman,

    I think you’re muddling trade surpluses/deficits with budget deficits/surpluses. A trade surplus is in private hands, and is not money that a government can pilfer in order to sort a budget issue. While trade surpluses are accorded to the relevant nation, the actual money tends to move around, and is sometimes never remitted into the banks of the country concerned.

    Germany does not have a budget surplus – in fact it has a significant deficit, and its sovereign debt pile is a rather nasty 80% of GDP.

    The German government does not have pots of cash to dish out – it’s pretty much broke!

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  • uc: You are correct that it’s not always the countries that physically hold the surpluses or debts. That’s why I said, “so the creditor countries/entities/people forgive, convert, modify or transfer a certain amount of debt”. Many surplus countries do actually have giant sovereign wealth funds but that is beside the point. We are talking about the shuffling and modification of debt paper rather than cash payments. Also beside the point but worth noting is that a surplus country has a much bigger tax take than a deficit country, which is how the governments get their share of the surpluses made by their associated entities. As a consequence of being a large surplus country, Germanys credit score is so good that they are able to raise giant sums of money with a very low coupon. This same credit rating is also part of the reason why they are able to transfer the discounted Greek debt onto their national banks books and to effectively underwrite the issue of new lower coupon, longer maturity Greek bonds. There are many measures of how rich or poor a country is and by most of them Germany is pretty far from broke

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  • “so the creditor countries/entities/people forgive, convert, modify or transfer a certain amount of debt”

    They could in theory, but don’t in practice – unless they believe that it will ultimately make them richer as a result.

    Is it in Germany’s interest for the euro to survive? They probably have a marginal economic interest, but from the polls, most Germans disagree.

    Does it make good economic sense for the Germans to borrow heavily to shore up the PIIGS? – Absolutely not – and why should they?

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  • uc: I’ve avoided making any economic or political judgement on it because i don’t have sufficient opinion either way. That’s why I’ve just stuck to the mechanics of it. Don’t shoot the messenger but for whatever reason, the governments involved (and several governments who are not involved) seem to what to preserve the integrity of the Euro and it’s member states. They do have the means (as previously described) and the political will to do it do it. The funny thing is that the political will of the governments involved seems to be divorced from the political will of their people. That is quite a strange state of affair for democratic countries which is probably why you and so many others accuse the Euro/Brussels machine of being undemocratic

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  • “which is probably why you and so many others accuse the Euro/Brussels machine of being undemocratic”

    Which it most certainly is.

    National politicians like the machine for its hospitality, and the fact that when they get kicked out by their home electorates, they can walk into a cushy overpaid post in Brussels – provided they’ve been good little boys along the way as far as the EU is concerned..

    The more you look at the workings of the EU machine, the more insidious you realise it is..

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  • Reuters say:
    “A tax on euro zone banks and cheaper, longer-dated official loans are the least risky way to provide extra funding for debt-stricken Greece, a confidential paper drafted ahead of a European summit showed on Tuesday”. UPDATE: “French European Affairs Minister Jean Leonetti confirmed that euro zone officials were eying a bank tax to raise extra money to help Greece”. Expect to see a few more suggestions as the day unfolds.

    ….I wonder how “official” the tax will be and how it will be enforced?

    Another problem is dealing with the next country in the queue! However, some debtors always lose out, as noted above.

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  • alan,

    Looks like desperate straw-clutching..!

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