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Showing posts with label EuroFinancialCrisis. Show all posts
Showing posts with label EuroFinancialCrisis. Show all posts
National budget problems and a single currency shouldn't be linked

National budget problems and a single currency shouldn't be linked

I have always thought that the claim that saving the Euro was essential to saving the EU.  From the WSJ: 
Contrary to what is claimed daily in the media by politicians and many economists, there is no "euro crisis." The single currency doesn't have to be "saved" or else explode.
The present crisis is not a European monetary problem at all, but rather a debt problem in some countries—Greece, Spain and some others—that happen to be members of the euro zone. Specifically, these are public-debt problems, stemming from bad budget management by their governments. But there is no logical link between these countries' fiscal situations and the functioning of the euro system. . . .
The public debt problem becomes a euro problem only insofar as governments arbitrarily decide that there must be some "European solidarity" inside the euro zone. But how does mutual participation in the same currency logically imply that spendthrift governments should get help from the others? Whenever a state in the U.S. has a debt problem, one never hears that there is a "dollar crisis." There is simply a problem of budget management in that state. . . .
The Debate over Spain's Austerity Program heats up

The Debate over Spain's Austerity Program heats up

Reuters reports:

Recession-plagued Spain unveiled new austerity measures on Wednesday designed to slash 65 billion euros from the public deficit by 2014 . . .
The conservative leader announced a 3-point hike in the main rate of Value Added Tax on goods and services to 21 percent and cuts in unemployment benefits and civil service pay and perks in a speech interrupted by jeers and boos from the opposition. . . .
Madrid won softer deficit targets from its European Union partners this week and also negotiated rescue aid of up to 100 billion euros ($123 billion) from the euro zone's bailout fund for its crippled banking sector. . . .
The Economist magazine talks about the kooky claimed "Multiplier" effect from government spending. I am not thrilled by the increase in marginal taxes, but that isn't the concern of the Economist.
More important, this is incredibly counterproductive. The Spanish economy is imploding. Without the ability to offset these cuts with a very aggressive monetary policy, the multiplier on this austerity will be substantial. There can't be much confidence that this austerity plan will generate any fiscal improvement given the likely cyclical hit to revenues and the resulting impact on banks, which could well feed back into greater sovereign obligations. It's more economic pain for no fiscal gain. . . .
There are two problems with this claim. 1) It ignores that the money has to come from someplace. 2) The multiplier implies that government spends all of times money, but private individuals don't. Yet, as I have tried to explain many times before, people essentially spend all of their money. If you put your pay check in the bank, either you spend it on the mortgage or car or food or the bank buys bonds or lends out the money. To believe the typical MPC argument you would have to believe that saving is the equivalent to throwing money in a hole in the backyard. David Malpass says that this is a false austerity, that they are really just moving money to other areas of spending.
Germany won't back down on its austerity plans

Germany won't back down on its austerity plans

German is holding firm.  It is amusing to see that they are starting to speak down to Obama in the same way that he has constantly been lecturing them.  Are they behaving irrationally?   From Der Spiegel:

German Finance Minister Wolfgang Schäuble rebuffed recent criticism of Germany's handling of the euro crisis from Barack Obama, telling the US president to get his own house in order before giving advice.
"Herr Obama should above all deal with the reduction of the American deficit. That is higher than that in the euro zone," he told German public broadcaster ZDF on Sunday night. It is easy to give advice to others, he added,Obama, worried about the impact of the debt crisis on the global economy and financial markets -- and on his own prospects for re-election --has been urging Europe to step up its efforts to tackle the problem.
In the interview, Schäuble also reiterated his opposition to euro bonds, saying countries must remain individually liable for their public debt as long as they were taking sovereign decisions on how the money was being spent.
"If you spend the money from my account, you won't be frugal with the money," said the finance minister. He added that he was against devoting large sums of money -- for example from the European Central Bank -- to fight the crisis. The roots of the crisis needed to be fought credibly, he said, adding that that was succeeding in Ireland and Portugal, which have both received international bailouts. "It's not succeeding so well in Greece," he added. . . .
UPDATE: George Soros weighs in an interview with Der Spiegel:

'A Tragic, Historical Mistake by the Germans'With the EU summit set to start on Thursday, pressure is on European leaders to find a way out of the euro crisis. Investor George Soros is pessimistic that a solution will be found and says time is extremely short. In an interview with SPIEGEL ONLINE, he warns that Germany could develop into a hated, imperial power.
SPIEGEL ONLINE: In Germany, once the motor of European integration, people are openly discussing the possibility of leaving the euro zone. Many Germans believe that a return to the deutschmark would be cheaper than to remain stuck in a flawed currency union. Are they right?
Soros: There is no question that a breakup of the euro would be very damaging, very costly, both financially and politically. And the biggest loss would be incurred by Germany. Germans have to bear in mind that, effectively, they have suffered practically no losses so far. Transfers have all been in the form of loans, and it is only when the loans are not repaid that real losses will be incurred. 

Here is a question: why exactly would countries returning to their own currencies be so bad?  Here are the 10 EU countries who are not using the Euro.
United Kingdom Bulgaria Czech Rep. Denmark Hungary Latvia Lithuania Poland Romania Sweden
Are they doing worse relative to other countries?  It is hard to see how that is the case.  Poland for example has done very well without being in the Euro and so has Germany.  The difference between countries seems to depend a lot more on whether the countries followed an austerity type policy, with those controlling government spending doing much better.

And the Greek election accomplished what exactly?: Pro-bailout parties want to delay deficit reductions for two years

And the Greek election accomplished what exactly?: Pro-bailout parties want to delay deficit reductions for two years

Remember all the fears about what would happen if the radical left anti-bailout Syriza party won the election?  That they would insist on the bailout being renegotiated.  Well, the pro-bailout parties also said that they wanted more favorable terms and it is finally clear what they want.  From the BBC:

Greece's new coalition government has proposed an extension to the deadline for it to reduce its budget deficit by at least two years, to 2016.
In a policy document, the government said its aim was for the fiscal target envisaged by the bailout deal to be met without further cuts to salaries and pensions. . . .
Nor does the future for this coalition sound extremely promising.

All three parties have signed a agreement to fully support the coalition, giving it a majority of 29 in parliament.  However, the cabinet is dominated by the conservative New Democracy party, after its left-wing partners Pasok and Democratic Left barred their MPs from joining.  They are represented by two party officials each. It is believed that they may not want to be associated with austerity measures. . . .

Estonia doing well with "austerity" budgets, and Spain is not an example of "austerity"

Paul Krugman, the guy who kept predicting disaster for Germany's austerity program, has gone after Estonia for what he calls being the "poster child for austerity defenders."


There are a couple of things that Krugman leaves out of his discussion.


1) Estonia was getting worse relative to other countries when it followed more of a Keynesian policy and has been growing relative to other countries since then.  Figure from The Global Post (click to make larger).  As that publication wrote: "Still, its recovery, after implementing austerity, is intriguing."  By the way, the publication also accuses Krugman of cherry picking data to show.


2) As the Figure above shows, Estonia has been growing relative to the US since mid 2009.


Note on Spanish "austerity."  Spain is in a lot of trouble, but it isn't because of "austerity."  From the WSJ.com.
In 2011, total public-sector spending in Spain was 13% higher than in 2007. . . .
Banks pressured to buy sovereign debt: When will government realize the problems from forcing banks to make risky loans?

Banks pressured to buy sovereign debt: When will government realize the problems from forcing banks to make risky loans?

Government forces banks to lend money to risky borrowers.  Now they force banks to lend money to governments.  When will the government learn that forcing banks to take on more risk than they want causes problems?  From CNBC:

US and European regulators are essentially forcing banks to buy up their own government's debt—a move that could end up making the debt crisis even worse, a Citigroup analysis says.
Regulators are allowing banks to escape counting their country's debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says.
While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen.
"Captive bank demand can buy time and can help keep domestic yields low," Lorenzen wrote in an analysis for clients. "However, the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn't used very prudently." . . .
Democrats think that the French and Greek votes are good news?

Democrats think that the French and Greek votes are good news?

Do voters just want to spend more money without worrying how to pay for it?  Dems think so.  From the Washington Examiner:

Democrats say that the angry, anti-austerity elections this week that saw voters throw out reform-minded French and Greek leaders could be good news for them, a signal that their plan to spend billions more than the Republicans is a vote winner.
Those elections “confirm the position that many of us have taken, which is the most important thing right now is to sustain and nurture the very fragile economy,” said Rep. Chris Van Hollen, D-Md., the ranking member of the House Budget Committee.
“While we have to develop and implement a long-term deficit reduction plan, we should be very careful in designing that, that we do nothing to hurt the fragile economy. In fact we believe that we should make some additional investments,” he added.
For example, he’s pushing for the passage of a massive $50 billion-plus infrastructure spending bonanza offered by President Obama, as well as spending on education, science, research and Middle Class programs. The reason: it would inject money into the economy and cut the 16 percent unemployment in construction and fix roads and bridges. . . .
Even the Pension fund for the Greek Military isn't going for agreement for bondholders

Even the Pension fund for the Greek Military isn't going for agreement for bondholders

You have to believe that the Greek government can put sufficient pressure on the Greek military pension fund to get them to agree. Can the government get 2/3rds of the remaining bondholders to fold? You would think that Greece would go into default. From the UK Telegraph:

Athens officials last night estimated more than 85pc of private creditors had accepted the €206bn (£173bn) bond swap shortly after a deadline expired yesterday evening. That is enough for the deal to go through, but leaves the possibility the government might have to use its controversial Collective Action Clauses (CACs).
Ratings agencies have warned they will declare a default if Greece activates the CACs, which allow the government to impose the deal on the remaining bondholders. The CACs will be used if the take-up falls below the desired 95pc but above the required 66pc.
The International Swaps and Derivatives Association (ISDA) is poised to convene again to decide if the deal amounts to a “credit event” that would trigger billions of euros of insurance.
Athens said the figures would be revealed at 6am GMT today. The 17 eurozone finance ministers have scheduled a conference call at lunchtime today to review the deal. They will meet on Monday to decide if Greece’s €130bn bail-out funds can now be released.
With the bondholder acceptance level too close to call yesterday, Evangelos Venizelos led the charge against a group of rebel Greek investors. The Greek finance minister said it was an embarrassment that six out of 15 state-controlled pension schemes – including one that serviced his own ministry – were withholding their support hours before the deadline. “When pension funds in other countries that invested in Greek bonds are taking a haircut, how can our own funds refuse to join in?” he said. . . .


UPDATE: AFP:

Moody's declared Greece in default on its debt Friday after Athens carved out a deal with private creditors for a bond exchange that will write off 107 billion euros ($140 billion) of its debt.
Moody's pointed out that even as 85.8 percent of the holders of Greek-law bonds had signed onto the deal, the exercise of collective action clauses that Athens is applying to its bonds will force the remaining bondholders to participate.
Overall the cost to bondholders, based on the net present value of the debt, will be at least 70 percent of the investment, Moody's said.
"According to Moody's definitions, this exchange represents a 'distressed exchange,' and therefore a debt default," the US-based rating firm said.
For one, "The exchange amounts to a diminished financial obligation relative to the original obligation."
Secondly, it "has the effect of allowing Greece to avoid payment default in the future." . . .
Europe giving up on Greece keeping its promises

Europe giving up on Greece keeping its promises

From the Financial Times:

Olli Rehn, the European Commission’s top economics official, warned there would be “devastating consequences” if Greece defaulted, and pleaded for eurozone governments to approve the bail-out quickly. Officials said Mr Rehn has support from the European Central Bank and the French government.
But a group of eurozone governments, particularly those that retain triple-A credit ratings, has lost faith Greece will ever deliver its end of the bargain. Hardline officials in Germany, the Netherlands and Finland are increasingly urging a Greek default.
“We are getting closer to default,” said a senior eurozone official. “Germany, Finland and the Netherlands are losing patience.”
Finance ministers will hold a conference call on Wednesday and reconvene at a scheduled meeting on Monday.
One key reason for the increasing boldness in northern Europe is a growing belief the EU can contain the blowback from a disorderly default, having built up the eurozone’s financial “firewalls” against contagion. Some officials also believe financial markets have priced in a default, meaning any adverse reaction will be limited. . . .
Stock prices falling in EU despite (or because of) Greek Debt deal?

Stock prices falling in EU despite (or because of) Greek Debt deal?

Why does the EU and the US government think that their money will be spent any better this time? Last time the Greeks got a bailout they just kept spending as they had previously. From Market Watch:

“They don’t trust Greece. Agreeing is one thing, but implementing is another and they want assurance that Greece will live up to the agreement,” said Lenhoff. “If the parliament refuses to approve the measures, Greece will have to leave the euro zone, because they’ll default.”
Greek Private Bond Holders facing 70 Percent Cut in Value of Bonds

Greek Private Bond Holders facing 70 Percent Cut in Value of Bonds

From the Associated Press:

Investors participating in a deal to slash Greece's massive debt would face an overall loss on their bond holdings of more than 70 percent, a person involved in with the negotiations said early Tuesday.
European leaders at a summit in Brussels said a final debt deal could be signed off in the coming days . . .

Athens and representatives of investors holding Greek government bonds over the weekend came close to a final agreement designed to bring Greece's debt down to a more manageable level. Without a restructuring, those debts would swell to around double the country's economic output by the end of the year.

If the agreement works as planned, it will help Greece remain solvent and help Europe avoid a blow to its already weakened financial system, even though banks and other bond investors will have to accept big losses.

The person involved in the talks said Monday that the more-than 70 percent loss was the result of cutting the bonds' face value in half, reducing the average interest rate to between 3.5 per cent and 4 percent and pushing repayment of the bonds 30 years into the future. A second person briefed on the talks confirmed that the loss on the so-called net present value of the bonds would be around 70 percent. . . .
New Fox News piece: Lessons to be learned from Europe's debt downgrades

New Fox News piece: Lessons to be learned from Europe's debt downgrades

My newest Fox News piece starts this way:

As we watch the Eurozone struggle with its financial challenges Keynesians keep telling us the solution to our economic problems is to spend more money, to pile up bigger debts.

A week and a half ago, Standard & Poor’s downgraded the debt of more than half of the Eurozone's countries, and the failure of those policies should be very obvious by now.

Solving the Greek debt crisis hit yet another snag on Sunday afternoon. New aid for Greece from the IMF, the European Commission and the European Central Bank would have relied on private bondholders “voluntarily” agreeing to a 50 percent cut in the value of the Greek bonds they hold as the Greek government claims it can't afford the interest rates demanded on the remaining debt. Unfortunately, for the Greek government, it lacks the power to abrogate the rights of foreign bondholders.

Greece can't simply apply the Obama administration's method of doing away with the rights of GM's and Chryslers' bondholders.

The European countries that have fared the best, such as Germany and Poland, rejected the Keynesian medicine. In contrast, countries following the Keynesian path with massive deficits to try to "stimulate" the economy -- such as Greece, Portugal, and Ireland -- have done poorly, with low growth and increased government debt. . . .
Big news out of Europe today on debt crisis in Greece?

Big news out of Europe today on debt crisis in Greece?

From Reuters:

Private creditors said on Sunday they had come to the limits of what losses they could concede, putting the ball in the court of the European Union and the IMF.

Market players are looking to a euro zone finance ministers meeting on Monday where they will decide what terms of a Greek debt restructuring they are ready to accept in order to pave the way for a second bailout package for Athens. . . .

Predicting which countries' stock markets will be most sensitive to news about EU financial crisis

S&P says that "euro zone's policy response to the debt crisis has been largely misguided"

Note that S&P doesn't think that "more fiscal stimulus" will help Europe. The countries that have been doing best (Germany and Poland) didn't follow the Keynesian policy prescriptions advocated by Obama. From the WSJ:

Standard & Poor's analysts on Saturday defended their downgrades of more than half of the euro zone's 17 members, as the highest-profile victim of the mass ratings cut—France—looked to play down the impact.

In a conference call hours after the downgrades, S&P analysts said they stood by their moves as they believe the euro zone's policy response to the debt crisis has been largely misguided and is building up future risks.

"The proper diagnosis would have to give more weight to the ... rising imbalances in the euro zone," said Moritz Kramer, head of European sovereign ratings. He pointed to problems such as divergences in competitiveness from one country to another, which he said is reflected in huge imbalances in national current accounts.

Mr. Kramer said the centerpiece of a December summit aimed at arresting the crisis, the adoption of tighter fiscal rules to avoid excessive deficits, "wouldn't have identified the risks" in advance as Germany had one of the largest budget deficits of all during the first 10 years of the euro's existence, whereas Spain, which is a problem area now, had a largely balanced budget.

But Mr. Kramer stressed that S&P isn't calling for more fiscal stimulus from the countries with the biggest debt problems, saying that they have neither the room, nor enough credibility in the debt markets, to try to spend their way out of trouble.

"That certainly wouldn't be regarded as a credit positive, not by our metrics at least," Mr. Kramer said.


Something more worrisome is on the horizon. If only the Europeans could deal with these pesky bond holders, the same way Obama dealt with the GM and Chrysler bond holders. From Market Watch:

but the real story is that the Greek bond “negotiations” on a “haircut” have broken down once again. The dudes in power over there are trying to put a good face on it and are sure they can get a deal done next week…but the markets appear to be running out of patience. . . .


Portugal is just barely above "non-investment grade." Greece is "likely to default."
More Stimulus for Europe? Note which countries are doing best and which ones the worse

More Stimulus for Europe? Note which countries are doing best and which ones the worse

So which countries in Europe are having problems? The ones where government spending over the last few years have been completely out of control. Which are doing best? The ones where spending has been restricted: Germany and Poland being obvious examples. The New York Times has this headline: "European Leaders Use Debt Downgrades to Argue for Austerity, and for Stimulus." But the accompanying story has little arguing for an Obama type Stimulus.

European leaders sought to limit damage from a ratings agency’s downgrade of nine countries on Friday, or even turn the news to their advantage, saying that it showed the need to impose more austerity or else do more to stimulate growth.

Germany’s chancellor, Angela Merkel, said Saturday that the downgrade by Standard & Poor’s meant the euro area must speed up measures to create a more centralized currency union.

“We are now challenged to implement the fiscal pact quickly,” Mrs. Merkel said in a statement Saturday, a day after S.& P. downgraded France, Austria and seven other countries — but not Germany. She added that leaders should not water down the agreement and instead quickly pass other measures they have agreed to, like limits on debt.

In Italy, Prime Minister Mario Monti used the downgrades to bolster his argument that austerity alone would not solve the euro crisis. Europe needs to support “national efforts in favor of growth and employment,” Mr. Monti told the newspaper Il Sole 24 Ore, according to Bloomberg News. . . .
Greece races clock to avoid default

Greece races clock to avoid default

The Financial Times has this discussion:

. . . a race against time to secure a second financing package from the country’s international creditors if Greece is to avoid a disorderly default in March.
The country must redeem a €14.4bn bond on March 20. Almost all analysts agree it will be unable to do so unless its official creditors approve a second €130bn bail-out package and unless a deal is agreed to cut the country’s debt by imposing a 50 per cent haircut on €206bn of privately held bonds.
Greece has already received about €73bn from the first bail-out package of €110bn, financed by the European Union and the International Monetary Fund. That package was approved in May 2010 to help the country stave off default.
Government officials hope the terms of the bond exchange, known as private sector involvement, or PSI, will be finalised well in advance of the EU summit on January 30. By the same deadline, the government hopes to have reached an agreement on “conditionality” – the set of economic policies and structural reforms required by the EU, IMF and European Central Bank.
Only when these requirements have been met will the so-called troika of lenders agree to disburse a large amount of funds, estimated at €89bn, in the first quarter of this year. That will include money towards implementing PSI, since private creditors will most likely receive €30bn in cash or equivalent upfront, while Greek banks will also be recapitalised by some €30bn. . . .
Here is my bet: Britain's financial sector will do better than the EU's in the future

Here is my bet: Britain's financial sector will do better than the EU's in the future

For those who blame private financial institutions and not the government for the recession, the EU is offering them what they want. The problem is that they have the government to blame and more government isn't the solution. It should be a pretty simple test to see who is right. From Reuters:

At that point, the British prime minister set out two concessions he wanted in exchange for Britain's support on treaty change. "One was a safeguard on the internal market ... but that was not the problem," the official said. "Then he launched the idea on financial services."

Financial services account for about 10 percent of Britain's economy and the government has been at pains to shield the sector from regulation emanating in Brussels. Britain had shared the outlines of its thinking with some of its partners, officials said, but it hadn't circulated anything approaching a document sufficiently detailed to form the basis of discussion. For that reason, the demands were news to many of the people around the table. But it wasn't just the way Cameron went about it, it was the substance of the demands. He was effectively asking for a softening of regulation on Britain's financial sector at a time when many voters and politicians believe banks are largely to blame for the crisis Europe is suffering and want tighter regulation on the sector.

"Politically speaking, when the banks are considered the enemy and the root of all the problems we have today, Cameron's arguments were the wrong arguments at the wrong time for the wrong people," the official said. "Politically, he was dead from the start." . . .
So what is in the new EU deal?

So what is in the new EU deal?

A nice summary is available here:

Q: How will greater fiscal austerity be achieved?
A: All countries that commit to the treaty cannot allow their annual deficits to exceed 0.5 percent of economic output in normal times. That cap can be broken -- and rises to 3 percent -- if there's a recession or other exceptional circumstances.
• There will be automatic penalties for countries whose deficits exceed 3 percent of GDP. In 2010, 23 out of 27 EU states had deficits of more than 3 percent.
• The European Court of Justice will make sure all states play by the rules.
• All states have to tell their partners in advance how much debt they plan to take on through bond sales.


From the Washington Post:

“This new agreement does nothing for the crisis,” said Daniel Gros, the head of the Center for European Studies, a Brussels think tank. “I doubt it will be implemented as planned.” . . .

Even if it goes into effect, countries could just ignore its requirements, which France and Germany did with a similar agreement in 2003, when they successfully lobbied to loosen requirements after economic problems pushed their deficits past the limits.

Nor is it clear that the deal is enough to satisfy demands from the European Central Bank. Bank President Mario Draghi said Friday that he felt the results were positive, but Reuters reported that the bank was instituting a new cap on its current, modest efforts to lower countries’ borrowing costs, citing bank sources. . . .

“Financing government debts by printing money is and will remain prohibited by treaty,” he said. . . .


UPDATE: The impact on stocks from the EU deal isn't as obvious as some claim. British stock rise on news that the UK won't go along with new EU agreement: "U.K. bank stocks rally after Cameron’s opt-out"

Britain’s benchmark index rose and bank stocks rallied Friday after British Prime Minister David Cameron rejected a proposal by European Union leaders for closer fiscal ties.

Shares in Lloyds Banking Group PLC UK:LLOY +6.33% advanced 6.5% and Barclays PLC UK:BARC +4.74% climbed 5.4%. Shares in Royal Bank of Scotland Group PLC UK:RBS +5.11% rose 5.1%.

The FTSE 100 index UK:UKX +0.83% rose 0.8% to 5,529.2.

The benchmark index shed 1.1% in the previous session after the European Central Bank cut interest rates and ECB President Mario Draghi dashed hopes that the institution would ramp up its bond-buying program.

An EU summit ended on Friday with euro-zone leaders agreeing on a new inter-governmental treaty that will lead to closer fiscal union in the region. In a statement, the leaders said that nine countries outside the currency zone — with the exception of Britain — may join them in forging closer fiscal ties.

Earlier on Friday, British Prime Minister David Cameron said he opted out of the treaty because ”it isn’t in Britain’s interest.”

Richard Perry, chief strategist at Central Markets, said Cameron’s decision not to support the treaty change had a positive effect on the financial-services sector.

“The opt-out that Cameron chose to take has meant that a financial transactions tax will not apply to the U.K. now and financial stocks are being buoyed by that,” Perry said. U.K. PM Cameron rejects EU plan. . . .
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