European Union

[Michael Scally MD]

How to stop a second Great Depression
How to stop a second Great Depression - FT.com
How to stop a second Great Depression | George Soros

George Soros | Financial Times | September 29, 2011

Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation. They need to regain control and they need to do so now.

Three bold steps are needed. First, the governments of the eurozone must agree in principle on a new treaty creating a common treasury for the eurozone. In the meantime, the major banks must be put under European Central Bank direction in return for a temporary guarantee and permanent recapitalisation. The ECB would direct the banks to maintain their credit lines and outstanding loans, while closely monitoring risks taken for their own accounts. Third, the ECB would enable countries such as Italy and Spain to temporarily refinance their debt at a very low cost. These steps would calm the markets and give Europe time to develop a growth strategy, without which the debt problem cannot be solved.

This is how it would work. Since a eurozone treaty establishing a common treasury would take a long time to conclude, in the interim the member states have to appeal to the ECB to fill the vacuum. The European Financial Stabilisation Fund is still being formed but in its present form the new common treasury is only a source of funds and how the funds are spent is left to the member states. It would require a newly created intergovernmental agency to enable the EFSF to cooperate with Europe’s central bank. This would have to be authorised by Germany’s Bundestag and perhaps by the legislatures of other states as well.

The immediate task is to erect the necessary safeguards against contagion from a possible Greek default. There are two vulnerable groups – the banks and the government bonds of countries such as Italy and Spain – that need to be protected. These two tasks could be accomplished as follows.

The EFSF would be used primarily to guarantee and recapitalise banks. The systemically important banks would have to sign an undertaking with the EFSF that they would abide by the instructions of the ECB as long as the guarantees were in force. Banks that refused to sign would not be guaranteed. Europe’s central bank would then instruct the banks to maintain their credit lines and loan portfolios while closely monitoring the risks they run for their own account. These arrangements would stop the concentrated deleveraging that is one of the main causes of the crisis. Completing the recapitalisation would remove the incentive to deleverage. The blanket guarantee could then be withdrawn.

To relieve the pressure on the government bonds of countries such as Italy, the ECB would lower its discount rate. It would then encourage the countries concerned to finance themselves entirely by issuing treasury bills and encourage the banks to buy the bills. The banks could rediscount the bills with the ECB but they would not do so as long as they earned more on the bills than on the cash. This would allow Italy and the other countries to refinance themselves for about 1 per cent a year during this emergency period. Yet the countries concerned would be subject to strict discipline because if they went beyond agreed limits the facility would be withdrawn. Neither the ECB nor the EFSF would buy any more bonds in the market, allowing the market to set risk premiums. If and when the premiums returned to more normal levels the countries concerned would start issuing longer-duration debt.

These measures would allow Greece to default without causing a global meltdown. That does not mean that Greece would be forced into default. If Greece met its targets, the EFSF could underwrite a “voluntary” restructuring at, say 50 cents on the euro. The EFSF would have enough money left to guarantee and recapitalise the European banks and it would be left to the International Monetary Fund to recapitalise the Greek banks. How Greece fared under those circumstances would be up to the Greeks.

I believe these steps would bring the acute phase of the euro crisis to an end by staunching its two main sources and reassuring the markets that a longer-term solution was in sight. The longer-term solution would be more complicated because the regime imposed by the ECB would leave no room for fiscal stimulus and the debt problem could not be resolved without growth. How to create viable fiscal rules for the euro would be left to the treaty negotiations.

There are many other proposals under discussion behind closed doors. Most of these proposals seek to leverage the EFSF by turning it into a bank or an insurance company or by using a special purpose vehicle. While practically any proposal is liable to bring temporary relief, disappointment could push financial markets over the brink. Markets are likely to see through inadequate proposals, especially if they violate Article 123 of the Lisbon treaty, which is scrupulously respected by my proposal. That said, some form of leverage could be useful in recapitalising the banks.

The course of action outlined here does not require leveraging or increasing the size of the EFSF but it is more radical because it puts the banks under European control. That is liable to arouse the opposition of both the banks and the national authorities. Only public pressure can make it happen.

[Michael Scally MD]

And who expects Greece not to default!!! The following is taking place now. These are published news stories. It is a good time to prepare for bargains.


The woman who beat the banks
OnNews: Η γυναίκα που νίκησε τις τράπεζες

Bartzokas George, Attorney-President of the Citizens' Movement - Borrowers, told newsbomb.gr said: "This is a historic decision, as it is the first court decision that removes 100% of the borrower's debt . handled flawlessly Article 8 paragraph 5 of N.3869, whereby the court clears the debt because the borrower is a long-term unemployed and has not even cover the minimum, both for itself and for dependents. Surely others will follow such decisions. "

The Court rejected the claims of the banks that loan, is not determined by "who" finds the amount for the cost of living and that of her family, although included in the notice of application data permanently prevented payment and the necessary documents.

"This decision of the district court Larissa is a victory of borrowers against banks, which, let's not forget, give consumer loans without guarantees. Act 3869 will ultimately vindicate the indebted households and especially those who are truly economically impossible debt repayment, as the unemployed and the economically disadvantaged, "says the newsbomb.gr o President George IKNA Lechouritou.

It should be noted that decisions issued by local courts for citizens who seek legal assistance following the failure of-court settlement increase exponentially. It is, in the overwhelmingly positive and achieves remission in 50-60%. For the first time, but a court decision provides the total debt cancellation.


Battered by Economic Crisis, Greeks Turn to Barter Networks
http://www.nytimes.com/2011/10/02/wo...e.html?_r=1&hp

VOLOS, Greece — The first time he bought eggs, milk and jam at an outdoor market using not euros but an informal barter currency, Theodoros Mavridis, an unemployed electrician, was thrilled.

“I felt liberated, I felt free for the first time,” Mr. Mavridis said in a recent interview at a cafe in this port city in central Greece. “I instinctively reached into my pocket, but there was no need to.”

Mr. Mavridis is a co-founder of a growing network here in Volos that uses a so-called Local Alternative Unit, or TEM in Greek, to exchange goods and services — language classes, baby-sitting, computer support, home-cooked meals — and to receive discounts at some local businesses.

[Michael Scally MD]

C'mon folks! Greece will "default," but the question is how much of a haircut the holders will take. In the pure sense of the word, it is not a default. Of course, the bigger problem now is if that guy got a deal, what about mine (PIIGS). Next! Does ANYONE really believe the "new" goals will be met@#$%^&

UPDATE 2-Greek budget draft sees deficit targets missed
UPDATE 2-Greek budget draft sees deficit targets missed | Reuters

The shortfall in the 2011 deficit target means Greece would need almost 2 billion extra euros just to finance its expenses for this year. It also means emergency tax hikes and wage cuts announced in the past two months to hit the target have not been enough to put Greece's finances back on track.

[Michael Scally MD]

PIMCO's Bill Gross
PIMCO | Investment Outlook - Six Pac(k)in'

Long-term profits cannot ultimately grow unless they are partnered with near equal benefits for labor.

There is only a New Normal economy at best and a global recession at worst to look forward to in future years.

If global policymakers could focus on structural as opposed to cyclical financial solutions, New Normal growth as opposed to recession might be possible.

There are no double-digit investment returns anywhere in sight for owners of financial assets. Bonds, stocks and real estate are in fact overvalued because of near zero percent interest rates and a developed world growth rate closer to 0 than the 3 – 4% historical norms. There is only a New Normal economy at best and a global recession at worst to look forward to in future years. A modern day, Budweiser-drinking Karl Marx might have put it this way: “Laborers of the world, unite – you have only your six-packs to lose.” He might also have added, “Investors/policymakers of the world wake up – you’re killing the proletariat goose that lays your golden eggs.”

[Michael Scally MD]

The Truth About China: An Economy On The Verge Of A Nervous Breakdown
China Is An Economy On The Verge Of A Nervous Breakdown

I just returned from a trip to New York, where earlier last week I gave a talk at the Council on Foreign Relations. The topic was the question on everyone’s mind these days: the outlook for China’s economy.

Over the past several weeks, a number of news reports and market figures have caught my attention, which appear to indicate that China’s economy may be approaching a crisis. I use the word “crisis” in the traditional (or medical) sense, meaning a critical turning point when tensions or contradictions are resolved, for better or worse — sometimes in unexpected ways. One potential interpretation of this crisis is that China is entering the terminal stage of a bubble, and that what we are seeing are the early signs of a much broader collapse. But it may not be that simple. I have been saying since the year began that China is due for a correction, and just last week I told the Globe and Mail that such a correction could be a lot worse than most people expect. How exactly the situation will unfold, though, and whether we’ve already reached a tipping point or not, remains to be seen. For the moment, I’m reminded of that song: Something’s happening here; what it is ain’t exactly clear. But — and this is the real point — something is happening, and people both inside and outside of China are right to be nervous.

[Michael Scally MD]

Rescue Aid to Greece Delayed as Pressure Rises for Reforms
http://www.nytimes.com/2011/10/04/bu...d-targets.html

By STEPHEN CASTLE
Published: October 3, 2011

LUXEMBOURG — Finance ministers from the 17-nation euro zone piled more pressure on Greece early Tuesday by postponing moves to release the next installment of aid and suggesting that more austerity measures were needed.

Meeting in Luxembourg, the finance ministers made it clear that Greece was now unlikely to receive 8 billion euros ($10.6 billion) before November.

Greece has said it could default on its debt within weeks without the aid — an outcome with potentially disastrous consequences for the euro zone. But on Monday, finance ministers served notice that they intended to push Greece further.

“Full compliance with the agreed conditions is necessary for Greece to receive the funds Greece needs,” said Olli Rehn, the European commissioner for economic and monetary affairs. “A credible push for structural reforms and privatization are essential.”

“It is very likely there will need to be new measures,” Mr. Rehn added, although he said that those might be for aid to be given in 2012 since time was short.

Jean-Claude Juncker, president of the euro zone finance ministers, suggested that the issue of private sector involvement in a deal struck in July on Greek debt might be reopened. He said revisions were being discussed, but refused to say whether this could mean increased losses for private investors.

There was some good news with an agreement to allow Finland to receive collateral for loans to the Greeks, removing an obstacle to a second bailout for Greece agreed to in principle in July. No other nation is expected to request the same arrangements because of the conditions that make them costly, Mr. Juncker said.

Meanwhile Belgium’s finance minister, Didier Reynders, sought to calm fears about the fate of the Franco-Belgian financial group Dexia amid concerns about its exposure to Greek debt and reports that the bank could be broken up.

Dexia called an emergency board meeting late Monday after a 10 percent drop in its share price, and a warning from the credit agency Moody’s that Dexia’s main operating businesses were on review for a downgrade.

That highlighted the impact of the announcement from Athens on Sunday that Greece’s 2011 budget deficit was projected to be 8.5 percent of gross domestic product, down from a forecast of 10.5 percent last year but shy of the 7.6 percent target set by international lenders.

Doubts about Greece’s ability to push through harsh structural changes have led to tense discussions with officials from the so-called troika of international lenders — the European Commission, the European Central Bank and the International Monetary Fund.

Representatives of those institutions, now visiting Athens, have yet to make a recommendation to release the money.

Evangelos Venizelos, the Greek finance minister, said his country was taking “all the necessary difficult measures in order to fulfill its obligations towards its institutional partners.”

[Michael Scally MD]

The Tea Party is really talking about killing the economy —

Again, it’s absolutely ludicrous. And if we need an example, we can just look across the pond and see what’s going on in Euroland. Putting somebody who is suffering from anorexia on a diet doesn’t make a lot of sense to me. But essentially that’s what the austerity folks are preaching and that’s what we’ve been grappling with here in the United States.

Greatest Moral Hazard, Says Paul McCulley, Is Austerity Here And Now | The Big Picture

[Michael Scally MD]

Banks in Europe Face Huge Losses From Greece
Banks in Europe Face Huge Losses From Greece - NYTimes.com

Europe’s biggest banks may finally be forced to own up to their losses.

While bank executives and government leaders have been reluctant to acknowledge that the hundreds of billions of euros of Greek debt held by financial institutions is worth far less than its face value, they are slowly accepting the grim reality, as investors, clients and lenders grow increasingly wary.

On Tuesday, Deutsche Bank said it would not meet its profit goals for the year, citing investor uncertainty and losses on Greek bond holdings. Government officials are debating dismantling Dexia, the large French-Belgian bank, and warehousing its troubled assets in a bad bank.

The latest woes prompted a broad market sell-off in Europe, hitting banks in France and Germany particularly hard. Wall Street, dragged down early by the problems on the Continent, lifted at the close, after reports that European financial officials were considering ways to shore up the industry.

As Europe’s debt crisis continues to fester, financial firms exposed to troubled sovereign debt face a brutal fallout.

Weaker banks are moving closer to the embrace of their governments. Shares of Dexia — which held more than 21 billion euros of Greek, Italian, Spanish and Portuguese bonds at the end of last year — collapsed in recent days. The situation led the Belgian and French governments, three years after originally bailing out Dexia, to guarantee the bank’s future financing needs.

For stronger banks like Deutsche Bank, the biggest in Germany, the pressure is building to cut costs and raise capital. On Tuesday, Deutsche said that it could no longer meet its 2011 profit target of 10 billion euros, or $13.3 billion. The bank said it would take a loss of 250 million euros on its Greek debt and cut 500 investment banking jobs, most of them outside Germany.

By the numbers, a write-down on Greek debt should be affordable. Some banks have already marked down their holdings to market prices. But several of the biggest holders, including Dexia, Société Générale, BNP Paribas and two German-owned state banks, have resisted admitting that their Greek bonds are worth, at best, 50 percent of their face value. Dexia has 3.4 billion euros on its books while Deutsche Bank holds 1.1 billion euros.

European policy makers are fearful of pushing Greece into default. Regulators want to wait until they can erect a firewall around Italian and Spanish debt and protect the European banks holding the bonds on their balance sheets at near or face value.

“Once you take a write-down on Greek debt for Dexia, this has systemic implications for the French and German banks,” said Karel Lannoo, the chief executive of the Center for European Policy Studies in Brussels. Dexia may be one of the worst-off banks, he said, but “the issue is the same for all banks — it will be the taxpayer that pays for this.”

European policy makers remain deeply divided on how to deal with the shaky banks.

The French government supports an exchange between Greece and bankers, which was negotiated in July as part of a second bailout for Athens.

But Germany has increasingly pushed for the banks to contribute a larger share of Greece’s growing bailout bill. Officials at the German finance ministry argue that the most efficient way to do this is for banks to take a 50 percent loss on their Greek bonds.

Since the private sector deal was forged in July, the prices of Greek bonds in secondary markets have plunged to about 36 percent of face value, from 75 percent. That has put additional pressure on European policy makers to change the terms of the deal. On Monday, Jean-Claude Juncker, the prime minister of Luxembourg, who leads a permanent working group of euro zone finance ministers, cited the changing market conditions and added that Europe was discussing “technical revisions” to the exchange.

Analysts point out that the cost of this private sector initiative has increased significantly. As originally planned, Greece was supposed to borrow 35 billion euros to buy the AAA bonds needed to back the new securities created for the debt swap.

But the global rally in high-quality debt has made the bonds pricier. People involved in the deal now say that Greece may need to borrow an extra 12 billion euros.

While the question remains whether taxpayers or financial firms will make up the difference, European authorities may be moving closer to a coordinated effort on the banks.

Olli Rehn, the European commissioner for economic affairs, told The Financial Times on Tuesday that banks’ capital positions “must be reinforced to provide additional safety margins and thus reduce uncertainty.” He said there was “a sense of urgency,” acknowledging that officials were discussing measures to bolster the banks.

Mr. Rehn’s reported comments appear to be at odds with those of his colleague, Michel Barnier, the European commissioner responsible for financial services. On Tuesday, after a meeting of European Union finance ministers in Luxembourg, Mr. Barnier said that although bank recapitalization was proceeding, there was no need for new measures.

A growing number of economists, and some voices within the International Monetary Fund, argue that banks need to formally acknowledge their losses to restore their credibility.

“It is difficult to see how Greece gets out of this without a write-down of its debt,” said a senior I.M.F. official who refused to be identified because he was not authorized to speak publicly on the sensitive issue.

[Michael Scally MD]

We analyse many – but not all – of the EFSF-based proposals for leveraging and increasing the firepower of the bailout fund in tackling the ongoing eurozone sovereign debt crisis. We assess their likelihood of being implemented and consider whether they would comprise a possible regime-shift for eurozone markets. We focus on three broad categories: proposals that appear to have few hurdles to being implemented; less probable options; and leverage-based options. While the most elegant solutions have no official sanction, we think the necessary political resolve is yet to be forthcoming, and the technical issues are challenging if not insurmountable for many of the legal workarounds, resulting in the need for yet another round of parliamentary approvals. Consequently, we see a significant risk that the market, looking for large headlines and enhanced flexibility, will be disappointed at least in the short run.


The search for a steady state solution

In analysing the eurozone debt crisis, the key challenge is to assess the likely path towards a steady state solution, defined as the market no longer being concerned about future default risks on government debt – at least over a timeframe that is meaningful to immediate asset allocation decisions. We have highlighted three broad alternative steady state solutions:

1. Full fiscal union and the issuance of Eurobonds with a joint and several liability structure or at least unconditional credit risk transfers to stronger countries for a extensive period of time (for sustainability to be re-established).

2. Aggressive policy reflation, whereby the ECB significantly expands its balance sheet and its SMP programme. (Given the requirement of EU governments to recapitalise the ECB, this option ultimately begins to blend into option 1.)

3. Default and debt restructuring in selected non-core countries and possible end of the euro area.

[Michael Scally MD]

Bold talk is one thing, but Europe’s leaders have so far failed to come to grips with the depths of their economic problems, two economists write.

The 4 Trillion-Euro Fantasy
Peter Boone and Simon Johnson: The 4-Trillion-Euro Fantasy - NYTimes.com

October 6, 2011, 5:00 AM
By PETER BOONE AND SIMON JOHNSON

Some officials and former officials are taking the view that a large fund of financial support for troubled euro-zone nations could be decisive in stabilizing the situation. The headline numbers discussed are 2 trillion to 4 trillion euros — a large amount of money, given that the gross domestic product of Germany is 2.5 trillion euros and that of the entire euro zone around 9 trillion euros.

This approach has some practical difficulties. The European Financial Stability Facility as currently devised has only around 240 billion euros available (and this will fall should more countries lose their AAA credit ratings). The International Monetary Fund, the only ready money at the global level, would be more than stretched to go “all in” at 300 billion euros.

Never mind, say the optimists — we’ll get some “equity” from the stability fund and then leverage up by borrowing from the European Central Bank.

Such an approach, if it could get political approval, would buy time, in the sense that it would hold down interest rates on Italian government debt relative to their current trajectory. But leaving aside the question of whether the European Central Bank — and the Germans — would ever agree to provide this kind of leverage and ignoring legitimate concerns about the potential inflationary impact of such measures, could a 4 trillion-euro package, for example, stabilize the situation?