European Union

Discussion in 'Men's Economics' started by Michael Scally MD, Sep 25, 2011.

  1. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Global Action for Global Recovery
    Global Action for Global Recovery - Christine Lagarde - Project Syndicate

    Christine Lagarde
    Christine Lagarde is Managing Director of the International Monetary Fund.

    Last edited: Dec 21, 2012
  2. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    Last edited by a moderator: Jun 4, 2014
  3. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    UBS Investment Research - xrm45376

    Risk case 1: Disorderly default

    It may be, however, that compromise between the ‘troika’ and the Greek government becomes at some point impossible. That could occur if the Greek government (and broader socio-political backdrop) is unable to deliver compliance with the IMF program of fiscal austerity, structural adjustment and privatization.

    This risk scenario could then unfold with a unilateral Greek default, which if not adequately anticipated and provisioned in the form of capital buffers in the financial sector, would lead to the default and collapse of much of the Greek banking system (given its extensive holdings of Greek government debt), which would then spread via counterparty default to the non-financial corporate and household sector in Greece, as well as to the financial counterparties elsewhere, above all in European banks, pension funds and insurance companies. Plausibly, rising risk premiums would also lead to rising bond yields and widening spreads in the government debt markets elsewhere in the Eurozone, above all in Italy and Spain. Selling pressures could easily overwhelm the modest buying-power of the EFSF (assuming its mandate to buy bonds has been approved) and could even challenge the ability or willingness of the ECB to engage in very large- scale bond purchases.

    The resulting rise in risk premiums would depress economic activity, quite possibly pushing weakly-growing economies such as Italy’s into recession, exacerbating sovereign credit risk perceptions. Financial stress and heightened uncertainty would almost surely be transmitted globally, dealing another shock to the already-fragile and wobbly US recovery. Indeed, we believe it would not be an overstatement to consider disorderly Eurozone sovereign default as the chief risk to global recovery.

    Risk 2: Eurozone exit

    In a recent paper “Euro breakup – the Consequences” we demonstrated how complex and costly expensive breaking up the Eurozone would be. The worst case scenario would be the exit of a weak country, such as Greece. Less costly, but still very expensive, would be the case of a strong country leaving the Eurozone. The ‘direct’ costs include sharp increases in risk premiums and large moves in exchange rates, which would likely result in recessions everywhere, compounded by very high inflation in weak countries that exit and issue their own currency.

    But the costs extend to widespread financial stress and default. Currency mismatches between assets and liabilities could lead to very large private sector defaults. Beyond that, it would be difficult, in our opinion, to contain financial risks, including bank runs in other ‘at risk’ countries. The ensuing dislocations in economic and financial terms could even result in severe social unrest and pressures on the political fabric of the EU itself.

    Elsewhere we have detailed the potential costs of Eurozone exit, either by a weak or strong country departure. We will not repeat those scenarios or calculations here—the interested reader is referred to the publications at the end of this document. However, suffice it to say, that exit represents in all likelihood the most adverse development of all, with output losses for affected Eurozone countries ranging from 20-40% of GDP (if not higher), accompanied by widespread bankruptcy and financial dislocation.

    Yet that does not mean that exit can be ruled out. In the scenario of a disorderly sovereign default outlined above, political pressure might well result in exit, particularly if the defaulted government had little prospect of receiving financial assistance from the EU, ECB or IMF.

    Needless to say, however, the broad market implications of disorderly default and exit only differ by degree. In either case, surging risk premiums and falling output would lead to declines in equity prices, widening credit spreads and financial market dislocations on par with those of the immediate post-Lehman brothers market melt-down. The refuges of risk-averse investors would most likely include the usual suspects: cash, the US dollar, Swiss franc and gold.

    Risk 3: Recession

    The latest stresses emanating from the Eurozone crisis are arriving at a time when the global economy slowed and is therefore more vulnerable to shocks. As global economist, Andy Cates, recently noted, model results suggest the probability of a global recession have risen to 15% from about nil just a few months ago. Global economic activity indicators have slumped relative to consensus estimates over the past month. And although the weakness is pronounced in sentiment and survey measures, concerns are rising that ‘hard’ activity indicators may turn sharply lower as well.

    The Eurozone crisis imparts two adverse shocks to the world economy. First, heightened uncertainty erodes confidence, resulting in weaker (discretionary) outlays by households and firms alike. Second, increased financial stress and rising counter-party risk—as evidenced by Eurozone bank funding gaps— threatens to curtail credit to the real economy.

    The market implications of a global ‘double-dip’ are superficially straightforward. Stocks, commodities and high-yield credit markets would slump, with safe-have bonds (Treasuries and Bunds) and currencies (Swiss franc) rallying.

    But the scope of moves could be considerable. Notwithstanding the widespread observation that ‘stocks are cheap’, a global recession could send share prices 20-30% lower. That’s not just because earnings would fall. Concerns about how the world economy could extricate itself from recession, given the relative impotence of advanced economy monetary policies and the political or financial restraints on fiscal expansion, would result in more elevated risk premiums. The old adage that stocks don’t trade on trough multiples alongside trough earnings might not hold true if the world economy double-dips.
  4. Michael Scally MD

    Michael Scally MD Doctor of Medicine

  5. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    Travels in the New Third World
    [ame=""] Boomerang: Travels in the New Third World (9780393081817): Michael Lewis: Books@@AMEPARAM@@[/ame]

    By Michael Lewis
    213 pages. W. W. Norton & Company. $25.95.

    Touring the Ruins of the Old Economy

    September 26, 2011

    Michael Lewis possesses the rare storyteller’s ability to make virtually any subject both lucid and compelling. In his new book, “Boomerang,” he actually makes topics like European sovereign debt, the International Monetary Fund and the European Central Bank not only comprehensible but also fascinating — even, or especially, to readers who rarely open the business pages or watch CNBC. The book could not be more timely given the worries about Europe’s deepening debt crisis and the recent warning issued by Christine Lagarde, managing director of the I.M.F, that “the current economic situation is entering a dangerous phase.”

    Combining his easy familiarity with finance and the talents of a travel writer, Mr. Lewis sets off in these pages to give the reader a guided tour through some of the disparate places hard hit by the fiscal tsunami of 2008, like Greece, Iceland and Ireland, tracing how very different people for very different reasons gorged on the cheap credit available in the prelude to that disaster. The book — based on articles Mr. Lewis wrote for Vanity Fair magazine — is a companion piece of sorts to “The Big Short: Inside the Doomsday Machine,” his bestselling 2010 book about the fiscal crisis. Like that earlier book its focus is narrow. It doesn’t aspire to provide a broad overview of the debt crisis but instead hands the reader a small but sparkling prism by which to view the problem, this time from a global perspective.

    Mr. Lewis explains why the world is so worried that Greece could default: “If Greece walks away from $400 billion in debt, then the European banks that lent the money will go down, and other countries now flirting with bankruptcy” might easily follow, destabilizing regional and world economies further. He also explains why taxpayers in Germany — the euro zone’s largest economy, with resources critical to a rescue plan — are reluctant to keep bailing out other countries they regard as profligate, indolent and irresponsible.

    This is why, Mr. Lewis writes, “European leaders have done nothing but delay the inevitable reckoning, by scrambling every few months to find cash to plug the ever growing holes in Greece, Ireland and Portugal, and praying that bigger and more alarming holes in Spain, Italy and even France do not reveal themselves.”

    How did this situation develop? In “Boomerang” Mr. Lewis captures the utter folly and madness that spread across both sides of the Atlantic during the last decade, as individuals, institutions and entire nations mindlessly embraced instant gratification over long-term planning, the too good to be true over common sense.

    Greece, Mr. Lewis writes, ran up astonishing debts — from high-paying government jobs and generous pensions, as well as waste, bribery and theft — that came to “about $1.2 trillion, or more than a quarter-million dollars for every working Greek.” In just the last 12 years, he says, “the wage bill of the Greek public sector has doubled, in real terms” with the average government job now paying almost three times the average private sector job. Those who work in jobs classified as “arduous” can retire and start collecting pensions, he adds, “as early as 55 for men and 50 for women”; more than 600 Greek professions have somehow managed “to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.”

    In the prelude to the 2008 economic meltdown, Mr. Lewis reports, British investors, lured by the prospect of 14 percent annual returns, “forked over $30 billion” to dubious Icelandic banks (“$28 billion from companies and individuals and the rest from pension funds, hospitals, universities and other public institutions” including Oxford University which “alone lost $50 million”). And property-related bank losses in Ireland, according to one Irish economist cited by Mr. Lewis, now come to roughly 106 billion euros; and since, Mr. Lewis says, a “handful of Irish politicians and bankers had decided to guarantee all the debts of the biggest Irish banks,” those losses “alone would absorb every penny of Irish taxes for the next four years.”

    At times Mr. Lewis can sound a lot like Evelyn Waugh: shrewd, observant and savagely judgmental, dispensing crude generalizations about other countries, even as he pokes fun at himself as a disaster tourist. He asserts that Icelanders “have a feral streak in them, like a horse that’s just pretending to be broken” and suggests that Germans are “obsessed with cleanliness and order yet harbor a secret fascination with filth and chaos” which is bound to result in “some kind of trouble.” He is perhaps toughest on his fellow Americans, concluding that the 2008 economic meltdown stemmed in large part from “people taking what they can, just because they can, without regard to the larger social consequences.”

    “It’s not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans,” he says, noting that states like California with ballooning pension obligations and employment costs face deficit problems not unlike those faced by Greece.

    “Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom,” he goes on. “They’d been conditioned to grab as much as they could without thinking about the long-term consequences. Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the Wall Street people who paid themselves a fortune to design the bad loans.”

    In “The Big Short” Mr. Lewis focused around a handful of investors who were aghast at how the dangers of the subprime mortgage market were being ignored by bank executives and government regulators, and who used their prescience to make a fortune betting against the stability of the system. One of them — left “on the cutting-room floor” of that earlier book — was a hedge-fund manager named Kyle Bass, who by the end of 2008 had already moved on to a “new all-consuming interest, governments.”

    Mr. Bass reasoned that the financial crisis wasn’t over, that, in Mr. Lewis’s words, “the bad loans made by highly paid financiers working in the private sector were being eaten by national treasuries and central banks everywhere,” which meant that entire countries could collapse. Months later, when entire countries did indeed start to go bust, Mr. Lewis asked himself, “How did a hedge fund manager in Dallas even think to imagine this strange world?”

    In the course of “Boomerang” Mr. Lewis introduces us to other, “disturbingly prescient” people, like Morgan Kelly, a professor of economics at University College Dublin, who began noticing in 2006 that something seemed seriously out of whack with the Irish housing market. He also foresaw the collapse of Irish banks, which had lent staggering amounts of money to property developers during the Irish real estate bubble.

    Among the other intriguing individuals in this volume there’s Stefan Alfsson, an Icelandic fisherman who in 2005 quit fishing and joined the stream of young people becoming bankers, setting himself up as “an adviser to companies on currency risk hedging” — without a day of training. And there are some canny Greek monks who built a vast real estate empire that set off a scandal that Mr. Lewis says helped bring down the government of Prime Minister Kostas Karamanlis in October 2009. When a new government took over, it “found so much less money in the government’s coffers than it had expected that it decided there was no choice but to come clean”; those revelations panicked investors, and the new higher interest rates the country was forced to pay, Mr. Lewis says, “left the country — which needed to borrow vast sums to fund its operations — more or less bankrupt.”

    Mr. Lewis’s ability to find people who can see what is obvious to others only in retrospect or who somehow embody something larger going on in the financial world is uncanny. And in this book he weaves their stories into a sharp-edged narrative that leaves readers with a visceral understanding of the fiscal recklessness that lies behind today’s headlines about Europe’s growing debt problems and the risk of contagion they now pose to the world.
    Last edited: Sep 27, 2011
    Millard Baker likes this.
  6. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    You really need to read just the first paragraph (below). The full-text is at the link below. I feel that the EU will do all it can to stay unified/together. The driving concern is the debt and how this is spread across the populace! If what he says is true, the volatility play is best. And dry powder to take advantage of any great downturn.

    The head of Unicredit Global Securities and former chief of the Hungarian Stock Exchange pens a remarkable essay (for someone in his position), calling the euro "virtually dead," saying it is only a matter of time before Greece defaults, and that the action will trigger an immediate magnitude 10 earthquake across Europe. Google Translate

    "Europe's common currency is virtually dead. The euro's doomed situation. The only open question now is, that European governments and the European Central Bank's desperate rearguard action even number of days to keep the spirit in Greece. For the moment, when Athens is declared bankrupt, a ten earthquake shakes the very Europe, which will be the overture to a whole new era in the life of the old continent."
  7. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    [ame=]Fiat Money - YouTube[/ame]
  8. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    European Economics & Strategy
    A Panorama of the European Debt System

    "In this primer, we have compiled the key background information and statistics relevant to the context in which the European debt markets operate, encompassing Europe’s Institutional Framework, the ECB and the banking system, as well as sovereign, corporate and household debt, both in aggregate and by country. The compilation reflects the most frequently asked questions our economics and strategy teams receive from clients globally."

    Attached Files:

  9. Michael Scally MD

    Michael Scally MD Doctor of Medicine

  10. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    As if EU, Greece, is not a worry, the real 800 POUND Gorilla is China.

    Dr. Copper Issues a Warning
    The metal with "PhD in economics" has been setting lows, which should be a warning.
    Copper's Plunge Portends Drops in Stocks and Global Economy -

    Dr. Copper says the outlook for the global economy isn't good and his colleagues concur. Commodities prices are in full retreat, signaling weakness around the world, even as policy-makers pull out all the stops to keep their economies from faltering further.

    Notwithstanding the best efforts of policy-makers on both sides of the Atlantic, commodities markets are pointing to weakening economies in the U.S. and abroad. Copper, which is ubiquitous in a broad range of consumer and capital goods as well as construction, is the ultimate harbinger of trends in goods-producing industries. So acute is the red metal's sensitivity to business trends that it has been dubbed Dr. Copper, in recognition that it is the commodity with a PhD in economics. That's a misnomer since copper can call economic turning points better than most academics, many of whom prefer to dissect the past rather than try to figure out the present, let alone where we're headed.

    What is incontrovertible is that copper traded at its lowest price of 2011 Thursday, and much of the commodity complex followed suit. The Standard & Poor's GSCI commodities index was down 9.8% for the third quarter with a day to go, according to Bloomberg. That would be the most severe decline since the fourth quarter of 2008 in the grips of the near-meltdown in financial markets and a freefall in global economies.

    The fall in copper to its lows of the year is a "sobering omen for global growth expectations," writes Michael Darda, chief economist and market strategist at MKM Partners. For those of you playing at home, the iPath-UBS Copper exchange-traded note (ticker: JJC) plunged more than 7% Wednesday and is down by nearly a third from just the beginning of August.

    "Copper is a bellwether for global demand and has been highly correlated to the S&P 500 over the last two years. That it's cracking to new lows for the year [Wednesday] (along with Chinese equities) is noteworthy, Darda writes in research note.

    "Why is this happening? It looks like some kind of liquidity squeeze is under way in China," he continues. The sharp widening in credit spreads for China implies as much. Spreads have gapped to the widest levels since the fall of 2008 and the summer of 1998, ahead of the credit crisis that began in Asia the previous year and culminated in the Russian debt default and the Long Term Capital Markets collapse.

    While the plunge in copper and other industrial goods portends poorly for the world economy, the outlook for all commodities isn't dire. F. Mark Turner, chief investment officer for Pentagram Investment Partners, draws a sharp distinction between "soft commodities," such as agricultural goods, and "hard" industrial commodities. 2008.

    "In the soft-commodity area, notwithstanding some bumper harvests, ending stocks remain at critical levels. China is no longer self-sufficient in food production and relentlessly pursues deals to secure access to food production. We favor a strategy of being long soft commodities and being short industrial metals against them," Turner writes in a letter to clients.

    In isolation, the slide in commodities might be ignored. What do a bunch of guys in smocks screaming in the futures pits know about the course of the global economy? (Forgive the stereotype. Most price discovery goes on computer screens.)

    More than it might be supposed. Prices of commodities are highly sensitive to changes in demand. Supply is relatively fixed in the short-term; you don't just open and close a mining operation based on the latest futures market report. So, prices can drop relatively sharply in reaction to weaker demand. That's why copper is watched by investors who aren't interested in the metal per se.

    But, as Darda points out, copper has been highly correlated with the S&P500. That should be sufficient reason for investors to pay attention to the metal with a PhD in economics.
  11. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    How to stop a second Great Depression
    How to stop a second Great Depression -
    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.
  12. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    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: ? ??????? ??? ?????? ??? ????????

    Bartzokas George, Attorney-President of the Citizens' Movement - Borrowers, told 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 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

    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.
  13. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    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

  14. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    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.

  15. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

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

  16. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    Rescue Aid to Greece Delayed as Pressure Rises for Reforms

    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.”
  17. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    The Tea Party is really talking about killing the economy —

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


    Attached Files:

  18. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    Banks in Europe Face Huge Losses From Greece
    Banks in Europe Face Huge Losses From Greece -

    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.
  19. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    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.

    Attached Files:

  20. Michael Scally MD

    Michael Scally MD Doctor of Medicine

    Re: Contagion

    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 -

    October 6, 2011, 5:00 AM