Thursday, September 8, 2011
Spain's Finance Minister Salgado Says No Recession
I wonder if this comment will end up in our "Iraqi Minister of Information" gallery? Nothing like the predictions of the Finance Minister of a financially challenged country. How would she know?
Remember the much celebrated Greek Debt Exchange?
Apparently is less popular in the implementation phase (Greece Bondholder Exchange Not Working).
This plan was supposed to emulate the Uruguayan debt exchange of 2002. Unfortunately, nobody bothered to study either this plan or the Uruguayan exchange. Uruguay, a VERY small country, had a LIQUIDITY problem because their debt was concentrated on short maturities at a time when their neighbor, Argentina (a much bigger economy) had a SOLVENCY problem.
The Greek exchange is more akin to the last efforts by (Argentine minister) Cavallo right before the default (for more information check our "Back To The Future" link on the main page. By the way, at that time Argentina had deficit of well under 3% (they were attempting to take it to zero) and a debt to GDP of 55% (Greece's last know calculation was over 120%).
One thing is clear, everything we have been told by the IMF and the European policymakers up to this point has be wrong, misleading or both.
This plan was supposed to emulate the Uruguayan debt exchange of 2002. Unfortunately, nobody bothered to study either this plan or the Uruguayan exchange. Uruguay, a VERY small country, had a LIQUIDITY problem because their debt was concentrated on short maturities at a time when their neighbor, Argentina (a much bigger economy) had a SOLVENCY problem.
The Greek exchange is more akin to the last efforts by (Argentine minister) Cavallo right before the default (for more information check our "Back To The Future" link on the main page. By the way, at that time Argentina had deficit of well under 3% (they were attempting to take it to zero) and a debt to GDP of 55% (Greece's last know calculation was over 120%).
One thing is clear, everything we have been told by the IMF and the European policymakers up to this point has be wrong, misleading or both.
Wednesday, September 7, 2011
Merkel Gets Emotional Over Paper Money
You know you are in trouble when politicians use emotional terms to explain technical issues. Brainy-German chancellors are no exception. According to Angela Merkel "If the Euro Fails, Europe Fails".
The question is: how does one go about defining "failure" for the Euro? It is obvious that the Southern countries are not competitive. Should they exit the Euro or endure decades of deflation? Does Frau Merkel seriously think the Greeks can lower their wages until they become competitive in Euros? How much will they owe at that point?
Given the amount of resources that are being spent on propping up Greece for the sake of German and French banks some may argue that the Euro is already a colossal failure.
Who knows, maybe 800 years of sovereign crises and economic logic don't matter. Maybe this time is really different.
The question is: how does one go about defining "failure" for the Euro? It is obvious that the Southern countries are not competitive. Should they exit the Euro or endure decades of deflation? Does Frau Merkel seriously think the Greeks can lower their wages until they become competitive in Euros? How much will they owe at that point?
Given the amount of resources that are being spent on propping up Greece for the sake of German and French banks some may argue that the Euro is already a colossal failure.
Who knows, maybe 800 years of sovereign crises and economic logic don't matter. Maybe this time is really different.
Obama Launches His Reelection Campaign Tomorrow
His so-called "Jobs Proposal" faces an uncertain future in Congress. Even if approved, it is too small to make a difference in the short-term. How about the long-term, you asked? Same as "hope now," "cash for clunkers," and all the other initiatives.
So why everyone talking about this? Pundits (and bloggers) need something to do.
So why everyone talking about this? Pundits (and bloggers) need something to do.
German High Court Rules That Parliament May Bailout Whomever They Want
After recent sell-offs even a long expected ruling (Germans don't like surprises) is a good excuse for a rally of sorts.
If you haven't been following the issue, a group of German private citizens had decided to challenge the constitutionality of bailing out foreign governments with German taxpayer money. The court, as expected, said that the Bundestag can lend money (on paper it is a loan) as they see fit.
If you haven't been following the issue, a group of German private citizens had decided to challenge the constitutionality of bailing out foreign governments with German taxpayer money. The court, as expected, said that the Bundestag can lend money (on paper it is a loan) as they see fit.
Tuesday, September 6, 2011
Theory: The Euro Can Be Saved By A Fiscal Union
What do these articles have in common?
They gloss over the fact that East German workers could be trained to fill the vacancies in West Germany in the same way that Eastern American workers could be encouraged to emigrate to West America (aka California).
What are the chances that young and well educated Greeks or Spaniards will move to Germany or the Netherlands? They are far more likely to come to the US.
Bureaucrats often forget they are dealing with people.
They gloss over the fact that East German workers could be trained to fill the vacancies in West Germany in the same way that Eastern American workers could be encouraged to emigrate to West America (aka California).
What are the chances that young and well educated Greeks or Spaniards will move to Germany or the Netherlands? They are far more likely to come to the US.
Bureaucrats often forget they are dealing with people.
Sunday, September 4, 2011
More Trouble Ahead For European Credit Markets
This past week, we found out the Finns, worried about their money, had cut a parallel deal with Greece. "Prime Minister Jyrki Katainen “can’t back down on the collateral demand as his government would likely collapse,” said Timo Tyrvaeinen, Chief Economist at Aktia Oyj in Helsinki."
Now it is Slovakia's turn to throw a monkey wrench in the sophisticated machinery of the German-French designed EFSF (the stabilization fund hoped to lend money to Greece, Portugal, Ireland and every European bank while not costing anybody anything) (Slovakia's EFSF Vote Not Before December , Reuters)
If you are lost in the saga, which now rivals a Wall Street prospectus in complexity, here is a brief summary:
The EFSF was created as a huge fund of which only a fraction would be used to help small countries, such as Greece in their temporary plight for liquidity. The facility would be guaranteed by all the euro-zone countries (the selfish English declined to help since the euro is not their currency).
The crazy markets, instead of recognizing the error of their ways, decided to cast doubt on Ireland and Portugal, so the fund had to bail them out as well.
After Ireland and Portugal were included in the deal, the EFSF needed more money in order to lend only a fraction. Since many euro-zone governments didn't' want to commit more (a few of them do not believe it is a good idea to lend money to a country with a runaway deficit), the EFSF had to go all in. Also, Greece needed a second (or a third?) bailout package. Except some or all of this needs to be approved by every government in the euro-zone (believe it or not, it is not just Germany running things). This still has to be done albeit at a European pace (they are only coming back from vacation tomorrow).
While the elite was enjoying their mandatory no-work August, the crazy markets, who do not take time off for some reason, decided to attack Spain and Italy. At that time Monsieur Trichet, who was either left on guard at the ECB or can make decisions from his vacation spot, decided to buy Italian and Spanish bonds in the secondary market (i.e. from intermediaries who buy from the governments. The ECB buying directly from the governments would be illegal.) on a temporary basis until the EFSF can be approved, funded, and ready to do its part.
What happens next?
The ECB may redefine temporary and continue to buy Italian and Spanish bonds (It is already the most leveraged bank in the world by far)
Germany may decide to throw away the pretense of a European bailout and recognize they do not really need Slovakia or Finland (do they need France?)
Finland may be bribed to drop their collateral requirement (who really follows Finnish politics anyway?)
Or this may be the week when the crazy markets take over again
The bottom line is that nobody believes this will work unless the Germans agree to pay Greek debts unconditionally and that, as we know, opens yet a different can of worms.
Now it is Slovakia's turn to throw a monkey wrench in the sophisticated machinery of the German-French designed EFSF (the stabilization fund hoped to lend money to Greece, Portugal, Ireland and every European bank while not costing anybody anything) (Slovakia's EFSF Vote Not Before December , Reuters)
If you are lost in the saga, which now rivals a Wall Street prospectus in complexity, here is a brief summary:
The EFSF was created as a huge fund of which only a fraction would be used to help small countries, such as Greece in their temporary plight for liquidity. The facility would be guaranteed by all the euro-zone countries (the selfish English declined to help since the euro is not their currency).
The crazy markets, instead of recognizing the error of their ways, decided to cast doubt on Ireland and Portugal, so the fund had to bail them out as well.
After Ireland and Portugal were included in the deal, the EFSF needed more money in order to lend only a fraction. Since many euro-zone governments didn't' want to commit more (a few of them do not believe it is a good idea to lend money to a country with a runaway deficit), the EFSF had to go all in. Also, Greece needed a second (or a third?) bailout package. Except some or all of this needs to be approved by every government in the euro-zone (believe it or not, it is not just Germany running things). This still has to be done albeit at a European pace (they are only coming back from vacation tomorrow).
While the elite was enjoying their mandatory no-work August, the crazy markets, who do not take time off for some reason, decided to attack Spain and Italy. At that time Monsieur Trichet, who was either left on guard at the ECB or can make decisions from his vacation spot, decided to buy Italian and Spanish bonds in the secondary market (i.e. from intermediaries who buy from the governments. The ECB buying directly from the governments would be illegal.) on a temporary basis until the EFSF can be approved, funded, and ready to do its part.
What happens next?
The ECB may redefine temporary and continue to buy Italian and Spanish bonds (It is already the most leveraged bank in the world by far)
Germany may decide to throw away the pretense of a European bailout and recognize they do not really need Slovakia or Finland (do they need France?)
Finland may be bribed to drop their collateral requirement (who really follows Finnish politics anyway?)
Or this may be the week when the crazy markets take over again
The bottom line is that nobody believes this will work unless the Germans agree to pay Greek debts unconditionally and that, as we know, opens yet a different can of worms.
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