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Sep 26 2011

Should have brought the Gatlings

Monday Business Edition

Europe Readying Yet Another "This Really Will Do the Trick" Bailout Package

Yves Smith, Naked Capitalism

Saturday, September 24, 2011

(I)n another bit of deja vu all over again, the powers that be in Europe are readying yet another bailout plan, this one supposedly big enough to do the trick once and for all. The problem is that was the premise of several of the last grand schemes, such as the EFSF and the ESM. The market calming effect relatively short lived because analysts quickly pencilled out the programs were inadequate in size and failed to address the problems of lack of a fiscal mechanism at the EU level and the need to address the elephant in the room, bank solvency.



The new rescue program seeks to create a sovereign debt crisis firebreak at Greece, Portugal, and Ireland, when contagion has already put Spain, Ireland, and Belgium in the crosshairs. The high concept is leverage on leverage plus monetization: the EFSF, which is basically a CDO, would then provide the equity to a new fund, and the ECD would provide “protected ‘debt'” I’m not at all certain what the latter is supposed to mean; reader input is welcome. But this sounds like a CDO squared, with an unfunded equity tranche, as a legal/political cover for the ECB monetizing Euro sovereign debt. Nevertheless, this mechanism will allegedly allow for sovereign bailout program of €2 trillion.

Similarly, the size of the bank recapitalization program is in the “tens of billions”, vastly short of the €2-€3 trillion that some experts think is necessary. And note this is backwards: the debt needs to be written down directly (rather than trying to squeeze blood out of turnips via austerity) and banks recapitalized directly. Instead, the focus is (yet again) on bailing out the sovereigns, who will presumably still be expected to wear austerity hairshirts, which will worsen their debt to GDP ratios (even if this program does succeed in getting them cheaper debt in sufficient volumes).

The Eurocrats are going to be slow out of the gate. They want to launch the plan at the next G20 meeting, which is six weeks away, November 4. Mr. Market doesn’t care about the schedules of the officialdom, and is highly unlikely to wait that long.

Euro Zone Death Trip

By PAUL KRUGMAN, The New York Times

Published: September 25, 2011

European policy makers seem set to deliver more of the same. They’ll probably find a way to provide more credit to countries in trouble, which may or may not stave off imminent disaster. But they don’t seem at all ready to acknowledge a crucial fact – namely, that without more expansionary fiscal and monetary policies in Europe’s stronger economies, all of their rescue attempts will fail.



Think of it this way: private demand in the debtor countries has plunged with the end of the debt-financed boom. Meanwhile, public-sector spending is also being sharply reduced by austerity programs. So where are jobs and growth supposed to come from? The answer has to be exports, mainly to other European countries.

But exports can’t boom if creditor countries are also implementing austerity policies, quite possibly pushing Europe as a whole back into recession.

Also, the debtor nations need to cut prices and costs relative to creditor countries like Germany, which wouldn’t be too hard if Germany had 3 or 4 percent inflation, allowing the debtors to gain ground simply by having low or zero inflation. But the European Central Bank has a deflationary bias – it made a terrible mistake by raising interest rates in 2008 just as the financial crisis was gathering strength, and showed that it has learned nothing by repeating that mistake this year.

As a result, the market now expects very low inflation in Germany – around 1 percent over the next five years – which implies significant deflation in the debtor nations. This will both deepen their slumps and increase the real burden of their debts, more or less ensuring that all rescue efforts will fail.



Part of the problem may be that those policy elites have a selective historical memory. They love to talk about the German inflation of the early 1920s – a story that, as it happens, has no bearing on our current situation. Yet they almost never talk about a much more relevant example: the policies of Heinrich Brüning, Germany’s chancellor from 1930 to 1932, whose insistence on balancing budgets and preserving the gold standard made the Great Depression even worse in Germany than in the rest of Europe – setting the stage for you-know-what.

Greece needs to default on its debt and exit the eurozone

If the current Greek government can’t take the necessary steps to do this, it should give way to other political forces than can

Stergios Skaperdas, The Guardian

Monday 26 September 2011 05.00 EDT

Preparing for default involves the formation of a large number of expert teams to defend Greek interests with conviction. For the debt that is based on Greek law, Greece has the upper hand. Negotiations for other debt will be more difficult and protracted.

Since Greek banks will become insolvent, they will have to be nationalised and preparations will need to be made for that. The insurance and pension funds will need to be bailed out, too. For both banks and funds to be bailed out, the country will need its own currency. Therefore, exit from the eurozone would follow.



(T)here is little doubt among economists that the easiest mechanism for a country to gain competitiveness is to have its currency depreciate. Hence, Greece having its own currency is the easiest path to gaining international competitiveness. Cars and iPhones will become more expensive but food might actually become cheaper and employment will pick up within a few months after the introduction of the new drachma. By contrast, unemployment and deprivation with no end in sight are the predictable results of following the troika’s policies.



The main problem with an exit from the eurozone is the transition period. Capital controls will have to be imposed. Temporary measures to ration foreign exchange for the importation of petroleum and other essential items will have to be undertaken. How will the Bank of Greece settle with the ECB? How will debt be converted from euros to drachmas?

1 comment

  1. ek hornbeck

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