Tag: Euro Zone

The economic crisis in Spain was supposed to have been resolved in an agreement reached June 29 EU Summit but clearly Germany missed the point of this part:

“We affirm that it is imperative to break the vicious circle between banks and sovereigns”

Instead of bailing out the banks without adding the burden of repayment on the Spanish government, Germany reversed that and place the burden for repayment entirely on the Spanish tax payers increasing the cost for Spain to borrow and causing the markets around the world to drop:

Analysts pointed to a combination of factors, including a decision by the Valencia regional government to seek a bailout from Spain’s central government as well as revised economic forecasts by Spain’s government. [..]

Strategists said market participants also registered disappointment with provisions of a bailout plan for Spanish banks approved by euro-zone ministers Friday. For now, liability for the package, which is expected to total as much as 100 billion euros ($123 billion), remains with the Spanish government.

That “will do nothing to break the ‘vicious circle between banks and sovereigns’ that EU policy makers asserted was ‘imperative to break’ in the statement that followed their June 29” summit meeting, wrote strategists at Capital Economics.

Spain’s approval of an austerity program didn’t help either:

AS David Dayen point explains Britain’s austerity measures haven’t eased their debt/deficit problem, instead has increased it:

Another austerity program in Spain, in a time of 24% unemployment, has no chance of succeeding, either in improving the economy or even reducing the debt. We have a test case of that today, in Britain:

   Chancellor George Osborne’s deficit-busting plans are struggling to keep up with full-year targets as official figures published today revealed another rise in Government borrowing.

   Public sector net borrowing, excluding financial interventions, such as bank bailouts, was £14.4 billion in June, up from a revised £13.9 billion the previous year, the Office for National Statistics (ONS) said.

So Britain, which is two years into its austerity program, is borrowing more money than ever. It’s not reducing the deficit, it’s exacerbating it. And that’s what you should expect in Spain.

The International Monetary Fund (IMF) has called on the European Central Bank (ECB) to “to cut interest rates, implement a “sizeable” package of quantitative easing, and wade into bond markets to drive down borrowing costs.”

The IMF expressed concern about “reinforced negative bank-sovereign linkages” – the increasingly close connection between struggling banks, many sitting on billions of euros of government bonds; and their home states, which in many cases have been forced to offer them aid.

This vicious circle “could further weigh on confidence, growth, and public debt trajectories”, the IMF suggested.

As Spain’s borrowing costs rose, Germany was able to borrow money at a negative real yield – suggesting investors are effectively willing to pay Berlin for holding on to their cash.

In its strongly worded report, the IMF warned that ultra-low bond yields in Germany and other “core” eurozone economies were a sign of malfunctioning financial markets that are depriving other countries of funds.

“Investors are withholding funding from member states most in need, moving capital ‘north’ and abroad to perceived safer assets. This has contributed to divergences in liquidity conditions and lending rates within the euro area, adding to already-severe pressures on many bank and sovereign balance sheets and raising questions about the viability of the monetary union itself,” it said.

The only country that has benefited from this crisis is Germany and all the talk at the EU Summit to stabilize the euro and end the crisis was useless because German Chancellor Angela Merkel never meant a word she said.

This was predictable:

Germany and France clash over eurobonds at summit

French president François Hollande marks his Brussels debut by challenging chancellor Angela Merkel over bailout

A special EU summit marking the debut of France’s President François Hollande saw him challenge Germany’s chancellor, Angela Merkel, on the euro, arguing that the pooling of eurozone debt liability – eurobonds – had to be retained as an option for saving the currency. Merkel has ruled out eurobonds as illegal under current EU law.

Hollande told the dinner of 27 leaders that he wanted to see eurobonds established, while conceding that this would take time, witnesses at the talks said.

Merkel responded that this was nigh-on impossible since it would require changes to the German constitution and around 10 separate legal changes, the sources said.

There was no policy breakthrough at the summit, rather a reiteration by leaders of known positions. Any decisions were postponed until the end of next month after French and Greek parliamentary elections on 17 June.

Illegal? Require changes? Well, they created this mess by changing laws and constitutions, now they need to fix it by changing the laws and the EU constitution. Chancellor Merkel sounds more and more like George W. Bush, “it’s hard work” (read: I don’t want to do this). The Euro Zone nations can’t have their cake and eat it, too. They want Greece to to stay in the Euro Zone but they want them to accept the austerity agreement that the Greeks have clearly rejected.

In a New York Times Op-Ed, Amartya Sen, a Nobel laureate and a professor of economics and philosophy at Harvard, points out that the EU economic crisis is a road to hell paved with good intentions:

There are two reasons for this.

First, intentions can be respectable without being clearheaded, and the foundations of the current austerity policy, combined with the rigidities of Europe’s monetary union (in the absence of fiscal union), have hardly been a model of cogency and sagacity. Second, an intention that is fine on its own can conflict with a more urgent priority – in this case, the preservation of a democratic Europe that is concerned about societal well-being. These are values for which Europe has fought, over many decades. [..]

Europe cannot revive itself without addressing two areas of political legitimacy. First, Europe cannot hand itself over to the unilateral views – or good intentions – of experts without public reasoning and informed consent of its citizens. Given the transparent disdain for the public, it is no surprise that in election after election the public has shown its dissatisfaction by voting out incumbents.

Second, both democracy and the chance of creating good policy are undermined when ineffective and blatantly unjust policies are dictated by leaders. The obvious failure of the austerity mandates imposed so far has undermined not only public participation – a value in itself – but also the possibility of arriving at a sensible, and sensibly timed, solution.

This is a surely a far cry from the “united democratic Europe” that the pioneers of European unity sought.

As David Dayen said, “we’re are essentially in a holding pattern” until the Greek and French Parliament elections on June 17. Please, do not hold your breath for a good solution, no matter what you may think a good solution is. Not everyone is going to be happy at the end of this. Let’s hope it’s the austerians who are unhappiest.

Greek, French and German voters went to the polls this past weekend and rejected pretty much told the European leaders they were very unhappy with the austerity measures that were being forced on them to bail out European banks. It took until yesterday for the world markets to react to this new reality with the Dow closing below its inflated 13,000 mark. Germany, the chief cheerleader for austerity, is not happy with France and very displeased with the new Greek leadership that blithely told Germany what to do with its austerity measures:

Alexis Tsipras, whose bloc came second in Sunday’s vote, said Greek voters had “clearly nullified the loan agreement”. [..]

The European Commission and Germany say countries must stick to budget cuts.

European Commission President Jose Manuel Barroso said on Tuesday: “What member states have to do is be consistent, implementing the policies that they have agreed.”  [..]

Mr Tsipras made his position clear to reporters in a five-point plan:

 

• Cancelling the bailout terms, notably laws that further cut wages and pensions
• Scrapping laws that abolish workers rights, particularly a law abolishing collective labour agreements due to come into effect on 15 May
• Promoting changes to deepen democracy and social justice
• Investigating Greece’s banking system which received almost 200bn euros of public money
• Setting up an international committee to find out the causes of Greece’s public deficit and putting on hold all debt servicing

It looks increasingly like the Greeks will be abandoning the Euro, it’s just a matter of when:

“Germans are now predominantly of the opinion that they would be better off if Greece left the euro zone,” said Carsten Hefeker, a professor of economics and an expert on the euro at the University of Siegen. “If the country really is continuing on the path they are taking now, it would be hard to justify keeping them in. How do you deal with a country that says we don’t want to keep any of the commitments we have made?” [..]

Perhaps the one card Greece has to play is the danger its exit could pose to other, much larger members like Spain and Italy, with far greater consequences. If Greece were pushed out, Mr. Hefeker said, the bond markets would start betting on the next country to be kicked out. “Then Spain or Italy would be put under pressure, and the danger would be of the whole euro zone collapsing,” he said.

There are few options are open for the European Union, the European Central Bank and the International Monetary Fund which is holding most of Greece’s debt and easing the threat to the banks.

First, the so-called “troika” could release just enough funds to keep the government running until the political situation stabilizes;

The terms of the agreement could be renegotiated with the creditors:

Or, lastly, the “troika” could just refuse to give Greece any money, as the IMF did over 10 years ago when Argentina faced similar economic crisis. This actually turned out well for Argentina over a shorter recovery than is predicted for Greece under the current terms.

Perhaps it is past time for Greece to go it on its own and let the Eu continue the blood letting without them.

Doing the same thing repeatedly and expecting different results is the definition of insanity. It then must follow that Germany’s Chancellor, Andrea Merkel has got to be insane.

Eurozone in new crisis as ratings agency downgrades nine countries

Standard & Poor’s strips France of its AAA credit rating, rekindling fears in the markets over future of single currency

S&P said austerity was driving Europe even deeper into financial crisis as it also cut Austria’s triple-A rating, and relegated Portugal and Cyprus to junk status.

The humiliating loss of France’s top-rated status leaves Germany as the only other major economy inside the eurozone with a AAA rating, and rekindled financial market anxiety about a possible break-up of the single currency.

S&P brought an abrupt end to the uneasy calm that has existed in the eurozone since the turn of the year by downgrading the ratings of Cyprus, Italy, Portugal and Spain by two notches. Austria, France, Malta, Slovakia and Slovenia were all cut by one notch.

The agency said that its actions on eurozone ratings were “primarily driven by insufficient policy measures by EU leaders to fully address systemic stresses”. It added that fiscal austerity alone “risks becoming self-defeating“.

Germany,too may be facing a downgrade as it slips into recession as its economy is contracting in the face of the deflationary economic policy of the euro zone. So what does Frau Merkel do? You got it, more austerity.

Merkel: Europe Faces ‘Long Road’ to Win Back Trust

German Chancellor Angela Merkel said Standard and Poor’s downgrades of nine countries underline the fact that the eurozone faces a “long road” to win back investors’ confidence, pushing Saturday for it to move quickly on a new budget discipline pact and a permanent rescue fund.

I agree with Chris in Paris at AMERICAblog that the ratings agencies should be rendered useless considering their part in the current economic crisis but they are right about austerity. The Europeans led by Merkel are ignoring reality.

The robust economy of Germany is starting to feel the effects of the economic crisis of its partner nations in the Eurozone and is showing signs of drastic slowing

Growth in the German economy slowed sharply between April and June and was weaker at the start of the year than previously thought, figures show.

The (German) economy grew by just 0.1% in the quarter, according to figures from the national statistics office. Growth in the eurozone as a whole also slowed.

Germany had been driving the economic recovery in the eurozone.

The figures come as German Chancellor Angela Merkel and French President Nicolas Sarkozy begin crunch talks.

The two leaders are discussing ways to solve the eurozone debt crisis that has threatened to engulf Italy and Spain and has sparked turmoil on global stock markets.

Figures also released on Tuesday showed that eurozone economic growth slowed to 0.2% in the second quarter, down from 0.8% in the previous three months.

The slow down has had its effect on markets in Europe and early trading in the US:

The news led European indexes lower. Germany’s DAX fell 2.6 percent, the FTSE in Britain was 1.3 percent lower, and in France the CAC 40 was down 1.9 percent.

In early trading, the Dow Jones industrial average was down 80.68 points, or 0.70 percent, at 11,402.22. The Standard & Poor’s 500-stock index was down 11.02 points, or 0.91 percent, at 1,193.47, and the Nasdaq composite index was down 26.38 points, or 1.03 percent, at 2,528.82.

“German G.D.P. data is the catalyst this morning that got us off to a bad start,” said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vt.

The German chancellor, Angela Merkel, and President Nicolas Sarkozy of France were to meet later Tuesday to discuss measures to contain Europe’s fiscal crisis. A joint news conference was scheduled at noon E.D.T.

Another component of the down turn is the idea of issuing bonds backed by all Eurozone nations to ease the crisis has been poo-pooed by both German Chancellor Angela Merkel and French President Nicholas Sarkozy but they may have no other choice:

The euro bond concept is gaining traction among economists and other outside experts like George Soros, the billionaire investor, as a way of preventing borrowing costs for Italy and Spain from rising so much that the countries become insolvent, an event that could destroy the common currency.

Debt issued and backed by all 17 members of the euro zone, euro bond proponents say, would be regarded as ultrasafe by investors and could rival the market for United States Treasury securities. The weaker euro members would benefit from the good standing of countries like Germany or Finland and pay lower interest rates to borrow than if left to face investors on their own.

“It may well be in order to calm markets right now,” said Jakob von Weizsäcker, an economist for the German state of Thuringia who has proposed a way to structure euro bonds so that countries would be encouraged to reduce their debt.

On the “bright side”, there is Nouriel Roubini:

.Karl Marx was right that globalization, financial intermediation, and income redistribution could lead capitalism to self-destruct

Now a combination of high oil and commodity prices, turmoil in the Middle East, Japan’s earthquake and tsunami, eurozone debt crises, and America’s fiscal problems (and now its rating downgrade) have led to a massive increase in risk aversion. Economically, the United States, the eurozone, the United Kingdom, and Japan are all idling. Even fast-growing emerging markets (China, emerging Asia, and Latin America), and export-oriented economies that rely on these markets (Germany and resource-rich Australia), are experiencing sharp slowdowns.

Until last year, policymakers could always produce a new rabbit from their hat to reflate asset prices and trigger economic recovery. Fiscal stimulus, near-zero interest rates, two rounds of “quantitative easing,” ring-fencing of bad debt, and trillions of dollars in bailouts and liquidity provision for banks and financial institutions-officials tried them all. Now they have run out of rabbits.

Fiscal policy currently is a drag on economic growth in both the eurozone and the United Kingdom. Even in the United States, state and local governments, and now the federal government, are cutting expenditure and reducing transfer payments. Soon enough, they will be raising taxes.