Tag Archive: Bond Market

Jul 09 2012

The Dragging US Economy

Austerity is not going well for Europe or the US.

U.S. Stocks Post Longest Slump in 1 Month on Europe Woes

by Rita Nazareth and Julia Leite

U.S. stocks fell, giving benchmark indexes the longest slump in more than a month, after a jump in Spanish bond yields above 7 percent intensified concern about Europe’s crisis and as investors awaited Alcoa (AA) Inc.’s results.

The Standard & Poor’s 500 Index slid 0.2 percent to 1,352.45 at 4 p.m. New York time, according to preliminary closing data, paring an earlier loss of as much as 0.6 percent. The benchmark index dropped 1.6 percent over three days.  [..]

Stocks joined a global slump as the yield on Spain’s 10- year bond rose above the threshold that prompted bailouts in Greece, Ireland and Portugal. German Finance Minister Wolfgang Schaeuble dismissed a rapid move toward direct bank recapitalization by the European rescue fund, limiting the tools for shoring up Spanish banks as the euro-area crisis simmers.

Stocks Retreat as Spanish 10-Year Bond Yield Exceeds 7%

By Stephen Kirkland and Rita Nazareth

U.S. stocks fell for a third day as Spain’s 10-year debt yield topped 7 percent, fueling concern the debt crisis is worsening, and investors awaited the start of the earnings season. Corn and soybeans surged on forecasts for more dry U.S. weather. Treasuries rose.

The Standard & Poor’s 500 Index slipped 0.2 percent at 4 p.m. in New York and the Stoxx Europe 600 Index fell 0.4 percent. Ten-year Spanish yields jumped 11 basis points to 7.06 percent after rising as high as 7.108 percent. The euro climbed 0.2 percent to $1.2319, rebounding from a two-year low of $1.2251. Corn rose as much as 5.8 percent and soybeans jumped to a four-year high. Oil added 1.8 percent to $85.99 a barrel and natural gas rallied as a strike threatened supplies from Norway.

E.U. Seeks to Dispel Doubts About Bank Bailouts

by Paul Geitner and Stephen Casstle

BRUSSELS – With borrowing costs for Spain and Italy climbing again to critical levels, European officials sought Monday to dispel doubts about a deal struck last month to break the “vicious circle” between shaky banks and weak governments.

Spain, suffering through its second recession in three years, was also expected to win more time to rein in its budget deficit even as euro zone finance ministers haggled in Brussels over terms of a bailout for its troubled banks.

Amid the unrelenting market pressure, the European Central Bank reaffirmed that it stood ready to do more to stem the crisis – within the limits of its mandate – while urging euro zone governments to press ahead with closer integration.

Even here in the US, the Federal Reserve admits that they may be reaching there limits on their ability to fix unemployment and are at odds as to what to do next.

Fed’s Lacker Says U.S. May Be Close to Maximum Employment

By Kathleen Hays and Jeff Kearns

Federal Reserve Bank of Richmond President Jeffrey Lacker said the U.S. may already be close to maximum employment from a monetary policy standpoint and that policy makers can’t do much more to cut the jobless rate.

“Given what’s happened to this economy, I think we’re pretty close to maximum employment right now,” Lacker said today in a Bloomberg radio interview on “The Hays Advantage” with Kathleen Hays and Vonnie Quinn. “That might be shocking. That might be surprising.”

Fed policy makers believe the U.S. central bank has limited control over the jobless rate because the employment level is driven by “non-monetary factors that affect the structure and dynamics of the labor market,” according to the January statement from the Federal Open Market Committee. The jobless rate was unchanged at 8.2 percent in June.

Lacker, who has dissented from all four FOMC decisions this year, is at odds with colleagues on what the Fed should do to boost the economy. He said in a June 22 statement that he opposed the FOMC’s $267 billion extension of its Operation Twist program because it may spur inflation and won’t give the economy a significant boost.

San Francisco Fed President John Williams said today the U.S. central bank must maintain “extraordinary vigilance” to see if the slowing economy requires additional monetary stimulus. “If further action is called for, the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities,” Williams said in a speech in Coeur D’Alene, Idaho.

While all the PTB debate how to save banks and the markets, the 99% are getting poorer putting an even bigger drag on the economy. For most the recession never ended.

Jun 28 2012

Bailing Out Europe

The heads of state of the EuroZone countries met in Brussels today for a two day summit to  try to come to an agreement on how to bail out two of its biggest members, Italy and Spain:

The 27 government chiefs will discuss buying Spanish and Italian government bonds to bring down borrowing costs that are near euro-era records, Finnish Prime Minister Jyrki Katainen said. He also proposed that bailout funds buy collateralized government debt in primary markets.

“I’ve come for very rapid solutions to support countries in difficulty on the markets,” French President Francois Hollande told reporters as he arrived in Brussels. Without specifying Spain or Italy, he said they “have made considerable efforts to deal with their public accounts.”

Leaders will consider short-term measures to stem the sovereign debt turmoil as EU President Herman Van Rompuy’s road map to strengthen the bloc’s common currency and financial oversight ran into immediate opposition from Germany. German Chancellor Angela Merkel has become increasingly isolated as Hollande, Italian Prime Minister Mario Monti and Spanish Premier Mariano Rajoy unite to push for quicker action to ease the crisis that emerged in Greece in late 2009.

Apparently all did not go German Chancellor Merkel’s way as she canceled her scheduled evening press conference. Or maybe she was watching her country’s football team get trounced by the Italians.

Euro 2012 Live Blogging: Italy 2 Germany 0

Mar 09 2012

Greece Succeeds In Averting Another Crisis

The Asia markets rose this morning after the news that Greece has reached a settlement with at least 90% of its bond holders:

The finance ministry said 85.8 percent of its 177 billion euros in bonds regulated under Greek law had been tendered, adding that the rate would reach 95.7 percent with the use of collective action clauses to enforce the deal on creditors who refused to take part voluntarily.

The result should clear the way for the European Union and International Monetary Fund to release a 130 billion euro bailout package agreed with Greece last month. [..]

The biggest sovereign debt restructuring in history will see bond holders accept losses of some 74 percent on the value of their investments in a deal that will cut more than 100 billion euros from Greece’s crippling public debt.

The unknown consequence of this agreement is that it may trigger the credit default swap (CDS) insurance that some investors hold on the bonds. Some economists don’t believe that this would be a problem:

Finance ministers from the 16 other countries that use the euro are to discuss the deal’s results in a conference call later Friday. The International Swaps and Derivatives Association said it would also meet to determine whether the deal would be deemed a so-called “credit event” – a technical default – which would trigger the payment of credit default swaps, which is essentially insurance against a default.

When the debt relief plan was first announced last year, eurozone leaders and the ECB worked hard to avoid a credit event, because they feared the a payout of CDS could destabilize big financial institutions that sold them.

However, since then a CDS payout has started to look less threatening. The ISDA, a private organization that decides on credit events, said that if they are triggered, overall payouts on CDS linked to Greece will be below $3.2 billion. That amount is spread over many financial firms and likely too small to significantly hurt any one of them.

However, the outlook for economic growth anytime soon is grim. The problems that have been inflicted on the average Greek citizen by the austerity measures of this deal still exist and it’s predicted, the situation for them will not be improving for years:

   It’s stunning here in Athens to see many traffic lights not working, to see beggars pawing through garbage for food, to see blackened ruins of shops burned in rioting. I was even greeted by a homeless man who spoke impeccable British-accented English.

   That man, Michael A. Kambouroglou, 35, claims that he studied English literature at Cambridge University and worked for years in the tourism industry, most recently at a five-star hotel. He told me that he had enjoyed a good life, visiting the United States and traveling around the world, until the day nearly a year ago when the collapsing economy caught up with him, and he was laid off.

   “To be honest, I never thought it could come to me,” he recalled. “It happened in a flash.” Kambouroglou says he goes out every morning, knocking on doors and looking for work, but in this economy it seems hopeless. The overall unemployment rate here is 21 percent – 48 percent among young people – and the European Union forecasts that the Greek economy (and all of the euro zone) will shrink further this year.

Without economic growth, the deal may only be buying a little time before it all goes back to square one. There are those who believe that this is just stalling the inevitable default and that the sooner Greece defaults the faster the pain for the Greek people will be relived:

Greece has defaulted five times since 1800, most recently in 1932.

Clearly, Greek’s own experiences reveal there is, indeed, life after default. So what’s the country waiting for?

Well, if its leaders are afraid a default won’t be tolerated in modern times, they need to consider the most recent examples set by Russia and Argentina…

In 1998, Russia defaulted on $40 billion in local debt. Within two years, its economy was growing by double-digit rates. And it continued to do so for the better part of a decade under Vladimir Putin’s leadership.

In late 2001, Argentina defaulted on $95 billion in debt. Yet, by the end of 2002, its economy returned to growth. And it continued growing for eight straight years. [..]

Bottom line: As Howard Davies, a former U.K. central banker and financial regulator, says, “It’s too late for Greece [to avoid default].” So let’s pull off the Band-Aid already and get it over with.

It won’t be painless or even remotely enjoyable. But it’s necessary if Greece ever wants to get its financial house in order and its economy growing again.

Feb 16 2012

Greece: The Continued Slide Towards Default

It is almost inevitable that Greece will default but in the interim the Eurozone leaders are determined to force more austerity on the country in order to protect the hedge funds profits at the expense of the Greek people. Is America headed down this same road?

Freedom Rider: Greece: Your Money or Your Life

By Margaret Kimberly, editor and senior columnist at the Black Agenda Report

Greece is at the epicenter of an horrific assault on working people and on their democracy. As a result of corruption at the top of the Greek government and world wide finance capital, that nation is teetering on the brink of insolvency. The rescue cooked up by the same people who created the problem is in fact anything but.

The so-called bail out is a plan to destroy the last vestiges of the welfare state and the expectations of humanity that they can have any hope of being treated fairly in capitalist countries. The European Central Bank, the International Monetary Fund and the European Commission have descended like vultures, making it crystal clear where their interests lie. [..]

Beginning in 2008, Americans got a dose of some of the same medicine. We were told that our economy would implode if we didn’t give our money to bail out the very same banks which created the crisis. Four years and trillions of dollars later, we are still in a recession, unemployment remains high, ordinary people have lost their assets and our president and Congress bicker over how much they can cut government spending and ruin our lives even more.

The Greeks are ahead of the curve. At least they stood up and protested. Hopefully more people around the world will be like them instead of like passive Americans. Hopefully Americans will stop being passive before they end up like people in Greece.

The Greek Experiment

Michael Hudson: Greek crisis used to find out how far finance can drive down wages and privatize.”

Michael Hudson is a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992 & 2009) and of The Myth of Aid (1971).

Transcript:

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington.

In Greece, the financial elites of Europe have gotten agreement from the Greek government to another round of what some people are calling savage austerity measures, for example, lowering the minimum wage by 22 percent, a new round of privatizations, and cuts to pensions and many other social programs. This is, I guess, an example of banks and a banking technocrat that now leads the Greek government directly intervening, calling government policy. So what does this tell us here in the U.S., Canada, and other countries that are watching this?

Now joining us to discuss all of this: Michael Hudson is a former Wall Street financial analyst, a distinguished research professor of economics at the University of Missouri-Kansas City, and he writes at Michael-Hudson.com. Thanks for joining us, Michael.

MICHAEL HUDSON, RESEARCH PROF., UMKC: Thank you very much.

JAY: So, Michael, what should we be learning from what’s going on in Greece?

HUDSON: Well, we should be learning what the European bankers are learning, and that is what is the result of a great experiment that’s going on. For the last five years in Latvia, they’ve-the neoliberals have lowered wages by about 30 percent. The basic premise of today’s model builders are: you don’t know how far you can lower wages and pensions until people begin to press back. Well, in Latvia they still haven’t begun to press back when they’ve lowered for 30 percent. Now they’re moving towards Greece on the way to Spain and Portugal and Italy, and they’re trying to figure out how much can we lower wages, how much can we drain an economy until there is pressure to come back.

And the right wing, who’ve essentially appointed, as you pointed out, a bank lobbyist, which is called a technocrat, in charge of Greece, is: let’s try the experiment to just see how much we can squeeze out-because they’ve realized that the left in Europe is completely fragmented. They don’t have a defense available, they don’t have a body of concepts available to say, wait a minute, this is crazy. When you’re lowering wages, you’re actually shrinking an economy. When you’re cutting the budget deficit, you’re reducing the amount of money that comes into the economy to promote demand. So in effect what Europe is doing is bleeding economies, very much like a medieval doctor would bleed blood on the ground, since this is going to make economies more productive.

Well, the only response that the Greek people have, not simply the left, but the right and the Greek people, is, look, if you think you’re going to increase the surplus, increase taxes by lowering our wages and cutting our pensions and cutting our health care, we’re going to do what the Egyptians are doing and what the Arab Spring is doing. We’re going to tear the economy apart, and there won’t be anything for you. And the PASOK, the socialist party that inaugurated this whole austerity program, now has an 8 percent approval rating in Greece. That’s even lower than Mr. Obama has for cutting wages here.

So what the Greeks are saying: look, when the premier said that they were going to have a referendum for whether we want to cut back the wages to pay the bankers, the first thing Angela Merkel said was, you can’t have a referendum. We’re going to suspend democracy, we’re going to impose a dictator on you, and we’re going to tell you what to do.

Well, under modern international law, if there’s no democratic commitment to pay, then the debt taken on is null and void. Well, the European common market, the European Union, has had its lawyers say, okay, we’re going to get the agreement of congress. Well, the Greek people can say, look, you can come down with bags of money and you can buy all the parliament members that you want to approve the deal, but as soon as there is an election, we’re going to throw them out, and they’re not acting on our behalf, and-.

JAY: Yeah, but it’s not clear by polling that the next election would actually elect a government that wouldn’t go along with this. Most of the parties that seem capable of winning elections in Greece have signed on to this deal. But can I go back to something earlier you said? Is not one of the big objectives here-’cause it’s hard to understand the logic of driving Greece into a decade of depression if you actually want any revenue that’s going to pay some of these debts back, which means, is not the real objective here not more about privatization, that if you can create so much chaos and dependency on the Greek government, on the European financial elites, they’re going to sell everything off? And apparently they’re talking now about selling airports and shipping-seaports, like, a whole ‘nother level of privatizations.

HUDSON: Not only that, but also the water systems, the sewer systems, real estate, the islands. You’re right. They think that if they can create a crisis, it becomes a grab bag area. And bankers and people who have a plan usually do much better in a crisis or a grab bag than people who don’t have a plan. So this indeed seems to be it. Finance today achieves what military invasion used to do in times past. So the new mode of warfare is financial, not military. It’s much cheaper and it’s much safer for the country doing the attack.

So you’re quite right: privatization is a big role. And that’s why yesterday the European Union said, wait a minute, we’re not even going to give you the money to pay us, namely, for us to pay our own banks that have bought your bonds, unless you spell out exactly what you’re going to privatize and commit to it now. And this is a sticking point. In the past, the Greeks have made promises, and thank heavens they haven’t privatized, because once they begin to sell things off, then there’s going to be a real squeeze and even more of an opposition. So you’re right. This is a property grab.

JAY: Yeah. We were joking off-camera. I was saying it’s amazing how the Europeans make Obama’s budget look good. And as critical as you and I and many people we’ve interviewed on The Real News have been critical of Obama, there actually does seem to be some kind of different approach between Wall Street (and, certainly, the sections of Wall Street that helped elect President Obama) and the Europeans. You can hear interviews with Wall Street representatives who actually say, no, you do have to have short-term stimulus before you have these kinds of austerity measures; you can’t force the world into a global depression. You hear that kind of language out of New York and out of President Obama, where the Europeans seem so committed to this severe austerity.

HUDSON: There are two reasons for that. Number one, from the very beginning, from the last century, America has already had in the private sector what was in the public domain in Europe. Europe had its power companies, electric and gas systems in the public domain. America privatized them, but as regulated public utilities. The public utilities were allowed-were regulated as to how much bond and equity they could get, what their rate of return would be. Europe has no body of law to regulate the prices or rent extraction the public utilities can charge, because they’d always had these in the public domain, just like Russia had no and the Soviet Union had no system like this. So the objective of privatizing in Europe, first of all, there’s much more property and public assets to grab in Europe than there were in the United States, and secondly, there is no regulatory body in Europe, because of the fact that in the past, power and sewer and water and public utilities were supplied either at cost or at subsidized rates to make the economy more competitive.

So the idea in Europe is not only that you cut wages by 30 percent, but you’re now going to raise the price of what you just mentioned, the access to water, sewers, transportation, everything else. You’re going to raise the price to put the real squeeze on wages. And the result in Greece will probably be the same as it was in Iceland, Latvia, and other countries. There’s going to be a large emigration of working-age labor. And the result will, of course, be to make the economy much less competitive.

And in this morning’s newspaper, when it turned out that Greece’s GDP fell at 7 percent annual rate, not the 5 percent expected, as usual the newspaper said, to everyone’s surprise, the situation is worse than projected. Well, of course it wasn’t really to our surprise, because we know that when you’re strangling an economy, of course it can’t cope very well. And they’re strangling the Greeks economy. And they’re using it, I think, as a laboratory experiment to say, what’s going to happen when we really just squeeze labor and squeeze labor? It’s like trying to feed a horse less and less and see whether it’s really going to be more efficient until it keels over dead.

JAY: And I guess it’s always-the way large-scale unemployment is always a good threat against the employed within a country, the more you can beat up Greece and Spain, Portugal, the more you can threaten the working class of France and Germany, where I guess the big targets eventually will be.

HUDSON: Well, if that happens, there’s going to be a renewed nationalism that’s going to cut the common market apart, and you’re going to have, all of a sudden, a realization that when Europe united, the whole idea of it’s united was so that it would never go to war again, military war. But now that it’s united under neoliberal bank rules, they think, wait a minute, we’re uniting and we are going to war. But it’s a class war. It’s an economic war. And this isn’t what we wanted. If the idea of uniting in Europe is for a class war under rules where we’re guaranteed to lose, then we’re saying no to Europe, just as the Icelanders have voted not to join Europe, just as other countries that had planned to join Europe, all the way to Turkey at the other end, are saying, wait a minute, if that’s the Europe that’s coming, an oligarchic Europe whose program is austerity and shrinkage, why on earth would we want to join?

JAY: Thanks for joining us, Michael.

HUDSON: Thank you very much.

JAY: And thank you for joining us on The Real News Network.

End

Greece is being forced out of eurozone, Venizelos claims

by Ian Traynor in Brussels and Larry Elliott of The Guardain UK

Greek finance minister says troika is shifting terms of €130bn bailout deal as part of move to force country out of eurozone

Greece rounded bitterly on its EU paymasters when the finance minister and socialist leader, Evangelos Venizelos, accused the eurozone of deliberately changing the terms of a proposed €130bn (£110bn) bailout because key players wanted to kick the country out of the single currency.

The charge that some eurozone countries were seeking to engineer a Greek sovereign default and exit from the euro deepened the rancour between debtor and creditors in the dangerous standoff.”There are many in the eurozone who don’t want us any more,” Venizelos declared at a meeting with President Karolos Papoulias. “We are constantly being given new terms and conditions.”

Papoulias went even further, denouncing Germany and Greece’s north European creditors after Wolfgang Schäuble, the German finance minister, said that Greece must not turn into a “bottomless pit” for eurozone bailout funds and that Europe was better prepared than when the crisis erupted two years ago to cope with a Greek sovereign default. [..]

Venizelos claimed the crucial debt swap with the banks – which technically requires three weeks to organise – will be announced on Monday provided the eurogroup signs off on the bailout.

The accord has to be in force well before 20 March when Greece is due to redeem €14.5bn of debt or face default.

Feb 13 2012

Greece Is Burning

Greek Parliament Passes Austerity Plan as Riots Rage

ATHENS – After violent protests left dozens of buildings aflame in Athens, the Greek Parliament voted early on Monday to approve a package of harsh austerity measures demanded by the country’s foreign lenders in exchange for new loans to keep Greece from defaulting on its debt.

Though it came after days of intense debate and the resignation of several ministers in protest, in the end the vote on the austerity measures was not close: 199 in favor and 74 opposed, with 27 abstentions or blank ballots. The Parliament also gave the government the authority to sign a new loan agreement with the foreign lenders and approve a broader arrangement to reduce the amount Greece must repay to its bondholders.  [..]

But the chaos on the streets of Athens, where more than 80,000 people turned out to protest on Sunday, and in other cities across Greece reflected a growing dread – certainly among Greeks, but also among economists and perhaps even European officials – that the sharp belt-tightening and the bailout money it brings will still not be enough to keep the count

The killing of Greece

By Delusional Economics

What makes the situation completely surreal are the numbers. Greek debt in 2008 was approximately 260bn Euro. The first bailout was 110bn, the current one, that appears to be tearing the country apart, is 130bn. Add in the PSI+ haircut of approximately 100bn ( after sweetener deduction ) and you realized that Europe could have simply paid the entire bill in 2008 and saved itself 80bn Euro. Ok, that is an oversimplification of the problem but you can see my point.

However now, after 340bn Euros, Greece is still has an unmanageable debt, is in a far worse position than it was 3 years ago and it appears the country itself is coming apart at the seams.

So basically the Greek politicians and the other Eurocrats took a quarter of a billion euro problem and turned it into a existential trillion Euro one. Worst still their refusal to work cooperatively and misguided policies based around “expansionary fiscal contraction” have plunged Greece into a depression which threatens contagion to other weak economies. Yet at this point I can see absolutely no data suggesting the country is in any way more competitive than it was 3 years ago.

Greece – A Default is Better Than the Deal on Offer

By Marshall Auerback

Pick your poison. In the words of Greek Finance Minister Evangelos Venizelos, the choice facing Greece today in the wake of its deal with the so-called “Troika” (the ECB, IMF, and EU) is “to choose between difficult decisions and decisions even more difficult. We unfortunately have to choose between sacrifice and even greater sacrifices in incomparably more dearly.” Of course, Venizelos implied that failure to accept the latest offer by the Troika is the lesser of two sacrifices. And the markets appeared to agree, selling off on news that the deal struck between the two parties was coming unstuck after weeks of building up expectations of an imminent conclusion.

In our view, the market’s judgment is wrong: an outright default might ultimately prove the better tonic for both Greece and the euro zone.

The only questions that remain to be resolved are these: have all of the parties begun preparations to mitigate the ultimate impact of an outright default by Athens? And will the ECB be sufficiently aggressive in combating the inevitable speculative attacks on the other members of the euro zone periphery, which are almost certain to ensue, once Greece is “resolved” one way or the other.

Greek Bailout Deal, With More Austerity, Poised to Pass Parliament Amid Riots

I’m curious what record unemployment and poverty, bonfires and 100,000 protesters in front of Parliament is, then, if not uncontrollable economic chaos and a social explosion. And Papademos added, strangely, that the deal would allow Greece to return to economic growth in late 2013. I don’t know where this claim was pulled from. Austerity has only brought a deeper recession – and a higher debt-to-GDP ratio – thus far.

About 20 members of the coalition of parties – which control 236 of the 300 seats in Parliament – said they would not agree to the deal. But this leaves a healthy cushion for success. Three members of the Socialists resigned from their party after the bailout terms were announced.

European finance ministers would not agree to bailout terms until Greece passed them first in the Parliament, as they have run out of patience with the Greek’s ability to abide by prior deals. The deal would pave the way for a work-out with Greece’s creditors that would include a nearly 70% haircut on existing debt. European leaders hope this will be seen as a “voluntary” reduction and not a default event that would trigger credit default swaps, but leading rating agencies have already said they won’t see it that way.

Yes, this is a mess with wide ranging global impact.

Feb 06 2012

Greece Still Creeping Towards Default

There is still no agreement on bailing out Greece as Greek Premier Lucas Papademos failed to get his government’s coalition parties to agree to the severe austerity terms set out by the European Commission, European Central Bank and International Monetary Fund:

After five hours of discussions, the three leaders of Greece’s national unity government had not accepted demands by international lenders for immediate deep spending cuts and labour market reforms as part of a new medium-term package.

Mr Papademos said the political leaders had agreed on some “basic issues”, including making spending cuts this year of 1.5 percentage points of gross domestic product, or about €3bn, according to a statement from his office. [..]

The talks with the three leaders of a national unity government came after the government failed to persuade the so-called “troika”- representatives of the European Commission, European Central Bank and International Monetary Fund – to ease conditions for the rescue deal.

Patience with Greek politicians has evaporated among its creditors. During a conference call on Saturday, eurozone finance ministers bluntly told Athens to deliver on its promises and agree to reforms or face default next month.

David Dayen at FDL News Desk points out that the Greeks are being asked to destroy themselves for a bailout and calls the terms “insane”:

The deal calls for Greece to run a primary budget surplus (not counting interest payments on debt) in 2013 of over 2% of GDP, rising to over 4% by 2014. That implies massive cuts to public spending in the middle of a 5-year recession, if not a depression. As Antonis Samaras, leader of the New Democracy Party, told the Financial Times, “They’re asking for more recession than the country can take.” Samaras also has highlighted that the troika seeks cuts in private sector wages as part of the deal, of up to 25%. There would also be a 35% cut in supplementary pensions.

Trying to pressure for a settlement that many Greek leaders feel would damage the Greek economy and prolong the five year Greek recession, French President Nicholas Sarkozy and German Chancellor Andrea Merkel issued statements and made a proposal that would reassure creditors:

Nicolas Sarkozy, French president, and Angela Merkel, German chancellor, also proposed that a special closed account be created for the interest due on Greek debt to reassure creditors that they would be paid.

“The situation of Greece has to be fixed once and for all,” Mr Sarkozy said after the two leaders met in Paris. He said the terms of a bail-out deal were “on the table” and called on all the main political leaders urgently to back them, adding “time is running out”.

“Our Greek friends must take responsibility and vote for the reforms to which they are committed. This concerns everybody – the prime minister, the leader of the socialist party and the leader of the [centre-right] New Democracy party.”

Ms Merkel added: “We want Greece to stay in the euro … but I also say there can be no new Greek programme if agreement is not reached with the troika [European Commission, European Central Bank and International Monetary Fund]. All those who bear responsibility in Greece must know we will not deviate from this position.”

She added: “Time is running short. A lot is at stake for the entire eurozone.”

The stalemate had its effect on stock markets today with US stocks taking a dip

The three major U.S. stock market indices retreated slightly on Monday as investors continued to await the outcome of a potential Greek sovereign debt deal with private creditors. At 2:30pm Eastern Time, the Dow Jones Industrial Average (DJIA) had lost 40 points, or 0.3 percent, to 12,822 while the NASDAQ Composite had backed down 0.2 percent to 2,899. Meanwhile, the S&P 500 was down 0.2% to 1,342 points.

The austerity measures have already caused a 6% drop in the GDP which increases the debt to GDP ratio. the last thing Greece needs, or for that matter Europe,is more austerity.

Jan 20 2012

Greek Default Appears Inevitable

On Wednesday it was reported that some greedy hedge funds are blocking the rescue of the Greek economy. The hedge funds which had bought up the distressed Greek bonds in hope of making a killing came up against the Greek agreement to reduce their debt in order to receive the next tranche of funds to stave off default:

{..} (F)ears have grown in recent weeks that the hedge funds that are blocking the deal – which have been identified as including Vega Asset Management, Och Ziff, York Capital, GreyLock Asset Management and Marathon Asset Management – do not consider the prospect of a disorderly default by Athens as a financial incentive to allow a voluntary writedown deal to proceed.

This is because these funds are believed to have purchased insurance policies on their holdings of Greek bonds, known as Credit Default Swaps (CDS). If Athens fails to pay its maturing debts in March, that would trigger large CDS payouts to these funds from the large financial firms that sold them the insurance.

There is a reason they are called hedge funds but this is more a game of “head I win, tales you lose.”

To ad insult to injury, when Greek Prime Minister Lucas Papademos told the hold out that he would ask Parliament to change the law and force them to take the interest rate cut, the greedy hedgers have come up with  plan to sue the Greek government in Human Rights Court forcing them to make good on the payment:

The novel approach would have the funds arguing in the European Court of Human Rights that Greece had violated bondholder rights, though that could be a multiyear project with no guarantee of a payoff. And it would not be likely to produce sympathy for these funds, which many blame for the lack of progress so far in the negotiations over restructuring Greece’s debts.

The tactic has emerged in conversations with lawyers and hedge funds as it became clear that Greece was considering passing legislation to force all private bondholders to take losses, while exempting the European Central Bank, which is the largest institutional holder of Greek bonds with 50 billion euros or so.

Legal experts suggest that the investors may have a case because if Greece changes the terms of its bonds so that investors receive less than they are owed, that could be viewed as a property rights violation – and in Europe, property rights are human rights.

As David Dayen at FDL News Desk points out this process could take years to litigate but he also found something significant buried in the New York Times article:

It is not just the legal cudgel that investors are threatening to use. Some hedge funds have discussed among themselves the possibility of demanding a side payment, as they describe it, as a price Europe and Greece must pay if the two want the funds to participate in the agreement.

Yes, David, I agree this is extortion..Give us the money or we blow up the world.

Jan 12 2012

EU: Austerity Policy Making It Worse

The current policy of austerity that is being forced on the European Union by Germany and England has been called “financially futile, economically erroneous, politically puzzling and socially irresponsible” by economists and monetary experts. Author and derivatives expert, Satyajit Das, writes in the first part of his series on “The Road to Nowhere, Part 1 – Fiscal Bondage” at naked capitalism that the December 2011 European summit to resolve the euro crisis was a failure:

The proposed plan is fundamentally flawed. It made no attempt to tackle the real issues – the level of debt, how to reduce it, how to meet funding requirements or how to restore growth. Most importantly there were no new funds committed to the exercise.[..]

The plan may result in a further slowdown in growth in Europe, worsening public finances and increasing pressure on credit ratings. This is precisely the experience of Greece, Ireland, Portugal and Britain as they have tried to reduce budget deficits through austerity programs. This would make the existing debt burden even harder to sustain. The rigidity of the rules also limits government policy flexibility, risking making economic downturns worse.[..]

The fiscal compact did not countenance any writedowns in existing debt. It also did not commit any new funding to support the beleaguered European periphery. Germany specifically ruled out the prospect of jointly and severally guaranteed Euro-Zone bonds. Instead, there were vague platitudes about working towards further fiscal integration.[..]

Instead of dealing with the financial problems of the central bailout mechanism (the EFSF – European Financial Stability Fund), European leaders chose the re-branding option.

Actions, or rather inactions, have consequences.

Germany is already in a recession too

by Edward Harrison

As I predicted in a message to Credit Writedowns Pro subscribers on Monday, statistics have shown that the German economy has finally succumbed to the deflationary economic policy of the euro zone.

   Germany showed first signs of feeling the pain from the euro zone’s debt crisis as the economy shrank in the last three month of 2011, despite outperforming its peers for main part of the year thanks to strong domestic demand and exports.

   Gross domestic product (GDP) grew 3.0 percent in 2011, preliminary Federal Statistics Office data showed on Wednesday, below the previous year’s growth rate of 3.7 percent – the fastest since reunification – and in line with a Reuters poll estimate.

   But GDP contracted by around 0.25 percent in the fourth quarter of 2011, an official from the Statistics Office added.

   “Germany cannot isolate itself so easily from tensions within the euro zone. In addition the export sector is facing a difficult period given the fall in global demand,” said Joerg Zeuner, chief economist at VP Bank.

Harrison wrote in November in the New York Times

that Europe is already in a double-dip recession. Already two months ago, the Markit Eurozone Manufacturing Purchasing Managers Index, which measures activity across Europe in services and manufacturing, had fallen to 50.4, the lowest since September 2009. The divider between expansion and contraction is 50, so Europe was still expanding. But last Wednesday, Markit data indicated that the situation has since deteriorated; the latest data showed a drop in private sector activity in the euro zone for the first time since July 2009. Moreover, the data are poor in the core of the euro zone as well as in the periphery, with Germany and France’s economies stalling as well. The sovereign debt crisis and the fiscal consolidation implemented to deal with it have taken their toll.[..]

Until the banks take substantially more credit write-downs and recapitalize, this crisis will continue and get worse.

The downward spiral is evident throughout Europe with even the strong German economy feeling the effects of erroneous policies

The German economy expanded faster than any other Group of 7 nation last year, official data showed Wednesday, but the stress of the euro crisis and a slowing global economy appear to be already weighing on output.

Germany expanded by 3 percent last year from 2010, the Federal Statistical Office said in Wiesbaden. It noted, however, that the growth came mostly in the first half of 2011, and estimated that the economy actually contracted by about 0.25 percent in the fourth quarter from the prior three months.

Some economists now predict another contraction for Germany in the first three months of 2012, which would meet the usual definition of a recession as two consecutive quarterly declines in output.

And austerity measures in Greece are making their budget deficits even worse:

Greece’s budget deficit widened last year as an austerity-fuelled recession cancelled out much of the extra revenues the government was hoping to raise through emergency taxes, data showed on Thursday. The central government budget gap widened 0.8 percent year-on-year to 21.64 billion euros ($27.45 billion) last year, according to figures from the finance ministry.

David Dayen at FDL News Desk thinks it is probably worse since “the EU uses a different measure to assess the Greek budget.”  He points out that even with increased taxes, the fall in tax compliance from an already lax system has reduced income. It all looks good on paper but that’s not the reality of what is actually in the treasury.

There is some hope that Europe’s leader are waking up to reality that there needs to be a growth strategy, although it may not be enough, or soon enough, to reverse the spiral.

It is a crisis in the € zone. The divergent trends in the € zone are too large. It is not an “optimum currency area”

It’s not just government, to “sovereign debt” but also excesses in the financial sector, real estate etc.

We must do everything to avoid recession. … We need a fiscal strategy that is “growth friendly”

Fiscal consolidation will not tell us to say “no” to all or which is cut everywhere. We must “prioritize”

We ask each member state to establish a “job plan”, we make commitments we can evaluate

The next meeting of the Eurozone member is the end of this month where a tax on financial transactions will be considered and, hopefully, they will discuss job creation and debt reduction.

Nov 16 2011

The EuroZone Bubble

I’m no expert on the bond market but I do know that when a bond interest rates rise, it is more expensive for the holder of those bonds to borrow money. That’s an over simplification as it pertains to the situation that has been developing with the Eurozone that is possibly on the verge of collapse due to the economic instability of Greece and, now, Italy. Of course, it is affecting market around the world. On Tuesday there was a massive sell off of all Eurozone bonds that is threatening the stability of the Eurozone. David Dayen explains:

Under current arrangements, the Eurozone doesn’t even have the money to save Italy. If the core countries start to lose their credit ratings and cannot afford to borrow, we’re really just done here. Spanish debt is also above the level where they would need a bailout, another troublesome sign.

About the only country on somewhat solid footing is Germany, and this has sowed resentment, particularly because of their domineering response to the crisis. Austerity for thee and not for me is bound to create a backlash.

This is all happening because the European Central Bank refuses to honor the “central bank” part of its name. This is dragging down all of Europe. Edward Harrison works through the issues in Italy, which is ground zero here.

   Italy needs to run a primary budget surplus (excluding interest payments) of about 5 percent of GDP, merely to keep its debt ratio constant at present yields. It won’t ever be able to do so.

   Therefore, yields for Italian bonds must come down or Italy is insolvent as it must roll over 300 billion euros of debt in the next year alone.

   Austerity is not going to bring Italian yields back down. First, Italian solvency is now in question and weak hands will sell. Moreover, investors in all sovereign debt now fear that they are unhedged due to the Greek non-default plan worked out in Brussels last month. As Marshall Auerback told me, any money manager with fiduciary responsibility cannot buy Italian debt or any other euro member sovereign debt after this plan.

   Conclusion: Italy will face a liquidity-induced insolvency without central bank intervention. Investors will sell Italian bonds and yields will rise as the liquidity crisis becomes a self-fulfilling spiral: higher yields begetting worsening macro fundamentals leading to higher default risk and therefore even higher yields.

Nobel Prize winning economist, Paul Krugman, mostly agrees with Harrison’s assessment of how the euro will end if the ECB doesn’t step in with a massive bail out and adds his thoughts:

I might place greater emphasis on the immediate channel through which falling sovereign bond prices force bank deleveraging, but we’re picking nits here.

And this is totally right:

   If the ECB writes the check, the economic and market outcomes are vastly different than if they do not. Your personal outlook as an investor, business person or worker will change dramatically for decades to come based upon this one policy choice and how well-prepared for it you are.

Crunch time. If prejudice and false notions of prudence prevail, the world is about to take a major change for the worse.

There are a number of factors here. Without the backing of Germany, the only Eurozone country with money, the ECB doesn’t have enough money to cover Italy’s debt and Germany’s participation hinges on their demand for austerity measures. The the elephant of a question then becomes what happens if the ECB doesn’t write the check? What if the ECB let’s Italy default, what then?

Harrison’s article at naked capitalism on the Italian default scenarios is long but well worth reading for the suggestions for investors on how they can protect themselves in either event.