Financial, Economic and Budgetary events in the Euro Zone.
Resident economic editor Dr Eric Edmond and other experts cast informed eyes over developments in the European Union for you.
So Spain needs a bail out after all
After the usual repeated denials of the inevitable Spain asks for a bail out of 100bn€. The markets have an initial bounce but there are however a number of unanswered questions and problems with this bail out and as with all the previous bailouts I expect it will rapidly unravel when the details are scrutinised.
First, the obvious question, where does the money come from? Well Brussels has not announced whether it will be the temporary ESF, European Stability Facility, or its permanent replacement, the ESM , the European Stability Mechanism. Either way like IMF loans other Eurozone members will be tapped for the cash. Only Germany has spare cash and it will push indebted Italy further into the mire. Oh dear!
Worse if it is done via the ESM then like IMF loans will be the first to be repaid in event of a default with existing commercial loans subordinate to ESM loans. Now would you want to buy ordinary Spanish bonds under these conditions? Obviously not. Spanish ordinary bond yields will rise and bond prices fall and it will be the same as a Greek haircut. Spain will be locked out of commercial capital markets and totally dependent on ECB and EU finance which means other Eurozone countries.
So the Eurozone will have a rising number of borrowers and a diminishing number of depositors. Its a bit like the UK benefits and tax system.
Politically its been rushed through before the coming Greek elections can cause further instability. This is typical EU unsmart thinking. They have handed a superb stick to those Greek parties that oppose their bail out with all its horrible austerity requirements to say me too. Ireland most of all will want the new austerity lite loan and quite right too!
The Spanish have been conned by their bankers as we were. Independent estimates of their bad property loans are in the range of 350bn to 450 bn€. So Don Juan will be back for more very soon.
In Spain it's the poor that are paying for the rich bankers but without our generous social security system they will suffer much more. There are no jobs in Spain. You cannot sell a house or flat to cover your mortgage loan. Its melt down.
These mortgage banks, cajas in Spanish, should have been allowed to go bust but that would be the end for all the Spanish political elite's careers. We went through the same thing with our mortgage bank, Northern Rock. That should have been allowed to go bust. I had shares in N Rock as did all its pensioners and employees but it would have been the best and cleanest solution. Death is not nice but its clean and inevitable. Attempts to avoid the inevitable end in disaster.
The least pain solution that keeps the Euro is for Germany to leave the Euro but it will end like Hitler at Stalingrad and Napoleon in Russia.
By Dr. Eric Edmond
Last Updated (Friday, 22 June 2012 10:56)
Crunch Time for the EU
Things are converging to the mother of all crises in Euroland. My biggest mistake has been to underestimate the insanity and selfishness of the ruling EU political class. They will now push for a full federal state using every dirty trick and scare story they can muster. They have already turned Greece into a third world state and destroyed democracy in Italy but still they push on with their idiotic policies.
They have plenty of previous in this area. The great French hero Napoleon lost half a million men in his Russian campaign yet still he is regarded as a national hero! A century and a half later Hitler repeated the error. He lost 250000 men at Stalingrad refusing every request from the commander on the ground to try and break out. The British of course have their great General Haig whose obstinacy cost hundreds of thousands of British soldiers their lives in WWI.
I remember a discussion I had with Trevor Colman some years ago on the Euro crisis where I opined the crunch would come when Spain started to crumple. That time has now arrived and the crisis is upon us. The politicians clearly don't know what to do other than have another meeting which achieves nothing.
The Eurocrats however do know what they will do. For them its a beneficial crisis and the solution is more of the same medicine increasing their power, salaries and influence. Watch Cameron & Merkel tonight on TV to see how bad things are. Merkel thinks Cameron's position is laughable. The Eurocrats will win because there is no effective opposition. The Britsh FCO will not push for radical reforms. That would be "irresponsible" in their view. The FCO clearly sees its responsibilities lie with supporting their fellow bureaucrats not the British people who pay their salaries.
There is now a gathering momentum for some sort of EU referendum in the UK. This will of course be fixed to get the result the EU wants by the wording of the question(s) and the weight of media coverage.
Last Updated (Friday, 08 June 2012 10:23)
New Documents Shine Light on Euro Birth Defects
Newly revealed German government documents reveal that many in Helmut Kohl's Chancellery had deep doubts about a European common currency when it was introduced in 1998. First and foremost, experts pointed to Italy as being the euro's weak link. The early shortcomings have yet to be corrected.
It was shortly before his departure to Brussels when the chancellor was overpowered by the sheer magnitude of the moment. Helmut Kohl said that the "weight of history" would become palpable on that weekend; the resolution to establish the monetary union, he said, was a reason for "joyful celebration."
Soon afterwards, on May 2, 1998, Kohl and his counterparts reached a momentous decision. Eleven countries were to become part of the new European currency, including Germany, France, the Benelux countries -- and Italy.
Now, 14 years later, the weight of history has indeed become extraordinary. But no one is in the mood to celebrate anymore. In fact, the mood was downright somber when current Chancellor Angela Merkel met with her Italian counterpart Mario Monti in Rome six weeks ago.
Even as the markets were already prematurely celebrating the end of the euro crisis, the chancellor warned: "Europe hasn't turned the corner yet." She also noted that new challenges would constantly emerge in the coming years. Her host conceded that his country had not even overcome the most critical phase yet, and that the fight to save the currency remained an "ongoing challenge."
It didn't take long for the two leaders' concerns to prove justified. The Spanish economy has continued its decline, interest rates for southern European government bonds are rising once again, and election results in both France and Greece have shown that citizens are tired of austerity programs. In short, no one can be certain that the monetary union will survive in the long term.
Many of the euro's problems can be traced to its birth defects. For political reasons, countries were included that weren't ready at the time. Furthermore, a common currency cannot survive on the long term if it is not backed by a political union. Even as the euro was being born, many experts warned that currency union members didn't belong together.
Pushing Ahead Regardless
But it wasn't just the experts. Documents from the Kohl administration, kept confidential until now, indicate that the euro's founding fathers were well aware of its deficits. And that they pushed ahead with the project regardless.
In response to a request by SPIEGEL, the German government has, for the first time, released hundreds of pages of documents from 1994 to 1998 on the introduction of the euro and the inclusion of Italy in the euro zone. They include reports from the German embassy in Rome, internal government memos and letters, and hand-written minutes of the chancellor's meetings.
The documents prove what was only assumed until now: Italy should never have been accepted into the common currency zone. The decision to invite Rome to join was based almost exclusively on political considerations at the expense of economic criteria. It also created a precedent for a much bigger mistake two years later, namely Greece's acceptance into the euro zone.
Instead of waiting until the economic requirements for a common currency were met, Kohl wanted to demonstrate that Germany, even after its reunification, remained profoundly European in its orientation. He even referred to the new currency as a "bit of a peace guarantee."
Of course, financial data doesn't play much of a role when it comes to war and peace. Italy became a perfect example of the steadfast belief of politicians that economic development would eventually conform to the visions of national leaders.
However, the Kohl administration cannot plead ignorance. In fact, the documents show that it was extremely well informed about the state of Italy's finances. Many austerity measures were merely window dressing -- either they were accounting tricks or were immediately dialed back when the political pressure subsided. It was a paradoxical situation. While Kohl pushed through the common currency against all resistance, his experts essentially confirmed the assessment of Gerhard Schröder, the center-left Social Democratic Party (SPD) candidate for the Chancellery at the time. Schröder called the euro a "sickly premature baby."
A Miraculous Cure
Operation "self-deception" began in December 1991, in an office building in the Dutch city of Maastricht, the capital of the southeastern province of Limburg. The European heads of state and government had come together to reach the decision of the century, namely to introduce the euro by 1999.
To ensure the stability of the new currency, strict accession criteria were agreed upon. Countries must have low rates of inflation, must have reduced new borrowing and must have their debt levels under control in order to be accepted. The European Commission and the European Monetary Institute (EMI) were to monitor developments, and European leaders were to reach the final decision in the spring of 1998.
As luck would have it, Italy fulfilled all requirements as the date approached -- surprisingly so, given that it had acquired a reputation for notoriously imbalanced budgets. But the country had undergone a miraculous cure -- on paper at least.
Officials at the German Chancellery in Bonn had their doubts. In February 1997, following a German-Italian summit, one official noted that the government in Rome had suddenly claimed, "to the great surprise of the Germans," that its budget deficit was smaller than indicated by the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD).
Shortly before the meeting, a senior German official had written in a memo that new posting rules for interest had alone resulted in a 0.26 percent decline in the Italian budget deficit.
A few months later Jürgen Stark, a state secretary in the German Finance Ministry, reported that the governments of Italy and Belgium had "exerted pressure on their central bank heads, contrary to the promised independence of the central banks." The top bankers were apparently supposed to ensure that the EMI's inspectors would "not take such a critical approach" to the debt levels of the two countries. In early 1998, the Italian treasury published such positive figures on the country's financial development that even a spokesman for the treasury described them as "astonishing."
In Maastricht, Kohl and other European leaders had agreed that the total debt of a euro candidate could be no more than 60 percent of its annual economic output, "unless the ratio is declining sufficiently and is rapidly approaching the reference value."
But Italy's debt level was twice that amount, and the country was only approaching the reference value at a snail's pace. Between 1994 and 1997, its debt ratio declined by all of three percentage points.
"A debt level of 120 percent meant that this convergence criterion could not be satisfied," says Stark today. "But the politically relevant question was: Can founding members of the European Economic Community be left out?"
Government experts had known the answer for a long time. "Until well into 1997, we at the Finance Ministry did not believe that Italy would be able to satisfy the convergence criteria," says Klaus Regling, at the time, the Director-General for European and International Financial Relations at the Finance Ministry. Currently, Regling is the chief executive of the temporary euro bailout fund, the European Financial Stability Facility (EFSF).
The skepticism is reflected in the documents. On Feb. 3, 1997, the German Finance Ministry noted that in Rome "important structural cost-saving measures were almost completely omitted, out of consideration for the social consensus." On April 22, speaker's notes for the chancellor stated that there was "almost no chance" that "Italy will fulfill the criteria." On June 5, the economics department of the Chancellery reported that Italy's growth outlook was "moderate" and that progress on consolidation was "overrated."
In 1998, the decisive year for the introduction of the euro, nothing about this assessment had changed. In preparation for a meeting with an Italian government delegation on Jan. 22, State Secretary Stark noted that the "longevity of solid public finances" was "not yet guaranteed."
By Sven Böll, Christian Reiermann, Michael Sauga and Klaus Wiegrefe in De Spiegel here
Last Updated (Wednesday, 23 May 2012 13:34)
"A traditional bank run"
What would happen if, in the summer or autumn of 2012, the banks of Spain and Italy were confronted with a traditional bank run? By “a traditional bank run”, I mean a run not in the inter-bank market where creditor banks refuse to roll-over lines to debtor institutions deemed not to have enough capital. I mean instead a run by mainstream non-bank customers, including companies and individuals. It is sometimes said that, because deposit insurance prevents – or ought to prevent – runs by smaller depositors, a traditional bank run cannot happen. Well, Northern Rock disproved that. Increases in deposit insurance cover since 2007 may have made runs less likely than they otherwise would have been, but – let us be clear – depositors above the limits are not protected. Like banks in the inter-bank market, large corporates and wealthy individuals are like to withdraw deposits if they fear they are not going to receive 100 cents in the dollar, 100 pence in the pound…
…or, indeed, 100 cents in the euro. If Greece leaves the Eurozone (and everyone is now talking about that, even the most dogmatically Europhile EU bureaucrats), many Greeks will see the value of their bank deposits in terms of euros plunge overnight. Traditional bank runs in Spain, Italy and so on would then become all too plausible. According to the usual understandings in this subject, the central bank (i.e., the European Central Bank) ought to respond by uninhibited expansion of its balance sheet, with unlimited loans of cash to all banks that are solvent. The trouble in the Eurozone – as I discuss in today’s note – is that the ECB has already expanded its balance sheet dramatically. It does not want to buy more government bonds, and the figure for “long-term refinancing operations” at 4th May was higher than the 1,000b. or so total of euros arranged in the two exercises in December 2011 and February 2012. I suggest that the ECB could still lend perhaps 200b. – 350b. euros more to Eurozone banks, subject to the availability of collateral. But, beyond that, there would surely be a massive rumpus if the ECB had to grow its balance sheet by a significant amount.
I don’t know what is going to happen. But I can tell you with some confidence that the ECB top brass – and in fact all the key players in the EU “construction” – are praying that the citizens of Italy, Spain and the other usual suspects do not in the next few months copy the behaviour of Northern Rock’s customers in September 2007.
By Prof.Tim Congdon Chief Executive, International Monetary Research Ltd.
Last Updated (Friday, 18 May 2012 09:19)
What next for the euro if France rejects austerity?
What on earth is going on with our money?
At a time when the UK Government is imposing another £16bn of spending cuts, is abolishing pensioner tax reliefs, and is apparently so financially stretched that it needs to tax warm pasties, it has somehow managed to find an additional £10bn to bail out the eurozone. This from a prime minister who declares himself a "eurosceptic". Is it any wonder that the Tories are trailing in the polls?
I've found myself genuinely torn by the debate around new loans to the International Monetary Fund (IMF). On the one hand, I'm a supporter of multilateral solutions, and find the spectacle of so many countries, some of them quite poor, coming together to create a bigger and more credible financial safety net both noble and inspiring.
Britain was one of the founding fathers of the IMF, and whatever the rights and wrongs of the euro, our future is vitally dependent on a stable and prosperous Europe. It would have seemed isolationist and almost gratuitously self-destructive to have stayed out while so many others were participating.
There is also something in the Treasury argument that this is not real money, since all commitments to the IMF come from the foreign exchange reserves and remain largely unused. The additional funds are billed as merely a contingency which could not in any case have been used for alternative, public spending purposes. With luck, it will cost nothing to have participated.
But I also substantially agree with the reservations expressed by the two major refuseniks, the United States and Canada. There is no obvious need for more IMF funding outside the growing likelihood of further eurozone bailouts. We have no idea on what terms the IMF might lend, but what we do know is that the eurozone is struggling to find politically acceptable solutions to its crisis, which, to the contrary, looks ever more intractable.
Future eurozone bailouts are likely to dwarf anything the IMF has done before; at the same time, there is no credible escape route or convincing path back to either growth or debt sustainability offered to any of the afflicted nations. This combination makes future IMF programmes very much more high risk than anything that has gone before.
Take the example of Spain. Should Spain need to become part of the programme, what conditions would the IMF impose? Monetary union precludes devaluation, which is normally key to re-establishing competitiveness, while the Spanish government is already enacting a degree of fiscal austerity and structural reform that is similar in its scope if not beyond what the IMF would recommend. Far from improving matters, this is proving self-defeating and making them worse.
In such circumstances, it is hard to see what additional conditions the IMF could or would impose. Any new lending would in effect be an unconditional bet on the euro somehow muddling through and solving its problems. On the evidence so far, such an outcome looks less than likely.
No new narrative emerged from the International Monetary Fund's spring meeting in Washington last week on how the eurozone periphery might regain competitiveness and thereby pay down its deficits.
Almost every viable solution to the debt crisis has been ruled out. Germany won't accept either fiscal transfers to fund the deficit nations, nor will it tolerate the higher level of domestic inflation that might give the periphery a fighting chance of returning to growth. Instead, a deflationary race to the bottom of wage and entitlement cuts is prescribed.
This will in time undoubtedly make the eurozone more competitive, but for what purpose if a quarter of the workforce is left unemployed and the rest are living in penury? In the meantime, the eurozone looks to the IMF to provide the transfers that Germany and others refuse.
As is evident from political developments over the weekend in France and the Netherlands, support for the approach chosen – austerity and structural reform – is fast eroding. Euroland faces a groundswell of populist rebellion. The political consensus around austerity is crumbling.
But nor yet does there appear to be substantive support, either in Germany or elsewhere, for the other self-evident solution, which is a smaller euro shorn of its troublesome south. All rests on the idea that given time, structural reform will work. Eventually, the faithful insist, markets will be convinced of this, and start lending again. And pigs might fly.
For evidence that the deflationary path back to viability can work, proponents tend to point to Ireland, which has returned to wage competitiveness and current account surplus. Domestic demand, on the other hand, remains flat on its back, with unemployment high and fast becoming structural. This kind of down-at-heel equilibrium is not obviously a model others would want to aspire to.
I'm not sure why anyone found the outcome of the first round of the French presidential election a surprise – it was always expected to result in a Sarkozy/Hollande run-off. Even so, it has helped unsettle markets anew. The prospect of a president determined to tear up the fiscal compact throws another giant spanner in the works.
Flanby (the nickname is derived from a form of crème caramel) rejects the austerity that underpins continued German support for the project. And to judge by the turnout for Marine Le Pen, nearly a fifth of the French vote wants out of the euro altogether.
In Washington last week, Christine Lagarde, managing director of the IMF, qualified her delight in more than doubling the size of the IMF safety net by saying that this was not in itself a solution. Indeed it is not.
On how to restart growth, she was all out of answers. To the extent that she did have a "solution" worth talking about, it was just more and deeper Europe - including Eurobonds and a federal banking system, with a single supervisor and resolution regime. This is a view shared, by the way, by the UK Chancellor, George Osborne. Unfortunately, neither of these two things is for the moment remotely acceptable to Germany.
Time is running out. Support for populist, national alternatives is growing. It is small wonder that the US and Canada won't participate in the IMF fundraising. With no solution in sight, they fear for the safety of their money.
By Jeremy Warner in The Daily Telegraph here
Last Updated (Friday, 27 April 2012 10:03)
Yet again the Eurozone wobbles…
Billionaire George Soros, the Hungarian born U.S. investor, was quoted by John Acher in a Reuters news feed on 16th April as saying… “I’m afraid that the euro crisis is getting worse. It’s not over yet, and it is going in the wrong direction”. In a discussion with Denmark’s economics minister Soros continued… “The euro is undermining the political cohesion of the European Union, and if it continues like that could even destroy the European Union.”
The point Soros was making was that Brussels’s failure to deal with the financial crisis was creating tremendous tensions between the countries of the Eurozone. People can see that rhetoric from politicians such as Sarkozy “Today the problem is solved (9th March)” is not confirmed by personal experience (unemployment across the 17 Eurozone countries ended 2011 at a record high of 10.4% - youth unemployment in Spain now stands at 50%) or the behaviour of the financial markets (Spain's benchmark 10-year bond yield exceeded 6 per cent last week). People see that Brussels’s policies and remedies are failing, and as such are driven into anti-European positions (riots in Greece) and dissent is growing within and between the countries of Europe.
Spain must repay a €11.9 billion bond on April 30, and at the end of July another €12.8 billion. If investors refuse to finance this repayment at an ''affordable'' rate, then another frenzy of eurozone bail-out activity will commence. Goldman Sachs, on the basis of its extended analysis has commented that, for some euro area countries - notably Greece and Portugal, but arguably Spain as well - the task of regaining fiscal balance appears so large that it may be insurmountable. Was there ever a more stark warning that monetary union is not working?
Last Updated (Tuesday, 24 April 2012 13:18)
The Draghi bazooka
Dictionaries define a bazooka as an “anti-tank rocket gun”. The Draghi bazooka – of massive cheap loans to Eurozone banks to encourage them to buy government bonds – was certainly a powerful weapon. It knocked out a large number of tanks on the bear side of the current on-risk/off-risk battle in financial markets. With over 1,000 trillion euros of central bank finance unexpectedly made available, Eurozone uncertainties were in abeyance in the four months from December 2011. On-risk trades multiplied in markets (for equities and currencies) which – on a logical basis – ought to have had little connection with the market in peripheral Eurozone government debt.
Now worries about Spain have caused a reversal of the on-risk trades. Spain’s problems are undoubtedly severe. The public-debt-to-GDP ratio is rising to 80%, towards the 90% figure identified in the Reinhart and Rogoff book This Time is Different as a threshold beyond which a nation’s financial reputation starts to disintegrate. But this must be kept in perspective. The 80% figure is far less than Greece’s figure, while on the whole Spain’s administrations (national and regional) are far more efficient that their Greek counterparts. Even if all the debt paid an interest rate of 6% (and most of it doesn’t), the ratio of debt interest to GDP would be under 5%. (The actual figure is nearer 3%, which is far from an emergency level.)
The central problem with the Eurozone remains the lack of an explicit agenda for a cyclical recovery in demand, output and asset prices. Basic to that strategy must be faster growth of the quantity of money. That is what matters to macroeconomic outcomes and banking system solvency, not the size of the European Financial Stability Fund. If broad money were to grow by 5% - 10% a year for a couple of years, a worthwhile revival in asset prices – which would help to clear up banks’ bad debts – might be in prospect. (I am not asking much. In the 30 months to end-2008, the average annual growth of Eurozone M3 money was 10.4%.) But, on the contrary, we see Eurozone policy-makers taking steps which will restrain money growth. According to reports by Ambrose Evans-Pritchard in The Daily Telegraph, the Bundesbank is considering German-specific action to hold back the growth of bank balance sheets and broad money. In Spain itself the official rhetoric is all wrong. According to the Financial Times today, “Miguel Angel Fernandez Ordonez, the Spanish central bank governor, said in a speech yesterday that banks would need extra capital if the economy worsened more than predicted.”
No, that is not the answer. If the economy worsens “more than predicted”, the correct policy response is for the monetary authorities to raise the rate of growth of the quantity of money and to let the banks recapitalize themselves in their own good time. Have these central bank governors learned nothing from the last few disastrous years? Banks’ equity is priced at less than book in most countries and certainly in Spain. So capital cannot be raised from the market. If banks are forced by officialdom to raise more capital, which in practice means more capital relative to assets, they shrink their assets. If they shrink their assets, the quantity of money falls, etc. The demands for extra bank capital initiate an Irving Fisher-style debt deflation cycle. When will all these wretched central bank governors, and all their cheerleaders in such organs as The Economist and the Financial Times, understand these simple ideas?
By Prof Tim Congdon
Last Updated (Thursday, 19 April 2012 07:13)
Market does not believe Spanish austerity plans are deliverable
Spain held a bond auction yesterday. The results were poor. Spanish 10 year bond yields closed at 5.71% with Italy at 5.37% and Portugal at 12.35%. So why so bad given the ECB's trillion Euro money printing?
The market thinks the Spanish plans are undeliverable and Spain, the 4th largest Eurozone economy, is headed for a recession and worse bank failures because of the property market collapse. There was a huge sell off today in Euroland equities with all the main markets including the UK down 2% to 3%. Banks were hardest hit with Spanish banks the biggest losers.
Its not over in Euroland by a long chalk.
By Dr. Eric Edmond
Last Updated (Thursday, 05 April 2012 08:13)
EU ups its trade war on the City
Today's Sunday Telegraph has a full page splash entitled, "The German MEP and a threat to UK insurance". This relates to the Solvency II capital rules which if applied as they are currently framed will reduce private pensions paid to UK pensioners. This is why the Pru's chief executive talked last week about relocating the Pru outside the EU to escape these regulations. Note the contentious part of the rule changes, allegedly inserted at the request of Dr Frau Merkel will not affect German or French mainly state funded pensions nearly as much as UK private pensions.
Pension funds will in effect be restricted to investing in sovereign bonds and not the higher yielding corporate bonds which incidentally directly finance industry. My old boss at the BoE deputy governor Paul Tucker said last week,"At the bank we are dismayed at how much it is costing the industry (insurance) and the regulator to adapt."
By Dr. Eric Edmond
Last Updated (Thursday, 22 March 2012 09:24)
LTRO, Draghi's Ponzi scheme
Mario Draghi is the governor of the ECB. LTRO stands for Long Term Repo Operation in this case 3 years as opposed to the usual 2 week or one month refinancing central banks have previously used to supply liquidity to money markets.Charles Ponzi was a crook who in the US in 1920 took peoples money and promised wonderful returns which were in fact paid by the subscriptions of the later entrants.
By Dr. Eric Edmond
Last Updated (Wednesday, 07 March 2012 14:35)
ECB creates another 529 bn Euro
The EU is now in full panic mode. Today the ECB lent 529 bn € on pretty dodgy collateral for 3 years today. The main bidders for this largesse were Italian banks, 130 bn €. The total lent under this LTRO (Long Term Repo Operations) scheme now totals 1.02 trillion Euro! What happens 3 years down the road when this sum has to be repaid?
Last Updated (Friday, 02 March 2012 12:36)