A RALLY BASED ON THIS, REALLY?
The EFSF is basically an empty box filled with promises of money - many of them from the very people who are most likely to need to borrow that same money. Should they need to borrow the money, they won't be able to make good on their promises so there will be less money for them to borrow. Now the brain trust running Europe have decided, in their collective wisdom, to apply leverage to the non-existent money in the empty box that they have yet to actually borrow, so it can backstop even more of the hundreds of billions of Euros of sovereign debt issued by countries whose finances are in such dire straits that they either require the kind of robust growth that is hardly likely to materialize any time soon or the forgiveness by the holders of that debt of a large part of it....Of course, granting Greece the package they did this past week, the Eurocrats have rather incredibly found yet another corner into which to back themselves. You can hardly champion the 'One Europe' manifesto on the one hand but then, as the next country lines up at the counter, declare "No soup for you!" - but that seems to be the 'plan' at this stage.
IT IS MORE INSANE THAN THE NASDAQ AND REAL ESTATE BULLSHIT COMBINED AND YET PEOPLE HAVE BOUGHT IN HOOK, LINE AND SINKER!
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European summits in ivory towers
Paul De Grauwe
Imagine an army going to war. It has overwhelming firepower. The generals, however, announce that they actually hate the whole thing and that they will limit the shooting as much as possible. Some of the generals are so upset by the prospect of going to war that they resign from the army. The remaining generals then tell the enemy that the shooting will only be temporary, and that the army will go home as soon as possible. What is the likely outcome of this war? You guessed it. Utter defeat by the enemy.
The ECB has been behaving like these generals. When it announced its programme of government bond buying it made it known to the financial markets (the enemy) that it thoroughly dislikes it and that it will discontinue it as soon as possible. Some members of the Governing Council of the ECB resigned in disgust at the prospect of having to buy bad bonds. Like the army, the ECB has overwhelming (in fact unlimited) firepower but it made it clear that it is not prepared to use the full strength of its money-creating capacity. What is the likely outcome of such a programme? You guessed it. Defeat by the financial markets.
Financial markets knew that the ECB was not fully committed and that it would stop the programme. As a result, they knew that the stabilisation of the price of government bonds would only be temporary and that after the programme is discontinued prices would probably go down again. Few investors wanted to keep these bonds in their portfolios. As a result, government bonds continued to be sold, and the ECB was forced to buy a lot of them.
There is no sillier way to implement a bond purchase programme than the ECB way. By making it clear from the beginning that it does not trust its own programme, the ECB guaranteed its failure. By signalling that it distrusted the bonds it was buying, it also signalled to investors that they should distrust them too.
Surely once the ECB decided to buy government bonds, there was a better way to run the programme. The ECB should have announced that it was fully committed to using all its firepower to buy government bonds and that it would not allow the bond prices to drop below a given level. In doing so, it would create confidence. Investors know that the ECB has superior firepower, and when they get convinced that the ECB will not hesitate to use it, they will be holding on to their bonds. The beauty of this result is that the ECB won't have to buy many bonds.
Why has the ECB not been willing to use this obvious and cheaper strategy?
Part of the answer has to do with the objections that have been raised against the idea that the central bank should be a lender of last resort in the government bond markets of a monetary union. Some are serious (moral hazard); others are phony (inflation risk). The people sitting around the table in Frankfurt continue to believe that financial stability is not part of their core business, and, to use the words of Trichet, that there is only one needle on the Frankfurt compass and that is inflation. As long as this view prevails the ECB will be reluctant to do the obvious.
The result of this failure of the ECB to be a lender of last resort has been that a surrogate institution, the EFSF/ESM, had to be created that everybody knows will be ineffective. It has insufficient firepower and has an unworkable governance structure where each country keeps its veto power. In times of crisis it will be paralysed. As markets know this, its credibility will be weak.
To hide these shortcomings European leaders are now creating the fiction that by some clever leveraging trick the resources of the EFSF/ESM can be multiplied, allowing the ECB to retire to its Panglossian garden of inflation targeting. European leaders should know, however, that leverage creates risk, very large risks. These appear with full force when liquidity crises erupt. Thus when the leverage trick will be most needed, it will fail as it will show how risky the positions are of those who have guaranteed the leverage construction.
Governments which now enjoy AAA creditworthiness will take the full blow of a 100% loss on their equity tranches and will lose their creditworthiness in one blow. The whole risky construction will collapse like other clever financial constructions of the recent past.
Academics have the reputation of living in an ivory tower far away from the realities of the world. My impression is that instead of the academics, it is the European leaders who have been living in an ivory tower. Disconnected from the economic and financial realities, they have created an institution that does not work and will never do so properly. Now they are creating a financial gimmick that, in their fantasies, they expect to solve the funding problems of major Eurozone countries. It is time for the European leaders to step back into the real world.
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Europe's new debt crisis agreement: the good, the bad, the ugly
MICHAEL SCHUMAN
Sometimes I think the euro zone debt crisis is like watching a remake of the Bill Murray classic Groundhog Day, with the screenplay written by Financial Times correspondents. I wake up and read the news coming from Europe: worries mount about a Greek default, contagion spreads across the continent, the euro zone leaders are lost in befuddled bickering, and then a new pact to fix the problems emerges, hailed as historic. Then I get up the next day to find we're in exactly the same place we were before, with the cycle just repeating itself. Again and again. The only difference is that Groundhog Day made me laugh. The euro crisis version makes me want to cry.
So we find ourselves with yet another supposedly historic agreement, the one that will finally, really, once-and-for-all put an end the debt crisis, the most dangerous threat to global financial stability today. But is this really the big one? Or will I wake up tomorrow listening to the same euro zone version of "I Got You Babe," sung by Nicolas Sarkozy and Angela Merkel?
This latest pact, reached after all-night, hard-fought negotiations, is still very short on details and has a long way to go before it can be called actual policy. But looking at the general outlines, I see some good aspects, some bad, and some truly ugly.
First, the good. The euro zone is finally getting real. Its leaders had been in denial that far greater and more comprehensive measures were necessary to quell the crisis, but this agreement shows they're waking up to reality. Everyone knew Europe's banks needed to be repaired; now, finally, we have a plan to recapitalize them. Everyone knew Greece needed a more drastic debt restructuring; now we have a bigger bailout (130 billion euros, or $180 billion) with a bigger reduction of debt. Everyone knew the euro zone's bailout fund, the European Financial Stability Facility, or EFSF, was too small to fight contagion; now we have a deal to increase the fund's capabilities by using it to guarantee private bondholders against losses on sovereign debt purchases. These are all important – in fact, crucial – steps to tackling the debt crisis, and Europe's leaders should get kudos for taking them.
But then there's the bad: As has been the custom, the plan is ultimately no more than a politically determined collection of half-measures. With voters at home turning more and more sour on euro bailouts, the zone's leadership has attempted to tackle the crisis with hardly any new money being put on the table. And, as the saying goes, you get what you pay for. The bank recapitalization plan calls for banks to raise 106 billion euros ($150 billion) in fresh capital. But that's about half what private estimates say is necessary, so it's unlikely to be a final cure for Europe's banking woes. Nor is it clear what role European governments will play in providing that capital.
On the expansion of the EFSF, the deal is aimed at giving the fund more firepower without adding any more ammunition. The actual size of the fund will remain the same; after the Greek bailout, no one is sure how much may actually be left. And as to that second bailout, Greece's situation will improve due to the 50% haircut being imposed on private bondholders. (Yes, imposed. Let's not kid ourselves that this debt restructuring is "voluntary." No one "voluntarily" loses half their money.) But Greece will still be stuck with a dangerously high debt burden. The new deal will lower its government debt to GDP ratio to a still-lofty 120% -- by the end of the decade. And even that estimate is based on unrealistic assumptions – that Greece can close its budget gap with its economy in free fall, or raise tens of billions in a privatization program that has yet to get off the ground. So my guess is that this deal resolves none of the major issues. The Greek debt crisis will continue; the banking crisis will continue; and Europe still hasn't put its money where its rhetoric is.
And now the ugly. The deal includes a proposal to tap China and other cash-rich emerging markets to participate in bolstering the EFSF, possibly through the IMF. French President Sarkozy is expected to phone Chinese President Hu Jintao to woo him into the scheme. This whole idea is truly pathetic. If I were Hu, I'd be insulted. The euro zone leaders are unwilling to spend more to solve their own debt crisis, so they think the Chinese are gullible enough to put in their savings? I don't think so. If Sarkozy called you up and asked for your paycheck to bailout Italy, would you give it to him? China is not a global ATM machine, or a charitable organization. In the end, China will invest its money as any other financier would – in ways that increase its return and preserve its wealth. Perhaps the Chinese can be bribed into cooperating – a notion has been floating about that Europe would promise Beijing more voting rights at the IMF. But even if China throws Europe a bone to boost its political influence in the region (or to gloat that the Europeans have come begging), the euro zone needs hundreds of billions of dollars, perhaps even trillions. They're not getting that from China.
So in the end, this historic agreement will likely get dumped in the dustbin of history like all of the other historic agreements. So the same cycle will repeat itself again. We'll probably be talking about a new grand agreement to halt the debt crisis by early next year. I guess it could be worse. I could be the groundhog.
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Eurozone 'Collapsed', Euro to Vanish, FinansInvest CEO Says
The eurozone has "already collapsed" and is disappearing as the region is on the brink of a banking crisis that will destroy the currency, said Zafer Onat, the chief executive of FinansInvest, a Turkish broker owned by National Bank of Greece SA. (ETE)
"I believe that the European monetary union doesn't exist anymore," Onat said in an interview in Istanbul today. "I think it already collapsed but no one has said it yet. Now we are in a deadlock. One of the world's major reserve currencies will disappear."
The U.S. is unlikely to come to the eurozone's rescue and the euro's departure will benefit the dollar, which will be "very strong," Onat said. He blamed slow-moving European politics and an inability to act for Europe's debt crisis.
"Europe's problem all comes from doing nothing," he said. "They just sat and talked."
Turkey will be affected by a global downturn, "but it will be minimal compared to other countries", he said. "The global problem from too much leverage doesn't exist in Turkey," Onat said. "Turkey's average household is not leveraged at all; we are just starting to be."
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CHINA SAYS IT WON'T BAIL EUROPE OUT............
A few days ago China telegraphed it refuses to continue to be seen as the world's rescuer and the dumbest money in the room. Many assumed China was only kidding: after all how would China let its biggest export partner flounder? And furthermore, all China does is provide vendor financing, right? Well, as it turns out wrong.
As AFP reports, "China's state media Sunday warned that the country will not be a "savior" to Europe, as President Hu Jintao left for an official visit to the region including a G20 summit. Hu's visit has raised hopes that cash-rich China might make a firm commitment to the European bailout fund, but in a commentary, the official Xinhua news agency said Europe must address its own financial woes. "China can neither take up the role as a savior to the Europeans, nor provide a 'cure' for the European malaise. "Obviously, it is up to the European countries themselves to tackle their financial problems," it said, adding that China could only do so "within its capacity to help as a friend." A friend, who at this point is quite sensible, and realizes far better deals are to be had down the line if one merely waits.
ALL THE HAPPY TALK FROM LAST WEEK WAS JUST THAT, HAPPY TALK!
