Weighing The Week Ahead: Deluge Of Data (But The Story Will Be All About Europe) [View article]
Agreed Peter.
At some point the necessity of liquidating unsustainable levels of debt trumps adding liquidity (more debt) under the mistaken belief additional debt will buy time and allow troubled sovereigns to undertake needed reforms while growing their way out of their dire circumstances.
This direction, the exhausted bromide of the Keynesian and kindred thinkers, is not viable and I believe the correct approach for most peripherals is rebuilding bank capital, austerity in the form of draconian labor market reforms, debt writedowns and some form of financial assistance when it can proven and shown that all economic and financial structural dynamics have stabilized.
Weighing The Week Ahead: Deluge Of Data (But The Story Will Be All About Europe) [View article]
Jeff, at a minimum you are a thoughtful, tolerant gentleman and at no times do I wish to appear disrespectful; I never feel you are picking on me as my replies tend to be blunt.
There will be no magic bullet and any efforts to provide additional liquidity through E bonds or ECB bond purchases will only defer the day on which uncompetitive peripherals must address competitive disadvantages built upon the unsustainable accumulation of debt passed through to public sector wages divergent with underlying productivity.
For those embracing this view, I think there is still money to be made in shorting European financial institutions and the Euro understanding that news driven events can interrupt what will prove to be an inevitable secular decline.
Weighing The Week Ahead: Deluge Of Data (But The Story Will Be All About Europe) [View article]
The leadership. Despite various meetings, European leaders seem no closer to progress toward a solution. I have noted that the problem has (at least) four important variables. Economic growth, spending levels, interest rates, and time. The market pressure on interest rates threatens all three other variables. Regardless of what is accomplished through additional capital, lower interest rates are essential. ______________________...
The viability and future of the EMU is entirely dependent upon the vision of EU leaders, their understanding of the web of interlocking relationships between member states, their understanding of the scope and scale of the current crisis, their understanding of existing structural imbalances and their ability to craft and implement appropriate policy in a timely manner.
Thus far, we have seen nothing to inspire confidence and this past week demonstrated that policy development is moving at something less than glacial speed while market events are unfolding at meteoric speeds, further complicating the already difficult process of policy development and implementation. Many say EU leaders simply don't understand what they are facing, making informed policy development impossible.
Everyone understands that further integration of the EMU is required but, like everything else, this is open to interpretation. Germany’s vision is focused upon initially reinforcing the Stability and Growth Pact via automatic sanctions and other changes to European Union treaties to improve economic governance and deepen integration among the 17 eurozone members. Germany has been pushing hard for mandatory penalties for governments that break rules on debt, deficits and other fiscal measures – rules Berlin wants to see enforceable in court.
Germany does not want to sign up for further integration, and possible euro bonds, until a working political, economic and legal framework is in place to ensure that euro bonds are not used to bail out countries that have not undertaken required reforms. Putting aside the question of whether Germany’s vision is even viable, the key dimension is timing and Germany’s grand plan could easily require years to implement while markets continue to punish banks and sovereigns on a daily basis.
Inside of this time warp of indecision, ad hoc decision making and lack of depth we have seen (1) borrowing costs ticking higher and more institutions selling their sovereign debt, creating a frenzy that forces bond prices to plunge and yields to rise at dizzying speeds, which begets even more selling, (2) further credit downgrades, most recently Portugal and Belgium, (3) a disappointing German bond auction, reflecting concern over the core of Europe, (4) a seizing up of debt market issuance, (5) money market funds slamming shut their lending to European banks, particularly France and (6) Greece unilaterally demanding that new bonds issued to investors as part of a debt swap have a net present value of 25 percent, lower than the “high 40s the banks have in mind”, setting a dangerous precedent for other countries such as Portugal and Ireland
The dynamic of falling bond prices also undermines the capital position of the banks, since they are among the biggest holders of government bonds in many countries. As those assets plunge in value, banks cut back on lending and hoard capital, increasing the likelihood of a recession already anticipated in forward looking surveys and recent reports on manufacturing and orders.
As Europe enters recession, the fiscal position of those with excessive debt will worsen as the relationship between growth and debt accumulation will further deteriorate spawning the conditions for additional financial shocks that will eventually trigger a collapse of the union as there are simply insufficient resources to bail out everybody or aborb the needed writedowns.
Most agree the auction was a failure in the sense that only 60% of the bonds were sold to to contain interest rates; had interest rates been of no concern, 100% of the bunds would have sold. As to whether there is monetization, it's not clear because the Finanzagentur, which retained 40% of the auction, may simply release these bonds/bunds into the secondary market, a typical and not unusual practice.
It would be monetization if the Finanzagentur credited the account of the Bundesbank and offset this entry with some type of liability. But once the bonds are released into the secondary market these entries would be reveresed along with any monetization.
Weighing The Week Ahead: Deluge Of Data (But The Story Will Be All About Europe) [View article]
At some point the necessity of liquidating unsustainable levels of debt trumps adding liquidity (more debt) under the mistaken belief additional debt will buy time and allow troubled sovereigns to undertake needed reforms while growing their way out of their dire circumstances.
This direction, the exhausted bromide of the Keynesian and kindred thinkers, is not viable and I believe the correct approach for most peripherals is rebuilding bank capital, austerity in the form of draconian labor market reforms, debt writedowns and some form of financial assistance when it can proven and shown that all economic and financial structural dynamics have stabilized.
Weighing The Week Ahead: Deluge Of Data (But The Story Will Be All About Europe) [View article]
There will be no magic bullet and any efforts to provide additional liquidity through E bonds or ECB bond purchases will only defer the day on which uncompetitive peripherals must address competitive disadvantages built upon the unsustainable accumulation of debt passed through to public sector wages divergent with underlying productivity.
For those embracing this view, I think there is still money to be made in shorting European financial institutions and the Euro understanding that news driven events can interrupt what will prove to be an inevitable secular decline.
Weighing The Week Ahead: Deluge Of Data (But The Story Will Be All About Europe) [View article]
______________________...
The viability and future of the EMU is entirely dependent upon the vision of EU leaders, their understanding of the web of interlocking relationships between member states, their understanding of the scope and scale of the current crisis, their understanding of existing structural imbalances and their ability to craft and implement appropriate policy in a timely manner.
Thus far, we have seen nothing to inspire confidence and this past week demonstrated that policy development is moving at something less than glacial speed while market events are unfolding at meteoric speeds, further complicating the already difficult process of policy development and implementation. Many say EU leaders simply don't understand what they are facing, making informed policy development impossible.
Everyone understands that further integration of the EMU is required but, like everything else, this is open to interpretation. Germany’s vision is focused upon initially reinforcing the Stability and Growth Pact via automatic sanctions and other changes to European Union treaties to improve economic governance and deepen integration among the 17 eurozone members. Germany has been pushing hard for mandatory penalties for governments that break rules on debt, deficits and other fiscal measures – rules Berlin wants to see enforceable in court.
Germany does not want to sign up for further integration, and possible euro bonds, until a working political, economic and legal framework is in place to ensure that euro bonds are not used to bail out countries that have not undertaken required reforms. Putting aside the question of whether Germany’s vision is even viable, the key dimension is timing and Germany’s grand plan could easily require years to implement while markets continue to punish banks and sovereigns on a daily basis.
Inside of this time warp of indecision, ad hoc decision making and lack of depth we have seen (1) borrowing costs ticking higher and more institutions selling their sovereign debt, creating a frenzy that forces bond prices to plunge and yields to rise at dizzying speeds, which begets even more selling, (2) further credit downgrades, most recently Portugal and Belgium, (3) a disappointing German bond auction, reflecting concern over the core of Europe, (4) a seizing up of debt market issuance, (5) money market funds slamming shut their lending to European banks, particularly France and (6) Greece unilaterally demanding that new bonds issued to investors as part of a debt swap have a net present value of 25 percent, lower than the “high 40s the banks have in mind”, setting a dangerous precedent for other countries such as Portugal and Ireland
The dynamic of falling bond prices also undermines the capital position of the banks, since they are among the biggest holders of government bonds in many countries. As those assets plunge in value, banks cut back on lending and hoard capital, increasing the likelihood of a recession already anticipated in forward looking surveys and recent reports on manufacturing and orders.
As Europe enters recession, the fiscal position of those with excessive debt will worsen as the relationship between growth and debt accumulation will further deteriorate spawning the conditions for additional financial shocks that will eventually trigger a collapse of the union as there are simply insufficient resources to bail out everybody or aborb the needed writedowns.
More On The German Bond Auction [View article]
Most agree the auction was a failure in the sense that only 60% of the bonds were sold to to contain interest rates; had interest rates been of no concern, 100% of the bunds would have sold. As to whether there is monetization, it's not clear because the Finanzagentur, which retained 40% of the auction, may simply release these bonds/bunds into the secondary market, a typical and not unusual practice.
It would be monetization if the Finanzagentur credited the account of the Bundesbank and offset this entry with some type of liability. But once the bonds are released into the secondary market these entries would be reveresed along with any monetization.