A refreshingly sober account of an option that has received insufficient attention.
And while its a straightforward idea many details would need to be addressed including balances owed Germany by the ECB and the Target 2 system of current account balances cleared through the ECB.
I think Germany has euro 600 billion outstanding in Target 2 balances, has contributed capital to the ECB and has guaranteed euro 60 billion of EFSF funding. And I'm sure there is more.
How Germany Benefited From The Euro [View article]
I'll take freebies where I can and we'll know more in July when the first tranches of capital are scheduled to flow into the empty shell of the ESM gleefully described by politicians as a massive firewall. And I'm not pro German but they have taken on some contingent liabilities but we'll soon see if they, along with others, are ready to part with hard cash. I'm sympathetic to your call for transparency but it's unlikely to happen as its not in the nature of political leaders and bureaucrats to disclose the true scope of problems whatever their nature. Deceit is their tool of choice.
How Germany Benefited From The Euro [View article]
That mentality is exactly the problem here, and I don't call 27% paying for everyone else, unless of course, I was absent the day they taught, 27%>73%?
We (EC / ESRB / EBA) are telling Germany, they are not telling us. ______________________...
We're making progress; you acknowledge Germany will be responsible for 27% of the capital structure of the ESM, something previously omitted
But you are correct in asserting that no cash has exchanged hands thus far, only guarantees explaining where Germany appears in the process.
How Germany Benefited From The Euro [View article]
The ESM has made no loans to date, though its predecesor, the EFSF, has. In an attempt to the expand lending capacity of the ESM unused resources of the EFSF will be combined with the resources of the yet to be created ESM, increasing its lending capacity to aroun euro 750 billion. And yes it will have a capital structure as described below.
From the German Federal Ministry of Finance:
The ESM’s maximum lending volume amounts to €500 billion. The ESM’s authorised capital stock will total €700 billion, comprising €80 billion in paid-in capital and €620 billion in callable capital. The original plan was for ESM members to contribute the paid-in capital of €80bn in equal annual instalments over a five-year period. The eurozone heads of state or government have, however, elected to accelerate payment and, with full respect for national parliamentary procedures, have agreed to pay two instalments for 2012.
In general, the member states’ shares of the ESM’s capital will be calculated to reflect their respective shares of the ECB’s capital. Temporary transitional provisions will apply to some new euro area member states.
Under the contribution key that determines each member state’s contribution to the ESM’s capital, Germany’s share amounts to 27.1464%. Accordingly, Germany’s share of the paid-in capital will be €21.72bn (with two instalments being made in 2012). The German share of the callable capital amounts to around €168bn, and will be arranged in the form of guarantees set out in Germany’s ESM Financing Act.
How Germany Benefited From The Euro [View article]
The launch of the euro locked the exchange rate and sent capital flows to the periphery producing inflation in those countries. ______________________...
A very interesting piece with very little to disagree with. I think it's important to note though as early as 2000 Greek state debt/GDP was close to 100% while the Maastricht treaty limits such debt to 60%. With the euro enjoying much implicit backing and Greek debt offering attractive yields versus alternatives, it is quite natural for capital to tend to flow to Greece.
What is not natural is for Greece to borrow irresponsibly by using debt proceeds to fund consumtion and expansion of the state rather than channel borrowings towards productive investments. Perhaps more seriously, there were serious instituional failures in allowing Greece to continue borrowing in violation of treaty terms.
Thus, negligence and failure allowed Germany to exploit inflation gaps far longer than it should have been able to.
G20: Little Room For Fresh Initiatives [View article]
Marc if you don't mind indulge me to add to your excellent article a melange of my writing and some cut and paste:
Christine Lagarde of the IMF has been pushing for an extra $500bn in funding to contain the eurozone crisis and to protect economies around the world from spillover effects. Eurozone countries have so far committed $200bn, while the US has said it will not contribute additional funds.
However, expanding IMF resources is being increasingly linked to the EMU expanding its firewall by combining remaining EFSF resources with that of the ESM , thereby adding close 250 billion euro to the rescue efforts.
Most of the rest of the G20 see such a decision as a prerequisite to agree to coordinated moves to resolve the crisis, including increased resources for the International Monetary Fund. Japan and China stand are united in wanting Europe to do more before offering outside assistance.
Eurozone finance ministers will face pressure to increase the size of their financial firewall as the continent’s sovereign debt crisis dominates discussion at the G20 meeting of finance ministers and central bank governors in Mexico this weekend. Thus far Germany has resisted these efforts.
In the past day, though, the German government may have softened its resistance to increasing the eurozone’s “firewall” against financial-market contagion from the Greek crisis by signaling it would consider the combination of the region’s temporary rescue fund with its permanent successor.
Wolfgang Schäuble, finance minister, said using “the remaining funds” in the European Financial Stability Facility to bolster the European Stability Mechanism was “one possible solution to the question” of how to better guard against bond market sell-offs hitting Italy or Spain.
Greek Default And Devaluation: Would It Even Matter? [View article]
The fact the troika is going to the lengths it is in restructuring Greek debt, while avoiding a credit event which would trigger CDS an avalanche of payment obligations, underscores the importance of CDS which tend to be poorly understood, opaque and reported on a net basis.
Interlocking relationships can arise through any number of possible linkages, including inter-bank lending, holding common assets and writing of credit insurance. Simply suggesting there are interlocking financial relationships between financial institutions does not in itself adequately address the danger of CDS and counter party risk.
Had this risk been recognized and addressed in further detail, it would have improved an otherwise excellent article.
European Crisis: We're Just At The Very Beginning [View article]
That the author believes private sector losses is bad or should be avoided is astonishing; why should poor investments in bonds be insured by sovereigns and ultimately taxpayers?
The reason is partly explained above by Dave but another explanation is that European banking system is very fragile, with little capital and excessive leverage. And because banks in the core of the EMU are heavily exposed to peripheral debt, a realistic valuation and/or real restructuring of sovereign debt would wipe out many banks as they lack the capital required to shoulder the losses. Additionally, it would trigger a default event.
Thus, the leaders of the EMU are protecting the banks to avoid costs associated with recapitalizing insolvent banks and, more importantly, protect banks that have been the largest purchasers of sovereign debt through liquidity offered by the ECB. Since the ECB is prohibited from direct monetization of debt, it must be done through the back door.
Eventually, the system will collapse but expect this subterfuge to continue until it cannot. Meanwhile, yields on Italian ten year debt rose above 7%; inter-bank lending has seized and banks are parking record levels of deposits with the ECB, rather than lending to each other; and Unicredit's shares are down close to 40% after a right offering to plug an 8 billion euro hole in its balance sheet.
Dealing With Debt: What Investors Should Expect [View article]
Together and unleveraged this offers close to euro 700 billion to deal with bank refinancing needs that could reach euro 1 trillion and close to euro 1.4 trillion in refinancing in 2012 alone, excluding new financing to fund deficits. ______________________...
My writing today is slightly off.
What the above should say is the EMU banks may need up to euro 1 trillion to repair their balance sheets and build capital buffers in anticipation of Basel III capital rules while, at the same time, EMU sovereigns will need to rollover close to euro 1.5 trillion of debt in 2012. With EMU sovereign bond yield spiking to record levels, it's very unlikely Italy and Spain will be able to refinance next year at a sustainable rate going forward as there’s not an effective backstop; France will most likely need to pay a much higher interest rate due to this debt crisis contagion; and Belgium sovereign bond interest rate is closing on the 7% threshold that could require external bailout band aid.
Dealing With Debt: What Investors Should Expect [View article]
I have had the pleasure of working with the BCG and I must say that they are staffed with the best and brightest, as reflected in the above letter.
Market demands and events will outpace the speed of EMU decision making and overwhelm the resources of the EFSF and accelerated ESM. The EFSF has about euro 200 billion remaining while the ESM is slated to be funded to the level of euro 500 billion, though no collateral has been posted as of yet.
Together and unleveraged this offers close to euro 700 billion to deal with bank refinancing needs that could reach euro 1 trillion and close to euro 1.4 trillion in refinancing in 2012 alone, excluding new financing to fund deficits.
The resources are simply insufficient to meet the staggering needs of the PIIGS and, possible, France. Additionally, there will continue to be public opposition to austerity and reforms which will result in higher deficits; Spain just announced its deficit would be 8% rather than the previously estimated 6%.
This is why I think, contrary to what EMU leaders say, the zone will either be restructured or one or more members will leave, a view shared by others including the chief executive of Standard Chartered who warned that there is an increasing likelihood of a country falling out of the eurozone because of the inability of politicians to resolve the crisis.
In today’s Telegraph he is quoted as saying "I think the probability of countries leaving the eurozone has increased because we have had several successive plans announced to solve the problem of the eurozone which simply haven't convinced the market – and ultimately, the current structure and shape and scope of the eurozone only works if the market believes it's worth supporting,"
Euro Plunge Reflects Market's Verdict On EU Summit: Downside Remains In Focus [View article]
The puzzle is not why the euro is so weak, but why it is so strong given recent developments.
The value of the euro continues to follow (1) the current account of the EMU and (2) its value expressed in dollars when plotted against two year spreads of German and US debt. Nothing is out of the ordinary.
But that’s not entirely true; the ECB balance sheet has grown by about $800 billion this year and is now larger than the Fed’s. When confidence is lost in the ECB, things will really start to unravel.
Dave the debt contracts of those countries remaining in the smaller southern euro area would remain intact and be denominated euro's. And with the ECB free to print, there will be no funding problems.
The smaller number of countries in the northern zone might use a reprised thaler, whose value would be held at 130% (to pick a number) until the capital and exchanges of the two systems stabilized.
And during during this period Germany, Holland and others would likely have to recapitalize their banks to absorb the shock of 30% FX losses on their Club Med bonds. The banking system might have to be nationalised but this would still be much cheaper than the trillions now needed to support the EMU’s rancid existence.
The points made by Davewmart are spot on and very logical, meaning they are likely to be completely overlooked by dominant decision makers, particularly Germany who is trying to preserve its competitive advantage while minimizing its exposure and losses while keeping the union alive.
Additionally, Germany does not want to be the one who is blamed for burying the dreams of Robert Schuman and Jean Monnet, the two Frenchman widely viewed as the architects of the EU.
There are endless possible outcomes to the EMU financial crisis, one of which is massive money printing at the risk of price stability. Since this is one of the worst possible outcomes and does nothing to correct structural imbalances, it must be viewed as a likely political outcome given the craven predilections of politicians and the messianic desire to preserve the dysfunctional union of Europe.
A far better and cheaper outcome would be to break the rotten edifice of the EMU into two sectors, a strong and faster region and a weak and slower region. As suggest by Ambrose Pritchard “Germany and its satellites should leave, bequeathing the euro, the ECB and other EMU institutions to a Latin union led by France. The euro debt contracts of the south would remain intact. (It is crucial that France stays in the southern bloc, otherwise the instant devaluation of the south would be too great, and France’s banks would blow up on Italian debt). The ECB would be free to print away.
"If conducted skilfully, the revalued Teutonic Thaler could be held by exchange and capital controls at a 30pc premium for long enough to stabilise the two systems. Ultimately each side would get what it wants: Germany could enjoy the stronger currency it needs; the south would restore labour competitiveness without having to go through a decade of grinding deflationary slump. This itself would reduce the risk of defaults."
Greek Referendum Could Trigger Default [View article]
Depending upon perspective, I tend to agree this is a wise call and will ultimately lead to a disorderly default and the expulsion of Greece from the EMU; it will free Europe from a disease. The populace of Greece has no idea what life will be like with all of their transfer payments in place but with a worthless drachma. They will look back with regret anguish.
How Germany Can Save The Euro [View article]
And while its a straightforward idea many details would need to be addressed including balances owed Germany by the ECB and the Target 2 system of current account balances cleared through the ECB.
I think Germany has euro 600 billion outstanding in Target 2 balances, has contributed capital to the ECB and has guaranteed euro 60 billion of EFSF funding. And I'm sure there is more.
How would this be addressed and in what currency?
How Germany Benefited From The Euro [View article]
How Germany Benefited From The Euro [View article]
We (EC / ESRB / EBA) are telling Germany, they are not telling us.
______________________...
We're making progress; you acknowledge Germany will be responsible for 27% of the capital structure of the ESM, something previously omitted
But you are correct in asserting that no cash has exchanged hands thus far, only guarantees explaining where Germany appears in the process.
How Germany Benefited From The Euro [View article]
From the German Federal Ministry of Finance:
The ESM’s maximum lending volume amounts to €500 billion. The ESM’s authorised capital stock will total €700 billion, comprising €80 billion in paid-in capital and €620 billion in callable capital. The original plan was for ESM members to contribute the paid-in capital of €80bn in equal annual instalments over a five-year period. The eurozone heads of state or government have, however, elected to accelerate payment and, with full respect for national parliamentary procedures, have agreed to pay two instalments for 2012.
In general, the member states’ shares of the ESM’s capital will be calculated to reflect their respective shares of the ECB’s capital. Temporary transitional provisions will apply to some new euro area member states.
Under the contribution key that determines each member state’s contribution to the ESM’s capital, Germany’s share amounts to 27.1464%. Accordingly, Germany’s share of the paid-in capital will be €21.72bn (with two instalments being made in 2012). The German share of the callable capital amounts to around €168bn, and will be arranged in the form of guarantees set out in Germany’s ESM Financing Act.
How Germany Benefited From The Euro [View article]
______________________...
A very interesting piece with very little to disagree with. I think it's important to note though as early as 2000 Greek state debt/GDP was close to 100% while the Maastricht treaty limits such debt to 60%. With the euro enjoying much implicit backing and Greek debt offering attractive yields versus alternatives, it is quite natural for capital to tend to flow to Greece.
What is not natural is for Greece to borrow irresponsibly by using debt proceeds to fund consumtion and expansion of the state rather than channel borrowings towards productive investments. Perhaps more seriously, there were serious instituional failures in allowing Greece to continue borrowing in violation of treaty terms.
Thus, negligence and failure allowed Germany to exploit inflation gaps far longer than it should have been able to.
G20: Little Room For Fresh Initiatives [View article]
Christine Lagarde of the IMF has been pushing for an extra $500bn in funding to contain the eurozone crisis and to protect economies around the world from spillover effects. Eurozone countries have so far committed $200bn, while the US has said it will not contribute additional funds.
However, expanding IMF resources is being increasingly linked to the EMU expanding its firewall by combining remaining EFSF resources with that of the ESM , thereby adding close 250 billion euro to the rescue efforts.
Most of the rest of the G20 see such a decision as a prerequisite to agree to coordinated moves to resolve the crisis, including increased resources for the International Monetary Fund. Japan and China stand are united in wanting Europe to do more before offering outside assistance.
Eurozone finance ministers will face pressure to increase the size of their financial firewall as the continent’s sovereign debt crisis dominates discussion at the G20 meeting of finance ministers and central bank governors in Mexico this weekend. Thus far Germany has resisted these efforts.
In the past day, though, the German government may have softened its resistance to increasing the eurozone’s “firewall” against financial-market contagion from the Greek crisis by signaling it would consider the combination of the region’s temporary rescue fund with its permanent successor.
Wolfgang Schäuble, finance minister, said using “the remaining funds” in the European Financial Stability Facility to bolster the European Stability Mechanism was “one possible solution to the question” of how to better guard against bond market sell-offs hitting Italy or Spain.
Greek Default And Devaluation: Would It Even Matter? [View article]
Interlocking relationships can arise through any number of possible linkages, including inter-bank lending, holding common assets and writing of credit insurance. Simply suggesting there are interlocking financial relationships between financial institutions does not in itself adequately address the danger of CDS and counter party risk.
Had this risk been recognized and addressed in further detail, it would have improved an otherwise excellent article.
European Crisis: We're Just At The Very Beginning [View article]
The balance sheet of the ECB is swelling making the solvent sovereigns of the EMU nervous as they must backstop the ECB.
European Crisis: We're Just At The Very Beginning [View article]
The reason is partly explained above by Dave but another explanation is that European banking system is very fragile, with little capital and excessive leverage. And because banks in the core of the EMU are heavily exposed to peripheral debt, a realistic valuation and/or real restructuring of sovereign debt would wipe out many banks as they lack the capital required to shoulder the losses. Additionally, it would trigger a default event.
Thus, the leaders of the EMU are protecting the banks to avoid costs associated with recapitalizing insolvent banks and, more importantly, protect banks that have been the largest purchasers of sovereign debt through liquidity offered by the ECB. Since the ECB is prohibited from direct monetization of debt, it must be done through the back door.
Eventually, the system will collapse but expect this subterfuge to continue until it cannot. Meanwhile, yields on Italian ten year debt rose above 7%; inter-bank lending has seized and banks are parking record levels of deposits with the ECB, rather than lending to each other; and Unicredit's shares are down close to 40% after a right offering to plug an 8 billion euro hole in its balance sheet.
And the euro traded below $ 1.27
Dealing With Debt: What Investors Should Expect [View article]
______________________...
My writing today is slightly off.
What the above should say is the EMU banks may need up to euro 1 trillion to repair their balance sheets and build capital buffers in anticipation of Basel III capital rules while, at the same time, EMU sovereigns will need to rollover close to euro 1.5 trillion of debt in 2012. With EMU sovereign bond yield spiking to record levels, it's very unlikely Italy and Spain will be able to refinance next year at a sustainable rate going forward as there’s not an effective backstop; France will most likely need to pay a much higher interest rate due to this debt crisis contagion; and Belgium sovereign bond interest rate is closing on the 7% threshold that could require external bailout band aid.
Dealing With Debt: What Investors Should Expect [View article]
Market demands and events will outpace the speed of EMU decision making and overwhelm the resources of the EFSF and accelerated ESM. The EFSF has about euro 200 billion remaining while the ESM is slated to be funded to the level of euro 500 billion, though no collateral has been posted as of yet.
Together and unleveraged this offers close to euro 700 billion to deal with bank refinancing needs that could reach euro 1 trillion and close to euro 1.4 trillion in refinancing in 2012 alone, excluding new financing to fund deficits.
The resources are simply insufficient to meet the staggering needs of the PIIGS and, possible, France. Additionally, there will continue to be public opposition to austerity and reforms which will result in higher deficits; Spain just announced its deficit would be 8% rather than the previously estimated 6%.
This is why I think, contrary to what EMU leaders say, the zone will either be restructured or one or more members will leave, a view shared by others including the chief executive of Standard Chartered who warned that there is an increasing likelihood of a country falling out of the eurozone because of the inability of politicians to resolve the crisis.
In today’s Telegraph he is quoted as saying "I think the probability of countries leaving the eurozone has increased because we have had several successive plans announced to solve the problem of the eurozone which simply haven't convinced the market – and ultimately, the current structure and shape and scope of the eurozone only works if the market believes it's worth supporting,"
Euro Plunge Reflects Market's Verdict On EU Summit: Downside Remains In Focus [View article]
The value of the euro continues to follow (1) the current account of the EMU and (2) its value expressed in dollars when plotted against two year spreads of German and US debt. Nothing is out of the ordinary.
But that’s not entirely true; the ECB balance sheet has grown by about $800 billion this year and is now larger than the Fed’s. When confidence is lost in the ECB, things will really start to unravel.
Eurozone: Print Or Perish [View article]
The smaller number of countries in the northern zone might use a reprised thaler, whose value would be held at 130% (to pick a number) until the capital and exchanges of the two systems stabilized.
And during during this period Germany, Holland and others would likely have to recapitalize their banks to absorb the shock of 30% FX losses on their Club Med bonds. The banking system might have to be nationalised but this would still be much cheaper than the trillions now needed to support the EMU’s rancid existence.
Eurozone: Print Or Perish [View article]
Additionally, Germany does not want to be the one who is blamed for burying the dreams of Robert Schuman and Jean Monnet, the two Frenchman widely viewed as the architects of the EU.
There are endless possible outcomes to the EMU financial crisis, one of which is massive money printing at the risk of price stability. Since this is one of the worst possible outcomes and does nothing to correct structural imbalances, it must be viewed as a likely political outcome given the craven predilections of politicians and the messianic desire to preserve the dysfunctional union of Europe.
A far better and cheaper outcome would be to break the rotten edifice of the EMU into two sectors, a strong and faster region and a weak and slower region. As suggest by Ambrose Pritchard “Germany and its satellites should leave, bequeathing the euro, the ECB and other EMU institutions to a Latin union led by France. The euro debt contracts of the south would remain intact. (It is crucial that France stays in the southern bloc, otherwise the instant devaluation of the south would be too great, and France’s banks would blow up on Italian debt). The ECB would be free to print away.
"If conducted skilfully, the revalued Teutonic Thaler could be held by exchange and capital controls at a 30pc premium for long enough to stabilise the two systems. Ultimately each side would get what it wants: Germany could enjoy the stronger currency it needs; the south would restore labour competitiveness without having to go through a decade of grinding deflationary slump. This itself would reduce the risk of defaults."
Greek Referendum Could Trigger Default [View article]