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."
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, 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.
Greek Default Back on the Table: Eurozone Not Acknowledging a Systemic Problem [View article]
The design of the EMU was flawed at the outset as the EMU has never fully satisfied the conditions for an optimal currency area: Synchronized economic activity and growth rates; a high level of labor and capital mobility; fiscal federalism allowing the fiscal risk sharing of idiosyncratic national shocks; and a significant degree of political union.
Instead it’s a patchwork of sixteen countries with different languages, different cultures, different ethics and different fiscal and budgetary policies. With this backdrop, the problems we are seeing today should not be particularly surprising given the massive accumulation of sovereign debt used to fund government expansion and lavish social welfare programs.
Thus far, the overreaching strategy has been to socialize the costs of the bad decisions made by private bankers and government officials through ECB purchases of soveriegn debt and protecting the national banks anchored to the core of the EZ through three, and counting, bailouts. Recognizing this is not working and the contagion is spreading with Italy under assault, I think the strategy is changing towards expanding the ETSF to accomodate further bailouts while reducing reducing debt burdens through considering defaults on private sector debt.
Papandreou Survives but European Markets Still Fraught With Risk [View article]
Angel, I agree and apparently the IMF does as well because they are delaying their contribution to the final tranche of the first bailout until they see that Greece can pay its bill for the following twelve months. After we get through this kabuki theater, Greece will promise much but fail to execute which will ultimately lead to default. I suspect this is why Mohamed El Erian said it's pointless to continue funding Greece when its already technically in default and suffering deteriorating metrics. But this is bigger than Greece and is all about saving the EZ and protecting highly leveraged banks.
Papandreou Survives but European Markets Still Fraught With Risk [View article]
Surviving the vote of confidence is just the beginning of the game. The Greek cabinet must draw up the legislation which will include further reforms and sale of state assets; parliament must then pass the legislation; and then it must be implemented. All, or most, of this must be accomplished before the EU and ECB meets in early July to discuss releasing the final trache of the first bailout package and agreeing to terms of the second package which is likely to call for unspecified participation by the private sector.
Greek Default: It's Only a Matter of Time [View article]
Based upon pricing of Greek CDS, the implied probability of default is around 51% according to CMA. To which you say:
"This is not surprising. Bond investors are unlikely to sit by idly knowing that the structural problems in Greece have not been resolved. Recent economic data shows that austerity is not working. The problems in Europe are structural and due primarily to the currency system and lack of true unity in the region"
To which I say the markets are expressing doubt that Greece will carry through with all of the reforms essential to an overhaul and restructuring of their economy. The role of the state must be reduced; public employment must be reduced; public employee salaries and benefits must be trimmed; corruption must be reduced or eliminated; productivity must be improved; their culture of leisure must be transformed; and systemic tax evasion must be checked.
Unless these reforms are undertaken Greece is not viable on its own or part of an expanded currency union, which is unlikely as why would a successful sovereign such as Germany hand over its fiscal affairs to a gaggle of clueless bureaucrats in Brussels.
At the center of the current crisis of the euro are fiscal deficits, especially in Greece, Portugal, Spain and Ireland. However, these fiscal deficits are just symptoms, but not the cause of the malaise. ______________________...
That's not entirely correct as the countries on the periphery, after lying to secure entry into the zone, abused the low interest rates that came with membership and expanded borrowing to fund growing governments who, in turn, doled out jobs and services as if there were tomorrow.
Yesterday's tomorrow is now today and it's easy to see the inherent problems in divorcing monetary policy from fiscal policy, producing an unworkable economic system exacerbated by a pernicious and prevalent entitlement mindset ingrained in the thinking of peripheral countries. If this disaster is to work, there must be fiscal union through all countries ceding control over national interests to bureaucrats in Brussels "who will figure things out".
The Germans, who have the most lose from this notion, are unlikely to hand over their country to a bunch of central planners bent upon centralized social engineering. Such efforts would only help weak members and hurt strong members even if such differentials are acquired through productivity, lower public services and hard work.
Fixing the Euro Crisis: Policy Recommendations [View article]
Your policy prescriptions are, for the most part, very thorough but I question why you avoided the heart of the matter: large government footprints that frequently cover around 50% of state economies and the countless unions that extort, protest, strike and cripple state economies. Until state governments are reduced in size relative to their respective economies and until the powers of unions are reduced, it will be difficult to undertake most, if not all, of the proposed reforms and restructurings. And while it may be required, a restructuring of Greece's debt (a polite default) is tantamount to their leaving the zone which may not be a bad idea given the currency constraint and the need for greater competitiveness through wage reductions. Freed of the euro, Greece could establish competitiveness in tradables through a weak drachma.
Why to Expect a New EMU Member Before Any Countries Exit the Eurozone [View article]
More from Marketwatch suggesting things are not all roses and that Estonia's incentive may be to reduce currency risk and (worse) ramp-up borrowing with a solid currency as did its Greek muse:
"Without having a flexible exchange rate to help the adjustment process, Estonia has had to rely on domestic wages and prices adjusting to restore competitiveness via a painful recession," wrote Win Thin, currency strategist at Brown Brothers Harriman & Co. in a research note. "That's why unemployment shot up and wages and prices fell across the Baltics."
Estonia's unemployment rate soared to a record high of 19.8% in the first quarter from 15.5% in the last three months of 2009. More than one third of the unemployed have been without a job longer than a year, according to official data.
Euro adoption will remove the residual currency risk the Estonian economy currently faces, with around 85% of total lending denominated in foreign currency compared to only 40% of deposits, according to David Oxley, emerging-markets economist at Capital Economics.
However, "there are a number of reasons why euro adoption will not be a panacea for Estonia," Oxley wrote in a recent note. Converting to the euro at the current fixed exchange rate "will only lock in the competitiveness problems that have dogged the economy over the past few years."
"While the real effective exchange rate has fallen over the past few months, we estimate that it is still overvalued by around 5% to 10%," Oxley said. "Accordingly, the 'internal devaluation' process still has further to run."
Capital Economics projects a 1% contraction in Estonia's economy this year.
Why to Expect a New EMU Member Before Any Countries Exit the Eurozone [View article]
I did a quick "google" and am relieved to find that Estonia is not a highly indebted (broke) sovereign wearing a flashy suit and carrying an attaché case full of fraudulent documents. This what was found:
Estonia is not subject to an EU Council decision on the existence of an excessive deficit. In the reference year 2009 the general government budget balance showed a deficit of 1.7% of GDP, i.e. well below the reference value. The general government gross debt-to-GDP ratio was 7.2% of GDP, i.e. far below the 60% reference value.
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."
Pressure Is Building On The ECB [View article]
Greek Default Back on the Table: Eurozone Not Acknowledging a Systemic Problem [View article]
Instead it’s a patchwork of sixteen countries with different languages, different cultures, different ethics and different fiscal and budgetary policies. With this backdrop, the problems we are seeing today should not be particularly surprising given the massive accumulation of sovereign debt used to fund government expansion and lavish social welfare programs.
Thus far, the overreaching strategy has been to socialize the costs of the bad decisions made by private bankers and government officials through ECB purchases of soveriegn debt and protecting the national banks anchored to the core of the EZ through three, and counting, bailouts. Recognizing this is not working and the contagion is spreading with Italy under assault, I think the strategy is changing towards expanding the ETSF to accomodate further bailouts while reducing reducing debt burdens through considering defaults on private sector debt.
Papandreou Survives but European Markets Still Fraught With Risk [View article]
Papandreou Survives but European Markets Still Fraught With Risk [View article]
Greek Default: It's Only a Matter of Time [View article]
"This is not surprising. Bond investors are unlikely to sit by idly knowing that the structural problems in Greece have not been resolved. Recent economic data shows that austerity is not working. The problems in Europe are structural and due primarily to the currency system and lack of true unity in the region"
To which I say the markets are expressing doubt that Greece will carry through with all of the reforms essential to an overhaul and restructuring of their economy. The role of the state must be reduced; public employment must be reduced; public employee salaries and benefits must be trimmed; corruption must be reduced or eliminated; productivity must be improved; their culture of leisure must be transformed; and systemic tax evasion must be checked.
Unless these reforms are undertaken Greece is not viable on its own or part of an expanded currency union, which is unlikely as why would a successful sovereign such as Germany hand over its fiscal affairs to a gaggle of clueless bureaucrats in Brussels.
Why the Euro Is Doomed [View article]
Why the Euro Is Doomed [View article]
______________________...
That's not entirely correct as the countries on the periphery, after lying to secure entry into the zone, abused the low interest rates that came with membership and expanded borrowing to fund growing governments who, in turn, doled out jobs and services as if there were tomorrow.
Yesterday's tomorrow is now today and it's easy to see the inherent problems in divorcing monetary policy from fiscal policy, producing an unworkable economic system exacerbated by a pernicious and prevalent entitlement mindset ingrained in the thinking of peripheral countries. If this disaster is to work, there must be fiscal union through all countries ceding control over national interests to bureaucrats in Brussels "who will figure things out".
The Germans, who have the most lose from this notion, are unlikely to hand over their country to a bunch of central planners bent upon centralized social engineering. Such efforts would only help weak members and hurt strong members even if such differentials are acquired through productivity, lower public services and hard work.
Fixing the Euro Crisis: Policy Recommendations [View article]
Why to Expect a New EMU Member Before Any Countries Exit the Eurozone [View article]
"Without having a flexible exchange rate to help the adjustment process, Estonia has had to rely on domestic wages and prices adjusting to restore competitiveness via a painful recession," wrote Win Thin, currency strategist at Brown Brothers Harriman & Co. in a research note. "That's why unemployment shot up and wages and prices fell across the Baltics."
Estonia's unemployment rate soared to a record high of 19.8% in the first quarter from 15.5% in the last three months of 2009. More than one third of the unemployed have been without a job longer than a year, according to official data.
Euro adoption will remove the residual currency risk the Estonian economy currently faces, with around 85% of total lending denominated in foreign currency compared to only 40% of deposits, according to David Oxley, emerging-markets economist at Capital Economics.
However, "there are a number of reasons why euro adoption will not be a panacea for Estonia," Oxley wrote in a recent note. Converting to the euro at the current fixed exchange rate "will only lock in the competitiveness problems that have dogged the economy over the past few years."
"While the real effective exchange rate has fallen over the past few months, we estimate that it is still overvalued by around 5% to 10%," Oxley said. "Accordingly, the 'internal devaluation' process still has further to run."
Capital Economics projects a 1% contraction in Estonia's economy this year.
Why to Expect a New EMU Member Before Any Countries Exit the Eurozone [View article]
Estonia is not subject to an EU Council decision on the existence of an excessive deficit. In the reference year 2009 the general government budget balance showed a deficit of 1.7% of GDP, i.e. well below the reference value. The general government gross debt-to-GDP ratio was 7.2% of GDP, i.e. far below the 60% reference value.